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02-01-2020, Zuari Industries, Section 43(1), 36(1)(iii), HIGH COURT OF BOMBAY

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3 weeks 3 hours ago #11960 by amit
Section - 43(1), 36(1)(iii), 15, 18(4)
Order Date - 02-01-2020
Favouring - Assessee
Appellant - CIT
Respondent - Zuari Industries Ltd.
Justice - M.S. SONAK & C.V. BHADANG, JJ.
Citation - 120Taxpundit65
Appeal No. - TAX APPEAL NO. 51 OF 2008
Asstt. Year - 1995-96


PER : C.V. Bhadang, J.

On 23rd June 2008, this Appeal was Admitted on the following substantial questions of law:

(I) Whether on the facts and in the circumstances of the case the ITAT was justified in holding that interest of Rs.1,97,91,197/- paid on borrowings, capitalized in the books of account for setting up of Argon Gas Plant as a revenue expenditure, even before putting the said plant into operation ?

(II) Whether on the facts and in the circumstances of the case, the ITAT was justified in holding that the amount of Rs.7,09,10,000/- paid to Texmaco, as deferred revenue expenditure allowing the payment to be amortised for a period of 8 years ?

2. Brief facts necessary for the disposal of the Appeal may be stated thus:

The respondent/assessee is a Company engaged in manufacture of fertilizers and cement. The respondent filed its return for the Assessment year 1995-96 on 2nd November 1995, which was revised on 27th March 1997, declaring income of Rs.68,02,32,080/-. It appears that the case was selected for scrutiny and notices under Section 143(2) and 142(1) of the Income Tax Act (Act for short) were issued calling for various details, which were supplied by the respondent. The Assessing Officer (AO) by an order dated 24.03.1998 completed the assessment in the following terms:

(i) The expenditure of Rs.2,01,000/- on foreign travel of the wives of the Directors of the Company was disallowed.

(ii) Insofar as interest of Rs.1,97,91,197/- on the loan for capital borrowed for setting up of Argon Gas Plant is concerned, the assessee claimed the interest paid on such borrowing as a revenue expenditure. The AO did not agree with the claim and held that such interest on borrowed capital is part of the actual cost as defined in Section 43(1) Explanation 8 of the Act.

(iii) Insofar as payment of Rs.7,09,10,000/- to Texmaco for the purposes of having continuous supply of limestone as a raw material, the assessee claimed it as a revenue expenditure. Here again, the AO did not agree with the claim as made and added back the said amount as capital expenditure.

3. Feeling aggrieved, the assessee filed an Appeal before the CIT (Appeals). The CIT (Appeals) by an order dated 14th January 2003, confirmed the order of the AO on the issue of payment made to Texmaco as capital expenditure. However, the CIT(Appeals) allowed the expenditure incurred on the foreign travel as business expense and the interest on borrowings for setting up of Argon Gas Plant as revenue expenditure. The assessee carried the matter in Appeal before the Income Tax Appellate Tribunal (ITAT), insofar as the treatment of the payment made to Texmaco in Appeal No. 27/PNJ/2003 is concerned. The Revenue challenged the order in Appeal No. 38/PNJ/2003 against the issue of expenditure on foreign travel and interest on borrowings.

4. The ITAT by an order dated 25th September 2007, allowed the assessee's Appeal holding the payment made to Texmaco as deferred revenue expenditure thereby permitting the assessee to amortise the amount for a period of eight years. As regards the Revenue's Appeal, the ITAT relying on its earlier decision, directed the AO to delete the disallowance. As regards the issue of interest on borrowings, the ITAT upheld the order of CIT (Appeals). Feeling aggrieved the
Revenue is in Appeal.

5. As the substantial questions of law framed would show that, we are only concerned about the issue of the treatment of interest on borrowings for setting of the Argon Gas Plant and the payment made to Texmaco.

6. Insofar as the first question about the interest on borrowing for setting up of the Argon Gas Plant is concerned, it may not detain us for long, as the issue is covered by the decision of the Hon'ble Supreme Court in the case of Deputy Commissioner of Income Tax Vs. Core Health Care Ltd. 6[2008] 167 Taxman 206 (SC). In that case, the assessee Company was engaged in the business and sale of intravenous solutions. During the assessment year under consideration, the assessee had installed new machinery and claimed deduction of interest on the borrowings. The AO disallowed the amount on the ground that, during the year assessee had installed the new machinery, production was not started. That order was confirmed by the CIT (Appeals). The ITAT held that the amount could not be added as income, which order was ultimately confirmed by the Hon'ble Supreme Court. Before the Hon'ble Supreme Court following substantial question of
law arose for determination:

Whether interest paid in respect of borrowings on capital assets not put to use in the concerned financial year can be permitted as allowable deduction under Section 36(1)(iii) of the Income Tax Act 1961 ?

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