INCOME TAX ACT, 1961

Section 37(1) read with Section 57(iii)

Business expenditure - Allowability - Business of assessee not set up during relevant year - Deduction to be granted for aggregate expenditure proportionately attributable to borrowed funds

Assessee was a private limited company engaged in business of generation of power. AO disallowed expenditure claimed by assessee on allegation that assessee did not commence its business and therefore, expenditure was to be capitalized. Held: Assessee company's business was not set-up and ready for commercial transactions because it was not equipped to start generation of power during relevant assessment year. However, as entire expense was proportionately attributable towards earning of interest income arising out of borrowed interest-bearing funds and funds received from other sources such as capital contribution, etc., which may or may not be interest-bearing funds because there were no other activities conducted by assessee company during relevant assessment year for earning income or toward advancing any other objects of assessee company. Further, when it comes to utilization of mixed funds of assessee, it is up to the assessee to determine as to which funds are to be deployed for what purpose and what funds are to be treated as retained. That is because revenue cannot sit on shoes of assessee and decide as to how assessee has to conduct its business. AO was directed to compute aggregate expenditure proportionately attributable to borrowed funds and allow the same as deduction while computing the income of the assessee under the head “income from other source” since the provisions of section 57(iii) mandate for the grant of deduction with respect to any revenue expenditure incurred wholly and exclusively for the purpose of earning such income.

REFERRED :

FAVOUR : Partly in assessee's favour.

A.Y. : 2014-15

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