2015 (1) TMI 400 - HC - Income Tax

Disallowance of Interest u/s 36(1)(iii) - Capital expenditure or Revenue Expenditure - Held that - Section 36(1)(ii) of the Act makes no distinction between money borrowed to acquire a capital asset or a revenue asset and that all that the section requires is that that the assessee must borrow capital and the purpose of borrowing must be for business which is carried on by the assessee in the year of account. - amount was revenue expenditure allowable u/s. 36(1)(iii) of the IT Act 1961 and further in allowing the claim of the assessee for the deduction of the said amount u/s 36(1)(iii) of the Act, when the interest attributable till the asset is put to use for the first time is required to be included in the actual cost as per Section 43 of the Act. - Following decision of Commissioner of Income Tax vs. Core Health Care Ltd. reported in 2008 (2) TMI 8 - SUPREME COURT OF INDIA - Decided against Revenue.

Summary

Issues Involved:
1. Deletion of disallowance of interest on borrowings under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Interpretation of Explanation 8 to Section 43(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Interest on Borrowings under Section 36(1)(iii):

The primary issue in the appeals was whether the ITAT was correct in deleting the disallowance of interest on borrowings claimed by the assessees as revenue expenditure under Section 36(1)(iii) of the Income Tax Act, 1961. The Assessing Officer had disallowed these claims, considering the interest expenses as capital expenditure since they were incurred for acquiring capital assets. However, the CIT(A) and ITAT allowed the claims, treating the interest expenses as revenue expenditure.

The Court referred to the Supreme Court's decision in Deputy Commissioner of Income Tax vs. Core Health Care Ltd., which clarified that Section 36(1)(iii) does not differentiate between borrowings for acquiring capital assets or revenue assets. The Supreme Court held that the only requirement under Section 36(1)(iii) is that the borrowed capital must be used for business purposes. The judgment emphasized that the transaction of borrowing is distinct from the transaction of investment in assets, and the interest on borrowed capital qualifies as revenue expenditure regardless of the purpose of the borrowing.

2. Interpretation of Explanation 8 to Section 43(1):

The appeals also raised the issue of whether the interest attributable to the period before an asset is put to use should be included in the actual cost of the asset as per Explanation 8 to Section 43(1). The Revenue argued that such interest should be capitalized and not allowed as revenue expenditure.

The Court again referred to the Supreme Court's decision in Core Health Care Ltd., which stated that the proviso to Section 36(1)(iii) inserted by the Finance Act, 2003, effective from 1.4.2004, does not apply retrospectively. Hence, for the relevant assessment years in these appeals, the interest on borrowed capital used for business purposes should be treated as revenue expenditure, irrespective of whether the borrowing was for acquiring a capital asset.

The Court concluded that the ITAT was justified in deleting the disallowance of interest on borrowings and allowing the claims as revenue expenditure under Section 36(1)(iii). The Court affirmed that the interest attributable to the period before the asset is put to use should not be included in the actual cost of the asset for the relevant assessment years.

Conclusion:

The Court answered the questions of law in favor of the assessees, holding that the ITAT was right in deleting the disallowance of interest on borrowings and treating it as revenue expenditure allowable under Section 36(1)(iii) of the Income Tax Act, 1961. The appeals were dismissed, and the ITAT's orders were confirmed.