Revenue expenditure test confirms interest paid under land acquisition statute is deductible as business expenditure.

Interest paid under the land acquisition statute was held not to form part of compensation or purchase price and therefore is not capital expenditure; the statutory framework for acquisitions made for a company supports a presumption that the acquisition was for business purposes. Applying the commercial test - treating as revenue expenditure those payments integral to the profit earning process rather than acquisition of a permanent asset - the payment of interest qualifies as expenditure laid out wholly and exclusively for the purposes of the business and is therefore deductible under the relevant income tax provision.

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Issues: Whether the interest paid under section 34 of the Land Acquisition Act in respect of land acquired for the company is deductible from total income under section 10(2)(xv) of the Income-tax Act as an expenditure wholly and exclusively laid out for the purposes of the business.

Analysis: The interest paid under section 34 was held not to form part of the compensation or purchase price of the land and therefore is not capital expenditure. The land was acquired by the Government for the company under the Land Acquisition Act with the statutory preconditions applicable to acquisitions for companies, permitting the presumption that the acquisition was for the purposes of the company's business. Applying the commercial test that expenditure is revenue expenditure if it is related to carrying on the business and forms an integral part of the profit-earning process rather than acquisition of a permanent asset, the payment of interest in the factual context qualifies as an expenditure laid out wholly and exclusively for business.

Conclusion: The interest paid under section 34 of the Land Acquisition Act is deductible under section 10(2)(xv) of the Income-tax Act and the question is answered in the affirmative in favour of the assessee.

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