Income Tax Appellate Tribunal - Chandigarh
Swaraj Engines Ltd. vs J.C.I.T., Spl. Range-1 on 29 June, 2005
Equivalent citations: (2005)98TTJ(CHD)346
ORDER
M.A. Bakshi, Vice President
1. Appeal of the assessee for assessment year 1998-99 is directed against the order dated 12.3.2001 of the CIT(A), Bathinda (Camp at Chandigarh).
2. Ground Nos. 1 and 2 raised by the assessee relate to disallowance of interest on borrowed capital of Rs. 84,64,767 claimed by the assessee in the return of income Under Section 36(1)(iii). The AO has disallowed the claim by treating the claim as capital expenditure.
3. The second issue involved is relating to disallowance of Rs. 33,333 out of technical know-how fees claimed Under Section 35AB of the Income-tax Act, 1961.
We have heard the parties and perused the records.
4. The relevant facts in this case are that assessee had filed return of income at Rs. 9,34,98,467 on 30.11.98. The said return was processed Under Section 143(1)(a). Subsequently, the assessment was taken up for scrutiny and notices Under Section 142(1) and 143(2) issued. On 31.3.2000, assesses filed a revised return. In the revised return, assessee made a claim for deduction on account of interest on loan amounting to Rs. 84,64,767 Under Section 36(1)(iii). The said interest was not debited to the profit & loss a/c but the same had been capitalized. According to the assessee, the claim was made on the basis of the judgment of Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd., 103 ITR 715, which has been confirmed by the Hon'ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT, 177 ITR 377. The AO, however, disallowed the claim on the ground that assessee has acquired new plant and machinery and building and, therefore, interest for the loan worth 1016 lacs which was utilized for creating capital assets was not permissible. The CIT(A) has confirmed the view of the AO. The AO as well as the CIT(A) have sought to distinguish the facts in the case of Alembic Chemical Works (supra) by pointing out that in that case the acquisition pertained to the process of profit earning and not the acquisition of profit earning machinery or apparatus. According to the AO, in that case, the right obtained by the assessee was more to the Use of know-how than its exclusive acquisition. In the case of the assessee, according to the revenue authorities, the assessee has acquired new plant and machinery and building and therefore interest on borrowed money utilized for purchase of plant and machinery was rightly capitalized in the books of account. Reliance has been placed on the decision of the Supreme Court in the case of CIT v. Associated Cement Cos. Ltd., 172 ITR 257. It has been observed by the revenue authorities that the decisions relied upon by the assessee are distinguishable on facts.
5. The ld. Counsel for the assessee contended that assessee had acquired machinery and building in the process of expansion of existing business. No new plant was set up by the assessee. It was contended that assessee had enhanced the production capacity for the existing business. Reliance was placed on the decision of the Chandigarh Bench Of the ITAT in the case of Vardhman Polytex Ltd., Ludhiana v. DCIT, Spl, Range, Ludhiana. in I.T.A. Nos. 1599/Chandi/95 and 23/Chandi/96 (cross appeals) for assessment year 92-93 order dated 8.7.2002. It was accordingly pleaded that deduction may be allowed to the assessee. The ld. Counsel contended that as per provisions of Section 36(1)(iii), deduction is permissible on account of Interest on capital borrowed for purposes of business. Since assessee was already in business, the loans obtained for acquisition of new machinery and building was for the purposes of business and not for setting Up of new business. The ld. Counsel pointed out that assessee has hot claimed any deduction Under Section 80IA or under any other provision of the Act in respect of setting up of a new plant as none was set up. On the other hand, there was expansion of the existing business.
6. The ld. D.R., on the other hand, contended that Section 36(1)(iii) has been amended by the Finance Act, 2003 w.e.f. 1.4.2004 and it has been specifically provided that interest from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use shall not be allowed as deduction. According to the ld. D.R., the said amendment is clarificatory in nature and accordingly applicable retrospectively. The ld. D.R. also invited our attention to Explanation 8 to Section 43(1) which was inserted by the Finance Act of 1986 w.e.f. 1.4-74. The said Explanation provides that the amount of interest paid or payable in connection with the acquisition of asset as relatable to the period after the asset is first put to use shall not be included in the actual cost of assets. According to the ld. D.R., it is evident that the legislative intention is not to allow the interest up to the date of putting the asset to use as revenue expenditure. The ld. D.R. placed reliance on the following decisions:-
i) CIT v. Oswal Spg. & Wvg. Mills Ltd., 160 ITR 426 (P&H);
ii) Challapalli Sugars Ltd. v. CIT, 98 ITR 167 (SC).
The decision of Hon'ble Supreme Court in the case of CIT v. Associated Fibre And Rubber Industries, 236 ITR 471 (SC) is stated to be distinguishable on facts. The ld. D.R. also relied upon the decision of the Calcutta High Court in the case of JCT Ltd. v. DCIT, wherein it has been laid down that the amended provisions of Section 36(1)(iii) are applicable retrospectively. The ld. D.R. pointed out that the Calcutta High Court has distinguished the decision of the Supreme Court in the case of CIT v. Associated Fibres, 236 ITR 471(SC). Reliance was also placed on the decision of Kolkatta Bench of the Tribunal in the case of JCT Ltd. v. Asst. CIT, 65 ITD 169(Cal.), in support of the contention that when the assessee has himself capitalized the interest in the books of account, deduction Under Section 36(1)(iii) would not be permissible. Reliance was also placed on the decision of Ahmedabad Bench of the Tribunal in the case of Bio Pharma v. DCIT, 85 ITD 575 (Ahd.) in support of the contention that the Tribunal has the power to differ with the earlier decision in case the said decision is contrary to the decision of the jurisdictional High Court. Reliance was also placed on the decision of Punjab & Haryana High Court in the case of CIT v. Ram Lal Babu Lal, 234 ITR 776, in support of the contention that an order which is contrary to the decision of the jurisdictional High Court is rectifiable Under Section 264(2)/154 of the Income-tax Act, 1961. It was contended that in view of the authoritative decision of the jurisdictional High Court in the case of CIT v. Oswal Spg. & Wvg. Mills Ltd., 160 ITR 426, the other decisions to the contrary cited on behalf of the assessee are of no consequence. It was accordingly pleaded that the appeal of the assessee may be dismissed.
7. In counter reply, the ld. Counsel for the assessee contended that the amended provisions of Section 36(1)(iii) have been held to be applicable prospectively and not retrospectively by the Rajasthan High Court in the case of CIT v. Hindustan Zinc Ltd., 269 ITR 369 (Raj.) and there is no contrary decision on this issue. It was further contended that the decisions of the jurisdictional High Court in the case of CIT v. Oswal Spg. & Wvg. Mills Ltd. (supra) and the decision of Supreme Court in the case of Challapalli Sugars Ltd. v. CIT (supra) are in favour of the assessee. Reliance was also placed by the ld. Counsel for the assessee on the following decisions in support of the contention that in the absence of clear intention to the contrary, the amended law imposing liability is applicable prospectively and not retrospectively:-
i) C.E.D. v. M.A. Merchant, 177 ITR 490 (SC),
ii) K.M. Sharma v. ITO, 254 ITR 772 (SC),
iii) Gem Granites v. CIT 271 ITR 322 (SC).
8. The ld. Counsel further contended that assessee has paid interest by obtaining loan to be utilized for the purposes of business and not specifically for acquisition of assets. It was accordingly pleaded that the decision of the Supreme Court in the case of India Cement Ltd. v. CIT, 60 ITR 52 is inapplicable to the facts of this case. It was accordingly pleaded that the deduction may be allowed to the assessee.
9. In regard to second issue, the ld. Counsel contended that assessee had claimed deduction Under Section 35AB which was allowed. The deduction is permissible for six years. Ordinarily, deduction for assessment year 1998-99 was not permissible. However, since assessee had not claimed deduction in assessment year 1993-94, the 6th year of deduction would fall in assessment year 1998-99. It was accordingly pleaded that deduction may be allowed to the assessee.
10. We have given our careful consideration to the rival contentions. The issue involved in this case is relating to the claim of deduction Under Section 36(1)(iii). It is not disputed that there is an amendment in Section 36(1)(iii) and when Section 36(1)(iii) is read with Explanation 8 to Section 43A, the claim of the assessee for deduction Under Section 36(1)(iii) for the interest paid for the money utilized for purchase of capital assets may not be permissible if the said section is applied retrospectively. The Rajasthan High Court in the case of CIT v. Hindustan Zinc Ltd., 269 ITR 369 (Raj.), held that the amendment in Section 36(1)(iii) is applicable prospectively and not retrospectively. Admittedly, there is a decision of the Calcutta High Court to the contrary in the case of JCT Ltd. v. DCIT. However, since there is no decision of the jurisdictional High Court on this issue, we adopt the view which is favourable to the assessee as per the principle of law laid down by the Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd., 88 ITR 192. We accordingly proceed on the basis that proviso to Section 36(1)(iii) is applicable prospectively and not retrospectively. We therefore, proceed to consider as to whether on the basis of pre-amended law, assessee is entitled to deduction for the interest paid on borrowed money utilized for the purposes of purchase of machinery, construction of building etc. (capital assets). It has been pointed out earlier that the assessee has categorically stated before us that no new unit was set up by the assessee and that the purchase of machinery, construction of building and other capital expenditure was incurred in connection with expansion of existing business. It would, therefore, be useful to refer to some of the decisions which may help us to decide the issue in accordance with law.
The first important decision is that of Hon'ble Supreme Court in the case of India Cement Ltd. v. CIT, 60 ITR 52. In this case, their Lordships of the Supreme Court held as under:-
"The appellant obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation secured by a charge on its fixed assets. In connection therewith it spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed this amount as business expenditure;
Held, that the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business and was therefore allowable as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider the object with which the loan was obtained.
Where there is no express prohibition, an outgoing, by means of which an assessee procures the use of a thing by which he makes a profit, is deductible from the receipts of the business to ascertain the taxable income.
Obtaining capital by issue of shares is different from obtaining loan by debentures.
A loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee."
The second important decision is again of Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT, 98 ITR 167. In this case, their Lordships held as under:-
"As the expression "actual cost" has not been defined, it should be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capaitalised and added to the cost of the fixed assets created as a result of such expenditure."
The third decision, which is relevant, is of Supreme Court in the case of CIT v. Associated Fibre and Rubber Industries, 236 ITR 471. In this case, it was held as under:-
"Even though the machinery had not been actually used in the business at the time when the assessment was made, the same had been treated as a business asset and it was purchased only for the purposes of the business. In the circumstances, the interest paid on the amount borrowed for purchase of such machinery was a deductible amount. Consequently, the view taken by the Tribunal was correct. No question arose for reference."
The Calcutta High Court in the case of Tetron Commercial Ltd. v. CIT, 261 ITR 422, held as under:-
Whether the deduction under Section 36(1)(iii) of the Income-tax Act, 1961, is available or not is dependent on the question whether the capital borrowed is for the purpose of the business of the assessee. If it is found that the capital was borrowed for the purpose of the business of the assessee, the interest payable thereon is admissible under the said section. It is immaterial whether the same is in the nature of capital expenditure or revenue expenditure. If the expenditure is a business expenditure which relates to any stage of the business activity carried on by the assessee, whether isolated transaction or not, it is admissible for deduction under the said section. A business commences with the activities undertaken even at the preparatory stage for setting up of the business. Acquisition of immovable property for being used in the business by borrowed capital entitles the assessee to claim benefit of the section on the interest paid thereon, even if the asset acquired is not utilized for the purpose of the business in the relevant previous year."
The Gujarat High Court in the case of CIT v. Alemibic Glass Industries Ltd., 103 ITR 715, held as under:-
" It was contended for the revenue that, since during the relevant account years, the unit at Bangalore had not started production, the payment of interest on the borrowing which was utilised for the purpose of establishing that new unit should go towards the cost of the new unit and therefore on the principle accepted by the Supreme Court in Challapalli Sugars Ltd. v. Commissioner of Income-tax this interest should be treated as a capital expenditure and not as a revenue expenditure. This contention was not correct. The ratio of the decisions of the Bombay High Court in Calico Dyeing and Printing Works v. CIT, and of the Supreme Court in India Cements Ltd. v. Commissioner of Income-tax (1966) 60 ITR 52 and Challpalli Sugar Ltd.'s case is: (1) Where the borrowing is for the purpose of a business, the interest paid on such a borrowing becomes eligible for deduction contemplated by Section 10(2)(iii) of the act of 1922 or Section 36(1)(iii) of the Act of 1961; (2) this would be so, whether the capital is invested in order to acquire a revenue asset or a capital asset, because the act of borrowing capital is distinct from the act of investment of the capital to acquire an asset; (3) however, the business for which an asset of enduring nature is purchased with the borrowed capital should not be separate or distinct from the business for the purpose of which the capital is borrowed, if deduction under Section 10(2)(iii) is to be allowed; and (4) if there is no existing business with reference to which the capital is borrowed and the borrowed capital is invested to purchase a new asset of enduring nature, then the interest paid on such borrowing till the asset so purchased goes into production, increases the cost of installation of the said asset, and hence should be treated as capital expenditure not covered by Section 10(2)(iii) of 1922 Act or Section 36(1)(iii) of the 1961 Act.
Applying the above principles the interest, miscellaneous expenses and traveling expenses incurred by the assessee referable to the Bangalore unit are for the purposes of the assessee's business and as such allowable as revenue expenditure."
It is evident from the above decisions that deduction in respect of interest paid on borrowed money utilized for investment in capital assets acquired in connection with expansion of existing business is allowable. So, however, in this case, before the matter can be decided one way or the other, it is necessary to consider the decision of the jurisdictional High Court of Punjab & Haryana in the case of CIT v. Oswal Spg. & Wvg. Mills Ltd., 160 ITR 426. It is the case of the revenue that the decision of the jurisdictional High Court is against the assessee. We therefore, proceed to consider the claim.
In the case of Oswal Spg. & Wvg. Mills Ltd. (supra), the issue related to the machinery purchased on deferred payment basis. The assessee was already in business of spinning and weaving of woolen yarn. The machinery had been purchased for setting up of a totally new unit of a different kind. The assessee had capitalized the interest paid in respect of the deferred payments. The revenue had taken the view that the assessee was not right in treating the interest paid on deferred payment towards the cost of the machinery. On these facts, the Hon'ble High Court held as under-
" The assessee which carried on the business of spinning and weaving woolen yarn purchased machinery on deferred term basis from a foreign country for starting a new unit. The payment for the machinery was to be made in equal yearly instalments spread over a period of 10 years and while paying the instalments interest due on the balance price had to be included, The assessee claimed that the amount of interest paid should be included in the cost of machinery and that it was entitled to depreciation and development rebate on the said amount. The Income-tax Officer rejected the claim of the assessee while the Tribunal accepted the claim. On a reference:
Held, that the interest paid on the purchase of machinery was part of the cost of machinery and that the assessee was entitled to depreciation and development rebate on the said cost."
It is evident from the decision quoted above that the issue before the Hon'ble High Court was as to whether interest paid on deferred payment for the purchase of machinery was to be added to the cost of the machinery. The assessee in that case had not borrowed money for the purposes of business and purchased the machinery out of the borrowed money. The interest was paid directly to the supplier of the machinery for deferred payment. The Hon'ble High Court decided the issue in favour of the assessee by holding that assessee was justified in capitalizing the interest paid on deferred payment for the purchase of machinery. The view expressed by the Hon'ble High Court is in consonance with the view expressed by the Hon'ble Supreme Court in the case of CIT v. Govinda Choudhury And Sons, 203 ITR 881. In the said case, the assessee had received the interest by virtue of an award for late remittance of sale proceeds. The Hon'ble Supreme Court held that the character of interest was that of the sale proceeds and was to be treated as such.
11. The next question that arises for consideration is as to whether the principle laid down by the Hon'ble Punjab & Haryana High Court is applicable in respect of interest paid on borrowed money utilized for the purposes of expansion of business. In our considered view, the decision of the Hon'ble Punjab & Haryana High Court has got to be seen in the context in which it has been rendered. This principle is well established by various decisions of the Hon'ble Supreme Court. In the case of Sun Engineering Pvt. Ltd., 198 ITR 297, their Lordships of the Supreme Court held as under:-
"It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision."
This principle has been reiterated by the Hon'ble Supreme Court in the case of Padmasundara Rao v. State of Tamil Nadu, 255 ITR 147 In the said case, their Lordships laid down as under:-
"Courts should not place reliance on decisions without discussing how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they were words in a legislative enactment. Judicial utterances are made in the setting of the facts of particular cases. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases."
When the decision of the jurisdictional High Court is seen in the context in which it was rendered, it would not be difficult for us to hold that the said decision is not applicable in respect of the interest paid on borrowed money utilized for purchase of capital assets for expansion of business. In fact from the very decision of the Hon'ble Punjab & Haryana High Court in the case of Oswal Spg. & Wvg. Mills Ltd. (supra), it becomes abundantly clear that the Hon'ble High Court has expressed a different view in respect of registration expenses for obtaining a loan incurred by the assessee in connection with setting up of a new unit as business expenditure. Their Lordships held as under:-
"The assessee, hitherto carrying on the business of spinning woolen yarn, incurred registration charges for obtaining a loan for the purpose of starting a new venture, viz., manufacture of vanaspati ghee, and claimed the amount as business expenditure. The Income-tax Officer disallowed the claim on the ground that the new unit had not been set up during the relevant accounting period but the Tribunal allowed the claim. On a reference:
Held, that the loan was not an asset or advantage of an enduring nature, and the object with which it was raised was wholly irrelevant. Even if the unit of manufacturing vanaspati ghee had not been set up, the registration expenses for obtaining the loan would be a business expenditure and not of a capital nature. More over, the assessee was already a running concern and the endeavour was to set up a new vanaspati ghee unit. Therefore, the registration expenses were allowable as business expenditure."
It is, therefore, evident that the decision of the jurisdictional High Court does not come in the way of the claim of the assessee. On the contrary, it indirectly supports the claim of the assessee. We are, therefore, of the considered view that assessee is entitled to deduction in respect of the interest paid on borrowed money utilized for purposes of business. We may, however, clarify that if the assessee has purchased the machinery on deferred payment, the interest paid to the supplier of the machinery on the authority of the judgment of the Punjab & Haryana in the case of Oswal Spg. & Wvg. Mills Ltd. (supra), the interest component shall have to be capitalized. The ld. Counsel for the assessee stated before us that he has no objection if the nature of the interest and the borrowings is examined by the AO for the purposes of deciding the claim in accordance with this decision. We accordingly set aside the issue to the file of the AO for the purposes of verification of the claim of the assessee and for deciding the issue as per our following directions:-
(a) If the interest has been paid on borrowed money even if utilized for the purchase or construction of capital assets in connection with the expansion of business, it will be allowed as a deduction Under Section 36(1)(iii);
(b) In case interest has been paid to the supplier of the machinery for deferred payment of purchase price, the said interest shall be capitalized and not allowed as a deduction Under Section 36(1)(iii).
We direct accordingly.
12. Before parting, we may point out that the mere fact that the assessee has capitalized the interest in the books of account does not debar the allowability of the claim in view of the following decisions:-
i) DCIT v. Mangalam Cement Ltd. (Jaipur)(TM);
ii) Core Health Care Ltd. v. DCIT, 78 ITD 1 (Ahd.)(TM);
iii) DCIT v. Tata Sponge Iron Ltd., 90 ITD 138 (Cuttak) &;
iv) 92 TTJ 568 (And.).
The decision of Calcutta Bench of the ITAT in the case of JCT Ltd. v. ACIT, 65 ITD 169 (Cal.) is the only decision to the contrary and we prefer the majority view.
13. The only other ground involved in this appeal is relating to the denial of deduction Under Section 35AB. Deduction Under Section 35AB, admittedly, was allowed to the assessee in assessment year 1992-93 @ 1/6th. Further deduction was permissible @ 1/6th in subsequent five years. The assessment year under appeal being 1998-99 falls beyond six years. The assessee had claimed deduction on the ground that no deduction was claimed in assessment year 1993-94 and, therefore, the assessee should get an extension of one year for the purposes of claim of deduction Under Section 35AB. In our considered view, there is no merit in the claim of the assessee insofar as deduction Under Section 35AB is permissible in six years consecutively. The mere fact that deduction for assessment year 93-94 was not claimed by the assessee does not extend the period of deduction Under Section 35AB to more than six years. Therefore, the disallowance of Rs. 33333/- out of the technical know-how fee claimed Under Section 35AB of the Income-tax Act, 1961 in the year under appeal is upheld.
14. In the result, the appeal of the assessee is partly allowed.