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TMI Blog2005 (6) TMI 220X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) issued. On 31st March, 2000, assessee filed a revised return. In the revised return, assessee made a claim for deduction on account of interest on loan amounting to Rs. 84,64,767 under section 36(1)(iii). The said interest was not debited to the profit and loss account but the same had been capitalized. According to the assessee, the claim was made on the basis of the judgment of Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715, which has been confirmed by the Hon'ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377. The Assessing Officer, however, disallowed the claim on the ground that assessee has acquired new plant and machinery and building and, therefore, interest for the loan worth Rs. 1016 lakhs which was utilized for creating capital assets was not permissible. The CIT(A) has confirmed the view of the Assessing Officer. The Assessing Officer as well as the CIT(A) have sought to distinguish the facts in the case of Alembic Chemical Works Co. Ltd. by pointing out that in that case the acquisition pertained to the process of profit earning and not the acquisition of profit earning machinery or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation 8 to section 43(1) which was inserted by the Finance Act of 1986 w.e.f. 1-4-1974. The said Explanation provides that the amount of interest paid or payable in connection with the acquisition of asset as relatable to the period after the asset is first put to use shall not be included in the actual cost of assets. According to the ld. D.R., it is evident that the legislative intention is not to allow the interest up to the date of putting the asset to use as revenue expenditure. The ld. D.R. placed reliance on the following decisions:- (1) CIT v. Oswal Spg. Wvg. Mills Ltd. [1986] 160 ITR 426 (Punj. Har.); (ii) Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (Se). The decision of Hon'ble Supreme Court in the case of CIT v. Associated Fibre Rubber Industries (P.) Ltd. [1999] 236 ITR 471 is stated to be distinguishable on facts. The ld. D.R. also relied upon the decision of the Calcutta High Court in the case of JCT Ltd v. Dy. CIT [2005] 144 Taxman 435, wherein it has been laid down that the amended provisions of section 36(1)(iii) are applicable retrospectively. The ld. D.R. pointed out that the Calcutta High Court has distinguished the decision of the Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest by obtaining loan to be utilized for the purposes of business and not specifically for acquisition of assets. It was accordingly pleaded that the decision of the Supreme Court in the case of India Cements Ltd v. CIT [1966] 60 ITR 52 is inapplicable to the facts of this case. It was accordingly pleaded that the deduction may be allowed to the assessee. 9. In regard to second issue, the ld. Counsel contended that assessee had claimed deduction under section 35AB which was allowed. The deduction is permissible for six years. Ordinarily, deduction for assessment year 1998-99 was not permissible. However, since assessee had not claimed deduction in assessment year 1993-94, the 6th year of deduction would fall in assessment year 1998-99. It was accordingly pleaded that deduction may be allowed to the assessee. 10. We have given our careful consideration to the rival contentions. The issue involved in this case is relating to the claim of deduction under section 36(1)(iii). It is not disputed that there is an amendment in section 36(1)(iii) and when section 36(1)(iii) is read with Explanation 8 to section 43A, the claim of the assessee for deduction under section 36(1)(iii) f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of enduring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider the object with which the loan was obtained. Where there is no express prohibition, an outgoing, by means of which an assessee procures the use of a thing by which he makes a profit, is deductible from the receipts of the business to ascertain the taxable income. Obtaining capital by issue of shares is different from obtaining loan by debentures. A loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee." The second important decision is again of Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. In this case, their Lordships held as under:- "As the expression "actual cost" has not been defined, it should be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot started production, the payment of interest on the borrowing which was utilized for the purpose of establishing that new unit should go towards the cost of the new unit and therefore on the principle accepted by the Supreme Court in Challapalli Sugars Ltd v. CIT [1975] 98 ITR 167 this interest should be treated as a capital expenditure and not as a revenue expenditure. This contention was not correct. The ratio of the decisions of the Bombay High Court in Calico Dyeing and Printing Works v. CIT [1958] 34 ITR 265 and of the Supreme Court in India Cements Ltd v. CIT [1966] 60 ITR 52 and Challapalli Sugars Ltd.'s case [1975] 98 ITR 167 is: (1) Where the borrowing is for the purpose of a business, the interest paid on such a borrowing becomes eligible for deduction contemplated by section 10(2)(iii) of the Act of 1922 or section 36(1)(iii) of the Act of 1961; (2) this would be so, whether the capital is invested in order to acquire a revenue asset or a capital asset, because the act of borrowing capital is distinct from the act of investment of the capital to acquire an asset; (3) however, the business for which an asset of enduring nature is purchased with the borrowed capital shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded. The assessee claimed that the amount of interest paid should be included in the cost of machinery and that it was entitled to depreciation and development rebate on the said amount. The Income-tax Officer rejected the claim of the assessee while the Tribunal accepted the claim. On a reference; Held, that the interest paid on the purchase of machinery was part of the cost of machinery and that the assessee was entitled to depreciation and development rebate on the said cost." It is evident from the decision quoted above that the issue before the Hon'ble High Court was as to whether interest paid on deferred payment for the purchase of machinery was to be added to the cost of the machinery. The assessee in that case had not borrowed money for the purposes of business and purchased the machinery out of the borrowed money. The interest was paid directly to the supplier of the machinery for deferred payment. The Hon'ble High Court decided the issue in favour of the assessee by holding that assessee was justified in capitalizing the interest paid on deferred payment for the purchase of machinery. The view expressed by the Hon'ble High Court is in consonance with the view expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficult for us to hold that the said decision is not applicable in respect of the interest paid on borrowed money utilized for purchase of capital assets for expansion of business. In fact from the very decision of the Hon'ble Punjab Haryana High Court in the case of Oswal Spg. Wvg. Mills Ltd., it becomes abundantly clear that the Hon'ble High Court has expressed a different view in respect of registration expenses for obtaining a loan incurred by the assessee in connection with setting up of a new unit as business expenditure. Their Lordships held as under:- "The assessee, hitherto carrying on the business of spinning woollen yarn, incurred registration charges for obtaining a loan for the purpose of starting a new venture, viz., manufacture of vanaspati ghee, and claimed the amount as business expenditure. The Income-tax Officer disallowed the claim on the ground that the new unit had not been set up during the relevant accounting period but the Tribunal allowed the claim. On a reference: Held, that the loan was not an asset or advantage of an enduring nature, and the object with which it was raised was wholly irrelevant. Even if the unit of manufacturing vanaspati ghee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alcutta Bench of the ITAT in the case of JCT Ltd. v. Asstt. CIT [1998] 65 ITD 169 (Cal.) is the only decision to the contrary and we prefer the majority view. 13. The only other ground involved in this appeal is relating to the denial of deduction under section 35AB. Deduction under section 35AB, admittedly, was allowed to the assessee in assessment year 1992-93 @1/6th. Further deduction was permissible @1/6th in subsequent five years. The assessment year under appeal being 1998-99 falls beyond six years. The assessee had claimed deduction on the ground that no deduction was claimed in assessment year 1993-94 and, therefore, the assessee should get an extension of one year for the purposes of claim of deduction under section 35AB. In our considered view, there is no merit in the claim of the assessee insofar as deduction under section 35AB is permissible in six years consecutively. The mere fact that deduction for assessment year 1993-94 was not claimed by the assessee does not extend the period of deduction under section 35AB to more than six years. Therefore, the disallowance of Rs. 33,333 out of the technical know-how fee claimed under section 35AB of the Income-tax Act, 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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