2014 (1) TMI 555 - HC - Income Tax

Whether expenditure made to start a telecom business are business expenditure - Held that - Assessee borrowed money for setting up the V-SAT application and incurred the entire expenditure - After setting up the new facility or the new project, the assessee continues to manage the said project as a part and parcel of the existing project - In order to increase the said capacity, V-SAT application through satellite was adopted to transfer data at much higher speed - The expenditure was incurred for switching over to the new technology - The said expenditure incurred is revenue expenditure - The expenditure squarely falls u/s 37. Interest paid on loan borrowed for purchase of new machinery - Revenue or capital - Held that - Following Deputy Commissioner of Income-Tax vs- Core Health Care Limited 2008 (2) TMI 8 - SUPREME COURT OF INDIA - As per section 36(1)(iii) - There is no distinction between money borrowed to acquire a capital asset or a revenue asset - All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business which is carried on by the assessee in the year of account - An assessee is entitled to claim interest paid on borrowed capital provided that capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed - Actual cost of an asset has no relevancy in relation to section 36(1)(iii) - The proviso inserted in section 36(1)(iii) by the Finance Act, 2003, with effect April 1, 2004, will operate prospectively - The assessee was entitled to deduction under section 36(1)(iii) prior to its amendment by the finance Act, 2003, in relation to money borrowed for purchase of machinery even though the assessee had not used the machinery in the year of borrowing - Decided against Revenue.

Summary

Issues:
1. Nature of expenditure incurred by the assessee - revenue or capital?
2. Deductibility of interest paid on loan borrowed for setting up plant and machinery.

Analysis:
1. The primary issue in this case was whether the expenditure incurred by the assessee was of a revenue or capital nature. The Tribunal held that the expenditure, including site charges, bandwidth charges, and DOT WPC fees, for setting up a V-Sat facility was revenue expenditure as it was for improving the telephonic connectivity used in the business. The Tribunal reasoned that the expenditure was incurred to enhance communication with clients and facilitate data transfer efficiently. The Tribunal also considered the commercial sense of the advantage gained, emphasizing that the expenditure facilitated trading operations and did not involve a new business project. The High Court referred to the principle laid down in the case of Empire Jute Co.Ltd. v. Commissioner of Income-Tax to analyze the nature of the advantage gained and concluded that the expenditure qualified as revenue expenditure under Section 37 of the Income Tax Act, allowing the deduction claimed by the assessee.

2. The second issue revolved around the deductibility of interest paid on a loan borrowed for the purchase of plant and machinery. The Revenue contended that the interest payment should not be deductible as it was related to setting up a new project, constituting capital expenditure. However, the High Court referred to the case of Deputy Commissioner of Income-Tax v. Core Health Care Limited, which clarified that Section 36(1)(iii) of the Income Tax Act does not distinguish between capital borrowed for a revenue or capital purpose. The court emphasized that as long as the borrowed capital is used for business purposes, the interest paid on it is deductible. Therefore, the High Court upheld the Tribunal's decision to allow the deduction for interest paid on the loan borrowed for setting up plant and machinery.

In conclusion, the High Court dismissed the appeal filed by the Revenue, upholding the Tribunal's decision to treat the expenditure as revenue expenditure and allow the deduction claimed by the assessee. The court also affirmed the deductibility of interest paid on the loan borrowed for the purchase of plant and machinery, in line with the provisions of Section 36(1)(iii) of the Income Tax Act.