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TMI Blog2016 (5) TMI 723X X X X Extracts X X X X X X X X Extracts X X X X ..... t incurred after closure of unit - ITAT allowed the claim u/s 37 - Held that:- CIT (A) and the Tribunal have rendered a concurrent finding of fact that the closure of the manufacturing unit at Thane was on account of statutory compulsion. Further, the business of manufacturing at Thane had not ceased but had been shifted to other locations/units of the RespondentAssessee. Moreover the CIT (A)as well as the Tribunal had by applying the decision of the Apex Court in K. Ravindranathan Nair (2000 (11) TMI 3 - SUPREME Court ) concluded that the business of manufacturing drugs at different units constituted a single business and closing down of one unit and shifting its activity to other units, would be expenditure incurred was for the purposes of business. The closure of Thane unit was out of business necessity arising out of statutory compulsion. Thus the expenditure was incurred with regard to carrying on its business and thus allowable under Section 37(1) of the Act. Investment in tax free bonds out of the own funds - non utilization of borrowed funds - Held that:- We find that the CIT(A) as well as the Tribunal have come to concurrent findings of fact that the investment made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der, the Tribunal also has placed reliance upon the decision of this Court in Bhor Industries Ltd. (supra) to dismiss the Revenue s Appeal on the above issue. (ii) Accordingly, question no.(a) as formulated does not give rise to any substantial question of law. Thus, not entertained. 4. Regarding question no.(b): (i) The RespondentAssessee is in the business of manufacturing pharmaceuticals, bulk drugs and glass bottles. During the subject assessment year the RespondentAssessee sought to expand its glass business and for that purpose set up and commissioned a new plant to manufacture glass bottles at Jambusar in Gujarat. (ii) In its Return of Income the RespondentAssessee claimed interest paid of ₹ 21.70 crores on loan taken for the purposes of setting up a new glass manufacturing plant as a revenue expenditure. The aforesaid interest of ₹ 21.70 crores was payable on the loan upto the date of commencement of manufacture/production of glass bottles at its new plant in Jambusar, Gujarat. The Assessing Officer by his order dated 28th February, 2001 passed under Section 143(3) of the Act rejected the aforesaid claim of interest by placing reliance upon Expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 36(1)(iii) of the Act, the Apex Court held as under:- According to the Department, section 36(1)(iii) of the 1961 Act being general in nature has to give way to special provisions contained in Explanation 8 to section 43(1) of the 1961 Act. According to the Department, in none of the earlier judgments this Court has considered the true scope of Explanation 8 to section 43(1) visavis section 36(1)(iii) of the Act. We find no merit in this contention. Section 43 groups together all provisions in the nature of definitions or interpretations relevant to the computation of income under the head Profits and gains of business . Section 43(1) defines actual cost . The definition of actual cost has been amplified by excluding such portion of the cost as is met directly or indirectly by any other person or authority. Explanation 8 has been inserted in section 43(1) by the Finance Act, 1986 (23 of 1986), with retrospective effect from April 1, 1974. It is important to note that the words actual cost would mean the whole cost and not the estimate of cost. Actual cost means nothing more than the cost accurately ascertained. The determination of actual cost in section 43(1) has r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... armaceutical drugs at its Thane plant. In September, 1996 the RespondentAssessee had to close down its manufacturing unit at Thane in view of failing to meet the standards required by the Food Drug Administration. The closure of its Thane plant resulted in shifting of its manufacturing activity at Thane to other units of the RespondentAssessee shifted at Mahad, Pithampur and Hyderabad all of which resulted in expenditure to the extent of ₹ 2.84 crores. (ii) In its return of income the petitioner had inter alia claimed an amount of ₹ 2.84 crores (Rs.1.29 crores staff cost + ₹ 1.54 crores other corpus) as deduction under Section 37 of the Act. The Assessing Officer by his order dated 28th February, 2001 disallowed the same on the ground that they are incurred for closing down the business operation and thus could not be considered as expenses incurred for running of the business. (iii) Being aggrieved the RespondentAssessee carried the issue in appeal before the CIT (A). The CIT (A) has rendered a finding of fact that the the manufacturing activity at Thane ceased as the RespondentAssessee had failed to satisfy the standards set by the Food and Drugs Administr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ratio the Assessing Officer by order dated 28th February, 2001 concluded that an amount of ₹ 21.82 crores out of ₹ 38.32 crores invested in shares, mutual funds and tax free bonds would come out of borrowed funds. On the aforesaid basis, he disallowed interest ₹ 1.32 crores attributable to the borrowed funds (Rs.21.82 crores) utilized for making tax free investment and disallowed the same. (ii) Being aggrieved, the Respondent Assessee carried the issue in appeal to the CIT (A). On examination the CIT (A) found that the entire investment in shares, mutual funds and tax free bonds were not made out of borrowed funds but made out of issue of fresh capital at a premium as was found on examining the resolutions of the Board of Directors as well as the balance sheet for the relevant period. Thus the order dated 22nd May, 2001 of the CIT (A) held that since the entire investment made in shares, mutual funds and tax free bonds were from its own interest free funds, there could be no question of disallowance of interest payable on the borrowed funds. In the above view, by order dated 22nd May, 2001 the disallowance of interest to the extent of ₹ 1.32 crores was ..... 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