Tribunal overturns disallowance of interest on bank overdraft and rules on depreciation treatment

The Tribunal found that the disallowance of interest on bank overdraft was unjustified as the interest-free advances to a subsidiary were made in the course of business. The disallowance was deleted based on legal precedents cited. Regarding the treatment of depreciation for weighted deduction, the Tribunal ruled that depreciation does not qualify as expenditure for weighted deduction under section 35C of the Income-tax Act, as it is an allowance for wear and tear of machinery, not an item of expenditure. The appeals were partly allowed in this regard.

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Issues involved: Disallowance of interest on bank overdraft, Treatment of depreciation as an expenditure for allowance of weighted deduction under section 35C of the Income-tax Act.

Disallowance of Interest on Bank Overdraft: The issue revolved around the disallowance of interest on bank overdraft for three assessment years. The Income Tax Officer (ITO) disallowed portions of interest claimed by the assessee on bank loans, citing advances made to a subsidiary without interest. The Commissioner (Appeals) upheld the disallowance based on the decision in CIT v. United Breweries. The assessee argued that the interest-free advance to the subsidiary was to secure a regular supply of raw materials, thus in the course of business. Referring to various case laws, the assessee contended that the disallowance was unjustified. The Tribunal found that the interest-free advances were made in the course of business to secure raw materials, and thus, disallowed interest on bank overdraft was unjustified. The disallowance was deleted based on the facts and legal precedents cited.

Treatment of Depreciation for Weighted Deduction: The controversy involved treating depreciation as an expenditure for allowance of weighted deduction under section 35C of the Income-tax Act for two assessment years. The ITO reduced the total expenditure claimed by the assessee, contending that depreciation is not an item of expenditure but an allowance. The Commissioner (Appeals) upheld this decision. The Tribunal analyzed the meaning of 'expenditure' and concluded that depreciation, being an allowance for wear and tear of machinery, does not qualify as expenditure for weighted deduction under section 35C. The Tribunal rejected the alternative submission that the cost of the asset could be allowed as an expenditure, as it was not raised before the lower authorities and did not align with the scope of section 35C. Consequently, the appeals were partly allowed in this regard.

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