×Latest Case Laws on Income Tax by Supreme Court of India
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The only common issue in these two appeals of assessee i.e., in ITA No. 3074/Mum/2017 & 3075/Mum/2017 for the AYs 2012-13 & 2013-14 and one appeal filed by the Revenue in ITA No. 3238/Mum/2017 for the AY 2013-14 is as regards the order of the Commissioner of Income Tax(Appeals)-14, Mumbai, deciding the claim of deduction on account of percentage allocation of interest expenses u/s. 57(iii) of the Income Tax Act, 1961 [herein after referred to as ‘Act’]. For this, assessee has raised identical worded grounds in both the years and relevant grounds we are taking from 2012-13, which read as under:
“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) ought to have held that the interest ncome earned by the appellant on the funds meant for construction of the port was inextricably linked to the setting up of the project and therefore, the same ought to be treated as capital receipts and adjusted against the work in progress.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not considering the plea for allowing the entire interest expenditure as revenue expenditure.
4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in allowing only part interest expenditure claimed u/s. 57(iii) of the income Tax Act, 1961 to the extent of 22,14,514/- as against the claim of the appellant to the tune of ₹ 45,19,842/-”.
2. Similarly, Revenue has raised the following grounds:
“i. The learned CIT(A) has erred on facts and in law in allowing deduction on account of percentage allocation of interest expenses u/s. 57(iii) of the I.T. Act, 1961 without properly appreciating the factual and legal matrix as clearly brought out by the Assessing Officer in his assessment order.
ii. The learned CIT(A) has erred on facts and in law in allowing the deduction of interest expenses u/s. 57(iii) of the I.T. Act, 1961 on the loans taken without appreciating the fact that an equivalent amount has to be reduced from capital work in progress”.
3. At the outset, Ld Counsel stated that the above issue stands covered by the decision of the Co-ordinate Bench in assessee’s own case in ITA No. 758/Mum/2012, dated 12-04- 2017, wherein the Tribunal vide para 8 has considered the issue in detail as under:
“8. We have carefully considered the rival submissions, material placed before us and the orders of authorities below including the earlier decisions of the Tribunal in assessee’s own case We find merit in the contentions of the ld.AR that the facts of the instant case before us are materially same as in the assessment years 2009-10 and 2010-11 which attained finality due to withd awal of appeals which were allowed by the co-ordinate bench of the Tribunal vide odder dated 10.2.2016. The relevant extract of the ld.CIT(A)’s order for the AYs2009-10 and 2010-11 is reproduced below:
“3.6 I have duly considered the facts and submissions made in the case. I have also gone e through the decision relied upon by the appellant as mentioned abo e. These facts are not disputed that appellant borrowed the money for setting up the plant however it could not commence the business as port was not yet complete and hence these interest-bearing funds being surplus with them were utilised for making intercorporate deposits and fixed deposits on which appellant have earned interest also. As far as A.Y 2009-10 is concerned this interest was initially offered by the appellant as interest income however the return was revised declaring total income of Rs.26,38,974/-. It is noted that assessing officer after treating the income as income from other sources has assessed total income at the figure of Rs.1,39,01,050/ - only. This has happened for the reason that the interest expenses incurred on the borrowed capital were not allowable under section 36 of the I T Act due to amended provisions ofsection 36 (1) (iii) with effect from 1.04.2004.
3.7 As it is accepted principle that in considering whether the interest paid by an assessee on loans raised for acquisition of new asset, before the same was first put to use, is to be added towards the cost of the asset or the same is to be granted as a revenue expenditure for the reason that the assessee was already in. business, the provisions of section 36 (l)(iii) cannot be read in isolation but have to be read with s.43 (1). DCIT vs. Core Healthcare 251 ITR 61 (Guj) dissented from. Further S. 36(1)(iii) does not confer a deduction borrowed for the purposes of setting up a new unit even in the case of an assessee already in business. Deduction for interest on capital borrowed can be allowed only after the asset is first put to use and started generating income. Then it is implicit from Expl 8 to sec 43(1), which provides that interest payable after the asset is put to use shall not be added to the actual cost, that interest payable before the asset is put to use has to be added to the actual cost. Thus in conformity with law and accounting principles, interest paid on capital borrowed for acquisition of an asset has to capitalized and cannot be allowed as a revenue deduction till the asset is put to use. There is no distinction between capital borrowed for the setting up of a new business and the expansion of an existing business. Thus the Proviso to s. 36(1)(iii) inserted by the Finance Act 2003 is to 'curb tax avoidance' and is merely clarificatory.
3.8 Now coming to the plea of appellant that while doing so assessing officer has not allowed expenditure in urred as interest paid on these very borrowed capital's which have been utilised for making these intercorporate as well as fixed deposits, I find that this has not been disputed by assessing officer also that these funds on which interest is being paid by the appellant are having direct link with the investment made by way of fixed deposit and intercorporate deposits. What all assessing officer has said in the assessment order as reproduced above in Para 5, as is coming out from a reading of the same that the question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The assessing officer has also clearly stated that this expenditure would have been deductible as in ur ed for the purpose of business if the assessee's business had ommenced but that is not the case. In that case the assessing officer has stated that the assessee may be entitled to capitalise the interest payable by it at what the assessee cannot claim its adjustment of this expenditure against the interest assessable under section 56. It is here that I find that the conclusion drawn by assessing
officer is unsupported by these decisions as none of these decisions say that when expenses are inextricably linked, is still they cannot be claimed as per provisions of the Act against the income earned by deploying the same funds. It is altogether a different matter that before the amendment came into effect III section 36 of the act the interest earned would have been treated as a capital receipt and thus would have gone to reduce the cost of asset being capital in nature, as per the decision given by Honourable Supreme Court in the case of CIT versus Bokaro steel Ltd. However as the amendment has come into effect from first of April 2004 such interest expenditure cannot be claimed in the