2019 (5) TMI 114 - HC - Income Tax

Disallowing the interest u/s 36(1)(iii) - borrowings to set up a new unit for manufacturing door-frames at Haryana - revenue expenses vs capital expenses - whether the new unit set up by the Appellant at Haryana for manufacture of door frames is not an expansion of existing business? - HELD THAT - Since the authorities below have consistently found against the Assessee that the interest on borrowings to the extent of 2.72 crores which had been capitalised by the Assessee itself in the Books of Accounts for setting up the Haryana Unit, there was no question of allowing the same as deductable expenditure for the Assessment year in question, as the said unit was yet to commence production. Even though the Assessee is one company and it has set up a different unit at Haryana and since the interest paid on borrowings pertains to Haryana Unit, which was a new unit set up by the same company,it cannot be construed as a mere expansion of business existing at Chennai particularly, when the Assessee has capitalised the said expansion in its Books of Accounts as consistently found by the authorities below. Therefore, the disallowance of said interest on borrowings under Section 36(1) (iii) of the Act was a natural consequence to follow. Disallowance u/s 14A - HELD THAT - No Substantial Question of law arises for consideration, as the said issue has only been remitted back to the AO by Tribunal for ascertaining actual expenses incurred by the Assessee in earning the exempted income for the Assessment Year in question. Whether the Assessee incurred anything or not is the question of fact and the same has to be ascertained by the Assessing authority the same does not give rise to any Substantial Questions of law.

Issues Involved:
1. Whether the new unit set up at Haryana for manufacturing door frames is an expansion of the existing business.
2. Disallowance of interest on borrowings to set up a new unit for manufacturing door frames at Haryana.
3. Disallowance of expenditure for earning dividend and tax-free interest income under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Expansion of Existing Business:
The primary issue was whether the new unit set up by the Assessee at Haryana for manufacturing door frames constitutes an expansion of its existing business. The Assessee argued that the Haryana unit was an extension of its Chennai unit, which manufactured narrow width strips for Hyundai Motors. The Assessee contended that the new unit was for manufacturing wide width strips and door frames for Maruti Udyog Limited, thus representing a continuity of business expansion.

However, the Tribunal and lower authorities consistently found that the Haryana unit was a new project, not an expansion of the existing business. The Tribunal noted that the Haryana unit was set up for a different product and had not commenced production during the relevant assessment year. The Tribunal concluded that the Haryana unit was a distinct business activity and not merely an expansion of the existing operations in Chennai.

2. Disallowance of Interest on Borrowings:
The second issue concerned the disallowance of interest on borrowings amounting to ?2.72 crores, which the Assessee claimed as a deduction under Section 36(1)(iii) of the Income Tax Act. The Assessee argued that the interest on borrowings for setting up the Haryana unit should be allowed as a deduction because it was part of the business expansion.

The Tribunal, however, found that the interest on borrowings had been capitalized by the Assessee in its books of accounts. Since the Haryana unit had not commenced production before the end of the assessment year, the interest on borrowings was not allowable as a deduction. The Tribunal relied on the principle that interest paid on borrowings prior to the commencement of production should be capitalized and not treated as revenue expenditure.

3. Disallowance under Section 14A:
The third issue involved the disallowance of expenditure for earning dividend and tax-free interest income under Section 14A of the Income Tax Act. The Assessee argued that Section 14A was not applicable for the assessment year 1998-1999 as it was introduced by the Finance Act, 2001, with retrospective effect from 01.04.1962.

The Tribunal remitted the matter back to the Assessing Officer to ascertain the actual expenditure incurred by the Assessee in earning the exempt income. The Tribunal noted that the provisions of Section 14A were applicable and empowered the Assessing Officer to disallow the expenditure incurred in relation to income not included in total income.

Conclusion:
The High Court dismissed the Assessee's appeal, upholding the findings of the Tribunal and lower authorities. The Court held that the Haryana unit was a new project and not an expansion of the existing business, and therefore, the interest on borrowings was not allowable as a deduction. Additionally, the Court found no substantial question of law regarding the disallowance under Section 14A, as it was a factual matter to be determined by the Assessing Officer. Consequently, the appeal was dismissed with no order as to costs.

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