TAXAP/94520/2006 1/7 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No. 945 of 2006 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ HONOURABLE MR.JUSTICE BANKIM.N.MEHTA ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= GUJARAT STATE FERTILIZER & CHEMICALS LTD. - Appellant(s) Versus ASSISTANT COMMISSIONER OF INCOME TAX - Opponent(s) ========================================================= Appearance : MR JP SHAH for Appellant(s) : 1,MR MANISH J SHAH for Appellant(s) : 1, MR MANISH R BHATT for Opponent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE K.A.PUJ and HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Date : 22/08/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE K.A.PUJ) TAXAP/94520/2006 2/7 JUDGMENT 1. The appellant – assessee has filed this Tax Appeal under Section 260(A) of the Income-tax Act, 1961 for the assessment year 1992-93. The appeal was admitted by this Court on 2.8.2006 and the following substantial question of law was formulated for determination and consideration of this Court. “Whether on the facts and in circumstances of the case, the Tribunal was right in law in disallowing the interest of Rs.27,96,55,759/- paid in respect of capital borrowed for the purposes of its business being second Caprolactum plant under installation?” 2. The brief facts giving rise to the present appeal are that the appellant is a Joint Sector Company owned by the Gujarat Government, the Public Financial Institutions and the individual shareholders. The appellant was already running one Caprolactum manufacturing plant and was in the midst of TAXAP/94520/2006 3/7 JUDGMENT installing second Caprolactum plant and had made huge borrowing in respect of the second Caprolactum plant. The interest on such borrowing was allowed by the Tribunal in the assessment year 1990-91 following this Court's decision in Commissioner of Income tax Vs. Alembic Glass Industries Ltd., reported in (1976) 103 ITR 715. This Court dismissed the Department's appeal therefrom on the point of deductability of interest. For the assessment year 1991-92 also the Tribunal allowed such interest and the department accepted the said order by not preferring an appeal to this Court against the said order. In the appeal for assessment year 1992-93, filed by the Revenue, the Tribunal took the view that these two orders of the Tribunal on identical facts were per incuriam and likewise, the two decisions of this Court in Commissioner of Income Tax Vs. Alembic Glass Industries Ltd., reported in (1976) 103 ITR 715 and Deputy Commissioner of TAXAP/94520/2006 4/7 JUDGMENT Income-tax Vs. Core Healthcare Ltd., reported in (2001) 251 ITR 61. Being aggrieved and dissatisfied with the order dated 12.5.2006 the appellant preferred the above Tax Appeal before this Court under Section 260(A) of the Income Tax Act. 3. Mr.J.P.Shah, learned counsel appearing for the petitioner has submitted that the issue is squarely concluded by the decision of the Hon'ble Supreme Court in the case of Deputy Commissioner of Income-tax Vs. Core Health Care Ltd., reported in (2008) 298 ITR 194 (SC). He had invited the Court's attention to the ratio laid down by the Hon'ble Supreme Court in the same judgment, which is squarely applicable to the facts of the present case. The Hon'ble Supreme Court in that case has held that Section 36(1)(iii) of the Income- tax Act, 1961 has to be read on its own terms: it is a code by itself. It makes no distinction between money borrowed to acquire TAXAP/94520/2006 5/7 JUDGMENT a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business which is carried on by the assessee in the year of account. Unlike Section 37 which expressly excludes an expense of a capital nature, Section 36(1)(iii) emphasise the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital. The legislature has, therefore, made no distinction in Section 36(1)(iii) between “capital borrowed for a revenue purpose” and “capital borrowed for a capital purpose”, and the Court, therefore, took the view in the said decision that the assessee is entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. “Actual cost” of an asset has no relevancy in TAXAP/94520/2006 6/7 JUDGMENT relation to section 36(1)(iii) of the Act. Applying the ratio of the decision of the Supreme Court to the facts of the present case and considering that there is no dispute about the fact that the capital borrowed was used for the purpose of business and whether it is for the capital purpose or revenue purpose is immaterial while allowing deduction under Section 36(1)(iii) of the Act, the appeal of the appellant is required to be allowed. 4. Mr.Manish Bhatt, learned Sr. Standing Counsel appearing for the Revenue cannot dispute the applicability of the ratio of the decision of the Hon'ble Supreme Court to the present case. 5. Considering the facts of the present case and the decision of the Hon'ble Supreme Court, we are of the view that the Tribunal was not right in law in disallowing the TAXAP/94520/2006 7/7 JUDGMENT interest of Rs.27,96,95,759/- paid in respect of capital borrowed for the purpose of its business being Second Caprolactum Plant under installation. This Tax Appeal is, therefore, allowed. The question formulated by this Court is answered in negative, that is, in favour of the assessee and against the Revenue. 6. This appeal is accordingly disposed off. (K. A. PUJ, J.) (B. N. MEHTA, J.) kks