Commissioner of Income Tax vs Amrit Soap Co.

Adarsh Kumar Goel, J.—The Revenue has preferred this appeal u/s 260A of the Income Tax Act, 1961 (the Act) against the order of the Income Tax Appellate Tribunal, Chandigarh Bench "A", Chandigarh, passed in I.T.A. No. 974/Chandi/2004 dated November 10, 2005, for the assessment year 2001-02 proposing to raise the following substantial questions of law:

(i) Whether, on the facts and law, the hon''ble Income Tax Appellate Tribunal was legally justified to allow interest on capital borrowed for construction of building during the pre-operative period within the meaning of Explanation 8 to Section 43 of the Income Tax Act?

(ii) Whether, on the facts and law, the hon''ble Income Tax Appellate Tribunal was legally justified to allow interest at 18 per cent, to close relatives and associated persons covered u/s 40A(2)(b) as compared to the rate of 15 per cent, paid to other creditors?

The Assessing Officer has disallowed the claim for deduction u/s 36(1)(iii) of the Act on account of interest paid on the capital borrowed for establishing a new unit. It was held that as per Explanation 8 to Section 43 of the Act, the interest paid for pre-operative expenses was not admissible. The Assessing Officer also disallowed the interest amount of Rs. 1,66,229 to persons covered u/s 40A(2)(b) of the Act on the ground that the same was excessive.

The Commissioner of Income Tax (Appeals) allowed the claim of the assessee which order has been confirmed by the Tribunal.

The Tribunal held:

The Assessing Officer, however, failed to take into consideration that the aforesaid proviso to Section 36(1)(iii) was introduced on the statute book by the Finance Act, 2003, with effect from April 1, 2004. Pertinently, there is no mention in the provision that such proviso has been made to operate retrospectively. As such, the proviso is prospective and is applicable with effect from April 1, 2004. It is not applicable to the assessment year under consideration, which happens to be the assessment year 2001-02. This point has been well considered by the learned Commissioner of Income Tax (Appeals) and having done so, the learned Commissioner of Income Tax (Appeals) has deleted the addition in question. For this reason, no fault can be found with the order of the Commissioner of Income Tax (Appeals). In Deputy Commissioner of Income Tax Vs. Core Healthcare Ltd., , it has been held that apropos Section 36(1)(iii) of the Income Tax Act, borrowing on capital or revenue account is not relevant. Where the capital was borrowed for purchase of machinery to increase production in the existing business but the machinery was not put to use in the accounting year such fact was not relevant and the interest on borrowed capital was held deductible. It was held that the assessee was under no obligation to capitalize such interest. No decision to the contrary has been cited on behalf of the Department....

We are in agreement with the learned Commissioner of Income Tax (Appeals). As pointed out by the learned Counsel for the assessee, the Assessing Officer was incorrect in making the observations which she did. The assessee did in fact pay interest at 18 per cent, to outside parties. It is also not disputed that brokerage had to be paid in advance, including which, the interest rate came to over 18 per cent, per annum, i.e., 18.02 per cent., to be exact. The contention of the learned Departmental representative that interest and brokerage are to be considered separately, does not hold water. The brokerage had to be paid on the date of receipt of loan, i.e., in advance. It was, therefore, inextricably linked with the rate of interest emanating from the loan. Also, it is a matter of record that for the immediately preceding year, interest at 18 per cent, paid to the partners stands allowed by the Assessing Officer. Moreover, it cannot be again said, as held by the hon''ble Madras High Court in the case of Commissioner of Income Tax, Madras Vs. Raman and Raman Ltd., , as rightly followed by the learned Commissioner of Income Tax (Appeals), that while allowing a particular expenditure, the Revenue cannot act as a businessman.

As regards question No. (i), it is not disputed that the judgment of the Gujarat High Court referred to hereinabove has since been affirmed by the hon''ble the Supreme Court in Deputy Commissioner of Income Tax, Ahmedabad Vs. Core Health Care Ltd., . The said question thus cannot be held to be a substantial question of law.

As regards question No. (ii), the Tribunal has recorded a finding of fact that the interest paid was not higher than the rate of interest paid to other creditors. Thus, this question cannot be held to be a substantial question of law.

The appeal is dismissed.