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TMI Blog2025 (3) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of Asset Reconstruction Cost ['ARC'] being an ascertained liability, or alternatively allowing deduction for such expenditure in the year of execution of lease agreements or over the period of the lease? B. Whether on the facts and in the circumstances of the case and in law, the ITAT erred in holding that installation of cell site towers amounted to 'extension of existing business' as stipulated in proviso to Section 36 (1) (iii) of the Income Tax Act, 1961 ["Act"] and, thereby warranting proportionate disallowance of interest under that provision? C. Whether on the facts and in the circumstances of the case and in law, the ITAT erred in misbranding the discount offered by the Appellant to the pre-paid sim-card distributors as commission and hence upholding disallowance made by the AO under Section 40 (a) (ia) of the Act? ITA 634/2019 A. Whether the ITAT erred in law and on facts in deleting the disallowance amounting to Rs. 14,23,29,976/- on account of commission paid to distributors by ignoring the factual matrix of the case and solely relying upon the decision of the DRP, Ahmedabad wherein the claim on commission expenditure was upheld? B. Whether the ITAT erred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt from others and which, admittedly, do not survive for our consideration. 5. The Draft Assessment Order framed on 28 March 2013 under Section 144C read with Section 143 (3) was assailed before the Dispute Resolution Panel [DRP] and which vide its directions dated 18 December 2013 accorded partial relief to the assessee under the head of ad hoc disallowance of commission expenditure. This led to the passing of a final assessment order on 30 January 2014. It is this order which formed the subject matter of the two cross appeals which came to be instituted before the Tribunal. 6. Having noticed the principal questions which arise for our consideration, we deem it appropriate to firstly advert to the issue of disallowance of depreciation under Section 32 of the Act. It becomes relevant to note that the disallowance of depreciation constituted Ground no.2 of the assessee's appeal. The depreciation itself was claimed in respect of fixed assets and the ARC that was provisioned for on account of the same being likely to be incurred in purported discharge of an obligation which stood placed upon the assessee to restore the cell sites to their original condition. 7. The assessee appears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or depreciation on the actual cost' of block of assets in the first year and, then, on the written down value as prescribed in the provision. Section 43 (1) defines 'actual cost' to mean the actual cost of assets to the assessee reduced by that portion of the cost thereof, if any, as has been directly or indirectly made by any other person or authority. On a conjoint reading of the above provisions it is manifest that depreciation can be claimed only on the actual cost of assest 'which is incurred by the assessee.' There is no question of providing depreciation on a notional cost which at the most can be considered as an unascertained liability. Under these circumstances, we are of the considered opinion that the authorities below were fully justified in rejecting the assessee's claim of depreciation of Rs. 5 .10 crore on the so-called asset restoration cost obligation.' 9. The Tribunal also construed the relevant provisions of the lease agreement and especially the words 'if any damage is caused' as being demonstrative of no positive obligation being placed upon the appellant. This becomes evident from a reading of Para 18 and which reads thus: - '18. In support of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esee had made were in accord with AS 29 and which makes provisions with respect to 'liabilities', 'obligating events' and guides assessee's with respect to the incorporation of a provision in the books provided the conditions specified in Clauses 14, 16 and 24 are broadly met. 11. As was noticed by us in our previous orders, it was Mr. Jolly's submission that quite apart from the claim of depreciation which was founded on Section 32, the appellants had also taken an alternate plea of the expenditure so provisioned for being liable to be claimed as a deduction referable to Section 37 of the Act. Section 37, insofar as it is relevant for our purposes is extracted hereunder: - '37. General. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 [***] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". [Explanation 1.]-For the removal of doubts, it is hereby declared that any expenditure incurred by an asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rase '....laid out or expended..' in the following terms:- '20. The words 'Lay (Laid out)' or 'Expend (Expended)', as employed in Section 37 (1) of the Act, are defined in the following manner, in the Second Edition of the Oxford English Dictionary published by Clarendon Press-Oxford, in the following manner: 'Expend- to pay out, spend. It differs from spend in being less colloquial, and (in mod.use) in implying some determinate direction or object of outlay. (a) To put away, lay out, spend (money). To spend, make away with, consume in outlay. (b) To lay out (money) for determinate objects. Const.in, upon. Expendable- Also expendible-That may be expended; considered as not worth preserving or salvaging; normally consumed in use; spec. of military personnel; that may be allowed to be sacrificed to achieve a military objective. hence as sb., an expendable person or object. Lay-To put away in store; to store up; to save (money). - To put away for future disposal or for safety. - To spend, expend, lay out. 21. These definitions indicate that the words Lay, Laid or Expend do not merely include the immediate expenditure or laying out of the funds, but if they are set ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing terms are used in this Standard with the meanings specified: 10.1 A provision is a liability which can be measured only by using a substantial degree of estimation. 10.2 A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 10.3 An obligating event is an event that creates an obligation that results in an enterprise having no realistic alternative to settling that obligation. 10.4 A contingent liability is: (a) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non occurrence of one or more uncertain future events not wholly within the control of the enterprise; or (b) a present obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) a reliable estimate of the amount of the obligation cannot be made. 10.5 A contingent asset is a possible asset that arises from past events the existence of which will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s whether a present obligation exists at the balance sheet date by taking account of all available evidence, including, for example, the opinion of experts. The evidence considered includes any additional evidence provided by events after the balance sheet date. On the basis of such evidence: (a) where it is more likely than not that a present obligation exists at the balance sheet date, the enterprise recognises a provision (if the recognition criteria are met); and (b) where it is more likely that no present obligation exists at the balance sheet date, the enterprise discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote (see paragraph 68). Past Event 16. A past event that leads to a present obligation is called an obligating event. For an event to be an obligating event, it is necessary that the enterprise has no realistic alternative to settling the obligation created by the event. 17. Financial statements deal with the financial position of an enterprise at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognised for costs that need to be incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estimate of the obligation that is reliable to use in recognising a provision. xxxx xxxx xxxx Contingent Liabilities 26. An enterprise should not recognise a contingent liability. xxxx xxxx xxxx 28. Where an enterprise is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability. The enterprise recognises a provision for the part of the obligation for which an outflow of resources embodying economic benefits is probable, except in the extremely rare circumstances where no reliable estimate can be made (see paragraph 14). xxxx xxxx xxxx Illustration A Tables - Provisions, Contingent Liabilities and Reimbursements The purpose of this illustration is to summarise the main requirements of the Accounting Standard. It does not form part of the Accounting Standard and should be read in the context of the full text of the Accounting Standard. Provisions and Contingent Liabilities Where, as a result of past events, there may be an outflow of resources embodying future economic benefits in settlement of: (a) a present obligation the one whose existence at the balance sheet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oil. At the balance sheet date, the rig has been constructed but no oil has been extracted. Present obligation as a result of a past obligating event -The construction of the oil rig creates an obligation under the terms of the licence to remove the rig and restore the seabed and is thus an obligating event. At the balance sheet date, however, there is no obligation to rectify the damage that will be caused by extraction of the oil. An outflow of resources embodying economic benefits in settlement - Probable. Conclusion -A provision is recognised for the best estimate of ninety per cent of the eventual costs that relate to the removal of the oil rig and restoration of damage caused by building it (see paragraph 14). These costs are included as part of the cost of the oil rig. The ten per cent of costs that arise through the extraction of oil are recognised as a liability when the oil is extracted.' 14. Reverting then to the judgment in Vedanta Limited, Mr. Jolly invited our attention to the following passages of that decision: - '29. Thus on the conspectus of the legal precedents discussed above, we are of the clear opinion that for the three Assessment Year in question, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of provision for meeting a liability by the Assessee in future and its connectivity with the business of the Assessee. Assuming that such set apart provision is not actually spent in future, or something less is spent of Site Restoration, nothing prevents Revenue Authorities and Assessee himself to offer it back for taxation in such future year, the unspent Provision to be brought back to tax as per Section 41(1) of the Act.' It was in the aforesaid backdrop that learned senior counsel submitted that the Tribunal had committed a manifest error in failing to deal with this significant issue which was directly raised for its consideration. 15. Upon hearing learned counsels for respective sides, we deem it apposite to observe at the very outset that we do not propose to deal with the issue pertaining to 'actual cost' as it appears in Section 32 (1) since, upon a holistic examination of the rival submissions which were addressed, we for reasons which we propose to assign hereinafter would be of the opinion that it is the alternate plea based on Section 37 which alone would merit further consideration. This more so in light of the stand of the assessee as voiced by Mr. Jolly that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cost of installing new cell site towers to be used for providing a better network to its customers. It was stated that roughly a period of three months is spent in the setting up of a tower. During the currency of such period of three months, i.e., when a tower is being set up, the costs incurred on such installation of towers are booked under the head 'Capital work-in-progress'. When installation gets completed, the amount so capitalised is transferred from the 'capital work-in-progress' account to the 'fixed assets' in regular course. From the above narration of factual background, it is clear that a sum of Rs.2789.6 million represents the amounts incurred by the assessee up to the end of the year on installation of towers, whose process of installation was still on at the end of the year. In other words, this figure represents the value of assets which may still not been used by the assessee during the year for its business purpose. The AO invoked first proviso to section 36 (1) (iii) which, at the material time, read as under:- 'Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset/or extension of existing business or prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which it operates. The company has further expanded its network to increase its coverage across all its Circles. During the year the company added 5096 cell sites to enhance its network coverage closing with 14411 cell sites as at 31st March, 2009." It is evident from the assessee's Director's Report that the setting up of new cell sites has enhanced its network coverage within all the three existing Circles and the resultant customer base, which is nothing, but, an extension of existing business. We, therefore, hold that the argument advanced by the Id. AR that the setting up of new cell sites, the cost of which was capitalised in the balance sheet as Capital work in progress (CWIP), does not lead to extension of existing business, is sans merit and, hence, dismissed.' 19. Before we proceed to notice the elaborate submissions which were advanced by Mr. Jolly based on a perceived distinction between the words 'extension' and 'expansion' as well as how the phrase 'extension of business' itself should be understood, we note that the Tribunal had, while ruling on this question, also alluded to certain recitals appearing in the Director's Report for the year under consideration. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96 cell sites to enhance its network coverage, closing with 14,411 cell sites as at 31 March 2009. The Company has outsourced some of its major functions i.e IT, Cell Site passive infrastructure maintenance to IBM and Indus respectively during the year, which will bring cost efficiencies in the coming years.' 20. Mr. Jolly submitted that if the finding of the Tribunal which flows from a perceived reading of the extracts appearing in the Director's Report were to be accepted, the appellant would clearly not fall within the mischief of the Proviso since those extracts had spoken of a network already established and put to use. It was in the aforesaid context that Mr. Jolly submitted that the ultimate conclusions rendered by the Tribunal are clearly contradictory and the order impugned before us is thus liable to be set aside on this score alone. 21. An ancillary issue which appears to have arisen was whether the investment in CWIP was made out of interest free funds available with the appellant itself and thus not entirely on the basis of capital borrowed for the purposes of making such an investment. This issue came to be answered by the Tribunal as under: - "27. Before dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance-sheet of the assessee adequately depicted that there were enough interest free funds at its disposal for making investment. The ld. CIT (A) got convinced with the assessee's submissions and deleted the addition. Before the Tribunal, it was contended on behalf of the revenue that the shareholder's fund was utilized for the purchase of its assets and hence the assessee was left with no reserve or own funds for making investment in the sister concern. Thus, it was argued that the borrowed funds had been utilized for the purpose of making investment in the sister concern and the disallowance of interest was rightly called for. The Tribunal, on appreciation of facts, recorded a finding that the assessee had sufficient (funds of its own for making investment without using the interest bearing funds. Accordingly, the order of CIT (A) was upheld. When the matter came up before the Hon'ble High Court, it was contended by the Department that the shareholders' funds stood utilized in the purchase of fixed assets and hence could not be construed as available for investment in sister concern. Repelling this contention, the Hon'ble High Court observed that : "In our opinion, the very bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the absence of such specific information, it is difficult to decide the issue at our end. The impugned order is set aside to this extent and the AO is directed to decide this issue afresh in consonance with our foregoing observations. It is made clear that if there is some direct borrowing for investing in CWIP, then interest paid on such borrowing has to be disallowed. If, on the other hand there is no specific borrowing, the financing of CWIP has to be treated as out of interest-free shareholder's fund. In such a scenario, no disallowance of interest can be made as the interest-free shareholders' fund would be higher than the amount of investment in CWIP." The Tribunal has thus, and as is evident from the above, ultimately left it open for the AO to examine the extent to which borrowings may have been utilized in connection with CWIP and the interest free funds that may have been used in the course thereof. 22. We propose to take up the issues pertaining to the question of depreciation and of whether a provision could have been made by the assessee insofar as ARC was concerned. From a reading of the order of the Tribunal we note that an amount of INR 510,79,752 had come to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut in separate columns. What is not recognised is a provision for a liability which arises from 'a possible obligation' that may, but probably will not, require an outflow of resources. 14. It is not in dispute that as and when transit breakages do occur the resultant losses are allowable as revenue expenditure, given the nature of the business of the Assessees. The decision in Commissioner of Income Tax v. Balaji Distilleries Ltd. (supra) and Commissioner of Income Tax v. Brindavan Beverages (P) Ltd. (supra) recognised this. In fact, for AYs 2002-03 to 2004-05 the AO has allowed transit breakages as revenue expenditure in the year in which the breakages occurred. 15. The issue, however, is the justification for creating a provision for such breakages anticipating them in advance of the occurrence of the actual breakages. If such transit breakages cannot be estimated with a reasonable degree of certainty then the liability on that score would be considered 'contingent' in terms of the definition of that expression in AS 29 i.e. 'a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contingent liability. On facts, it was not in dispute that the warranty clause was part of the sale document and imposed a liability on the Assessee to discharge an obligation under the clause for the period of warranty. 'It was a liability which was capable of being construed in definite terms which had arisen in the accounting year even though the actual quantification and discharge was deferred to a future date.' In terms of the accepted principles of commercial practice and accountancy, it was held that a liability accrued, though discharged at a future date would be a proper deduction." 24. After having examined some of the decisions pertinent to the question which stood posed, the Court ultimately negated the stand of the assessee upon forming the opinion that no uniform or scientific method could be discerned so as to justify the creation of a provision. This becomes evident from a reading of Paras 24 and 27 of the report and which are extracted hereinbelow: - "24. The Court is unable to discern any uniform scientific method followed by the Appellant in making provision for the breakages. As noticed by the ITAT in its order dated 16thMarch 2009, the explanation offered b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognised. 23. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognised as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. xxxx xxxx xxxx 25. In the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 'possible' obligations with AS-29 defining the former to be an obligation which is considered probable i.e. more likely than not while a possible obligation is to be understood as meaning an eventuality which is considered not probable. 29. Proceeding further to expound upon the concept of a present obligation, AS-29 in Para 15 stipulates that an enterprise would be justified in creating a provision where it is more likely than not that the present obligation exists at the Balance Sheet date. It explains a converse situation and where the enterprise would only disclose a contingent liability and where no present obligation exists or where the possibility of an outflow of resources is remote. In Para 22, AS-29 explains that in order for a liability to qualify for recognition it must satisfy the twin conditions of there existing a present obligation as also the probability of an outflow of resources. It proceeds further to expand upon those basic postulates by observing that an outflow of resources would be regarded as probable if the event is more likely than not to occur, i.e. the probability of the event occurring being greater than a probability that it would not. It was thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, that a present obligation exists. 32. A contingent liability on the other hand is defined to mean a possible obligation that may or may not arise and the existence of which in any case would be confirmed only upon the occurrence or non-occurrence of one or more uncertain future events. AS-29 also brings within the fold of a contingent liability, cases which although qualifying the test of a present obligation, do not stand coupled with a probability of an outflow of resources or one in respect of which no reliable estimate can be made. Thus, a contingent liability contemplates the uncertainty of the existence of both an obligation as well as the occurrence of unpredictable future events. It also brings within its fold those cases where it is not probable that the liability may lead to an outflow of resources as well as a situation where the liability itself cannot be quantified on the basis of the principles of reasonable estimation. Thus, the provisions of AS-29 bar the creation of a provision only in the case of a contingent liability and which, as a concept, stands explained in the manner indicated above. 33. Of equal significance are the Illustrations which form part of AS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be viewed as an improbability. In our opinion, the phrase 'if any damage is caused' as it occurs in the agreement would only be germane to the issue of actual computation of the expenditure that would be incurred in the course of restoration. The qualificatory language as adopted in the agreement is thus liable to be viewed as merely being pertinent to identification of actual damage at the end of the lease term and the true or concrete expense to be incurred in repair and restoration. The said qualification would, in any case, have to be read in conjunction with the primary obligation to restore the premises to its original condition. The obligation to repair and restore forms the core of the contractual obligation which stood placed upon the assessee. It was therefore entitled to provision for such an expense provided it was considered probable and could be quantified on the basis of a reasonable estimation. The usage of the phrase 'if any damage is caused' did not transform that obligation into a contingent liability. We thus find ourselves unable to countenance the view expressed by the AO and the Tribunal in this respect. 36. A provision can be validly made, provided it be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture. It is the facet of such liabilities neither being probable, more likely not to occur and being immeasurable which distinguishes these liabilities from those in respect of which a provision may be legitimately made. 38. The provision as made thus, clearly appears to follow lines similar to the site restoration situation which the Madras High Court had an occasion to review in Vedanta Ltd. As was held by that High Court, the words 'laid out' or 'expended' are not confined to an immediate expenditure but would also comprehend an expenditure which may arise in the future. Their Lordships noted that the assessee in that case was placed under the contractual obligation to expend monies on site restoration and the creation of the provision itself being based on empirical principles. It thus held that all that Section 37 (1) requires is that the expenditure should be 'laid out' or 'expended' for the purposes of business. 39. The Madras High Court also had an occasion to notice a whole body of precedent which had, while speaking of provisions for liabilities being made, clearly interpreted the words 'laid out' or 'expended' as including an expenditure likely to be incurred in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lace below a table which captures how that provision stood pre and post its amendment by Finance Act, 2015: SECTION 36 AS AMENDED BY THE FINANCE ACT, 2003 SECTION 36 AS AMENDED BY THE FINANCE ACT, 2015 Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (i) the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession; [(ia) the amount of any premium paid by a federal milk co-operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk raised by its members to such federal milk co-operative society;] [(ib) the amount of any premium paid by cheque by the assessee as an employer to effect or to keep in force an insurance on the health of his employees under a scheme framed in this behalf by the General Insurance Corporation of India formed under section 9 of the General Insurance Business (Nationalisation) Act, 1972 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission; the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (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 fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause. 44. As we view Section 36 (1) (iii) it becomes manifest that an assessee would be liable to claim deductions in respect of the amount of interest paid in respect of capital borrowed for the purposes of business. On a reading of the principal part of Section 36 (1) (iii), it becomes evident that such a deduction coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded to that word flows on lines similar to those found in Black's, it also equates the word 'extension' with 'expansion' basis a decision rendered by the Allahabad High Court. 49. The Oxford English Dictionary defines the word 'extend' as meaning to stretch out, to prolong in duration, to carry to a further point of completeness. Relevant extracts from that lexicon are reproduced hereinbelow:- 'Extend- I. To stretch out II. To stretch or pull out (anything) to its full size; to strain (nerves); to hold or maintain in a stretched condition. Also to train (a vine)' 50. Words and Phrases in its Permanent Edition renders the following illuminating explanation to the meaning of the word 'extend': 'Extend - 'The word extend is used in a statute providing that motion for a new trial shall be filed within four days after return of verdict, provided that on application of defendant court may extend time for filing motion for 30 days, means time added to basic four days, unless extension order discloses, or contrary intention, so that time as extended makes a total of 34 days. Mo. 1994 the word 'extend', as used in statue, providing that motion for new trial shall we filed withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending itself to a variety of meanings dependent upon the context in which it may be used. While so explaining the meaning of the word 'extend', it also significantly states that it would also imply increase, amplify as well as any action which would be in tune with its well-known synonyms such as expand including the 'extension of business'. 52. Some of the major lexicons and dictionaries, while explaining the meaning of the word 'expansion' have stated that it would derive colour from the word 'expand' and which essentially means to become greater or bigger in size. The Oxford English Dictionary ascribes the following meaning to that word:- 'Expansion-'The action of expanding the fact or state of being expanded. I. Spreading out, Unfolding, opening out. II. The action or process of spreading out or unfolding; the state of being spread out or unfolded; the opening of a bud, flower, etc. Also a spreading out to view a display. 1646 SIR T. BROWNE Pseud. Ep. IV. V. 191 The.. distance betwixt the extremity of the fingers of either hand upon expansion. 1656 tr. Hobbes' Elem. Philos. (1839) 458 Whereupon there will follow a great expansion of light, with vehement flame. 1664 PO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pace to which anything is extended. b. Pure space (see quot. from Locke). 1690 LOCKE Hum. Und. 11. vii. §10 The capacious Mind of Man..extends its thoughts often, even beyond the utmost expansion of Matter. Joid. 11. xv. §1 Distance or Space, in its simple abstract conception. I call Expansion to distinguish it from Extension, which by some is used to express this distance only as it is in the solid parts of Matter. 1712 BLACKMORE Creation IV. (1718) 121 Lost in expansion, void and infinite. 1755 in JOHNSON. 4. a. The action or process of causing something to occupy or contain a larger space, or of acquiring greater volume or capacity; dilatation; an instance of this. 1664 Phil. Trans. I. 29 To prove the expansion of glass by heat. 1665 Ibid. 1. 49 What Bodies are expanded by being frozen, and how that expansion is evinced. 1692 BENTLEY Boyle Lect. viii. (1693) 27 The condensation and expansion of any portion of the Air is always proportional to the weight and pressure incumbent upon it. 178a Specif. Watt's Patent No. 1321. 5 The piston continues to descend by virtue of the expansion of the steam. 1830 R. KNOX Béclard's Anat. 235 They are furnished with tenso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r expanding over and above what may have originally existed. We also contemplate both words envisaging the spread of or addition to what may exist, both in its vertical as well as horizontal forms. It is this synonymous and similar meaning ascribed to the words 'extend' and 'expand' which weighs upon us and convinces us to desist from toeing this line of reasoning. 54. More fundamentally, and in our considered opinion, the objective of the Proviso does not really revolve or pivot upon the use of the word 'extension' as it appears. This would become evident from the discussion which ensues. The phrase 'extension of existing business' came to be introduced in the statute on the basis of Finance Bill, 2003. The Explanatory Memorandum seeks to shed light on the underlying objective of its insertion in the following words :- "Clarificatory amendments in respect of deduction for interest on borrowed capital Under the existing provisions contained in clause (iii) of sub-section (1) of section 36, deduction of interest is allowed in respect of capital borrowed for the purposes of business or profession in the computation of income under the head 'profits and gains of business or profe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of proviso to clause (iii) of sub-section (1) of section 36 of the Income-tax Act have been amended so as to provide that the borrowing cost incurred for acquisition of an asset shall be capitalised up to the date the asset is put to use without making any distinction as to whether an asset is acquired for extension of existing business or not. 16.4 The provisions of the ICDS are applicable for computation of income and not for the purposes of maintenance of books of account. There may be cases where the income is recognised for computation of taxable income in accordance with the provisions of ICDS without recording the same in the books of account and such income may be required to be reversed in accordance with the provisions of the ICDS. For claiming bad debt, the provisions of section 36(1)(vii) of the Income-tax Act, inter alia, require that the amount should be written off in the accounts of the assessee. 16.5 Therefore, the reversal of income in accordance with the provisions of the ICDS may not be allowable on the ground that same has not been written off in the accounts as per the provisions of section 36(1)(vii) of the Income-tax Act. In view of this, a proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r filing an answer, to extend a lease, term of office, charter, railroad track, etc. xxxx xxxx xxxx 25. The contention of Mr Mehra that the extended coverage does not cover the goods in transit till they reach any part of the country is not correct because the transit infers storage also till it reaches its destination. The damage on the rail or road would also include that in transit the goods are to be kept in transit shed, the policy would cover that also. If this interpretation is not given then the extended coverage would be of no use. Looking to the expression used in the background of the intention of the parties, it clearly transpires that once the goods were insured, then till they reach any part of the country they shall be covered by the extended coverage. Therefore, the contention of Mr Mehra cannot be accepted." 57. Our view with respect to the soundness of the submission based on a perceived distinction between the words 'extend' and 'expand' also finds resonance in the judgment handed down by the Punjab and Haryana High Court in Nahar Poly Films Ltd. vs. Commissioner of Income-Tax, Ludhiana [2011] 201 Taxman 304 (Punjab & Haryana) and where while dealing with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of capacities and up-gradation of technology in the success of business which was the instrument for increasing the spindle capacity which, in turn, was to be financed by the term loan raised by the assessee-company during the year. In the facts before the Hon'ble Delhi High Court in Modi Industries Ltd.'s case (supra) relied upon by the assessee, person was engaged in the business of manufacture of diverse items and a new item was added to its manufacturing business, whereas there was complete unity or control and utilisation of common funds and it was held that the business of manufacturing of new items was an extension of the business and not a new business. In the facts before us, though the same line of business is being carried on but scope of production has been enlarged by increasing the spindle capacity and the same is extension of business by the assessee. Consequently, the provisions of proviso to section 36 (1) (iii) are applicable in the case. 21. The plea of the assessee before us was that the increased capacity amounts to expansion of business, and is not extension of business envisaged in the proviso to section 36 (1) (iii). The dictionary meaning of the word ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations: - "12. It has not been disputed that so far as the question before us is concerned the legal position for determining the actual cost for the purpose of development rebate is the same as for the purpose of depreciation. 13. It would appear from the above that while considering the question of deduction on account of depreciation and development rebate, we have to take into account the written down value. Written down value in its turn depends upon the actual cost of the assets to the assessee. The expression 'actual cost' has not been defined in the Act, and the question which engages our attention is whether the interest paid before the commencement of production on the amount borrowed for the acquisition and installation of the plant and machinery can be considered to be part of the actual cost of the assets to the assessee. So far as the interest after the commencement of production in respect of capital borrowed for the purposes of business is concerned, the same can be deducted under clause (iii) of sub-section (2) of Section 10 of the Act. 14. In finding the answer to the question mentioned above, we have to bear in mind that it arises in the context of profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny work or building or the provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way of share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision of any plant. The reason indeed would be stronger in case such interest is paid on money taken on loan for meeting the above expenses. xxxx xxxx xxxx 21. It may be mentioned that as against the view taken by the Andhra Pradesh High Court in the judgment which is the subject-matter of the appeal, three other High Courts have taken the contrary view and have held that interest paid in such circumstances can be capitalised and included in the actual cost of the machinery and plant. The decision of the Calcutta High Court in which the contrary view has been taken is the subject-matter of appeal before us. The view of Calcutta High Court has been followed by the Madras High Court and the Allahabad High Court. The decision of the Madras High Court is in the case of CIT v. L.G. Balakrishnan and Bros. (P) Ltd. [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvantage of an enduring nature; (b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within Section 10 (2) (xv)." 63. In our considered opinion, the true import of the judgments of the Supreme Court in Challapalli Sugar and India Cements were correctly explained by the Gujarat High Court in CIT vs. Alembic Glass Industries 1975 SCC OnLine Guj 55 as well as by our Court in CIT vs. Monnet Industries Ltd [2008 SCC OnLine Del 1506]. In Alembic Glass, the principal issue which arose was whether the borrowing obtained by the assessee was liable to be viewed as an extension of an existing business or for the purposes of establishment of a separate undertaking. It was while dealing with the principal issue of commonality of purpose, interlacing of businesses that the Gujarat High Court held as under: - "14. We shall first analyse the facts of the Bombay case because these facts are found to be quite apposite to the facts of the present case. In the Bombay case the assessee-fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the whole scheme of subsection (2), the capital which is borrowed must be used in the year of account. If the capital is used in the year of account and the use is for the purpose of the business, then it is immaterial whether the user of capital actually yields profit or not. What sub-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 10 (2) (xv) which expressly excludes an expense of a capital nature, the legislature has made no distinction in section 10 (2) (iii) between capital borrowed for a revenue purpose and a capital purpose. An assessee is entitled to claim interest paid on borrowed capital provided it is for the purpose of the business irrespective of what may be the result of using the capital which he has borrowed." 15. These observations show that when for the purpose of a running business an assessee borrows some amount then it is immaterial for the purpose of section 10 (2) (iii) of the Act of 1922 to consider whether the borrowed amount was invested for the purpose of obtaining an asset of enduring nature or was spent for revenue. The facts of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Cements Ltd.'s case [[1966] 60 ITR 52 (SC).], it would be necessary to state shortly the facts relating to that decision. There the assessee was a public limited company engaged in the manufacture and sale of sugar. The company went into production on January 22, 1958. It had borrowed considerable sums of moneys from the Industrial Finance Corporation of India for the installation of machinery and plant. During the accounting period, the company paid Rs. 2,38,614 as interest and claimed that the said payment should be treated as part of the cost of the machinery and plant installed by it, and the depreciation should be calculated accordingly. The Income-tax Officer rejected this claim of the company and held that the interest paid by the company from year to year was revenue expenditure. The matter eventually went to the Andhra Pradesh High Court which held that where a plant is constructed out of borrowed money, the interest on loan up to the date of the commencement of the business could not be capitalised or treated as part of the actual cost of the plant. The Supreme Court rejected this view of the High Court on consideration of the question as to what was the 'actual cost' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset, seems to be on the ground 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 the investment of the borrowed capital in the purchase of the new asset which brings that asset into existence. Since the transaction of borrowing is not the same as the transaction of investment, the Supreme Court has observed in India Cements Ltd. v. Commissioner of Income-tax [[1966] 60 ITR 52 (SC).] that, for considering whether payment of interest on a borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. Thus, the decisions of the Bombay High Court in Calico Dyeing & Printing Works [[1958] 34 ITR 265 (Bom).] and of the Supreme Court in India Cements Ltd. [[1966] 60 ITR 52 (SC).] were given with reference to the borrowings made for the purposes of running businesses, while the decision of the Supreme Court in Challapalli Sugars Ltd. [[1975] 98 ITR 167, 178 (SC).] was given with reference to the borrowings which could not be treated as made for the purposes of business, as no business had yet been commenced. Thus, there is no incompatibility betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is made for the purposes of a business, the interest paid on such a borrowing becomes eligible to deduction contemplated by section 10 (2) (iii) of the Act of 1922 or section 36 (1) (iii) of the Act of 1961. (2) This would be so, even if the capital is invested in order to acquire a revenue asset or a capital asset, because the act of borrowing capital is distinct from the act of investment of that capital to acquire an asset. (3) However, the business for which an asset of enduring nature is purchased with the borrowed capital should not be separate or distinct from the business for the purposes of which the capital is borrowed if deduction under section 10 (2) (iii) is to be allowed. (4) If there is no existing business with reference to which the capital is borrowed and the borrowed capital is invested to purchase a new asset of enduring nature, then the interest paid on such borrowing till the asset so purchased goes into production, increases the cost of the installation of the said asset, and hence should be treated as capital expenditure not covered by section 10 (2) (iii) of the Act of 1922 or section 36 (1) (iii) of the Act of 1961." 65. Of significance is the High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of control and management, the Supreme Court in the cases of Setabganj Sugar Mills Ltd. v. CIT (1961) 41 ITR 272 and L. M. Chhabda and Sons v. CIT (1967) 65 ITR 638, laid down the tests that the following will have to be borne in mind, the inter-relation of the businesses, the employment of same capital, the maintenance of common books of account, employment of same staff to run the business, the nature of the different transactions, the possibility of one being closed without affecting the texture of other. 23. This test was further refined by the Supreme Court in the case of CIT v. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632. In this case, while holding that life insurance business and general insurance business were the "same business", it observed that in determining whether two or more lines of businesses may be regarded as "same business" or "different business", what has to be looked at is, the nature of businesses, the nature of their organization, management, source of capital fund utilized, method of book keeping used and other related circumstances which stamp the businesses as the same or distinct. The Supreme Court concluded that both life insurance and general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Gujarat High Court dealt with a similar situation wherein the assessee-company had an existing unit for manufacture of glass at Baroda since 1947. During the relevant assessment years 1965-66 and 1966-67, the assessee-company incurred expenditure for establishing a new glass unit at Bangalore. The unit at Bangalore did not go into production during the aforesaid two assessment years in question and, therefore, during the course of assessment, the Income-tax Officer disallowed the payment of interest on borrowings in respect of the aforesaid two assessment years. The Income-tax Officer was also of the view that the Bangalore unit was not a branch of the assessee factory at Baroda and was, therefore, a new business and since this new business had not started production, the payment of interest could not be taken as revenue expenditure. The Gujarat High Court was called upon to answer the following questions (page 719): "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the Whitefield factory at Bangalore did not constitute a separate undertaking but was only an establishment of a new unit of the existing factory at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n borrowed capital for the purposes of business. That being the case, in our view, the Tribunal correctly allowed the financial charges i.e., interest paid to the extent of Rs. 3,50,83,472 as deduction under section 36 (1) (iii) of the Act". 68. As is apparent from the conclusions which came to be drawn by our Court in Monnet Industries, as long as a loan is taken for purposes of business, the assessee would be entitled to claim interest as a deduction under Section 36 (1) (iii) of the Act. It however drew a distinction between a business which had already commenced as opposed to a new line of business which was yet to be operationalized. It was in that context that Monnet Industries had spoken of unity of control and management and other similar precepts that Courts have enunciated. However, in the facts of the present appeals, we are really not called upon to examine issues akin to commonality of control and management since, and undisputedly, the assessee was engaged in an existing business. 69. We then proceed to examine the decision in Core Healthcare and which appears to be more apt insofar as this set of appeals is concerned. In Core Healthcare the primary question which s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid precepts in mind and Section 36 (1) (iii) is understood as being applicable merely upon capital being borrowed, it is evident that all other aspects as were sought to be urged by learned counsels for respective sides pale into insignificance. 71. We are, however, in these appeals concerned more with the scope of the Proviso to Section 36 (1) (iii) as opposed to divergent lines of business, managerial control or commonality of interest. This, since we are primarily called upon to ascertain its true intent bearing in mind the undisputed fact of the interest liability being concerned with CWIP. As we bear the legislative history preceding the insertion of the Proviso and the various judgments rendered in the context of Section 36 (1) (iii) or its avatar in the erstwhile regime, it clearly appears to have been prompted by the felt need to overcome a contingency where although capital comes to be borrowed, the asset which is sought to be created with its assistance is yet to be utilised or put to use. It was in order to make appropriate provisions with respect to such an eventuality that Parliament stepped in and clarified that the interest burden borne, although for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of an asset which may be utilized for or in the course of extension of an existing business and thus disables the assessee from deducting interest paid on that borrowing during the period when the capital was first borrowed and till such time as the asset is put to use. Thus, the interest borne on borrowed capital during this period alone is sought to be removed from the ambit of Section 36 (1) (iii). 75. We thus recognize the principal purpose of the Proviso as being merely to exclude a claim of interest paid on borrowed capital as a deduction and borne during the period identified above. The submissions, therefore, based on a conceived difference between 'extension' or 'expansion' of an existing business are of little relevance or import. 76. However, and the additional issue which must be necessarily borne in mind is the factual position in these appeals and where the identifiable line between borrowed capital and the utilisation of interest free funds which were available in the hands of the assessee became blurred and with the Tribunal itself noting that the material as existing was insufficient to enable it to render a conclusive finding on this score. It is in the af ..... X X X X Extracts X X X X X X X X Extracts X X X X
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