TaxTMI 
TaxTMI 
2007 (4) TMI 182
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....iture incurred for the replacement of parts of plant and machinery, which reflected in the books and the balance sheet. The expenditure was in the nature of routine maintenance of the machinery and therefore, the same was claimed as revenue expenditure under Section 31 of the Act in the year in which the expenses were incurred. These expenses were amortised over the estimated life of such expenditure in eight years in the books by debiting the Profit & Loss Account and crediting deferred revenue expenditure account. 4.According to the assessee, the expenditure incurred by him for the replacement of the machinery is a revenue expenditure under Section 31 of the Act. But, the assessing officer rejected the contention of the assessee on the ground that the expenditure was in the nature of capital expenditure on acquisition of plant and machinery, as the assessee himself admits the life of the machinery installed as eight years, as entered in his books of accounts and therefore, the assessee cannot ask for a different treatment to the capital expenditure on the plant and machinery and claim full cost of machinery as a deduction in one year, i.e., in the year i....
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.... assessing officer on the ground that the assessee diverted the funds borrowed from the financial institutions and banks to its sister concerns and therefore, the interest paid on such funds borrowed for purchase of machinery on working capital finance, which was subsequently diverted to the sister concerns, is not entitled to be allowed as deduction under Section 36(1)(iii) of the Act. Aggrieved by the order of assessment made by the assessing officer, the assessee preferred appeals before the Commissioner of Income-tax (Appeals), who rendered a finding that the amounts paid by the assessee to its sister concerns are not out of the funds borrowed from the financial institutions and banks, the interest paid on which is sought to be allowed, but out of the profits earned during the relevant assessment years, as it is not in dispute that the assessee had earned profits during the relevant assessment years and consequently, the Commissioner, based on the facts, held that the advances were made by the assessee to the sister concerns out of the profits earned during the relevant assessment years and the borrowings of the assessee company were fully utilised for acquisition of fixe....
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....r anxious consideration to the submissions of the learned standing counsel for the Revenue and also perused the entire materials placed before us. 13.All the above three questions revolve on the issue as to whether the interest paid on the borrowed capital to the extent relatable to the sums advanced to the sister concern is allowable as deduction under Section 36(1)(iii) of the Act, referred to earlier. 14. In K.SOMASUNDARAM AND BROTHERS vs. COMMISSIONER OF INCOME-TAX [(1999) 238 I.T.R. 939], cited supra, a Division Bench of this Court observed that it is not in dispute that the amount of interest paid in respect of capital borrowed for the purposes of the business or profession as referred to in Section 36(1)(iii) of the Act, implies that the capital amount so borrowed should not only be invested in the business, but that the amount borrowed should continue to remain in the business and so long as the amount borrowed is used in the business, the interest paid on such borrowing is an expenditure which is required to be deducted in the computation of income from the business. In the said case, the assessee-firm was engaged in the business of construction and it borrowed cer....
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....ssing officer disallowed proportionate interest payments in respect of the amounts so advanced by the assessee in computing its profits, even though the appellate Tribunal held that the disallowance was not proper because the partners and their relatives had utilised the amounts for business purposes, such as construction of a shop building, a Division Bench of the Kerala High Court, on a reference, reversed the decision of the appellate Tribunal by holding that the disallowance of proportionate interest was proper, since so long as the assessee was not the beneficiary of the investments made by the partners and their relatives, the nature of the investments or the utilisation of such advances had no relevance and that the cash balances available for the advances to the partners, their relatives and the sister concerns were also of no effect. It was further held that so long as the assessee was not the beneficiary of the investments made by their relatives and the sister concerns and so long as the advances made were interest-free, the Assessing Officer was justified in disallowing interest in proportion to the advances made. 16.But, in the instant case, both the Commissione....
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....e the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It is further held that no businessman can be compelled to maximize his profit and the income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act and they must not look at the matter from their own point but that of a prudent businessman. 18. In the instant case, the assessing officer refused to allow the interest paid by the assessee on the amounts borrowed from the financial institutions and banks on the ground that the assessee advanced certain amounts to SPMM hospital, run by S.Palaniandi Mudaliar Charitable Trust, out of the funds borrowed by the assessee. But, both the Commissioner and the appellate Tribunal factually found that the assessee had made advances to the hospital/trust not out of the amounts borrowed, but out of the profits made during the relevant assessment years. 19.That apart, the case of the assessee&nb....