Delayed loss return acceptance and deduction of statutory interest on government capital were upheld under income-tax principles.

A loss return filed after the section 139(3) time limit was still accepted because CBDT instructions for the relevant year permitted consideration of delayed loss returns within the assessment window, so the loss could be carried forward. Interest paid by a statutory road transport corporation on capital contributed by the Central and State Governments was treated as a statutory outgoing rather than interest on borrowed capital, making section 36(1)(iii) inapplicable and the deduction allowable under section 37. On those facts, the Commissioner's revision under section 263 was not sustainable because no real prejudice to the Revenue was shown.

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Issues: (i) Whether a loss return filed beyond the time prescribed under section 139(3) of the Income-tax Act, 1961 could still be accepted and the loss carried forward in the relevant assessment year; (ii) Whether interest payable by a statutory road transport corporation on capital contributed by the Central and State Governments was deductible and whether the Commissioner's revision under section 263 of the Income-tax Act, 1961 was justified.

Issue (i): Whether a loss return filed beyond the time prescribed under section 139(3) of the Income-tax Act, 1961 could still be accepted and the loss carried forward in the relevant assessment year.

Analysis: The applicable CBDT instructions permitted consideration of loss returns filed out of time but within the specified period for assessment, and those instructions covered the relevant assessment year. The return in question was therefore within the zone of acceptance under the Board's circular and the consequent loss was eligible to be carried forward.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether interest payable by a statutory road transport corporation on capital contributed by the Central and State Governments was deductible and whether the Commissioner's revision under section 263 of the Income-tax Act, 1961 was justified.

Analysis: The capital was provided under sections 23 and 28 of the Road Transport Corporation Act, 1950, and the interest was payable to the contributing Governments as a statutory outgoing. It was not interest on capital borrowed in the ordinary sense, so section 36(1)(iii) was inapplicable, and the claim fell within the residuary allowance under section 37 of the Income-tax Act, 1961. The order was also found not to be prejudicial to the interests of the Revenue because the assessee's exemption position meant that no real revenue loss arose on the facts of the case.

Conclusion: The deduction was allowable and the revision under section 263 was not sustainable.

Final Conclusion: The assessment order was restored in substance and the assessee succeeded on both the carry-forward of loss issue and the deduction of interest issue.

Ratio Decidendi: A statutory payment of interest on Government-contributed capital, when not constituting borrowed capital, is deductible under the residuary business-expense provision, and revision under section 263 cannot stand where the alleged error causes no real prejudice to the Revenue.

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