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TMI Blog2015 (8) TMI 718X X X X Extracts X X X X X X X X Extracts X X X X ..... proviso to Section 36 (1) (iii) of the Act would not apply. The rationale for allowing the payment of interest on borrowings as revenue expenditure was explained as it does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset, because all that the section requires is that the assessee must borrow the capital for the purpose of his business. This dichotomy between the borrowing of a loan and actual application thereof in the purchase of a capital asset, seems to proceed on the basis that a mere transaction of borrowing does not, by itself bring any new asset of enduring nature into existence, and that it is the transaction of investment of the borrowed capital in the purchase of a new asset which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same as revenue expenditure? 4. There were three projects being undertaken by the Respondent Assessee in Srinagar, Goa and Mumbai. The Assessee had borrowed loans for the said projects. It had shown them as works in progress. In para 7.1 of the Assessment order dated 28th March 2003, the Assessing Officer (AO) noted that 75% of the total interest of ₹ 1.54 crores paid on the term loan obtained from the Jammu and Kashmir Bank amounting to ₹ 1,15,77,137 was capitalised. The balance of ₹ 38,59,046/- was charged to the profit and loss account as revenue expenditure. According to the AO, the Assessee did not provide any justification how 25% of the total interest paid could be claimed as revenue expenditure. This was accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ajay Vohra, learned Senior Counsel appearing for the Assessee, that the applicable provision is Section 36 (1) (iii) of the Act which at the relevant time, i.e. prior to the insertion of the proviso thereto with effect from 1st April 2004, allowed as deduction the amount of interest paid on loans borrowed for the purposes of business operation. Mr. Vohra referred to the decisions in Commissioner of Income-Tax v. Modi Industries Ltd. (1993) 200 ITR 341 (Del), Commissioner of Income-Tax v. Monnet Industries Ltd. (2011) 332 ITR 627 (Del) and Deputy Commissioner of Income-Tax v. Core Health Care Ltd. (2008) 298 ITR 194 (SC). He submitted that in terms of Section 36 (1) (iii), during the AY in question, the Assessee was entitled to treat the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan taken can be claimed as deduction under Section 36(1)(iii) of the Act. (iv) in coming to the conclusion whether the interest paid on capital borrowed or loan taken in setting up a new line of business ought to be capitalized or treated as revenue expenditure, the test as laid down by the Supreme Court in the cases of Produce Exchange Corporation (supra) and Prithvi Insurance Company (supra) would be relevant and; (v) lastly, as long as interest is paid on capital borrowed or loan taken in respect of new line of business which is in the same business fold for the purposes of ascertaining income under Section 28 of the Act, it can be claimed as a deduction under Section 36(1)(iii) of the Act. 10. The order dated 29th August 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture. In that case too, the Department relied on Explanation 8 under Section 43(1) of the Act to argue that the Assessee was not entitled to claim deduction and that Section 36 (i) (iii) of the Act being general in nature had to give way to the special provision contained in Explanation 8 to Section 43(1) of the Act. 13. After analysing both the provisions, the Supreme Court came to the conclusion that Explanation 8 of Section 43(1) only applied to provisions like Sections 32, 32A, 33 and 41 which deal with concepts like depreciation. It was observed that Explanation 8 of Section 43 (1) had no relevance to Section 36 (1) (iii). On the facts of that case since the AYs in question were prior to 1st April 2004, the Supreme Court conclud ..... X X X X Extracts X X X X X X X X Extracts X X X X
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