Supreme Court Of India
DCIT vs. Core Health Care Ltd.
Section 36(1)(iii), 43(1), Expln. 8, 260A
Asst. Year 1992-93, 1993-94, 1995-96 & 1997-98
S.H. Kapadia & B. Sudershan Reddy, JJ.
Civil Appeal Nos. 3952 to 3955 of 2002
8th February, 2008
Counsel Appeared :
P. Vishwanatha Shetty with T. Srinivasa Murthy, Gaurav Agrawal & B.V. Balaram Das, for the Appellant : S. Ganesh with Amar Dave & Rustom B. Hathikhanawala, for the Respondent
JUDGMENT
S.H. KAPADIA, J. :
For the sake of convenience we state the facts occurring in Civil Appeal Nos. 3952 to 3955 of 2002—Dy. CIT vs. Core Health Care Ltd.
These civil appeals are directed against judgment and order dt. 25th April, 2001 delivered by Gujarat High Court in Tax Appeal Nos. 449 and 450 of 2000 and in Civil Appln. Nos. 53 and 54 of 2001 whereby the Department’s appeals, under s. 260A of the IT Act, 1961, stood dismissed.
On 31st Dec., 1992 assessee filed its return of income for asst. yr. 1992-93 declaring “nil” income. Later on the assessee filed a revised return on 6th Aug., 1993 declaring a loss of Rs. 1,11,68,543. Assessee company 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 of Rs. 1,56,76,000. During the assessment year under consideration assessee had installed new machinery. The AO vide assessment order dt. 30th March, 1995 disallowed the amount of Rs. 1,56,76,000 placing reliance on the judgment of this Court in Challapalli Sugars Ltd. & Anr. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC), inter alia, on the ground that during the assessment year under consideration assessee had installed new machinery on which production had not started. On appeal, vide order dt. 15th Nov., 1996, CIT(A) confirmed the addition of interest amount on borrowings of Rs. 1,56,76,000. Therefore, both the authorities, namely, the AO 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 dt. 6th June, 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 AO 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.
4. The following question of law has been placed before us for determination :
“Whether 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 s. 36(1)(iii) of the IT Act, 1961 ?”
5. 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 Expln. 8 to s. 43(1) of the IT 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 s. 36(1)(iii) of the 1961 Act were required to be harmoniously construed along with the provisions of Expln. 8 to s. 43(1) regarding actual cost. According to the Department provisions of s. 36(1)(iii) being general in nature had to give way to the special provisions contained in Expln. 8 of s. 43(1) of the 1961 Act.
6. At 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 1st April, 1991 to 31st March, 1992.
7. We quote hereinbelow s. 36(1)(iii) and Expln. 8 to s. 43(1) of the 1961 Act which read as follow : “36. Other deductions—(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 s. 28— (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Provided 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 deduction. Explanation : Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;” “43. Definitions of certain terms relevant to income from profits and gains of business or profession.—In ss. 28 to 41 and in this section, unless the context otherwise requires (1) ‘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 : Provided 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. Explanation 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.”
8. 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 vs. CIT (1958) 34 ITR 265 (Bom)]. 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 s. 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 s. 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-s. (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 s. 37 which expressly excludes an expense of a capital nature. The legislature has, therefore, made no distinction in s. 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 s. 36(1)(iii) of the 1961 Act which otherwise find place in ss. 32, 32A, etc. of the 1961 Act. The expression “actual cost” is defined in s. 43(1) of the 1961 Act which is essentially a definition section which is subject to the context to the contrary.
9. In the case of CIT vs. Associated Fibre & Rubber Industries (P) Ltd. (1999) 152 CTR (SC) 21 : (1999) 236 ITR 471 (SC), the Division Bench of this Court held as follows : “Even 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 deductible amount.”
10. As stated above, the Department contended before us that the judgments of this Court, prior to insertion of Expln. 8 in s. 43(1) of the 1961 Act, has no application to the present case. According to the Department, s. 36(1)(iii) of the 1961 Act being general in nature has to give way to special provisions contained in Expln. 8 to s. 43(1) of the 1961 Act. According to the Department, in none of the earlier judgments this Court has considered the true scope of Expln. 8 to s. 43(1) vis-a-vis s. 36(1)(iii) of the 1961 Act. We find no merit in this contention. Sec. 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”. Sec. 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 s. 43 (1) by Finance Act, 1986 (23 of 1986), with retrospective effect from 1st April, 1974. It is important to note that the word “actual cost” would mean the whole cost and not the estimate of cost. “Actual cost” means nothing more than the cost accurately ascertained. The determination of actual cost in s. 43(1) has relevancy in relation to s. 32 (depreciation allowance), s. 32A (investment allowance), s. 33 (development rebate allowance), and s. 41(balancing charge). “Actual cost” of an asset has no relevancy in relation to s. 36(1)(iii) of the 1961 Act. This reasoning flows from a bare reading of s. 43(1). Sec. 43 defines certain terms relevant to income from profits and gains of business and, therefore, the said section commences with the words “In ss. 28 to 41 and unless the context otherwise requires” “actual 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, Expln. 8 applies only to those sections like ss. 32, 32A, 33 and 41 which deal with concepts like depreciation. The concept of depreciation is not there in s. 36(1)(iii). That is why the legislature has used the words “unless the context otherwise requires”. Hence, Expln. 8 has no relevancy to s. 36(1)(iii). It has relevancy to the aforementioned enumerated sections. Therefore, in our view Expln. 8 has no application to the facts of the present case.
11. Before concluding on this point we may state that in this batch of civil appeals we are concerned with the asst. yrs. 1992-93, 1993-94, 1995-96 and 1997-98. A proviso has since been inserted in s. 36(1)(iii) of the 1961 Act. That proviso has been inserted by Finance Act, 2003 w.e.f. 1st April, 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 s. 36(1)(viia) by the same Finance Act which is also made w.e.f. 1st April, 2004. Same is the position with regard to insertion of a sub-section after s. 90(2) and before the Explanation. This insertion also operates w.e.f. 1st April, 2004. In short, the above amendments have been made by Finance Act, 2003 and all the said amendments have been made operational w.e.f. 1st April, 2004. Therefore, the proviso inserted in s. 36(1)(iii) has to be read as prospectively and w.e.f. 1st April, 2004. In this case, we are concerned with the law as it existed prior to 1st April, 2004. As stated above, we are not concerned with the interpretation or applicability of the said proviso to s. 36(1)(iii) w.e.f. 1st April, 2004 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. CIT (1966) 60 ITR 52 (SC) 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, s. 36(1)(iii) of the 1961 Act has to be read on its own terms. It is a code by itself. Sec. 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 s. 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. Conclusions :
For the above reasons, we hold that AO was not justified in making disallowance of Rs. 1,56,76,000 in respect of borrowings utilized for purchase of machines. Accordingly, the above question is answered in favour of the assessee and against the Department.
Apart from the above question under s. 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 Appln. 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 memorandum of appeal raising substantial questions of law, namely : (a) whether advertisement expenses incurred by the assessee to create a brand image with enduring benefit are allowable as revenue expenditure; (b) whether the Tribunal had erred in granting deduction under s. 35D regarding short-term loan, in view of Explanation to s. 35D(3) which refers only to long-term borrowings; (c) whether the Tribunal had erred in directing deduction under ss. 80HH and 80-I on the miscellaneous income of Rs. 26,64,113 being income on sale of empty containers ? Although the Department had moved the said Civil Appln. 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 Appln. Nos. 53 and 54 of 2001. We are of the view that the High Court had erred in dismissing the above two civil applications for amendment of the memorandum 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 to 3955 of 2002 and Civil Appeal Nos. 8509 and 8510 of 2002 filed by the Department are partly allowed with no order as to costs.
[Citation : 298 ITR 194]
