Income Tax Appellate Tribunal - Ahmedabad
Core Health Care Ltd. vs Deputy Commissioner Of Income Tax on 6 June, 2000
Equivalent citations: (2001)70TTJ(AHD)490
ORDER
R.K. Bali, AM.
These two cross-appeals: one by the assessee and the other by the revenue relating to assessment year 1992-93 are taken up together and disposed of by a common order for the sake of convenience.
2. In ITA No, 444/Ahd/1997, which is the appeal filed by the assessee, the following substantial grounds have been taken :
(1) The order passed by the learned Commissioner (Appeals) is bad in law and contrary to the facts of the case.
(2) On the facts and in the circumstances of the case, the Commissioner (Appeals) erred in not allowing interest paid on borrowings amounting to Rs. 1,56,76,000 as a deduction under section 36(1)(iii).
(3) The Commissioner (Appeals) erred in not allowing the following expenditure as revenue expenditure :
Sr. No. Particulars Amount in Rupees 1 .
Salaries & wages 21,80,000
2. Travelling expenses 7,40,000
3. Telephone & Telex exp.
5,06,000
4. Lease rent charges of vehicles 5,58,000
5. Misc. Factory expenses 7.20,000
6. Recruitment expenses 4,64,000
7. Insurance 3,61,459 On the facts and circumstances, your appellant submitted that the expenditure is fully allowable as claimed, as it is not capital expenditure.
(4) Debenture issue expenses
(a) It is submitted that the statement by the Commissioner that it was the assessee's argument that the expenditure relating to convertible part of the debentures were only covered by section 35D is erroneous.
(b) The learned Commissioner (Appeals) erred in not disposing of ground No 2(b)(i) of the appeal relating to inclusion of Rs. 200 lakhs of non-convertible debentures which were already allotted on 23-3-1992, and utilised for the purpose of the project as part of capital employed.
(5) Debentures issue expenses The Commissioner (Appeals) has erred in directing the assessing officer to allow on proportionate basis the expenditure of Rs. 40,25,137 on the facts and circumstances of the case. Your appellant submits that this expenditure is fully allowable under section 37(1) of the Act.
(6) Expenditure on advertisement : Rs. 70,22,742 The Commissioner (Appeals) has erred in not allowing the total expenditure on advertisement as shown on the facts and circumstances of the case. Your appellant submits that the expenditure should be allowed in full.
(7) Disallowance of Rs. 20,000 out of gift articles The Commissioner (Appeals) has erred in confirming ad hoc disallowance of Rs. 20,000 made by the assessing officer. Your appellant submit that this disallowance, should be deleted.
(8) Disallowance of Rs. 30,000 out of marketing expenses The Commissioner (Appeals) has erred in confirming ad hoc disallowance of Rs. 30,000 made by the assessing officer. Your appellant submit that this disallowance should be deleted.
(9) Regarding claim of deduction under section 80HH and 80-I
(a) The Commissioner (Appeals) has erred in excluding gross interest receipt of Rs. 99.30 lakhs from income eligible for deduction under section 80HH and 80-I. Your appellant submit that this income forms part of income derived from industrial undertaking and, therefore, eligible for deduction under section 80HH and 80-I.
(b) Without prejudice to what is stated in (a) above, it is submitted that the Commissioner (Appeals) has erred in deducting only Rs. 1 lakh as expenditure to earn the interest income on the facts and circumstances of the case. Your appellant submit that interest paid on borrowings and other expenses attributable to the earning of interest income should be deducted from the gross receipt of income and only such net income of interest then should be deducted/excluded from the income eligible for deduction under section 80HH and 80-I.
(c) The Commissioner (Appeals) has erred in confirming the method of computing income eligible for deduction under section 80-I wherein the effect of deduction under section 80HH is given first and on the balance amount, deduction under section 80-I is given. Your appellant submit that for the purpose of section 80-I prior effect should not be given for deduction under section 80HH.
(d) The Commissioner (Appeals) has erred in holding that brought forward investment allowance should be deducted for arriving at the income eligible for deduction under section 80HH and 80-I. Your appellant submit that unabsorbed investment allowance of earlier years should not be deducted from the current year's income for the eligibility of deduction under section 80HH and 80-I.
3. In ITA No. 529/Ahd/1997, which is the appeal filed by the revenue , the following substantial grounds have been taken :
"1. The learned Commissioner (Appeals) has erred in law and on facts in:
(i) directing to recompute the deduction under section 35D considering bridge loan into capital employed;
(ii) deleting the disallowance of Rs. 44,250 made under section 40A(3);
(iii) deleting the disallowance of Rs. 4,51,452 made under section 43B.
(iv) directing to allow deduction under section 80HH and 80-I on miscellaneous income."
4. The assessee is a domestic company in which the public are substantially interested. The company is engaged principally in the business of manufacturing intravenous fluids (large volume parenterals i.e., LVP) and sterile water for injections (small volume parenterals i.e., SVP). The manufacturing operations are carried out at its factory at village Rajpur of Kadi Taluka in Mehsana District which is a centrally notified backward area. The commercial production was commenced in February, 1988, at Rajpur factory.
The manufacturing capacity of LVP was gradually increased from time to time. During the financial year ended 31-3-1992, the company installed three more machines (in addition to three existing machines) for the production of LVP and SVP. The capacity of LVP was doubled from 18 million bottles to 36 million bottles and new capacities were established for manufacture of 45 million units of SVP. In case of LVP, the range of I.V. fluids was increased by installing additional machines together with increase of capacities.
The new machines purchased during the previous year were installed at the same location i.e., at Rajpur where existing operations are carried out.
5. The return was filed by the assessee declaring Nil income for the assessment year 1992-93 on 31-12-1992. Subsequently a revised return was filed on 6-8-1993, declaring a loss of Rs. 1,11,68,543. In the revised return the assessee-company has de-capitalised certain expenditure in respect of purchase and installation of new machineries and claimed its deduction as a revenue expenditure. In the note attached with the return the assessee gave the following justification for filing the revised return :
"Following expenses incurred during the previous year have not been charged to P&L a/c of the year but have been capitalised in the books of account of the company :
Rs.
(a) Interest 1,56,76,000
(b) Salaries & wages 21,80,000
(c) Travelling expenses (including foreign travelling of Rs. 8,90,000) 16,30,000
(d) Telephone, telex expenses 5,06,000
(e) Professional fees 3,50,000
(f) Lease rental charges of vehicles 5,58,000
(g) Factory miscellaneous expenses 7,20,000
(h) Recruitment expenses 4,64,000
(i) Expenses incurred on trial runs of machineries including cost of raw materials, fuel, power wages, etc. 14,15,000
(j) Insurance 3,61,459 2,38,59,459 Out of these, following expenses are directly related to the acquisition/installation of the capital assets :
Rs.
Foreign travelling 8,90,000 Professional fees 3,50,000 Trial runs expenses 14,14,000 26,54,000 Other expenses aggregating to Rs. 2,12,05,459 are of revenue nature and are fully deductible under the provisions of Income Tax Act, 1961. These expenses are of revenue nature and are incurred wholly and exclusively for the purpose of business. These are fully deductible under the provisions of Income Tax Act, 1961, and hence the same are claimed in full, It is submitted that the same be allowed in full. Subsequently, on reversal of capitalised expenditure, the depreciation has been claimed on the basis of revised cost as per attached computation of depreciation.
Original return of income is revised to the above extent."
6. The assessee's case was taken for assessment and the assessing officer disallowed an amount of Rs. 2,12,05,459 out of the new project expenses which were claimed by the assessee as a revenue expenditure in the note attached with the revised return reproduced supra. The above action of the assessing officer has since been confirmed by the Commissioner (Appeals) and the assessee has challenged this action of the departmental authorities by taking up grounds of appeal Nos. 2 and 3 in ITA No. 444/Ahd/1997 before us.
7. The assessing officer discussed at length the case of the assessee claiming the aforesaid expenditure of Rs. 2,02,05,459 as a revenue expenditure in the revised return filed and adjudicated the issue against the assessee by observing as under :
"The first relevant point to be considered here is whether the assessee-company is entitled to file a revised return on the basis of a change in opinion ? Section 139(5) provides that if any person discovers any omission or wrong submission therein,. he may furnish a revised return at any time before the expiry of prescribed period of time. Such radical change in the treatment of expenditure cannot be covered by the meaning of the words "discovers any omission or any wrong statement", i.e., the assessee-company cannot revise the return on these grounds.
In view of these facts, the assessee-company was asked to show cause as to why the above-mentioned expenditure of Rs. 2,12,05,459 which pertains to purchase of the machinery and wrongly claimed as deduction in the revised return should not be disallowed and added to the total income of the assessee-company.
Submission of the assessee-company:
In response to the show-cause notice, the assessee-company vide its written submission dated 24-3-1995, has filed reply running in 20 pages. In view of the lengthy reply of assessee, the contentions raised are summarised as under :
(i) It is stated by authorised representative of assessee that the abovementioned expenditure of Rs. 2,12,05,459 pertains to purchase and installation of three machineries for production of LVP and SVP. With the installation of these new machineries, the capacity of LVP was doubled from 18 million bottles to 36 million bottles and a new capacity was established for manufacture of 45 million units of SVP.
(ii) It is further contended that making of accounting entries is different with determination of the character or nature of claim of deduction and relied upon the decision of Supreme Court in the case of CIT v. India Discount Co. Ltd. (1970) 75 ITR 191 (SC). In addition to this, various other court decisions are also quoted.
(iii) It is also pleaded that the case of assessee is not covered by the Supreme Court decision in the case of Chellapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC) on the reason that the assessee-company had made investment in existing business.
(iv) It is further stated that the case of assessee is covered by the decision of Hon'ble Gujarat High Court in the case of CIT v. Alembic Glass (P) Inds. Ltd. (1976) 103 ITR 715 (Guj).
(v) It is further argued that the assessee's case is covered by the Supreme Court decision in the case of India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC) and Bombay High Court decision in the case of Callico v. CIT (1958) 34 ITR 265 (Bom).
Determination :
I have carefully examined the above-mentioned submissions of the assessee and have observed as under:
(i) It is a matter on record that the above-mentioned expenditure of Rs. 2,12,05,459 pertains to setting up of a new unit, in which three machineries were installed for enhancement of existing LVP production and to start a new production line of SVP. The assessee has capitalised the above-mentioned expenditure along with cost of new machinery and has claimed depreciation on such capitalised cost. In the original return of income filed, the assessee-company has not made any changes in respect of such capitalised amounts. However, later on the assessee-company has filed a revised return and claimed total expenditure of Rs. 2,12,05,459 as revenue expenses.
(ii) The first contention of the assessee is that treatment of an expenditure by the assessee-company in the books of accounts is neither determinative nor conclusive. But, it is to clarify that treatment of a particular expenditure in its books of accounts, though neither determinative of the nature of expenditure nor conclusive one way or other cannot be regarded as irrelevant. My this conclusion is supported by the Bombay High Court decision in the case of CIT v. Sandoz India Ltd. (1994) 206 ITR 599 (Bom). It is an admitted fact that the assessee-company was in the process of setting up a new project during the year under consideration. Accordingly, the expenses incurred for the construction of a new unit have been rightly classified by the assessee as pre-operative expenses and rightly capitalised to the cost of the assets.
(iii) The assessee is following mercantile system of accounting and as per this accounting method, only those expenses are to be deducted from the income which have been incurred to earn such income. Following this basis of mercantile system of accounting, assessee has not debited per-operative expenses in support of new machinery installed, in the P&L a/c prepared for the year under consideration. The accounting principle followed by the assessee is in accordance with the guidelines issued by the Institute of Chartered Accountants of India in which it is clarified that all the expenses incurred for setting up a project including interest, salaries, travelling expenses and other expenditure may be capitalised with the cost of the asset for the period prior to the asset coming into production. It is, therefore, seen that the final accounts of the assessee were prepared correctly as per the method of accounting followed by it and as per the guidelines of Institute of Chartered Accountant of India. In the original return of income also, the assessee-company has computed taxable income on the basis of profit determined as per its audited accounts. Thereafter, suddenly, the assessee has revised its return of income and has come out with a claim for deduction of all the expenditure incurred for setting up of a unit for expansion of the production capacities of existing and new products and no reason is specified for this change of opinion by the assessee. If the company was rightly of the opinion that such expenditure was of revenue in nature, then it should have debited the same to the P&L a/c.
(iv) It has been held by various courts that the assessee cannot follow two different methods of accounting for computing the profit-one to be presented before the shareholders, bank and other purposes on one hand and another method for presenting before the revenue authorities on the other hand. As per the provisions of section 145(1) also, income chargeable under the head "Profits and gains of business or profession" is to be computed as per the method of accounting regularly followed by the assessee. Therefore, once the company has come to the conclusion that pre-operative expenses including interest on borrowed funds are of capital in nature and has to be included to the cost of machinery, there is no reason why such expenditure or part thereof should be claimed as revenue expenditure and to be allowed as deduction while computing the profit of business for the purpose of taxation.
(v) Without prejudice to the above, it appears that the assessee-company has tried to extend the decisions given by High Courts in different facts and circumstances, Out of the decisions relied upon by the assessee, the facts of the case of India Cements Ltd. (supra), are of altogether different as in that case, the expenditure under consideration of the court was that of certain expenditure incurred on raising loans and hence the same is not applicable to the facts of assessee's case. In next decision quoted by the assessee is delivered by Honble Gujarat High Court in the case of Alembic Glass Works Ltd. (supra). It may be stated here that this decision of Gujarat High Court was given in 1974 when there was no clear-cut definition to the 'actual cost' of the asset was available in the statute and the said decision was pronounced with reference to assessment years 1965-66 and 1966-67, with regard to capitalisation of interest expenditure. Therefore, the ratio of the decision cannot be made applicable after insertion of various Explanations below section 43(1) of the Income Tax Act, 1961.
(vi) It is to further add that the assessee has de-capitalised various expenditure pertaining to new project including the expansion of its capacity. In this regard, the following submission of the assessee-company is mentioned for the sake of clarification..
"In connection with setting up of the new unit, certain expenses incurred were treated as cost of assets created in the books of accounts of the company as under :
Rs.
(a) Interest in respect of borrowings utilised for construction of building/purchase of machineries 1,56,76,000
(b) Salaries and other benefits of personnel employed in project division whose main function relates to new projects including expansion of capacities (Purchase Department, Finance Department, etc).
21,80,000
(c) Travelling expenses in connection with purchases of equipments, raising of finance, taking statutory approvals, etc. (foreign travelling expenses incurred specifically import of machines has been treated as part of the cost for income-tax purposes) 7,40,000
(d) Telephone and telex expenses incurred for purchase of equipments, borrowings of funds and other incidental activities for expansion project 5,06,000
(e) Lease rental charges for vehicle used by project persons for going to factory and other suppliers' places, meeting bankers, etc. 5,58,000
(f) Miscellaneous expenses incurred at factory in connection with setting up of expansion capacities which are not directly linked with creation of assets 7,20,000
(g) Recruitment expenses for persons to be employed for new unit 4,64,000
(h) Insurance during the period of establishment of the project for building, machineries, etc. 3,61,459 Total 2,12,05,459"
(Refer submission dated 24-3-1995) It is evident from the submission of the assessee-company that the expenditure in respect of the new project has been de-capitalised not in the original return, but in the revised return. The above-mentioned details of expenses clearly indicate that the expenditure which was de-capitalised pertains to the new project undertaken by the assessee. In view of this, the decision of Alembic Glass Works Ltd. (supra) cited by the assessee is not applicable in this case.
(vii) The assessee has de-capitalised all the expenditure which pertains to actual cost' of the assets in respect of the new project. 'Actual cost' according to section 43(1) means "the actual cost of the assets to the assessee. The ordinary meaning of the word "actual" is "existing in fact or fact as opposed to imaginary or past state of things". The dictionary meaning of the word "cost" is what is laid out or suffered to obtain anything". The meaning of the expression actual cost to the assessee" would, therefore, be what the assessee has, in fact, expended or laid out for the purpose of acquiring the asset.
The expression "actual cost" should be construed in the sense which no commercial man would misunderstand. For this purpose, it would be necessary to ascertain the connotation of above expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The word "cost" as observed on p. 424 of Simon's Taxes, 3rd Edn., Vol. B is not synonymous with the price. Other items of direct expenditure must be added to the price. The accepted accountancy rule for determining the 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 the company for acquisition and erection of machinery, the interest incurred before commencement of production from the plant and machinery on such borrowed money can be capitalised and added to the cost of a fixed assets which have been created as a result of such expenditure. It was laid down by the Hon'ble Supreme Court in Jogta Coal Co. Ltd. v. CIT (1959) 36 ITR 521 (SC) that actual cost to be determined for the purposes of section 43(1) is the actual cost of assets to the assessee and not the price paid by assessee to vendor. In Chellapalli Sugars Ltd. v. CIT (supra), the Supreme Court has explained the meaning of expression "actual cost' as under :
"It would appear from above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition."
It is evident from above judgment of Hon'ble Supreme Court that the legislature has used the word "cost" advisedly and not the word "price", why ? Cost comprehends much more than the mere listed price of a "plant" and preoperative interest is also included in it.
The Honble Gujarat High Court has also examined the issue of capitalisation of interest to the cost of plant and machinery under section 43(1) in its subsequent decisions. In the case of CIT v. Khedut Sahakari Khand Udyog Mandali Ltd. (1976) 104 ITR 206 (Guj), while examining the issue of capitalisation of interest to the actual cost of assets under section 43(1), the then Hon'ble Justice H. J. Diwan has observed as under :
"We may point out that, so far as the second question is concerned, the matter is directly covered now by the decision of the Supreme Court in Chellapalli Sugars Ltd. v. CIT (supra). There, the Supreme Court has laid down that interest paid before the commencement of production on amounts borrowed by the assessee for acquisition and installation of plant and machinery forms part of the "actual cost" of the assets to the assessee within the meaning of expression in section 10(5) of the Indian Income Tax Act, 1922, and the assessee will be entitled to depreciation allowance and development rebate with reference to such interest also. It was further held by the Supreme Court that, 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 for accountancy prevailing in commerce and industry. The accepted accountancy rule for determining the 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 capitalised and added to the cost of the fixed assets created as a result of such expenditure... "
At a later date, the Hon'ble Gujarat High Court in the case of Arvind Mills Ltd. v. CIT 1978 CTR (Guj) 90 (1978) 112 ITR 64 (Guj) has examined the ratio as upheld by the Hon'ble Supreme Court in the case of Chellapalli Sugars Ltd. (supra) with reference to the actual cost of assets to the assessee, which is quite relevant and clearly applicable to the facts of this case, and has held as under :
"It would thus appear to be well settled that the expression "actual cost" in the context of the statutory provisions under consideration must be understood in the sense in which no commercial man would misunderstand. The word "cost" is not synonymous with the "price". Besides, the price of machinery or plant, it takes in many other items of expenditure such as for instance, freight, warehouse or insurance charges, legal expenses incurred in connection with acquisition and interest before the commencement of production on capital contributed or borrowed to acquire such assets. In other words, in determining the actual cost of a fixed asset into existence and to put it in working condition may legitimately be taken into account (observation of Justice P.D. Desai at p. 77, 112 ITR).
It is thus proved from the above cited decisions with regard to "actual cost' that all expenses including interest on borrowed funds, which were incurred in order to bring an asset in working condition should be capitalised to the actual cost of the asset. In fact, all the decisions of different High Courts, whenever the question regarding "actual cost" was under consideration, not only the ratio of Chellapalli Sugars Ltd. (supra) is relied upon but it is followed. This clearly indicated that the decision in the case of Chellapalli Sugars Ltd. (supra) in a landmark decision on the issue of 'actual cost' which is also in accordance with the normally accepted accountancy policy and recommended by institute of Chartered Accountants of India. The ratio of Chellapalli Sugars Ltd. (supra) is followed by different High Courts, in addition to the cases cited above, in all the cases where the question of 'actual cost" was under consideration. irrespective of the fact whether the assessee was running the business or in the process of starting a new business. In this regard, following decisions may be referred where the decision of Chellapalli Sugars Ltd. (supra) was followed and in these cases it is held that interest on borrowed capital for the period before the use of assets was to be capitalised with the cost of assets :
(1) CIT v. Tata Hydro Electric Power Supply Co. Ltd. (1987) 63 CTR (Bom) 244;
(2) CIT v. United Carbon India Ltd. (1989) 178 ITR 444 (Bom); and (3) Sampathkumar v. CIT (1986) 158 ITR 25 (Mad).
Without prejudice to the above-mentioned argument, it is important to mention here that the assessee-company has capitalised above referred expenditure of Rs. 2,12,05,459 to the cost of assets in the books of accounts and similar stand was taken in its original return of income filed. However, later on, after a gap of more than 7 months, the assessee-company has suddenly revised its return of income and has treated the said capital expenditure worth R. 2,12,05,459 as revenue expenditure and no reasonable cause is forthcoming for such changed stand when all the circumstances were the same for the assessee-company. Section 139(5) gives an opportunity to the assessee-company to file a revised return if he discovers any omission or wrong statement in the original return filed earlier. The facts of the case clearly indicate that the case of assessee is not covered by the word "omission or any wrong statement therein" i.e., the assessee-company was not entitled to revise the return of income under section 139(5) of the Income Tax Act, merely on a reason that after 7 months from the date of filing of original return, now a different treatment is required on certain capital expenditure.
Subject to the above discussion, it is held as under:
"(i) The assessee's case is clearly covered by the principle as upheld by Hon'ble Supreme Court in the case of Chellapalli Sugars Ltd. (supra). The case laws, as cited by the assessee-company are not applicable considering the facts of the case.
(ii) The assessee-company has correctly capitalised the expenditure of Rs, 2,12,05,459 pertaining to the new project/expansion along with the cost of assets in its books of accounts and as claimed in its original return of income.
(iii) The above mentioned expenditure of Rs. 2,12,05,459 are to be included to the cost of asset as per the provisions of section 43(1) of the Income Tax Act.
Considering the above facts and circumstances, the claim of assessee-company for deduction of Rs. 2,12,05,459 as revenue expenditure is rejected and these expenditure are capitalised to the cost of assets. The assessee-company will, however, be entitled to claim depreciation when the new project is set up and machinery has actually been put to use and started commercial production. "
8. As already mentioned in para 6 the assessee's appeal to the Commissioner (Appeals) was dismissed on this point and the Commissioner (Appeals) has adjudicated this issue by passing an elaborate order after summarising the findings of the assessing officer and taking into consideration the submissions of the assessee. The issue has been discussed from pp. 1 to 84 of the impugned appellate order. After summarising the order of the assessing officer at pp. 1 to 15 of the impugned appellate order in pp. 2 to 2.9, the Commissioner (Appeals) endorsed the view of the assessing officer with regard to the action in holding that the amount of Rs. 1,56,76,000 paid on account of interest was required to be capitalised in view of the decision of the Supreme Court in the case of Chellapalli Sugars Ltd. (supra) after distinguishing the judgment of the Supreme Court in the case of India Cements Ltd. (supra) relied upon by the assessee before the assessing officer as well as the Commissioner (Appeals). The Commissioner (Appeals) also referred to Board's Circular No. 461, dated 9-7-1986 (paras 18.1 and 18.2 of Circular) and his findings are summarised in para 2.5 which we will like to reproduce to bring it into close focus :
'2.5 To sum up, the judgment in India Cements Ltd. is with reference to cost of raising loan and is not concerned with issue of interest on funds specifically borrowed for acquiring capital asset. The Institute of Chartered Accountants of India have laid down clear guidelines which are based on distinguishing the facts in the case of India Cements Ltd. In subsequent decision in the case of Chellapalli Sugars Mills Ltd. inclusion of interest in actual cost has been upheld. Even otherwise the judgments in the cases of India Cements Ltd., Chellapalli Sugar Mills Ltd. and Alembic Glass Industries Ltd. related to assessment years 1950-51, 1955-56, 1959-60, 1965-66 and 1966-67. At that time there was no provision in the Income Tax Act on this issue. After insertion of Expln. 3(1), the law has to be understood as per the statutory provision of Expln. 8. This position is amply clarified in Central Board of Direct Taxes Circular No. 461, dated 9-7-1986 (supra).
The Circular of the Board referred to supra by the Commissioner (Appeals) (Paras 18.1 and 18.2) are as under:
'18.1. Under the existing provisions of section 43(1) of the Income Tax Act, "actual cost" means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. It was found that certain taxpayers supported by some court decisions had resorted to a major change in accounting practice by capitalising the interest paid or payable in connection with acquisition of an asset relatable to the period after such asset is first put to use. This capitalisation implies inclusion of interest in the actual cost of the asset for the purposes of claiming depreciation, investment allowance, etc. under the Income Tax Act.
18.2. It is an accepted accounting principle that where an asset is acquired out of borrowed funds, the interest paid or payable on such funds constitute the cost of borrowings and not the cost of the asset acquired with those funds. It is for this reason that as per the clear guidelines issued by the Institute of Chartered Accountants of India, the interest on moneys which are specifically borrowed for the purchase of a fixed asset may be capitalised only relating to the period prior to asset coming into production i.e., relating to the erection stage of the asset.
The Commissioner (Appeals) thereafter recorded the submissions made on behalf of the assessee in paras 3 to 3. 11 at pp. 15 to 27 of the impugned appellate order and gave his findings in paras 4 to 4.25 and 5 to 5.14 at pp 29 to 77 of the order to the effect that the assessee is not entitled to claim the deduction of Rs. 1,56,76,000 as a revenue expenditure which it has initially treated as a capital expenditure in its books of accounts and claimed it as a revenue expenditure only by filing a revised return as an afterthought.
9. Thereafter, the Commissioner (Appeals) discussed the question relating to the deduction of expenditure of salaries, wages, travelling expenses, telephone and telex expenses, professional fees, lease rent charges of vehicles, miscellaneous factory expenses, insurance, financial charges, etc. other than interest on borrowed funds which were initially capitalised by the assessee in the books of accounts and which related to acquisition of three machines and putting them into working condition but subsequently claimed as deduction while filing the return under section 139(5) on the ground that such type of expenditure do not fall in the categories of expenses to which the provisions like section 36(1)(iii) can be applied. According to the Commissioner (Appeals), these expenses have apparently been claimed as a deduction under the provisions of section 37 which expressly debars allowance of expenditure in the nature of capital expenditure. Thereafter, the Commissioner (Appeals) recorded in paras 6 and 6.1 to 6.4 of the impugned appellate order his findings that such type of expenditure cannot be allowed as deduction under section 37 as admittedly these related to the acquisition and putting into working condition of new machines and even according to the assessee itself these were capitalised in the books of accounts. The Commissioner (Appeals) thereafter referred to certain authorities enumerated in para 6.1 of the impugned order and held that such type of expenditure has to be necessarily capitalised and treated as part of the cost of acquisition of the new machines irrespective of the fact that whether the business has come into existence or not. Accordingly, the Commissioner (Appeals) upheld the action of the assessing officer in denying the assessee's claim for deduction also in respect of other expenses relating to salaries, wages, travelling expenses, telephone and telex expenses, miscellaneous factory expenses, lease rent charges, insurance, etc. which were initially capitalised in the books of accounts by the assessee but subsequently claimed as deduction under section 37 on the ground that the new machines were only meant to increase the existing business capacity of the assessee and they were in relation to the staff who was looking after the entire business of the assessee and it was wellnigh impossible to bifurcate as to which portion of the salaries paid to the staff related to the existing machines and which portion related to the new machines acquired in the assessment year under consideration.
10. Aggrieved with the order of the Commissioner (Appeals) the assessee has filed this second appeal and the learned Advocate Shri S.E. Dastur, appearing on behalf of the assessee, submitted that the assessing officer as well as the Commissioner (Appeals) both have erred in not allowing the deduction of Rs. 2,12,05,459 claimed by the assessee as a revenue expenditure by filing the revised return. Shri Dastur further submitted that the assessing officer has disallowed the claim of the assessee on the basis of reasons given in the assessment order which can be summarised as under :
(i) That the interest of Rs. 1,56,76,000 paid related to acquisition of new machines which was connected with the expansion of new unit.
(ii) The assessee itself has capitalised the same in its books of accounts and showed it as capital expenditure.
(iii) There was no debit of the amount of interest as well as part of other expenses relating to salaries, wages, travelling expenses, lease rent charges, telephone and telex expenses, miscellaneous factory expenses, insurance, etc. which were claimed as a deduction in the return filed under section 139(5) in the R&L A/c.
(iv) The assessee has consciously followed two methods of accounting; one for shares holders and financial institutions and the other for tax authorities which is not permissible.
(v) The assessing officer further held that the Supreme Court decision in the case of India Cement (supra) was distinguishable and the Gujarat High Court decision in the case of Alembic Glass Industries (supra) would not apply in view of the insertion of Expln. 8 to section 43(1). The assessing officer accordingly disallowed the claim of the assessee purportedly relying on the decision of the Supreme Court in the case of Chellapalli Sugars Mills (supra), the decision of the Gujarat High Court in the case of Khedut Sahakari Khand Udyog Mandali Ltd. (supra) and the decision in the case of Arvind Mills Ltd. (supra).
10.1 Shri S.E. Dastur, the learned Advocate, further submitted that the Commissioner (Appeals), on the other hand, upheld the action of the assessing officer by passing although a very detailed order which is full of repetition but in essence he upheld the addition on the following reasonings :
That in an ongoing business principles of accountancy are very important and in a ongoing business, income computation is a method of estimation based on principles of accounting. It was submitted that the learned Commissioner (Appeals) is of the opinion that the assessee having once chosen to capitalise the interest and other related expenditure in connection with the installation of new machineries and putting them into working condition although in an existing business which was expanded by the assessee, he can not be allowed to later on claim that the expenditure incurred in relation to interest as well as other related expenses on salaries, wages, travelling expenses, telephone and telex expenses, insurance, etc., should now be allowed as deduction as these are expenses of revenue nature. It was submitted that the Commissioner (Appeals) was of the opinion though erroneously that whether an item of expenditure is capital or revenue is a matter of accounting and not of law and the treatment given by the assessee in the books of accounts will overrule the law. Shri Dastur further submitted that the Commissioner (Appeals) has confused himself by treating the mode of making entries in the books of accounts as synonymous with the method of accounting followed by assessee. It was submitted that the Commissioner (Appeals) has erroneously held that the method of accounting adopted by the assessee and entries made by it are binding on the department and has erroneously distinguished the case of India Cements Ltd. (supra) on the ground that it deals with expenditure other than interest despite holding that the Supreme Court in India Cements Ltd. holds expenses such as interest is not of revenue account. It was submitted that the Commissioner (Appeals) has erroneously tried to distinguish the decision of the Gujarat High Court in the case of Allambic Glass Industries (supra) by relying on the decision of the Supreme Court in the case of Chellapalli Sugars Mills (supra). Shri S.E. Dastur, the learned Advocate, submitted that the crux of the arguments and findings of the Commissioner (Appeals) in its very lengthy order is that once the assessee has capitalised the interest in its books of accounts, it ceased to be interest and similar is his view in relation to other related expenses incurred under other heads like salaries, wages, travelling expenses, lease rent charges, insurance, etc. 10.2. After summarising the findings of the assessing officer as well as the Commissioner (Appeals) which have been elaborately recorded by the assessing officer in 10 pages and the Commissioner (Appeals) in 84 pages, Shri Dastur submitted that both of them have erred in denying the claim of deduction of account of interest and other related expenses claimed by the assessee as a revenue expenditure by filing the revised return under section 139(5). Shri Dastur further submitted that the method of accounting and the entries made in the books of accounts are two separate things and the provisions of section 145 are concerned only with method of accounting. For that Shri Dastur placed reliance on the decisions which are as under :
(i) CIT v. Chunilal V. Mehta & Sons (P) Ltd. (1971) 82 ITR 54 (SC)'.
(ii) CIT v. Motilal Padampat Sugar Mills Co. (P) Ltd. (1979) 118 ITR 825 (All);
(iii) CIT v. McMillan & Co. (1958) 33 ITR 182 (SC);
(iv) CIT v. A. Gajapathy Naidu (1964) 53 ITR 114 (SC); and
(v) Bharat Forge Ltd. v. Deputy CIT (1995) 53 ITD 757 (Pune-Trib).
Shri S.E. Dastur, the learned Advocate, further submitted that the claim of an assessee has to be decided on the basis of the provisions contained in the Income Tax Act and not on the basis of entries made by the assessee in the books of accounts. For this reliance was placed on the following decisions :
(i) Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC);
(ii) India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC);
(iii) CIT v. Gujarat Mineral Development Corpn, (1981) 132 ITR 377(Guj); and
(iv) Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC).
Shri Dastur further submitted that as far as the deduction on account of interest is concerned, the same is revenue expenditure and is allowed as deduction under section 36(1)(iii) irrespective of the fact as to whether it is used for acquiring a capital asset as well as for acquiring money used for the purpose of business. It was submitted that the crucial test for allowance of interest as deduction is that the borrowing should be for the purpose of business and whether that borrowing is used to acquire a capital asset or not, is irrelevant. Reliance was placed on the following decisions:
(i) India Cements Ltd. v. CIT (supra).
(ii) Bombay Steam Navigation Co. (1953) (P) Ltd. v. CIT (1965) 56 ITR 52 (SC).
(iii) CIT v. Akkammba Textiles Ltd. (1997) 227 ITR 464 (SC); and
(iv) Bharat Forge Ltd. v. Deputy CIT (1995) 53 ITD 575 (Pune-Trib).
It was further submitted that the reliance of the assessing officer as well as the Commissioner (Appeals) on the decision of the Supreme Court in the case of Chellapalli Sugars Mills (supra) is misplaced because in the case of Chellapalli Sugars Mills the interest related to the acquisition of capital assets of a business which was yet to commence production and as such the Supreme Court held that in such like situation the interest can be capitalised. However, once the interest is paid on money borrowed in a continuing business the same has to be allowed irrespective of the fact as to whether it is used for acquiring the capital asset or not. Reliance was placed on the following decisions :
(i) CIT v. Alembic Glass Industries Ltd. (supra);
(ii) Arvind Polycot Ltd. v. CIT (1996) 222 ITR 280 (Guj);
(iii) Veecumsees v. CIT (1996) 220 ITR 185 (SC); and
(iv) CIT v. Woodcraft Products Ltd. (1996) 217 ITR 862 (Cal).
As regards the deduction on account of expenditure other than the interest as taken in ground of appeal No. 3, Shri Dastur mainly relied on his submissions reproduced earlier in relation to ground No. 2 and reiterated that once the expenditure relates to an existing business and is not completely related with the acquisition and installation of a new asset it must be allowed as a deduction. Shri Dastur then elaborated on the concept of what is the same business any relying on the case of Alembic Glass Industries (supra) submitted that in that case a new unit started by the company at a totally different location was also held to be the expansion of the same business. Applying the principles laid down by the Gujarat High Court, Shri Dastur submitted that in the case of the assessee if was only an expansion of the same business as it was only the capacity of the existing unit which were expanded by the installation of additional machines. Reliance was also placed on the following decisions :
(i) CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC);
(ii) Produce Exchange Corporation Ltd. v. CIT (1970) 77 ITR 739 (SC); and
(iii) Bansidhar (P) Ltd. v. CIT (1981) 127 ITR 65 (Guj).
Shri Dastur further submitted that the expenditure of the same business although capitalised in the books of accounts was allowable as a deduction if in fact it represents an expenditure of a revenue nature. Reliance was placed on the following decisions :
(i) Veecumsees v. CIT (supra);
(ii) CIT v. Modi Industries Ltd. (1993) 200 ITR 341 (Del); and
(iii) Karnataka Light Metal Industries Ltd. v. CIT (1997) 225 ITR 947 (Karn).
11. Shri M. J. Thakore and Shri S.S. Panwar, the learned standing counsel appearing on behalf of the department strongly relied on the orders of the assessing officer as well as the Commissioner (Appeals) for the proposition that the additional machines installed constituted a separate business and as such it was pleaded that the departmental authorities were justified in treating the expenditure on account of interest and other related expenditure as capital expenditure relating to additional machines which formed a separate unit. Alternatively, it was pleaded that even assuming though not admitting that the additional machines installed resulted into only an expansion of the existing business yet the expenditure incurred on interest as well as under other various heads which were directly related to the acquisition of and putting into operation of the new machines was rightly capitalised by the assessee in its books of accounts. It was submitted that it was open to the assessee either to treat this expenditure relating to the acquisition and putting them into operation of new machines as a capital expenditure or revenue expenditure depending upon the nature of various items of expenditure. It was submitted by the standing counsel that once having followed one method of accounting to treat this expenditure as capital in its books of accounts the assessee cannot now change it and claim the same expenditure as revenue by filing the revised return under section 139(5). Shri Thakore, the learned standing counsel then referred to the provisions of section 43(1), Explanation 8, section 4 as well as section 145 and pleaded that there is no prohibition in law to treat expenditure on account of interest and other related expenditure incurred for the acquisition of additional machines and putting them into operation as capital expenditure and once having exercised the option to treat this expenditure as capital expenditure in its books of account, the assessee cannot now claim it as a revenue expenditure. Reliance was placed on the decision in Hinds v. Buenos Ayres Grand National Tramways Company Ltd. (1906) 2 Ch.D. 654 and the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT (supra). Relying on the above authorities it was submitted that the method of accounting relating to valuation/cost of assets is that price paid along with the related expenses and the same is now clearly permissible to be capitalised under section 43(1). The learned standing counsel further relied on the following decisions :
(i) CIT v. UCO Bank (1993) 200 ITR 68 (Cal); and
(ii) Addl. CIT v. Chandravilas Hotel (1987) 165 ITR 300 (Guj).
As regards the findings of the departmental authorities with regard to the treatment of an expenditure other than interest which has been claimed by the assessee as a revenue expenditure by filing the revised return under section 139(5), the learned standing counsel relied on the orders of the assessing officer as well as the Commissioner (Appeals) and further submitted that their findings are supported by the following decisions :
(i) Addl.CIT v. Rajindra Flour & Allied Industries (P) Ltd. (1981) 128 ITR 402 (Del);
(ii) CIT v. Hindustan Polymers Ltd. (1985) 156 ITR 860 (Bom);
(iii) CIT v. Great Eastern Shipping Co. Ltd. (1979) 118 ITR 772 (Bom);
(iv) CIT v. J.MA. Industries Ltd. (1981) 129 ITR 373 (Del);
(v) Bralco Metal Industries Ltd. v. CIT (1994) 206 ITR 477 (Bom); and
(vi) CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC)
12. We have considered the rival submissions and have also gone through the orders passed by the assessing officer as well as the Commissioner (Appeals). We have also extracted the relevant portions of the order of the assessing officer in para 7 of this order and have also referred to various paras of the order of the Commissioner (Appeals) wherein he has dealt with this issue.
12.1. Ground of appeal No. 2 relates to the claim of deduction on account of interest paid on borrowed capital for acquiring the additional three machines (in addition to three existing machines) for the production of LVP and SVP. The capital of LVP was double from 18 million bottles to 36 million bottles and new capacities were established for manufacture of 45 million units of SVP. The new machines purchased were installed at the same location i.e., at Rajpur where the existing operations are carried out. The main reasoning of the assessing officer as well as the Commissioner (Appeals) that the money borrowed on which interest was claimed as a deduction was utilised for acquiring these three new machines and the interest component formed a part of the capital cost of these three machines and was rightly capitalised by the assessee in its books of accounts in view of the Expln. 8 to section 43(1) and the action of the assessee was clearly in accordance with the principles laid down by the Supreme Court in the case of Challapalli Sugars Ltd. (supra). The learned standing counsel who argued the case for the revenue also emphasized on this aspect that the assessee could have claimed the payment of interest as a deduction under section 36(1)(iii), had it not capitalised the same in its books of accounts. According to the learned standing counsel the Income Tax Laws do not prohibit treating interest paid on borrowed funds for acquiring capital assets to be capitalised and once having exercised the option to capitalise the interest in relation to the funds used for acquiring capital assets the assessee cannot now claim the same as a revenue expenditure and for that reliance was placed on the decision of Supreme Court in the case of Challapalli Sugars Ltd. (supra). On the other hand, the claim of the assessee is that the entries made by the assessee in its books of accounts are totally irrelevant to decide as to whether the assessee is entitled to any deduction which he is legally entitled to in terms of specific provisions of Income Tax Act. For that it was pleaded by Shri Dastur, the learned counsel for the assessee, that the case of the assessee was squarely covered by the decision of the Supreme Court in the case of India Cements Ltd. (supra) whereas the case of Challapalli Sugars Ltd. (supra) was distinguishable as that case related to a business which has not commenced production whereas in the case of the assessee the three new machines resulted only into expansion of existing business. In this connection, it will be useful to refer to the decision of the Supreme Court in the case of CIT v. India Discount Co. Ltd. (1970) 75 ITR 191 (SC) at p. 192 "that the receipt being one which in law could not be regarded as income, it could not become income merely because the respondent erroneously credited it to the P&L a/c". Similar is the observation of the Supreme Court in the case of CIT v. Chunilal V. Mehta & Sons (P) Ltd. (supra) at p. 55 that :
"The method of maintaining the accounts was one thing and the actual entries in the accounts maintained was a different thing. What was relevant was the method of accountancy and not the actual entries."
To similar effect are the observations of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT (supra) wherein it was held as under :
"Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter."
The facts of the case before us are quite similar to the case before the Gujarat High Court in the case of Alembic Glass Industries Ltd. (supra) where the Hon'ble Gujarat High Court referred to the decisions of the Hon'ble Supreme Court in the cases of Challapalli Sugars and India Cements Ltd. (supra). The Honble Gujarat High Court summarised the decision of the Supreme Court in the case of India Cements Ltd. (supra) relating to admissibility of claim of deduction on account of interest paid under section 10(2)(iii) of the Income Tax Act, 1922 (which is analogous to section 36(1)(iii) of the Income Tax Act, 1961 as under :
"(a) the loan obtained is not an asset or an advantage of an enduring nature
(b) that the expenditure was made for securing the use of money for a certain period ., and
(c) that it is irrelevant to consider the object with which the loan was obtained.
Consequently, in the circumstances of the case, the expenditure was revenue expenditure within the meaning of section 10(2)(xv). "
The Hon'ble Gujarat High Court at p. 725 of the report considered the decision in the case of Challapalli Sugars Ltd. (supra) as under :
"The question which still remains to be considered is whether, in spite of the above referred two decisions, any difference in the legal situation is made by the recent decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT. In order to understand the ratio of the decision in Challapalli Sugars Ltd.'s case, with a view to see how far the said ratio is in harmony with the ratio of the above referred decision of the Supreme Court in India Cements Ltd.'s case, it would be necessary to state shortly the facts relating to that decision. There the assessee was a public limited company engaged in the manufacture and sale of sugar.
The company went into production on 22-1-1958. It had borrowed considerable sums of moneys from the Industrial Finance Corporation of India for the installation of machinery and plant. During the accounting period, the company paid Rs. 2,38,614 as interest and claimed that the said payment should be treated as part of the cost of the machinery and plant installed by it, and the depreciation should be calculated accordingly. The Income Tax Officer rejected this claim of the company and held that the interest paid by the company from year to year was revenue expenditure, The matter eventually went to Andhra Pradesh High Court which held that where a plant is constructed out of borrowed money, the interest on loan upto the date of commencement of the business could be capitalised or treated as part of the actual cost of the plant. The Supreme Court rejected this view of the High Court on consideration of the question as to what was the 'actual cost' for the purpose of determining "written down value" of a plant. The Supreme Court considered the principles of accountancy and held that the cost of fixed assets should include all expenditure necessary to bring such assets into existence and to put them in working condition and, therefore, 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 capitalised and added to the cost of fixed assets which have been created as a result of such expenditure.
Relying upon this decision, Shrikaji contended on behalf of the revenue that the new plant installed by the assessee in our case had not gone into production in the accounting period and hence the interest paid on the borrowings made for the purpose of the installation of that plant would go to augment the cost of the plant so installed, and should, therefore, be treated as capital expenditure. He also submitted that whatsoever be the previous position in law regarding the interest paid on borrowings, the said position is changed in view of the decision given by the Supreme Court in Challapalli Sugars Ltd. v. CIT. It is no doubt true that in the case of Challapalli Sugars Ltd. the Supreme Court has unequivocally observed that interest paid on the borrowings utilised to bring into existence a fixed asset which has not gone into production goes to add to the cost of installation of that asset. But these observations have been made with reference to a situation wherein it was not possible to contend that the borrowing on which interest was paid was made for the purpose of any business. The company which had made the borrowing in that case had not yet started production, and hence had not commenced any business when it borrowed the amount in question. Therefore, it was not possible to say in that case that the borrowing was made "for the purpose of business" to bring the case within the ambit of section 10(2)(iii) of the Indian Income Tax Act, 1922, which is equivalent to section 36(1)(iii) of the Income Tax Act, 196l." If the said borrowing was not "for the purpose of business" inasmuch as no business had come into existence, it must follow that it was made for the purpose of acquiring an asset which could be put to use for doing business, and hence interest paid on such borrowing would go to add to the cost of the assets so acquired. "
Their Lordships further observed at p. 727 thus:
"Since the transaction of borrowing is not the same as the transaction of investment, the Supreme Court has observed in India Cements Ltd. v. CIT that, for considering whether payment of interest on a borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. Thus, the decisions of the Bombay High Court in Calico Dyeing and Printing Works and of the Supreme Court in India Cements Ltd. were given with reference to the borrowings made for the purpose of running business, while the decision of the Supreme Court in Challapalli Sugars Ltd. was given with reference to a borrowings which could not be treated as made for the purpose of business, as no business had yet been commenced. Thus, there is no incompatibility between these decisions. The Supreme Court itself has distinguished its earlier decision in India Cement Ltd. in the following terms in Challapalli Sugars Ltd.
"This case too is of no assistance to the revenue . The appellant company in that case at the time it raised the loan was a running concern. Unlike the assessee in the present appeals, the loans raised by the appellant company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in the actual cost of the plant did not arise in that case."
In view of this, we conclude that the decisions of the Bombay High Court in Calico Dyeing & Printing Works and of the Supreme Court in India Cement Ltd. hold the field with equal force, even after the decision in Challapalli Sugars Ltd. We can state the ratio of all these decisions as under :
(1) Where a borrowing is made for the purposes of a business the interest paid on such a borrowing becomes eligible to deduction contemplated by section 10(2)(iii) of the Act of 1922 or section 36(1)(iii) of the Act.
(2) This would be so even if 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 that 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 purposes of which the capital is borrowed if deduction under section 10(2)(iii) of the Act of 1922 or section 36(1)(iii) of the Act of 1961."
In the light of the specific observations and findings of the Hon'ble Gujarat High Court in the case of Alembic Glass Industries (supra) which is a binding decision on the officers working in the State of Gujarat, we are of the opinion that the departmental authorities were wholly unjustified in holding that the decision of the Gujarat High Court in the case of Alembic Glass Industries is contrary to the Supreme Court decision in the case of Challapalli Sugars Ltd. (supra). In fact the decision of the Supreme Court in the case of Challapalli Sugars Ltd. is not applicable in a case where there is an expansion of an existing business. The decision of the Gujarat High Court in the case of CIT v. Khedut Sahakari Khand Udyog Mandali (supra) and the decision in the case of Arvind Mills (supra) are distinguishable on facts as there the controversy related to the question as to whether the assessee was entitled to development rebate and depreciation on the amount which has been capitalised and the assessee never claimed the deduction of interest on borrowed funds under section 36(1)(iii).
Therefore, respectfully following the decisions of the Gujarat High Court in the case of Alembic Glass Industries (supra) and that of the Supreme Court in the case of India Cements Ltd. (supra) we are of the opinion that the assessee is entitled to deduction of Rs. 1,56,76,000 on account of interest on borrowings which is used for installation of three new machines under section 36(1)(iii). In this connection, it will be useful to refer to the decision of the Supreme Court in the case of Ambika Prasad Mishra v. State of UP. & Ors. (1980) 3 SCC 719 dealing with the point where it is held that under Article 141 every new discovery or argumentative novelty cannot undo or compel reconsideration of a binding precedent. Similar is the view of the Supreme Court in the case of Kesho Ram & Co. & Ors. etc. v. Union of India & Ors. (1989) 3 SCC 151 wherein at p. 160 it is held:
"The binding effect of a decision of this court does not depend upon whether a particular argument was considered or not, provided the point with reference to which the argument is advanced subsequently was actually decided in the earlier decision."
In this view of the matter since the question of deduction of interest on borrowed capital it squarely covered by the decision of the Supreme Court in the case of India Cements Ltd. (supra) as well as the decision of the Gujarat High Court in the case of Alembic Glass Industries (supra) we allow the claim of the assessee and adjudicate ground of appeal No. 2 in favour of the assessee.
13. Coming to ground of appeal No. 3 the position is different. Here admittedly the expenditure on salaries, wages, travelling expenses, telephone and telex expenses, lease rent charges, insurance, etc. is directly related to erection of three new machines and there is no provision like section 36(1)(iii) in the Act where deduction on account of these expenses can be claimed. These expenses have necessarily to be considered for allowance under section 37 which specifically debars the deduction on account of expenditure in the capital field. In this connection, it will be useful to refer once again to the decision of the Gujarat High Court in the case of Alembic Glass Industries (supra) which has been strongly relied on by Shri S.E. Dastur, the learned counsel for the assessee. In the said decision the Tribunal referred the following two questions for the opinion of the Honble Gujarat High Court .
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the Whitefield Factory at Bangalore did not constitute a new business but was the new establishment of a new unit of an existing business at Baroda ?
(2) Whether, on the facts and in the circumstances of the case, the interest, miscellaneous expenses, and travelling expenses incurred by the assessee referable to the Bangalore unit are wholly and exclusively for the purpose of the assessee's business ?
The Hon'ble Gujarat High Court then recasted the question No. 1 in the following words :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the Whitefield Factory at Bangalore did not constitute a new business but was the new establishment of a new unit of an existing business at Baroda ? "
After consideration of the matter, the Honble Gujarat High Court answered question No. 1 as reframed by them in the affirmative. The second question was answered by them in the following manner :
"In view of this we find on question No. 2 that in this case the amounts of interest are allowable as revenue expenses."
From the judgment of the Gujarat High Court it is very clear that they have found even in this case only the amount of interest as allowable revenue expenditure. The other expenses including miscellaneous and travelling expenses have, therefore, by implication found not allowable as revenue expenditure. It appears that deductibility of the other expenses was not even argued before the Hon'ble High Court during the course of hearing. The reasons for that are not far to seek. Unlike the provisions of section 36(1)(iii) the provisions of section 37 clearly and unmistakably deny any deduction of expenditure in the capital field. In this connection, reference may be made to the binding decision of the Gujarat High Court in the case of Shree Vallabh Glass Works Ltd v. CIT (1981) 127 ITR 37 (Guj) and the decision in the case of CIT v. Peas Industrial Engineers (P) Ltd. (1994) 205 ITR 447 (Guj) wherein it is held that all expenditure necessary to bring assets into existence and to put those assets in working condition is part of the actual cost of the assets to the assessee and it is in the light of that actual cost that the question of depreciation has to be considered by the tax authorities and as such the same was rightly capitalised by the assessee in its books of account and subsequent claim of the assessee to treat a part of that expenditure on revenue account on pro rata basis is not tenable in law as there is no specific provision in the Income Tax Act for allowance of such expenditure treating same to be of revenue expenditure corresponding to section 36(1)(iii) under which interest paid on borrowings is permissible as a deduction irrespective of the fact that the money borrowed is utilised for acquiring a capital asset or not.
Accordingly, we will adjudicate ground No. 3 in favour of the revenue and against the assessee and hold that the departmental authorities were justified in rejecting the claim of deduction in relation to expenses other than the interest which were claimed as a revenue expenditure in the revised return filed under section 139(5) but were capitalised in the books of account. The assessing officer however, will grant depreciation on the capitalised value of the assets.
14. Coming to ground No. 4 it is seen that in the assessment year under consideration the assessee-company has made a public issued of partly convertible debentures aggregating to Rs. 18.57 crores and it incurred the following expenditure in connection with the issue of debentures :
Rs.
Cost of advertisement 4,07,010 Underwriting commission 16,15,000 Brokerage 23,50,000 Fees of managers and registrars to the issue 12.20,000 Printing & stationery 17,88,250 73,80,260 Before the assessing officer the assessee contended that the object of the issue of partly convertible debentures was for expansion of the existing business and has claimed that the expenditure of Rs. 73,80,260 on issue of debentures is covered under the provisions of section 35D of the Act. It was further contended before the assessing officer that in accordance with the provisions of section 35D, the total expenditure eligible for deduction comes to Rs. 85,08 lakhs as calculated below :
Capital employed Rs. in lakhs
(a) Loans from financial institutions 1231.07
(b) Debentures :
Non-convertible Debenture 200 Partly convertible Debentures 1,857 2,057,00
(c) Increase in share capital 114.91 3403.04(sic) 2.5 per cent of above is Rs. 85.08 lakhs.
In addition to this, the assessee has claimed other debenture issue expenses amounting to Rs. 28,05,137 as deductible under section 37(1) of the Act. During the course of assessment proceedings the assessing officer pointed out to the assessee that the fees of managers and registrars to the issue claimed at Rs. 12,20,000 were not covered under section 35D(2)(c)(iv) of the Act and the assessing officer asked the assessee to explain why the expenditure of Rs. 28,05,137 which was claimed as a revenue expenditure under section 37(1)( may not be disallowed as it is an expenditure of capital nature. In response to the above, the assessee filed written submissions dated 24-3-1994, wherein it is claimed that the total expenditure in connection with the convertible debentures was Rs. 1,01,85,397 (Rs. 73,80,260 plus Rs. 28,05,137) and this entire expenditure should be allowed as a deduction under section 37(1). Alternatively, it was argued that those expenses which are specifically allowable under section 35D(2)(c)(iv) should be allowed under section 35D by way of amortization and balance shall be allowed under section 37. Reliance was placed on the decisions stated below :
(a) CIT v. Modi Industries Ltd. (supra);
(b) CIT v. Prithvi Insurance Co. Ltd. (supra); and
(c) Produce Exchange Corporation Ltd. v. CIT (supra).
The assessee further submitted revised working of capital employed for the purpose of deduction under section 35D as under :
"Capital employed Rs. in lakhs
(a) Increase in loans from financial institutions 1231
(b) Increase in shares capital 115
(c) Loan from Ind. Bank Merchant Banking Services Ltd.300
(d) Non-convertible debentures 200
(e) Loan from banks/financial Institutions 1250 3096 2.5 per cent of Rs. 3096. lacs Rs. 77.40 lakhs."
The assessing officer after considering the submissions of the assessee held that the assessee was entitled to deduction under section 35D at 2.5 per cent of the capital employed which was calculated at Rs. 1346 lakhs which come to Rs. 33.65 lakhs and 1/10th of this viz., Rs. 3,36,500 was allowed as deduction.
With regard to the balance expenditure the assessing officer held that the expenditure claimed as a deduction under section 37(1) on the issue of convertible debentures was not admissible as a revenue expenditure as it was for the purpose of raising equity capital by issue of convertible debentures and as such it becomes capital expenditure and was not admissible as deduction under section 37(1).
14.1. The assessee appealed and the Commissioner (Appeals) discussed this issue in paras 7 to 7.13 of the impugned order and gave his findings in para 7.12 that the issue for public subscription of shares or debentures of a company are covered by the provisions of section 35D(2)(c)(iv). Any the mere fact that the appellant's issue was in relation to partly convertible debentures would not take same out of the purview of provisions of section 35D. The Commissioner (Appeals) further held that there is force in the arguments of the learned counsel for the assessee that it is only an expenditure which are specifically enumerated in section 35D(2)(c)(iv) which are specifically covered by these provisions. Accordingly, the expenditure to the extent of Rs. 61,60,260 was held to be covered by the provisions of section 35D(2)(c)(iv).
With regard to the balance expenditure of Rs. 40,25,137 the Commissioner (Appeals) directed the assessing officer to allow deduction to the assessee on a pro rata basis and upheld the disallowance to the extent the same can be attributed to issue of share capital on conversion of debentures.
14.2. The assessee is aggrieved with this order of the Commissioner (Appeals) and has filed this appeal. The learned representative of the assessee submitted that the total expenditure incurred by the assessee in relation to the issue of partly convertible debentures was Rs. 1,01,85,397 and out of this only such expenditure which can be attributed to convertible part of debentures was covered under the provisions of section 35D and the balance expenditure which was attributable to non-convertible part of debentures was not covered by the provisions of section 35D at all and that the entire expenditure was allowable as a deduction under section 37(1) in view of the decision of the Supreme Court in the case of India Cement Ltd. (supra). The learned counsel for the assessee further submitted that the entire issue was not on partly convertible debentures and in fact issue to the extent of Rs. 2 crores to financial institutions was in the nature of non-convertible debentures which were allotted by the assessee to Life Insurance Corporation Mutual Fund and Ind. Bank Merchant Banking Services Ltd. on 23-3-1992, which date fell within the accounting year relevant to assessment year under consideration. It was further submitted that although the Commissioner (Appeals) passed a very detailed order yet he has not adjudicated on the issue of allotment of non convertible debentures amounting to Rs. 2 crores to financial institutions which were taken as a part of the capital employed by the assessee in the industrial undertaking for the purpose of calculation of deduction under section 35D. Accordingly, it was submitted that the directions of the Commissioner (Appeals) to calculate the deduction under section 35D(2)(c)(iv) is factually not correct and the matter has to be restored to the Commissioner (Appeals) for readjudication after verifying the fact as to whether the issue of non-convertible debentures to financial institutions amounting to Rs. 2 crores was a part of the capital employed for the purpose of calculation under section 35D.
14.3. With regard to the balance expenditure of Rs. 40,25,137 it was submitted that the same was clearly allowable as a deduction under section 37(1) keeping in view the fact that no shares were allotted on partial conversion of the debentures in the assessment year under consideration and the conversion of part of the debentures into equity shares took place only in the subsequent year. Accordingly it was submitted that so far as the assessment year under consideration is concerned, the expenditure was incurred in relation to the raising of loans by issue of partly convertible debentures and the same was clearly allowable as a deduction in view of the Supreme Court decision in the case of India Cement Ltd. (supra) as well as the decision of the Tribunal in the case of Inspecting Assistant Commissioner v. KS.B. Pump Ltd. (ITA No. 4648/Bom/1986) for assessment year 1982-83, order dated 2-8-1989, and the decision of the Tribunal in the case of Inspecting Assistant CIT v. F.G.P. Ltd. (ITA No. 2150/Ahd/1985) for assessment year 1982-83 order, dated 24-4-1992.
14.4 The learned standing counsel for the department relied on the orders of the assessing officer as well as the Commissioner (Appeals) and further submitted that since admittedly the expenditure was in relation to convertible debentures which have characteristic of equity shares, such debentures cannot be termed as debentures and therefore, the proportionate expenditure on such debentures was for augmentation of equity base of the company and as such had to be treated as capital expenditure. Reliance was placed on the decision of the Ahmedad Bench of the Tribunal in the case of Banco Products (India) Ltd. v. Deputy CIT (1997) 63 lTD 370 (Ahd-Trib).
14.5 We have considerer the rival submissions and have also gone through the orders passed by the assessing officer as well as the Commissioner (Appeals). The Commissioner (Appeals) in para 7 of the order has held that the amount was borrowed from the government, IFCI, ICICI or any other financial institutions or any banking institution, such amount was long-term borrowing within the meaning of section 35D(3)(c) because this definition did not prescribe any time-limit and, therefore, the assessing officer was not justified in excluding these amounts calling them short-term loans. The Commissioner (Appeals)'s order is however silent about the amounts raised by the assessee by issue of Rs. 2 crores of non-convertible debentures to Life Insurance Corporation Mutual Fund and Ind. Bank Merchant Services Ltd. which according to the assessee were allotted to these institutions on 23-3-1992, and as such were required to be considered as part of the capital employed. Accordingly, we will restore the matter with regard to the computation of deduction admissible under section 35D to the file of the Commissioner (Appeals) for fresh adjudication specifically to consider the amount of Rs. 2 crores which was issued in the form of non-convertible debentures by the assessee to the two institutions referred to supra on 23-3-1992, and then recalculate the deduction permissible to the assessee under section 35D.
14.6 With regard to the balance claim of expenditure relating to partly nonconvertible debentures which will remain after the deduction allowed by the Commissioner (Appeals) to the assessee under section 35D in compliance to our directions contained earlier, we have to observe that the Tribunal in the case of F.G.P. Ltd. (supra) to which one of us was a party has held that the entire, expenditure for raising partly convertible debentures is an allowable deduction as revenue expenditure if the partly convertible debentures are not converted into equity shares in the assessment year under consideration relying on the decision of the Supreme Court in the case of India Cements Ltd. (supra).
Similar is the view of the Tribunal in the case of K.S.B. Pump Ltd. (supra). From the records it is not clear as to when these partly convertible debentures were converted into equity shares. Since we have restored the matter with regard to the deduction under section 35D to the file of the Commissioner (Appeals) in relation to ground No. 4(b) we restore the question with regard to the allowability of the balance expenditure in connection with the issue of partly convertible debentures also to the file of the Commissioner (Appeals) for reconsideration (to avoid piecemeal adjudication) in the light of the decision of the Supreme Court in the case of India Cements Ltd. (supra) as well as the decision of the Tribunal in the case of F. G. (P) Ltd. (supra) and K.S.B. Pump Ltd. (supra). Accordingly, ground of appeal Nos. 4 and 5 are allowed for statistical purposes.
15. Coming to ground of appeal No. 6 which relates to the claim of deduction on account of expenditure on advertisement amounting to Rs. 70,22,742, the issue has been discussed by the assessing officer in para 4 at p 10 of the assessment order. The assessing officer while examining the accounts found that the assessee has treated the above expenditure amounting to Rs. 70,22,742 in its directors' report as deferred revenue expenditure and has claimed 1/4th of the same as deductible. However, at the time of filing of the return the assessee has claimed the entire expenditure of Rs. 70,22,742 as revenue expenditure. During the course of assessment proceedings the assessee furnished written submissions dated 24-3-1995, with regard to its claim of deduction of this advertisement expenditure of Rs. 70,22,742 as under :
(i) The large scale advertisement campaign is made through newspapers, periodicals and magazines in order to create a corporate image of the company and to make known to the people at large the company's projects, its activities and its success.
(ii) It is further stated that the company was established in the year 1988 and it was decided to carry out various expansion/diversification projects in the field of pharmaceuticals on a large scale and accordingly it was commercially expedient to go for such mass advertisement, which will make the company including its future plans known to the general public, which will generate a positive atmosphere to the advantage of the assessee.
(iii) It is also stated that the above expenditure does not bring into existence any tangible asset and cannot be held as capital expenditure in view of Supreme Court decision in the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC). Various other decisions are also cited. (refer written submission, dated 24-3-1995.) The assessing officer examined the above contentions but adjudicated the issue against the assessee holding that this expenditure of Rs. 70,22,742 was an expenditure of a capital nature on the ground that it was a special advertisement campaign launched for creating a corporate image of the company and was not incurred for running of the existing business of the assessee-company as normal advertisement expenses are separately debited in the P&L a/c. The assessing officer further held that this advertisement campaign was not for publicity of the existing project of the assessee-company but was aimed at new area of ventures to be undertaken shortly and to make the people aware of the various new projects of the company and its diversification plans so that more persons can contribute to the assessee-company by way of subscription in the forthcoming public issue. Accordingly, the assessing officer held that this special advertisement campaign was meant for future and the expenses were incurred to acquire a benefit of enduring nature and as such was in the capital field. He accordingly disallowed the entire expenditure of Rs. 70,22,742.
15.1. On appeal, the Commissioner (Appeals) discussed this issue in para 8 to 8.5 of the impugned order and upheld the order of the assessing officer relying upon his reasoning relating to the disallowance of interest amounting to Rs. 1,56,76,000 and the fact that the assessee has treated this expenditure as a deferred revenue expenditure in its books of account and initially claimed only 1/4th of it as a deduction but subsequently while filing the return, entire amount was claimed as deduction treating the same as revenue expenditure. The Commissioner (Appeals) held that the treatment given in the books of account of an assessee can be departed only when the treatment itself is found to be erroneous or improper. In the absence of that the assessment has to be made on the basis of profit resulting from the books of account. He accordingly upheld the action of the assessing officer.
15.2. Shri S.E. Dastur, the learned Advocate for the assessee, submitted that this special advertisement campaign expenditure was incurred by the company in the assessment year under consideration on advertisements in various newspapers, periodicals and magazines in different languages all over India and the advertisements were issued with the object of raising corporate image of the company and to make known to the people at large the company's projects, its activities and its success. It was submitted that through this advertisement the people at large would come to know about the company, its profits and its philisophy which will help the company to grow its business. It was submitted that no doubt in the accounts the expenditure was treated as deferred revenue expenditure and only 1/4th of it was charged to the Profit and loss account, but in the return filed the entire expenditure was claimed as a revenue expenditure because the term "Deferred revenue expenditure" is not know to Income Tax Laws in this country. It was submitted that the expenditure was incurred for the purpose of business of the assessee and as such was allowable as a deduction under section 37(1) or 37(3). Reliance was placed on the following decisions :
(i) Hindustan Commercial Bank Ltd. v. (1952) 21 ITR 353 (All);
(ii) CIT v. Bongaigaon Refinery & Petrochemicals Ltd. (1996) 222 ITR 208 (Gau),. and
(iii) Bangalore Tool Works (P) Ltd. v. Income Tax Officer (1993) 47 ITD 604 (Bang-Trib).
It was submitted that in order to disallow expenditure treating it to be of a capital in nature, even assuming the advantage acquired to be of an enduring nature, it must be in the capital field i.e., for acquisition of tangible/intangible assets or addition to the profit-making apparatus of the assessee, as held by the Supreme Court in the case of L.H. Sugar Factory & Oil Mills (P) Ltd. v. CIT (1980) 125 ITR 293 (SC). Alternatively, it was submitted that even assuming that this is an expenditure in the capital field it will still be allowed as a deduction under section 37(3) in view of the decision of the CIT v. Navodaya (1997) 225 ITR 399 (Ker) and the decision reported in 148 ITR 101 (sic).
15.3. The learned standing counsel for the department relied on the orders of the assessing officer as well as the Commissioner (Appeals), and further submitted that after having itself treated the entire expenditure as an expenditure of deferred revenue nature and having charged only 1/4th of the entire expenditure to the P&L a/c, the assessee could not claim the entire expenditure as a revenue expenditure in the return filed.
15.4. We have considered the rival submissions and have gone through the orders passed by the assessing officer as well as the Commissioner (Appeals). The conditions necessary for deduction under section 37(1) are that an expenditure incurred for the purpose of business is allowable as a deduction provided the expenditure is not in the nature of personal expenditure or is an expenditure in the capital field. The assessee being a company and considering the nature of expenditure and other fact it can not be disputed that the expenditure is not of a personal nature. As regards the second limb of section 37 that the expenditure should not be of a capital nature it is seen that the assessee has accounted this expenditure incurred, as deferred revenue expenditure in the books of account but this will not change its basic character i.e., being an expenditure of revenue nature. As already held while disposing of ground No. 2 making of accounting entries in the books of account is not determinative of the character and/or nature of claim for deduction. The expenditure incurred by the assessee does not bring into existence any tangible assets and even though the expenditure incurred may bring to the assessee some benefit of an enduring nature this alone will not be sufficient to treat the expenditure as an expenditure of capital nature in view of the decision of the Supreme Court in the case of Empire Jute Mfg. Co. v. CIT (supra) wherein it is held as under :
"There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case."
The above principle was amplified by the Supreme Court in the case of Alembic Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC) wherein it is held as under :
"The idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin the statutory conditions., nor are the notions of 'capital' or revenue' a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression 'asset' or 'advantage of an enduring nature' was evolved to emphasise the element of a sufficient degree durability appropriate to the context."
For the aforesaid reasons we are of the opinion that the departmental authorities were not justified in disallowing the claim of Rs. 70,22,742. Accordingly, this issue is adjudicated in favour of the assessee and the addition made by the departmental authorities is directed to be deleted.
16. Coming to ground of appeal No. 7 which relates to disallowance of Rs. 20,000 out of gift articles. The assessing officer has dealt with this issue in para 10 of the assessment order as under :
"10. During the year under consideration, the assessee-company has incurred an expenditure under the head gift at Rs. 15,50,978. Most of these expenditure pertains to gifts made by the medical representative of various users of the products of the assessee-company. A scrutiny of the details as filed during the course of assessment proceedings has revealed that the assessee has incurred an expenditure of Rs. 1,97,806 under the head " Miscellaneous gifts'. It is further observed that the expenditure under the head 'Miscellaneous gifts' is not fully vouched and certain expenditure are for the personal purposes. Considering the above facts and circumstances of the case, an amount of Rs. 20,000 is disallowed out of Miscellaneous gifts being unverifiable in nature and an expenditure which are not laid for the purpose of the business of the assessee-company."
16.1. The Commissioner (Appeals) has upheld the action of the assessing officer for the reasons given in para 11 of the impugned order as under :
'11. The next issue in appeal for assessment year 1992-93 is disallowance of a sum of Rs. 20,000 claimed by the appellant on account of gift articles. The assessing officer has made the disallowance on the ground that the expenditure is not fully supported by vouchers. During the course of proceedings before me, the appellant has argued that the expenditure is fully supported by the vouchers kept in this behalf. After consideration of the matter, I hold that the estimate of disallowance of Rs. 20,000 out of miscellaneous gifts of Rs. 1,97,806 made by the assessing officer for want of complete verification is fair and reasonable. The same is therefore confirmed."
16.2. Before us the learned representative of the assessee submitted that the disallowance is not justified because the entire expenditure is supported by vouchers and the Commissioner (Appeals) and the assessing officer have wrongly mentioned that the expenditure is not fully supported by vouchers. The learned Departmental Representative supported the orders of the assessing officer and the Commissioner (Appeals).
16.3. We have considered the rival submissions. Since the assessee has claimed before the Commissioner (Appeals) that the entire expenditure is supported by vouchers, there is no justification for making an ad hoc disallowance of Rs. 20,000 out of miscellaneous gift articles which were claimed at Rs. 1,97,806 and were given to various customers and patrons in connection with the business of the assessee-company accordingly, this ground is adjudicated in favour of the assessee.
17. Coming to ground of appeal no. 8 which relates to disallowance of a sum of Rs. 30,000 out of 'Marketing expenses", the issue has been discussed by the assessing officer in para 11 of the assessment order as under :
"11. The assessee-company has incurred expenditure of Rs. 11, 79,244 under the head 'marketing miscellaneous". During the course of assessment proceedings details of the expenditure under the head was examined with reference to the vouchers. It is observed that the marketing miscellaneous expenses are incurred for lodging and boarding, expenditure on marketing staff, during the meetings at the different centres, a scrutiny of the vouchers has revealed that some of the expenditure under the head are personal in nature and meant for catering the personal need. Some of the expenditure are not vouched fully. Considering the above facts, an amount of Rs. 30,000 is disallowed under the head marketing miscellaneous being unverifiable in nature and not 'laid for the business purpose. ''
17.1. The Commissioner (Appeals) upheld the disallowance for the reasons given in para 12 of the impugned order as under :
"12. Next ground of appeal in assessment year 1992-93 relates to disallowance of a sum of Rs. 30,000 out of marketing expenses. This disallowance has been made by the assessing officer on the ground that the entire expenditure is not vouched, whereas the contention of the appellant- company has been that each and every expenditure has been fully vouched. Here again I hold that the estimate of disallowance as made by the assessing officer for want of complete verification and for possible disallowables is fair and reasonable. The same is accordingly confirmed."
17.2. Before us the learned representative of the assessee submitted that the entire expenditure under the head 'marketing expenses' were fully vouched and these were incurred for lodging, boarding, on marketing staff during the meetings in the different centres. It was submitted that the assessing officer has disallowed an ad hoc amount of Rs. 30,000 on the ground that the expenditure are personal in nature and meant for catering personal needs. It was submitted that there cannot be any personal expenditure of the assessee as it is a public limited company which is only an artificial juridical person.
The learned Departmental Representative supported the order of the assessing officer as well as the Commissioner (Appeals).
17.3. We have considered the rival submissions. The expenditure under the head 'marketing' are fully vouched and the assessing officer has not pointed out any instance of expenditure of inadmissible nature. As rightly pointed out by the learned counsel for the assessee that the assessee being a public limited company which is an artificial juridical person can have no personal expenditure and as such there was no justification for making an ad hoc addition of Rs. 30,000 which is directed to be deleted.
18. Coming to ground of appeal No. 9, the dispute is with regard to the deduction under sections 80HH and 80-I The assessing officer while discussing the claim of deduction under section 80HH and 80-O held that the interest income of Rs. 99,30,121 cannot be considered as income eligible for deduction under sections 80HH and 80-I as it did not form part of the income derived from the industrial undertaking.
18.1. On appeal, the Commissioner (Appeals) upheld the action of the assessing officer in this regard and allowed deduction of only Rs. 1 lakh as expenditure to earn interest income.
18.2. The assessee is in appeal before us and it was submitted by the learned representative of the assessee that the interest was earned on the funds available with the assessee consequent to the issue of partly convertible debentures issue and were linked with the business ctivity of the assessee and the amount was kept for a very short period over which interest of Rs. 99.30 lakhs was earned. Accordingly, it was pleaded that this income also formed part of the income derived from industrial undertaking and as such was eligible for deduction under section 80HH and 80-I. Reliance was on the decisions in the cases of CIT v. United Carbon India Ltd. (1991) 190 ITR 622 (Bom), CIT v. Ahmedabad Electricity Co. Ltd. (1993) 203 ITR 521 (Bom) and the decision in the case of CIT v. Hindustan Antibiotics Ltd. (1982) 137 ITR 42 (Bom).
Alternatively, and in support of ground of appeal No. 9(b) it was submitted that if it is held that the amount of Rs. 99.30 lakhs being the gross interest income is not the income derived from the industrial undertaking then the interest paid on borrowings and other expenses attributable to earning of interest income should be deducted from the gross interest income and only such net income of interest then should be deducted/excluded from the income eligible for deduction under sections 80HH and 80-I. Regarding ground of appeal No- 9(c) it was submitted that the same is covered in favour of the assessee as per the decision of the High Court in the case J.P. Tobacco Products (P) Ltd. v. CIT (1998) 229 ITR 123 (MP).
So far as ground No. 9(d) is concerned, it was submitted that the Commissioner (Appeals) has erred in holding that brought forward investment allowance and unabsorbed depreciation should be deducted for arriving at the income eligible for deduction under section 80HH and 80-I.
19. The learned standing counsel appearing for the department submitted that in view of the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra) the income earned from interest on short-term deposit is required to be assessed under the head "other sources" and by implication it cannot be treated as a profit derived from industrial undertaking. Similarly, it was submitted that in this very decision the Supreme Court has not approved the contention of the assessee that the interest paid on borrowings and other expenses attributable to the earning of interest should be deducted from the gross receipt to calculate the income assessable under the head "other sources".
It was accordingly submitted that as far as ground No. 9(a) and (b) are concerned the same should be dismissed.
Regarding ground No. 9(c) he simply relied on the order of the Commissioner (Appeals). So far as ground No. 9(d) is concerned it was submitted that the same is covered in favour of the revenue and against the assessee as per the decision of the Gujarat High Court in the case of Paushak Ltd. v. CIT (1994) 210 ITR 535 (Guj).
20. We have considered the rival submissions and have also gone through the orders passed by the assessing officer as well as the Commissioner (Appeals). In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) the Supreme Court has held that the income earned on short-term deposits is required to be assessed as income from other sources in the case of a company which has not started commercial production and the Supreme Court also negatived the argument of the assessee that the expenditure incurred in the form of interest on advances and other expenditure should be set off against the interest income earned on short-term deposit to arrive at the net income which is required to be assessed under the head "other sources". However, the above decision of the Supreme Court appears to be silent in the case of a running concern where the business has already commenced and surplus funds received by the assessee are parked into fixed deposit receipts in the bank for short time to earn interest. Now in such a situation as to whether interest earned has to be treated as income from other sources or income derived from industrial undertaking and if it is to be held as income from other sources whether the assessee will be entitled to deduction of expenditure incurred by the assessee for raising loans in connection with the issue of partly convertible debentures, the application money received in respect of which was parked in short-term deposit with the bank from where interest income was earned, the decision is not very clear. The Commissioner (Appeals) has not considered the impact of the decision of the Supreme Court in the case of Tuticorin Chemicals as the same was not available at the time when the Commissioner (Appeals) passed the impugned order. Therefore, it is considered fair and proper to restore the issue raised in ground Nos. 9(a) and (b) to the file of the assessing officer for fresh adjudication in accordance with law and in particular in the light of the Supreme Court decision in the case of Tuticorin Chemicals (supra).
20.1. As regards ground No. 9(c) the same is covered in favour of the assessee and against the revenue by the decision of the High Court in the case reported in 140 CTR 329 (supra).
20.2. So far as ground No. 9(d) is concerned, the same is covered in favour of the revenue and against the assessee as per the decision of the Gujarat High Court in the case reported in the case of Paushak Ltd. (supra).
21. In the result, the appeal filed by the assessee is partly allowed.
22. Coming to the revenue 's appeal, the first issue is with regard to the recomputation of deduction under section 35D considering bridge loan into capital employed. This ground is linked with ground No. 4(a) and 4(b) which we have set aside to the file of the Commissioner (Appeals) for fresh adjudication in accordance with law and in particular in terms of our directions therein. As far as the merit of the controversy is concerned, we are in agreement with the findings of the Commissioner (Appeals) that when the funds are borrowed from financial institutions whether they are bridge loan for a short period or for long period, the same have to be considered as a part of the capital employed as section 35D does not mention any specific time-limit on the duration of loan taken. Accordingly, we do not find any merit in this ground. Accordingly, it is adjudicated against the revenue .
23. Coming to ground No. 2 which relates to the action of the Commissioner (Appeals) in deleting the disallowance of Rs. 44,250 made by the assessing officer by invoking the provisions of section 40A(3). The Commissioner (Appeals) has adjudicated this issue in para 9 and 9.1 of the impugned appellate order as under :
"9. For assessment year 1992-93, the appellant has objected to disallowance of a sum of Rs. 44,250 made by the assessing officer under the provisions of section 40A(3). The assessing officer has discussed disallowance in para 7 of the assessment order. The appellant paid a sum of Rs. 32,000 to the principal of K.M. Kundanani College of Pharmacy by way of testing fees and Rs. 12,250 to Shri Karsanbhai Rathod. During the course of assessment proceedings the appellant explained that both these persons have demanded payment by cash and, therefore, the amounts were paid in cash. According to the assessing officer the appellant- company failed to establish that the payment could not have been made by crossed cheque or bank draft due to exceptional and unavoidable circumstances. Relying upon the judgment of the Hon'ble Andhra Pradesh High Court reported in S. Venkata Subba Rao v. CIT (1988) 173 ITR 340 (AP) the assessing officer held that the appellant's case was hit by the provisions of section 40A(3) and made the disallowance of Rs. 44,250.
9.1 During the course of proceedings before me the appellant stated that having regard to the scale of turn-over and level of expenditure incurred by the appellant the amount of total cash payments is negligible. The assessing officer should not have, therefore, disbelieved the contention of the appellant- company that payment in cash was made as these persons insisted on cash payments, at material time. Appellant company further explained that insofar as the principal of K. M. Kundanani College of Pharmacy to whom testing fees of Rs. 32,000 was paid, it was only one time dealing. Shri Karsanbhai Rathod dealt with loading and unloading of the materials, where occasionally this kind of contingency arises. On consideration of the matter having regard to the otherwise immaculate record of the appellant-company in compliance with the provisions of section 40A(3), I hold that the contention of the appellant-company that they found themselves hardpressed to make payment by cash to these two persons should not be disbelieved. The disallowance made by the assessing officer is, therefore, directed to be deleted."
23.1. After hearing both the parties to the dispute we are of the opinion that the order of the Commissioner (Appeals) requires no interference and we uphold his findings as recorded in para 9.1 of the impugned order which we have extracted above. This ground is accordingly adjudicated in favour of the assessee and against the revenue .
24. Ground No. 3 relates to action of the Commissioner (Appeals) deleting the disallowance of Rs. 4,51,452 made by the assessing officer under section 43B. The Commissioner (Appeals) has discussed this issue in para 10 of the impugned order as under :
"10. Next dispute in appeal for assessment years 1992-93 relates to disallowance of Rs. 4,51,452 being bonus. The assessing officer has made the disallowance as the amount was not paid during the previous year itself. During the course of proceedings before me the appellant explained that although this amount was not paid before the end of the previous year in question, the same was paid during the months of October/November, 1992, well before the expiry of the time to furnish return of income by the company within the provisions of section 139(1). The appellant also explained that the proof of payment of bonus had also been attached along with the return of income. In this view of the matter I hold that the appellant's claim of deduction is fully covered by the provisions of first proviso to section 43B. The assessing officer is, therefore, directed to allow the appellant- company deduction of the sum of Rs. 4,51,452. "
24.1. After hearing both the parties to the dispute, we do not find any justification in taking a view which is different from that of the Commissioner (Appeals). Therefore, we will upheld the order of the Commissioner (Appeals) for the reasons given in para 10 of the impugned order reproduced above.
25. Ground No. 4 relates to deduction under section 80HH and 80-I on miscellaneous income. This issue is linked with ground No. 9 in the assessee's appeal. In fact while adjudicating the claim of the assessee under sections 80HH and 80-I the assessing officer treated the amount of Rs. 99.30 lakhs on account of interest and miscellaneous income on sale of containers amounting to Rs. 26,64,113 as the income not eligible for deduction under sections 80HH and 80-I as the same was not relatable to or derived from the industrial undertaking. The Commissioner (Appeals) in para 37 of the impugned order held that the income of Rs. 26,64,113 on sale of containers has to be held as income of the assessee derived from industrial under-taking because in the first instance these containers were purchased along with raw materials which were used for the purpose of industrial undertaking and as such the income generated from the sale of containers necessarily has to be treated to be the income from industrial undertaking in view of the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (1978) 113 ITR 84 (SC).
25.1. After hearing the parties to the dispute, we do not find any infirmity in the order of the Commissioner (Appeals) and the reasons given by the Commissioner (Appeals) whose order we will uphold in this regard.
26. In the result, the appeal filed by the revenue is dismissed.
Gopal Chowdhury, J.M. 2nd April, 1998 I wish to record my respectful dissent with regard to the finding that the interest payment of Rs. 1,56,76,000 is to be deducted under section 36(1)(iii) of the Income Tax Act.
2. The fact of the case is not in dispute that the assessee-company has been manufacturing fluids viz. LVP and SVP for injections. An additional unit has been set up for manufacturing similar items where the assessee installed three new machineries for which the assessee has incurred various expenses including interest, salaries and wages, travelling expenses, telephone, telex, recruitment and other expenses (total Rs. 2,38,59,459). The break-up has been given in para 5 of the order passed by the learned Accountant Member which includes interest payment of Rs. 1,56,76,000. Admittedly in the books of accounts, the assessee capitalised the said expenditure obviously on the ground that the expenditure obviously on the ground that the expenditure was incurred in capital field. The assessee has been maintaining its account following mercantile system of accounting. Therefore, adopted the established procedure of accounting and did not debit the aforesaid pre-operative expenses in the P&L a/c prepared for the year under consideration. In the original return the assessee has not claimed the aforesaid expenditure as revenue expenditure but thereafter the company filed a revised return claiming the entire expenditure as revenue expenditure. The assessing officer rejected the claim made by the assessee mainly on the grounds that (a) the assessee's case is covered by the decision of Supreme Court in the case of Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC)'. (b) the company has rightly capitalised the expenditure along with the cost of assets in the books of accounts and claimed the same in the original return of income; (c) The expenditure of Rs. 2,12,05,459 are to be included to the cost of assets according to the Expln. 8 to section 43(1) of Income Tax Act. The finding was confirmed by the Commissioner (Appeals).
3. The learned Accountant Member at p. 40 of the order held that in view of the decisions of Gujarat High Court in the case of CIT v. Alembic Glass Industries (1976) 103 ITR 715 (Guj) and that of Supreme Court in the case of India Cement Ltd. v. CIT (1966) 60 ITR 52 (SC), the assessee is entitled to deduction of Rs. 1,56,76,000 on account of interest on borrowings which is used for installation of three new machines under section 36(1)(iii) of the Act. It appears that the applicability of Expln. 8 to section 43(1) in relation to the meaning of actual cost has not been examined by the learned Accountant Member. Further, I find that the aforesaid provision came into force in the statute by Finance Act, 1986, with retrospective effect from 1-4-1974. Admittedly, that provision was not in existence while Hon'ble Supreme Court and Honble Gujarat High Court rendered the decisions of India Cements and Alembic Glass Industries. The provision of Explnation 8 to section 43(1) is reproduced below :
"Explanation 8 : For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset."
From perusal of the aforesaid provision, it is clear that the same has been inserted with a view to clarify the meaning of actual cost as provided in section 43 of the Act. According to the aforesaid provision, the amount of interest payable or paid for acquisition of an asset, so much of such amount as is relatable to any period after the asset is first put to use shall not be included in the actual cost of such asset. Meaning thereby before such asset is first put to use such interest can be included in the actual cost of such asset. The assessee had followed the aforesaid procedure provided under law which is also supported by the principles of accountancy. The assessee did not claim the expenditure as revenue expenditure in the books of accounts. Admittedly even according to the assessee it had not committed any mistake but since the law permits it to claim the interest as deduction under section 36 as such relief should be given to it. In my opinion, the contention of the assessee should not be accepted because the treatment originally given by the assessee in respect of the interest payment for the new assets is supported by law i.e., Explation 8 to section 43(1) of Income Tax Act. The original action of the assessee is not only an act of book entry, but the same is also supported by law. It is needless to mention here that admittedly the entire expenditure has been incurred by the assessee in the capital field. Therefore, the learned Accountant Member has rightly confirmed the finding recorded by the Commissioner (Appeals) with regard to the other expenditures excluding the expenditure of interest payment.
4. In my opinion, the view taken by the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. (supra) covers the present issue. The other case law of Gujarat High Court in the case of CIT v. Khedut Sahakari Khand Udyog Mandali (1976) 104 ITR 206 (Guj) also supports the aforesaid view taken by the Commissioner (Appeals). In the case of Challapalli Sugars Ltd. (supra), Supreme Court dealt with the provisions of "actual cost" and it has been held that interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery forms part of the actual cost of the assets to the assessee for which the assessee will be entitled to depreciation allowances and development rebate with reference to such interest also. The theory of actual cost has not been considered by the Supreme Court in India Cement's case (supra) whereas in the present case as we have already noticed that the authorities below have refused relief to the assessee mainly on the ground that the interest paid by the assessee for acquiring capital asset should be capitalised in view of the Explanation 8 of section 42(1) of Income Tax Act. Therefore, in my opinion, the India Cement's case is distinguishable for the purpose of present issue. Similar position is with the case of Alembic Glass Industries (supra) where the provision of Explanation 8 of section 43(1) was not considered may be because the aforesaid provision was not available during the relevant point of time. In the Alembic Glass Industries case Supreme Court's decision in Challapalli Sugars Ltd. was not followed because in the Challapalli's case borrowing was made for the purpose of starting its business whereas in Alembic Glass Industries case the borrowings is made in an already running business. Therefore, according to the Hon'ble High Court the provision of section 36(1)(iii) is applicable irrespective of the fact that whether the borrowings has been made for capital field or revenue field. Only it has to be seen whether the borrowings has been made for the purpose of business or not. If it is for the purpose of business, then section 36(1)(iii) is applicable according to the Alembic's case. In my opinion, in the present case before us admittedly the borrowings were made for the purpose of establishing' a new unit consisting of three machines. The assessee-company might have running business and the borrowings has not been made for the purpose of starting a new business but it has to be seen that borrowings has been made for the purpose of acquiring new plants and machineries in the new unit and the assets have not yet put to use. Therefore, the assessee had rightly capitalised the interest payment also in its books of accounts following the provision of Explanation 8 of section 43(1) of the Income Tax Act. Therefore, in my opinion, the finding recorded by the Commissioner (Appeals) on this issue should be confirmed.
5. On behalf of the assessee, two decisions of the Tribunal, Pune Bench were relied upon which are as follows :
In the case of Bharat Forge Ltd. v. Deputy CIT (1995) 53 lTD 575 (Pune-Trib) the similar issue with regard to the applicability of Explanation 8 of section 43(1) came up before the Tribunal. However, I do not find that any definite finding was recorded by the Tribunal with regard to the applicability of the aforesaid provision and the Tribunal followed the decision of the Supreme Court in India Cement's case (supra) at para 26 of the order. In a later decision of the same Bench in Kalyani Steels Ltd. v. Deputy CIT (1997) 62 lTD 233 (Pune-Trib), the Tribunal considered the provision of Explanation 8 but held that by implication it cannot be held that interest paid or payable in connection with acquisition of asset before such asset was put to use shall be included in the actual cost of asset. The Tribunal was of the view that for allowability of interest under section 36(1)(iii) of Income Tax Act, the aforesaid provision has no relevance and reliance was placed in the case of Bharat Forge Ltd. (supra). In my opinion, in the present case while the assessee has followed the established procedure of accounting and followed the procedure prescribed under law i.e., Explanation 8 to section 43(1) has been followed by the assessee and the interest payment has already been capitalised by the assessee, it cannot be said that the same interest payment should be allowed under section 36(1)(iii) of the Act.
6. Except the issue of interest payment, I agree with the finding recorded by the learned A.K in respect of other issues in ITA No. 444/Ahd/97, I agree with the finding recorded by the learned A.M. in the revenue's appeal in ITA No. 529/Ahd/97.
Order under section 255(4) of the Income Tax Act, 1961 R.K. Bali, AM : April, 1998 Since there has been a difference of opinion between the Members who heard the present appeals, the same is required to be resolved by Third Member to be nominated by the Hon'ble President of the Tribunal in terms of section 255(4) of the Act. Accordingly we refer the following point of difference for the opinion of the Third Member:
"Whether, in the facts and circumstances of the case, the view of the A.M. that the interest payment of Rs. 1,56,76,000 in relation to the money invested in the expansion of the manufacturing units of the assessee for LVP and SVP by installing three additional machines was allowable as a deduction under section 36(1)(iii), is correct or the view of the learned J.M. that the interest has to be capitalised as was initially done by the assessee in its books of accounts, but was subsequently claimed as a revenue expenditure in the revised return filed before the departmental authorities, is justified ?"
Gopal Chowdhury, J.M.: 6th May, 1998 Since there has been a difference of opinion between the Members in one issue of the present appeals, the same is required to be resolved by one or more Members of the Tribunal as nominated by the Hon'ble President, Tribunal in terms of section 255(4) of the Act. Accordingly, the following point of difference is referred :
"Whether in the facts and in the circumstances of the case, considering the different views taken by the different Benches of the Tribunal i.e., Bharat Forge Ltd. v. Deputy CIT (supra), Kalyani Steels Ltd. v. Deputy CIT (supra) and J.C.T. Ltd. v. Assistant CIT (1998) 5 DTC 358 (Cal-Trib) : (1998) 65 ITD 169 (Cal) (Calcutta Bench) and the decisions of Supreme Court and High Court discussed in the orders, the interest paid on borrowed capital which has been capitalised in the books of accounts as part of actual cost of the new machineries of the new unit of the assessee-company can be claimed as deduction under section36(1)(iii) of the Income Tax Act ?"
B.M. Kothari, A.M. (As Third Member): 12th May, 2000 These appeals were heard by the Division Bench of the Tribunal (C-Bench), Ahmedabad. The order was proposed by Shri R.K. Bali, the learned A.M. The learned J.M., however, did not agree with the view expressed by the learned A.M. in relation to allowability of deduction of interest payment of Rs. 1,56,76,000. Since there was no unanimity in identifying the difference of opinion between the learned Members of the Division Bench, both of them have referred to the following separate point of difference to the Hon'ble President, Tribunal under section 255(4) of the Income Tax Act, 1961. The points of difference referred by the learned A.M. and learned J.M. are reproduced below :
The point of difference referred by the learned A.M. "Whether in the facts and circumstances of the case, the view of the A.M. that the interest payment of Rs. 1,56,76,000 in relation to the money invested in the expansion of the manufacturing units of the assessee for LVP and SVP by installing three additional machines was allowable as a deduction under section 36(1)(iii) is correct or the view of the learned J.M. that the interest has to be capitalised as was initially done by the assessee in its books of accounts, but was subsequently claimed as a revenue expenditure in the revised return filed before the departmental authorities, is justified."
2. The point of difference referred by the learned J.M. is as under:
"Whether in the facts and in the circumstances of the case, considering the different views taken by the different Benches of the Tribunal i.e. Bharat Forge Ltd. v. Dy. CIT (supra), Kalyani Steels Ltd. v. Dy. CIT (supra) and J.C.T. Ltd. v. Assistant CIT (supra) and the decisions of Supreme Court and High Court discussed in the orders, the interest paid on borrowed capital which has been capitalised in the books of account as part of actual cost of the new machineries of the new unit of the assessee-company can be claimed as deduction under section 36(1)(iii) of the Income Tax Act."
3. The Hon'ble President of the Tribunal has appointed me as a Third Member under section 255(4) of the Income Tax Act. Accordingly, the matter was heard at Ahmedabad on 26-4-2000. Shri S.E. Dastur, the learned Senior Advocate with Shri Porus Kaka appeared on behalf of the assessee. Shri R.K. Gupta, the learned Senior Departmental Representative appeared on behalf of the department.
4. Shri Dastur, the learned Senior Advocate, submitted that the appellant-company was a manufacturer of intra-venus injection. The products manufactured by the company have been described as 'LVP" and "SVP" for bravity. The manufacturing operations of the appellant-company commenced in February, 1988, at Rajpur factory, During the financial year ended on 31-3-1992, the company installed three additional machines in addition to three existing machines for production of LVP and SVP. The capacity of LVP was doubled from 18 million bottles to 36 million bottles and new capacities were established for manufacture of 45 million units of SVP. Shri Dastur submitted that three additional machines installed in the year under consideration were not for the purpose of starting a new business, but those were part of the same business as being already carried on by the assessee. Shri Dastur pointed out that a perusal of the orders proposed by the learned A.M. and learned J.M. and the points of difference referred by them under section 255(4) would clearly indicate that both the learned Members have unanimously held that these three additional machines were installed by the assessee for manufacture of similar items and such installation is not for the purpose of starting a new business, but those were installed in a new unit of the existing business, which forms part of the same business. There is no difference of opinion between the learned Members about the fact that the setting up of the new unit of the existing business was a part of the same business. Therefore, the only issue on which they have differed is the effect of insertion of Explanation 8 to section 43(1) and whether the same affects deductibility of interest on capital borrowed for an existing business as laid down by the decisions of the Hon'ble Gujarat High Court in the case of CIT v. Alembic Glass Industries (1976) 103 ITR 715 (Guj) and the judgment of the Hon'ble Supreme Court in the case of India Cement Ltd. v. CIT (supra). Shri Dastur further pointed out that the point of difference referred to by the learned J.M. containing reference of the decision of Calcutta Bench in J C. T Ltd. v. Assistant CIT (supra) is patently erroneous, as the said decision was not referred during the course of hearing nor a reference thereto finds a mention in the proposed order of the learned J.M. How can a decision which was not subject-matter of consideration by the learned two Members of the Division Bench be made a part of the point of difference referred to the President, Tribunal, in terms of section 255(4).
5. Shri Dastur drew my attention to the facts stated in para 12.1 of the proposed order passed by the learned A.M. He pointed out that the learned standing counsel appearing on behalf of the department argued before the Tribunal that the assessee could have claimed the payment of interest as a deduction under section 36(1)(iii), had it not capitalised the same in its books of account. According to the learned standing counsel the income-tax laws do not prohibit treating interest paid on borrowed funds for acquiring capital assets to be borrowed funds for acquiring capital assets to be capitalised and once having exercised the option to capitalise the interest in relation to the funds used for acquiring capital assets, the assessee cannot now claim the same as revenue expenditure and for that reliance was placed on the decision of Supreme Court in the case of Chellapalli Sugars Ltd. (supra). Shri Dastur pointed out that such submissions made by the learned standing counsel appearing on behalf of the department that the assessee could claim it as a deduction under section 36(1)(iii) necessarily means that such interest expenditure was incurred for the purposes of existing business.
6. Shri Dastur also invited my attention to para 15, p. 51, of the order of the learned AM in which the assessee's claim for grant of deduction in respect of expenditure on advertisement amounting to Rs. 70,22,742 has been discussed. The assessee treated the above expenditure as deferred expenditure in its books of account and director's report and claimed 1/4th of the same as deductible. However, at the time of filing the return, the assessee claimed the entire expenditure of Rs. 70,22,742 as revenue expenditure. The learned A.M. in para 15.4 has observed that "As already held while disposing of the ground No. 2 (relating to deductibility of interest of Rs. 1,56,76,000) making of accounting entries in the books of account is not determinative of the character and/or nature of claim for deduction."
The learned A.M. has held that deduction of the entire sum of Rs. 70,22,742 should be allowed in the year under consideration. The learned J.M. has not differed with the view so taken by the A.M. in relation to this point. Therefore, there is no real difference between the learned A.M. and J.M. on the question as to whether the existence or absence of book-keeping entry will affect the allowability of a deduction or taxability of an income.
7. Shri Dastur then drew my attention to proposed order passed by the learned J.M. He pointed out that in para 2 on p. 69, the learned J.M. has observed that:
"An additional unit has been set up for manufacturing similar items where the assessee installed three new machines for which the assessee has incurred various expenses including interest, salaries, travelling, etc. (totalling to Rs.2,38,59,459 including interest payment of Rs. 1,56,76,000."
He further submitted that the learned J.M. at p. 73 has observed that.... ... In the present case borrowings were made for the purpose of establishing a new unit consisting of three machines. The company might have running business and the borrowings have not been made for the purpose of starting a new business, but it has to be seen that borrowings has been made for the purpose of acquiring new plants and machineries in the new unit. He submitted that the learned J.M. has also accepted the fact that the borrowings have been made for the purpose of starting of a new business, but such borrowings have been made for acquiring new plants and machineries in the new unit of an existing business. The learned counsel also drew my attention to the main objects of the company as defined in the memorandum of association to show that the business of manufacturing LVP and SVP are part of the same business and are covered by the main objects of the company. He also drew my attention to the facts of the case submitted at p. 2 of the compilation to show that there was common management common funds, common marketing and management, etc. The learned counsel submitted that after consideration of the entire relevant material and evidence, both the learned Members had agreed that the new unit where the three additional machineries were installed was part of the same business. The learned counsel also placed reliance on judgments in Bansidhar (P) Ltd. v. CIT (1981) 127 ITR 65 (Guj), CIT v. Indian Aluminium Co. Ltd. (1977) 108 ITR 367 (SC) and CIT v. Shree Digvijay Cement Co. Ltd. (1983) 144 ITR 532 (Guj).
8. Shri Dastur then submitted that entries in the books of account made by the assessee capitalising the amount of interest in question and not debiting the same to P&L a/c is not decisive or relevant for the purpose of determining the allowability thereof under the provisions of Income Tax Act. In fact, on this issue also, the learned counsel submitted that there is no dispute between the two learned members. If there would have been a difference of opinion between them, the learned J.M. would not have agreed for allowability of deferred revenue expenditure incurred by way of advertisement as discussed herein before. Shri Dastur draw my attention to the decision of the Tribunal Special Bench in Dy. CIT v. Nagarjuna Investment Trust Ltd. (1998) 65 ITD 17 (Hyd-Trib) (SB) in which it was inter alia, held as under :
"That the provisions of section 145 cannot override section 5. If an income has neither accrued nor received within the meaning of section 5 whatever section 145 may say, such income cannot be charged to tax even though a book-keeping entry has been made recognising such hypothetical income which in law and on fact did not really accrued or rice or received in previous year."
He placed reliance on the following decisions to support his contention, that it is irrelevant that in the books of account the interest was capitalised and not debited in the P&L a/c.
(a) Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (1997) 227 ITR 172 (SC);
(b) Arvind Polycot Ltd. v. Assistant CIT (1996) 222 ITR 280 (Guj),.
(c) India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC);
(d) CIT v. Gujarat Mineral Development Corporation (1981) 132 ITR 377 (Guj);
(e) Kalyani Steels Ltd. (1997) 62 ITD 233 (Pune-Trib);
(f) Inspecting Assistant Commissioner v. Coromandal Fertlizers Ltd. (1989) 29 ITD 455 (Hyd-Trib);
(g) Bharat Forge Ltd. v. Dy. CIT (1995) 53 ITD 575 (Bang-Trib);
(h) Addl. CIT v. Backau Wolf New India Engg. Works Ltd. (1986) 157 ITR 751 (Bom);
(i) CIT v. Chunilal V. Mehta & Sons (P) Ltd. (1971) 82 ITR 54 (SC);
(j) Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC); and
(k) Indian Rare Earths Ltd. v. Income Tax Officer (1984) 8 ITD 882 (Bom-Trib).
9. The learned counsel also submitted a brief synopsis of arguments in which reliance was placed on several judgments to support the allowabilty of interest. The same are reproduced hereunder :
"1. Once business has commenced interest is always revenue expenditure :
(a) India Cements Ltd. v. CIT (supra);
(b) Bombay Steam Navigation Co. v. CIT (1965) 56 ITR 52 (SC);
(c) State of Madras v. G.J Colho (1964) 53 ITR 186 (SC);
(d) Addl. CIT v. Akkamba Textiles Ltd. (1997) 227 ITR 464 (SC); and
(e) CIT v. Sivakami Mills Ltd. (1997) 227 ITR 465 (SC).
2. Interest is the rent paid for use of money obtained by way of loan and is deductible under section 36(1)(iii) of the Income Tax Act and the purpose of utilisation of that loan is irrelevant as the loan is not capital asset but a liability.
(a) India Cements Ltd. v. CIT (supra);
(b) Bombay Steam Navigation Co. (supra);
(c) Aravind Polycot Ltd. (supra);
(d) CIT v. Alembic Glass Industries (supra);
(e) CIT v. Woodcraft Products Ltd. (1996) 217 ITR 862 (Cal); and
(f) CIT v. Associated Fibres & Rubber Industries (P) Ltd. (1998) 8 DTC 225 (SC) : (1999) 236 ITR 471 (SC).
3. Once business has commenced, interest payable on loans taken by the assessee is deductible.
(a) Arvind Polycot Ltd. (supra);
(b) CIT v. Alembic Glass Industries (supra);
(c) Inspecting Assistant Commissioner v. Coromandel Fertilizers Ltd. (supra);
(d) CIT v. Associated Fibre and Rubber Industry (P) Ltd. (supra);
(e) CIT v. Malwa Vanaspati & Chem. Co. Ltd. (1997) 226 ITR 253 (MP); and
(f) Chief CIT v. Senapathy Whitely Ltd. (supra).
4. As both the members have concluded that the assessee has not set up a new business the interest is fully allowable under section 36(1)(iii).
(a) Arvind Polycot Ltd. (supra).,
(b) CIT v. Alembic Glass Industries Ltd. (supra);
(c) Inspecting Assistant Commissioner v. Coromandel Fertilizers Ltd. (supra);
(d) Calico Dyeing & Printing Works v. CIT (1958) 341TR 265 (Bom);
(e) CIT v. Associated Fibre (supra);
(f) CIT v. Malwa Vanaspati & Chemicals Co. Ltd. (supra).,
(g) Chief CIT v. Senapathy Whitely Ltd. (supra); and
(h) Bharat Forge Ltd. v. Dy. CIT (supra).,
5. Even the test of same business is irrelevant for section 36(1) (iii) as there is no such condition of same business as found in section 72.
(a) Veecumes v. CIT (1997) 220 ITR 185 (SC); and
(b) CIT v. Western Bengal Coal Fields Ltd. (1998) 233 ITR 139 (Cal)."
10. Shri Dastur further argued that section 36(1)(iii) draws no distinction between capital and revenue. All that the provision requires is that amount of interest paid is in respect of capital borrowed for the purpose of the business. He drew my specific attention to judgments reported in (1996) 222 ITR 280 (Guj) (supra), CIT v. Gujarat Mineral Development Corpn. (1981) 132 ITR 377 (Guj) (supra), Addl. CIT v. Buckau Wolf New Engg. Works Ltd. (supra), 34 ITR 265 (Bom) (supra) (said to be a binding judgment for Gujarat), 103 ITR 715 (Guj) (supra), 56 ITR 52 (supra), (1999) 236 ITR 471 (SC) (supra) and Tuticorin Alkali' Chemicals & Fertilizers Ltd. v. CIT (supra).
11. Shri Dastur then submitted that the only real point of difference between the learned Members relates to the impact of insertion of Expln. 8 to section 43(1) in respect of deductibility of interest on borrowed capital as per the principles laid down by the Gujarat High Court in the case of Alembic Glass Industries (supra) and the judgment of Supreme Court in the case of India Cement Ltd. (supra). He submitted that section 43(1) refers to determination of 'actual cost' primarily for the purpose of grant of depreciation, development rebate, etc. thereon. The deductibility of interest is determined by the provisions of section 36(1)(iii) and reference to Explanation 8 to section 43(1) is irrelevant for the purpose. The occasion to refer to section 43 will arise only when one is called upon to determine the 'actual cost' of an asset. The Explanation 8 simply 'explains' the provisions of section 43 and is not relevant for considering deductibility of interest under section 36(1)(iii). The Explanation to a definition of 'actual cost' given in section 43(1) cannot override a specific provision which permits grant of deduction in respect of interest under section36(1)(iii). The said Explanation 8 to section 43(1) is a negative clause providing that interest cannot be capitalised once the asset is put to use. It does not follow the interest paid for the period prior to the date of user of the asset cannot be claimed as deduction. The insertion of ExpIn. 8 was made with a view to overcome the difficulty caused by various judgments such as the judgment of Hon'ble Gujarat High Court in the case of CIT v. Tensile Steel Ltd. (1976) 104 ITR 581 (Guj). This would be clear from the circular issued by the Board explaining the object and scope of the aforesaid amendment made in section 43(1). The learned counsel also drew my attention to the memorandum and the relevant Finance Bill, as published in 158 ITR 107 (St) at p. 116. It is clearly observed that the said amendment was made with a view to overcome the difficulty caused by the judgment such as the one delivered by the Hon'ble Allahabad High Court on 13-5-1974, which is published in CIT v. J.K .Cotton Spg. & Wvg. Mills Ltd. (1975) 98 ITR 153 (All).
12. Shri Dastur submitted that the various Benches of the Tribunal even after considering Expln. 8 to section 43(1) have held that interest paid in respect of borrowings made for running business/existing business is deductible under section 36(1)(iii). He placed reliance on decisions reported in (1995) 53 ITD 575 (supra), (1997) 62 ITD 233 (supra), Kumar Printers (P) Ltd. v. Income Tax Officer (1996) 59 ITR 370 (Del) decision of Tribunal, Ahmedabad Bench in the case of Vadilal Dairy International (ITA No. 500/Ahd/-97), CIT v. Rajaram Bandekar (1993) 202 ITR 514 (Bom) and (1996) 222 ITR 280 (Guj) (supra), The learned counsel submitted that judgment of Hon'ble Gujarat High Court reported in (1996) 222 ITR 280 (Guj) (supra) relates to assessment year 1993-94 and it was delivered in the year 1996. The judgment of Honble Jurisdictional High Court after insertion of Explanation 8 once again confirms the earlier view expressed in CIT v. Alembic Glass Industries (supra). Therefore, the view proposed by the learned J.M. is clearly contrary to the judgment of the Hon'ble Jurisdictional High Court.
13. Shri Dastur submitted that the learned J.M. at para 3, p. 70 of his order observed that 'It appears that the applicability of Explanation 8 to section 43(1) in relation to the meaning of actual cost has not been examined by the learned A. M. Shri Dastur pointed out that the said Explanation was specifically considered by the A.M. in his order at more than one place. At p. 20 of his order, the learned AM has not only considered the provisions of section 43(1) but has reproduced the relevant extracts from the Circular No. 461, dated 9-7-1986. Again at pp 32 and 33 of his order, the learned A.M. has specifically referred to the main reasoning of the assessing officer and the Commissioner (Appeals) that interest on moneys borrowed was rightly capitalised by the assessee in its books of account in view of Explanation 8 to section 43(1). It is, therefore, incorrect to say that the Explanation 8 to section 43(1) had escaped the attention of the learned A.M. Shri Dastur submitted that the decision of the Tribunal, Calcutta Bench reported in 65 ITD 169 (supra) which is referred to in the point of difference formulated by the J.M. is clearly contrary to the judgment of the Honble Gujarat High Court in the case of Alembic Glass Industries (supra). The Tribunal has failed to appreciate that the method of accounting is different than the entries in the books of account. He referred to the judgment of the Hon'ble Supreme Court in CIT v. A. Krishnaswami Mudaliar & Ors. (1964) 53 ITR 122 (SC) to show that there are only 3 recognised methods of accounting, namely, cash method, mercantile method and hybrid system. The entries in the books of account cannot be regarded as method of accounting followed by the assessee. He also drew my attention to the judgment of the Hon'ble Supreme Court reported in 82 ITR 54 (supra). Shri Dastur submitted that the assessee is entitled to grant of deduction in respect of interest under section 36(1)(iii) and also under section 37. Even if it is assumed that more than one provision is applicable in respect of a particular deduction, the assessee can claim the deduction under that provision which is more beneficial to him. He drew my attention to the judgment of the Honble Supreme Court in the case of CIT v. Mahendra Mills (2000) 14 DTC 618 (SC) : (2000) 243 ITR 56 (SC), in which it was held by the Apex Court that it is optional for the assessee to claim depreciation. The department cannot fasten the grant of depreciation to the assessee in a particular year where the assessee chooses not to claim such depreciation. The learned counsel submitted that the assessee is clearly entitled to grant of deduction in respect of interest under section 36(1)(iii).
14. The learned counsel submitted that there is nothing in Explanation 8 to section 43(1) which in anyway dilutes the effect of the following binding decisions :
(a) India Cements Ltd. v. CIT (supra);
(b) Alembic Glass Industries Ltd. (supra)
(c) Arvind Polycot Ltd. (supra);
(d) Coromandel Fertilizers Ltd. (supra);
(e) Vadilal Dairy International (ITA No. 500/Ahd. /97, ITAT, Ahd); and
(f) Kumars Printers (P) Ltd. (supra).
The learned counsel thus strongly supported the order of the A.M.
15. Shri Ramkrishna Gupta, the learned senior Departmental Representative supported the order of the learned J.M. He submitted that the point of difference relates to what treatment should be given to the interest paid on the borrowed funds utilised for the acquisition of new assets forming part of new unit during the pre-production period. He submitted that the dispute as to whether the new unit, where the three new machines were installed was a part of the same business is still there and there was no unanimity on this point between the two learned Members. The learned J.M. has clearly held that plant and machinery has been installed in the new unit and it has not been put to use. This clearly means that the learned J.M. intends to say that new unit is not a part of the same business. The learned Senior Departmental Representative submitted that the learned AM. has decided the aforesaid issue in favour of the assessee by placing reliance on judgment of Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. (supra) and India Cement Ltd. (supra). The Gujarat High Court decision referred to above is not applicable as when the said decision was delivered, the Hon'ble Gujarat High Court did not have an occasion to consider the scope of Explanation 8 to section 43(1). The judgment of the Honble Supreme Court in the case of India Cement Ltd. (supra) also is not applicable, as the Hon'ble Supreme Court was not dealing with the issue relating to 'actual cost of assets'.
16. Shri Gupta, submitted that the assessee following the correct law has rightly capitalised the interest cost in the books of account. This act on the part of the assessee is not only a mere book entry but it is in accordance with the legal provisions. The treatment so given by the assessee with regard to capitalisation of interest in the books of account is also in accordance with the accounting standards. The Explanation 8 to section 43(1) not only clarifies the doubts regarding the allowance of interest as revenue expenditure after the asset has been put to use, but it also necessarily follows that interest pertaining to the period prior to the date when the asset has been put to use, is required to be capitalised. The learned Departmental Representative submitted that the real point in issue is as to what is the meaning and scope of the expression "actual cost" used in section 43(1). Section 43(1) defines 'actual cost' means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. Explanation 8 to section 43(1) was inserted for removal of doubts in regard to the includibility of interest relatable to any period after the asset has first been put to use in the computation of its actual cost. But this Explanation, it has been declared by the Parliament that "where any amount is paid or payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shah not be included and shall be deemed never to have been included in the actual cost of such assets." The learned senior Departmental Representative also drew my attention to Circular No, 461, dated 9-7-1986, explaining the provisions contained in Finance Bill 1986, to show that Explanation 8 to section 43(1) was inserted to overcome the difficulties caused by various judgments, the first being in the case of CIT v. J.K. Cotton Spg. & Wvg. Mills Ltd. (supra). This decision as well as the subsequent decisions based thereon were contrary to the legislative intent. Hence, the aforesaid Explanation was inserted with a view to remove the doubts and clarify that once the production starts, no interest on borrowings made for the purpose of such assets should be capitalised. Shri Gupta pointed out that in this circular it is also clearly mentioned that as per the guidelines issued by the Institute of Chartered Accountants of India (hereinafter referred to as the ICA), the interest on moneys which are specifically borrowed for the purchase of a fixed asset may be capitalised only relating to the period prior to the assets coming into production i.e., relating to the erection stage of the assets. The learned senior Departmental Representative submitted that the capitalisation of the interest for the pre-production period was not in dispute and, therefore, there was no need of a specific mention of this fact in Explanation 8 to section 43(1). The learned Departmental Representative also relied upon the judgments reported in CIT v. Rajaram Bandekar (supra) and CIT v. India Pistons Ltd. (2000) 242 ITR 672 (Mad) to support his contention that interest for post-production period cannot be capitalised.
17. Shri Gupta submitted that in various judgments where interest was paid for the period prior to commencement of production in cases of business already in existence, it has been held that interest on amount borrowed by the assessee for the acquisition and installation of plant and machinery pertaining to the period prior to the commencement of production forms part of actual cost of the assets within the meaning of section 43(1). He relied upon the judgment of the Hon'ble Calcutta High Court in the case of CIT v. New Central Jute Mills (1982) 135 ITR 736 (Cal), in which it was held that interest paid, for the period prior to commencement of production on amounts borrowed by the assessee for acquisition and installation of plant and machinery forms part of actual cost of the assets within the meaning of section 43 of Income Tax Act, 1961, and will qualify for grant of depreciation and development rebate under sections 33 and 34 of Income Tax Act, 1961. The judgment of the Hon'ble Supreme Court in Chellapalli Sugars Ltd. (supra) was applied.
18. Shri Gupta then invited my attention to the judgment of Hon'ble Calcutta High Court in the case of CIT v. India Steam Ship Co. (1992) 196 ITR 917 (Cal). He submitted that the assessee-company in that case had been carrying on shipping business for a long time. During the year under reference, it purchased two ships, namely, Indian Venture and Indian Valour. The assessee which carried on ship business claimed that interest payments on loans prior to the delivery of the ships should be capitalised for purposes of development rebate and interest payments pertaining to the period after delivery of ships should also be capitalised for the purposes of development rebate. It was held by the Calcutta High Court by relying upon the judgment of the Hon'ble Apex Court in the case of Chellapalli Sugars Ltd. (supra) that interest pertaining to the period before such ships were delivered to the assessee was includible in the actual cost of the assets for the purposes of development rebate. However, interest for the period after delivery of the two vessels could not be capitalised for the purposes of claiming development rebate in view of Explanation 8 to section 43(1). The learned Departmental Representative therefore, argued that even in cases where new unit or new items of plant and machinery are acquired, in the case of existing and running business, interest pertaining to the pre-production period is to be capitalised.
19. Shri Gupta then referred to the judgment of Honble Gujarat High Court in the case of Arvind Mills Ltd. v. CIT (1978) 112 ITR 64 (Guj) This was also a case of existing/running business. The assessee runs a textile mill. In order to expand its spinning capacity and to renovate and modernise some of the sections of the mill, the assessee negotiated to import machineries from abroad. It was held that additional liability in respect of repayment of loan borrowed by the assessee for acquiring imported machinery during the relevant previous year, which was incurred as an integral part of the original transaction can legitimately be taken into account as enhancement of cost of machinery purchased and it should, therefore, be taken into consideration in determining the actual cost of such machinery to the assessee for the purpose of allowing development rebate under section 33. There is no need to resort to section 43A(1) and the provisions of section 43A(2) cannot, therefore, be pressed into service to deny to the assessee the benefit which was available to it under section 33 itself. Reliance was placed on CIT v. Tensile Steel Ltd. (supra).
20. Shri Gupta then relied upon the judgment of Hon'ble Allahabad High Court in the case of J.K. Cotton Spg. & Wyg. Mills Ltd. (supra) in which the Honble Allahabad High Court held that the assessee was entitled to include all the items which had been allowed by the Tribunal in the 'actual cost' of his assets for purposes of depreciation and development rebate. As the entire loan from State Government was utilised for the purposes of setting up of the factory, and became part of the cost of the factory, the interest paid for borrowing such capital is also part of the cost. Shri Gupta submitted that this decision of the Hon'ble Allahabad High Court has been approved by the Hon'ble Supreme Court in Chellapalli Sugars Ltd. (supra) Shri Gupta by citing the afore-referred judgments of Calcutta, Gujarat and Allahabad High Courts submitted that the judgment of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. applied in relation to capitalisation of interest for the pre-production period in those cases also, where the assessee had existing and running business. He submitted that even if the three additional machineries installed by the assessee in its new unit is treated as a part of the same business, the interest pertaining to the pre-production period, capitalised by the assessee, will have to be accepted as correct in accordance with the legal principles laid down in the judgment of Honble Supreme Court in the case of Challapalli Sugars Ltd. (supra).
21. Shri Gupta submitted that the learned A.M. by following the judgment of the Hon'ble Gujarat High Court in the case of Alembic Glass Industries (supra) has held that interest paid on the money borrowed for the purposes of business is allowable under section 36(1)(iii) as revenue expenditure irrespective of the fact whether expenditure incurred is on account of revenue or capital. He submitted that section 43(1) defines the term 'actual cost'. Actual cost means the actual cost of assets to the assessee. What are the items of expenditure which are to be included in the actual cost has not been specifically defined in the Act. Therefore, one has to take recourse to legal pronouncement on the issue and the accounting standard issued by the ICA. He submitted that the term 'actual cost' has been defined by the Hon'ble Supreme Court in the case of Challapalli, in the following words :
"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 expression in accordance with normal rules of accountancy prevailing in the commerce industries the cost of which is to include all expenditure necessary to bring such assets and to put them in working condition."
22. The learned Departmental Representative submitted that the aforesaid principle for determination of the actual cost of assets was applied by the Hon'ble Gujarat High Court in the case of Arvind Mills Ltd. (supra), Shri Gupta submitted that inclusion of interest in the actual cost of asset is in accordance with the accounting standards issued by the ICAI. The Hon'ble Supreme Court in the case of CIT v. UP State Industrial Development Corpn. (1997) 225 ITR 703 (SC) has held that in order to determine the question of taxability, the well settled legal principles as well as principles of accounting have to be taken into account. It is a well accepted proposition that "for the purpose of ascertaining profits and gains, the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statute". In the present case, the capitalisation of interest by the assessee is in conformity with the legal principles laid down by the Apex Court in the case of Challapplli Sugars Ltd. and such treatment given in the books of account also in accordance with the principles of commercial accounting, as clarified in the accounting standards issued by the ICA. Shri Gupta thus submitted that the judgment of Hon'ble Gujarat High Court in Alembic's case (supra) was delivered in the year 1975 and they did not have an occasion to deal with the Explanation 8 to section 43(1) introduced subsequently. Had the Hon'ble High Court examined the reasons which compelled the legislature to introduce Explanation 8, certainly exposition of law with regard to allowability of interest under section 36(1)(iii) would have been different. He submitted that the question relating to capitalisation of interest about pre-production period as forming part of the actual cost, which was not a subject-matter of controversy prior to introduction of Explanation 8 to section 43(1) has now become controversial after the introduction of the said Explanation. The object with which the Explanation 8 was inserted, clearly explains that interest pertaining to the pre-production period should be capitalised and interest pertaining to the post-production period should not be capitalised. The learned Departmental Representative further drew my attention to judgment of Hon'ble Supreme Court in the case of CIT v. P.D. Oriaswamy Chetty (1990) 183 ITR 559 (SC) to support his contention that the purpose of introduction of Explanation was to clear the doubts which were created by some of the court judgments, such as CIT v. J.K. Cotton Spg. & Wvg. Mills Ltd. (supra), the Allahabad High Court decision and judgment of Gujarat in CIT v. Tensile Steel Ltd. (supra) and others with regard to capitalisation of interest on deferred payments. Explanation 8 was brought in the statute to remove this limited controversy and there was no controversy whatsoever with regard to the capitalisation of interest pertaining to pre-production period or pertaining to the period prior to the date when the asset is put to use. Shri Gupta also relied upon the judgment of the Supreme Court in the case of UCO Bank v. CIT (1999) 10 DTC 2 (SC) : (1999) 237 ITR 889 (SC) to support his contention that the contents of circular are binding. The circular explaining the object of insertion of Explanation 8 to section 43(1) clearly states that interest for the pre-production period may be capitalised. Such a view ought to have been accepted by the learned A.M.
23. The learned senior Departmental Representative drew my attention to section 35D of the Act relating to amortization of preliminary expenses. Such preliminary expenses include expenses incurred before the commencement of business as well as expenses incurred after the commencement of business, in connection with the expansion of industrial undertaking or in connection with setting up of a new industrial unit. Shri Gupta wanted to draw an inference from the language of section 35D that wherever legislature so intended, they have introduced a specific provision in relation to grant of deduction in respect of such capital expenditure. The expenses incurred in relation to extention or expansion of existing business are part of capital expenditure known as preliminary expenses'. But for section 35D, no deduction will be allowable. Shri Gupta submitted that expenditure relating to extention/expansion of the existing business prior to the period when such assets are put to use are part of the capital expenditure. Such a view has been taken by the Gujarat High Court in the decisions in CIT v. Ambica Mills Ltd. (1990) 236 ITR 921 (Guj) and CIT v. Deepak Nitrite Ltd. (2001) 247 ITR 362 (Guj).
24. Shri Gupta invited my attention to para 3 of the facts of the case presented by the assessee in the paper book, which reads as under :
"At the same place at Rajpur, where the company was continuously carrying out its operations since 1989, a new building was constructed adjoining to the existing building and new machines were installed in the new building. The commercial production of the three machines were commenced during the financial year 1991-92. "
He also drew my attention to a copy of letter, dated 24-3-1995, submitted to the Deputy Commissioner (Asst.) in relation to assessment proceedings for assessment year 1992-93 regarding claim of expenditure of Rs. 2,12,05,459 including interest of Rs. 1,56,76,000. It was explained before the assessing officer that such expenditure was incurred in connection with the setting up of the new unit and those were treated as cost of assets in the books of account of the company. He also drew my attention to the prospectus issued by the appellant- company for public issue of 8,50,000-14 per cent secured redeemable partly convertible debentures (P.C.Ds). At p. 9 of the said prospectus the finance required for the aforesaid new project was estimated at Rs. 3700 lakhs. The same was proposed to be financed by issue of PCDs, NCDs, loan from IFCI, etc. Out of Rs. 3700 lakhs, finance from internal accruals was of Rs. 697 lakhs only. The remaining was to be raised by way of issue of PCDs and NCDs, and loan from IFCI. At p 13 of the prospectus, it has been mentioned that the company estimates a total manpower requirement of 300 persons for the project. The company currently employs 729 persons. These facts were pointed out by Shri Gupta with a view to show that this new project was not a part of the same business. In fact, it was a major project and should be regarded as a new business.
25. Shri Gupta then drew my attention to various judgments on the question as to what constitutes part of 'same business'. He referred to the judgment of Hon'ble Supreme Court in the case of Waterfall Estate Ltd. v. CIT (1996) 219 ITR 563 (SC) approving the judgment of the Hon'ble Madras High Court in this case which is Waterfall Estates Ltd. v. CIT (1981) 131 ITR 207 (Mad). The learned senior Departmental Representative pointed out that the onus lies on the assessee to show that the different ventures carried out by the assessee constitute part of the same business. In this case, the assessee, which had a composite estate in tea and coffee had acquired the other two coffee estates. The Hon'ble Madras High Court held that from the speeches of the chairman, quoted at p. 220 of 131 ITR, the Tribunal has drawn the inference that the history of company's expansion itself shows that the later addition of coffee estate as well as the commissioning of the coffee curing works did not form an integral part of the original business of the assessee. The company itself has been apportioning the expenses amongst the different activities. Same staff is not engaged in all the business of the company at various places. In facts, there was separate staff even for coffee and tea estate in Waterfall estate. The Hon'ble High Court observed that apart from the existence of head office, no material was placed before the Tribunal to show that the day-to-day functioning of the various estates and the coffee curing works was interdependent or that there were transactions inter se of such nature so as to establish interlacing or interconnection or dovetailing of one another. The facts indicate the existence of several businesses and there is no proof of the existence of a single business. The aforesaid judgment of Hon'ble Madras High Court has been affirmed by the Honble Supreme Court and it has been held that there were a number of factors to support the finding of the Tribunal that the various activities carried on by the assessee constitute separate business.
26. Shri Gupta then drew my attention to the judgment of the Hon'ble Supreme Court in the case of L.M. Chhabra & Sons v. CIT (1967) 65 ITR 678 (SC). In that case, the assessee were acquiring various theatres from time to time either on lease or otherwise and run each of them independently with separate indentical books, opening a new theatre or a closure of another will not affect the working of the remaining ones. It has been observed in the said judgment on p. 639 that "this is after all the proper test of an integrated and interlace business. Prakash Talkies had been run quite independently of other cinemas and as such a source had dried up in 1952, itself. The assessee claimed Rs. 92,240 out of the amount of mesne profits "relating to Prakash Talkies" as permissible allowance in the computation of their income. The Hon'ble Supreme Court held that on the facts, it could not be said that the venture of Prakash Talkies was a part of general business of exhibiting films carried on by the appellant and, therefore, the sum of Rs. 92,240 was not an allowable deduction in computing the appellant's business income for assessment year 1955-56. From the mere circumstances that the result of the accounts of the different venture was entered in the accounts maintained at the head office, no inference necessarily arose that the exhibition of films in different theatres constitute the same business.
27. Shri Gupta submitted that in the present case, the new unit is of larger dimension. Investment in the new unit is Rs. 37 crores while in the old unit investment was Rs. 23 crores only. The new machineries have been installed in a new building. Finances have been raised independently for the new project. All these facts viewed in the light of principles laid down by the Supreme Court in the case of Waterfall Estate Ltd. and L.M. Chhabra & Sons (supra) it will be clear beyond any doubt that the new unit set up by the assessee cannot be treated as part of the old business.
28. The learned senior Departmental Representative submitted that the reference of decision of Tribunal, Calcutta reported in 65 ITD 169 (supra) given by the learned J.M. in the point of difference referred under section 255(4) is perfectly valid, as the said decision only explains the legal proposition, which can be incorporated in the point of difference so referred by the learned J.M.
29. Shri Gupta also submitted that the argument advanced by Shri Dastur the learned senior Advocate, based on the arguments of the standing counsel referred to at p. 33 of the order of learned A.M. has to'be read in the context of his main arguments. The learned standing counsel had vehemently argued that the amount of interest cannot be allowed as a revenue expenditure and the same has rightly been capitalised by the assessee in conformity with the legal principles and accounting principles.
30. Shri Gupta submitted that the reliance placed by the learned counsel on the judgment of the Hon'ble Supreme Court in CIT v. Aluminium Co. Ltd. (supra) does not in any manner support the assessee's contention, as in that case it was held that expansion of the existing business or setting up of a new unit of existing business will qualify for grant of deduction under section 15C (later section 84 and then section 80J). This in fact supports the revenue 's contention that new unit set up in the course of expansion will also be treated as a new and separate unit qualifying for exemption under section 15C of the old Act.
31. Shri Gupta then submitted that reliance placed by the learned counsel on the decision of Tribunal Ahmedabad Bench-C in the case of Vadilal Diary International (ITA No. 500/Ahd./97, dated 15-6-1998), is not proper on the facts of the present case. The said decision was delivered by Ahmedabad Bench (C-Bench) of the Tribunal of which the learned A.M. was also a party. The learned A.M. was himself a party who referred the point of difference in the present case under section 255(4) to the Honble President in the month of May, 1998 (precisely on 6-5-1998), Thereafter he should not have rendered another decision on the same point sitting with Shri S.L. Banerjee, the learned Vice-President on a subsequent date namely, on 15-6-1998. No reliance can, therefore, be placed on the said decision.
32. Shri Gupta submitted that the decision of the Tribunal in the case of Grasim Industries Ltd. v. Deputy CIT (ITA No. 1523/Mum/97) submitted by the learned counsel is also of no help to the assessee, as the judgment of the Hon'ble Supreme Court in the case of Waterfall Estate Ltd. and L.M Chhabra & Sons (supra) have not been properly considered in the said decision. Shri Gupta also submitted that the judgment in CIT v. Associated Fiber & Rubber Industries Ltd. (1999) 8 DTC 225 (SC) : (1999) 236 ITR 471 (SC) cited by the learned counsel relates to assessment year 1972-73 i.e., prior to the year of introduction of Explanation 8 to section 43(1). The judgment of the Honble Gujarat High Court reported in Arvind Polycot Ltd. v. Assistant CIT (supra) is clearly distinguishable as the question in that case was entirely different. In that case, the main question related to validity of proceedings initiated under section 147 and issue of notice under section 148. The same is not of any help to the assessee on the facts of the present case. Shri Gupta submitted that section 43(1) defines the term 'Actual cost'. This being the specific provision, recourse cannot be had to be general provisions under section 36(1)(iii). It is a well known principle that specific provision supersedes the general provision. He submitted that Latin dictum generalia specialibus non derogant was applied in the following cases :
1. CIT v. Shiv Shakti Timbers (1998) 229 ITR 505 (MP)
2. CIT v. S. Teja Singh AIR 1959 SC 656; and
3. Pepper (Inspector of Taxes) v. Hart (1994) 210 ITR 156 (HL) (Regarding purposive interpretation).
Shri Gupta also submitted that provisions of section 21 of Companies Act required the Board of Directors to lay before the Annual General Body, the balance sheet and Profit and loss account. Section 211 of the said Act requires that every balance sheet should disclose a true and fair view of the company as at the date of balance sheet and true and fair view of the profit/loss of the year. The accounting standards issued by the Institute of Chartered Accountants of India are mandatory for the auditors. The accounting standards issued by Institute of Chartered Accountants of India have a binding force of law as has been held by the Honble Apex Court in the case of CIT v. UP State Industrial Development (supra). The capitalisation of interest made by the assessee in their books of account is, therefore, perfectly in conformity with the accounting standards and the legal principles.
33. Shri Gupta also relied on judgment in the case of CIT v. Sarangpur Cotton Mills(1938) 6 ITR 36 (PC) to support his contention that inclusion of interest prior to production period in the cost of assets is as per the accounting method laid down in the accounting standard and, therefore, the assessing officer is bound to determine the income as per regular method of accounting followed by the assessee under section 145 of the Act.
34. Shri Gupta thus strongly supported the order of the learned JM, on this point.
35. I have carefully considered the rival submissions made by the learned representatives and have gone through the orders of the learned departmental authorities, various documents submitted in the compilation to which my attention was drawn during the course of hearing and also the dissenting decisions, rendered by the learned Members of Tribunal, Ahmedabad Bench-C, Ahmedabad. I have also carefully gone through all the judgments cited by the learned representatives of both sides. I have given my deep and thoughtful consideration to the entire relevant material and submissions.
36. Both the 'learned Members have referred separate point of differences under section 255(4) of the Act. In substance, the point of difference is whether on the facts and circumstances of the case, the interest payment of Rs. 1,56,76,000 is allowable as a deduction under section 36(1)(iii) of the Income Tax Act, 1961, particularly when such interest has been capitalised in the books of account as a part of actual cost of the new machineries installed in the new unit of the assessee-company.
37. In order to resolve the aforesaid difference the following question will have to be dealt with and decided in accordance with the legal principles enunciated from the various relevant judgments on the point in issue :
(A) Whether the three new machines ( in addition to the three existing machines) installed for the production of LVP and SVP in a new building, constructed adjoining to the existing building, was part of the same business or whether it was a new unit of an altogether new business.
(B) If the installation of three more machines in the new factory building is considered to be a part of the same business or is considered as a new unit of the existing running business, will the fact that the interest cost pertaining to pre-production period has been capitalised in the books of account make any difference with regard to allowability of the interest payment as a deduction under section 36(1)(iii) of the Act ?
(C) Whether interest pertaining to the pre-production period should be considered to be part of actual cost of assets within the meaning of section 43(1) read with Explanation 8 thereto and in the light of judgment of Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. (supra) regardless of the fact that such new unit was part of the old and existing business or it was a new business altogether or such interest pertaining to the pre-production period should be allowed as deduction under section 36(1)(iii) or a revenue expenditure under section 37 in case of the new unit being a part of the old business ?
(D) Whether the insertion of Explanation 8 to section 43(1) adversely affect the deductibility of interest on borrowed capital as per the principles of law laid down by the Hon'ble Gujarat High Court in the case of Alembic Glass Industries (supra). What is the impact of insertion of Explanation 8 to section 43(1) in relation to deductibility of interest under the provisions of section 36(1)(iii) of the Act ?
38. The first crucial question is as to whether the new unit was an expansion of old business or a part of old existing running business of the assessee or the new unit was entirely an independent and new business. The learned senior Departmental Representative had relied on several judgments but the main emphasis was laid by him on the two judgments of the Hon'ble Apex Court
1. Waterfall Estate Ltd. (supra); and
2. L.M. Chhabda & Co. (supra).
39. It is well settled law that before applying the principles of law laid down in any judgment, one has to understand as to what is the controversy between the parties in that case and in what context that particular judgment was rendered. In the statement of the case drawn by the Tribunal, they summarised its findings in the following manner as reproduced at p. 567 of 219 ITR.
"(a) the various estates and the coffee curing works exist at different places and insofar as the assessee was concerned they were required at different times. They were independent and closure of one would not affect the continuance of another;
(b) each estate has its own subsidiary accounts and is managed locally although overall the head office controls all the estimates and maintained a single P&L a/c;
(c) there are separate staff for the various estates and even for tea and coffee estates in Waterfall estates separately,
(d) the various estates are far-flung and not in one place., the characters of the business ventures in the various estates are different.,
(e) apart from the existence of a centralised management and head office where a single set of final accounts is maintained there is no evidence relating to interlacing, interconnection and interdependence of the various estates in the day-to-day affairs or of their functioning being dovetailed into one another.
It is on the basis of the above findings that the Tribunal held that the several activities carried on by the appellant- assessee constitute separate and distinct activities. "
The facts of the present case appear to be totally different and distinguishable. In the present case, the new building has been, constructed at the same location. The items manufactured by the new unit, namely, LVP is exactly the same as is manufactured by the existing unit. The only difference is that the capacity of the old unit has been doubled. One new item 'SVP' has been treated by both the learned Members as 'similar items'. The learned J.M. in his dissenting order at p. 69 has clearly observed that the additional unit has been set up for manufacturing similar items. The new product 'SVP' is a product of similar nature and it may be an improved small size of the same product. In an existing business, one may enlarge and augment the range of its existing products to meet the requirements of modernisation in the global competitive market. The new unit in the present case is managed by same Board of Directors and most of the employees are common. This is evident from the fact as pointed out by the learned Departmental Representative himself, wherein he had pointed out on the basis of prospectus issued for the new project, in which it was inter alia, mentioned that the company presently employs 729 persons and will meet a manpower requirement of 300 persons for the project. The learned senior Departmental Representative has also observed that the new project was of the larger dimension than the old one. The number of manpower required for the new project was only 300 persons as against the present strength of the old and existing business of 729 persons.
This clearly shows that the persons looking after the existing business will mainly look after the new project also. Even the finance of the new project was out of the common funds, as is evident from the fact that the new project was to be financed to the extent of 697 lakhs from internal accruals also. The term loan from IFCI and PCDs and LCDs were also raised on the strength of performance and net worth of the existing business. The Hon'ble Supreme Court in the case of Waterfall Estate Ltd. (supra) held that in order to determine whether various activities constitute the same or separate business, no single test can be devised as universal and conclusive. The question has to be decided on a consideration of all the relevant facts and circumstances.
40. The learned senior Departmental Representative also placed heavy reliance on the judgment in the case of L.M. Chhabda & Sons (supra). In this case the Income Tax Officer disallowed the claim on the ground that business of Prakash Talkies was not carried on by the assessee during 1954. The Tribunal affirmed the disallowance holding that the cinema theatre acquired by appellant from time to time on lease or otherwise was run independently of one another and with separate identifiable books and that the opening of a new theatre or closure of another did not affect the working of the remaining theatre. On these facts, it was held that it could not be said that the venture of Prakash Talkies was a part of the general business of exhibition of films carried on by the assessee and, therefore, the sum of Rs. 92,240 was treated as not an allowable deduction in assessment year 1955-56. In this case, the Hon'ble Supreme Court has observed that it was for the appellant to establish that different ventures constitute parts of the same business. There is no evidence about unity and control of management or inter-relation of the business, or employment of the same staff to run the business or the possibility of one theatre being closed without affecting the rest of the business. The Hon'ble Supreme Court has also held that whether the different ventures carried on by the assessee form part of the same business must depend on the facts and circumstances of each case and it is for the assessee to establish that the different ventures constitute part of the same business. The facts of the present case, as already discussed above, are clearly distinguishable with the facts of L.M. Chhabda's case (supra).
41. It may be relevant here to mention that the Hon'ble Gujarat High Court in the case of CIT v. Alembic Glass Industries (supra) had considered the principles laid down in the case of L.M. Chhabda (supra). At p. 721 of the Hon'ble Gujarat High Court has observed as under :
"Reliance was placed by Shri Kaji on the decision of the Supreme Court given in L.M. Chhabda & Sons v. CIT. The Supreme Court has therein observed that if the assessee carries on several distinct and independent businesses, and one of such businesses is closed before the previous year, he cannot claim allowance under section 10 of the Indian Income Tax Act of 1922 of an outgoing attributable to the business which is closed against the income of his other business in that year. It was further observed that there is no general principle that where an assessee carried on business ventures of the same character at different places, it must be held as a matter of law that the ventures are parts of a single business : whether different ventures carried on by the assessee form part of the same business must depend on the facts and circumstances of each case, and it is for the assessee to establish that the circumstances of each case and it is for the assessee to establish that the different ventures constitute parts of the same business. In our opinion the facts of this case have no application to the facts of the case under our consideration, because in the case considered by the Supreme Court, the assessee owned two theatres at two different places. Each of these theatres had a separate and distinct business of its own, and closure of one could obviously not have affect the business of the other which was situated at a different place. That is not the case here, because it cannot be gainsaid that the closure of either of the two units at Baroda or at Bangalore would have an obvious impact on the business carried on by the other unit."
42. It may also be worthwhile to refer some more judgments of the Hon'ble Jurisdictional (Gujarat) High Court. In the case of Bansidhar (P) Ltd. v. CIT (supra) the Honble High Court considered a similar question relating to what constitutes 'same business'. The assessee, a Private Ltd. Company in that case was carrying on different activities at different points of time, viz., (i) purchase and sale of cloth, (ii) processing of cloth and manufacturing of chemicals and dyes., (iii) manufacture of machinery., and (iv) steel plant and rolling mill. The Tribunal held that since retrenchment compensation was paid and all debts were incurred in business, totally distinct from the business carried on by the assessee, the deduction could not be allowed in the assessment of the assessee because : (i) the other businesses were widely different in nature and they covered both, manufacturing and trading activities. (ii) each business had its own staff including different managements and the staff was not interchangeable; (iii) the different businesses were carried on at different places., (iv) inter se transactions with various businesses were separately and meticulously recorded; (v) the closure of one business was not shown to have affected the other business because out of five different businesses, three had closed down without affecting the remaining two businesses; (vi) different books of account were maintained for each business and separate P&L a/c and balance sheet were prepared, in respect of each business, although ultimately the accounts were consolidated into a common account; (vii) the overall control of the Board of Directors, overall finance, common ownership of the various businesses, common source of finance, etc. were factors of no material importance., and (viii) in the case of a limited company, there can be different businesses, although overall control was retained by the same Board of Directors. The Gujarat High Court held as under :
"Held, that the Board of Directors of the assessee, which was a private company, was in overall control of all the five business activities which were owned and carried on by the assessee. There was a common fund from which the necessary capital and working funds were supplied in the various business activities. The ultimate gain or loss of the businesses was also worked out by a consolidated P&L a/c and balance sheet. The source of finance for running the various businesses was thus one and the same and there was consolidation of accounts for the purpose of ascertaining the ultimate working result of the businesses carried on by the assessee. Merely because there was a separate staff, which was not inter-transferable, the unity of control was not affected since, at the apex, there was common management and administration with an overall control of the various businesses vesting in the Board of Directors of the assessee-company. Though some or most of the businesses were carried on at different places, the ultimate control was exercised at the registered office of the assessee-company and that circumstance also did not detract from the unity of control. The emphasis on the widely different nature of the business activities though not altogether irrelevant was not by itself decisive. The fact that manufacturing business was combined with trading activities was against a matter of no consequence because that by itself or coupled with other circumstances would not lead to the conclusion that there was no interlacing or interdependence, since there was unity of control. Even if different books of account were maintained and the transactions inter se between the different business units were recorded in those books of accounts, that circumstance would pale into insignificance once it was found that ultimately there was a common Profit and loss account and balance sheet. The fact that the closure of one business did not affect or lead to the closure of the other businesses was also not of much consequence because no decisive inference can be drawn therefrom.
Therefore, there was complete interconnection interlacing, interdependence and dovetailing of the different business activities carried on by the assessee and all the activities constituted one and the same business and the deduction on account of retrenchment compensation paid by the assessee upon the closure of one of its businesses and the write off of its outstanding dues as bad debts in the other were allowable deductions under section 37 and section 36(1)(vii) respectively. "
43. The facts of the present case are much stronger as compared to the facts of Bansidha.r (P) Ltd.'s case (supra). In the present case the employees were common, the production is of similar items, location of both the units is at the same place. There is adequate evidence of complete interconnection, such as purchase of raw material is common, marketing is common, the management is common. There is evidence of interdependence, interlacing, unity of control, etc.
44. The Hon'ble Gujarat High Court in the case of Arvind Polycot Ltd. (supra) also considered a similar question. In that case the assessee was engaged in the manufacturing of cloth. The new machinery was purchased for manufacturing fabrics with greater width. It was held by the Honble High Court that it was clear that the business was the same, the administration was the. same, funds were common, the staff was the same, persons in the management were the same and the output would be textile fabrics. Thus, it was clear that it would not be a new business. It may also be relevant here to refer to some observations made at P. 288 in this case, which reads as under:
"Thus, it is clear that what is required to be seen is whether business is carried on by the assessee or not. In the instant case, we put a question to Mr. Shelat, the learned counsel that if the assessee is engaged in the running of railways and if meter gauge lines are converted into broad gauge lines, would the assessee not be entitled to the benefit of section 36(1)(iii) to which Mr. Shelat stated in view of the aforesaid decision, he need not be questioned. Suffice it to say that the assessee was manufacturing cloth of a particular width and if machinery is purchased for the purpose of manufacturing cloth having larger width, it cannot be said that it is a new business."
45. In the present case, the assessee is a manufacture of intra-venous injection. Most of the raw material is stated to be common. The production and marketing is also looked after by common employees and senior executives. The apparent difference between the two types of products, namely, LVP and SVP is that the intravenous fluid being large volume parenterals has been described as LVP and sterile water for injections small volume parenterals has been described as SVP. The major difference appears to be the large volume of one product and shall volume of other similar product. The aforesaid observations made by the Hon'ble Gujarat High Court in the case of Arvind Polycot (supra) applies with full force to the facts of the present case.
46. The learned J.M. has observed in his separate order that in the present case, borrowings were made for the purpose of establishing a new unit consisting of three machines. But he has not given any finding as to whether the new unit was a part of existing running business, whether it was expansion and extension of the same business or whether the new unit constituted an altogether new business. Further finding given by the learned J.M. is that the assessee-company might have running business and the borrowings have not been made for the purpose of starting a new business, but it has to be seen that the borrowings had been made for the purpose of acquiring new plants and machineries in the new unit and the assets have not yet been put to use. From these findings, it is clear that the learned J.M. was of the view that interest paid for acquiring new plants and machineries for the period upto the date till such machineries are put to use, even in a case of old existing running business will have to be capitalised. He has, therefore, held that the assessee has rightly capitalised the interest payment in its books of account following the provisions of Explanation 8 to section 43(1). The learned J.M. does not seriously dispute the findings given by the learned A.M. that the new project was established in the course of expansion and extension of the old existing business, which was already being carried on by the assessee.
47. After a careful consideration of the entire relevant facts, material and evidence existing on records, I am of the considered opinion that there was complete interconnection, interlacing, interdependence, unity of control, common funds and common management and the new unit, where three additional machines were installed by the assessee, in addition to the three existing machines already run by them in their existing unit, was a part of the same business. It was a new unit of the existing running business whereby the assessee expanded its production capacity of LVP and also new capacities were established for manufacture of SVP, a different variety of the same product, namely, intra-venous fluids. The LVP and SVP are two different varieties of the same kind of products, namely, intra-venous fluids. Both the units are, therefore, part of the same running business.
48. The next issue which is required to be determined is whether the fact that the assessee capitalised the interest cost for the pre-production period in the year under consideration in conformity with the accounting principles, accounting standards, etc will make any difference in relation to assessee's claim for deductibility of the entire amount of interest under section 36(1)(iii) or under any other provision of the Income Tax Act.
49. The learned senior Departmental Representative had placed heavy reliance on the accounting standards issued by the ICAI and contended that they are binding. The copy of guidelines, notes and accounting standards issued by the ICA, have been furnished in the compilation by the learned Senior Departmental Representative at pp. 36 to 42. Para 15.1.3 is reproduced hereunder :
"15.1.3 Capitalisation of borrowing costs--Para 20 of the AS-10 "Accounting for fixed assets" suggests that financing costs relating to deferred credit or to borrowed funds attributable to construction or acquisition of fixed assets for the period upto the completion of construction or acquisition of fixed assets should be included in the gross book value of the fixed assets. However, financing costs should not be capitalised after the asset is ready for use. Para 4 of the statement of deferred payment of interest issued by the ICAI states that capitalisation of interest on defer payment during the construction period is a well recognised principle and approved by the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT (1975). Para 11 of the statement suggests that interest payable for the period after commencement of production in respect of assets purchased on deferred credit should not be capitalised."
50. The Tribunal, Hyderabad Bench (SB) in the case of Deputy CIT v. Nagarjuna Investment Trust Ltd. (supra) had inter alia considered this question. The Special Bench had examined the legal principles laid down by Hon'ble Courts in a various cases, and held that provisions of section 145 cannot override section 5 of the Act. If an income has neither accrued nor received within the meaning of section 5 of the Act, whatever section 145 may say, such income cannot be charged to tax even though a book-keeping entry has been made recognising such income which in law and on facts did not really accrue or arise or received in previous year. Section 145 determines the mode of computing the taxable income. It does not affect the range of taxable income or ambit of taxation. Computation provisions cannot enlarge or restrict the contents of taxable income.
The range of taxable income or ambit of taxation are to be determined in accordance with the charging provisions. It was further held in para 26(iii) at p. 58:
"(iii) The term 'accrual' of income used in the Companies Act, as explained in the various accounting standards and as understood for the purpose of taxation laws in certain circumstances may have different meanings depending on the purpose of legislation, the context in which such expression has been used and on the interpretation of the terms of relevant contracts. For tax purposes, the accrual or receipt of income in the relevant previous year will have to be determined in consonance with the ambit of taxable income as per section 5 of the Act on the basis of a careful scrutiny of the terms of contract for hire-purchase and lease agreements regardless of the method of accounting followed by the assessee for recognition of such income in its books of account."
51. The Hon'ble Supreme Court in the case of India Cements Ltd. (supra) held that the amount of Rs. 84,633 spent by the assessee towards stamp duty, registration fees, lawyers' fees was allowable as a deduction under section 10(2)(xv) of the Indian Income Tax Act, 1922, though the said amount was not charged to revenue but capitalised and carried forward in the balance sheet, but claimed as revenue expenditure for the purposes of income-tax.
52. The Honble Gujarat High Court in the case of Arvind Polycot Ltd. (supra) had considered almost a similar question. The assessee made a claim of Rs. 1,27,95,596 in respect of interest stating specifically that this interest has been capitalised in the books and that being in respect of borrowed capital, it is allowable under section 36(1)(iii) of the Act, in accordance with the decision in the case of CIT v. Alembic Glass Industries Ltd. (supra). The Hon'ble High Court quashed the notice of reassessment issued under section 148 for assessment year 1993-94 and thus confirmed the allowability of such interest for pre-production period, although the interest had been capitalised in the books of account.
53. The Hon'ble Gujarat High Court in the case of CIT v. Gujarat Mineral Development Corpn. (supra), at p. 389 held that the question whether the amount was spent in a particular year or not and if it was by way of revenue expenditure, has to be decided in the light of the legal position and the facts of the case. The fact that certain entries were made or not made in a particular year of account is totally immaterial and in any event, such entries are not decisive or conclusive of the matter. The Hon'ble Gujarat High Court had followed the judgment of the Hon'ble Apex Court in the case of CIT v. India Discount Co. Ltd. (1970) 75 ITR 191 (SC), in which it was held that the receipt being one which in law could not be regarded as income, it could not become income merely because the assessee erroneously credited it into the P&L a/c. The Hon'ble Gujarat High Court has also followed the judgment of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. v. CIT (supra). At p. 367 the Hon'ble Supreme Court has observed as under :
"Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter."
54. The Hon'ble Bombay High Court in the case of Assistant Commissioner v. Buckau Wolf New India Engg. Works Ltd. (supra), has held that the question whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in books of account be decisive or conclusive. It was held that the amount payable for acquisition of know-how was revenue expenditure in assessment year 1967-68, although it had not debited the entire amount in its books.
55. It is clear from the principles of law enunciated in the above referred judgments that the question whether a particular deduction is allowable or not under the provisions of the Act will not depend on the existence or absence of entries in the books of account. In any case entries in the books of account cannot be treated as decisive or conclusive in relation to determination of the question relating to taxability of an expenditure under the provisions of the Act. If on a true and correct interpretation of the relevant provisions of law, the assessee is entitled to deduction of a particular expenditure, manner and mode of making an entry in the books of account will not adversely affect the allowability thereof. The method of accounting and the manner of making a particular entry are two different things.
56. The learned senior Departmental Representative had argued that the capitalisation of interest cost for the pre-production period is in conformity with the accounting standards and accounting method and, therefore, income has to be computed as per the regular method of accounting followed by the assessee under section 145(1). Since the assessee had capitalised the interest cost, the same cannot be claimed as a revenue expenditure by filing a revised return. As already stated hereinbefore, the Special Bench in the case of Nagarjuna Investment Ltd. (supra) on the strength of various judgments referred to therein has held that the provisions of section 145 cannot override section 5 of the Act. If an expenditure is allowable under the relevant provision of law, the deduction cannot be denied because a book-keeping entry of capitalisation of such interest has been made on the basis of the recognised method of accounting and the accounting standards issued by ICAI. Whenever, the accounting standards or the system of accounting or the manner of making a book-keeping entry is not in conformity with the legal position, the provisions of law will prevail over the method of accounting or book-keeping entry or accounting standards. In the present case, the learned A.M. observed that interest for the pre-production period in respect of expansion of the existing business is clearly allowable in view of the judgment of the Hon'ble jurisdictional High Court in the case of Alembic Glass Industries and the judgment of the Supreme Court in the case of India Cements Ltd. If, in law, such interest is allowable as deduction under section 36(1)(iii) in conformity with the aforesaid binding judgment of the Hon'ble Gujarat High Court and Supreme Court, the mode of making a book-keeping entry or the accounting standard or the method of accounting will not prevail over the legal principles laid down by the Hon'ble Gujarat High Court and Honble Supreme Court, which are binding for all subordinate authorities, including the Tribunal. The aforesaid discussions thus answer the second question relating to impact of existence or absence or the manner of book-keeping entry made in respect of capitalisation of interest in the present case.
57. Let me now deal with the third question. The learned senior Departmental Representative has vehemently contended that interest for the pre-production period has rightly been capitalised in accordance with the well recognised principle of accounting, accounting standards and such a view has been approved by the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. (supra). He submitted that capitalisation of interest in question is in conformity with the accounting principles as well as the legal principles. Shri Gupta submitted that the judgment of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. has been applied by various High Courts in cases where the assessees were having an existing running business also. He relied upon the judgment of the Hon'ble Calcutta High Court in the case of India Steam Ship Co. (supra). The assessee-company had been carrying on shipping business for a long time. During the year under reference, it purchased two ships, namely, Indian Venture and Indian Velour. The assessee claimed that interest payment prior to the delivery of the ships should be capitalised for the purposes of development rebate. It also claimed that interest payment made after delivery of the ships should also be capitalised for the purposes of development rebate. The Income Tax Officer rejected the claim but the Tribunal allowed it. The Hon'ble High Court held that interest for the period prior to the delivery of the ships was includible in the actual cost of the ship for the purposes of development rebate. The judgment of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. (supra) was applied for arriving at this conclusion. However, interest for the period after delivery could not be capitalised for purposes of claiming development rebate with reference to Explanation 8 to section 43(1). At p. 923 of 196 ITR, the Honble Calcutta High Court has observed that it has not been disputed before the Hon'ble High Court, having regard to the principles laid down by the Supreme Court in the case of Challapalli Sugars Ltd. (supra) that interest paid on amounts borrowed before such ships were delivered to the assessee is includible in the actual cost of ships acquired. In view of this concession made by the revenue in favour of the assessee, before the Hon'ble High Court, it was held that interest for pre-delivery period is includible in the actual cost of ships acquired. The question in that case did not relate to allowability of interest under section 36(1)(iii) or 37 of the Act, but it relates to capitalisation of interest for the purposes of grant of development rebate.
58. The next judgment which Shri Gupta cited is also the judgment of the Hon'ble Calcutta High Court in the case of CIT v. New Central Jute Mills (supra). In this case, also it was held that interest on deferred payment for machinery purchased prior to the commencement of production forms part of the actual cost of the machinery and development rebate is admissible on such actual cost under sections 33 and 34 of the Act. The judgment of the Honble Supreme Court in the case of Challapalli Sugars Ltd. (supra) was applied. Here also, the question proposed by the revenue has to be seen. The question itself says that whether the Tribunal was right in holding that interest payments which were not allowable as revenue expenditure represent an element of actual cost of assets, and as such depreciation and development rebate are admissible with reference to the said amounts. The question proposed by the revenue starts with the assumption that such interest is not allowable as revenue expenditure. The controversy relates to allowability of development rebate and depreciation on such amount of interest capitalised by the assessee. The question relating to allowability of interest under section 36(1)(iii) in case of an expansion of existing business, was not the issue before the Hon'ble Calcutta High Court in this case also.
59. The Senior Departmental Representative had also placed reliance on judgment of Hon'ble Gujarat High Court in the case of Arvind Mills Ltd. v. CIT (supra). This judgment has been reversed by the Hon'ble Supreme Court in the case CIT v. Arvind Mills Ltd. (1992) 193 ITR 255 (SC): Moreover it was a case relating to interpretation of section 43A and grant of development rebate. It was not a case relating to deductibility of interest under section 36(1)(iii).
60. Shri Gupta had also relied upon the judgment of the Gujarat High Court in the case of CIT v. Vallabh Glass Works Ltd. (1982) 137 ITR 389 (Guj), In this case bank guarantee, commission and other necessary items of expenditure to bring the machineries, capital assets into existence was held to be capital expenditure. The Hon'ble Gujarat High Court dissented from judgment of Andhra Pradesh High Court in Addl. CIT v. Akkamba Textiles Ltd. (1979) 117 ITR 294 (AP) and judgment of Madras High Court. The case of Addl. CIT v. Akkamba Textiles Ltd. (supra) was affirmed by the Hon'ble Supreme Court in the case of Addl. CIT v. Akkamba Textiles Ltd. (1998) 227 ITR 464 (SC) (supra). It has been held by the Honble Supreme Court that guarantee commission paid by the assessee to the banker and the insurance company for insuring deferred payment of the purchase consideration of machinery was an admissible deduction under section 37.
61. The learned Senior Departmental Representative has also placed reliance on the judgment of Allahabad High Court in the case of CIT v. J.K. Cotton Spg. & Wyg. Mills Ltd. (supra). It was held therein that the assessee was entitled to include all the items which have been allowed by the Tribunal in the 'actual cost' of assets for purposes of depreciation and development rebate. As the entire loan from the State Government was utilised for the purpose of setting up of the factory, and became part of the cost of the factory, the interest paid for borrowing such capital was also part of the cost. The learned Senior Departmental Representative submitted that this judgment of Hon'ble Allahabad High Court has been affirmed by the Honble Supreme Court in the case of Challapalli Sugars Ltd. (supra). It was a case where the assessee wanted to capitalise the interest paid to the UP Government and the foreign suppliers from whom the assessee had purchased machinery on deferred payment basis. The Hon'ble Allahabad High Court held that assessee was entitled to include inter alia, such interest paid to the State Government and foreign suppliers of machineries on deferred payment terms in computing 'actual cost' for purposes of depreciation and development rebate. This was not a case relating to deductibility of interest under section 36(1)(iii) or section 37 of the Act. The assessee wanted to claim depreciation and development rebate on actual cost including interest component which was held to be allowable to the assessee on the facts of that case. Explanation 8 to section 43(1) has been inserted to overcome the difficulties caused by such decisions. It has been specifically mentioned in the memorandum explaining the said amendment made by Finance Bill, 1986, which has been published in 158 ITR 107 (at p. 116) (St.) that it has been found that certain taxpayers (backed by some court decisions, the first of which was rendered on 13-5-1974) are resorting to a major change in accounting practice by capitalising the interest paid or payable in connection with the acquisition of an asset relatable to the period after such asset is first put to use. This capitalisation implies inclusion of such interest in the 'actual cost' of the asset for the purposes of claiming depreciation, investment allowance, etc. under the Income Tax Act. As this was never the legislative intent nor does it conform to accepted accounting principles, with a view to counter-acting tax avoidance through this method any placing the matter beyond doubt, the Bill seeks to provide that any amount paid or payable as interest in connection with acquisition of an asset and relatable to a period after the asset is first put to use shall not form part and shall be deemed never to have formed part of the actual cost of the asset. The judgment delivered on 13-5-1974, referred to in this memorandum explaining the Finance Bill, 1986, relates to this very judgment of Hon'ble Allahabad High Court in the case of CIT v. J.K. Cotton & Spg. & Weg. Mills Ltd. (supra). The effect of this judgment has been undone by the aforesaid Explanation 8 to section 43(1). This judgment also does not, therefore, in any manner supports the contention of the learned Senior Departmental Representative.
62. It may be relevant here to once again refer to the judgment of the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. (supra). The Hon'ble Gujarat High Court had deeply considered the ratio of judgments of the Hon'ble Apex Court in the case of India Cement Ltd. (supra) as well as in the case of Challapalli Sugars Ltd. (supra). The relevant extracts appearing at pp. 726 and 727 from the judgment of the Hon'ble Gujarat High Court in CIT v. Alembic Glass Industries, are reproduced below :
"Section 10(2)(iii) of the Act of 1922 allows deduction of interest on all borrowings which are made 'for the purpose of business'. The expression 'purposes of business' is comprehensive enough to cover expenditure of revenue nature as well as of capital nature because both the types of expenditures can be incurred for business purposes. Therefore, even if a borrowing is made for incurring an expenditure of capital nature, it remains the borrowing for a business purpose. If that is so, the requirements of section 10(2)(iii) are fully satisfied and interest paid on such borrowing is entitled to deduction as revenue expenditure. The High Court of Bombay has unequivocally stated in Calico Dyeing & Printing Works v. CIT (1958) 34 ITR 265 (Bom) that in order to attract the provisions of section 10(2)(iii) it does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset, because all that the section requires is that the assessee must borrow the capital for the purpose of his business. This dichotomy between the borrowing of a loan and actual application thereof in the purchase of a capital asset seems to be on the ground that a mere transaction of borrowing does not by itself, bring any new asset of enduring nature into existence, and that it is the transaction of the investment of the borrowed capital in the purchase of the new asset which brings that asset into existence. Since the transaction of borrowing is not the same as the transaction of investment, the Supreme Court has observed in India Cements Ltd. that for considering whether payment of interest on a borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. Thus, the decisions of Bombay High Court in Calico Dyeing & Printing Works and of the Supreme Court in India Cements Ltd. v. CIT (1958) 34 ITR 265 (Bom) were given with reference to the borrowings made for the purposes of running business, while the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC), was given with reference to the borrowings which could not be treated as made for the purposes of business, as no business had yet been commenced. Thus, there is no incompatibility between these decisions."
63. The Hon'ble Supreme Court thereafter reproduced the relevant extracts from the judgment of Challapalli Sugars Ltd. (supra) where the Hon'ble Apex Court had itself distinguished its earlier decision in India Cements Ltd. (supra). The relevant extract has already been reproduced by the learned AM in his order at pp. 38 and 39 of his order. It is, therefore, clear that the matter relating to allowability of interest for the pre-production period in a case of running business will be governed by India Cement Ltd (supra). While the judgment of Hon'ble Apex Court in the case of Challapalli Sugars Ltd. (supra) will apply in relation to interest on borrowings made for an entirely new business, for the period prior to the commencement of the business. The Hon'ble Gujarat High Court has clearly so held in the case of Alembic Glass Industries Ltd. (supra). The facts of the present case are much stronger than the case of Alembic Glass Industries. In that case, the new undertaking was set up at a distant and different place, namely, Bangalore, while the old unit was situated at Baroda. The Bangalore unit did not go into production during the two assessment years in question. The Hon'ble Gujarat High Court held that interest on borrowings made for establishing a new glass manufacturing unit at Bangalore was part of the same business and it was nothing but an expansion of existing business and, therefore, interest was clearly allowable under section 36(1)(iii) of the Act.
64. The learned senior Departmental Representative has also relied upon the judgment of Hon'ble Supreme Court in the case of CIT v. UP State Industrial Development Corpn. (supra) for supporting his contention that capitalisation of interest made in conformity with accounting principles and the legal principles laid down by the Apex Court in the case of Challapalli Sugars Ltd. should be accepted for computation of taxable income of the assessee. The said judgment also clarifies that the principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statute. The Hon'ble Gujarat High Court in the case of Alembic Glass Industries (supra) has clearly held that interest under such circumstances is allowable under section 36(1)(iii). The book-keeping entries or the system of accounting cannot override legal principles laid down by the Hon'ble Gujarat High Court which are binding for all authorities working in the State of Gujarat.
65. The learned senior Departmental Representative also placed reliance on provisions of section 35D with a view to explain that the expenses incurred for extension or expansion of an existing business are capital expenditure and deduction in respect of such preliminary expenses can be allowed only under a specific provision like section 35D by way of amortization of preliminary expenses. A perusal of section 35D(2) clearly indicates that the said provisions relating to amortization of certain preliminary expenses include within its ambit the expenditure like preparation of feasibility report, preparation of project report, expenses incurred for conducting marketing survey or any other survey necessary for the business, engineering services relating to the business, legal charges for drafting agreement or memorandum and articles of association of the company, expenses on printing of MA and AA, expenses by way of fees for registering the company under the provisions of the Companies Act, expenses incurred for public issue of shares and debentures, etc. It does not include interest on funds borrowed for expansion and extension of existing business. Sec. 35D(2)(d) also clearly indicates that this provision is not applicable in relation to expenditure eligible for any allowance or deduction under any other provision of this Act. The aforesaid argument of the learned senior Departmental Representative based on section 35D instead of supporting his contention supports the view taken by the learned A.M. that deductibility of interest under such circumstances will be governed by provisions of section 36(1)(iii).
66. The facts of various other cases relied upon by the learned senior Departmental Representative are clearly distinguishable with the facts of the present case. In some cases, the point in issue was entirely different. I, therefore, do not consider it necessary and proper to deal with each and every judgment cited by the learned senior Departmental Representative. I may, however, repeat that I have gone through all the judgments relied upon by him and am of the view that none of the judgments relied upon by him would in anyway dilute the applicability of the principles of law laid down by the Hon'ble Gujarat High Court in the case of Alembic Glass Industries (supra) so far as it relates to deductibility of interest under section 36(1)(iii) in the present case is concerned. The decision of the Calcutta Bench reported in (1999) 65 ITD 169 (supra) is also clearly contrary to the judgment of the Hon'ble jurisdictional High Court in the case of Alembic Glass Industries. It is also contrary to various decisions of the Tribunal which have been referred to in the order of the learned A.M. The impact of Explanation 8 inserted in section 43(1) will be considered in the later part of this order. The said decision is based mainly on the fact that after capitalisation of the amount of interest, it has merged into cost of assets and thus lost its original character. The interest component capitalised by the assessee has been treated as part of actual cost of the asset in view of the judgment of Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. (supra) in which it was held that the expression 'actual cost' would be inclusive of other expenses in accordance with the normal rules of accountancy. One will have to bear in mind that the method of accounting is different than the entries made in the books of account. I have already discussed hereinbefore that the manner and mode of making book-keeping entry or the existence or absence of a book-keeping entry will not be decisive or conclusive in relation to allowability of a particular deduction. The deductibility of an expenditure will depend on the relevant provision of law, as has been interpreted by the Hon'ble Courts. In the present case, the view taken by the learned AM is based on the judgment of the Hon'ble jurisdictional High Court in the case of Alembic Glass Industries (supra) and also the judgment of the Honble, Supreme Court in the case of India Cements Ltd. (supra). The Calcutta Bench of the Tribunal has placed reliance on Explanation 8 to section 43(1). The impact of the said provision will be discussed in the later part of this order.
67. Shri Dastur, the learned counsel appearing on behalf of the assessee argued that section 36(1)(iii) draws no distinction between capital borrowed for the purpose of acquiring a capital asset and capital borrowed for acquiring a revenue asset. Interest on funds borrowed for extension or expansion of the same business is allowable regardless of the fact that such plant and machinery have not been put to use. Since the new unit set up by the assessee is part of the same business, interest on funds borrowed for purposes of business is clearly allowable. He placed reliance on various judgments, which have already been elaborately discussed in the orders of the learned A.M. However, I would like to make a specific reference to some of those judgments cited by Mr. Dastur before me.
A. Calico Dyeing & Printing Works (supra) Shri Dastur submitted that this judgment was given at a time when the jurisdiction of the Bombay High Court extended to Gujarat also. Hence this judgment is binding upon the authorities working in the State of Gujarat. The Hon'ble Bombay High Court in the aforesaid case has held as under :
"The assessee-firm which carried on the business of bleaching, dyeing and printing cloth borrowed money in the year of account in order to extend its business, purchased land and erected additional plant and machinery and paid interest on the borrowed capital. In its assessment to income-tax in the relevant assessment year the claim of the assessee to deduction of the interest so paid under section 10(2)(iii) of the Indian Income Tax Act, 1922, was rejected on the ground that the plant and machinery were not used for the business, in the year of account on a reference :
Held, that the assessee was entitled to the deduction claimed even though the plant and machinery were not used in the year of account.
Where the assessee claims deduction of interest paid on capital borrowed under section 10(2)(iii) of the Income Tax Act, all that the assessee has to show is that the capital which was borrowed was used for the purposes of the business of the assessee in the relevant year of account. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset. If the capital is used in the year of account, and the use is for the purpose of the business of the assessee, it is immaterial whether the user of the capital actually yielded profit or not and it is not open to the department. to reject the claim of the assessee in respect of the interest paid on that capital merely because the use of the capital is unremunerative. "
B. CIT v. Alembic Glass Industries (supra) The learned A.M. has reproduced the relevant findings given by the Hon'ble Gujarat High Court in the aforesaid judgment. The principles of law laid down by the Hon'ble Gujarat High Court in this case are fully applicable on the facts and circumstances of the present case. It may be relevant here to mention that the Hon'ble Gujarat High Court reproduced the summarised findings given by the Hon'ble Supreme Court in the case of India Cements at p. 724. After reproducing the summarised part of the judgment of the Supreme Court, the Gujarat High Court at pp. 724 and 725 observed as under :
"This decision of the Supreme Court makes it clear that where for the purpose of a running business a borrowing is made, then the loan obtained by the said borrowings is not to be considered as an advantage of an enduring nature and that the consideration of the object with which the loan was obtained is irrelevant. If that be so, in this case also it can be said that even if the disputed borrowings were made by the respondent- assessee with the object of establishing a new industrial unit at Bangalore, the interest paid by it on those borrowings cannot be treated as the capital expenditure if it is found that the borrowings in question were for the purpose of its running business. Now it cannot be disputed that the borrowings were for the purpose of business which the assessee was already running at Baroda, when it decided to establish a new industrial unit at Bangalore, because though the unit at Bangalore was to be newly established, it was merely the expansion of the existing business, which was carried on by the assessee at Baroda. "
The other relevant extracts from the aforesaid judgment have been extensively quoted in the order of the learned A.M. and, therefore, the same are not repeated here. The ratio of the judgment of the Hon'ble Gujarat High Court in the aforesaid case fully and squarely applied to the facts of the present case.
C. Arvind Polycot Ltd. (supra) This is a case relating to assessment year 1993-94 and the judgment was delivered by the Hon'ble Gujarat High Court on 10/11-7-1996. This judgment relates to the period after insertion of Explanation 8 to section 43(1) and the judgment was delivered by the Hon'ble Gujarat High Court much after the said Explanation 8 was inserted. Explanation 8 to section 43(1) was inserted by Finance Act, 1986, with effect from 1-4-1974. The Hon'ble Gujarat High Court, at page 283 held as under :
"The assessee is engaged in the manufacturing of cloth. It appears that a new air-jet looms were purchased with a view to manufacture fabrics having width of 36 inches to 44 inches only. As it was not possible to manufacture fabrics having width of 56 inches with old looms, new air-jet looms were purchased. It appears that this has led the assessing officer to believe that the assessee has purchased the machinery for the purpose of new business. It thus appears that modernisation has been considered by the assessing officer as a new business. It is not disputed that the assessee-company, having its manufacturing activity at Ahmedabad, is engaged in weaving and spinning and manufacturing varieties of textile cloth. It is clear that the business is the same, the administration is the same, the funds are common, the staff is the same, persons in the management are the same and the output would be textile fabrics. Thus, it is clear that it would not be a new business."
The Hon'ble Gujarat High Court followed the judgment of the Hon'ble Supreme Court in the case of CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC), Standard Refinery & Distillery Ltd. v. CIT (1971) 79 ITR 589 (SC), judgment of the Hon'ble Gujarat High Court in CIT v. Alembic Glass Industries (supra), the judgment of Hon'ble Gujarat High Court in the case of Bansidhar (P) Ltd. v. CIT (supra) and various other judgments. After considering all the judgments it was held by the Hon'ble Gujarat High Court that interest on funds borrowed for purchase of machinery for the new unit of the existing business was rightly allowed by the assessing officer and proceedings initiated under section 148 were quashed.
D. India Cements Ltd. v. CIT (supra) It was held by the Hon'ble Supreme Court at p. 63, as under :
"A loan may be intended to be used for the purpose of raw material when it is negotiated, but the company may after raising the loan, change its mind and spend it on securing capital assets. Is the purpose at the time the loan is negotiated to be taken into consideration or the purpose for which it is actually used ?
Further suppose that in the accounting year the purpose is to borrow and buy raw material but in the assessment year the company finds it unnecessary to buy raw material and spends it on capital assets. Will the Income Tax Officer decide the case with reference to what happened in the accounting year or what happened in the assessment year ? In our opinion, it was rightly held by the Nagpur Judicial Commr. in Nagpur Electric Light & Power Co. v. CIT (1931) 6 ITC 28 that the purpose for which the new loan was required was irrelevant to the consideration of the question whether the expenditure for obtaining the loan was revenue expenditure or capital expenditure."
E. CIT v. Associated Fibres and Rubber Industries (supra) The relevant headnote is reproduced below :
"Held, that even though the machinery had not 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 purpose 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.
F. CIT v. H. C. Shankarappa (1999) 7 DTC 81 (Karn-HC) : (1998) 234 ITR 15 (Karn) In this case the assessee, an exhibitor of films was running a cinema theatre. It purchased a site and commenced construction of another cinema theatre. During assessment year 1981-82, the assessee claimed deduction of interest of Rs. 56,429 paid to Karnataka Bank Ltd. Similarly, in assessment year 1982-83 to 1984-85, the assessment years under consideration, the assessee paid interest amounting to Rs. 1,65,738, Rs. 2,29,206 and Rs. 3,97,032 and claimed the same as revenue expenditure against its business income. The Income Tax Officer disallowed the claim on the ground that borrowed amount on which interest had been paid was utilised for the construction of a new cinema building and as such the payment of such interest had to be capitalised. The theatre building was still under construction and was incomplete during assessment year 1982-83 to 1984-85. The Honble High Court held that the loan had been taken for expansion of business. There was an interconnection, interlacing and interdependence between the existing business and the new business. Setting up of the new cinema hall did not constitute a new business, but was only an establishment of a new unit of an existing business, which was already carried on by the assessee. It constituted the same business. The assessee was entitled to deduct the interest as revenue expenditure, irrespective of the fact that the building in question was not actually put to use for carrying out a business during the accounting year by the assessee. The Honble Karnataka High Court has also examined the applicability of principles laid down by the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. (supra). At pp 19 and 20, the Hon'ble Karnataka High Court observed as under :
"In Challapalli Sugar Ltd.'s case (supra), the Supreme Court was considering whether the interest paid on amounts borrowed for the acquisition and installation of plant and machinery forms part of the actual cost entitling the assessee to depreciation allowance and development rebate with reference to such interest also. The assessee was a public limited company engaged in the manufacture and sale of sugar. The company went into production on 22-1-1958. The assessee-company had borrowed considerable sums of money from the Industrial Finance Corpn. of India for the installation of machinery and plant. During the relevant year and for the period prior to the commencement of its business the assessee paid Rs. 2,38,614 as interest. The case of the assessee was that the payment of interest be added to the cost of machinery and plant of the assessee and as such while calculating depreciation admissible to the assessee the interest paid should be considered as part of the cost of the machinery and plant to the assessee. Their Lordships of the Supreme Court accepted this contention of the assessee and held (headnote) :
"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 capitalised to the cost of the fixed assets created as a result of such expenditure."
The point canvassed before the Supreme Court was different from the point involved in the present case. There was no existing business with reference to which the capital was borrowed either for acquisition of a new asset or expansion of the already existing unit or business. There the capital was borrowed for installation of a new unit and interest paid on the borrowed capital was treated as capital expenditure adding to the capital cost of the asset entitling the assessee to depreciation allowance and development rebate with reference to such interest also.
In the present case, the assessee had taken the loan for the new unit which was taken to be the expansion of the already existing business of the assessee. The Tribunal has proceeded on the basis that the assessee had taken loan for further expansion of his business and the interest paid by the assessee on such was deductible as revenue expenditure."
The Hon'ble Karnataka High Court has also considered the judgment of L.M. Chhabda's case (supra) in the aforesaid judgment.
G. CIT v. Bhilai Iron Foundry (P) Ltd. (1999) 234 ITR 661 (MP).
The relevant headnote is reproduced below :
"Held that the Tribunal had found that capital had been borrowed for expansion of the old business. This finding had not been challenged by the revenue . The question whether the new unit had gone into production was not relevant. The assessee was entitled to deduction of interest on the borrowed capital under section 36(1)(iii) of the Income Tax Act, 1961."
H. CIT v. Kasthuri & Sons (2000) 14 DTC 643 (Mad-HC) : (2000) 241 ITR 412 (Mad) The Hon'ble Madras High Court in this case held that interest paid on moneys borrowed for the purpose of erecting another plant to carry on the assessee's business in a more efficient manner would constitute a deductible item of expenditure for the purposes of section 37 of the Act. In this case also, interest paid on such borrowings was capitalised by the assessee in its books of account but was claimed as revenue expenditure in the income-tax proceedings.
I. A view favourable to the assessee on identical facts and circumstances has also been taken by various Benches of the Tribunal. Some of these decisions are reported in Philips India Ltd. v. Income Tax Officer (1996) 59 ITD 390 (Bom), Bharat Forge Ltd. v. Deputy CIT (1995) 53 ITD 573 (Pune-Trib), Hindustan Zinc Ltd. v. Deputy CIT (2000) 14 DTC 27 (Jp-Trib) : (2000) 74 ITD 25 (Jp-Trib) in Vadilal Dairy International Ltd. (ITA No. 500/Ahd.97) and in Grasim Industries Ltd. v. Deputy CIT (ITA No. 1523/Mum/97, assessment year 1993-94) etc. Those decisions also support the view taken by the learned A.M.
68. In view of the aforesaid facts and circumstances, I am of the view that interest paid on funds borrowed for business purposes including for the purpose of setting up of a new unit of existing running business, qualifies for grant of deduction under section 36(1)(iii), irrespective of the fact whether such a new unit has commenced production or not in the year under consideration. Such a view is fully supported by the judgment of the Hon'ble jurisdictional High Court in the case of Alembic Glass Industries Ltd. (supra) and also the Hon'ble Supreme Court in the case of India Cements Ltd. (supra).
69. The last question which now requires consideration is in relation to the impact of inserting of Explanation 8 to section 43(1) of the Income Tax Act.
70. Shri Gupta, the learned senior Departmental Representative submitted that Explanation 8 to section 43(1) clarifies the doubts regarding the allowance of interest as revenue expenditure after the asset has been put to use. It also necessarily implies that interest pertaining to the period prior to the date when the asset has been put to use is required to be capitalised. He submitted that capitalisation of interest pertaining to the pre-production period was never in dispute before the insertion of Explanation 8 to section 43(1). This was capitalised by taxpayers and added to the cost of assets in conformity with the accounting principles/legal principles. Shri Gupta also placed reliance on circular explaining the object of inserting Explanation 8. He submitted that taxpayers, with a view to claim higher depreciation and development rebate, etc. capitalised the entire payment of interest payable on deferred payment of machinery supplied which included the interest for the post-production period. This was against the legislative intention. Explanation 8 had to be inserted to remove such doubts created as a result of certain judgments, such as the one reported in (1975) 98 ITR 153 (All) and (1976) 104 ITR 581 (Guj) (supra) etc. He submitted that section 43(1) read with Explanation 8 clarifies beyond doubt that interest for pre-production period is part of actual cost. Once interest merges in the cost of assets, it cannot be claimed as deductible expenditure under section 36(1)(iii) or any other provisions of law.
71. Let us once again look at the memorandum explaining the aforesaid amendment which is published in 158 ITR (St) 107 at p. 116. It has been mentioned that certain taxpayers backed by some court decisions, are resorting to a major change in accounting practice by capitalising the interest paid or payable in connection with the acquisition of an asset relatable to the period after such asset is first put to use. This capitalisation implies inclusion of such interest in the 'actual cost' of the asset for the purposes of claiming depreciation, investment allowance, etc. under the Income Tax Act. As this was never the legislative intent nor does it conform the accepted accounting practice, the Bill, with a view to counteracting tax avoidance, seeks to provide that the amount paid or payable as interest in connection with the acquisition of an asset and relatable to a period after the asset in first put to use shall not form part and shall be deemed to have never formed part of the actual cost of the asset.
72. Explanation 8 to section 43(1) reads as under :
Explanation 8 : "For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included in the actual cost of such asset."
73. A bare reading of this Explanation shows that it was added with the object of removing doubts with regard to includibility of interest relatable to any period after the asset has first been put to use in the computation of its actual cost. The said Explanation nowhere provides that interest pertaining to the preproduction period is necessarily required to be capitalised. It also does not say that such interest pertaining to the pre-production period paid for extension or expansion of the existing business will not be allowed as a deduction under section 36(1)(iii) or under section 37 of the Act.
74. The learned Departmental Representative has also placed reliance on the Circular No. 461, dated 9-7-1986, issued by the Board, a copy of which has been placed at p. 11 of the paper book. The circular inter alia, clarifies that interest on moneys which are specifically borrowed for the purpose of a fixed asset may be capitalised in respect of the period prior to the asset coming into production i.e., relating to the erection stage of the asset. However, once the production starts, no interest on borrowings for the purchase of such asset should be capitalised. It has also been mentioned in the said circular that the aforesaid amendment has been made to get over the difficulty created by the decision in the case of CIT v. J.K. Cotton Wyg. & Spg. Mills (supra) as such decisions which were contrary to the legislative intent. The learned Senior Departmental Representative also submitted that such a circular is binding on the departmental authorities in view of the Honble Supreme Court's judgment reported in (1999) 237 ITR 889 (SC) (supra). The said circular only gives an option to the taxpayer that they may capitalise interest on moneys borrowed relating to the period prior to putting the asset to use. This circular also does not draw any distinction between allowability of interest on expansion or extension of the existing business and interest paid for setting up of an entirely new business. The Hon'ble Gujarat High Court in the case of Alembic Glass Industries (supra), after carefully considering the judgment of the Hon'ble Apex Court in the case of India Cements Ltd. and Challapalli Sugars Ltd. (supra) has drawn a very subtle and significant difference and has explained that in the case of a running business interest paid for expansion of business and for acquiring capital assets for such expansion will be allowable under section 36(1)(iii) in view of judgment of Hon'ble Supreme Court in the case of India Cements and interest paid for setting up of an altogether new business will form part of actual cost in view of the judgment of the Supreme Court in the case of Challapalli Sugars Ltd. (supra). The Explanation 8 does not in any manner, dilute the applicability of the ratio of the judgment of the Hon'ble Gujarat High Court in Alembic Glass Industries (supra) in relation to deductibility of interest paid on borrowed funds utilised for setting up of an additional unit, which is part of the same old running business irrespective of the fact whether production of the new unit of existing business has started production or not.
75. The various judgments relied upon by the learned Senior Departmental Representative where the Honble High Courts have applied the ratio of judgment of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. are the cases which relate to inclusion of interest in the actual cost for purposes of grant of depreciation, investment allowance or development rebate with reference to such interest also. The assessee claimed in all these cases that interest should be included in the actual cost for purposes of grant of these deductions. The Hon'ble High Courts and Honble Supreme Court in the case of Challapalli Sugars Ltd. accepted such contention of the assessee and held that such interest can be capitalised. The point before the Honble Supreme Court in the case of Challapalli Sugars Ltd. was different from the question relating to deductibility of interest under section 36(1)(iii). It was not existing business with reference to which the capital was borrowed either for acquisition of a new asset or expansion of already existing unit. Interest was paid on borrowed capital for installation of an altogether new unit, which was absolutely a new business.
76. Even if it is assumed that interest for the pre-production period for setting up a new unit of an old existing/running business may be capitalised for purposes of grant of depreciation and investment allowance and the assessee is also entitled to claim entire amount of such interest as deductible under section 36(1)(iii) the provision which is more beneficial to the assessee will have to be applied.
77. It may be worthwhile here to refer to the judgment of the Hon'ble Supreme Court in the case of CIT v. Mahendra Mills (supra). At p. 62 of the Hon'ble Supreme Court has observed as under :
"When there are two provisions under which an assessee could claim some benefit, it is for the assessee to choose one. A reference was made to a claim for medical reimbursement for the current year which is different from a claim for depreciation. This is so because depreciation is a claim on the written down value and if depreciation is not claimed in the current year, the written down value would remain the same for the following year. Prior to the amendment of section 32 business loss could be carried forward for eight years. There was no timelimit for the claiming of depreciation. This is not so now. Earlier, therefore, it was always for the assessee to claim business loss first and current depreciation thereafter, if he so desired."
Again at p. 80, the Hon'ble Supreme Court has observed as under :
"In the second Madras case in CIT v. Southern Petro Chemicals Industries Corpn. Ltd. (1998) 233 ITR 400 (Mad), the assessee did claim depreciation but he withdrew the same in the revised return. On that basis, it was held that since the assessee had furnished the particulars regarding the claim of depreciation in the original return, the assessee would not be able to withdraw his claim for depreciation. It would appear that the High Court proceeded on the basis that the revised return was not a valid return under section 139(5) of the Act. The High Court followed its earlier decision in Dasaprakash Bottling Co.'s case (1980) 122 ITR 9 (Mad). To us it appears that if the revised return is a valid return and the assessee has withdrawn the claim of depreciation, it cannot be granted replying on the original return when the assessment is based on the revised return.
We get support from the earlier decision of this court in Dharampur Leather Co. Ltd.'s case (1966) 60 ITR 165 (SC). Allowance of depreciation is calculated on the written down value of the assets, which written down value would be the actual cost of acquisition less the aggregate of all deductions 'actually allowed' to the assessee for the past years. 'Actually, allowed' does not mean 'notionally allowed. If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing is 'allowed' when it is claimed A subtle distinction is there when we examine the language used in section 16 and that of sections 34 and 37 of the Act. It is rightly said that a privilege cannot be to a disadvantage and an option cannot become an obligation. In the present case also, the assessee claimed deduction in respect of interest in question by filing a revised return on 6-8-1993. The claim so made in the revised return was claimed to be supported by the various judgments, including the judgments reported in (1976) 103 ITR 715 (Guj), (1966) 60 ITR 52 (SC) and (1958) 34 ITR 265 (Bom) (supra).
78. It may also be imperative to refer one more judgment of the Honble Supreme Court in the case of CIT v. Indian Engg. Commercial Corpn. (1993) 201 ITR 723 (SC), in which it was held as under at p. 728..
"The employees concerned herein also happen to be directors. The provision in clause (c) of section 40 applies to directors among others. Of course, section 40(c) in applicable only to companies whereas section 40A(5) is applicable to employees, whether of companies or others. In the case of directors who are also employees, both the provisions will be attracted-the higher of the two ceilings has to be applied."
The aforesaid judgment of the Hon'ble Apex Court clarifies that when there are two provisions under which an assessee could claim some benefit, it is for the assessee to choose one which is more beneficial. In the present case, the assessee was therefore, clearly entitled to claim grant of deduction in respect of such interest under section 36(1)(iii).
79. Section 43 gives definitions of certain terms relevant to income from profits and gains of business or profession. Sub-section (1) of section 43 defines "actual cost" means actual cost of the assets to the assessee Explanation 8 to section 43(1) inserted by the Finance Act, 1986, with effect from 1-4-1974, clarifies, for removal of doubts that interest in connection with the acquisition of an asset, as is relatable to any period after such asset is first put to use shall not be included in the actual cost of such asset. The said provision do not expressly provide that interest for the pre-production period should necessarily be capitalised. The learned senior Departmental Representative while arguing that Explanation 8 to section 43(1) necessarily implies that interest for pre-production period should be capitalised, irrespective of the fact whether new unit is a part of the same running existing business or an altogether new business wants to add certain words and rewrite the said Explanation 8 as if it provides that interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included and shall be deemed never to have been included in the actual cost of such asset and the interest relatable to any period prior to the date when such asset is first put to use shall be included in the actual cost, irrespective of the fact that such asset has been acquired for the business purposes of an existing business or acquired for an altogether new business.
While interpreting a provision, one cannot read the words, which do not exist in the relevant provision, on the ground of harmonious construction or purposive interpretation. Where the legislative has defined a particular word or expression in a particular manner it is not permissible to the court to read in that definition something which is not there.
80. Generally the purpose of a definition is to furnish a key to the proper interpretation of the words in an enactment. The said definition given in section 43(1) read with Explanation 8 will, therefore, be relevant for interpretation of those provisions, where such words or expression" actual cost" has been used, such as in sections 32, 32A and 33 of the Act. That is why the cases which-have been relied upon by the learned senior Departmental Representative mostly relate to grant of depreciation, development rebate and investment allowance on 'actual cost' including interest pertaining to pre-production period. None of these cases relate to deductibility of interest on funds borrowed for purposes of business, which includes expansion or extension of existing business under section 36(1)(iii).
81. Let us now turn again to the plain language of section 36(1)(iii) of the Act, which clearly indicates that deduction is permissible in relation to the amount of interest paid in respect of capital borrowed for the purpose of business The learned senior Departmental Representative wants to draw a distinction between capital borrowed for acquiring a capital asset and capital borrowed for acquiring a capital asset and capital borrowed for acquiring a revenue asset. Unlike section 37, which, expressly excludes an expenses of a capital nature, the legislature has made no distinction in section 36(1)(iii) between capital borrowed for a revenue asset or capital asset. Here also the interpretation sought to be placed by the learned senior Departmental Representative would require adding of certain words in section 36(1)(iii) and he wants the said provision to be read as if it contains the words "in respect of capital borrowed for the purpose of business, provided the asset which has been acquired as a result of the borrowed capital is used in the year of account". In my view, there is no warrant to accept the submissions of the learned senior Departmental Representative to read the provisions of Explanation 8 to section 43(1) and 36(1)(iii) in the manner indicated above. The provisions of Explanation 8 to section 43(1) cannot override the clear provision of section 36(1)(iii) as authoritatively interpreted by the Hon'ble Gujarat High Court in the case of Alembic Glass Industries (supra), nor it affects the applicability of the principles of law laid down by the Hon'ble Gujarat High Court in Alembic Glass Industries (supra) case on the facts of the present case.
82. In view of the aforesaid facts and discussions, I am inclined to agree with the view taken by the learned A.M. In my view he has rightly held that the question of deduction of interest on borrowed capital is squarely covered by the decision of the Supreme Court in the case of India Cements Ltd. (supra) as well as the decision of Gujarat High Court in the case of Alembic Glass Industries (supra) and the same is clearly deductible under section 36(1)(iii) of the Income Tax Act, 1961.
83. The matter will now go back to the Division Bench in order to decide the matter according to the majority view as per section 255(4) of the Income Tax Act, 1961.
R.K. Bali, A.M. : 6th June, 2000 These two cross appeals were heard by Ahmedabad Bench "C" comprising of S/Shri R.K. Bali-AM and Gopal Chowdhury JM and an order was passed on 11-3-1998, wherein the appeal filed by the revenue was dismissed and the appeal filed by the assessee was partly allowed. However, in respect of one particular ground relating to the claim of the assessee on account of interest paid on borrowings amounting to Rs. 1,56,76,000 as a deduction under section 36(1)(iii) which was ground of appeal No. (2) in ITA No. 444/Ahd/1997 filed by the assessee, there was a difference of opinion between the Members who heard the appeals to the extent that the AM was of the view that the assessee is entitled to deduction of this amount of Rs. 1,56,76,000 on account of interest on borrowings being revenue expenditure, Shri Gopal Chowdhury, J.M. was of the opinion that since this interest related to the amount borrowed for investment in additional machinery installed by the assessee, it should be treated as a capital expenditure. Accordingly, the point of difference was referred to the Third Member under section 255(4) of the Act. Now, Shri B.M. Kothari, AM as Third Member in his order dated 12-5-2000, has agreed with the view taken by the AM and held that the disputed amount of Rs. 1,56,76,000 is clearly deductible under section 36(1)(iii). Therefore, this ground of appeal No. (2) in ITA No. 444/Ahd/1997 is allowed in view of the majority view of the members as per section 255(4) of the Act.
2. In the result, the appeal filed by the assessee is partly allowed whereas the appeal filed by the revenue is dismissed.