2020 (1) TMI 178 - HC - Income Tax

Interest on borrowing for setting up of the Argon Gas Plan - revenue or capital expenditure - ITAT holding that interest paid on borrowings, capitalized in the books of account for setting up of Argon Gas Plant as a revenue expenditure - HELD THAT - In R.B. Seth Moolchand Suganchand 1972 (9) TMI 8 - SUPREME COURT the assessee was granted a lease of certain areas for mining of Mica for twenty years. The mines were earlier worked out by other companies for a period of fifteen years. The question was whether the expenditure for acquiring the leasehold rights were on revenue or a capital account. The Hon'ble Supreme Court held that the lease was a long term lease and it conferred right to excavate mica, that is to remove it, grade it and pay royalty to the government in accordance with the quality of mica extracted and thus, was a revenue expenditure. On behalf of the assessee it was contended that the expenditure was for getting a specific quantity of mica in the mines which was assessee's stock in trade. On behalf of the Revenue, it was contended that the amount of lease was a capital expenditure in as much as the pillars of mica (before it is mined) cannot be said to be stock in trade. Accepting the claim made on behalf of the Revenue, the expenditure was held to be capital expenditure. ITAT could not have held that because the mine continued to belong to the Government (in fact the mineral rights would always belong to the Government) and the observation that the facts speak for themselves are insufficient to interfere with the concurrent finding of fact properly recorded by the AO and the CIT (Appeals). We find that the respondent had obtained a long term captive source of the raw material by purchase of right from Texmaco. However, at the same time the raw material was required to be won, gotten and brought to the surface and as such, cannot be said to be a stock in trade as held by the Hon'ble Supreme Court in the case of R.B. Seth Moolchand Suganchand. Consequently, the substantial question of law framed at serial no. II is answered in the negative and in favour of the appellant.

Summary

Issues Involved:
1. Treatment of interest on borrowings for setting up the Argon Gas Plant.
2. Treatment of payment made to Texmaco for mining rights as revenue or capital expenditure.

Issue-wise Detailed Analysis:

1. Treatment of Interest on Borrowings for Setting up the Argon Gas Plant:

The primary question was whether the interest of ?1,97,91,197/- paid on borrowings for setting up the Argon Gas Plant, which was capitalized in the books of account, should be treated as revenue expenditure even before the plant was operational.

The Assessing Officer (AO) disallowed the interest claim, treating it as part of the actual cost under Section 43(1) Explanation 8 of the Income Tax Act. However, the CIT (Appeals) allowed the interest as revenue expenditure, a decision upheld by the ITAT.

The High Court referred to the Supreme Court's decision in Deputy Commissioner of Income Tax Vs. Core Health Care Ltd., which held that interest on money borrowed for business purposes is a necessary item of expenditure. The Supreme Court emphasized that Section 36(1)(iii) of the Income Tax Act does not distinguish between capital borrowed for revenue or capital purposes, focusing instead on the use of the capital.

The High Court concluded that once it is shown that the borrowing was for business purposes, the interest paid on such borrowing is an allowable deduction. Thus, the substantial question of law regarding the interest on borrowings was answered against the appellant (Revenue) and in favor of the assessee.

2. Treatment of Payment Made to Texmaco for Mining Rights:

The second issue concerned the payment of ?7,09,10,000/- made to Texmaco for acquiring mining rights to ensure a continuous supply of limestone, which the assessee claimed as deferred revenue expenditure to be amortized over eight years.

The AO and CIT (Appeals) treated the payment as capital expenditure, arguing that it was spent to acquire an enduring source of raw material. They relied on the Supreme Court's decision in R.B. Seth Moolchand Suganchand, which found that expenditure for acquiring leasehold rights for mining was capital expenditure.

The ITAT, however, treated the payment as revenue expenditure, noting that the limestone quarries were not acquired by the respondent but continued to be owned by the Andhra Pradesh Government. The ITAT concluded that the payment was for ensuring a supply of raw materials necessary for running the business, thus treating it as revenue expenditure.

The High Court disagreed with the ITAT, emphasizing that the nature of the right acquired is crucial. It found that the respondent had obtained a long-term captive source of raw material that required extraction, aligning with the Supreme Court's empirical test in R.B. Seth Moolchand Suganchand. The High Court held that the expenditure was capital in nature, as it was for acquiring a benefit of an enduring nature.

Consequently, the substantial question of law regarding the payment to Texmaco was answered in the negative and in favor of the appellant (Revenue). The High Court set aside the ITAT's order on this issue, restoring the AO's decision as confirmed by the CIT (Appeals).

Conclusion:

The High Court upheld the ITAT's decision regarding the interest on borrowings, treating it as revenue expenditure. However, it reversed the ITAT's decision on the payment to Texmaco, treating it as capital expenditure. The appeal was partly allowed, with no order as to costs.