Capitalisation of pre-production borrowing cost bars set-off against interim interest income; loom-hours expenditure also not deductible.

Interest on borrowings raised for a new plant under construction before commencement of production had to be capitalised as part of the plant's cost, and could not be deducted against interest earned from temporary deposit of the unutilised funds because the borrowing was not taken for the purpose of earning that income. The expenditure therefore lacked the necessary nexus with the interim interest income. Amounts spent on purchase of loom hours were also not treated as revenue expenditure deductible in assessment, as the issue was covered by an earlier binding decision. The Revenue's position was upheld on both points.

---

---

Issues: (i) Whether the amount spent on purchase of loom hours was allowable as revenue expenditure; (ii) Whether interest paid on borrowed moneys utilised for setting up a new plant could be deducted against interest income earned from temporary deposit of the borrowed funds.

Issue (i): Whether the amount spent on purchase of loom hours was allowable as revenue expenditure.

Analysis: The issue was treated as covered by the earlier binding decision governing loom-hours expenditure. On that basis, the amount was not regarded as revenue expenditure deductible in assessment.

Conclusion: The answer was in the negative and against the assessee.

Issue (ii): Whether interest paid on borrowed moneys utilised for setting up a new plant could be deducted against interest income earned from temporary deposit of the borrowed funds.

Analysis: The borrowed funds were obtained for a new industrial unit under construction, and the interest on such borrowing, incurred before commencement of production, was required to be capitalised and added to the cost of the plant. The temporary deposit of the unutilised loan funds and the resultant interest income did not alter the character of the borrowing cost, and the assessee did not establish that the borrowing was for the purpose of earning such interest income. The expenditure therefore lacked the requisite purpose for deduction against that head of income.

Conclusion: The answer was in the negative and in favour of the Revenue.

Final Conclusion: The reference was answered by upholding the Revenue's position on both questions, and the borrowing cost relating to the under-construction plant could not be treated as a deductible set-off against the interim interest income.

Ratio Decidendi: Interest on borrowing incurred for a new asset under construction before commencement of production must be capitalised as part of the cost of the asset, and it cannot be recharacterised as a deductible loss against incidental interest income unless the borrowing was undertaken for the purpose of earning that income.

---