Interest on Borrowed Capital Deductible as Revenue Expenditure under Income-tax Act

The Court upheld the disallowance of pre-operative expenses claimed as revenue expenditure and the treatment of interest payment on loans for expansion projects as revenue expenditure. It held that interest paid on borrowed capital for business purposes is deductible under Section 36(1)(iii) of the Income-tax Act, regardless of whether the capital was used for a capital or revenue purpose. The appeal was dismissed, affirming the decisions of the Income Tax Appellate Tribunal and answering the issues in favor of the assessee.

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Issues:
1. Disallowance of pre-operative expenses claimed as revenue expenditure.
2. Treatment of interest payment on loans for expansion projects as revenue expenditure.

Issue 1: Disallowance of pre-operative expenses claimed as revenue expenditure
The appellant challenged the order of the Income Tax Appellate Tribunal (ITAT) confirming the deletion of disallowance of pre-operative expenses amounting to Rs. 14,09,56,125. The appellant contended that the expenses were related to the acquisition of capital assets and should have been capitalized, not treated as revenue expenditure. The appellant argued that the assets were not put to use, and therefore, the expenses should have been capitalized with the cost of acquisition of the assets. However, the respondent cited a decision of the Gujarat High Court in a similar case, emphasizing that interest paid on borrowed capital for business purposes is deductible under Section 36(1)(iii) of the Income-tax Act, regardless of whether the capital was used for a capital or revenue purpose. The Court agreed with the respondent's argument and held that the interest paid on the borrowed capital for business purposes was deductible, thus dismissing the appeal.

Issue 2: Treatment of interest payment on loans for expansion projects as revenue expenditure
The appellant disputed the treatment of interest payment on loans taken for expansion projects as revenue expenditure. The appellant argued that the interest expenses should have been capitalized as the assets were not put to use. However, the respondent relied on a Supreme Court decision emphasizing that interest paid on borrowed capital for business purposes is deductible under Section 36(1)(iii) of the Income-tax Act, irrespective of whether the capital was used for a capital or revenue purpose. The Court, considering the facts and the Supreme Court decision, held that the interest paid on the borrowed capital for business purposes was deductible. The Court confirmed the ITAT's decision and dismissed the Tax Appeal, answering the question raised in favor of the assessee.

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