2012 (9) TMI 478 - HC - Income Tax

Disallowance of interest paid on borrowed loans on a pro-rata basis - ITAT allowed it - Held that - As decided in DEPUTY COMMISSIONER OF INCOME-TAX Versus CORE HEALTH CARE LTD. 2008 (2) TMI 8 - SUPREME COURT OF INDIA interest paid on borrowed funds has to be allowed in terms of Section 36(1)(iii)which provides that deduction should be allowed in respect of payment of interest on amounts borrowed even in respect of capital used for the purposes of business or profession - As in the present facts there could be no dispute that the respondent-assessee was in the business of running business centers and the borrowed capital on which interest was paid was utilized for the purpose of constructing/establishing further business centers - thus the interest paid has to be allowed as deduction u/s 36(1)(iii) as in existence during the assessment year 1999-2000 as a transaction of borrowing is not the same as a transaction of investment - in favour of assessee. Disallowance of repairs and maintenance charges - ITAT allowed it - Held that - The appellant is in the business of running business centres which are required to be kept in proper condition with appropriate ambiance. Therefore expenses on account of repairs and maintenance is an on going process for a business such as the one run by the respondent assessee. Further the quantum of amount spent can never be a factor by itself to conclude that the expenses are of a capital nature and not expenses on revenue account. Thus the expenses are incurred not for bringing any new asset into existence and therefore the expenditure is incurred not on capital but revenue account - in favour of assessee.

Summary

Issues involved:
1. Deductibility of interest on borrowed funds for capital expenditure.
2. Treatment of expenses on repairs and maintenance as revenue or capital in nature.
3. Deletion of charging interest under Section 234D on proportionate interest paid on loans borrowed.

Analysis:

Issue 1: Deductibility of interest on borrowed funds for capital expenditure
The appeal challenged an order by the Tribunal regarding the deductibility of interest paid on borrowed funds for capital expenditure during the assessment year 1999-2000. The respondent-assessee argued that Section 36(1)(iii) of the Income Tax Act allowed deduction of interest paid on amounts borrowed for business purposes, even if utilized for capital expenditure. The Tribunal referred to the decision in Dy. Commissioner of Income Tax Vs. Core Health Care Ltd. and held that interest paid on borrowed funds for capital expenditure is deductible under Section 36(1)(iii) of the Act. The Tribunal distinguished the case of Challapalli Sugar Ltd. where interest on funds used for a fixed asset not yet in production was disallowed. The Court concluded that interest paid for establishing further business centers, a part of the existing business, is deductible as it serves the business purpose. Therefore, the Tribunal's decision was upheld, dismissing the appeal on this issue.

Issue 2: Treatment of expenses on repairs and maintenance
During the assessment year 1999-2000, the respondent-assessee claimed expenses on repairs and maintenance totaling Rs.1.39 crores. The Assessing Officer considered these expenses as capital in nature, leading to their disallowance. However, the Commissioner of Income Tax (Appeals) allowed the appeal, stating that similar expenses were allowed in previous assessment years. The Tribunal also upheld the revenue's appeal, stating that expenses for repairs and maintenance are revenue in nature, following its decision for a previous assessment year. The Court noted that ongoing expenses for maintaining business centers do not result in the acquisition of new assets and are necessary for revenue generation. Citing the case law, the Court determined that such expenses are revenue in nature and not capital expenditure. Consequently, the Tribunal's decision was upheld, dismissing the appeal on this issue.

Issue 3: Deletion of charging interest under Section 234D
As questions (a) and (b) were dismissed for not raising substantial questions of law, the consequential question (c) regarding the deletion of charging interest under Section 234D on proportionate interest paid on loans borrowed was also dismissed. The appeal was ultimately dismissed with no order as to costs.

This detailed analysis of the judgment from the Bombay High Court provides insights into the legal reasoning and application of relevant provisions in resolving the issues raised in the appeal.