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TMI Blog2011 (3) TMI 1027X X X X Extracts X X X X X X X X Extracts X X X X ..... e but by the proviso inserted w.e.f. 1.4.2004 by the Finance Act, 2003, such interest paid in respect of capital borrowed for acquisition of asset for the extension of existing business or profession shall not be allowable for any period beginning from the date on which capital was borrowed for acquisition of the asset till the date on which such asset was first put to use - Admittedly, the dominant purpose for the loan taken was for the extension of the existing business by way of setting up a new power generation plant at Bhilai - Since assessee had been denied the benefit by inserting a specific proviso to section 36(1)(iii), therefore, matching principle shall help assessee - Hence, set aside the order of the CIT (A) on this issue and restore the order of the Assessing Officer. - ITA Nos. 4668 to 4673/Del./2010 - - - Dated:- 25-3-2011 - Rajpal Yadav, B.C. Meena, JJ. M.P. Rastogi, Adv. and P.N. Shastry, CA, for the Appellant Sangeeta Gupta, CIT DR, for the Respondent ORDER Bench: All these six appeals filed by the revenue arise out of the order of CIT (Appeals)-XVIII, New Delhi dated 19.07.2010. The grounds of appeal in ITA Nos.4668 to 4672/Del/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. CIT(A) erred in ignoring the fact that the assessee was expanding its existing business and interest expense during construction period was not an allowable revenue expenditure and that case ratio of Tuticorin Akali Chemicals Fertilizers Ltd. VS.CIT 227 ITR 172 (SC) was clearly applicable. 5. The appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal." 2. Thus, the grounds of appeal are common in ITA Nos.4668 to 4672/Del/2010 and the ground nos.1 and 2 are also common in ITA No.4673/Del/2010. 3. In the ground nos.1 and 2 in all the appeals, the issue involved is regarding the depreciation on the power plants as per the cost of acquisition of the assets. 4. The assessee company was incorporated on 8.2.1999 with the paid up capital of Rs.1000/- only consisting of 100 shares of Rs.10/- each. Out of 100 shares, 98 shares were subscribed by M/s. Steel Authority of India Limited (hereinafter referred to as SAIL) and 1 share each by Shri S.C.K. Patne and Shri Ranjit Chakrabarty, both employees of SAIL. The SAIL owned and operated captive power plants at Durgapur and Rourkela which were necessary for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he first contention, we concur with the views of ld. CIT (A) that merely two shares issued in the names of two employees of SAIL cannot be said that the assessee was not a wholly owned subsidiary of SAIL. It is not the case that the employees became the share holders from the public issue. Moreover it is not a case where the privatization of portion of SAIL is being done by SAIL by incorporating the assessee company. Since no scheme for privatization has been placed on record and from the material available on record, the two employees share holders appear to be nominee share holders of SAIL. Nothing has been placed on record that the said employees have been taken as partners of two persons of Government for commercial purposes. We concur with the views of ld. CIT (A) that no company can ever be held as wholly owned subsidiary as for registration/incorporation of a private limited company minimum two share holders are required and if the contention of the assessee is accepted, then there can never be a 100% holding-subsidiary company concept. Therefore for all purposes, we find no infirmity in the order of ld. CIT (A) for confirming the action of the A.O., treating SAIL as 100% ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded that liability to tax does not accrue on day to day basis. Hence, in the light of above stated cases the holding of Steel Authority of India Ltd., as at the end of the previous year is to be considered and not the positions during the year. Hence Explanation 6 of section 43(1) is not applicable in this particular case as at the end of previous year SAIL, Power Supply Company Pvt. Ltd. was Joint Venture company of NTPC and Steel Authority of India Ltd. There are a number of enclosures by way of letters and approvals by various Government of India Ministries and bodies to show that the company was always converted as a Joint Venture between SAIL and NTPC even before the transfer of fixed assets. The ld. Counsel for the assessee invited our attention to the decision of ITAT Mumbai Bench in the case of Essar Oil Ltd. vs. DCIT reported in (2007) 13 SOT 691 on the identical issue. The head notes of the said decision for the sake of clarity are reproduced as under:- "(I) Section 49, read with sections 47, 47A and 32 of the Income-tax Act, 1961-capital gains-cost with reference to certain modes of acquisition-assessment year 1993-94-Whether provisions of section 47 are withdrawn on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee company seized to be a subsidiary of transferor company, provisions of section 47(iv) will not apply and therefore the transaction in the hands of the assessee company has to be treated as transfer at the cost at which it had acquired the asset. The A.O. is directed to act as directed above. The assessee gets the relief accordingly. Thus, ground no.1 of the assessee is allowed." The facts remain the same and respectfully following the same, we dismiss ground nos.1 and 2 in all the appeals. 7. Ground No.3 in ITA Nos.4668 to 4672/Del/2010 is general in nature and does not require any adjudication. 8. Ground Nos.3 and 4 in ITA No.4673/Del/2010 are related to the deletion of addition of Rs.3,31,58,000/- on account of interest earned on the deposits and advances. 9. Brief facts of the issue are as under:- The assessee company was in the procession of expansion of its business by setting up new units at Bhilai for generation of power. Separate books of account and records were maintained for the new units being set up under expansion programme. For financing the expansion plans, the assessee company has raised the additional capital of Rs.45,000 lakhs during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable to the facts of the assessee's case and the order of CIT (A) deserves to be set aside. 11. On the other hand, the learned AR relied on the order of CIT (A) and also on the case laws relied thereupon. 12. After hearing both the sides, we hold as under. Prior to the inserting of proviso to section 36(1)(iii), the interest paid on capital borrowed for the purpose of extension of existing business or profession was being allowed as deduction u/s 36(1)(iii) of the Income-tax Act as revenue expenditure. By inserting proviso to this section w.e.f. 1.4.2004 by the Finance Act, 2004, the amount of interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession whether capitlised in the books of account or not, for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. The assessee company was running two power plants. Thereafter a new power plant was to be set up at Bhilai for generation of power. Company raised term loan for setting up this new plant. The separate books of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court has held that the interest earned was inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of assets and these are receipts of capital nature. However, the decision of Hon'ble Supreme Court in the case of CIT vs. Bokaro Steel Limited was delivered in December, 1998, and thereafter a proviso has been added to section 36(1)(iii) of Income-tax Act w.e.f. 1.4.2004. By inserting this proviso to section 36(1)(iii), the interest paid on capital borrowed for acquisition of an asset for extension of existing business or profession for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. The assessee has claimed the adjustment of interest against the incidental expenses during construction on the basis of matching principle is also not as per law. As we have stated above, the interest earned on FDRs made from surplus fund and interest earned on margins and advances made for expansion work shall be assessed under the head 'income from other sources'. The set off claimed against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and therefore has to necessarily be treated as income from other sources and not business income. (vi) Once business income has been determined by applying accounting standards as well as the provisions contained in the Act, the assessee would be permitted, in terms of section 37 of the Act, to claim as deduction, expenditure laid out for the purposes of earning such business income. (vii) In the second stage, the Assessing Officer will deduct from the profits of the business computed under the head "Profits and gains of business or profession" the following sums in order to arrive at the "profits of the business" for the purposes of section 80HHC(3) : (a) 90 per cent. of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28, i.e., export incentives; (b) 90 per cent. of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (c) profits of any branch, office, warehouse or any other establishment of the assessee situate outside India. (viii) The word "interest" in clause (baa) of the Explanation connotes "net interest" and not "gross interest". Therefore, in deducting such inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for the purpose of earning such income. The interest expenditure paid in respect of capital borrowed for acquisition of an asset for extension of the existing business or profession was allowable as revenue expenditure but by the proviso inserted w.e.f. 1.4.2004 by the Finance Act, 2003, such interest paid in respect of capital borrowed for acquisition of asset for the extension of existing business or profession shall not be allowable for any period beginning from the date on which capital was borrowed for acquisition of the asset till the date on which such asset was first put to use. It has also been made clear by the amendment that whether the interest amount has been capitalised in the books of account or not it will not make any difference in the allowability of the deduction. Admittedly, the dominant purpose for the loan taken was for the extension of the existing business by way of setting up a new power generation plant at Bhilai. Since assessee had been denied the benefit by inserting a specific proviso to section 36(1)(iii), therefore, matching principle shall help assessee. Whatever cannot be achieved directly, it can also not be achieved indirectly. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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