ITC Bhadrachalam Paperboards Ltd., Secunderabad V. The Commissioner of Income Tax, A.P.-II, Hyderabad

ITTA/53/2001

AI Insights

The case involves ITC Bhadrachalam Paperboards Ltd., the appellant, contesting a decision by the Commissioner of Income Tax, A.P.-II, Hyderabad, regarding the deductibility of interest on a loan taken for setting up a new plant. The Tribunal had earlier ruled that the interest was a capital expenditure, which the appellant challenged. The main legal question was whether the interest expenditure on the loan could be treated as a revenue expenditure under Section 36(1)(iii) of the Income Tax Act, 1961. The Supreme Court's decision in similar cases was considered, particularly focusing on whether the purpose of borrowing affects the classification of interest as a revenue or capital expenditure.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 796383 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 30-07-2013
• Assessment Year: misc
• Other Referred Cases: Deputy Commissioner of Income Tax, Ahmedabad 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: Revenue
• Court: HIGH COURT
• Keywords: Capital expenditure; Deduction; Interest Expenditure; Loan; New plant and machinery
• Section: 36 (1) (iii); 260-A

Judgement Text

"HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTA AND HON’BLE SRI JUSTICE K.C.BHANU I.T.T.A.No.53 of 2001 Date: 30.07.2013 Between: ITC Bhadrachalam Paperboards Ltd., Secunderabad.. .....Appellant AND The Commissioner of Income Tax, A.P.-II, Hyderabad . ...Respondent HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTA AND HON’BLE SRI JUSTICE K.C.BHANU I.T.T.A.No.53 of 2001 JUDGMENT: (per Hon’ble the Chief Justice Sri Kalyan Jyoti Sengupta ) This appeal is directed against the judgment and order of the learned Tribunal dated 20.02.2001 in I.T.A.No.846/Hyd/98 in relation to the assessment year 1995-96. This Court, on 30.07.2001, admitted the appeal, but no substantial question of law was formulated. Section 260(A) of the Income Tax Act, 1961 obliges the Court to hear the appeal on the substantial question of law. After perusing the judgment and order of the learned Tribunal and taking note of the suggested grounds of appeal, we are of the view that the only substantial question of law involved in this matter is as follows: “Whether on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the interest expenditure incurred on the loan amount can be treated to be a capital expenditure so as to deny the deduction under Section 36 (1) (iii) of the Income Tax Act, 1961? We have heard the learned Counsel for the parties and gone through the judgment and order of the learned Tribunal. Learned Counsel for the appellant submits that irrespective of the object for which the loan is taken, the amount of interest incurred on the borrowed capital shall be deducted as has been held by the Supreme Court in Deputy Commissioner of Income Tax, Ahmedabad Vs. Core Health Care Ltd.[1]. He has drawn our attention to paragraph-14 of the said decision. Now we shall decide whether the aforesaid judgment is the answer to the issue involved in this case. Para-14 of the aforesaid decision reads as follows: “In our view the above observations have to be confined to the facts in the case of Challapalli Sugars Ltd. 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 MANU/SC/0188/1965 : {1966}60 ITR52(SC) 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 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 and the judgment of the Supreme Court in India Cements Ltd. 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. 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.” To our reading of the aforesaid para-14, the Supreme Court nowhere stated that the deduction shall be allowed under Section 36 (1) (iii), in the event the interest amount is incurred on account of the borrowed capital in a newly established plant and machinery. Learned Counsel for the appellant wants to take advantage of the observation of the Supreme Court in para-14 of the aforesaid decision that “for considering whether payment of interest on borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant”. We are of the view that the aforesaid observation does not help this case because the deduction can only be allowed if the pre-condition of the Section 36(1)(iii) of the Act is satisfied. We, therefore, set out the aforesaid provision as under: “The amount of the interest paid in respect of capital borrowed for the purpose 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 capitalized 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.”} The aforesaid proviso has been brought into the statute book with effect from 2004. The aforesaid proviso cannot be directly put into operation. The basic object of the deduction of the amount of interest paid in respect of capital borrowed is that it must not be in relation to setting up of a new plant or machinery; it must be in relation to the business. Here on fact, it was found by the learned Tribunal that the loan was taken by the assessee from IDBI for the purpose of setting up a new plant aimed at developing a totally new and highly improved variety of products i.e., coated paper and acquiring new assets. It is true the assessee is carrying on business. No doubt, carrying on business is one thing and setting up a new plant or new unit with highly improved variety of products in connection with business is another thing. Consequently, interest was paid in respect of capital borrowed for the purpose of acquisition of assets of durable nature. The learned Tribunal has correctly accepted the order of the Commissioner of Income Tax (Appeals). Hence, we do not find any reason to interfere with the judgment and order of the learned Tribunal. Accordingly, the appeal is dismissed. Miscellaneous petitions, if any pending, shall stand disposed of. No order as to costs. ___________________ K.J. SENGUPTA, CJ _______________ K.C.BHANU, J 30.07.2013 Gsn [1] (2008) 2 SCC 465 "