Madras High Court
M/S..Tube Investments Of India Ltd., vs . The Joint on 21 March, 2019
Author: V.K
Bench: Vineet Kothari, C.V.Karthikeyan
Judgment in T.C.A.No.233 of 2008 dt.21.03.2019
M/s..Tube Investments of India Ltd., Vs. The Joint
Commissioner of Income Tax
1/16
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 21.03.2019
CORAM:
THE HON'BLE DR. JUSTICE VINEET KOTHARI
and
THE HON'BLE MR. JUSTICE C.V.KARTHIKEYAN
T.C.(A).No.233 of 2008
M/s. Tube Investments of India Ltd.,
Dare House, 3rd Floor,
234, N.S.C.Bose Road,
Chennai-600 001. .. Appellant
..Vs..
The Joint Commissioner of Income Tax,
Special Range - I,
Chennai - 600 034. .. Respondent
Prayer : Tax Case (Appeal) is filed under Section 260-A of the Income Tax Act,
1961, against the order of the Income Tax Appellate Tribunal, Chennai 'C' Bench,
dated 27.07.2007 passed in I.T.A.NO.1429/MDS/2004 for the Assessment Year
1998-1999.
For Appellant : Mr.V.S.Manoj
for Mr.K.Vaitheeswaran
For Respondent : Mr.T.Ravi Kumar
for Ms.V.Pushpa
Senior standing counsel
http://www.judis.nic.in
Judgment in T.C.A.No.233 of 2008 dt.21.03.2019
M/s..Tube Investments of India Ltd., Vs. The Joint
Commissioner of Income Tax
2/16
JUDGMENT
(Judgment of the Court was delivered by DR.VINEET KOTHARI, J.) The Assessee has filed this Appeal raising the Substantial Questions of law arising from the order of the learned Income Tax Appellate Tribunal dated 27.07.2007, whereby the learned Tribunal has dismissed the Appeal of the Assessee for the Assessment Year 1998-1999.
2. The present Appeal filed by the Assessee was admitted by the Co-ordinate Bench of this Court on 27.03.2008 only on the Substantial Question of Law No.3, which is filed by the Assessee.
3. But the learned counsel for the Assessee urged before this Court that the remaining two questions also raised from the order of the learned Tribunal and therefore the Appeal may be heard on all the three questions.
4. At the request of the learned counsel for the Assessee, we have permitted him to argue on the three Substantial Questions of Law. Accordingly, first and second Questions of Law are framed now along with the third Substantial Question of Law, which was already framed by the Co-ordinate Bench of this Court on http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 3/16 27.03.2008. All the three Substantial Questions of Law are quoted below for the ready reference:
"a) Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal has erroneously concluded that the new unit set up by the Appellant at Haryana for manufacture of door frames is not an expansion of existing business?
b) Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal is right in disallowing the interest on borrowings to set up a new unit for manufacturing doorframes at Haryana?
c) Whether the Income Tax Appellate Tribunal is right in law in setting aside the issue pertaining to disallowance of expenditure for earning dividend and tax free interest income for disallowing the actual expenditure incurred despite there being no provision on the date of passing the Assessment Order to disallow such expenditure and on the basis of Sec.14A which has only a proposed section in Finance Bill, 2001 which had not then been passed into the Act on the date the Assessment Order was passed?"
http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 4/16
5. The learned counsel for the Assessee Mr.V.S.Manoj, submitted that the Assessee was engaged in the manufacture of narrow width strips in its unit set up at Chennai for Hyundai Motors and during the Assessment year in question, the Assessee had set up a different unit at Bawal, Haryana to manufacture wide width strips and door frames for Maruti Udyog Limited. He submitted that interest paid on borrowings made for setting up of the Haryana Unit to the extent of Rs.2,75,70,802/- was allowable as a deduction from profits of assessee under Section 36(1)(iii) of the Income Tax Act, 1961 (in short 'the Act') because the Haryana Unit set up for manufacture of wide width strips is nothing but an expansion of the existing unit set up by the Assessee at Chennai for manufacture of narrow width strips and therefore it was a continuity of business expansion for Assessee in Haryana and hence the interest on such borrowings deserves to be allowed for the Assessment year in question, in the hands of the Assessee. He submitted, that the findings recorded by the Tribunal that such interest on borrowings to the extent of 2.72 crores which had been capitalised by the Assessee himself in the Books of Accounts maintained by the Assessee for his Haryana Unit, is an incorrect finding of fact.
6. On the third question of disallowance under Section 14A of the Act, it is submitted that the matter has been remitted back to the learned Assesseing http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 5/16 Authority to ascertain the actual expenditure incurred during the Assessment year in the form of dividends, but, since the provisions of Section 14 A was not avaialable for the Assessesment year 1998-1999 in question, the finding rendered by the Tribunal is not justified and the Assessee had in fact not incurred any expenditure.
7. The learned counsel for the Revenue Mr.T.Ravikumar, however submitted that all the three authorities below have taken a consistent view against the Assessee for the interest on borrowings to the extent of 2.72 crores which had been capitalised by the Assessee himself in the Books of Accounts maintained by the Assessee for its Haryana Unit and therefore the same have not been rightly allowed as deduction in the hands of the Assessee, since the unit at Haryana is yet to commence production in this Assessment Year. He further submitted that Section 14 A was inserted on the statute book by the Finance Act, 2001 with retrospective effect from 01.04.1962 and which empowers Assesseing authority to disallow the Expenditure incurred in relation to income not included in total income under Section 14 A. Therefore, the said provision was very much available and could be invoked by the Assessing Authority for A.Y.-1998-1999. He further submitted that since the matter is only remitted by the learned Tribunal to the Assessing Officer on the said ISSUE, no Substantial Question of Law infact arises for consideration by this Court.
http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 6/16
8. Having heard the learned counsel for the parties, we are satisfied that the present Appeal filed by the Assessee has no merit and deserves to be dismissed.
The reasons are as follows:
(i) On the issue of interest on borrowings to the extent of Rs.2.72 crores, we find that all the three authorites consistently have given a finding of fact against the Assessee that the said interest on borrowing paid by the Assessee pertaining to the loan taken for set up of Haryana Unit for manufacture of wide width strips & doorframes could not be allowed as deduction under Section 36(1)(iii) of the Act as the said Haryana unit admitedly did not commence the production before the closing of the previous year for Assessment Year 1998-1999 in question. The findings of three authorites are quoted below for ready reference:
From the Order dated 27.03.2001 of Joint Commissioner of Income Tax, Spl.Range I, Chennai.
"2.6. Interest paid on borrowings for setting up new projects During the year, the assessee has capitalised in the books interest of Rs.272.02 lakhs paid on borrowings. This amount has however been fully claimed in the computation of income filed along with return.
From the details furnished it is seen that the interest relates http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 7/16 to loans taken for the projects set up to manufacture widewidth strips & doorframes. The assessee has claimed the entire exependiture incurred on interest placing reliance on the case cited in 60 ITR 52 & the Madras High Court decision in 24 ITR 412.
It is seen that an amount of Rs.218.81 lakhs has been incurred as interest on borrowings to set up a facility to manufacture widewidth. Rs.53.21 lakhs has been incurred as interest on borrowings to set up a new project at Bawal, Haryana to manufacture doorframes from M/s.Maruti Udyog Ltd.
The assessee has hitherto been manufacturing only narrow width strips. The new project set up was to manufacturing widewidth strips which is a new product. Similarly in the case of the new unit at Haryana, the assessee company had not ben manufacturing doorframes. The new unit therefore, had again been set up to manufacture a new product.
In the Madras High Court decision relied upon by the assessee, the company had started a new unit in the same product already being produced by the assessee. The facts of the assessees case are therefore distinguishable.
Reliance is placed on the Supreme Court case in Challapathi Sugars (98 ITR 167) where the apex court had held that insterest http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 8/16 paid on borrowings prior to commencement of production is to be capitalised. Reliance is also placed on 98 IRR 24, where the Kerala High Court had held that interest paid on capital borrowed for construction of project would be part of the actual cost of the assets. In this case, the assessee borrowed funds to acquire & install a new 60 ton caustic soda plant; being already engaged in the manufacture of caustic soda.
While considering whether the interest paid should form part of the actual cost, the Kerala High Court referred to an earlier decision of the Calcutta High Court in Standard Vacuum Refining Company. There the Calcutta High Court had held that if the principles of accountancy are considered, interest is to be regarded as an element of cost. Therefore, applying the principles of accountancy, it was held that interest paid till the plant is ready for production would form part of the actual cost of the assets.
Accordingly, the Kerala High Court has also held that interest paid on borrowed capital till the building, plant or machinery is erected or constructed is part of the actual cost to the assessee.
Accordingly, the amount paid as interest on funds borrowed by the assessee for setting up two new projects for manufacturing new products and capitalized in the books, is not allowed as revenue expenditure as claimed by the assessee."
http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 9/16 From the Order dated 26.03.2004 of CIT (Appeals) "6.2. The Assessing Officer in the course of assessment proceedings found that the appellant-Company has capitalised in its books of account interest of Rs.2,72,02,000/- paid on borrowing. However, in the Incometax computation, this amount has been fully claimed as deduction. On examination of details, he found that the above interest relates to loan taken for projects set up to manufacture width Strips and doorframes. According to the Assessing Officer, the appellant was manufacturing only narrow width strips, the new project set up was to manufacture wide width strips which means, the appellant has started producing new product out of investment made from the loans taken. Similarly, a new unit has been set up at Haryana where the appellant-company was manufacturing door frames and the door frame is a new product for the Company. In view of the above, the Assessing Officcer held that the appellant-company has started new unit for producing a new product. In view of this, he rejected the appellant's claim and also held that the ratio of the decision cited in 60 ITR 52(SC) in the case of India Cements Ltd. V.CIT and 241 ITR 412 in the case of Kasturi & Sons V. CIT (Madras) are not applicable to the facts of the appellant's case.
6.3. Before me, it is submitted that during the period relevant to asst.year 1998-99, the appellant-company capitalised the interest on capital expenditure spent on the facility to manufacture wide http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 10/16 width strips and doorframes for Maruti Udyog Ltd. The interest upto the stage of commencement was capitalised in the books of account based on the spending and claimed as revenue for Incometax since they represent additionl capacity for the existing business of manufacturing cold rolled strips and sold rolled formed sections. The manufacture of wide width strips and doorframes are only expansion of existing line of business. Hence, the interest on the loan should be allowed as a revenue expenditure for incometax purpose.
6.4. I have carefully considered the submission. The appellant has not disputed the Assessing Officer's finding that the investments has been made for manufacturing of new products i.e. wide width strips and doorframes. The appellant was not manufacturing these products earlier. Therefore, the fact remains that the appellant-company has made investment in the manufacturing or a new product for which the appellant cannot place reliance on the decision of Supreme Court in India Cements Ltd. V.CIT (60 ITR 52) and decision of Madras High Court in 241 ITR 412. On consideration of the facts of the case, I hold that the manufacturing of wide width strips and door frames are not part of existing line of manufacturing of Cold Rolled Strips and Cold Rolled Formed Sections of the appellant-company. Therefore, the Assessing Officer is justified in disallowing the claim as captial expenditure. I confirm the disallowance of interest of Rs.2,72,02,000/-.
http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 11/16 From the Order dated 27.07.2007 of the Income Tax Appellate Tribunal "10.We have heard the rival submissions and perued the record. In this case, the assessee has capitalized the interest paid in its books of accounts. Even the same was claimed as deduction for income tax purposes. The interest was for loans taken for the projects set up to manufacture wide width strips & doorframes. According to the assessee it is engaged in the manufacture of narrow width strips and there is no difference between narrow width strips and wide width strips. According to the AO the assessee was manufacturing only narrow width strips, the new project set up was to manufacture wide width strips. According to the AO manufacture of wide width strips was a new project and the loan availed was for set up of manufacturing wide width strips. In our opinion, the contention of the assessee that the manufacture of wide width strips is only an expansion of existing business and interest paid on such loans should be allowed. The assessee also incurred interest on the loan borrowed for set up of project at Haryana. The AO disallowed this interest also on the ground that there was no commencement of the project. According to the assessee, this is also an expansion of the project. Now the question arising is that various activities carried by the assessee can be taken as one single activity or they represent distinct business. In our opinion, the project relating to manufacture of wide width strips and narrow width strips has to be treated as single integrated activity because there is not separate staff for this unit. There is interconnection and interdependency http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 12/16 of these two units and common profit and loss registers were maintained. It is not the same in the case of unit of Haryana which is manufacturing door frames and which is a new project started by the assessee. The closure of the Haryana unit does not affect in any way the carrying on of business at Chennai. The business carried on by the assessee at Haryana cannot be said to be the same business as carried on at Chennai. In our opinion, the business carried on by the assessee at Haryana is a new business and is not an expansion of the existing business. In our opinion, the assessee has availed the loan to set up a new project at Haryana which had not commenced. As such the interest payable on commencement is a capital expenditure and it cannot be allowed as a revenue deduction. However in the case of loan availed for the project to manufacture wide width strips, as it is expansion of existing business and interest incurred is revenue expenditure and is to be allowed. This issue is partly allowed. "
9. Since the authorities below have consistently found against the Assessee that the interest on borrowings to the extent of 2.72 crores which had been capitalised by the Assessee itself in the Books of Accounts for setting up the Haryana Unit, there was no question of allowing the same as deductable expenditure for the Assessment year in question, as the said unit was yet to commence production.
Mr.M.V.Subbiah, the Chairman of the Assessee Firm, has stated in his Annual report http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 13/16 dated 19.06.1998, about the Haryana unit as under:
"The division's new project at Bawal, Haryana for manufacturing of door frames for Maruthi's 800 cc car is nearing completion and commercial production is expected in the 2nd quarter of this year."
10. In view of the said finding of facts, which are binding on this Court, while hearing the Appeal under Section 260 A, we cannot entertain the arguments advanced by the learned counsel for the Assessee that Haryana Unit set up by the Assessee for manufacturing of wide width strips & doorframes is merely an expansion of the existing business at Chennai which is engaged in the manufacture of narrow width strips for Hyundai Motor India Limited which is a different car manufacturing unit in Chennai. Even though the Assessee is one company and it has set up a diferent unit at Haryana and since the interest paid on borrowings pertains to Haryana Unit, which was a new unit set up by the same company,it cannot be construed as a mere expansion of business existing at Chennai particularly, when the Assessee has capitalised the said expansion in its Books of Accounts as consistently found by the authorities below. Therefore, the disallowance of said interest on borrowings under Section 36(1) (iii) of the Act was a natural consequence to follow. Therefore, there is no merit in the contentions raised before http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 14/16 this Court and hence the Questions of Law Nos. 1 and 2 are answered against the Assessee and in favour of the Revenue.
10 As far as Section 14 A of the Act, involved in Question No.3 quoted above, is concerned, we are satisfied that no Substantial Question of law arises for consideration, as the said issue has only been remitted back to the Assesseing Officer by the learned Tribunal for ascertaining actual expenses incurred by the Assessee in earning the exempted income for the Assessment Year in question.
Whether the Assessee incurred anything or not is the question of fact and the same has to be ascertained by the Assessing authority the same does not give rise to any Substantial Questions of law. Since no Substantial Questions of law requires consideration under Section 260 A of the Act, we do not find any merit in this appeal filed by the Assessee. Hence, the Appeal is dismissed. No order as to costs.
(V.K.,J.) (C.V.K.,J.)
21.03.2019
Index : Yes/No
Internet : Yes/No
arr
http://www.judis.nic.in
Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 15/16 To
1. Joint Commissioner of Income Tax, Special Range-1, Chennai-34.
2. Commissioner of Income (Appeals) IV Chennai - 600 034.
3. Income Tax Appellate Tribunal, 'C' Bench, Chennai.
http://www.judis.nic.in Judgment in T.C.A.No.233 of 2008 dt.21.03.2019 M/s..Tube Investments of India Ltd., Vs. The Joint Commissioner of Income Tax 16/16 DR. JUSTICE VINEET KOTHARI,J and MR. JUSTICE C.V.KARTHIKEYAN,J arr T.C.(A).No.233 of 2008 21.03.2019 http://www.judis.nic.in