Commissioner of Income Tax Vs KCP Sugars Industries Corporation (P) Ltd.

1. The Revenue is on appeals as against the common order of the Income Tax Appellate Tribunal, Bench "A", Chennai, dated 12.5.2006 relating to the assessment years 1999-2000 and 2000-2001 respectively raising the following question of law:-

1. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the additional realisation on free sale sugar is a capital receipt?

2. Whether on the facts and in the circumstances of the case, the Tribunal was right in following the decision in the case of Ponni Sugars 250 ITR 605 and holding that incentive of levy sugar had to be treated as capital receipts, without going into the facts prevailing in the present case?

3. Whether on the facts and in the circumstances of the case, the Tribunal was right in allowing the interest paid in respect of capital borrowed on modernisation of the assessee''s factory when no factual details were filed by the assesses?

2. In respect of questions of law 1 and 2 are concerned, both the learned counsel fairly stated that the issue is squarely covered by the Apex Court judgment in die case of Commissioner of Income Tax, Madras Vs. Ponni Sugars and Chemicals Ltd., wherein it was held that the receipt of the subsidy was capital in nature. There is no dispute that the issue is squarely covered by the abovesaid judgment of the Supreme Court. Following the same, we answer the questions of law 1 and 2 in favour of the assessee and against the Revenue. It is pertinent to note that the assessee is one of the parties before the Apex Court.

3. The third question of law relates to the assessment years 1999-2000 and 2000-2001. For these two assessment years, the issue involved relates to claim of interest in respect of borrowed capital and whether the same is liable for deduction u/s 36(1)(iii) of the Act. The assessing officer disallowed the interest on the ground that no details have been furnished by the assessee and held that the claim of interest on term loan availed for incurring capital expenditure towards plant and machinery was treated as capital expenditure. Aggrieved by that order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals)-III, Chennai. The Commissioner allowed the appeal for both the assessment years. Aggrieved by that order, the Revenue has filed an appeal before the income tax Appellate Tribunal. The Tribunal dismissed the appeal filed by the Revenue. Aggrieved by that order, the Revenue filed the above appeals,

4. The learned Standing counsel appearing for the Revenue submitted that the authorities below erred in allowing the interest paid in respect of capital borrowed for modernization of assessee''s factory. He further submitted that when the assessing officer directed the assessee to furnish the details regarding the modernization, the assessee failed to do so. He further contended that Explanation 8 to 43(1) of the Act is clearly attracted and further it was brought to the notice of the Court that the interest paid on the borrowed capital for purchase of plant and machinery for expansion of existing unit is capital expenditure till the plant and machinery is first put to use. He further contended that no details available that the assessing officer is correct in disallowing the interest on borrowed capital and hence, the order passed by the Tribunal has to be set aside.

5. The learned counsel appearing for the assessee submitted that there is no dispute the amount was borrowed for the purpose of business and the assessee also paid interest on the borrowed capital and both the authorities are correct in allowing interest u/s 36(1)(iii) of the Act and hence, the same may be confirmed.

6. Heard the learned counsel appearing on either side and perused the documents on record. The only reason given by the assessing officer is that no details were furnished by the assessee and hence, it was held that the amount borrowed for expansion of business and interest paid on borrowed capital is a capital expenditure. In the present case, the assessee borrowed capital for the purpose of the business and the amount is borrowed only for acquiring asset. The asset may be revenue or capital and it is not relevant for the purpose of claiming deduction u/s 36(1)(iii) of the Act and the same reads thus:

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:

(Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning 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.)

From a reading of the Section it is clear that the capital borrowed is for the purpose of the business of the assessee. It is pertinent to note that we are concerned only with the provision of Section 36(1)(iii). The proviso will not be applicable to the facts of the present case since it was introduced by the Finance Act of 2003 with effect from 1.4.2004. In the present case, the assessment years involved are prior to the amendment. So we are not concerned with the proviso. In respect of the main provision, the only ingredient is that whether the capital borrowed is for the purpose of the business of the assessee. If the finding that capital is borrowed for the purpose of business, interest is allowable under the Section. It is immaterial whether the same is in the nature of capital expenditure or revenue expenditure. In the present case, there is no dispute that the amount is borrowed for the purpose of business. Therefore, the authorities below has correctly allowed the deduction, however, the learned Standing counsel appearing for the Revenue relied on the decision of the High Court of Calcutta in the case of JCT Ltd. Vs. Deputy Commissioner of Income Tax and Another, and stated that the Tribunal ought to have considered the Explanation 8 to Section 43(1) of the Act. The learned counsel appearing for the assessee brought to the notice of this Court the judgment of the Supreme Court in the case of Deputy Commissioner of Income Tax, Ahmedabad Vs. Core Health Care Ltd., wherein the Supreme Court has considered the scope of Explanation 8 of Section 43(1) of the Act and also Section 36(1)(iii) of the Act and held that the said Explanation 8 of Section 43(1) cannot be made applicable to Section 36(1)(iii) of the Act and paragraph 10 reads thus:

10. As stated above, the Department contended before us that the judgments of this Court, prior to insertion of Explanation 8 in Section 43(1) of the 1961 Act, have no application to the present case. According to the Department, Section 36(1)(iii) of the 1961 Act being general in nature has to give way to special provisions contained in Explanation 8 to Section 43(1) of the 1961 Act. According to the Department, in none of the earlier judgments this Court has considered the true scope of Explanation 8 to Section 43(1) vis-a-vis Section 36(1)(iii) of the 1961 Act. We find no merit in this contention. Section 43 groups together all provisions in the nature of definitions or interpretations relevant to the computation of income under the head "Profits and gains of business". Section 43(1) defines "actual cost". The definition of "actual cost" has been amplified by excluding such portion of the cost as is met directly or indirectly by any other person or authority. Explanation 8 has been inserted in Section 43(1) by the Finance Act, 1986 (23 of 1986), with retrospective effect from 1.4.1974. It is important to note that the words "actual cost" would mean the whole cost and not the estimate of cost. "Actual cost" means nothing more than the cost accurately ascertained. The determination of actual cost in Section 43(1) has relevancy in relation to Section 32 (depreciation allowance), Section 32A (investment allowance), Section 33 (development rebate allowance) and Section 41 (balancing charge). "Actual cost" of an asset has no relevancy in relation to Section 36(1)(iii) of the 1961 Act. This reasoning flows from a bare reading of Section 43(1). Section 43 defines certain terms relevant to income from profits and gains of business and, therefore, the said Section commences with the words "In Sections 28 to 41 and in this Section, unless the context otherwise requires" "actual cost" shall mean the actual cost of the assets to the assessee, reducing by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. In other words, Explanation 8 applies only to those Sections like Sections 32, 32-A, 33 and 41 which deal with concepts like depreciation. The concept of depreciation is not there in Section 36(1)(iii). That is why the legislature has used the words "unless the context otherwise requires". Hence, Explanation 8 has no relevancy to Section 36(1)(iii). It has relevancy to the aforementioned enumerated Sections. Therefore, in our view. Explanation 8 has no application to the facts of the present case.

From a reading of the above, it is clear that the Supreme Court has held that Explanation 8 to Section 43(1) has no relevancy to Section 36(1)(iii) of the Act. In these circumstances, Explanation 8 to Section 43(1) relied on by the learned Standing Counsel for the Revenue has no basis and the same is rejected. Further, the authorities have considered all the facts and circumstances of the case and came to the conclusion that the borrowed money is used for the purpose of business. Both the authorities have given a concurrent finding that the interest paid on the borrowed money is allowable deduction. The income tax Appellate Tribunal in paragraph 8 of its order held as follows:

8. In both the appeals by the Revenue in ITA Nos. 2610 & 2611/Mds/05 against assessments completed u/s 143(3) read with Section 147, the only issue raised is on the deletion of disallowance of interest on borrowed for modernising the assessee''s factory at Vuyyuru and Lakshmipuram. We have gone through the orders of the authorities below and considered the rival submissions. The decision of the Hon''ble Bombay High Court in the case of Commissioner of Income Tax Vs. Tata Chemicals Ltd., is squarely applicable to the case present before us. We agree with the finding of the Ld. CIT (A) that the interest paid in respect of capital borrowed for acquisition of capital asset for extension of existing business or profession. The ld. DR. could not controvert this factual finding arrived at by the ld. CIT(A). Therefore, respectfully following the decision of the Hon''ble Bombay High Court in CIT v. Tata Chemicals Ltd. (supra), we see no merit in the ground raised by the Revenue.

From a reading of the orders of the authorities below, we are of the view that they are justified in allowing the claim of the assessee in respect of interest paid on borrowed money u/s 36(1)(iii) of the Act. We do not find any error or illegality in the order of the Tribunal warranting interference. Accordingly, we answer the third question of law in favour of the assessee and against the Revenue and the Tax Case Appeals are dismissed. No costs.