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TMI Blog2008 (2) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... sed return on 6.8.93 declaring a loss of Rs.1,11,68,543/-. Assessee-company is engaged in the business of manufacturing and sale of intravenous solutions. For the assessment year under consideration assessee claimed deduction towards expenses aggregating to Rs.2,12,05,459/- which included interest on borrowings of Rs.1,56,76,000/-. During the assessment year under consideration assessee had installed new machinery. The A.O. vide assessment order dated 30.3.95 disallowed the amount of Rs.1,56,76,000/- placing reliance on the judgment of this Court in Challapalli Sugars Ltd. Anr. v. Commissioner of Income-tax, A.P. and Anr. - (1975) 98 ITR 167, inter alia, on the ground that during the assessment year under consideration assessee had installed new machinery on which production had not started. On appeal, vide order dated 15.11.96, CIT (A) confirmed the addition of interest amount on borrowings of Rs.1,56,76,000. Therefore, both the authorities, namely, the A.O. and CIT (A) added the said amount of Rs.1,56,76,000/- to the income of the assessee. The matter was carried in appeal by the assessee. Vide order dated 6.6.2000 the Tribunal held that the Department was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised 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. Explanation : Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;" "Definitions of certain terms relevant to income from profits and gains of business or profession.43. In sections 28 to 41 and in this section, unless the context otherwise requires - (1) "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority: Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31 st day of March, 1967, but bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of what may be the result of using the capital which the assessee has borrowed. Further, the words "actual cost" do not find place in Section 36(1)(iii) of the 1961 Act which otherwise find place in Sections 32, 32A etc of the 1961 Act. The expression "actual cost" is defined in Section 43(1) of the 1961 Act which is essentially a definition section which is subject to the context to the contrary. 9. In the case of Commissioner of Income-tax v. Associated Fibre and Rubber Industries (P) Ltd. - (1999) 236 ITR 471, the Division Bench of this Court held as follows : "Even though the machinery has not been actually used in the business at the time when the assessment was made, the same has to be treated as a business asset as it was purchased only for business purposes. In the circumstances, the interest paid on the amount borrowed for purpose of such machinery is certainly a deductible amount." 10. As stated above, the Department contended before us that the judgments of this Court, prior to insertion of Explanation 8 in Section 43(1) of the 1961 Act, has no application to the present case. According to the Department, Section 36(1)(iii) of the 1961 Act being general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivil appeals we are concerned with the assessment years 1992-93, 1993-94, 1995-96 and 1997-98. A proviso has since been inserted in Section 36(1)(iii) of the 1961 Act. That proviso has been inserted by Finance Act, 2003 w.e.f. 1.4.2004. Hence, the said proviso will not apply to the facts of the present case. Further, in our view the said proviso would operate prospectively. In this connection it may be noted that by the same Finance Act, 2003 insertions have been made by way of proviso in Section 36(1)(viia) by the same Finance Act which is also made with effect from 1.4.2004. Same is the position with regard to insertion of a sub-section after Section 90(2) and before the Explanation. This insertion also operates w.e.f. 1.4.04. In short, the above amendments have been made by Finance Act, 2003 and all the said amendments have been made operational w.e.f. 1.4.04. Therefore, the proviso inserted in Section 36(1)(iii) has to be read as prospectively and w.e.f. 1.4.04. In this case, we are concerned with the law as it existed prior to 1.4.2004. As stated above, we are not concerned with the interpretation or applicability of the said proviso to Section 36(1)(iii) w.e.f. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e judgment of the Supreme Court India Cements Ltd. (supra) have been given with reference to the borrowings made for the purposes of a running business, while the decision of the Supreme Court in Challapalli Sugars Ltd. (supra) was given with reference to the borrowings which could not be treated as made for the purposes of business as no business had commenced in that case. Therefore, there is no inconsistency between the above decisions. CONCLUSIONS 14. For the above reasons, we hold that A.O. was not justified in making disallowance of Rs.1,56,76,000/- in respect of borrowings utilized for purchase of machines. Accordingly, the above question is answered in favour of the assessee and against the Department. 15. Apart from the above question under Section 36(1)(iii), the present civil appeals are filed by the Department against the decision of the High Court whereby the High Court has dismissed Civil Application Nos.53 and 54 of 2001 filed by the Department. It may be noted that during the pendency of Tax Appeal Nos.449 and 450 of 2000, the Department had moved the above two civil applications for amendment of its Memo of Appeal raising substanti ..... 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