2013 (10) TMI 152 - HC - Income Tax

Allowability of deduction u/s 36(1)(iii) - interest on borrowed capial Held that - Deduction allowed relying upon the decision in the case of Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT OF INDIA , wherein it has been held 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. Allowability of premium paid on redemption of debenture Held that - As per Hon ble Supreme Court decision in the case of Madras Industrial Investments Corporation Limited v. Commission of Income tax 1997 (4) TMI 5 - SUPREME Court it has been held that 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 Decided accordingly. Allowability of deduction u/s 35D of the Income Tax Act Held that - Since last several years, the Assessing Officer granted such claim on the same consideration, therefore, such claim could not have been suddenly disallowed - Income-tax Act recognizes the principle of consistency Decided against the Revenue.

Summary

Issues involved:
I. Disallowance of deduction claimed under Section 36(1)(iii) of the Income Tax Act for money borrowed and expended before the commencement of business.
II. Disallowance of deduction on account of restructuring of term loan and spreading it over several years.
III. Allowing the expenditure claimed by the assessee under Section 35D of the Income Tax Act despite not being disallowed in earlier years.
IV. Disallowance of depreciation claimed on certain assets due to them being financial arrangements and the assessee not being engaged in leasing business.
V. Disregarding the fact that the assessee is not the owner of the assets and the agreement is primarily for securing depreciation benefits for the lessor.

Analysis:

I. The Tribunal ruled in favor of the assessee's deduction claim under Section 36(1)(iii) based on the Supreme Court's decision in the case of Deputy Commissioner of Income-tax v. Core Health Care Ltd. The deduction was allowed as the borrowing was for the expansion of the existing business, and there was a clear interconnection between the existing operations and the new plant. The Tribunal correctly permitted the deduction, irrespective of the purpose of borrowing, as interest on such borrowings is always an allowable deduction under the Act.

II. The Tribunal accepted the assessee's claim for deduction on the premium paid on redemption of debentures under Section 36(1)(iii) or alternatively under Section 37(1) of the Act. The premium amount was spread over a period of 5 years and proportionately claimed in the relevant year. The decision was supported by the precedent set by the Supreme Court in Madras Industrial Investment Corporation Ltd. v. Commissioner of Income Tax, which allowed such expenditures for business purposes.

III. The Tribunal upheld the assessee's claim under Section 35D of the Act, noting that the claim had been consistently allowed in previous years. The Tribunal relied on the principle of consistency and previous practice by the Assessing Officer in granting the claim. The Tribunal correctly held that the claim could not be suddenly disallowed after being consistently accepted in prior assessments.

IV. The Tribunal reversed the disallowance made by the Revenue authorities on account of depreciation claimed by the assessee on leased assets. The Tribunal emphasized the rule of consistency and noted that the assessee had consistently made and been granted the claim over several assessment years. The Tribunal found no error in allowing the claim, especially considering the terms of the lease agreement and the assessee's interest in the assets.

V. The Tribunal considered the assessee's claim for depreciation benefits on leased assets, emphasizing the rule of consistency and the lack of evidence to refute the terms of the lease agreement. The Tribunal directed the Assessing Officer to allow the claim, highlighting the assessee's interest in the assets and the consistent practice of granting the claim over multiple assessment years.

In conclusion, the High Court dismissed the Tax Appeal based on the detailed analysis and rulings provided for each issue raised by the Revenue, affirming the Tribunal's decisions in favor of the assessee on various deduction and allowance claims under the Income Tax Act.