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TMI Blog2010 (8) TMI 456X X X X Extracts X X X X X X X X Extracts X X X X ..... n of law that arises for consideration in this appeal and as framed at the time of admission is as under: Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was right in holding that the expenditure on setting up new sugar units in Orissa were allowable as a revenue expenditure on the ground that the said expenditure has been incurred for the expansion of the assessee's existing business ? 2. The assessment year was 1992-1993. The issue centres around the expenses relating to Baramba and Dhenkanal sugar units of the respondent. The respondent is having three different lines of manufacturing activities viz., Sugar Division, Distillery Division and Foundry Division. 3. In the Sugar Division, its factory at Sakthi Nagar is situated in Periyar District, Tamil Nadu has been noted as Unit-I, its manufacturing unit at Padamathur, Sivaganga Taluk, P.M.T. District also in Tamil Nadu is called Unit-II and its manufacturing unit at Sunapal, Barambagarh, Cuttack District, Orissa is known as Unit-III. 4. The Baramba Sugar Unit was stated to have commenced production on 11.12.1991 and 29,719 tonnes of sugarcane has been crushed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses incurred in setting up of a new units does not amount to starting of a new business but only expansion or extension of the business which was being carried on by the assessee held that they are deductible as revenue expenditure. The Commissioner of Income Tax (Appeals) also placed reliance upon the earlier decisions reported in 175-ITR-215 (Commissioner of Income Tax Vs. Indian Telephone Industries Ltd.,), 175-ITR-216 (Commissioner of Income Tax Vs. Hindustan Machine Tools), 196-ITR-845 (Kesoram Industrials Cotton Mills Ltd. case) and 109-ITR-715 (Commissioner of Income Tax Vs. Allambic Glass Mills Ltd.). The Commissioner of Income Tax (Appeals) further directed the Appellate Authority to verify whether the entire expenses claimed were incurred during the year and if so allow the claim in full. 10. The Revenue went on appeal before the Tribunal. The Tribunal also held that expenses incurred by the assessee in setting up the new sugar factories at Baramba and Dhenkanal in Orissa to an extent of ₹ 6,84,78,570/- does not amount to starting of a new business, but only expansion or extension of the business already being carried on and the expenses in connection with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of Income Tax) and 255 ITR 243 (Commissioner of Income Tax Vs. Madras Cements Ltd.) in support of his submissions. 14. As against the above submissions, Mr.R.Vijaya Raghavan, learned counsel appearing for the assessee contended that Baramba and Dhenkanal units were nothing but expansion of the assessee's sugar manufacturing business and that it was not a new business. The learned counsel placed before us the details of expenditure in connection with Baramba unit and Dhenkanal unit in ₹ 1,00,21,283/- and ₹ 5,84,57,287/- respectively totalling ₹ 6,84,78,570/- and pointed out that every one of such expenditure were incurred for the running of the business of the sugar units in Baramba and Dhenkanal and none of the expenditure were capital in nature. 15. The learned counsel further contended that even the interest on capital was eligible as revenue expenditure under Section 36(1)(iii) of the Act which was thus permitted till the proviso came into force w.e.f. 01.04.2004 and that too prospectively. 16. The learned counsel therefore contended that the Commissioner of Income Tax (Appeals), as well as, the Tribunal was well justified in accepting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of Baramba unit which were stated to be by way of pre-operation expenses were incurred towards salaries, wages, bonus, contribution to Provident Fund, workmen welfare expenses, power, fuel and water, manufacturing expenses, rent for office building, insurance premium, repairs and maintenance for machinery and building, motor vehicle, office equipment etc., interest on bills cleared, freight and transport, cane development expenses, travelling expenses, other administrative expenses and financial and bank charges. 20. In respect of Dhenkanal Sugar unit, the expenses incurred by way of pre-operative expenses for the year 1991-92 were towards cane development expenses, travelling expenses, administrative and other expenses, legal and professional charges, electricity charges, rates and taxes, insurance premium, repairs and maintenance charges for building and machinery and motor vehicle and other office equipment maintenance, financial and bank charges, freight and transport, salaries, wages, bonus etc., workmen welfare expenses, interest charges and depreciation. 21. The said statement of expenditure which provide a break-up for the entire sum of ₹ 6,84,78,570 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax Vs. Gujarat Alkalies and Chemicals Ltd.), (2006) 205 CTR (Mad) 498 (Commissioner of Income Tax Vs. Carborandum Universal Ltd.) and (2007) 293 ITR 459 (Mad) (Commissioner of Income Tax Vs. Rane (Madras) Ltd.). 26. In (1955) XXVII ITR 34 (Assam Bengal Cement Co. Ltd., Vs. Commissioner of Income Tax, West Bengal) the Hon'ble Supreme Court stated how to identify an expenditure either as capital expenditure or revenue expenditure as under at page 45: .....If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure...... (Emphasis added) 27. In the decision reported in (1997) 224 ITR 414 (Ballimal Naval Kishore Vs. Commissioner of Income Tax), the Hon'ble Supreme Court followed the Division Bench decision of the Bombay High Court reported in (1956) 30 ITR 338 (New Shorrock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said section, all that is necessary is that, firstly, the money, i.e., capital, must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business; and, thirdly, the assessee must have paid interest on the borrowed amount (see Calico Dyeing and Printing Works Vs. CIT (1958) 34 ITR 265 (Bom). All that is germane is : whether the borrowing was, or was not, for the purpose of business. The expression for the purpose of business occurring in section 36(1)(iii) indicates that once the test of for the purpose of business is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under section 36(1)(iii) of the 1961 Act. This provision makes 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. What clause (iii) emphasises is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital unlike section 37 which expressly excludes an expense of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowed the amount in question. 31. The above said decision of the Hon'ble Supreme Court was subsequently followed in (2008) 299 ITR 85 (SC) (Deputy Commissioner of Income Tax Vs. Gujarat Alkalies and Chemicals Ltd.) and the Hon'ble Supreme Court made it clear that the interest on borrowed capital by the assessee for establishing new project was allowable as business expenditure. 32. The conditions to claim the benefits under Section 36(1)(iii) has been clearly set out by the Division Bench of this Court in the decision reported in (2006) 205 CTR (Mad) 498 (Commissioner of Income Tax Vs. Carborandum Universal Ltd.). In paragraph 5 the Division Bench has stated the legal position as under: 5. In respect of question No.3, the assessee claimed deduction under s.36(1)(iii) of the Act, which reads as follows: 36(1)(iii). The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession. From a very reading of the above clause, it is clear that three conditions are required to be specified to enable the assessee to claim deduction in respect of interest on borrowed money, which are as follows: (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is than it was intimately linked with the value of the asset. That determines the character of the expenditure and it was capital in nature. Keeping the about tests in mind, when we examine the case on hand, the various kinds of expenditures relating to the sum of ₹ 6,84,78,570/-, the details of which have been mentioned in paragraphs 19 and 20, disclose that all those expenditures were incurred in the relevant years for the purpose of manufacture of sugar in the respective factories with a view to earn profits and therefore they are nothing but revenue expenditure only. 35. In other words, applying the principles set out in the various decisions referred to above, as stated earlier, the expenses which were in a sum of ₹ 6,84,78,570/- were all expenses which were incurred by way of salaries, wages, bonus, provident fund contribution, workmen welfare expenses, power, fuel and water, manufacturing expenses, rent for office building etc., were all expenses which were incurred for the purpose of running of the business and it cannot be held to be by way of investment. In fact there was no dispute that whatever investments made for Baramba unit and Dhenkanal unit were c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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