2017 (11) TMI 327 - HC - Income Tax

Interest on Secured Promissory Notes disallowed - whether the said interest was in respect of the capital borrowed for the purposes of the business of the appellant? - Held that - As in case of this very assessee in Tax Appeal 2017 (11) TMI 63 - GUJARAT HIGH COURT we had held in favour of the assessee as held that for the said deduction, all that was necessary was that the money i.e. capital must have been borrowed by the assessee, that it must have been borrowed for the purpose of business and lastly, that the assessee must have paid interest on the borrowed amount. All that is germane is whether the borrowing was, or was not, for the purpose of the business. It was held that the provision makes no distinction between money borrowed to acquire a capital asset or a revenue asset - Decided against revenue Disallowing expenditure pertaining to Soda Ash and Lab Front projects as revenue expenditure - Held that - This issue is covered in favour of the assessee by virtue of judgement of this Court in case of Commissioner of Income Tax vs. Nirma Ltd. 2014 (10) TMI 396 - GUJARAT HIGH COURT the assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called lab for its captive consumption for the purpose of its existing manufacturing business. It is no doubt that the assessee is engaged in the business of manufacture of soap and the soda ash and lab so produced is used by way of captive consumption. When such facts viewed in light of the findings of the CIT (Appeals) and the Tribunal, we have no reason to interfere with the ultimate conclusion. Had it been a case of entirely a new project undertaken by the assessee as canvassed by the counsel for the Revenue, a serious question of claiming pre-operative expenditure of interest by way of revenue expenditure would arise. - Decided in favour of assessee.

Summary

Issues:
1. Whether interest on Secured Promissory Notes was rightly disallowed by the Income Tax Appellate Tribunal?
2. Whether expenditure related to Soda Ash and Lab Front projects was correctly treated as revenue expenditure by the Income Tax Appellate Tribunal?

Analysis:

Issue 1:
The first issue revolved around the disallowance of interest on Secured Promissory Notes by the Income Tax Appellate Tribunal. The court referred to a previous judgment in favor of the assessee where it was established that interest paid on capital borrowed for business purposes is deductible under section 36(1)(iii) of the Income Tax Act. The court emphasized that the crucial factor is whether the borrowing was for the purpose of business, irrespective of whether it was for acquiring a capital or revenue asset. The Revenue's objections were addressed, including the contentions that the borrowing was for capital expenditure and that the transaction was a device to avoid tax. The court upheld the deduction of interest paid on capital borrowed for business needs.

Issue 2:
The second issue dealt with the treatment of expenditure related to Soda Ash and Lab Front projects by the Income Tax Appellate Tribunal. The court relied on a precedent involving Nirma Ltd., where it was established that in cases of expansion of an existing business, the nature of borrowings as capital or revenue expenditure is irrelevant. The court highlighted that the expansion of an existing business, as opposed to starting a new unit, was a key factor in determining the allowability of such expenditure. The court affirmed that if the business expansion was part of the existing operations, the nature of borrowing becomes immaterial. The decision was made in favor of the assessee, allowing the Tax Appeal and disposing of the case accordingly.

In conclusion, the High Court of Gujarat ruled in favor of the assessee on both issues, allowing the Tax Appeal and providing detailed reasoning based on legal precedents and interpretations of relevant sections of the Income Tax Act.