Law:

Section:

Section 37(1) of the Income-tax Act, 1961 – Business expenditure – Allowability of – Assessment year 1969-70 – Assessee was carrying on business of growing and manufacturing tea – It purchased a tea estate at auction and deposited bid money by taking loan from a bank – However, sale was ultimately set aside at instance of original owners of tea estate and deposited amount was refunded to assessee – Tribunal found that transaction entered into by assessee in purchasing tea estate was made in execution or rather in expansion of its tea business and that there was one unit of management and control and business of assessee could not be said to be separate from business that assessee sought to enter into by purchasing said tea estate – Whether amount of interest paid on loan and traveling and litigation expenses incurred for acquiring said tea estate were allowable as revenue expenditure even though transaction did not ultimately materialise – Held, yes FACTS The assessee-company was carrying on business of growing and manufacturing tea. It purchased a tea garden at an auction sale and it was required to deposit 25 per cent of the bid money immediately on the close of the bid. The assessee took a loan from the Bank against its fixed deposits and deposited the amount with the Court. However, the auction sale was challenged by the original owners of the tea estate and the sale was ultimately set aside. The amount paid by the assessee was accordingly refunded. But the assessee had paid certain sum as interest on the loan. The assessee had also incurred traveling expenses and litigation expenses in connection with the transaction of purchase. The amount of interest and these expenses were held to be capital expenditure and the ITO disallowed them in computation of assessee's total income. On appeal, the AAC held the amounts to be allowable expenditure. The Revenue's appeal to the Tribunal was dismissed. On reference : HELD The Tribunal had found that though, ultimately, the sale was set aside at the instance of the owners of the tea estate, the transaction entered into by the assessee was made in execution or rather in expansion of its tea business and that there was…

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