Commissioner of Income Tax, Ahmedabad Vs. M/S. Core Health Care Ltd  Insc
155 (8 February 2008)
Kapadia & B. Sudershan Reddy
APPEAL NOS.3952-3955OF2002 WITH Civil Appeal Nos. 8509-10 of 2002 Commissioner
of Income Tax, Baroda Appellant (s) versus M/s. Core Health Care Ltd. ... Respondent
(s) KAPADIA, J.
the sake of convenience we state the facts occurring in Civil Appeal
Nos.3952-55 of 2002 Dy. Commr. of Income Tax, Ahmedabad v. M/s. Core Health
These civil appeals are directed against judgment and order dated 25.4.01
delivered by Gujarat High Court in Tax Appeal Nos.449 and 450 of 2000 and in
Civil Application Nos.53 and 54 of 2001 whereby the Department's appeals, under
Section 260A of the Income-tax Act, 1961, stood dismissed.
31.12.92 assessee filed its return of income for A.Y. 1992-93 declaring
"nil" income. Later on the assessee filed a revised return on 6.8.93
declaring a loss of Rs.1,11,68,543/-.
is engaged in the business of manufacturing and sale of intravenous solutions.
For the assessment year under consideration assessee claimed deduction towards
expenses aggregating to Rs.2,12,05,459/- which included interest on borrowings
the assessment year under consideration assessee had installed new machinery.
The A.O. vide assessment order dated 30.3.95 disallowed the amount of Rs.1,56,76,000/-
placing reliance on the judgment of this Court in Challapalli Sugars Ltd. &
Anr. v. Commissioner of Income-tax, A.P. and Anr. (1975) 98 ITR 167, inter alia,
on the ground that during the assessment year under consideration assessee had
installed new machinery on which production had not started.
appeal, vide order dated 15.11.96, CIT (A) confirmed the addition of interest
amount on borrowings of Rs.1,56,76,000.
both the authorities, namely, the A.O. and CIT (A) added the said amount of
Rs.1,56,76,000/- to the income of the assessee. The matter was carried in
appeal by the assessee. Vide order dated 6.6.2000 the Tribunal held that the
Department was not justified in adding Rs.1,56,76,000/- to the income of the assessee.
In other words, the Tribunal held that the A.O. was not justified in making
disallowance of Rs.1,56,76,000/- in respect of borrowings utilized for purchase
of machinery. This decision was confirmed by the High Court, hence these civil
appeals are filed by the Department.
following question of law has been placed before us for determination:
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?"
According to the Department, the assessee was not entitled to treat the
interest on borrowings as revenue expenditure. According to the Department, in
view of Explanation 8 to Section 43(1) of the Income-tax Act, 1961 (for short,
"1961 Act') the assessee was not entitled to claim deduction for interest
on borrowings, particularly, when the machines were not put to use during the
assessment year under consideration. According to the Department, provisions of
Section 36(1)(iii) of the 1961 Act were required to be harmoniously construed
along with the provisions of Explanation 8 to Section 43(1) regarding actual
to the Department provisions of Section 36(1)(iii) being general in nature had
to give way to the special provisions contained in Explanation 8 of Section
43(1) of the 1961 Act.
the outset, we may clarify that before the High Court it was not the case of
the Department that a new business was set up or commenced during the
assessment year under consideration. It was undisputed before the High Court
that three additional machines were installed by the assessee during the
assessment year under consideration for the production of intravenous injectibles.
It was not in dispute that the assessee had borrowed moneys during the
accounting year commencing from 1.4.91 to 31.3.92.
quote hereinbelow Section 36(1)(iii) and Explanation 8 to Section 43(1) of the
1961 Act which read as follow:
(1) The deductions provided for in the following clauses shall be allowed in
respect of the matters dealt with therein, in computing the income referred to
in Section 28 - (iii) the amount of the interest paid in respect of capital
borrowed for the purposes of the business or profession :
that any amount of the interest paid, in respect of capital borrowed for
acquisition of an asset for extension of existing business or profession
(whether capitalised in the books of account or not); for any period beginning
from the date on which the capital was borrowed for acquisition of the asset
till the date on which such asset was first put to use, shall not be allowed as
subscriptions paid periodically by shareholders, or subscribers in Mutual
Benefit Societies which fulfill such conditions as may be prescribed, shall be
deemed to be capital borrowed within the meaning of this clause;"
of certain terms relevant to income from profits and gains of business or
sections 28 to 41 and in this section, unless the context otherwise requires
"actual cost" means the actual cost of the assets to the assessee,
reduced by that portion of the cost thereof, if any, as has been met directly
or indirectly by any other person or authority:
that where the actual cost of an asset, being a motor car which is acquired by
the assessee after the 31st day of March, 1967, but before the 1st day of
March, 1975, and is used otherwise than in a business of running it on hire for
tourists, exceeds twenty-five thousand rupees, the excess of the actual cost
over such amount shall be ignored, and the actual cost thereof shall be taken
to be twenty-five thousand rupees.
8: For the removal
of doubts, it is hereby declared that where any amount is paid or is payable as
interest in connection with the acquisition of an asset, so much of such amount
as is relatable to any period after such asset is first put to use shall not be
included, and shall be deemed never to have been included, in the actual cost
of such asset."
Interest on moneys borrowed for the purposes of business is a necessary item of
expenditure in a business. For allowance of a claim for deduction of interest
under the said section, all that is necessary is that firstly, the money, i.e.
capital, must have been borrowed by the assessee; secondly, it must have been
borrowed for the purpose of business; and, thirdly, the assessee must have paid
interest on the borrowed amount [See: Calico Dyeing & Printing Works v. Commr.
Of Income-tax, Bombay City-II (1958) 34 ITR 265]. All that is germane is :
whether the borrowing was, or was not, for the purpose of business. The
expression "for the purpose of business" occurring in Section
36(1)(iii) indicates that once the test of "for the purpose of
business" is satisfied in respect of the capital borrowed, the assessee
would be entitled to deduction under Section 36(1)(iii) of the 1961 Act. This
provision makes no distinction between money borrowed to acquire a capital
asset or a revenue asset. All that the section requires is that the assessee
must borrow capital and the purpose of the borrowing must be for business which
is carried on by the assessee in the year of account. What sub- section (iii)
emphasizes is the user of the capital and not the user of the asset which comes
into existence as a result of the borrowed capital unlike Section 37 which
expressly excludes an expense of a capital nature. The legislature has,
therefore, made no distinction in Section 36(1)(iii) between "capital
borrowed for a revenue purpose" and "capital borrowed for a capital
purpose". An assessee is entitled to claim interest paid on borrowed
capital provided that capital is used for business purpose irrespective of what
may be the result of using the capital which the assessee has borrowed.
Further, the words "actual cost" do not find place in Section 36(1)(iii)
of the 1961 Act which otherwise find place in Sections 32, 32A etc of the 1961
Act. The expression "actual cost" is defined in Section 43(1) of the
1961 Act which is essentially a definition section which is subject to the
context to the contrary.
the case of Commissioner of Income-tax v. Associated Fibre and Rubber
Industries (P) Ltd. (1999) 236 ITR 471, the Division Bench of this Court held
though the machinery has not been actually used in the business at the time
when the assessment was made, the same has to be treated as a business asset as
it was purchased only for business purposes. In the circumstances, the interest
paid on the amount borrowed for purpose of such machinery is certainly a
stated above, the Department contended before us that the judgments of this
Court, prior to insertion of Explanation 8 in Section 43(1) of the 1961 Act,
has no application to the present case. According to the Department, Section
36(1)(iii) of the 1961 Act being general in nature has to give way to special
provisions contained in Explanation 8 to Section 43(1) of the 1961 Act.
According to the Department, in none of the earlier judgments this Court has
considered the true scope of Explanation 8 to Section 43(1) vis-`-vis Section
36(1)(iii) of the 1961 Act. We find no merit in this contention.
43 groups together all provisions in the nature of definitions or
interpretations relevant to the computation of income under the head
"Profits and Gains of Business".
43(1) defines "actual cost". The definition of "actual
cost" has been amplified by excluding such portion of the cost as is met
directly or indirectly by any other person or authority. Explanation 8 has been
inserted in Section 43(1) by Finance Act, 1986 (23 of 1986), with retrospective
effect from 1.4.74. It is important to note that the word "actual
cost" would mean the whole cost and not the estimate of cost.
cost" means nothing more than the cost accurately ascertained. The
determination of actual cost in Section 43(1) has relevancy in relation to
Section 32(depreciation allowance), Section 32A(investment allowance), Section
33(development rebate allowance), and Section 41(balancing charge).
"Actual cost" of an asset has no relevancy in relation to Section
36(1)(iii) of the 1961 Act. This reasoning flows from a bare reading of Section
43(1). Section 43 defines certain terms relevant to income from profits and
gains of business and, therefore, the said section commences with the words
"In Sections 28 to 41 and unless the context otherwise requires"
cost" shall mean the actual cost of the assets to the assessee, reducing
by that portion of the cost thereof, if any, as has been met directly or
indirectly by any other person or authority. In other words, Explanation 8
applies only to those Sections like Sections 32, 32A, 33 and 41 which deal with
concepts like Depreciation. The concept of Depreciation is not there in Section
36(1)(iii). That is why the legislature has used the words "unless the
context otherwise requires". Hence, Explanation 8 has no relevancy to
Section 36(1)(iii). It has relevancy to the aforementioned enumerated sections.
in our view Explanation 8 has no application to the facts of the present case.
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.
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
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.
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. v. Commissioner of Income-tax, Madras (1966) 60
ITR 52 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.
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.
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.
For the above reasons, we hold that A.O. was not justified in making
disallowance of Rs.1,56,76,000/- in respect of borrowings utilized for purchase
the above question is answered in favour of the assessee and against the
Apart from the above question under Section 36(1)(iii), the present civil
appeals are filed by the Department against the decision of the High Court
whereby the High Court has dismissed Civil Application Nos.53 and 54 of 2001
filed by the Department. It may be noted that during the pendency of Tax Appeal
Nos.449 and 450 of 2000, the Department had moved the above two civil
applications for amendment of its Memo of Appeal raising substantial questions
of law, namely
advertisement expenses incurred by the assessee to create a brand image with
enduring benefit are allowable as revenue expenditure;
whether the Tribunal had erred in granting deduction under Section 35D
regarding short-term loan, in view of Explanation to Section 35D(3) which
refers only to long-term borrowings;
the Tribunal had erred in directing deduction under Section 80-HH and 80-I on
the miscellaneous income of Rs.26,64,113 being income on sale of empty
Although the Department had moved the said Civil Application Nos.53 and 54 of
2001 during the pendency of Tax Appeal Nos.449 and 450 of 2000 well within
limitation the High Court without answering the above three questions summarily
rejected Civil Application Nos.53 and 54 of 2001.
of the view that the High Court had erred in dismissing the above two civil
applications for amendment of the Memo of Appeal in Tax Appeal Nos.449 and 450
of 2000. In our view the above three questions are substantial questions of law
and, therefore, the High Court ought to have decided those questions.
Accordingly, we remit the above three questions to the High Court for fresh
consideration by it in accordance with law. Accordingly, Civil Appeal
Nos.3952-55 of 2002 and Civil Appeal Nos.8509-8510 of 2002 filed by the Department
are partly allowed with no order as to costs.