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