The DCIT, Circle-5, Ahmedabad V. M/s. Core Health Care Limited, Ahmedabad

ITA 1734/AHD/2014

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 8096 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-06-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 1999-2000
• Appeal Filed On: 05-06-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VASUNDHARA UPMANYU
• Assessee Lawyers: PARIN SHAH ARS; S N SOPARKAR HEMANS HU SHAH
• Keywords: Capital asset; Depreciation; Business expenditure; Retrospective amendment; Revenue expenditure; Capital expenditure
• Section: 143(3); 32; 147; 37; 28

Judgement Text

ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 1 OF 19 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH, AHMEDABAD BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER AND MS. MADHUMITA ROY, JUDICIAL MEMBER ITA NOS.1733, 1734, 1735, 1736 & 1737/AHD/2014 ASSESSMENT YEARS: 1998-99, 1999-2000, 2000-01, 200 1-02 & 2002-03 RESPECTIVELY DY. COMMISSIONER OF INCOME TAX, VS. M/S. CORE HEAL TH CARE LIMITED, CIRCLE 5, AHMEDABAD. NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD. [PAN AAACC 6252 H] (APPELLANT) (RESPONDENT) APPELLANT BY : SMT. VASUNDHARA UPMANYU, CIT (D.R.) RESPONDENT BY : S/SHRI S.N. SOPARKAR, HEMANS HU SHAH & PARIN SHAH, A.RS. DATE OF HEARING : 03.05.2018 DATE OF PRONOUNCEMENT : 20.06.2018 O R D E R PER PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER THE CAPTIONED APPEALS HAVE BEEN FILED AT THE INSTAN CE OF THE REVENUE AGAINST THE ORDER OF CIT(A) DATED 31.03.201 4 ARISING IN THE RESPECTIVE ASSESSMENT ORDERS PASSED BY THE ASSESSIN G OFFICER UNDER SECTION 143(3) READ WITH SECTION 254 OF THE INCOME TAX ACT, 1961 CONCERNING A.YS. 1998-99, 1999-2000, 2000-01, 2001- 02 & 2002-03. 2. AT THE TIME OF HEARING, IT WAS SUBMITTED ON BEHA LF OF THE ASSESSEE AS WELL AS ON BEHALF OF THE REVENUE IN CHORUS THAT THE FACTS IN ISSUE IN ALL THE FIVE REVENUE APPEALS ARE IDENTICAL WITH VARIATI ON IN THE QUANTUM OF DISALLOWANCE OF INTEREST EXPENDITURE UNDER SECTION 36(1)(III). IN VIEW OF THE ASSERTIONS MADE ON BEHALF OF THE PARTIES CONCER NED, ALL THE FIVE APPEALS WERE HEARD TOGETHER AND DISPOSED OF BY THIS COMMON ORDER. ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 2 OF 19 APPEAL ITA NO.1733/AHD/2014 A.Y. 1998-99 3. FOR THE SAKE OF CONVENIENCE, WE SHALL FIRST TAKE REVENUES APPEAL CONCERNING ASSESSMENT YEAR 1998-99 AS A LEAD CASE. 4. THE REVENUE BY WAY OF ITS GROUND OF APPEAL HAS C HALLENGED ACTION OF THE CIT(A) IN DELETING THE DISALLOWANCE OF RS.25 ,83,00,000/- ON ACCOUNT OF INTEREST EXPENDITURE INCURRED BY THE ASS ESSEE. SIMILAR DISALLOWANCES WERE MADE IN OTHER ASSESSMENT YEARS I N APPEAL OF DIFFERENT AMOUNTS AS TABULATED ON PAGE NO.2 OF THE CIT(A)S O RDER APPEALED AGAINST, IN THE SIMILARLY PLACED FACTS. 5. BRIEFLY STATED, THE ASSESSEE COMPANY IS ENGAGED IN THE MANUFACTURING AND SALES OF PHARMACEUTICAL PRODUCTS. THE ASSESSING OFFICER IN THE COURSE OF ASSESSMENT UNDER SECTION 1 43(3) READ WITH SECTION 147 OF THE ACT FOUND THAT THE ASSESSEE COMP ANY HAS CLAIMED AN AMOUNT OF RS.25.83 CRORES ON ACCOUNT OF INTEREST EX PENDITURE AS DEFERRED REVENUE EXPENDITURE IN THE BOOKS OF ACCOUNT BUT CL AIMED THE SAME AS REVENUE EXPENDITURE IN THE STATEMENT OF INCOME FI LED WITH THE RETURN OF INCOME. IN ORDER TO EXAMINE THE CORRECTNESS OF THE CLAIM OF DEDUCTIBLE INTEREST EXPENSES UNDER SECTION 36(1)(III) OF THE A CT TOWARDS SUCH EXPENDITURE INCURRED, AN ENQUIRY WAS MADE IN THIS R EGARD WITH THE ASSESSEE. THE ASSESSEE SUBMITTED TO THE ASSESSING OFFICER THAT THE COMPANY HAS MADE BORROWINGS TO FINANCE THE COGENERA TION POWER PLANT AND UTILITY PROJECT WHICH WERE HELD BY THE COMPANY FOR DIVESTMENT. INTEREST PAYABLE ON BORROWINGS FOR SUCH POWER PLANT PROJECTS WAS CLAIMED AS ALLOWABLE EXPENDITURE DESPITE ITS CAPITALISATION OR A DIFFERENT TREATMENT IN THE BOOKS OF ACCOUNT. THE ASSESSING OFFICER, HO WEVER, OBSERVED THAT THE ASSESSEE HAS WRONGLY CLAIMED DEDUCTION OF INTER EST CONCERNING POWER PROJECT WHICH IS DIFFERENT FROM ITS MAIN STREAM OF BUSINESS OF PHARMACEUTICAL PRODUCTS. THE ASSESSING OFFICER ALS O NOTED THAT THE EXPENDITURE WAS PRE-OPERATIVE IN NATURE PERTAINING TO ASSETS BEFORE IT BEING PUT TO USE. THE ASSESSING OFFICER ACCORDINGL Y INVOKED EXPLANATION-8 TO SECTION 43 OF THE ACT AND HELD THA T INTEREST PAID PRIOR TO ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 3 OF 19 THE DATE OF SUCH ASSET BEING PUT TO USE BUT REQUIRE S TO BE CAPITALISED. ACCORDINGLY INTEREST CLAIM ON BORROWINGS ATTRIBUTAB LE TO POWER PROJECTS WAS DISALLOWED IN THE HANDS OF THE ASSESSEE IN THE FIRST ROUND OF PROCEEDINGS. THE CIT(A) IN TURN VIDE ITS ORDER DAT ED 23.03.2007 CONFIRMED THE REJECTION OF CLAIM OF INTEREST. THE CIT(A) OBSERVED THAT THE CAPTIVE POWER PLANT SET UP BY THE ASSESSEE WAS ENTIRELY A NEW VENTURE AND IT HAS NO RELATION WITH THE EXISTING PHARMACEUT ICAL BUSINESS OF THE ASSESSEE. IT WAS THUS OBSERVED THAT IT CANNOT BE SA ID THAT NEW BUSINESS WAS THE CONTINUATION OR EXPANSION OF THE EXISTING B USINESS. THE CIT(A) ACCORDINGLY RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CHALLAPALLI SUGARS LIMITED VS. CIT (1975) 9 8 ITR 167 (SC) AND HELD THAT EXPENDITURE CANNOT BE ALLOWED AS REVENUE EXPENDITURE BUT HAS TO BE CAPITALISED NECESSARILY. 6. AGGRIEVED BY THE AFORESAID ORDER OF THE CIT(A) I N FIRST ROUND OF PROCEEDINGS, THE ASSESSEE PREFERRED APPEAL BEFORE T HE ITAT. THE CO- ORDINATE BENCH OF ITAT VIDE ITS ORDER DATED 05.06.2 009 IN ITA NOS.2543 TO 2547/AHD/2007 SET ASIDE THE ENTIRE ISSUE FOR MAK ING REQUISITE ENQUIRY INTO RELEVANT FACTS AND TO REDO THE ASSESSMENT. 7. IN CONSEQUENCE OF THE ORDER OF THE ITAT, ANOTHER ORDER DATED 21.12.2010 WAS FRAMED BY THE ASSESSING OFFICER UNDE R SECTION 143(3) READ WITH SECTION 254 OF THE ACT. THE ASSESSING OF FICER ONCE AGAIN OBSERVED THAT CAPTIVE POWER PLANT WAS IN THE PROCES S OF BEING SET UP AND THE SAME WAS NOT IN OPERATION DURING THE ASSESSMENT YEARS IN QUESTION. THE ASSESSING OFFICER AGAIN REITERATED THAT THE EXI STING LINE OF BUSINESS OF THE ASSESSEE WAS MANUFACTURING OF VARIOUS PHARMA CEUTICAL PRODUCTS AND INJECTIBLES WHICH ARE ENTIRELY DIFFERENT FROM G ENERATION OF POWER. THE ASSESSING OFFICER ALSO NOTED WITH REFERENCE TO THE ANNUAL ACCOUNT THAT THE ASSESSEE ITSELF HAS TAKEN STAND THAT CAPTIVE POWER PLANT (FOR WHICH THE BORROWINGS WERE MADE AND INTEREST WAS INCURRED) WAS HELD BY COMPANY FOR THE PURPOSE OF DIVESTMENT. THE ASSESSING OFFICE R THUS CONCLUDED THAT IN THESE FACTS, IT IS CLEAR THAT THE ASSESSEE NEVER INTENDED TO OPERATE THE ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 4 OF 19 POWER PLANT. THE ASSESSING OFFICER ACCORDINGLY HEL D THAT THE INTEREST EXPENDITURE ON BORROWINGS ATTRIBUTABLE TO POWER PLA NT BEING SET UP IS REQUIRED TO BE CAPITALISED AND CANNOT BE ALLOWED AS REVENUE EXPENDITURE AS WRONGLY CLAIMED BY THE ASSESSEE. 8. AGGRIEVED BY THE SECOND ORDER OF THE ASSESSING O FFICER, THE ASSESSEE KNOCKED THE DOOR OF THE CIT(A) ONCE AGAIN. THE CIT(A) AFTER TAKING NOTE OF VARIOUS SUBMISSIONS MADE ON BEHALF O F THE ASSESSEE, FOUND MERIT IN THE CLAIM OF THE ASSESSEE FOR ALLOWABILITY OF INTEREST EXPENSES AS REVENUE EXPENDITURE. THE CIT(A) TOOK A VIEW THAT S ETTING UP UNIT FOR GENERATING POWER FOR CAPTIVE CONSUMPTION IS BACKWAR D INTEGRATION AND THUS EXPANSION IN THE SAME LINE OF BUSINESS. THE CI T(A) THEREAFTER PLACED RELIANCE UPON THE DECISION OF CO-ORDINATE BENCH OF ITAT AHMEDABAD IN THE CASE OF NIRMA LIMITED AND HELD THAT SET UP OF C APTIVE POWER PLANT CAN BE SAID TO BE EXPANSION OF THE EXTENSION BUSINESS. THE CIT(A) ALSO REFERRED TO THE DECISION OF THE HONBLE SUPREME COU RT IN ASSESSEES OWN CASE RELEVANT TO A.Y. 1992-93 TO HOLD THAT EXPLANAT ION-8 TO SECTION 43(1) CONCERNING DETERMINATION OF ACTUAL COSTS HAS NO A PPLICATION WHILE DETERMINING ELIGIBILITY OF INTEREST IN RELATION TO SECTION 36(1)(III). THE CIT(A) ALSO OBSERVED THAT IN VIEW OF THE INTERPRETA TION RENDERED BY THE HONBLE SUPREME COURT IN OWN CASE OF THE ASSESSEE, THE PROVISO INSERTED TO SECTION 36(1)(III) BY FINANCE ACT 2003 W.E.F. 01 .04.2004 REQUIRING CAPITALISATION OF INTEREST WOULD OPERATE PROSPECTIV ELY AND NO APPLICATION TO VARIOUS ASSESSMENT YEARS IN QUESTION. THE CIT(A) ACCORDINGLY ALLOWED THE CLAIM OF THE ASSESSEE. THE RELEVANT OPERATIVE PARAGRAPH OF THE ORDER OF THE CIT(A) IN THE SECOND ROUND OF PROCEEDING IS REPRODUCED AS UNDER :- 3.8 DECISION:- I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, THE SUBMISSION OF THE APPELLANT, THE FINDINGS GIVEN BY THE AO AND THE DIRECTIONS OF HON'BLE ITAT AHMEDABAD WHILE SETTING ASIDE THE ISSUE, TO TH E FILE OF THE AO FOR CONSIDERATION. THE ISSUE INVOLVED HERE IS THE ALLOW ABILITY OF INTEREST EXPENDITURE INCURRED BY THE APPELLANT FOR INSTALLAT ION OF CAPTIVE POWER PLANT AT SACHANA UNIT. THE APPELLANT WANTED TO INST ALL A CAPTIVE POWER PLANT FOR WHICH IT HAS TAKEN CERTAIN LOANS FROM VAR IOUS FINANCIAL INSTITUTIONS. THE PAYMENT OF INTEREST ON THAT LOAN WAS INITIALLY SHOWN BY IT AS A CAPITAL ITEM IN THE ACCOUNTS, HOWEVER IT CL AIMED THE INTEREST ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 5 OF 19 PAYMENT AS DEDUCTION WHILE FILING THE RETURN OF INC OME BY WAY OF A NOTE IN THE RETURN OF INCOME. THE AO DISALLOWED THE SAME ON THE GROUND THAT THE PLANT HAS NOT BEEN INSTALLED AND THE ASSETS HAV E NOT BEEN PUT TO USE. THERE WAS NO GENERATION OF ELECTRICITY FROM THAT PL ANT. HE HAS ALSO OBSERVED THAT THE APPELLANT HAS MADE A NOTE IN THE ACCOUNTS THAT THE PLANT HAS BEEN MARKED FOR THE DISINVESTMENT. THE ISSUES WHICH ARE TO BE EXAMINED, IN ACCORDANCE WITH THE DIRECTIONS OF HON'BLE ITAT, WHICH HAVE BEEN GIVEN I N PARA-5 OF THE ORDER THROUGH WHICH THE ISSUE WAS SET ASIDE, ARE, W HETHER THE RELATED PLANT WAS USED IN THE APPELLANT'S OWN BUSINESS AND WHETHER CAPTIVE POWER PLANT SETUP WAS IN THE EXISTING LINE OF BUSIN ESS OR NOT. THE HON'BLE ITAT HAS ALSO OBSERVED THE FACT THAT THE AN NUAL ACCOUNT OF THE APPELLANT ITSELF MENTIONED THAT THE CAPTIVE POWER P LANT WAS HELD BY THE APPELLANT COMPANY FOR THE PURPOSE OF DISINVESTMENT WAS ALSO RELEVANT. ACCORDINGLY THE HON'BLE ITAT HAS DIRECTED TO EXAMIN E WHETHER THE APPELLANT'S INVESTMENT IN THE CAPTIVE POWER PLANT W AS IN THE SAME LINE OF BUSINESS OR NOT AS THE APPELLANT WAS IN THE BUSINES S OF MANUFACTURING OF VARIOUS PHARMACEUTICAL PRODUCT AND POWER USED BY TH E APPELLANT GENERATED OUT OF THE CAPTIVE POWER PLANT MADE THE A PPELLANT'S BUSINESS OF SAME LINE OR NOT. THE CAPTIVE POWER PLANT, AS THE NAME ITSELF SUGGEST , IS NORMALLY SET UP BY AN INDUSTRIAL UNIT FOR GENERATING THE POW ER FOR CAPTIVE CONSUMPTION. IT IS A WELL KNOWN FACT THAT THE POWER IS THE MOST ESSENTIAL INGREDIENT FOR RUNNING ANY INDUSTRIAL UNIT. THE ELE CTRICITY IS GENERALLY PURCHASED FROM ELECTRICITY BOARDS ON PAYMENT BASIS HOWEVER WITH THE RECENT INCENTIVES GIVEN BY THE GOVERNMENT OF INDIA AND CONSIDERING THE ECONOMY IN SETTING UP CAPTIVE POWER PLANT MOST OF T HE UNITS AND BIG INDUSTRIAL HOUSES HAS STARTED SETTING UP CAPTIVE PO WER PLANT. IT IS ONE WAY OF DOING THE BACKWARD INTEGRATION. FOR EXAMPLE IF A MANUFACTURING COMPANY IS USING X MATERIAL FOR PRODUCTION OF CERTA IN PRODUCT AND IT INSTALLS A UNIT FOR PRODUCTION OF MATERIAL X, IT WO ULD BE BACKWARD INTEGRATION OF THE PRODUCTION UNIT AND SHOULD ACCOR DINGLY BE CONSIDERED AS THE EXPANSION IN THE SAME LINE OF BUSINESS. THE APPELLANT HAS POINTED OUT TO A JUDGEMENT OF HON'BLE ITAT AHMEDABAD IN THE CASE OF NIRMA LTD. IN ITA NUMBER 1823/AHD/2001 FOR A.Y. 1997-98. IN THAT CASE THE COMPANY HAD INSTALLED A SODA ASH PROJECT AND, LAB P ROJECT AND CLAIMED THE EXPENSES AS REVENUE ON THE GROUND THAT THE PROJ ECT CONSTITUTED ONE AND THE SAME BUSINESS. IT WAS CLAIMED BY THE COMPAN Y THAT THIS WAS THE EXPANSION OF THE EXISTING BUSINESS, BECAUSE MAJOR P RODUCTION OF SODA ASH AND BENZENE(LAB) WERE TO BE CONSUMED FOR IN-HOU SE PRODUCTION. THE HON'BLE ITAT ALLOWED THE CLAIM OF THE APPELLANT IN RESPECT OF INTEREST AS WELL AS OTHER EXPENSES WITH RESPECT TO SODA ASH PRO JECT AND LAB PROJECT. IN THE PRESENT CASE ALSO THE POWER WHICH WOULD HAVE BEEN PRODUCED BY THE CAPTIVE POWER PLANT AND WAS MEANT TO BE USED IN THE PRODUCTION BY THE APPELLANT COMPANY AND ACCORDINGLY IT WAS ONE KI ND OF EXTENSION OF THE EXISTING BUSINESS. IN A CASE DECIDED BY HON'BLE ITAT BOMBAY IN THE CASE OF KSB PUMPS LTD. 14 ITD 377, IT WAS HELD THAT THE INTEREST AND COMMITMENT CHARGES IN RESPECT OF NEW POWER PROJECT DIVISION WHICH HAS NOT STARTED ANY PRODUCTION DURING THE YEAR WAS HELD TO BE ALLOWABLE. IT WAS HELD BY THE HON'BLE ITAT THAT THE FACT THAT INT EREST WAS PAID TO ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 6 OF 19 ACQUIRE A CAPITAL ASSET AND THE BUSINESS HAS NOT CO MMENCED WERE NOT RELEVANT. IT WAS HELD THAT IT WAS NOT A CASE OF COM PANY CLAIMING THE COMMENCEMENT EXPENSES OF NEW BUSINESS BUT IT WAS TH E CASE OF COMPANY WHICH IS ALREADY IN BUSINESS AND THE EXPENSES WERE INCURRED ON INSTALLING PLANT AND MACHINERY IN THE COURSE OF EXP ANSION OF BUSINESS. THE HON'BLE BENCH WHILE DECIDING THE ISSUE ALSO PLA CED RELIANCE ON THE JUDGEMENT OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF ALEMBIC GLASS INDUSTRIES 103 ITR 715. THEREFORE I AM OF THE CONS IDERED OPINION THAT SETTING UP OF CAPTIVE POWER PLANT IS IN THE LINE OF BUSINESS AND CAN BE SAID TO BE AS EXTENSION OF THE EXISTING BUSINESS OF THE APPELLANT AND THE POWER GENERATED FROM IT WOULD HAVE BEEN USED BY THE APPELLANT FOR ITS PRODUCTION FACILITY. THE OTHER POINT WHICH IS TO BE EXAMINED IS THAT THE APPELLANT HAD MADE A REMARK IN THE ANNUAL ACCOUNT THAT THE PLANT WAS HELD BY THE COMPANY FOR THE PURPOSE OF DISINVESTMENT. IT IS NO TED THAT THE COMPANY HAD STARTED SETTING UP OF THE PLANT WITH A VIEW OF GENERATING POWER FOR CONSUMPTION FOR ITS OWN UNIT, HOWEVER DUE TO SOME F INANCIAL DIFFICULTIES THE APPELLANT DID NOT PURSUE THE FURTHER INSTALLATI ON OF THE PLANT AND IT WAS MARKED FOR DISINVESTMENT. DURING THIS PROCESS ITSELF THE COMPANY SOLD THE POWER PLANT TO IDBI LTD. AND TAKEN BACK TH E SAME ON LEASE. HOWEVER IT APPEARS THAT DUE TO SOME FINANCIAL DIFFI CULTIES THE PLANT COULD NOT BE STARTED DURING THE YEAR. THESE FACTS W ILL NOT BE MATERIAL AS THE PURPOSE FOR WHICH THE PLANT WAS INITIALLY INSTA LLED WAS FOR THE EXPANSION OF EXISTING UNIT AND THEREFORE, THE RATIO OF ALLOWABILITY OF INTEREST WILL TOE APPLICABLE ON THESE FACTS ALSO. THE ENTIRE ISSUE IS APPARENTLY COVERED BY THE DECIS ION OF HON'BLE SUPREME COURT IN APPELLANT'S OWN CASE FOR A.Y. 1992 -93. THE FINDINGS GIVEN BY THE HON'BLE SUPREME COURT IN THAT CASE ARE REPRODUCED HERE UNDER: - INTEREST ON MONEYS BORROWED FOR THE PURPOSES OF BU SINESS IS A NECESSARY ITEM OF EXPENDITURE IN A BUSINESS. FOR AL LOWANCE OF A CLAIM FOR DEDUCTION OF INTEREST UNDER THE SAID SECT ION, ALL THAT IS NECESSARY IS. THAT - FIRSTLY, THE MONEY, I.E., CAPI TAL MUST HAVE BEEN BORROWED BY THE ASSESSEE; SECONDLY, IT MUST HAVE BE EN BORROWED FOR THE PURPOSE OF BUSINESS; AND, THIRDLY, THE ASSE SSEE MUST HAVE PAID INTEREST ON THE BORROWED AMOUNT [SEE : CALICO DYEING & PRINTING WORKS V. CIT (1958) 34 ITR 265]. ALL THAT IS GERMANE IS : WHETHER THE BORROWING WAS, OR WAS NOT, FOR THE PU RPOSE OF BUSINESS. THE EXPRESSION 'FOR THE PURPOSE OF BUSINE SS' OCCURRING IN SECTION 36(1)(III) INDICATES THAT ONCE THE TEST OF 'FOR THE PURPOSE OF BUSINESS' IS SATISFIED IN RESPECT OF THE CAPITAL BO RROWED, THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION UNDER SECTI ON 36(1)(III). THIS PROVISION MAKES NO DISTINCTION BETWEEN MONEY B ORROWED TO ACQUIRE A CAPITAL ASSET AND A REVENUE ASSET. ALL T HAT THE SECTION REQUIRES IS THAT THE ASSESSEE MUST BORROW CAPITAL A ND THE PURPOSE OF THE BORROWING MUST BE FOR BUSINESS WHICH IS CARR IED ON BY THE ASSESSEE IN THE YEAR OF ACCOUNT. WHAT SUB-SECTION (III) EMPHASIZES ON IS THE USER OF THE CAPITAL AND NOT THE USER OF T HE ASSET WHICH COMES INTO EXISTENCE AS A RESULT OF THE BORROWED CA PITAL, UNLIKE ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 7 OF 19 SECTION 37 WHICH EXPRESSLY EXCLUDES AN EXPENSE OF A CAPITAL NATURE. THE LEGISLATURE HAS, THEREFORE, MADE NO DIS TINCTION IN SECTION 36(1)(III) BETWEEN 'CAPITAL BORROWED FOR A REVENUE PURPOSE' AND 'CAPITAL BORROWED FOR A CAPITAL PURPOS E'. AN ASSESSEE IS ENTITLED TO CLAIM INTEREST PAID ON BORR OWED CAPITAL PROVIDED THAT THE CAPITAL IS USED FOR BUSINESS PURP OSE IRRESPECTIVE OF WHAT MAY BE THE RESULT OF USING THE CAPITAL WHIC H THE ASSESSEE HAS BORROWED. FURTHER, THE WORDS 'ACTUAL COST' DO N OT FIND A PLACE IN SECTION 36(1)(III), OTHERWISE FIND PLACE IN SECT IONS 32, 32A, ETC. THE EXPRESSION 'ACTUAL COST' IS DEFINED IN SECTION 43(1) WHICH IS ESSENTIALLY A DEFINITION SECTION AND IS SUBJECT TO THE CONTEXT TO THE CONTRARY. [PARA 8]. SECTION 43 GROUPS TOGETHER ALL PROVISIONS IN THE NA TURE OF DEFINITIONS OR INTERPRETATIONS RELEVANT TO THE COMP UTATION OF INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINES S'. SECTION 43(1) DEFINES 'ACTUAL COST'. THE DEFINITION OF 'ACT UAL COST' HAS BEEN AMPLIFIED BY EXCLUDING SUCH PORTION OF THE COST AS IS MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY. EX PLANATION 8 HAS BEEN INSERTED TO SECTION 43(1) BY THE FINANCE ACT, 1986, WITH RETROSPECTIVE EFFECT FROM 01.04.1974. IT IS IMPORT ANT TO NOTE THAT THE WORDS 'ACTUAL COST' WOULD MEAN THE WHOLE COST A ND NOT THE ESTIMATED COST. 'ACTUAL COST' MEANS NOTHING MORE TH AN THE COST ACCURATELY ASCERTAINED. THE DETERMINATION OF ACTUAL COST GIVEN IN SECTION 43(1) HAS RELEVANCY IN RELATION TO SECTION 32 (DEPRECIATION ALLOWANCE); SECTION 32A (INVESTMENT ALLOWANCE); SEC TION 33 (DEVELOPMENT REBATE ALLOWANCE) AND SECTION 41 (BALA NCING CHARGE). 'ACTUAL COST' OF AN ASSET HAS NO RELEVANCY IN RELATION TO SECTION 36(1)(III). THIS REASONING FLOWS FROM A BAR E READING OF SECTION 43(1). SECTION 43 DEFINES CERTAIN TERMS REL EVANT TO INCOME FROM PROFITS AND GAINS OF BUSINESS AND, THEREFORE, THE SAID SECTION COMMENCES WITH THE WORDS. 'IN SECTIONS 28 TO 41 ARI D UNLESS THE CONTEXT OTHERWISE REQUIRES' 'ACTUAL COST' SHALL MEA N THE ACTUAL COST OF THE ASSETS TO THE ASSESSEE, REDUCED BY THAT PORT ION OF THE COST THEREOF, IF ANY, AS HAS BEEN MET DIRECTLY OR INDIRE CTLY BY ANY OTHER PERSON OR AUTHORITY. IN OTHER WORDS, EXPLANATION 8 APPLIES ONLY TO SECTIONS LIKE SECTIONS 32, 32A, 33 AND 41 WHICH DEA L WITH CONCEPTS LIKE DEPRECIATION. THE CONCEPT OF DEPRECIATION IS N OT THERE IN SECTION 36(1)(III). THAT IS WHY THE LEGISLATURE HAS USED THE WORDS 'UNLESS THE CONTEXT OTHERWISE REQUIRES'. HENCE, EXP LANATION 8 HAS NO RELEVANCY TO SECTION 36(1)(III). IT HAS RELEVANC Y TO THE AFOREMENTIONED ENUMERATED SECTIONS. THEREFORE, EXPL ANATION 8 HAD NO APPLICATION TO THE FACTS OF THE INSTANT CASE . [PARA 10]. A PROVISO HAS SINCE BEEN INSERTED IN SECTION 36(1)( III). THAT PROVISO HAS BEEN INSERTED BY THE FINANCE ACT, 2003 WITH EFFECT FROM 01.04.2004. HENCE, THE SAID PROVISO WILL NOT APPLY TO THE FACTS OF THE INSTANT CASE. FURTHER, THE SAID PROVIS O 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), WHICH IS MADE EFFECTIVE FRO M 01.04.2004. SAME IS THE POSITION WITH REGARD TO INSERTION OF A SUBSECTION AFTER ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 8 OF 19 SECTION 90(2). THIS INSERTION ALSO OPERATES WITH EF FECT FROM 01.04.2004. IN SHORT, THE ABOVE AMENDMENTS HAVE BE EN MADE BY THE FINANCE ACT, 2003 AND HAVE BEEN MADE OPERATIONA L WITH EFFECT FROM 01.04.2004. THEREFORE, THE PROVISO INSERTED IN SECTION 36(1)(III) HAS TO BE READ AS PROSPECTIVELY AND WITH EFFECT FROM 01.04.2004. IN THIS CASE, THE LAW CONCERNED WAS AS IT EXISTED PRIOR TO 01.04.2004 [PARA 11]. SECTION 36(1)(III) HAS TO BE READ ON ITS OWN TERMS. IT IS A CODE BY ITSELF. SECTION 36(1)(III) IS ATTRACTED WHEN THE AS SESSEE BORROWS THE CAPITAL FOR THE PURPOSE OF HIS BUSINESS. IT DOE S NOT MATTER WHETHER THE CAPITAL IS BORROWED IN ORDER TO ACQUIRE A REVENUE ASSET OR A CAPITAL ASSET, BECAUSE ALL THAT THE SECT ION REQUIRES IS THAT THE ASSESSEE MUST BORROW THE CAPITAL FOR THE P URPOSE OF HIS BUSINESS. THIS DICHOTOMY BETWEEN THE BORROWING OF A LOAN AND ACTUAL APPLICATION THEREOF IN THE PURCHASE OF A CAP ITAL ASSET, SEEMS TO PROCEED ON THE BASIS THAT A MERE TRANSACTI ON OF BORROWING DOES NOT, BY ITSELF, BRING ANY NEW ASSET OF AN ENDURING NATURE INTO EXISTENCE, AND THAT IT IS THE TRANSACTI ON OF INVESTMENT OF THE BORROWED CAPITAL FOR THE PURCHASE OF A NEW A SSET WHICH BRINGS THAT ASSET INTO EXISTENCE. THE TRANSACTION O F BORROWING IS NOT THE SAME AS THE TRANSACTION OF INVESTMENT. IF T HIS DICHOTOMY IS KEPT IN MIND IT BECOMES CLEAR THAT THE TRANSACTION OF BORROWING ATTRACTS THE PROVISIONS OF SECTION 36(1)(II). [PARA 13] THE DECISION OF HON'BLE SUPREME COURT MENTIONED ABO VE HAS BEEN FOLLOWED IN SUBSEQUENT YEARS IN THE CASE OF THE APP ELLANT ITSELF AND THE CLAIM OF INTEREST HAS BEEN ALLOWED. IN VIEW OF THE ABOVE FACTS AND DISCUSSION I AM OF T HE CONSIDERED OPINION THAT THE INTEREST EXPENDITURE ON BORROWINGS MADE FOR SETTING UP OF CAPTIVE POWER PLANT, WHICH WAS NOT PUT TO USE DU RING THE YEAR, IS AN ALLOWABLE DEDUCTION FROM THE INCOME OF THE APPELLAN T AS SETTING UP OF CAPTIVE POWER PLANT IS IN THE EXISTING LINE OF BUSI NESS AND WAS FOR EXTENSION OF THE EXISTING BUSINESS OF THE APPELLANT . THE DISALLOWANCE MADE BY THE AO IS THEREFORE, DIRECTED TO BE DELETED. 9. AGGRIEVED BY THE REVERSAL OF DISALLOWANCE OF INT EREST EXPENSE CLAIMED UNDER SECTION 36(1)(III), THE REVENUE HAS P REFERRED APPEAL BEFORE THIS TRIBUNAL THIS TIME. 10. LD. CIT DEPARTMENTAL REPRESENTATIVE (DR) VEHEME NTLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER GIVING RISE TO T HE PRESENT CONTROVERSY AND SUBMITTED THAT THE CIT(A) IN THE SECOND ROUND O F PROCEEDINGS HAS MISDIRECTED ITSELF IN LAW IN COMING TO A WRONGFUL C ONCLUSION TOWARDS ADMISSIBILITY OF INTEREST EXPENDITURE. THE LD. CIT DR REFERRED TO THE ASSESSMENT ORDER AND SUBMITTED THAT IT IS THE CONSI STENT POSITION OF THE ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 9 OF 19 ASSESSEE THAT THE CAPTIVE POWER PLANT IS UNDER PROG RESS AND HAS NOT BEEN COMPLETED OR PUT TO USE TILL THE END OF THE VARIOUS ASSESSMENT YEARS IN QUESTION. IT WAS THEREAFTER CONTENDED THAT THE POW ER PLANT FOR WHICH THE BORROWINGS, GIVING RISE TO THE INTEREST EXPENSES WE RE MADE, WERE NOT CONNECTED WITH THE EXISTING PHARMACEUTICAL BUSINESS OF THE ASSESSEE. IN THIS SITUATION, THE INTEREST COSTS ATTRIBUTABLE TO THE POWER PLANT UNCONNECTED TO THE EXISTING BUSINESS IS REQUIRED TO BE CAPITALISED AS RIGHTLY DONE BY THE ASSESSING OFFICER. LD. CIT DR T HEREAFTER INSISTED THAT IN VIEW OF THE UNDISPUTED FACT THAT THE ASSESSEE CO MPANY HAD INTENDED TO DIVEST ITS INVESTMENT MADE IN THE POWER PLANT, THE INTEREST ATTRIBUTABLE TO THE SET UP OF POWER PLANT CANNOT BE SET OFF AGAINST THE INCOME ARISING FROM PHARMACEUTICAL OPERATIONS. IT WAS VEHEMENTLY S UBMITTED THAT THE CAPTIVE POWER PLANT WAS ENTIRELY A NEW LINE OF BUSI NESS WHICH WAS ONLY IN THE PROCESS OF BEING SET UP AND THUS INTEREST ATTRI BUTABLE TO SUCH A NEW ACTIVITY CANNOT BE ACCEPTED AS PERMISSIBLE DEDUCTIO N WITHIN THE AMBIT AND SCOPE OF SECTION 36(1)(III) IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CHELLAPALLI SUGAR MILLS (SUPRA ). LD. CIT DR THUS FORCEFULLY CONTEND THAT THE CIT(A) HAS WRONGLY APPR ECIATED THE FACTS WHILE COMING TO THE CONCLUSION THAT POWER PLANT IS ONLY AN EXTENSION OF THE EXISTING BUSINESS. LD. CIT DR THEREAFTER CONTE NDED THAT ASSESSEES RELIANCE IN ITS OWN CASE AS REPORTED IN 298 ITR 94 IS OF NO ASSISTANCE AS THE FACTS IN THAT CASE ARE NOT IDENTICAL AT ALL. I T WAS CONTENDED THAT IN THE CASE BEFORE THE HONBLE SUPREME COURT, IT WAS FOUND AS A MATTER OF FACT THAT THE EXPENDITURE WAS INCURRED FOR THE EXPANSION OF THE EXISTING LINE OF BUSINESS WHEREAS FACTS ARE ALTOGETHER DIFFERENT IN THE INSTANT CASE AS POINTED OUT. THE CIT DR ALSO CONTENDED THAT THE AS SESSEE HAS ITSELF CLASSIFIED THE INTEREST EXPENDITURE UNDER THE HEAD DEFERRED REVENUE EXPENDITURE FOR APPRECIATING TREATMENT IN THE YEAR OF DIVESTMENT OF THE INVESTMENT. IT WAS CONTENDED THAT IN SUCH SCENARIO WHERE THE INTEREST EXPENSES HAVE BEEN INCURRED FOR CAPITAL WORK IN PRO GRESS, THE EXPENDITURE IS WITHOUT DOUBT CAPITAL IN NATURE. THE CIT DEPARTM ENTAL REPRESENTATIVE ACCORDINGLY SUBMITTED THAT THE CIT(A) HAS DRAWN CON CLUSION IN FAVOUR OF ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 10 OF 19 THE ASSESSEE ON A WRONG FOOTING DEHORS THE FACTS AN D THUS REQUIRES TO BE SET ASIDE AND THE ORDER OF THE ASSESSING OFFICER RE QUIRES TO BE UPHELD. 11. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, STRONGLY SUPPORTED THE ORDER OF THE CIT(A) APPEALED AGAINST BY THE REVENUE. THE LEARNED AR VEHEMENTLY SUBMITTED THAT THE CIT(A) HAS CORRECTLY UNDERSTOOD THE FACTS IN PERSPECTIVE. THE ASSESSEE COMPANY IS ENGAGED IN THE MANUFACTURING AND SELLING OF VARIOUS PHARMA PRO DUCTS IN ITS PLANT SITUATED AT SACHANA. THE COMPANY HAS ALSO SET UP C APTIVE POWER PLANT AT THE SAME LOCATION AT SACHANA. THE CAPTIVE POWER PLA NT WAS UNDER INSTALLATION IN THE RELEVANT ASSESSMENT YEAR. MAJO R EQUIPMENTS WERE OBTAINED. THE COMPANY BORROWED FUNDS TO FINANCE TH IS CAPTIVE POWER PLANT. THE CAPTIVE POWER PLANT WAS EVENTUALLY SOLD TO IDBI BANK AND TAKEN BACK ON LEASE FOR THE PURPOSES OF MEETING ITS BUSINESS REQUIREMENTS. THE POWER PLANT WAS SET UP BY THE ASSESSEE WITH AN OBJECTIVE TO SUPPLY POWER TO THE PHARMACEUTICAL COMPANY AT A LOWER COST AND CONSEQUENTLY TO COMPETE AND SURVIVE IN THE BUSINESS ENVIRONMENT. T HE LEARNED AR REFERRED TO NOTE NO.14 OF THE ANNUAL ACCOUNTS WHICH PROVIDES FOR INFORMATION REGARDING THE PLANT AND SUBMITTED THAT CAPTIVE POWER PLANT IS PART OF THE BUSINESS OF THE COMPANY AND INTENDED TO RESULT IN BACKWARD INTEGRATION WHEN THE POWER PLANT PRODUCES ELECTRICI TY WHICH IS INTENDED TO BE USED IN THE MANUFACTURING OF PHARMA PRODUCTS, IT IS OBVIOUSLY PART OF THE SAME BUSINESS AND THUS, ALLOWABLE UNDER S. 3 6(1)(III) OF THE ACT. IT WAS POINTED OUT THAT IT IS OSTENSIBLE THAT THE POWE R PLANT WOULD REDUCE THE ELECTRICITY EXPENSES AND THEREBY THE COST OF PHARMA PRODUCT WOULD BE LOWER. THE LEARNED AR THEREAFTER FORCEFULLY SUBMIT TED THAT, NOTABLY, THERE IS UNITY OF MANAGEMENT, CONTROL, ADMINISTRATI ON AND FINANCE ETC. 11.1 REGARDING INTENTION EXPRESSED TOWARDS DIVESTME NT, THE LEARNED AR SUBMITTED THAT DUE TO THE FINANCIAL CRUNCH, THE ASS ESSEE WAS NOT IN A POSITION TO COMPLETE THE PROJECT AND THEREFORE, INT ENDED TO DIVEST THE SAME TO CUT THE COSTS. IT WAS SUBMITTED THAT NON-CO MPLETION OF POWER PROJECT PER SE WILL NOT MAKE ANY DIFFERENCE AS LONG AS THE BORROWI NGS ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 11 OF 19 WERE FOUND TO BE MADE FOR ADVANCEMENT OF BUSINESS. THE LEARNED AR THEREAFTER REFERRED TO THE SALE AND LEASE AGREEMEN T ENTERED INTO WITH THE IDBI BANK AND SUBMITTED THAT THE CAPTIVE POWER PLAN T SOLD WAS TAKEN BACK ON LEASE BASIS FOR CAPTIVE CONSUMPTION OF POWE R TO BE GENERATED FROM THE POWER PLANT. 11.2 THE LEARNED AR, THEREAFTER, REFERRED TO THE DE CISION OF HONBLE SUPREME COURT IN THE CASE OF ASSESSEE COMPANY FOR E ARLIER ASSESSMENT YEARS REPORTED IN DY.CIT VS. CORE HEALTH CARE LTD. 298 ITR 194 TO SUBMIT THAT SECTION 36(1)(III) NOWHERE STIPULATES T HAT BORROWING HAS TO BE ON REVENUE ACCOUNT. THE LEARNED AR ALSO SUBMITTED THAT EXPLANATION 8 UNDER SECTION 43(1) OF THE ACT DOES NOT IN ANY WAY CURTAIL THE SCOPE OF PRE-AMENDED SECTION 36(1)(III) OF THE ACT. LEARNED AR SUBMITTED THAT IN ASSESSEES OWN CASE, THE HONBLE SUPREME COURT HAS HELD THAT EXPLANATION 8 OF SECTION 43(1) CANNOT OVERRIDE THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT. THE LEARNED AR ALSO CONTEND ED THAT REGARDLESS OF THE UTILITY PROJECT NOT HAVE BEEN PUT TO USE IN THE ASSESSMENT YEARS IN QUESTION, THE INTEREST PAID ON BORROWING FOR SUCH A CQUISITION WITH AN IDEA TO IMPROVE THE PROFITABILITY OF THE EXISTING BUSINE SS REQUIRES TO BE ALLOWED AS BUSINESS EXPENDITURE IN THE LIGHT OF THE DECISION OF HONBLE SUPREME COURT IN ITS OWN CASE. 11.3 THE LEARNED AR EMPHASISED THAT THE PROVISO TO SECTION 36(1)(III) OF THE ACT INSERTED BY FINANCE ACT, 2003, W.E.F. 01.04 .2004 HAS BEEN HELD TO BE OPERATIVE PROSPECTIVELY BY THE HONBLE SUPREME C OURT. THUS, AS PER THE ERSTWHILE PROVISIONS OF SECTION 36(1)(III) OF T HE ACT PRIOR TO AMENDMENT, INTEREST PAID ON CAPITAL BORROWED FOR EX PANSION OF EXISTING BUSINESS WAS ALLOWABLE DEDUCTION NOTWITHSTANDING TH E FACT THAT THE ASSETS IN CONSIDERATION WERE NOT PUT UNDER ACTUAL USE IN T HE RELEVANT ACCOUNTING YEAR. THE LEARNED AR, THEREAFTER, REFERRED TO THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF ALEMBIC GLASS IND USTRIES 103 ITR 715 (GUJ) TO SUBMIT THAT EVEN IF PLANTS ARE AT DIFFEREN T ALLOCATIONS STILL INTEREST ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 12 OF 19 EXPENSES ARE ALLOWABLE WHEREAS IN THE INSTANT CASE, THE PLANT IS AT THE SAME PLACE. 11.4 THE LEARNED AR RAISED AN ALTERNATIVE PLEA THAT WHERE THE CAPTIVE POWER PLANT WAS SOLD TO IDBI UNDER THE SALE AND LEA SE AGREEMENT IN THE EARLIER YEAR, THE POWER PLANT WAS NO LONGER OWNED B Y THE ASSESSEE THEREAFTER. THUS, THE EXISTING LOANS CONTINUED WIT H THE ASSESSEE FOR THE PURPOSE OF ITS EXISTING ON-GOING BUSINESS. IN THE ABSENCE OF CAPTIVE POWER PLANT, THE INTEREST ON LOANS CANNOT BE ATTRIB UTED TO CAPTIVE POWER PLANT ANY LONGER AND THEREFORE, DISALLOWANCE UNDER S. 36(1)(III) ON THIS SCORE IS UNCOMPREHENSIBLE. THE LEARNED AR, IN CONC LUSION, SUBMITTED THAT THE FINDINGS OF CIT(A) CANNOT BE DISTURBED. 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND ALL OTHER DOCUM ENTS AND MATERIALS REFERRED TO AND RELIED UPON IN THE COURSE OF HEARIN G BEFORE US. THE SUBSTANTIVE ISSUE INVOLVED FOR ADJUDICATION IS ALLO WABILITY OF INTEREST EXPENDITURE INCURRED BY THE ASSESSEE ON BORROWED FU NDS UTILIZED FOR INSTALLATION OF CAPTIVE POWER PLANT WHICH HAS NOT B EEN PUT TO USE DURING THE ASSESSMENT YEARS IN QUESTION. IT IS THE CASE O F THE ASSESSEE THAT IT WANTED TO INSTALL A CAPTIVE POWER PLANT FOR GENERAT ION OF ELECTRICITY FOR THE PURPOSES OF ITS ON-GOING AND EXISTING PHARMACEU TICAL BUSINESS. IN ORDER TO IMPLEMENT THE CAPTIVE POWER PLANT, IT OBTA INED CERTAIN LOANS FROM BANKS AND FINANCIAL INSTITUTIONS. THE INTEREST ON BORROWED FUNDS HAS BEEN CLAIMED AS REVENUE EXPENDITURE FOR THE PURPOSE OF T AXATION IN DEPARTURE WITH THE POSITION TAKEN IN THE BOOKS OF ACCOUNT WHE RE IT HAS BEEN TREATED AS A CAPITAL ITEM. THE AO HAS REFUSED TO ACCEPT TH E CLAIM OF THE ASSESSEE TOWARDS INTEREST EXPENDITURE ON BORROWED FUNDS AS A REVENUE EXPENDITURE ON THE BROAD GROUNDS, NAMELY; (I) THE PLANT HAS NOT BEEN INSTALLED AND THE ASSETS HAVE NOT BEEN PUT TO USE (II) THERE WAS NO G ENERATION OF ELECTRICITY FROM THAT PLANT (III) AS PER THE NOTE IN THE FINANC IAL STATEMENTS, THE POWER PLANT HAS BEEN MARKED FOR DIS-INVESTMENT BY THE ASS ESSEE. ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 13 OF 19 12.1 AS BORNE OUT FROM THE ORDERS OF THE AUTHORITIE S BELOW, IT IS THE CLAIM OF THE ASSESSEE THAT POWER PLANT WAS SOUGHT T O BE INSTALLED FOR CAPTIVE POWER CONSUMPTION IN THE LARGER CONTEXT OF THE BUSINESS NECESSITY TO CUT DOWN THE COSTS OF POWER CONSUMPTION OF ITS E XISTING AND ON-GOING PHARMACEUTICAL BUSINESS. IT IS THE CLAIM OF THE AS SESSEE THAT DUE TO FINANCIAL DIFFICULTIES, THE POWER PLANT WAS MARKED FOR DIS-INVESTMENT AND FINALLY SOLD TO THE FINANCIAL (IDBI) AND TAKEN BACK ON LEASE BY WAY OF SALE & LEASE BACK AGREEMENT DURING THE FY 1996-97 ( AY 1997-98) VIDE AGREEMENT DATED 26TH SEPTEMBER, 1996. 12.2 IN THE CONTEXT OF THE FACTS NOTED ABOVE, WE AD VERT TO PURPORT OF SECTION 36(1)(III) OF THE ACT. AS NOTICED JUDICIAL LY BY PRECEDENTS, THE DEDUCTION UNDER S. 36(1)(III) IS DEPENDENT ON THE F ACT WHETHER CAPITAL BORROWED IS FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE OR NOT. IF IT IS FOUND THAT THE CAPITAL WAS BORROWED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE, THE INTEREST PAYABLE THEREON IS ADMISSIBL E UNDER THE SAID SECTION. IT IS IMMATERIAL WHETHER THE UTILIZATION O F THE BORROWED FUNDS IS IN THE NATURE OF CAPITAL EXPENDITURE OR REVENUE EXP ENDITURE. IF THE EXPENDITURE IS A BUSINESS EXPENDITURE RELATING TO A NY STAGE OF THE BUSINESS ACTIVITY CARRIED ON BY THE ASSESSEE, IT IS AN ADMIS SIBLE DEDUCTION UNDER S. 36(1)(III) OF THE ACT. IF THE BORROWED FUNDS HAVE BEEN UTILIZED FOR ACQUISITION OF ASSET WHICH IS CLOSELY RELATED TO TH E CARRYING ON OF THE BUSINESS, THE INTEREST EXPENDITURE HAS TO BE REGARD ED AS AN EXPENDITURE FOR THE PURPOSES OF BUSINESS. THE ASSESSEE, IN THE INS TANT CASE, HAS NOT STARTED ANY NEW BUSINESS OF GENERATION OF POWER BUT THE POWER PLANT WAS SOUGHT TO BE BUILT TO ASSIST THE RATIONALISATION OF COSTS INVOLVED IN EXISTING PHARMACEUTICAL BUSINESS. THEREFORE, THE C APTIVE POWER PLANT IN CONSIDERATION WAS ONLY AN EXPANSION OR EXTENSION OF THE EXISTING BUSINESS BY WAY OF INTEGRATION OF THE ACTIVITIES. NEEDLESS TO SAY, THE QUESTION WHETHER THE PARTICULAR EXPENDITURE IS REVENUE EXPEN DITURE INCURRED FOR THE PURPOSE OF BUSINESS MUST BE VIEWED IN THE LARGER CO NTEXT OF THE BUSINESS NECESSITY OR EXPEDIENCY. IF THE OUTGOING OR EXPEND ITURE IS SO RELATED TO ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 14 OF 19 THE CARRYING ON OR CONDUCT OF THE BUSINESS, IT MAY BE REGARDED AS AN INTEGRAL PART OF REVENUE EARNING PROCESS AND THUS, A REVENUE EXPENDITURE. 12.3 THE CLAIM OF THE ASSESSEE IS THAT THE POWER PL ANT IS NOTHING BUT THE EXPANSION OF ITS EXISTING PHARMACEUTICAL BUSINESS U NDER THE SAME MANAGEMENT AND ADMINISTRATION AND AT THE SAME PLACE WHERE THE PHARMA UNIT IS IN OPERATION. 12.4 THE AO, KEEPING IN VIEW, THE FACT THAT LOAN WA S RAISED FOR SETTING UP A POWER PLANT WHICH IS AKIN TO CREATING A CAPITA L ASSET, WHICH IS YET TO COME INTO PRODUCTION OF POWER, HAS DISALLOWED THE I NTEREST FOR THE PERIOD PRIOR TO ITS BEING PUT TO USE AS REVENUE EXPENDITUR E. FOR DOING SO, EXPLANATION 8 TO SECTION 43(1) OF THE ACT WAS RELIE D UPON. IT IS THE CASE ON BEHALF OF THE REVENUE THAT IN THE LIGHT OF THE D ECISION OF HONBLE SUPREME COURT IN CASE OF CHALLAPALLI SUGARS LTD. V. CIT [1975] 98 ITR 167, ALL EXPENDITURES INCLUDING INTEREST WHICH HAS BEEN INCURRED TO BRING POWER PLANT INTO EXISTENCE AND TO PUT IN OPERATION IS REQUIRED TO BE CAPITALISED AND CANNOT BE CLAIMED AS REVENUE EXPEND ITURE. WE ARE NOT IMPRESSED BY SUCH APPROACH OF THE AO. THE ISSUE IS REQUIRED TO BE EXAMINED IN THE LIGHT OF THE PLEA OF THE ASSESSEE T HAT ERECTION OF POWER PLANT IS ONLY AN EXPANSION OF THE EXISTING BUSINESS TO BRING EFFICACY IN REVENUE GENERATION. IN CHALLAPALLI SUGARS LTD.S C ASE (SUPRA), THE EXPRESSION ACTUAL COST UNDER INCOME TAX ACT, 1922 WAS UNDER CONSIDERATION WHICH WAS NOT DEFINED IN THAT ACT. T HE HONBLE SUPREME COURT OBSERVED THAT INTEREST PAID ON THE BORROWING UTILIZED TO BRING INTO EXISTENCE FIXED ASSETS WHICH HAS NOT GONE INTO PROD UCTION GOES TO ADD TO THE COSTS OF INSTALLATION OF THAT ASSET. HOWEVER, NOTABLY, IT WAS FURTHER OBSERVED THAT IF THE SAID BORROWING WAS NOT FOR TH E PURPOSE OF BUSINESS IN AS MUCH AS NO BUSINESS HAD COME INTO EXISTENCE, IT MUST FOLLOW THAT IT WAS MADE FOR THE PURPOSE OF ACQUIRING AN ASSET WHIC H COULD BE PUT TO USE FOR DOING BUSINESS AND THUS INTEREST PAID WOULD GO TO ADD THE COST OF ASSETS SO ACQUIRED. THE ASSESSEE WHICH HAD AVAILED THE BORROWED FUNDS IN THAT CASE HAD NOT YET STARTED PRODUCTION AND HENCE, HAD NOT YET ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 15 OF 19 COMMENCED ANY BUSINESS WHEN IT BORROWED THE AMOUNT IN QUESTION. THEREFORE, IT WAS NOT POSSIBLE TO SAY IN THAT CASE, THE BORROWING WAS MADE FOR THE PURPOSES OF BUSINESS. THE HONBLE SUPREME COURT IN CHALLAPALLI SUGARS LTD.S CASE (SUPRA) THUS OBSERVED IN THE CON TEXT THAT IF MONEY IS BORROWED BY A NEWLY STARTED COMPANY WHICH IS IN THE PROCESS OF CONSTRUCTING OR ERECTING ITS PLANT, THE INTEREST IN CURRED BEFORE THE COMMENCEMENT OF PRODUCTION ON THE BORROWED MONEY CA N BE CAPITALIZED AND ADDED TO THE COST OF FIXED ASSETS CREATED AS A RESULT OF THE EXPENDITURE. THUS, IT WILL BE SEEN THAT THE CASE W AS ESSENTIALLY RELATED TO A COMPANY, WHICH WAS NEWLY STARTED AND WHICH HAD NO T COMMENCED ANY PRODUCTION OR BUSINESS. IN DEPARTURE, IN THE INSTA NT CASE, THE ASSESSEE IS CARRYING ON THE BUSINESS AS A RUNNING CONCERN AND T HE LOANS RAISED BY THE ASSESSEE FOR POWER PLANT WAS NOT BEFORE THE COMMENC EMENT OF PRODUCTION BUT AT A LATTER STAGE. THEREFORE, IN OUR VIEW OF T HE CLEAR DISTINCTION BETWEEN THE CASE OF THE ASSESSEE VIS--VIS CHALLAPA LLI SUGARS LTD., THERE DOES NOT APPEAR TO BE ANY IMPEDIMENT TO THE ASSESSE E FOR CLAIMING OF INTEREST AS REVENUE EXPENDITURE. THE RELIANCE PLAC ED ON THE DECISION OF HONBLE SUPREME COURT BY REVENUE IS THUS A DAMP SQU IB. 12.5 WE SHALL NOW REFER TO THE DECISION OF THE HON BLE SUPREME COURT IN ASSESSEES OWN CASE IN DCIT VS. CORE HEALTH CARE LT D.(298 ITR 194)(SC) ARISING FROM THE DECISION OF THE HONBLE J URISDICTIONAL HIGH COURT REPORTED IN 251 ITR 61 (GUJ). THE HONBLE SU PREME COURT EXPLAINED THAT THE EXPRESSION FOR THE PURPOSE OF B USINESS OCCURRING IN SECTION 36(1)(III) INDICATES THAT ONCE THE TEST FO R THE PURPOSE OF BUSINESS IS SATISFIED IN RESPECT OF THE CAPITAL BO RROWED, THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION UNDER S. 36(1)(III). THIS PROVISION MAKES NO DISTINCTION BETWEEN THE MONEY BORROWED TO ACQUIR E A CAPITAL ASSET OR A REVENUE ASSET. ALL THAT THE SECTION REQUIRES IS TH AT THE ASSESSEE MUST BORROW CAPITAL AND PURPOSE OF BORROWING MUST BE FOR BUSINESS WHICH IS CARRIED ON BY THE ASSESSEE FOR THE YEAR OF ACCOUNT. IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT WHAT IS RELEV ANT FOR THE PURPOSE OF SECTION 36(1)(III) IS THE USER OF CAPITAL AND NO T THE USER OF THE ASSET ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 16 OF 19 WHICH COMES INTO EXISTENCE AS A RESULT OF BORROWED CAPITAL. HONBLE SUPREME COURT ALSO TOOK COGNIZANCE OF EXPLANATION 8 TO SECTION 43(1) INSERTED BY THE FINANCE ACT, 1986 WITH RETROSPECTIV E EFFECT FROM 1ST APRIL, 1974 AND HELD THAT THE AFORESAID EXPLANATION HAS NO RELEVANCY TO SECTION 36(1)(III). SIGNIFICANTLY, IN THE INSTANT CASE, WE ARE CONCERNED FOR VARIOUS ASSESSMENT YEARS PRIOR TO THE INSERTION OF PROVISO OF SECTION 36(1)(III) OF THE ACT ADDED VIDE FINANCE ACT, 2003 W.E.F. 01.04.2004. THE AFORESAID PROVISO CALLS FOR DISALLOWANCE OF INT EREST ON MONEY BORROWED FOR THE CAPITAL ASSET TILL THE DATE ON WHI CH SUCH ASSET WAS PUT TO USE. IN THIS CONTEXT, HONBLE SUPREME COURT IN COR E HEALTH CARE LIMITED (SUPRA) ALSO HELD THAT THE AFORESAID PROVISO SHALL OPERATE PROSPECTIVELY. AS OBSERVED, THE CASE IN HAND RELATES TO ASSESSMENT YEARS PRIOR TO THE AMENDMENT AND INSERTION OF PROVISO. THE EXISTING P OSITION OF LAW THUS IS THAT DEDUCTION OF INTEREST IS ALLOWED IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF CAPITAL ASSETS FOR THE PURPOSE OF EX PANSION OF EXISTING UNIT WHETHER OR NOT THE INTEREST IS CAPITALIZED IN THE B OOKS OF ACCOUNTS. IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT I N ASSESSEES OWN CASE, IF THE EXISTING UNIT BORROWS MONEY FOR EXPANS ION, INTEREST PAID ON SUCH BORROWING IS AN ALLOWABLE EXPENDITURE. THE EX ISTING SECTION 36(1)(III) OF THE ACT, AS APPLICABLE TO THE ASSESSM ENT YEARS IN QUESTION, NOWHERE STIPULATES THAT BORROWING HAS TO BE ON REVE NUE ACCOUNT. THEREFORE, IN TERMS OF ERSTWHILE PROVISIONS OF SECT ION 36(1)(III) INTEREST FOR THE PERIOD PRIOR TO THE DAY ON WHICH THE ASSET IS PUT TO USE IS ALSO ALLOWABLE ON REVENUE ACCOUNT. 12.6 CONSIDERING THE DICTUM OF LAW LAID DOWN BY THE HONBLE SUPREME COURT IN ASSESSEES OWN CASE, WE DO NOT FIND ANY ER ROR IN THE APPROACH OF THE CIT(A) FOR ALLOWING THE INTEREST CLAIM OF THE A SSESSEE ON REVENUE ACCOUNT. 12.7 WE ALSO TAKE NOTE OF THE PLEA ON BEHALF OF THE REVENUE THAT POWER PLANT WAS INTENDED FOR DIS-INVESTMENT AND THEREFORE CANNOT BE REGARDED AS EXTENSION OF BUSINESS. WE FIND THAT SUCH PLEA LACK S BOTH THE LEGAL AND ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 17 OF 19 FACTUAL BASIS. AS ALREADY NOTED, THE CONDITION THA T BORROWING MUST HAVE BEEN MADE FOR THE PURPOSE OF BUSINESS BEING CARRIED ON BY THE ASSESSEE IN THE PREVIOUS YEAR IS IMPLICIT OR INBUILT IN SECTION 36(1)(III) OF THE ACT ITSELF. THE CAPTIVE POWER PLANT WAS INTENDED FOR P HARMACEUTICAL BUSINESS AS PER THE CONSISTENT STAND OF THE ASSESSEE SINCE I NCEPTION. THERE IS NO REBUTTAL ON THIS ACCOUNT. IT IS A MATTER OF RECORD THAT THE ASSESSEE HAS ENTERED INTO SALE & LEASE BACK AGREEMENT OF CAPTIVE POWER PLANT WITH THE LENDERS WITH A VIEW TO REDUCE FINANCIAL COSTS. NOTWITHSTANDING, THE ASSESSEE THROUGHOUT IS ENGAGED IN THE BUSINESS OF P HARMACEUTICAL AND THEREFORE, INTEREST INCURRED ON POWER PLANT INCIDEN TAL TO PHARMA UNIT IS ALLOWABLE DEDUCTION ON REVENUE ACCOUNT. THE POWER PLANT ULTIMATELY TAKEN BACK ON LEASE IS NOTHING BUT THE EXPANSION/IN CIDENCE OF EXISTING BUSINESS. THUS, DIS-INVESTMENT AND GAINING CONTROL OVER THE ASSET BY WAY OF LEASE WOULD NOT, IN OUR VIEW, CHANGE THE CHARACT ER OF CLAIM. THUS, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A ) IN ADJUDICATING THE ISSUE IN FAVOUR OF THE ASSESSEE. 12.8 THIS APART, WE ALSO TAKE NOTE OF SIGNIFICANT P LEA RAISED ON BEHALF OF THE ASSESSEE THAT THE ASSESSEE EXECUTED SALE & LEAS E BACK EQUIPMENT LEASE AGREEMENT WITH INDUSTRIAL DEVELOPMENT BANK OF INDIA ON 26.09.1996 RELEVANT TO AY 1997-98. WE THUS ALSO FI ND MERIT IN THE ALTERNATIVE PLEA RAISED IN THIS REGARD THAT WHERE T HE EQUIPMENT WAS SOLD AND COMPANY IS NOT THE OWNER OF THE ASSET AT ALL, T HE INTEREST ON SUBSISTING LOANS/BORROWING CANNOT BE ATTRIBUTED ANY LONGER TO THE ASSETS SO DIVESTED. WHILE THE POWER GENERATION ASSET HAS BEEN SOLD, THE SUBSISTING LOANS/BORROWINGS HAS REMAINED AND CONTINUED IN THE BOOKS OF ACCOUNTS AND USED FOR THE PURPOSE OF EXISTING AND ONGOING BU SINESS OF THE ASSESSEE COMPANY IN REVENUE ACCOUNT. THUS, INTEREST ON LOAN AMOUNT PRESENTLY USED IN ONGOING PHARMA BUSINESS IS ALLOWABLE OTHERW ISE ALSO. 13. IN VIEW OF THE AFORESAID DISCUSSION, WE DO NOT SEE ANY GOOD REASON TO ASSAIL THE CONCLUSION DRAWN BY CIT(A). WE THUS DECLINE TO INTERFERE. ITA NOS.1733 TO 1737/AHD/2014 A.YS. 1998-99 TO 2002-03 PA GE 18 OF 19 IN THE RESULT, APPEAL OF THE REVENUE IN ITA NO.1733 /AHD/2014 RELEVANT TO AY 1998-99 IS DISMISSED. 14. OTHER CAPTIONED APPEALS FOR REMAINING ASSESSMEN T YEARS INVOLVE IDENTICAL ISSUE OF DISALLOWANCE OF INTEREST. THERE FORE, IN PARITY, ALL THE REVENUES APPEALS CAPTIONED ABOVE ARE DISMISSED. 15. IN THE COMBINED RESULT, ALL THE CAPTIONED REVEN UES APPEALS ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF JUNE, 2018. SD/- SD/- (MS. MADHUMITA ROY) (PRADIP KUMAR KEDIA ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD, THE 20 TH DAY OF JUNE, 2018 PBN/* TRUE COPY COPIES TO: (1) THE APPELLANT (2) THE RESPOND ENT (3) CIT (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER, ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD