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1978 Supreme(Cal) 296
High Court Of Calcutta
DIPAK KUMAR SEN, C. K. BANERJEE
COMMISSIONER OF INCOME-TAX - Appellant
Versus
J.K.INDUSTRIES (P.) LTD - Respondent
Income-Tax Reference 163 Of 1969
Decided On : 04/20/1978
Sanjoy Bhattacharyya, SUHAS SEN
Borrowed capital utilized for acquiring a business asset and renovation expenses of a non-enduring nature are deductible as business expenses.
Headnote:
INTEREST ON BORROWED CAPITAL - BUSINESS PURPOSE - DEDUCTION - MUNICIPAL TAX - DEDUCTION - RENOVATION EXPENSES - REVENUE OR CAPITAL - REBATE OF SUPER-TAX - DIVIDENDS - COMPUTATION.
Fact of the Case:
The assessee, J. K. Industries (P) Ltd., purchased a plot of land to construct a multi-storeyed building to house its office and the offices of several companies managed by it. The assessee borrowed money from a bank and claimed deduction of interest paid and municipal tax paid on the land as business expenses. The assessee also claimed deduction of renovation expenses incurred on its office premises. The ITO disallowed the deductions, but the AAC allowed a partial deduction for renovation expenses. The Tribunal allowed the deductions for interest, municipal tax, and renovation expenses, holding that the borrowed capital was utilized for acquiring a business asset and that the renovation expenses were of a revenue nature. The Commissioner referred questions of law to the High Court.
Finding of the Court:
The High Court found that the Tribunal's findings of fact were not challenged and that the assessee had utilized the borrowed capital to acquire a business asset. The Court also found that the assessee's object in acquiring the asset was to house its own office as well as the offices of the managed companies, which was a part of its business. The Court held that the deductions claimed by the assessee were allowable under Section 10 (2) (iii) or Section 36 (1) (iii) of the Income-tax Act, 1922/1961, and that Section 24 of the I. T. Act, 1961, was not applicable. The Court also held that the renovation expenses incurred by the assessee were of a revenue nature and were deductible.
Issues: 1. Whether the assessee is entitled to deduct interest paid on borrowed capital and municipal taxes as business expenses under Section 10 (2) (iii)/Section 36 (1) (iii) of the Income-tax Act, 1922/1961? 2. Whether the assessee is entitled to deduct renovation expenses as revenue expenditure? 3. Whether the assessee is entitled to claim rebate of super-tax under Section 99 (1) (iv) of the Income-tax Act, 1961, on the entire amount of dividends received or only on the amount less deductions allowable under Section 56 (2)?
Ratio Decidendi: 1. The assessee is entitled to deduct interest paid on borrowed capital and municipal taxes as business expenses under Section 10 (2) (iii)/Section 36 (1) (iii) of the Income-tax Act, 1922/1961, where the borrowed capital is utilized for acquiring a business asset and the object in acquiring the asset is to house the assessee's own office as well as the offices of the managed companies. 2. The assessee is entitled to deduct renovation expenses as revenue expenditure where the expenses are of a non-enduring nature and do not result in any enduring benefit to the assessee. 3. The assessee is entitled to claim rebate of super-tax under Section 99 (1) (iv) of the Income-tax Act, 1961, on the entire amount of dividends received.
Final Decision: The High Court answered all the questions referred to it in the affirmative and in favor of the assessee.
( 1 ) THE facts found and/or admitted in these proceedings may shortly be stated as follows : Messrs. J. K. Industries (P) Ltd. , Calcutta, the assessee, purchased a plot of land measuring about 20 cottahs on Chowringhee Road, Calcutta, on the 28th November, 1960, at a cost of Rs. 6,13,013 pursuant to a resolution of its board of directors dated the 24th August, 1960. For the aforesaid purpose, the assessee borrowed a sum of Rs. 4,50,000 from the Hindusthan Commercial Bank Ltd. In the assessment years 1961-62 to 1964-65, the relevant financial years being 1960-61 to 1963-64, the assessee claimed deduction of the interest paid to the said bank against the aforesaid loan each year as also municipal tax paid on the land for the purpose of computation of its business profits. The assessee contended that its object in purchasing the said land was to construct a multistoreyed building where it could set up its own office as also the offices of several companies managed by it. In the assessment year 1961-62, i. e. , accounting year 1960-61, the assessee claimed a further deduction of Rs. 9,206, allegedly incurred as renovation expenses in respect of its office premises which included the cost of panelling the walls with plywoods, cost of a notice board and book case and the cost of installing the said book case and a safe.
( 2 ) IN the assessment year 1961-62, the ITO allowed the claim of the assessee in respect of the interest paid to the bank as also the municipal tax paid in respect of the said land but disallowed the assessee's claim for renovation on the ground that the expenses incurred were capital in nature. On appeal, the AAC gave notice to the assessee and the municipal tax should not be disallowed (sic ). The AAC found that between the assessment and the appeal the assessee had not taken any steps in furtherance of its purported objective and the scheme of the assessee to have a multistoreyed building was not even in a blue-print stage. He held further that, even if the avowed object of the assessee was accepted, it followed that the assessee had acquired an investment mainly to derive income from property, and, therefore, the interest paid to the bank and the municipal tax paid could not be deducted as having been incurred for the purpose of the business of the assessee. He disallowed the deductions claimed for the interest as also for the municipal tax in all the assessment years. On the claim for deduction of renovation expenses, the AAC allowed an estimated amount of Rs. 4,000.
( 3 ) THE assessee preferred a further appeal before the Income-tax Appellate Tribunal. The Tribunal found, inter alia, that : (a) The expenses in question, i. e. , the interest paid to the bank and the municipal tax paid had, admittedly been incurred in the course of the carrying on of the assessee's existing business. (b) The primary object for the proposed construction of the multi-storeyed building was to house the office of the assessee and those of the managed companies. (c) The assessee had refused accommodation to the State Bank of India which wanted to hire the ground floor of the proposed building.
( 4 ) THE Tribunal considered a blue-print of the proposed multi-storeyed building prepared by the architects of the assessee and a copy of the letter of the architects dated the 18th November, 1964, addressed to the managing director of the assessee.
( 5 ) BY reason of the aforesaid, the Tribunal held that the amount of the borrowed capital had been utilised by the assessee for acquiring a business asset for the purpose of its own business as well as for that of its managed companies. Following Calico Dyeing and Printing Works v. CIT [1958] 94 ITR 265 (Bom), the Tribunal held that the interest paid on the borrowed amount as also the incidental expenses like municipal tax must be allowed under Section 10 (2) (iii) of the Indian I. T. Act, 1922, as legitimate business expenses.
( 6 ) THE Tribunal found further that th
