ITR/63/1998 1/7 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 63 of 1998 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 ? ===================================================== COMMISSIONER OF INCOME TAX - Applicant(s) Versus MIHIR TEXTILES LTD. - Respondent(s) ===================================================== Appearance : MR MANISH R BHATT for Applicant(s) : 1, SERVED BY RPAD - (R) for Respondent(s) : 1, ===================================================== CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MR.JUSTICE Z.K.SAIYED Date : 05/05/2008 ORAL JUDGMENT ITR/63/1998 2/7 JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) 1. The Income Tax Appellate Tribunal, Ahmedabad Bench-B has referred the following two questions for the opinion of this Court under sec. 256(1) of the Income Tax Act, 1961 (the Act), at the instance of the applicant- Revenue. 1. Whether, the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT (Appeals) directing the AO to allow deduction of Rs. 6,28,968/- in respect of commitment charges paid for issuing debentures ? 2. Whether, the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT (Appeals) directing the AO to allow deduction in respect of repairs and replacement expenditure which according to the AO amounted to creation of new assets ? 2. The Assessment Year is 1987-88, the relevant accounting period being Financial Year ended on 31.3.1987. The assessee, a Public Limited Company claimed (i) deduction of Rs. 6,28,968/- in respect of commitment charges; (2) Rs. 1,86,319/- plus Rs. 1,08,092/- plus Rs. 2,16,775/- plus Rs. 2,17,132/- totaling to Rs. 7,28,318/- as expenditure on repairs of existing plant and machinery. The Assessing Officer disallowed the first claim, as according to the Assessing Officer the commitment charges had been incurred for obtaining additional working capital and ITR/63/1998 3/7 JUDGMENT were thus in the nature of initial capital expenditure. In relation to the expenditure on repairs, the Assessing Officer was of the opinion that the expenditure was not of routine nature, the expenditure involved amounted to creation of new assets, and was of an enduring nature. He, therefore, disallowed the said expenditure. 3. The assessee carried the matter in appeal before the Commissioner (Appeals), who came to the conclusion that the commitment charges are incurred in respect of debentures issued by the company to acquire more working capital and were thus wholly and exclusively incurred for the purposes of business. In relation to the amount spent towards repairs and replacement, it was held by the Commissioner (Appeals) that the expenditure was incurred for the purposes of running the existing auto loom shed in a more efficient manner. 4. The Revenue assailed the order of Commissioner (Appeals) before the Tribunal. The Tribunal vide impugned order dated 8.5.1998 agreed with the findings recorded by the Commissioner (Appeals) and dismissed the departmental appeal on the aforesaid two issues. 5. Heard learned Standing Counsel Ms. Bhatt for the applicant – revenue. Though served, there is no appearance on behalf of respondent. ITR/63/1998 4/7 JUDGMENT 6. Learned Standing Counsel read extensively from the order of the Assessing Officer to contend that the findings recorded by the Assessing Officer have not been properly appreciated by Commissioner (Appeals) and the Tribunal. That, in so far as the commitment charges are concerned, the same were incurred for enhancing the working capital and were thus on capital account and were rightly disallowed. In relation to the repairs and replacement expenditure, it was submitted that it was assessee's own case that certain items of plant and machinery were replaced and, therefore, new assets had come into existence giving enduring benefit to the assessee. 7. As can be seen from the facts of the case in relation to the first item of disallowance, Commissioner (Appeals) has recorded categorically that the commitment charges were payable in connection with issue of debentures. The funds acquired by issuance of debentures were for the purposes of business. The commitment charges were payable under an agreement. The borrowings were to meet with needs of working capital. Therefore, Commissioner (Appeals) concluded that the expenditure had been wholly and exclusively incurred for business of the assessee and was allowable as a deduction under sec. 36 of the Act. 8. The aforesaid findings of Commissioner (Appeals) have been confirmed by the Tribunal. Admittedly, ITR/63/1998 5/7 JUDGMENT money borrowed by issuance of debentures is in the nature of loan and cannot assume characteristic of investment. In fact, the assessee is under a liability to return such borrowed funds upon maturity of debentures or earlier, if the term of the debentures so provide. Therefore, the expenditure in the nature of commitment charges at the time of issuing such debentures would be on revenue account only, considering the fact that the expenditure had been incurred in a existing business. Even otherwise, the position in law is well settled and expenditure which is incurred even on capital account would be allowable under sec. 36(1) of the Act as the said provision nowhere draws distinction between borrowings made on capital account and borrowings made on revenue account. Reference is made to the decision of this High Court in the case of Deputy Commissioner of Income Tax Vs. Core Health Care Ltd., reported in (2001) 251 ITR 61. The decision of this High Court has since been confirmed by the Apex Court as reported in [2008] 298 ITR 194 (SC). 9. Therefore, in absence of any error in law and considering the concurrent findings of fact recorded by both, Commissioner (Appeals) and the Tribunal no interference is warranted in relation to the allowability of deduction of commitment charges. 10. In so far as the expenditure relating to repairs and replacement is concerned, Commissioner (Appeals) has found that no new assets came into existence and ITR/63/1998 6/7 JUDGMENT the entire expenditure was incurred for the purpose of running of existing auto loom shed in a more efficient manner. It has further been found that the quantum of expenditure, when compared with gross block of assets, cannot be termed to be very high. These findings have been confirmed by the Tribunal. 11. Thus, it is apparent that both Commissioner (Appeals) and the Tribunal have recorded the findings of fact after appreciating the evidence on record. The order of Commissioner (Appeals) shows that Commissioner (Appeals) examined in detail each and every item of expenditure before recording the aforesaid findings. In the circumstances, the appellate authorities have rightly examined the issue by appreciating as to whether the quantum of expenditure is substantial when compared to gross block of assets so as to suggest that there is a replacement of assets on capital account. It has been found on facts that the expenditure is not very high when compared to gross block of assets in light of the depreciation claimed and allowed during the year which comes to the tune of Rs. 2.82 crores. 12. Hence, in the facts and circumstances of the case, even as regards second question, it is not possible to record that any error in law has been committed by Commissioner (Appeals) and the Tribunal. Accordingly, both the questions are answered in the affirmative, that is, in favour of assessee and against the revenue. ITR/63/1998 7/7 JUDGMENT 13. Before parting, it is necessary to note that the frame of the questions leaves a lot to be desired. More particularly, the second question, in fact, suggests as if the Tribunal and Commissioner(Appeals) are bound by the findings recorded by the Assessing Officer and cannot take an independent view in the matter. It has to be borne in mind that once statutory appeals are provided in hierarchy where the appellate authority is superior to the Assessing Authority the order of Assessing Authority merges, on the issue contested, in the order of the appellate authority. The powers of the first appellate authority are co-extensive and co-terminus with that of the Assessing Officer and hence, on facts, once the appellate authority finds that the facts recorded by the Assessing Officer are not correct, in the proposed questions, there should be no suggestion to the contrary. 14. The Reference is accordingly disposed of with no order as to costs. (D.A. MEHTA, J.) (Z.K. SAIYED, J.) mandora/