Gujarat H.C : the Tribunal was right in law in allowing an expenditure of Rs.10.50 Lacs as an expenditure incurred on feasibility study of a project which was ultimately abandoned

High Court Of Gujarat

DCIT, Bharuch Circle vs. Gujarat Narmada Valley Fertilizers Co. Ltd.

Section : 37(1)

Akil Kureshi And Ms. Sonia Gokani, JJ.

Tax Appeal No. 516 Of 2012

March  12, 2013

ORDER

Akil Kureshi, J – Revenue is in appeal against the judgment of the Income-tax Appellate Tribunal, Ahmedabad (“Tribunal” for short) dated 30th December, 2011, raising following questions for our consideration.

I “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in allowing an expenditure of Rs.10.50 Lacs as an expenditure incurred on feasibility study of a project which was ultimately abandoned ?”

II “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that premium amounting to Rs. 23,80,000/- paid on redemption of debentures has to be allowed in the year of payment and not following the ratio of the Honb’le Supreme Court’s decision in the case of Madras Industrial Investment Corporation Ltd. v. CIT[1997] 225 ITR 802, which is directly applicable to the facts of the case ?”

III “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the disallowance of the claim of deduction on account of restructuring of term loan amounting to Rs. 78,54,102/- as the restructuring has resulted into enduring benefit, it has to be spread over a period of several years and not following the ratio of the Hon’ble Supreme Court’s in the case of Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802, which is directly applicable to the facts of the case ?”

IV “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in not deciding the issue on the merits and allowing the expenditure of Rs. 74,23,000/- claimed by the assessee u/s.35D of the I.T. Act on the ground that such claim was not disallowed in earlier years and thereby allowing to perpetuate an error on the face of very clear and undisputed provision of law ?”

V “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the disallowance made of Rs. 9,00,10,279/- being amount of deduction claimed u/s.36(1)(iii) of the I.T. Act in respect of money borrowed and expended prior to the commencement of business ignoring the fact that proviso added to Section 36(1)(iii) of the I.T. Act was only classificatory in nature and was applicable to all pending proceedings ?”

VI “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the disallowance made on account of depreciation of Rs. 1,61,23,149/- claimed on certain assets since the said transactions are mere a financial arrangements and that the assessee is not engaged in leasing business ?”

VII “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in law in ignoring the fact that the assessee is not the owner of the assets and that the essence of the agreement is drawn for securing depreciation benefits for the lessor ?”

2. With respect to Question [I], counsel for the Revenue pointed out that the Tribunal had relied solely on the decision in case of assessee for the earlier years, which has been challenged by the Revenue in Tax Appeal No. 2033 of 2009. Such Tax Appeal is admitted. This question, therefore, in our opinion requires to be considered .

3. With respect to Question [II], we noticed that the assessee had paid premium of Rs. 23.80 lakhs on redemption of debentures. The Tribunal accepted assessee’s claim of deduction on such amount. Assessee had contended that such deductions would be available under Section 36(1)(iii) of the Income-tax Act, 1961, or alternatively under Section 37(1) of the Act. Such premium which was otherwise spread-over a period of 5 years and was amortized over such period, is proportionately claimed in the year under consideration.

3.1 In our view, the Tribunal correctly accepted assessee’s version; particularly in view of the decision of the Apex Court in case of Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340. Learned counsel for the assessee brought to our notice a decision of this Court dated 1st February, 1998 rendered in Income-Tax Application No. 259 of 1998 in case of CIT v. Anil Starch Products Ltd., wherein, it is observed as under :-

“4. The question arose for consideration before their Lordship in Supreme Court in Madras Industrial Investments Corporation Limited v. Commissioner of Income tax225 ITR 802. it was a case where the appellant company had issued debentures in December 1966, at a discount. The total discount on the issue of Rs.1.5 crores amounted to Rs.3.00 lakhs. For the assessment year 1968-69, the company wrote off Rs.12,500 out of the total discount of Rs.3 lakhs being the proportionate amount of discount for the period of six months ending with June 30, 1967, taking into account the period of 12 years which was the period of redemption and dividing the amount of Rs.3 lakhs over the period of 12 years. The Income-tax Officer disallowed the claim but the appellate Assistant Commissioner allowed the deduction of Rs. 12,500. The Tribunal held that the entire expenditure of Rs. 3,00,000 was allowable as expenditure for the year of issue incurred for the purpose of business. On a reference, the High Court noted that out of the total discount of Rs. 3,00,000 an amount of Rs.12,500 had been allowed which the Department had not challenged. Hence, the High Court was concerned only with the balance amount of Rs. 2,87,500 which the High Court held, could not be considered as expenditure. On appeal to the Supreme Court, the Supreme Court held that the liability to pay the discounted amount over and above the amount received for the debentures was a liability incurred by the company for the purposes of business in order to generate funds of its business activities. It was therefore revenue expenditure.

5. Thus, according to the law laid down by the Supreme Court, where the company undertakes to pay more amount than what it has borrowed, and liability to pay the excess amount undertaken to be paid by the company to fulfil its needs for borrowed money is an allowable expenditure under section 37 of the Income Tax Act.

This question, therefore, is not required to be considered.

4. With respect Question-III, the assessee claimed deduction of a sum of Rs. 78.54 lakhs [rounded off] expended towards restructuring of the term loan by way of charges of Chartered Accountants’ firm and other related expenditure. The case of the Revenue was that by such restructuring of the loans, the assessee would earn enduring benefit spreading over a long period of time and the expenditure incurred in gaining such enduring benefit must be treated as capital expenditure.

4.1 The Tribunal, however, upheld the assessee’s claim for deduction of the said sum on the ground that pre-payment of amount of loan which is an act of borrowing the amount was incidental to carrying on the assessee’s business. The assessee had already obtained a loan, which cannot be treated as an asset, or advantage of enduring nature. Any expenditure incurred to secure money at lower interest would therefore, have to be allowed as a business expenditure. The Tribunal relied on the decision of the Apex Court rendered in case of India Cements Ltd. v. CIT [1966] 60 ITR 52.

4.2 We are of the view that the Tribunal correctly judged the issue. In case of India Cements Ltd. (supra), the Supreme Court held and observed that the act of borrowing money was incidental to carrying on of the business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure so made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained. Thus, when obtaining of a loan is not considered as an asset or an advantage of enduring nature, any expenditure incurred for reducing such loan burden or securing the borrowings, on more advantageous condition, cannot be seen as resulting into a benefit of enduring nature so as to be categorized as a capital expenditure.

5. Question IV pertains to claim of deduction of the assessee under Section 35D of the Act. In the year under consideration, such claim was made to the extent of Rs. 87.73 lakhs. The Assessing Officer restricted it to Rs. 13.50 lakhs on the ground that only eligible expenses are allowed to be spread over under Section 35D of the Act and therefore, expenses only to the extent that have nexus to the eligible projects are admissible.

5.1 Tribunal, however, noted that in last seven years, no such disallowances were made. Referring to and relying on the decision in case of Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC), the Tribunal directed that such benefit be granted.

5.2 It is an undisputed position that claim under Section 35D of the Act did not arise for consideration for the first time. Since last several years, the Assessing Officer had granted such claim on the same consideration. The Tribunal therefore, correctly held that such claim could not have been suddenly disallowed. We may refer to a decision of this Court in case of Saurashtra Cement & Chemical Industries Ltd. v. CIT [1980] 123 ITR 669/[1979] 2 Taxman 22, wherein, in the context of successive claim of tax holiday, the Court held that the ITO was not justified in refusing to continue the benefit of such tax holiday granted to the assessee in the earlier years, without disturbing the relief granted for the initial years. We are conscious that the issue is not identical in nature. However, the Income-tax Act recognizes the principle of consistency. In the present case, for as many as seven years, previously the Assessing Officer did not dispute certain claims and therefore, the Tribunal correctly interpreted that the Assessing Officer has sought to reopen the issue.

6. Question-V pertains to deduction claimed by the assessee under Section 36(1)(iii) of the Act. The Assessing Officer disallowed claim, upon which ultimately, the Tribunal in the impugned judgment, relying on the decision of the Supreme Court in case of Dy. CIT v. Core Health Care Ltd. [2008] 298 ITR 194/167 Taxman 206, ruled in favour of the assessee.

6.1 We may notice that the claim of interest in question was with respect to money borrowed for expansion of business for an existing plant of the assessee-Company. Before the authorities, the assessee had contended that there was complete inter-acting, inter-dependence and inter connection between the existing business operations and the new plant being installed. It was pointed out that the Department had allowed such deduction in the earlier years.

6.2 Quite independent of the decision of the Apex Court in case of Core Health Care Ltd. (supra), we are of the opinion that the Tribunal correctly permitted the deduction. Core Health Care Ltd. (supra) does lay down a proposition that irrespective of purpose of borrowing – whether for capital or revenue expenditure, interest on such borrowings is always an allowable deduction under Section 36(1)(iii) of the Act.

6.3 In the present case, therefore, when it was found that the machinery being purchased through borrowed funds was not for the purpose of new business but expansion of the existing business claim of interest was rightly held allowable.

7. With respect to questions-VI and VII, we notice that the issues pertain to disallowance of depreciation claimed by the assessee on the ground that transactions of lease were questioned by the Assessing Officer. The Assessing Officer’s stand appears to be that the assessee did not retain its interest in the leased out equipments. The Tribunal reversed the order of the Revenue authorities, making following observation :-

“35. We have heard the rival contentions and perused the facts of the case. As regards reliance on the decision of he Hon’ble Supreme Court in the case of Asea Brown Boveri Ltd. (supra) by the learned DR, the arguments of the learned DR that the assessee had purchased the equipments for the economic life of the plant itself and not more than that. As a matter of fact, it is not a case, as is appearing from different clauses of the lease deed that the equipments leased will be returned back to the lessor after the expiry of the lease. Nothing has been brought to disapprove the said clauses of the lease deed by any of the authorities below or by the learned DR. The learned DR could not prove that in fact the assessee is only a financier and is not interested in the assets and therefore, it cannot be said as full payout lease. Therefore, in the circumstances and facts of the case, the arguments made by the learned DR cannot be accepted and following the rule of consistency, the assessee deserves to be allowed the claim and we direct the AO accordingly to allow the claim of the assessee.

The order of the learned CIT(A) is reserved. Thus, Ground No.12 of the assessee’s appeal is allowed.

7.1 From the above, we noticed that one of the prime factors which weighed with the Tribunal was the rule of consistency. Learned counsel for the assessee rightly pointed out that such claim did not arise for consideration for the first time, but, is spread over to the entire period between A.Ys. 1996-97 to 1999-2000. Such claim was made by the assessee and duly granted by the Assessing Officer. In that view of the matter, in our opinion, the Tribunal committed no error.

8. In view of the above discussion, Tax Appeal is admitted for consideration of Question No. [I] only :

“Whether on the facts and in the circumstances of the case, the Tribunal was right in law in allowing an expenditure of Rs. 10.50 Lacs as an expenditure incurred on feasibility study of a project which was ultimately abandoned ?”

[Citation : 356 ITR 460]