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Allowability of Business Expenditure


Last updated: 02 February 2009

Court :
Supreme Court

Brief :
Business expenditure — If income from an activity is assessed as an income, expenditure incurred in respect of that activity should be allowed.

Citation :
Kerala Road Lines v. CIT (2008) 299 ITR 343 (SC)]

The assessee entered into an agreement with M/s. Peirce Leslie (India) Ltd. on September 27, 1983, for purchase of 466 cents of land with buildings thereon at Calicut. It was agreed that the sale deed will either be got executed in favour of the assessee or its nominees. As per the agreement, if the purchase price was not paid within the specified time, the assessee was liable to pay interest at the rate of 18% per annum. The buildings standing on the lands were demolished and the scrap materials were sold for Rs.5,88,001. This income was treated as business income. Under the agreement, the assessee had to pay an interest of Rs.4 lakhs for the delayed payment of purchase consideration. The assessee claimed this amount as a revenue expenditure. The assessing authority disallowed the claim of the assessee on the ground that the payment of interest on the purchase of the property would be in the nature of capital expenditure and not revenue expenditure. This order of the assessing authority was confirmed by the Commissioner of Income-tax (Appeals). It was held that the intention of the assessee was to enter into an adventure in the nature of trade and ultimately the assessee had retained only 65.57 cents of land with it and the remaining land was purchased by the sister concerns of the assessee in small pieces. It was held that since the assessee was only an intermediary for the other sister concerns, the part of interest referable to the lands sold to the sister concerns could not be allowed as revenue expenditure. Thus, the Commissioner of Income-tax gave part relief and allowed the interest referable to 65.57 cents of land retained by the assessee. The assessee, being aggrieved, filed an appeal before the Income-tax Appellate Tribunal. The Tribunal accepted the appeal, set aside the order passed by the Commissioner of Income-tax (Appeals). It was held that the assessee had entered into an agreement to purchase the entire property including buildings standing thereon. The buildings were demolished and structures standing thereon were sold as scrap material for Rs.5,88,001. This sum was offered for assessment as business income and assessed as such. The payment of interest of Rs.4 lakhs for the delayed payment of purchase consideration has been provided in the agreement and thus, the payment of interest was a contractual obligation. It was held by the Tribunal that, the payment of interest was to be viewed as an expenditure u/s.37 of the Income-tax Act, 1961, especially when the sale proceeds of the scrap materials from the demolished structures have been treated as business income and ultimately allowed the claim of the assessee for deduction of interest. The High Court, without answering the question as to whether the expenditure is capital or revenue in nature, reversed the decision of the Tribunal by holding that the assessee was not doing the business in real estate; that the business of the assessee was transport only and, therefore, the expenditure would not be covered by the provisions of S. 37(1) of the Act. On appeal to the Supreme Court by the Department, it was held that once the Revenue has accepted the sum of Rs.5,88,001 (being sale proceeds from the scrap material of the structures standing on the lands) as business income, then correspondingly the assessee would be entitled to claim the sum of Rs.4 lakhs as revenue expenditure paid as interest on the delayed payment of the purchase consideration.
 
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