1989 (4) TMI 103 - AT - Income Tax

Tribunal allows interest as revenue expenditure, not capital. Reassessment based on change of opinion.

The Tribunal considered the reassessment based on change of opinion and the nature of expenditure in the case. The reassessment was questioned as the ... - Issues:1. Reopening of assessment based on change of opinion.2. Nature of expenditure - capital or revenue.Analysis:Issue 1: Reopening of assessment based on change of opinionThe case involved a reassessment by the Income Tax Officer (ITO) where the original assessment showed a loss. The ITO initiated proceedings under section 147(b) after discovering that the assessee had deposited funds for acquiring capital assets. The assessee contended that the interest paid to the Directors should not be disallowed based on the Supreme Court decision in CIT vs. Rajendraprasad Moody. The ITO disallowed the interest claims, leading to revised incomes. The CIT(A) upheld the decision. The Tribunal considered whether the ITO's action was a change of opinion or valid reassessment. Citing precedents, the Tribunal emphasized that if the material had been considered earlier, the ITO could not reopen the assessment. As the original assessment orders were not available, the matter was remanded to the CIT(A) to verify if the interest was considered during the original assessment.Issue 2: Nature of expenditure - capital or revenueThe second question revolved around the nature of the expenditure. The assessee argued that the interest paid to the Directors for acquiring office and show room premises should be treated as revenue expenditure. The Tribunal examined relevant case laws, including Calico Dyeing and Printing Works vs. CIT and CIT vs. J.K. Industries (P) Ltd., to determine the treatment of interest paid on borrowed capital for acquiring capital assets. The Tribunal noted the difficulty in distinguishing between capital and revenue expenditure, emphasizing the need to consider the commercial perspective. It was highlighted that while the purpose of the expenditure was to acquire a capital asset, the interest payment could be claimed as a revenue expenditure under section 36. The Tribunal concluded that the interest paid by the assessee was allowable as a revenue expenditure under section 36 and not disallowed as capital expenditure under section 37. Therefore, the appeals of the assessee were allowed on merit.In conclusion, the Tribunal addressed the issues of reassessment based on change of opinion and the nature of expenditure, ultimately allowing the appeals of the assessee on the grounds that the interest paid was considered a revenue expenditure under section 36.