Law:

Section:

Section 37(1) of the income-tax act, 1961-Capital or revenue expenditure-Assesses purchased capital assets with borrowed funds-Nothing on record to show that acquisition of capital asset was unrelated to its business-Whether interest paid on said borrowed funds was revenue expenditure-Held, on facts, yes Facts For the assessment year 1970-71, the assessee-company borrowed moneys for the purpose of utilising the same for creation of capital assets. It paid interest on the said borrowings. The ITO did not record any findings either as to whether the assessee had spent the said borrowed moneys in creation of capital assets before the commencement of its business or production, or whether the acquisition of capital asset was unrelated to the assessee's business. He disallowed the assessee's claim for deduction of the said interest under section 37(1) on the ground that with the borrowed money a capital asset was created. The AAC set aside the ITO's order and the Tribunal sustained the AAC's order. On reference : Held If the expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset, the expenditure may be regarded as revenue expenditure. In the instant case, there was no material on record to show that acquisition of capital asset was not related to the carrying on or conduct of the assessee's business. Accordingly, the impugned interest was a revenue expenditure and was deductible under section 37(1). Case review Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) distinguished. Cases referred to Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT [1965] 56 ITR 52 (SC), India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC), Prem Spg. & Wvg. Mills Co. Ltd. v. CIT [1975] 98 ITR 20 (All.), State of Madras v. G.J. Coelho [1964] 53 ITR 186 (SC) and Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC). Judgment Mankad, J.-The assessee, a private limited company, carries on business of manufacturing and selling fertilisers. In the course of assessment for the assessment year 1970-71, one of the questions which arose before the ITO was whether…

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