Commissioner of Income Tax vs Core Emballage Ltd.

K.S. Jhaveri, J.—Being aggrieved and dissatisfied with the impugned order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench ''C'' (hereinafter referred to as ''the Tribunal'') dated 28.07.2006 in ITA No. 1604/Ahd/2000 for the Assessment Year 1996-97, the revenue has preferred the present Tax Appeal.

1.1. This appeal was admitted by this Court on 20.09.2007 for consideration of the following substantial question of law:

"Whether the Appellate Tribunal is right in law and on facts in holding that the assessee was entitled to deduction of interest amounting to Rs. 26,02,575/- made u/s. 36(1)(iii) of the Act, incurred by the assessee in respect of funds borrowed for the purpose of setting up new units for the manufacturing of corrugated boxes?"

The assessee firm is engaged in the business of leasing and finance. During the course of assessment proceedings, the assessing officer the Assessing Officer rejected the claim of the assessee to allow deduction in respect of interest paid on capital borrowed for the purpose of new units for the manufacturing of corrugated boxes. On appeal the CIT (Appeals) confirmed the findings of the Assessing Officer.

2.1. On appeal before the Tribunal, by impugned order, the Tribunal directed the Assessing Officer to allow deduction to the assessee for the same. Being aggrieved and dissatisfied with the impugned order passed by the Tribunal, the revenue has preferred the present Tax Appeal for consideration of the aforesaid substantial question of law.

The question of law raised in the present Tax Appeal has already been answered by the Apex Court in the case of Deputy Commissioner of Income Tax, Ahmedabad Vs. Core Health Care Ltd., wherein the Hon''ble Supreme Court has held as under.

"Before concluding on this point we may state that in this batch of civil appeals we are concerned with the assessment years 1992-93, 1993-94, 1995-96 and 1997-98. A proviso has since been inserted in Section 36(1)(iii) of the 1961 Act. That proviso has been inserted by Finance Act, 2003 w.e.f. 1.4.2004. Hence, the said proviso will not apply to the facts of the present case. Further, in our view the said proviso would operate prospectively. In this connection it may be noted that by the same Finance Act, 2003 insertions have been made by way of proviso in Section 36(1)(viia) by the same Finance Act which is also made with effect from 1.4.2004. Same is the position with regard to insertion of a sub-section after Section 90(2) and before the Explanation. This insertion also operates w.e.f. 1.4.04. In short, the above amendments have been made by Finance Act, 2003 and all the said amendments have been made operational w.e.f. 1.4.04. Therefore, the proviso inserted in Section 36(1)(iii) has to be read as prospectively and w.e.f. 1.4.04. In this case, we are concerned with the law as it existed prior to 1.4.2004. As stated above, we are not concerned with the interpretation or applicability of the said proviso to Section 36(1)(iii) w.e.f. 1.4.04 in the present case.

In the case of Challapalli Sugars Ltd. (supra) this Court observed that interest paid on the borrowing utilized to bring into existence a fixed asset which has not gone into production, goes to add to the cost of installation of that asset. It was further observed that if the said borrowing was not "for the purpose of business" inasmuch as no business had come into existence, it must follow that it was made for the purpose of acquiring an asset which could be put to use for doing business, and hence interest paid on such borrowing would go to add to the cost of the assets so acquired.

In our view the above observations have to be confined to the facts in the case of Challapalli Sugars Ltd. (supra). 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. Vs. Commissioner of Income Tax, Madras, 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 (supra) and the judgment of the Supreme Court India Cements Ltd. (supra) 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. (supra) 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."

3.1. In the aforesaid decision the Hon''ble Supreme Court has held that an assessee is entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed and that ''actual cost'' of an asset has no relevancy in relation to section 36(1)(ii).

3.2. Similarly this Court in the case of Gujarat State Fertilizer and Chemicals Ltd. Vs. Asstt. Commissioner of Income Tax, on similar set of facts and question of law has held in favour of the assessee. This Court held therein that since there was dispute about the fact that the capital borrowed was used for the purpose of the business, the interest on the borrowed capital was deductible under section 36(1)(iii) of the Act. This Court while coming to the said conclusion has relied upon the decision of the Apex Court in the case of Core Health Care (supra).

Mr. Manish Bhatt, learned Senior Advocate appearing with Ms. Mauna Bhatt, learned advocate on behalf of the revenue is not in a position to dispute the above and is not in a position to show and/or point out any contrary decision.

Having heard learned advocates appearing on behalf of the parties and the question posed for consideration before us reproduced hereinabove and considering the decisions of the Apex Court in the case of Core Health Care (supra) as well as this Court in the case of Gujarat State Fertilizer and Chemical ltd. (supra), the question which is raised in the present appeal is required to be answered in favour of the assessee. We are not giving further elaborate reasons for the same as in the aforesaid cases, the question has already been answered in favour of the assessee. Accordingly, the question is answered in the affirmative i.e. against the appellant-revenue and in favour of the assessee. The Tribunal is right in law and on facts in holding that the assessee was entitled to deduction of interest amounting to Rs. 26,02,575/- made u/s. 36(1)(iii) of the Act, incurred by the assessee in respect of funds borrowed for the purpose of setting up new units for the manufacturing of corrugated boxes.

In view of the above, the impugned judgment and order passed by the Tribunal is confirmed. Hence, the present Tax Appeal is dismissed.