2013 (7) TMI 336 - HC - Income Tax

Interest u/s 36(1)(iii) - Loans borrowed for expansion of business - New unit established in the existing premises under the same management and finance control - Held that - main expenditure incurred was in the nature of salary, wages, repairs, maintenance, design and engineering fee, travelling and other expenses of administrative nature. Certain part of the expenditure was also made for the construction of additional shades, building to keep machines and products safely. But, no separate accounts were maintained - The unit, which the appellant has set up had inextricable linkage with the existing business of the appellant. The proposed business was not an individual business but vertical expansion of the present business. Thus, the test of existing business with common administration and common fund is clearly met - It is a case of interest paid on the borrowed capital - Interest paid on the loan borrowed from the IDBI will have to be treated as revenue in nature and accordingly, the same is allowable - Following decision of CIT vs. Tarai Development Corporation Ltd. 1993 (8) TMI 64 - ALLAHABAD High Court , Rama Synthetics India Ltd. vs. CIT 2009 (9) TMI 635 - Delhi High Court - Decided against Revenue.

Summary

Issues: Allowability of interest under Section 36(1)(iii) of the Income-Tax Act, 1961 for the assessment year 2000-01.

Issue Analysis:

1. Background and Initial Assessment:
The appellant, a public limited company engaged in manufacturing, appealed against the Tribunal's order allowing interest under Section 36(1)(iii) of the Act for the assessment year 2000-01. The original assessment was challenged before the Tribunal, which remanded the matter to the Assessing Officer (AO) to examine the interest's allowability.

2. Appellant's Argument:
The Department contended that the interest was not allowable as it pertained to a new unit and business expansion, which falls outside Section 36(1)(iii) of the Act. The AO disallowed a portion of the interest, which was upheld by the first appellate authority but deleted by the Tribunal. The Department argued that the borrowed funds were not appropriately bifurcated and the expansion should be treated as a capitalized expenditure, eligible only for depreciation.

3. Respondent's Argument:
The assessee justified the Tribunal's decision, emphasizing that the borrowed funds were fully utilized for the expansion of the existing business, under the same management and finance control. Citing legal precedents, the respondent argued that interest on borrowed capital for business purposes is allowable, provided the funds are used for business expansion.

4. Legal Interpretation and Precedents:
The Court analyzed Section 36(1)(iii) of the Act, which allows interest paid on capital borrowed for business purposes to be deducted. The distinction between capital and revenue expenditure was crucial, with the Court referring to past judgments like Atherton vs. British Insulated and Helsby Cables Ltd., highlighting that expenditure for starting a new business is capital in nature, while expenses for expanding an existing business can be treated as revenue expenditure.

5. Judgment and Conclusion:
After examining the facts and circumstances, the Court upheld the Tribunal's order, deeming the interest paid on borrowed funds for business expansion as revenue expenditure. The Court found that the borrowed funds were exclusively used for business expansion, resulting in increased production capacity. Consequently, the interest paid was considered allowable under Section 36(1)(iii) of the Act. The appeal by the appellant-revenue was dismissed, affirming the Tribunal's decision.

6. Final Outcome:
The Court sustained the Tribunal's order, concluding that the interest on borrowed funds for business expansion was revenue in nature and thus allowable under Section 36(1)(iii) of the Income-Tax Act, 1961 for the assessment year 2000-01. The appeal by the Department was dismissed at the admission stage.