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32. The fourth issue is with, regard to the action of the AO in disallowing interest amounting to Rs. 4,06,55,312 on capital borrowed for setting up a new plant. Briefly stated the facts are that the assessee incurred expenditure by way of interest payment on capital borrowed for setting up of new manufacturing plant at Sonepat. The AO noted that the assessee had claimed such interest amounting to Rs. 4,06,55,312 capitalised in the books of account as revenue expenditure. The claim of the assessee was under Section 36(1)(iii) of the Act. The contention of the assessee was that the new unit was set up for manufacturing of its existing product i.e. Horlicks and is under the same management. The AO rejected the plea of the assessee on the ground that the interest related to capital borrowed for setting up of a new plant which had not started production during the year under consideration. Secondly, the AO noted that since interest related to capital borrowed for a new plant, the same was to be treated as capital in nature. Thirdly, the AO noted that the amendment under Section 36(1)(iii) made by the Finance Act, 2003 w.e.f. 1st April, 2004 provided that interest from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use shall not be allowed as deduction. The AO has held that the said amendment being clarificatory in nature, was to be applied retrospectively. Fourthly, the AO noted that similar expenditure on account of interest on borrowed capital pertaining to the, immediately preceding assessment year of 1999-2000 has not been claimed as revenue expenditure by the assessee itself. Therefore the claim of the assessee, to the contrary in this year was disallowable. The AO held that the amount in question of Rs. 4,06,51,312 was to be capitalised and accordingly disallowed the claim of the assessee for deduction under Section 36(1)(iii) of the Act. The CIT(A) has sustained the stand of the AO.

33. Before us the learned Counsel for the assessee has vehemently argued that the capital borrowed was utilized for setting up a new manufacturing unit at Sonepat for production of an existing product and therefore it was an expenditure incurred on the expansion of existing business. It was submitted that the new line of production was completely dependent on the existing line of business there being a unity of control, common funds and common management. The learned Counsel specifically relied upon the phraseology of Section 36(1)(iii) which provided that the amount of interest paid in respect of capital borrowed for the purpose of the business shall be allowed as deduction in computing the income. The learned Counsel also argued that the reliance placed by AO on the newly inserted proviso to Section 36(1)(iii) was untenable since the said amendment was prospective in nature and cannot be read retrospectively. In this regard reliance was placed on the judgment of the Tribunal in assessee's own case for the asst. yr. 1992-93 in ITA No. 1316/Chd/1998 dt. 31st Jan., 2005 wherein it is held that the amendment to Section 36(1)(iii) is prospective in nature. Reliance was also placed on the decision of the Tribunal in the case of Swaraj Engines Ltd. v. Jt. CIT (2005) 98 TTJ (Chd) 346 : (2005) 97 ITD 45 (Chd) besides reliance was also placed on the decision of the Rajasthan High Court in the case of CIT v. Hindustan Zinc Ltd. . Apart from the aforesaid reliance was also placed on a number of decisions :

35. We have considered the rival submissions carefully. The fact position in the instant case is not in dispute. Admittedly the assessee has utilized borrowed capital for setting up of a new manufacturing unit at Sonepat for undertaking manufacture of an existing product, namely, Horlicks. The said unit has not commenced production in the year under consideration. Evidently the impugned activity of manufacture of Horlicks at Sonepat is only expansion of the existing business of the assessee, The moot question is as to whether the expenditure incurred on capital borrowed for such purpose is allowable expenditure or not. The claim of the assessee is to be examined with reference to the provisions of Section 36(1)(iii) of the Act. Section 36(1)(iii) provides that while computing the income referred to in Section 28 of the Act, the amount of interest paid in respect of capital borrowed for the purposes of business is an allowable deduction. The assessee has incurred expenditure on interest in respect of capital borrowed and utilized for expansion of its existing line of production. In this background, following the decisions of the Supreme Court in the cases of India Cement Ltd. v. CIT , Challapalli Sugars Ltd. v. CIT , CIT v. Associated Fibre & Rubber Industries (P) Ltd. and Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. (supra), it is evident that the deduction in respect of interest paid on borrowed money utilized for investment in capital assets acquired in connection with the expansion of existing business is an allowable deduction. Therefore on the basis of the aforesaid, we do not find any infirmity in the claim of the assessee that the impugned expenditure was an allowable deduction in terms of Section 36(1)(iii) of the Act. Similar proposition has also been upheld by the Tribunal in the assessee's own case for the asst. yr. 1992-93 (supra).

64. In ground No. 4 the issue is with regard to the disallowance of interest amounting to Rs. 10,32,90,873 incurred by the assessee on capital borrowed for setting up of a new plant at Sonepat. The Revenue disallowed the expenditure on the plea that the same was capital in nature. Similarly, expenditure pertaining to assessment year 2000-01 (ITA No. 309/Chd/2005) has been dealt with by us in the earlier paras In terms thereof the impugned ground of the assessee is liable to be decided against the Revenue. In the result assessee succeeds on this ground.