M/S. DEEPAK NITRITE LTD. V. DY.COMMISSIONER OF INCOME TAX

TAXAP/428/2007

AI Insights

M/S. Deepak NITRITE LTD appealed against the orders of the Income Tax Appellate Tribunal which disallowed interest on borrowed capital used for the establishment and extension of manufacturing plants. The Tribunal's decisions were based on earlier interpretations of the law which were found to be inconsistent with the Supreme Court's ruling in the case of Deputy Commissioner of Income-tax Vs. Core Health Care Ltd. The High Court of Gujarat, referencing this Supreme Court decision, overturned the Tribunal's decisions, allowing the appeals and thereby permitting the deduction of interest on the borrowed capital.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 771661 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 18-12-2014
• Assessment Year: misc
• Other Referred Cases: Gujarat State Fertilizer And Chemicals Ltd. v. Assistant Commissioner of Income-Tax, Deputy Commissioner of Income-tax Vs. Core Health Care Ltd.
• Laws Referred To: Income-tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K M PARIKH
• Assessee Lawyers: MANISH SHAH
• Keywords: Assessment Order; Borrowed capital; Interest disallowance; Manufacturing plants; Tax appeal
• Section: 142(1); 143(2); 36 (1) (iii); 143(1)(a)

Judgement Text

"O/TAXAP/426/2007 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 426 of 2007 With TAX APPEAL NO. 427 of 2007 TO TAX APPEAL NO. 428 of 2007 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 ? ================================================================ M/S. DEEPAK NITRITE LTD.....Appellant(s) Versus JOINT COMMISSIONER OF INCOME TAX [ASSESSMENT]....Opponent(s) ================================================================ Appearance: MR MANISH J SHAH, ADVOCATE for the Appellant(s) No. 1 MR KM PARIKH, ADVOCATE for the Opponent(s) No. 1 ================================================================ Page 1 of 7 O/TAXAP/426/2007 JUDGMENT CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 18/12/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. By way of these Tax Appeals, the assessee has challenged the judgment and order passed by the Income Tax Appellate Tribunal in ITA No. 1707/Ahd/2001 for AY 1991-92, ITA No. 1013/Ahd/2002 for AY 1995-96 and ITA No. 1126/Ahd/2005 for AY 2001-02. 2. While admitting these Tax Appeals, this Court has framed the following substantial questions of law: Tax Appeal No. 426/2007 (1) Whether on the facts and in the circumstances of the case, the Tribunal was right in disallowing the interest of Rs. 26,39,697/- treating the amount borrowed for the purpose of brining the assets into existence for the purpose of establishment of plants for manufacturing ONCB,PNCB, ONT and PNT ? (2) Whether extension of the plant is for extension of existing business ? Page 2 of 7 O/TAXAP/426/2007 JUDGMENT Tax Appeal No. 427/2007 (1) Whether on the facts and in the circumstances of the case, the Tribunal was right in disallowing the interest of Rs. 7,75,000/- treating the amount borrowed for the purpose of brining the assets into existence for the purpose of establishment of plants for manufacturing ONCB,PNCB, ONT and PNT ? (2) Whether extension of the plant is for extension of existing business ? Tax Appeal No. 428/2007 Whether on the facts and in the circumstances of the case the Tribunal was right in law in disallowing the interest of Rs.9,48,054/- incurred by the assessee on the borrowings ?” 3. The facts of the present case are that the return of income was filed on 31.12.1991. In the return, the assessee company declared income under the Income-tax Act at Rs. 68,55,931/-. Processing u/s. 143(1)(a) was made on 9.3.92, determining the total income at Rs. 74,43,220/-.In response to various notices issued u/s. 143(2) and 142(1) of the Act, the assessee has furnished necessary details. After considering the material on record, the assessment order came to be passed. The said assessment order has been challenged by the assessee before the CIT(A), which came to be Page 3 of 7 O/TAXAP/426/2007 JUDGMENT partly allowed. Against the said order of CIT(A), the Revenue has preferred appeal being ITA NO. 1707/Ahd/2001 and ITA No. 1013/Ahd/02 and the assessee has preferred appeal being ITA NO. 1126/Ahd/05 which were partly allowed by the Tribunal. Being aggrieved by the order of the Tribunal, the assessee has preferred all these Tax Appeals before this court. 4. We have heard the learned advocates appearing for the parties and considered the submissions. The Tribunal has in its order relied on the order dated 12th May, 2006 passed in ITA No. 735/Ahd/1999, which was carried by way of appeal before this Court which is reported in [2009] 313 ITR 244 (Guj) decided on August 22, 2008, in the case of Gujarat State Fertilizer And Chemicals Ltd. v. Assistant Commissioner of Income-Tax, wherein, the issue is now decided in favour of the assessee. “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 Page 4 of 7 O/TAXAP/426/2007 JUDGMENT 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 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 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. 5. The said matter was carried to the Hon’ble Page 5 of 7 O/TAXAP/426/2007 JUDGMENT Supreme Court and the SLP was dismissed. In that view of the matter, the issue is concluded and no further reasonings are required to be assigned since the Tribunal has dismissed the appeal on relying the decision in the case of GSFC. As the facts are similar and identical and as we have relied on the decision of the Apex Court which has reversed the judgment on which the Tribunal had relied, we do not think that further elaborate reason or discussion of facts required to be gone into as we have perused the entire record of all these matters and the questions of law as framed hereinabove are not required to be discussed at length as they are concluded by the decision of the Apex Court. Ld. Counsel for the respondent is not in a position to show any later decision of the Apex Court taking a contrary view than that taken in these matters. Hence, the questions are answered in favour of the assessee and against the Revenue. 6. In Tax Appeal No. 426/2007, it is held that the Tribunal was not right in disallowing the interest of Rs. 26,39,697/- treating the amount borrowed for the purpose of brining the assets into existence for the purpose of establishment of plants for manufacturing ONCB,PNCB, ONT and PNT and the extension of the plant is not for extension of existing business. In Tax Appeal No. 427/2007, it is held that the Tribunal was not right in disallowing the interest of Rs. Page 6 of 7 O/TAXAP/426/2007 JUDGMENT 7,75,000/- treating the amount borrowed for the purpose of brining the assets into existence for the purpose of establishment of plants for manufacturing ONCB, PNCB, ONT and PNT the extension of the plant is not for extension of existing business. In Tax Appeal No. 428/2007, it is held that the Tribunal was not right in law in disallowing the interest of Rs.9,48,054/- incurred by the assessee on the borrowings. The Tax Appeals stand allowed. (K.S.JHAVERI, J.) (K.J.THAKER, J) mandora Page 7 of 7 "