Income-tax---

----Business expenditure---Capital or revenue expenditure---Interest on borrowed capital ---Assessee borrowing money for purpose of setting up a printing facsimile unit---Interest paid allowable as revenue expenditure-- Indian Income Tax Act, 1961, S.37.

The assessee established a printing facsimile unit at Hyderabad for printing its newspaper locally so that dispatch to that destination from Madras which would involve delay could be avoided. The assessee borrowed monies for the purpose of setting up that unit and though it had capitalised the interest paid on such borrowing in its accounts by way of an adjustment statement, it claimed the interest as revenue expenditure. That claim was disallowed by the Income-tax Officer, but was allowed by the Commissioner (Appeals) and such allowance was affirmed by the Tribunal. On a reference:

Held, that the interest paid on monies borrowed for the purpose of erecting another plaint to carry on the assessee's business in a more efficient manner would constitute a deductible item of expenditure for the purpose of section 37 of the Income Tax Act, 1961.

Indian Cements Ltd. v. CIT (1966) 60 ITR 52 (SC) and CIT (Addl.) v. Akkamamba Textiles Ltd. (1997) 227 ITR 464 (SC) fol.

Mrs. Chitra Venkataraman for the Commissioner. V. Ramakrishnan for the Assessee.

JUDGMENT

R. JAYASIMHA BABU, J.---The question referred to us at the instance of the Revenue is as to whether the Tribunal was right in holding and had valid materials to hold that the interest on the amount borrowed for its Hyderabad facsimile project should be treated as a revenue expenditure and allowed as a deduction in computing the income of the assessee." The assessment year is 1977-78.

The assessee is a Publisher of the Hindu newspaper. It has been carrying on business of several decades. It established a printing facsimile unit at Hyderabad for printing its paper locally so that despatch to that destination from Madras which involved delay could be avoided. The assessee borrowed monies for the purpose of setting up that unit and though it had capitalised the interest paid on such borrowing in its accounts by way of an adjustment statement, it claimed the interest as revenue expenditure. That claim was disallowed by the Income-tax Officer, but was allowed by the Commissioner and such allowance was affirmed by the Tribunal.

The Commissioner had relied on the decision of the Supreme Court in the case of India Cements Ltd. v. CIT (1966) 60 ITR 52, wherein the Court held that a loan obtained was not an asset or an advantage of an enduring nature, that it is obtained only for securing the use of money for a certain period and that it was irrelevant to consider the object with which the loan was obtained. The Court further observed that where there is no express prohibition, an outgoing by means of which an assessee procures the use of a thing by which he makes a profit, is deductible from the receipts of the business to ascertain the taxable income.

In view of this pronouncement that the object with which the loan is obtained is irrelevant and that the loan is not an enduring asset, interest paid on such loan is necessarily to be regarded as revenue expenditure, as there is no prohibition on such outgoing and the amount paid is an item of an expenditure:

The Supreme Court in the case of Addl. CIT v. Akkamamba Textiles Ltd. (1997) 227 ITR 464, dismissed the appeal against the judgment of the High Court which had held that the guarantee commission paid by the assessee to the banker and the insurance company for ensuring deferred payment of the purchase consideration of machinery was an admissible deduction under section 37 of the Income Tax Act, 1961.

Even as the expenditure incurred in connection with the obtaining of the loan such as stamp duty, registration fees, lawyers's fees were held to be allowable items of the expenditure in the case of India Cements Ltd. v. CIT (19661 60 ITR 52 (SC) and guarantee commission paid for ensuring deferred payment of the purchase consideration of machinery was held to be an allowable item of an expenditure under section 37 of the Act in the case of Additional CIT v. Akkamamba Textiles Ltd, (1997) 227 ITR 464 (SC), the interest paid on monies borrowed for the purpose of erecting another plant to carry on the assessee's business in a more efficient manner would constitute a deductible item of expenditure for the purpose of section 37 of the Act. We, therefore, answer the question referred to us in favour of the assessee and against the Revenue. There will be no order as to costs.

M.B.A./597/FCReference answered.