Borrowing interest deduction and mining rights payment classified as revenue and capital expenditure respectively.

Interest on borrowings used for business purposes was deductible as revenue expenditure even though the plant was not yet put to use, because the interest deduction provision does not distinguish between borrowings for capital and revenue purposes and Explanation 8 to actual cost does not control that deduction. The payment made to acquire mining rights to secure a long-term captive limestone supply was capital expenditure, since it obtained an enduring source of raw material and a right to win and extract minerals rather than a mere purchase of stock-in-trade. Relief was retained on the first issue and denied on the second.

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Issues: (i) Whether interest on borrowings used for setting up a plant, before the plant was put to use, was deductible as revenue expenditure. (ii) Whether the sum paid for acquiring mining rights to secure limestone supply was capital expenditure or revenue expenditure.

Issue (i): Whether interest on borrowings used for setting up a plant, before the plant was put to use, was deductible as revenue expenditure.

Analysis: Interest paid on money borrowed for business purposes is allowable if the borrowing is for the purposes of business, the money is borrowed by the assessee, and interest is actually paid. The provision governing deduction of business interest does not draw a distinction between capital borrowed for a revenue purpose and capital borrowed for a capital purpose. Explanation 8 to the provision dealing with actual cost does not control the deduction of business interest.

Conclusion: The interest on borrowings was allowable as revenue expenditure and the issue was decided in favour of the assessee.

Issue (ii): Whether the sum paid for acquiring mining rights to secure limestone supply was capital expenditure or revenue expenditure.

Analysis: The payment secured a long-term captive source of raw material by taking over the rights earlier held by another concern. In mining cases, the decisive factor is whether the mineral has already been won and lies on the surface, or whether it must still be extracted and brought to the surface. Where the mineral has to be won and extracted, the expenditure for acquiring that right is capital in nature. The payment here was for obtaining an enduring source of supply and not merely for purchase of raw material in stock-in-trade form.

Conclusion: The payment was capital expenditure and the issue was decided in favour of the Revenue.

Final Conclusion: The appeal succeeded only on the second issue, with the assessee retaining relief on the first issue. The order of the Tribunal was reversed to that extent and the assessment order was restored on the second issue.

Ratio Decidendi: Interest on borrowings for business is deductible even if the asset financed is not yet put to use, but a lump-sum payment securing a long-term right to win and extract minerals from the earth is capital expenditure and not revenue expenditure.

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