2006 (8) TMI 174 - HC - Income Tax

Court Rules on Expenditure for Debentures & Interest on Borrowings

The court upheld that the expenditure for issuing debentures falls under section 35D, to be spread over ten years. Interest on direct borrowings for ... AO, CIT & ITAT were right in holding that expenditure towards execution of debenture issue was in the nature of preliminary expenses & thereby covered by section 35D and not by section 37, hence not deductible as revenue expenses – borrowed money used for purchase of securities will be treated as used for purpose of business, hence interest on that money is allowable as business expenditure – while calculating special deduction u/s 80M, interest on borrowed capital should be taken into account Issues Involved:1. Deduction of expenditure incurred in the assessment year 1990-91 for issuing debentures under section 37 vs. section 35D of the Income-tax Act.2. Deduction of interest payment of Rs. 10,99,007 against business income and its impact on deduction under section 80M.3. Disallowance of interest payment of Rs. 5,83,700 against the loan raised to purchase tax-free securities.4. Inclusion of the cost of interest in the purchase price of units/tax-free securities and its impact on short-term capital loss under section 45 vs. deduction from dividend income under section 56.Issue-Wise Detailed Analysis:1. Deduction of Expenditure for Issuing Debentures:The appellant (assessee) argued that the expenditure of Rs. 22.18 lakhs incurred for issuing debentures should be allowed as revenue expenditure under section 37. However, the Assessing Officer, Commissioner of Income-tax (Appeals), and the Tribunal held that this expenditure falls under section 35D, which pertains to preliminary expenses. The court upheld this view, stating that the expenditure was incurred in connection with the 'extension' of the industrial undertaking, which includes 'expansion.' Therefore, it must be spread over ten successive years as specified in section 35D. The court emphasized that special provisions like section 35D prevail over general provisions for claiming deductions.2. Deduction of Interest Payment and Section 80M:The appellant claimed a deduction for interest payments of Rs. 10,99,007 against business income and sought deduction under section 80M on gross dividend income. The Assessing Officer disallowed this, allocating the interest against dividend and interest received. The Commissioner of Income-tax (Appeals) allowed partial relief, permitting interest on the overdraft account as business expenditure but disallowed interest on direct borrowings for investment in securities. The Tribunal upheld this view. The court confirmed that interest on direct borrowings for investment in securities is not allowable as business expenditure, aligning with section 14A, while interest on the overdraft account was rightly allowed. The court also upheld the calculation of deductions under section 80M as per the Supreme Court's decision in Distributors (Baroda) P. Ltd. v. Union of India.3. Disallowance of Interest Payment against Loan for Tax-Free Securities:The appellant did not press this issue during the hearing. Consequently, the court answered this issue against the assessee, concurring with the Tribunal's findings.4. Inclusion of Cost of Interest in Purchase Price of Units/Tax-Free Securities:The court stated that this issue stands answered against the assessee once question No. 2 is resolved. The Tribunal's findings were upheld, and no further discussion was deemed necessary.Appeal by Revenue:The Revenue's appeal questioned the Tribunal's decision on interest attributable to amounts withdrawn from the CC account for investment in units and bonds and the calculation of deduction under section 80M. The court found no merit in the Revenue's appeal, affirming the Tribunal's partial decisions in favor of both parties.Conclusion:The court dismissed both the assessee's and the Revenue's appeals, upholding the Tribunal's decisions. The expenditure for issuing debentures was to be treated under section 35D, and the interest on direct borrowings for investment in securities was not allowable as business expenditure. The calculations for deductions under section 80M were correctly applied as per the Supreme Court's guidelines.