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2016 (5) TMI 723 - HC - Income TaxPre commencement interest on capital borrowed for a new glass manufacturing unit - Revenue or capital expenditure - ITAT allowed as revenue - Held that - CIT (A) and the Tribunal have rendered a finding of fact that the Respondent Assessee was carrying on business of glass manufacturing plant at Jambusar in Gujarat and setting up the new business was a mere expansion of its existing business. Further, both the Authorities also found that as a matter of fact there was a functional integrity between all the three business viz. Pharma business, bulk drugs business and glass manufacturing business with interlinking of management and funds. This finding of fact rendered by the Tribunal has not been shown to be perverse or arbitrary. Moreover the finding of fact rendered by the CIT(A) and the Tribunal about glass manufacturing being existing business and commonality of management and funds not being shown to be perverse, the question as formulated does not give rise to any substantial question of law. Thus, not entertained. Expenses pertaining to closed down Thane unit incurred after closure of unit - ITAT allowed the claim u/s 37 - Held that - CIT (A) and the Tribunal have rendered a concurrent finding of fact that the closure of the manufacturing unit at Thane was on account of statutory compulsion. Further, the business of manufacturing at Thane had not ceased but had been shifted to other locations/units of the RespondentAssessee. Moreover the CIT (A)as well as the Tribunal had by applying the decision of the Apex Court in K. Ravindranathan Nair (2000 (11) TMI 3 - SUPREME Court ) concluded that the business of manufacturing drugs at different units constituted a single business and closing down of one unit and shifting its activity to other units, would be expenditure incurred was for the purposes of business. The closure of Thane unit was out of business necessity arising out of statutory compulsion. Thus the expenditure was incurred with regard to carrying on its business and thus allowable under Section 37(1) of the Act. Investment in tax free bonds out of the own funds - non utilization of borrowed funds - Held that - We find that the CIT(A) as well as the Tribunal have come to concurrent findings of fact that the investment made in the shares, mutual funds and tax free bonds were not made out of borrowed funds but out of the RespondentAssessee s own funds. The Revenue has not been able to show that the aforesaid finding of fact is in any manner perverse.In the above view, the question as formulated does not give rise to any substantial question of law
Issues Involved:
1. Justification of Tribunal in allowing aggregated expenses as revenue expenditure. 2. Justification of Tribunal in allowing pre-commencement interest on capital borrowed as revenue expenditure. 3. Justification of Tribunal in allowing expenses pertaining to a closed-down unit under Section 37 of the Income Tax Act, 1961. 4. Justification of Tribunal in holding that entire investment in tax-free bonds was made out of own funds. Issue-wise Detailed Analysis: 1. Aggregated Expenses as Revenue Expenditure: - The Tribunal allowed the aggregated expenses of ?15,25,73,928 on account of VRS payments, gratuity payments, and other terminal benefits as revenue expenditure. - The Revenue's counsel acknowledged that this issue is concluded against the Revenue by the decision of the Court in CIT Vs. Bhor Industries Ltd. 264 ITR 180. - Consequently, this question does not give rise to any substantial question of law and was not entertained. 2. Pre-commencement Interest on Capital Borrowed: - The Respondent-Assessee, engaged in manufacturing pharmaceuticals, bulk drugs, and glass bottles, set up a new glass manufacturing plant at Jambusar, Gujarat. - The Assessee claimed interest of ?21.70 crores on loans for setting up the new plant as revenue expenditure. - The Assessing Officer capitalized the interest based on Explanation (8) to Section 43(1) of the Act, considering it should be capitalized until the asset is first put to use. - The CIT (A) and the Tribunal held that the new plant was an expansion of the existing business, allowing the interest as a deduction under Section 36(1)(iii) of the Act. - The Supreme Court's decision in Deputy Commissioner of Income Tax Vs. Core Health Care Ltd. 298 ITR 194 clarified that Explanation 8 to Section 43(1) does not apply to Section 36(1)(iii), supporting the Tribunal's decision. - The Tribunal's finding that the new plant was an expansion of the existing business and the interlinking of management and funds was upheld, and the question was not entertained as it did not raise a substantial question of law. 3. Expenses Pertaining to Closed-down Unit: - The Respondent-Assessee closed its Thane plant due to failure to meet FDA standards, incurring expenses of ?2.84 crores for shifting operations to other units. - The Assessing Officer disallowed the expenses, considering them as incurred for closing down the business. - The CIT (A) and the Tribunal found that the closure was due to statutory compulsion and the business was shifted to other units, allowing the expenses under Section 37 of the Act. - The decision was supported by the Supreme Court's ruling in K. Ravindranathan Nair Vs. Commissioner of Income Tax 247 ITR 178. - The question was not entertained as it did not raise a substantial question of law, given the concurrent findings of fact and the application of the Apex Court's decision. 4. Investment in Tax-free Bonds: - The Respondent-Assessee invested ?38.32 crores in shares, mutual funds, and tax-free bonds. - The Assessing Officer attributed 57% of the investment to borrowed funds and disallowed interest of ?1.32 crores. - The CIT (A) found that the investments were made from fresh capital issued at a premium, not borrowed funds, and deleted the disallowance. - The Tribunal upheld the CIT (A)'s findings, noting the Revenue's inability to controvert the findings. - The question was not entertained as it did not raise a substantial question of law, with the findings of fact not shown to be perverse. Conclusion: The appeal was dismissed with no order as to costs, as none of the questions raised substantial questions of law, given the concurrent findings of fact and the application of relevant legal precedents.
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