Nahar Poly Films Ltd. V. The Commissioner of Income Tax Ludhiana

ITA/9/2011

AI Insights

Nahar Poly Films Ltd. appealed against the order of the Income Tax Appellate Tribunal, which had upheld the disallowance of interest paid on term loans used for acquiring assets. The loans were taken from Canara Bank and Punjab National Bank, and the interest was claimed as a revenue expenditure for the assessment year 2006-07. The primary legal contention was whether the increase in spindle capacity constituted an 'extension' of business, which would trigger the proviso to Section 36(1)(iii) of the Income Tax Act, 1961, disallowing interest as a deduction until the asset was put to use. The Tribunal and the High Court found that the increase in capacity was indeed an extension of the business, thus applying the proviso and disallowing the interest deduction.

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 805141 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 07-04-2011
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-tax v. Modi Industries, Commissioner of Income Tax v. Relaxo Footwears Ltd.
• Laws Referred To: Income-Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: SANJAY BANSAL; ANURAG GOYAL
• Keywords: Business expansion; Income Tax; Interest disallowance; Term Loan; Business Extension
• Section: 36 (1) (iii); 260A

Judgement Text

"t- \" :::> 0 u J: (!) - J: a.. , Income Tax Appeal NO.9 of 2011 '2 interest of Rs. 9,05,976/- paid by the appellant on \"Term Loan raised for acquiring asset in its existing business is disallowable in view of proviso to Section 36( 1)(iii) of the Act? b) Whether on the facts and circumstances of the, case, the Tribunal acted perversely in interpreting the words 'Expansion and Extension' as synonymous in spite of the fact these two I words have been used in the different sections separately and , carry different meaning? c) Whether on the facts and circumstances of the, case, the Tribunal acted perversely and illegally in holding thqt increase in spindle capacity in appellant's Unit is extension of business? 3. The facts, in brief, necessary for adjudication as narrated in the appeal, 'are that the assesseeraised a term loan of Rs. 30,61,00,000/- from Canara Bank, and another sum of Rs. 7,98,00,000/- from the Punjab National Bank for acquisitioning the assets for its existing business and paid interest on the term loan so raised. The assessee claimed the amount of interest paid as revenue expenditure under $ection '36(1)(iii) of , , the Act. For the assessment year in question, the assessee filed its income tax return at the total income of Rs. 33,86,25,911/-. The assessipg officer, however, vide order dated 21.1.2008, computed the ! , - i total ipcome of the assessee at Rs. 34,07,33,922/- by making disallowance of some amounts including the amount paid as interest. 4. The Commissioner of Income-tax (Appeals) {in short \"the C!T(A)''} sustained the disallowance made by the assessing officer and , , dismissed the appeal of the assesseevide order dated 12.1.20Q9.' ~~ I- ~ => 0 U :I: c..? - :J: a.. Jncome Tax Appeal No.9 of 2011 3 5; The Tribunal upheld the orders of the lower authorities, i.e. the Assessing Officer and the CIT(A),and dismissed the assessee's appeal videthe order under appeal. 6. This is how the assessee is once again in appeal before us. 7. We have heard learned counsel for the assessee and have perused the record. 8. The only point that arises for consideration in this case is, whether the interest paid by the assessee on the borrowing~made for purchase of the machineryin the facts of the present case was hit by the proviso to Section 36(1)(iii) of the Act and was inadmissible revenue expense. 9. Learned counsel for the assessee submitted that there was no extension of business and, therefore, the provisoto Section 36(1)(iii) did not apply. Accordingto the learned counsel, it was only an expansion in business which had taken place and the same was not covered within the term 'extension'. Learnedcounsel argued that in Section36(1)(iii)the word extension has been used whereas Sections aD IC(8)(ix) and 80 , IE(7)(iii) contain the word expansion. Furth€br the expression [ . restructuring and reconstruction has been stated in Section 80 ID(3)(i), 80IB~nd 33Bof the Act.Section80 IA(4)(iv)has the term renovationand I mode~nisation mentioned therein. Elaborating his submissions, the learned counsel urged that the legislature has used different words in different Sections whichcarry different meanings. The counselrelied upon . , two judgments of the HighCourtof Delhi,in Commissioner ,ofIncome- tax v. Modi Industries, 200 ITR 341 (Delhi) and Commissioner of Income Tax v. Relaxo Footwears Ltd., 293 ITR 231 (Delhi). - t .. -- eal No.9 of 2011 4 It would be expedient to reproduce Section 36(1)(iii) of the \"Other deductions. 36. (1) The deduction provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in t ' computingthe incomereferred to in section 28- ... ) I- a:: .::> 0 U :J: (!) - :J: « Z ~ a:: ~ ~ J: ;~ 1) ~ \"'\"') ? ,- ':J whereas the meaning of the word \"expansion\" is 'the act Qr state of expanding. The distinction between \"Extension\"and \"Expansion\"as has been sought to be projected by the assessee does not carry any persuasion as there is no real distinction between the two as suggested by the counsel. Even ifthe distinctionas professed by the learned counsel in the terms \"Extension\"and \"'Expansion\" is taken to exist stillthe plea of the assessee does not inspire acceptance as \"Expansion\"would be wider and embrace \"Extensiori\"withinit. The Tribunal had recorded'a'finding of fact that there was extension of the assessee's business as it had purchased the assets for the same by borrowing capital from the banks I - and, therefore, it was not entitled to deduction under ~ection 36(1)(iii)of i ' ' i the Act.The relevant observations of the Tribunal,in p~ra Nos. 20 and 21 of the $rder are as under: \"20. The facts of the present case before us' are that the assessee was running a unit with spindle capacity 153664 spindles whichwas increased to 201664 spindles by putting up new machinery. This exercise of increasing the' capacity amounts to the process of enlarging and/or extending the existing capacity and hence is a case of extension of ex!sting business. It can by no stretch be called as acquisition of ~;\"\".\"- ,- -- 1IImiI- ~, '.:1 \",..,...,- \"\"'''_00 -~--- I t- n:: -::) 0 (.) ::J: C) - ::J: « z ~ ~ « :.t: ~ CO « ..., z :::) c.. ADceal NO.9 of 2011 6 issets for the existing business as even in the director's -- -report, the managing director talks about the changing global textile scenario,'and the role of capacities and up-gradation of technology in the success of business wh,ich was the .instrument for increasing the spindle capacity which, in turn, was to be financed by the term loan raised by the assessee company during the year. In the facts before the Hon'ble Delhi High Court in CIT Vs Modi Industries Ltd. (Supra) relied upon by the assessee, person was engaged in the business of manufacture of diverse items and a new item was added to its manufacturing business, whereas there was complete unity or control and utilisation of common funds and it was held that , - - the business of manufacturing of new items was,an extension of the business and not a new business. In the facts before us, though the same line of business is being carried on but scope of production has been enlarged by increas~n.9the spindle capacity and the same is extension of business by the assessee. Consequently, the provisions ofiproviso to 36(1)(iii) , are applicable in the case. 21. The plea of the assesseebefore us was that the increased - , capacity amounts to expansion of business.'and is not extension of business envisaged in the proviso 'to Section 36(1)(iii). The dictionary meaning of the word 'expand' or as per the Concise Oxford English Dictionary is 'to make or become larger or more extensive' and the meaning of the word 'expansion' is 'the action or an in~tance of expanding'. In ----------------------------------------- ~ 7 'eof the two words 'expansion' and 'extension' are rous and even if it be taken as expansion, as !,,!oed by the assessee, it is not different fro~ -~xtension iusiness and tonsequently the application of the -proviso to Section 36(1)(iii) of the Act is justified. In the entirety of facts and circumstancesand in view of the machinery not being put .. I- a:: :::J 0 l) J: :!) - J: .t( Z :::( >- ~ ~ r .- to use, the interest expenditure on the utilisationof borrowed funds for the acquisitionof new assets, from the date of its acquisition till the date when machinery is put to use, is disallowable. Accordingly, we uphold the order 'of CITe A) and dismiss the ground No.3raised by the assessee.\" '- ' 13. , In view of the' above well reasoned observations of the Tribunal and the fact that the judgments relied upon by the learned :;(S :a ~ \"\"') z - .:> .l. counsel do not support the case of the assessee being based on individual factual situation involvedtherein, no substantial question of law arises in this appeal. Accordingly, finding no merit in the appeal the same is dismissed. April 7, 2011 *7 "