COMMISSIONER OF INCOME TAX V. KAYAL SYNTEX LTD.

TAXAP/235/2006

AI Insights

The case revolves around a dispute concerning the classification of certain expenditures by Kayal Syntex Ltd. for the Assessment Years 1996-97 and 1997-98. The Commissioner of Income Tax appealed against the ITAT's decision which had set aside the CIT (Appeals) order and deleted the addition made by the Assessing Officer, who had treated the expenditure as capital in nature. The main legal question was whether the ITAT was correct in law and on facts in upholding the addition on account of revenue expenditure being capital in nature under section 37 of the Income Tax Act, 1961. The Supreme Court's decision in Core Health Care Ltd. was pivotal, establishing that the purpose of borrowing and the use of the capital for business purposes are crucial, irrespective of the nature of the asset acquired.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 741704 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 14-11-2014
• Assessment Year: misc
• Other Referred Cases: Deputy Commissioner of Income Tax vs. Core Health Care Ltd., India Cements Ltd. v. Commissioner of Income-tax, Madras, Challapalli Sugars Ltd., Calico Dyeing & Printing Works
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: HARDIK VORA
• Assessee Lawyers: MANISH BHATT
• Keywords: Capital expenditure; Income tax appellate tribunal; Revenue expenditure; Substantial question of law
• Section: 37; 36 (1) (iii); 90(2); 36(1)(viia)

Judgement Text

"O/TAXAP/234/2006 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 234 of 2006 With TAX APPEAL NO. 235 of 2006 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 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....Appellant(s) Versus KAYAL SYNTEX LTD.....Opponent(s) ================================================================ Appearance: MR MANISH R BHATT, ADVOCATE for the Appellant(s) No. 1 MR. HARDIK V VORA, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and Page 1 of 6 O/TAXAP/234/2006 JUDGMENT HONOURABLE MR.JUSTICE K.J.THAKER Date : 14/11/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. Being aggrieved and dissatisfied with the impugned judgment and order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench (hereinafter referred to as ITAT) dated 18.02.2005 in ITA No. 2546/Ahd/2000 & 2547/Ahd/2000 for the Assessment Year 1997-98 & 1996-97 respectively, the revenue has preferred the present Tax Appeals for consideration of the following substantial question of law: 2. This Court while admitting this matter on19.09.2006 framed the following substantial question of law for consideration: Whether the Appellate Tribunal was right in law and on facts in upholding the addition on account of revenue expenditure being capital in nature u/s 37 of the Income Tax Act, 1961? 3. The assessee had claimed expenditure of Rs. 37,04,458/- as revenue expenditure. It was observed by the Assessing Officer that the said expenditure was towards acquisition of a capital expenditure and therefore not entitled to deduction as revenue expenditure. On appeal the CIT (Appeals) deleted the addition to the extent of certain amount and sustained the remaining addition. On appeal before the ITAT, by impugned judgment and order, ITAT set aside the order of CIT(A) and Page 2 of 6 O/TAXAP/234/2006 JUDGMENT deleted the remaining part of addition imposed by CIT(A). 3. Being aggrieved and dissatisfied with the impugned judgment and order passed by the ITAT, the revenue has preferred the present Tax Appeals for consideration of the aforesaid substantial question of law. 5. Mr. Hardik Vora, learned Counsel appearing on behalf of the respondent – assessee has submitted that as such the issue involved in the present Tax Appeal is now not res integra in view of the decision of the Honble Supreme Court in the case of Deputy Commissioner of Income Tax vs. Core Health Care Ltd. reported in (2008) 298 ITR 194 (SC) wherein the Hon’ble Supreme Court has held as under. “Before concluding on this point we may state that in this batch of civil appeals we are concerned with the assessment years 1992-93, 1993-94, 1995-96 and 1997-98. A proviso has since been inserted in Section 36(1)(iii) of the 1961 Act. That proviso has been inserted by Finance Act, 2003 w.e.f. 1.4.2004. Hence, the said proviso will not apply to the facts of the present case. Further, in our view the said proviso would operate prospectively. In this connection it may be noted that by the same Finance Act, 2003 insertions have been made by way of proviso in Section 36(1)(viia) by the same Finance Act which is also made with effect from 1.4.2004. Same is the position with regard to insertion of a sub-section after Section 90(2) and before the Explanation. This insertion also operates w.e.f. 1.4.04. In short, the above amendments have been made by Finance Act, 2003 and all the said amendments have been made operational w.e.f. 1.4.04. Therefore, the proviso inserted in Section 36(1)(iii) has to be read as prospectively and w.e.f. 1.4.04. In this case, we are concerned with the law as it existed prior to 1.4.2004. As stated above, we Page 3 of 6 O/TAXAP/234/2006 JUDGMENT are not concerned with the interpretation or applicability of the said proviso to Section 36(1)(iii) w.e.f. 1.4.04 in the present case. In the case of Challapalli Sugars Ltd. (supra) this Court observed that interest paid on the borrowing utilized to bring into existence a fixed asset which has not gone into production, goes to add to the cost of installation of that asset. It was further observed that if the said borrowing was not \"for the purpose of business\" inasmuch as no business had come into existence, it must follow that it was made for the purpose of acquiring an asset which could be put to use for doing business, and hence interest paid on such borrowing would go to add to the cost of the assets so acquired. In our view the above observations have to be confined to the facts in the case of Challapalli Sugars Ltd. (supra). It was a case where the company had not yet started production when it borrowed the amount in question. The more appropriate decision applicable to the present case would be the judgment of this court in the case of India Cements Ltd. v. Commissioner of Income-tax, Madras (1966) 60 ITR 52 in which it has been observed that, for considering whether payment of interest on borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. In our view, Section 36(1)(iii) of the 1961 Act has to be read on its own terms. It is a Code by itself. Section 36(1)(iii) is attracted when the assessee borrows the capital for the purpose of his business. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset, because of that the section requires is that the assessee must borrow the capital for the purpose of his business. This dichotomy between the borrowing of a loan and actual application thereof in the purchase of a capital asset, seems to proceed on the basis that a mere transaction of borrowing does not, by itself bring any new asset of enduring nature into existence, and that it is the transaction of investment of the borrowed capital in the purchase of a new asset which brings that asset into existence. The transaction of borrowing Page 4 of 6 O/TAXAP/234/2006 JUDGMENT is not the same as the transaction of investment. If this dichotomy is kept in mind it becomes clear that the transaction of borrowing attracts the provisions of Section 36(1)(iii). Thus, the decision of the Bombay High Court in Calico Dyeing & Printing Works (supra) and the judgment of the Supreme Court India Cements Ltd. (supra) have been given with reference to the borrowings made for the purposes of a running business, while the decision of the Supreme Court in Challapalli Sugars Ltd. (supra) was given with reference to the borrowings which could not be treated as made for the purposes of business as no business had commenced in that case. Therefore, there is no inconsistency between the above decisions. ” 5.1. It is submitted that in the aforesaid decision the Honble Supreme Court has held that an 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 and that ‘actual cost’ of an asset has no relevancy in relation to section 36(1)(ii). 6. Mr. Manish Bhatt, learned Senior Counsel has appeared with Ms. Mauna Bhatt, learned advocate on behalf of the Department. He is not in a position to dispute the above and is not in a position to show and/or point out any contrary decision. 7. Having heard Mr. Bhatt, learned Senior Counsel appearing on behalf of the Department and Mr. Vora, learned advocate appearing on behalf of the assessee and the question posed for consideration by us reproduced hereinabove and considering the decision of the Honble the Supreme Court in the case of Core Health Care Ltd. (Supra), the question, Page 5 of 6 O/TAXAP/234/2006 JUDGMENT which is raised in the present appeal is required to be answered in favour of the assessee. We are not giving any elaborate reasons for the same as in the case of Core Health Care Ltd. (Supra) it is held by Honble the Supreme Court that section 36(1)(ii) of the Act makes no distinction between money borrowed to acquire a capital asset or a revenue asset and that all that the section requires is that that the assessee must borrow capital and the purpose of borrowing must be for business which is carried on by the assessee in the year of account. 8. In view of the above, the question raised for consideration in the present appeals are answered in favour of the assessee and consequently, the impugned judgment and order passed by the ITAT is confirmed. Hence, the present Tax Appeals are dismissed. No costs. (K.S.JHAVERI, J.) (K.J.THAKER, J) divya Page 6 of 6 "