ITR/40/1999 1/12 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 40 of 1999 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA HONOURABLE MR.JUSTICE Z.K.SAIYED ============================================================================ 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 ? ===================================================== THE COMMISSIONER OF INCOME TAX - Applicant(s) Versus VADILAL DAIRY INTERNATIONAL - LTD. - Respondent(s) ===================================================== Appearance : MR BB NAIK for Applicant(s) : 1, MRS SWATI SOPARKAR for Respondent(s) : 1, ===================================================== CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MR.JUSTICE Z.K.SAIYED Date : 13/05/2008 ORAL JUDGMENT ITR/40/1999 2/12 JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) 1. This reference is, in fact, involving cross references, both by the Revenue and the Assessee. The Income Tax Appellate Tribunal, Ahmedabad Bench-C, has referred the following one question at the instance of revenue and six questions at the instance of the assessee, under section 256(2) of the Income Tax Act, 1961 (the Act) for the opinion of this Court. R.A. No. 700/Ahd/1998 (By Revenue) 1. Whether, the Appellate Tribunal is right in law and on facts in allowing deduction of interest amounting to Rs. 38,92,769/- under section 36(1)(iii) on the funds borrowed for setting up of a new business which is unconnected with the regular business of the assessee? R.A. No. 783/Ahd/1998 (By Assessee) 1. Whether, in the facts and circumstances of the case the Tribunal was right in law in holding that, the assessee was not entitled to deduction of expenditure of Rs. 32,56,038/- incurred by it? 2. Whether, in the facts and circumstances of the case the Tribunal was right in law in holding that the expenditure of Rs. 32,56,038/- was in the capital field connected with setting up of a new unit? ITR/40/1999 3/12 JUDGMENT 3. Whether, in the facts and circumstances of the case the Tribunal was right in law in holding that because the unit being set up at Sinnar had not started production the expenditure of Rs. 32,56,038/- was not admissible as a deduction under sec. 37 of the Income-tax Act? 4. Whether, in the facts and circumstances of the case the Tribunal was right in law in holding that, expenditure for foreign travel in the sum of Rs. 11,05,724/- was not an admissible deduction under sec. 37 of the Income-tax Act ? 5. Whether, in the facts and circumstances of the case the Tribunal was right in law in not accepting the prayer made by the assessee for setting aside the issue as to foreign travel expenditure in sum of Rs. 11,05,724/- for fresh adjudication to the Assessing Officer ? 6. Whether, in the facts and circumstances of the case the finding of the Tribunal that the foreign travel expenditure of rs. 11,05,724/- was in respect of a unit being set up in Sinnar is not incorrect and contrary to record and as such it could not have been arrived at ?” 2. The assessee, a limited company, filed return of income on 31.12.1993 showing Nil income for Assessment Year 1993-94. The relevant previous year ITR/40/1999 4/12 JUDGMENT is Financial Year ended on 31.3.1993. The assessee claimed deduction of a sum of Rs. 38,92,769/- which included various expenses comprised of 20 items as recorded by the Tribunal in paragraph No. 6 of its order. The Assessing Officer disallowed the same and hence the assessee carried the matter in appeal before the Commissioner (Appeals). However, Commissioner (Appeals) confirmed the disallowance made by the Assessing Officer and hence assessee preferred second appeal before the Tribunal. The Tribunal has allowed deduction of a sum of Rs. 6,36,731/- towards the interest paid for the funds borrowed for setting up of a new business which is unconnected with the regular business of the assessee. Rest of the expenses amounting to Rs. 32,56,038/- have been held to be rightly disallowable by the Tribunal. 3. Mr B.B. Naik learned Standing Counsel appearing on behalf of the revenue contended in relation to the deduction of interest allowed under sec. 36(1)(iii) of the Act that in a case where the business is newly set up or commenced during the Assessment Year under consideration the deduction would not be allowable even under sec. 36(1)(iii) of the Act because of the observation made by the Apex Court in the case of Deputy Commissioner of Income Tax vs. Core Health Care Ltd. Reported in [2008] 298 ITR 194. It was submitted that the Proviso inserted below section 36(1)(iii) of the Act was only clarificatory in nature and legislative intent was always there to ITR/40/1999 5/12 JUDGMENT disallow the interest paid in respect of capital borrowed for acquisition of assets for extension of existing business and such interest was disallowable till the point of time such asset was first put to use. 4. As against that, on behalf of respondent – assessee, reliance was placed on the very same judgment of the Apex Court in the case of Deputy Commissioner of Income Tax vs. Core Health Care Ltd. (supra) to contend that the contentions raised by revenue have been specifically negatived by the Apex Court and hence the Tribunal has rightly held that the interest was allowable deduction. 5. In the Apex Court's decision in the case of Deputy Commissioner of Income Tax vs. Core Health Care Ltd. (supra), the Apex Court has stated: “The expression “for the purpose of business” occurring in section 36(1)(iii) indicates that once the test of “for the purpose of business” is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under section 36(1) (iii) of the 1961 Act. This provision makes no distinction between money borrowed to acquire 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 ITR/40/1999 6/12 JUDGMENT is carried on by the assessee in the year of account. What clause (iii) emphasises is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital unlike section 37 which expressly excludes an expense of a capital nature. 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”. An assessee is entitled to claim interest paid on borrowed capital provided that capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. Further, the words “actual cost” do not find place in section 36(1)(iii) of the 1961 Act which otherwise find place in sections 32, 32A, etc. of the 1961 Act. The expression “actual cost” is defined in section 43(1) of the 1961 Act which is essentially a definition section which is subject to the context to the contrary.” 6. In relation to the Proviso under sec. 36(1)(iii) of the Act, the Apex Court has specifically found that the Proviso has been inserted by Finance Act, 2003 and is made operative with effect from 1.4.2004. Therefore, the Proviso has to be read as applicable prospectively with effect from 1.4.2004 only. ITR/40/1999 7/12 JUDGMENT Therefore, for the Assessment Year under consideration, i.e. Assessment Year 1993-94, revenue cannot press into service the Proviso under sec. 36(1)(iii) of the Act. 7. In relation to the first three questions at the instance of the assessee, the only issue is whether the expenditure of Rs. 32,56,038/- was in the capital field connected with setting up of new unit or whether the expenditure was admissible as a deduction under under sec. 37 of the Act. The contention on behalf of the applicant – assessee is that the assessee is engaged in the business of manufacturing and selling of ice cream and the unit is operating at Tarapur; about 200 to 250 km away from the existing unit an additional unit for procurement of milk and production of milk products was set up at village Sinnar, District Nasik in State of Maharashtra; that the said unit should be considered as an extension of the same business because procurement of milk was a case of back-ward integration, milk being necessary for making ice-cream. It was contended that in case of Deputy Commissioner of Income Tax vs. Gujarat Alkalies And chemicals Ltd., reported in (2008) 299 ITR 85, the Apex Court has specifically held that charges paid to COFACE is similar to commitment charges and hence were allowable as revenue expenditure deductible under sec. 37 of the Act. Reliance is also placed on the judgment of the High Court of Madras in the case of Commissioner of Income Tax vs. Rane (madras) Ltd., reported in (2008) 215 ITR/40/1999 8/12 JUDGMENT CTR (Mad) 250 to submit that merely because the unit is set up at a distant place from existing unit, the new unit does not cease to be an extension of the existing unit. That the business of the assessee remains the same and the expenditure incurred for such a new unit has to be allowed as a revenue expenses. 8. It was further contended that the assessee had employed staff, there was common administration, there was interconnection, interlacing and inter dependence of the new unit with that of old unit in respect of the financial transactions and hence the new unit was nothing else but expansion of existing business. 9. The Tribunal has, as noted hereinbefore, agreed with the view expressed by Commissioner (Appeals). The Commissioner (Appeals) had formulated the controversy by posing a question: “Whether on the facts and circumstances of the case the amount related to expenditure other than interest is deductible as revenue expenditure under the provisions of section 37 of the Act ?” 10. In this connection, the Tribunal has recorded as under: “As regards question/issue No. (iii) we are ITR/40/1999 9/12 JUDGMENT of the opinion that the CIT(A) was perfectly justified in holding that the expenditure other than interest which was admittedly related to the setting up of a separate unit at Sinnar for the production/procurement of milk and milk products was in the capital field and was rightly capitalised by the assessee in the books of accounts and was not admissible as deduction under the provisions of sec. 37 which specifically prohibits the claim of deduction of expenditure of personal nature or of capital nature. In this connection we are in complete agreement with the reasoning and conclusion of the CIT(A) as recorded in para 76 to 78 of the impugned order and hold that except for the amount of Rs. 6,36,731/- and which is the interest paid on borrowed funds for investment in the new unit at Sinnar, the assessee it not entitled to any deduction in relation to other expenditure which are admittedly in the capital field connected with the setting up of the new project for the production/procurement of milk and milk products.” 11. In relation to the submission made by the assessee in relation to common staff etc., the Tribunal has found that neither the Assessing Officer nor Commissioner (Appeals) have recorded any finding while holding that the new unit at Sinnar was a ITR/40/1999 10/12 JUDGMENT separate independent unit. The Tribunal also, therefore, has not recorded any finding as to this contention. 12. In the aforesaid set of facts and circumstances of the case, it is not possible to accept the submissions of the assessee that the new unit was a part of the existing business of the assessee. In fact, the concurrent findings recorded by Commissioner (Appeals) and the Tribunal show that they have categorically held otherwise when it has been observed that the expenditure in question has admittedly been incurred in the capital field connected with setting up of the new project for the production/procurement of milk and milk products. In face of this finding, it is not possible to take any other view of the matter and no error can be found in the impugned order of Tribunal in relation to the expenditure of Rs. 32,56,038/- incurred by the assessee as being capital expenditure which is not entitled to deduction under sec. 37 of the Act considering the plain language of the said provision. 13. In so far as questions Nos. 4,5 and 6 at the instance of the assessee are concerned, they relate to allowability of foreign travel expenses to the tune of Rs. 11,05,724/-. The finding of the Tribunal in this connection reads as under: “Coming to ground No. 4 relating to foreign traveling expenses of Rs. 11,05,724/- the ITR/40/1999 11/12 JUDGMENT claim of the assessee before us is that it not only related to new unit for the production/procurement of milk and milk products at Sinnar but also to the existing ice cream manufacturing unit. However this contention of the assessee's counsel does not appear to be correct because had it been so, then the assessee would never have capitalised this amount under the head capital “work-in-progress”, relating to the unit at Sinnar. It is pertinent to note that before the AO the assessee never corporated which is apparent from the details of opportunities allowed by the AO as recorded at pages 3,4 and 5 of the assessment order. Accordingly, we do not find any merit in the ground wherein prayer is made for setting aside of this amount for fresh adjudication to the AO. Accordingly, this ground is adjudicated against the assessee.” 14. In light of the aforesaid findings recorded after appreciating the evidence on record no other view is possible. The Tribunal was justified in holding that the expenditure in connection with foreign travel was not allowable on revenue account as the same was capitalised under the head capital “work-in-progress”. 15. In the result, question referred at the instance of revenue is answered in the affirmative, that is, ITR/40/1999 12/12 JUDGMENT in favour of the assessee and against the revenue. 16. In so far as the six questions referred at the instance of assessee are concerned, all the six questions are answered in affirmative, that is, in favour of the revenue and against assessee. The Reference stands disposed of accordingly with no order as to costs. (D.A. MEHTA, J.) (Z.K. SAIYED, J.) mandora/