9911796707
TMI Blog2025 (3) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of actual computation of the expenditure that would be incurred in the course of restoration. 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. The usage of the expression 'probable' is equated to 'more likely than not'. Thus, it is the reasonable likelihood of the outflow as opposed to a remote or uncertain possibility which is deemed to be germane and relevant. It thus has to be viewed as distinct from unforeseen liabilities and obligations. As we view the contract term, we have no hesitation in recognising the same as being the manifestation of a positive commitment to repair and restore. The duty to repair and restore stands attached to the removal of equipment as well as the liability to restore the premises to its original co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nction between the words 'extension' and 'expansion' especially since etymologically both appear to have been employed interchangeably and on many occasions, deemed to be synonyms of each other. Authoritative work explains that the word 'extend' is clearly flexible, lending 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'. Thus, it leads to the inevitable conclusion of both 'expand' and 'extend', essentially seeking to convey enlargement or 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. We are thus of the considered opinion that the question which stands posited would have to answere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions are thus clearly incompatible.
Therefore and in our considered opinion, the scope of the remand would necessarily entail the AO not only examining the aspects pertaining to a common pool of funds as framed by the Tribunal but also whether the cell sites had been actually brought into use. The exercise which the AO would thus be obliged to undertake would have to cover the twin issues that we have identified above bearing in mind the construction that we have placed on Section 36 (1) (iii) of the Act.
We would thus answer Question A in the affirmative and in favour of the assessee. Insofar as Question B is concerned, we direct the AO to re-examine the issues emanating from Section 36 (1) (iii) bearing in mind the enunciation of the scope of that provision as explained by us in terms of this judgment. We also expand the scope of the remand in light of the observations which appear hereinabove and to thus include the twin issues of a common pool of funds as well as cell sites having been put to use. Question C concededly stands concluded by the decision of the Supreme Court in Bharti Cellular [2024 (3) TMI 41 - SUPREME COURT] and thus needs no further elaboration. X X X X Extracts X X X X X X X X Extracts X X X X ..... up for review on 03 April 2024, we had taken note of the contention of Mr. Jolly, learned senior counsel appearing for the assessee, that the Tribunal had undisputedly failed to deal with the alternative plea which was taken by the assessee with respect to Asset Reconstruction Cost [ARC]. The ARC was sought to be factored in while computing depreciation claimed and the same, according to the assessee, being otherwise liable to be accorded recognition by virtue of Section 37 (1) of the Income Tax Act, 1961 [Act] in case its stand of the same being covered by Section 32 were to not find favour. It was thus contended that the Tribunal had clearly committed a manifest illegality in failing to deal with the aforesaid question. 3. Turning then to the issues emanating from Section 36 (1) (iii), we had taken note of the submissions addressed by learned counsels appearing for respective sides and who had extensively argued on the meaning liable to be ascribed to the word 'extension' as appearing in the Proviso thereto. Insofar as Question 'C' as framed in the assessee's appeal was concerned, it was conceded that the issue stands conclusively answered and laid to rest in light of the judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion at the end of the lease period. The appellant had claimed depreciation in this respect in the sum of INR 5.10 crores. The provision itself was made in light of Accounting Standard 29 [AS 29] on the basis of the same constituting a present obligation and which could be reasonably estimated. However, the AO proceeded to disallow the said provision holding that it was not in the nature of an ascertained liability. It also rejected the alternate plea of the assessee resting on Section 37 of the Act. The objections which were taken in this respect came to be rejected by the DRP and the view so expressed affirmed ultimately by the Tribunal. 8. The Tribunal records that the appellant had estimated the aforenoted sum as likely to be incurred in the course of restoration of the said sites and which was an obligation which already stood placed upon it. However, it took the view that the word 'actual cost' as it appears in Section 32 would have to derive meaning from Section 43 (1) of the Act and thus constitute actual cost of assets to the assessee reduced by that portion of the cost as may have been directly or indirectly made. It thus came to conclude that depreciation could have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the further sum of Rs. 5000/- per month towards 'maintenance charges'. Consequences of determination of the agreement have been set out in clause 10, which is the bedrock of the assessee's claim for the asset restoration cost obligation and resultant depreciation. The relevant part of this clause provides that the assessee; 'shall at its own cost restore the premises of the said building to its original state, if any damage is caused in the court of the removal of cables, antennas or other equipments.' There is absolutely no doubt on the interpretation of clause 10 of the agreement that the assessee will be obliged to incur cost at the time of determination of the agreement only if damage is caused in the course of removal of cables, antennas or other equipments and not otherwise. Damage to the premises, if any, arising on the removal of cables, antennas and other equipments, etc., can be ascertained only at the time of termination of the agreement and not at the time of entering into the agreement. Further, no obligation will be incurred if no loss is caused to the premises at the time of removal of cables etc. as such, we are of the considered opinion that the addition of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation 2.-For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.] [Explanation 3.-For the removal of doubts, it is hereby clarified that the expression "expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law" under Explanation 1,shall include and shall be deemed to have always included the expenditure incurred by an assessee,- (i) for any purpose which is an offence under, or which is prohibited by, any law for the time being in force, in India or outside India; or (ii) to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guideline, as the case may be, for the time being in force, governing the conduct of such person; or (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich regulate the creation of a provision in Balance Sheets. For purposes of evaluating the aforenoted submission, we deem it apposite to extract the following relevant parts of AS 29:- 'Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets (This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal authority. Paragraphs set in bold italic type indicate the main principles. This Accounting Standard should be read in the context of its objective and the General Instructions contained in part A of the Annexure to the Notification.) Pursuant to this Accounting Standard coming into effect, all paragraphs of Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date, that deal with contingencies (viz., paragraphs 1 (a), 2, 3.1, 4 (4.1 to 4.4), 5 (5.1 to 5.6), 6, 7 (7.1 to 7.3), 9.1 (relevant portion), 9.2, 10, 11, 12 and 16), stand withdrawn except to the extent they deal with impairment of assets not covered by other Indian Accounting Standards. Objective The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable, its existence at the balance sheet date is considered not probable. 10.8 A restructuring is a programme that is planned and controlled by management, and materially changes either: (a) the scope of a business undertaken by an enterprise; or (b) the manner in which that business is conducted. 11. An obligation is a duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement. Obligations also arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. 12. Provisions can be distinguished from other liabilities such as trade payables and accruals because in the measurement of provisions substantial degree of estimation is involved with regard to the future expenditure required in settlement. By contrast: (a) trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and (b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise's future actions (i.e. the future conduct of its business) that are recognised as provisions. Examples of such obligations are penalties or clean-up costs for unlawful environmental damage, both of which would lead to an outflow of resources embodying economic benefits in settlement regardless of the future actions of the enterprise. Similarly, an enterprise recognises a provision for the decommissioning costs of an oil installation to the extent that the enterprise is obliged to rectify damage already caused. In contrast, because of commercial pressures or legal requirements, an enterprise may intend or need to carry out expenditure to operate in a particular way in the future (for example, by fitting smoke filters in a certain type of factory). Because the enterprise can avoid the future expenditure by its future actions, for example by changing its method of operation, it has no present obligation for that future expenditure and no provision is recognised. xxxx xxxx xxxx Probable Outflow of Resources Embodying Economic Benefits 22. For a liability to qualify for recognition there must be not only a present obligation but also the probability of an outflow of resources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e can be made of the amount of obligation. There is a possible obligation or a present obligation that may, but probably will not require an outflow of resources. There is a possible obligation or a present obligation where the likelihood of an outflow of resources is remote A provision is recognised (paragraph 14). Disclosures are required for the provision (paragraphs 66 and 67) No provision is recognised (paragraph 26). Disclosures are required for the contingent liability (paragraph 68). No provision is recognised (paragraph 26). No disclosure is required. (paragraph 68). Reimbursements No provision is recognised (paragraph 26). No disclosure is required. (paragraph 68). The enterprise has no obligation for the part of the expenditure to be reimbursed by the other party. The obligation for the amount expected to be reimbursed remains with the enterprise and it is virtually certain that reimbursement will be received if the enterprise settles the provision. The obligation for the amount expected to be reimbursed remains with the enterprise and the reimbursement is not virtually certain if the enterprise settles the provision. The enterprise has no liability fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or expended wholly for the purpose of business of the Assessee. There is no dispute that the Provision on question was made wholly and exclusively for the purpose of business. The only dispute was that expenditure not actually incurred in there years and the amount was to be spent in future out of the Provision made during these Assessment years namely A.Y.1996-1997 to 1998-1999. 30. We find no prohibition or negation for making a provision for meeting such a future obligation and such a provision being treated as a revenue expenditure under Section 37 (1) of the Act. The Hon'ble Supreme Court in the case of Calcutta Company Limited clearly held that the words Lay (laid out) or Expend includes expendable in future also, which has been quoted by us above. The making of a Provision by an Assessee is a matter of good business or commercial prudence and it is to set apart a fund computed on scientific basis to meet the expenditure to be incurred in future. There is no time frame or limitation prescribed for the said provisions to be actually spent. Merely because in the context like the one involved in this case, the contract period was long viz., 25 years, which too now stands exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or expended wholly and exclusively for the purposes of business, is liable to be taken into consideration while computing income chargeable under the head profits and gains of business or profession. This provision thus focuses on expenditure 'laid out' or 'expended' as opposed to the identification of an actual cost and which constitutes the heart of Section 32. 16. This would constitute an appropriate juncture to also broadly capture the issues which emanate from Section 36 (1) (iii) of the Act and the challenge which stood raised by the appellant assessee to the disallowance of interest paid in respect of capital borrowed for purposes of business. Insofar as this aspect is concerned, the Tribunal had taken note of the admitted fact of the appellant having declared Capital Work-in-Progress [CWIP] amounting to INR 278.96 million in its Balance Sheet. The Tribunal records that the AO, however, had found that the above was in addition to Fixed Assets disclosed to be INR 12828 million as an item distinct from CWIP which was shown separately. It has then proceeded to hold that since CWIP would not qualify the requirement of 'extension of existing business', as that phrase existed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as deduction.'' 18. It proceeded to negate the contention that the interest burden would qualify the requirement of 'extension of existing business' in the following terms: - '24. We are not convinced with the contention advanced by the Id. AR. The words 'for extension of the existing business' presuppose that there is already a business in existence and capital is borrowed for acquisition of assets for extension of such existing business. 'Extension' can be vertical as well as horizontal. Existing telecommunication business can be extended in different forms. One of such forms can be the one described by the Id. AR in which a Cellular mobile service provider (CMSP) expands its area of business to a different Circle which was not hitherto-in its reach. In the same breath, there can be an extension of existing business when CMSP increases its reach within the allotted Circle itself by means of setting up new towers. To put it simply a CMSP has license to operate in a particular state, it may initially set up cell towers catering to urban areas for meeting the requirements of population residing therein. With the passage of time, it may try to reach to rural areas and still more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NANCIAL PERFORMANCE Set out below is the summary of the financial performance of the Company during the year under review: Particulars Year ended 31 Mar 2009 Period ended 31 Mar 2008 Revenue from operation 31,301.5 27,501.90 PBIDTA 7,344.1 8,811.20 Depreciation and Amortisation 5,315.4 3,855.50 Finance Charges 1,709.4 1,537.60 Profit Before Tax 319.3 3,418.10 Profit After Tax 317.1 3,497.80 The Earning Per Share for the year has substantially declined to Rs. 3.1 per share from Rs. 34.6per share in the previous period which can be attributed primarily due to increased rates in depreciation resulting in higher depreciation and amortisation costs coupled with higher finance and fuel costs. DIVIDEND With a view to augment resources, your Directors do not recommend any Dividend. OPERATIONS 2008-09 was a challenging year for all Telecom Operators. The year witnesses launch of several new operators coupled with regulatory driven tariff cuts, drop in International In roaming traffic due to global economic slowdown. The end of the year finally saw the impact of the global slowdown hitting India visibly in statistical terms. During the year under revie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid up Share capital to the tune of Rs. 1011.0 Million and Reserves and Surplus for a sum of Rs. 4571.8 Million. Thus, it is palpable that as against the investment of Rs. 2789.6 Million in CWIP, the assessee has its own shareholders fund for a sum of Rs. 5582.9 Million, which is roughly double the amount of Capital work in progress. 28. Section 36(1 )(iii) provides for deduction of interest of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. The essence of this provision is that the interest should be allowed so long as the capital borrowed, on which such interest is paid, is used for the purpose of business or profession. If, however, an assessee is having its own interest free surplus funds and such funds are utilised as interest free advances even for a non business purpose, there cannot be any disallowance of interest paid on interest bearing loans. The Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year, apart from substantial share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .' In upholding the order of the Tribunal, the Hon'ble High Court held that, 'if there be interest free funds available to an assessee sufficient to meet its investment and at the same time the assessee had raised a loan, it can be presumed that the investments were from the interest free funds available". Thereafter, the judgment of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627 (SC) and also the judgment of the Hon'ble Calcutta High Court in Woolcombers of India Ltd. Vs. CIT (1981) 134 ITR 219 (Cal) were considered. It was finally concluded that "The principle, therefore, would be that if there are funds available both interest free and overdraft and/or loans taken, then a presumption would arise that the investments would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment". Consequently the interest was held to be deductible in full. 29. From the above judgment, it is manifest that there can be no presumption that the shareholders' fund of a company was utilized for purchase of fixed assets. If an assessee has interest free fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of an ascertained liability and which was also affirmed by the Tribunal. It is this stand which was reiterated by Mr. Rai and who had principally argued that ARC was clearly a contingent liability as explained by AS-29 and, therefore, no provision could have been made in respect thereof. 23. According to Mr. Rai, the Lease Agreement itself had used the expression 'if any' and thus clearly being indicative of there being no present obligation that could be acknowledged in law. Mr. Rai had in this respect also sought to draw sustenance from a judgment rendered by a Division Bench of the Court in Seagram Distilleries Pvt. Ltd. (Now Pernod Ricard India Pvt. Ltd.) v. Commissioner of Income Tax 2015 SCC OnLine Del 12586 and where the Court had an occasion to review some of the provisions comprised in AS-29. It, however, becomes pertinent to note that Seagram Distilleries arose in the context of a provision which the assessee had made in respect of transit breakages. The Court was thus called upon to consider whether breakage of bottles during transit and a provision made in respect thereof was liable to be viewed as a liability and whether it could be said to have been est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposes to first discuss the decision in Bharat Earth Movers (supra). There the Assessee had floated a beneficial scheme for its employees for encashment of leaves. The Assessee made a provision for meeting the liability to the extent of the entitlement of the officers and staff to accumulated earned leaves in terms of the scheme and claimed that provision as a deduction. The ITAT held in favour of the Assessee but the High Court reversed it on the ground that the provision for the accrued leaves was a contingent liability. The Supreme Court, however, disagreed with the High Court and held as under: "The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in prasenti though it will be discharged at a future date. It does not make any difference if the future date o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 30 days after despatch of the goods. The Court also concurs with the view of the ITAT that with the first Assessee having entered the line of business only from AY 2001-02, it cannot be said to have gathered sufficient experience to have reasonably estimated such breakages for the AYs in question. In the circumstances, the 'liability' on that score could at best be described as a 'contingent liability' as defined in AS-29. xxxx xxxx xxxx 27. To summarise the legal position as far as the Assessees are concerned: (a) There is no reasonable scientific method adopted by the Assessees to estimate the transit breakages so as to justify creating of provision for such breakages. (b) The provision would, in the circumstances, be a provision for a contingent liability and, therefore, in terms of the AS 29 ought not be recognised. (c) The actual transit breakages as and when they occur are allowable as revenue expenditure in the accounting year in which such breakages occur.' 25. Mr. Rai had also cited for our consideration the judgment of the Supreme Court in Rotork Controls India (P) Ltd. v. CIT 2009 SCC OnLine SC 1119. In Rotork, the Supreme Court was called upon to examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctuators in large numbers. The statistical data indicates that every year some of these manufactured actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy valve actuator without a warranty. Therefore, warranty became integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognised as provisions. These past events are known as obligating events." 27. The enunciation of the legal position with respect to provisioning was thus succinctly explained by the Supreme Court as relating to the accepted and recognised practise of an amount being set aside to cover the expected cost of a probable liability which an assessee may incur and factor in, provided it can be measured by a reasonable degree of estimation and subject to it being found that the assessee was burdened by a present obligation flowing from a past event coupled with the probability of an outflow of resources for purposes of settling such an obligation. The Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only contemplates the making of appropriate disclosures in that respect in accordance with Para 68. In contrast to the meaning assigned to a present obligation, obligating event, liability and a provision, AS-29 defines a contingent liability to be a possible obligation, the existence of which would be confirmed only upon the occurrence or non-occurrence of one or more uncertain future events, and which may or may not be wholly within the control of the enterprise. A contingent liability is further defined to mean that though flowing from a present obligation arising from past events, it is not liable to be recognized since it is not probable that it would lead to an outflow of resources or where a reliable estimate of the expense involved cannot be made. 31. The key takeaways from AS-29, is of an enterprise being entitled to create a provision if a liability is found to exist. A liability is explained to mean a present obligation arising from past events and the settlement of which is expected to result in an outflow of resources. The past event insofar as the assessee is concerned, is the lease agreement and under which it came to be placed under the obligation to expend an asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliably estimate the monetary liability that may come to be created if such an obligation were to be discharged. AS-29 prohibits the recognition of a provision where although a possible or present obligation is found to exist, but it would probably not entail an outflow of resources or where the outflow is considered to be remote. Illustration 3, which forms part of AS-29, explains a situation where an enterprise which was operating an offshore oil field is contractually obliged to remove the apparatus at the end of production and restore the seabed to its original condition. The answer which AS-29 provides in respect of that query, lends credence to the case set forth by the assessee herein as would become clearer from the discussion which follows. 34. One cannot possibly doubt the imperative requirement of civil works being undertaken on premises in order to erect cell towers. This would necessarily be liable to be removed upon the end of the license term in light of the contractual obligation which stands imposed upon the assessee. Since this would necessarily entail dismantling as well as restoration of the site to its original condition, the assessee appears to have estimate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts firstly proceeds on the incorrect premise of the liability being one which already exists and in respect of which there cannot possibly be a doubt. It is while proceeding on this fundamental postulate which has led to the Tribunal seeking to discern the existence of an ascertained liability. This clearly runs contrary to the express language of AS 29 when it defines a liability to be one whose settlement is expected to result in an outflow. AS 29 while explaining when a provision may be justifiably made speaks of the probability of an outflow. The usage of the expression 'probable' is equated to 'more likely than not'. Thus, it is the reasonable likelihood of the outflow as opposed to a remote or uncertain possibility which is deemed to be germane and relevant. It thus has to be viewed as distinct from unforeseen liabilities and obligations. As we view the contract term, we have no hesitation in recognising the same as being the manifestation of a positive commitment to repair and restore. The duty to repair and restore stands attached to the removal of equipment as well as the liability to restore the premises to its original condition. The contract thus constitutes the past ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied the prescriptions of AS 29 and the assessee was thus justified in accounting for the same. The ARC obligation clearly met the test of a positive obligation flowing from a past event, being a conceivable probability as well as being measurable. In any event, both the AO as well as the Tribunal appear to have proceeded on the basis that only an ascertained liability could have been provisioned for. That view is not only erroneous but also unsustainable in law. 41. We are also of the view that the Tribunal in any case failed to notice or engage with the contention of the assessee in the alternative and which was based on Section 37 of the Act. By placing its case within the ambit of Section 37, the assessee stood relieved of getting into the quagmire of 'actual cost' and other related issues. All that it was left to establish was that the expenditure had been laid out. As the Madras High Court correctly explains in Vedanta, the usage of the expression 'laid out' and 'expended' in Section 37 are indicative of that section not being confined to immediate expenditure but also factoring for situations where an amount may be set apart for a determined or specified objective. The appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nus or commission; (iia) [Omitted by the Finance Act, 1999, w.e.f. 1-4-2000.] (iii) 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 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 fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause; 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- 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 prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly pertaining to Section 36 (1) (iii) and which revolved upon the meaning to be ascribed to 'extension of business', it was vociferously argued that the Tribunal had clearly erred in holding that the investments which was made was for the purposes of extension of an existing business. It was in the aforesaid context that learned counsel had also sought to draw sustenance from certain other provisions comprised in the Act and which define the word 'expansion' as well as 'substantial expansion' as distinct from 'extension'. 46. However, in our considered opinion, the distinction which was sought to be canvassed for our consideration and the arguments based thereon would clearly distract us from discerning the true intent and purpose underlying the insertion of the Proviso to Section 36 (1) (iii). We express our hesitation in founding our judgment on the perceived distinction between the words 'extension' and 'expansion' especially since etymologically both appear to have been employed interchangeably and on many occasions, deemed to be synonyms of each other. 47. The Black's Law Dictionary defines the word 'Extension' as a part constituting an addition, enlargement or enlargement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended makes a total of 34 days. The word 'extension' ordinarily implies the existence of something to be extended, state vs graves. Mo 1932. Word 'extend' is defined as to enlarge in any sense; to make more comprehensive or capacious to broaden the application or action of its synonyms being increase, enlarge, expand and widen.' - Meyering v. Miller, 51 S.W.2d 65, 330 Mo. 885. Mont. 1936. To "extend" means to make more comprehensive; enlarge the scope of; give wider range. "Reference statutes," which by reference wholly or partly adopt pre-existing statutes, are not strictly "amendatory" or "revisory" in character, and hence are not obnoxious to constitutional provision that no law should be revised or amended, or extended by reference to its title only. State ex rel. Berthot v. Gallatin County High School Dist., 58 P.2d 264, 102 Mont. 356. N.J.Err. & App. 1930. Word "extend" lends itself to great variety of meanings, which must in each case be gathered from context.- Blouch v. Stevens, 150 A. 581, 106 N.J.L. 488. N.J. Sup.1903. The word "extend," both by etymology and by common usage, is an exceedingly flexible term, lending itself to a great variety of meanings, which mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fair expansion lie. 1847 DE QUINCEY Sp. Mil. Nun §8 (1853) 18 A mob orator, whose brawling mouth open to its widest expansion, [etc.]. 1867 The detailed expression of what is implicitly contained in a statement; the writing out in full the meaning of graphical contractions. Also in Alg. the process of working out a contracted expression (cf. EXPAND I b.) and stating the result in full; the result or statement thus obtained. 1858 TODHUNTER Algebra xxxvi. §519 The subject of the expansion of expressions is.. properly a portion Differential Calculus. Ibid. xxxvi. §524 To find the number of terms in the expansion of any multinomial. 1886 J. EDWARDS Diff. Calc. 96 96 Now assuming the possibility of such an expansion, let, etc. 1869 E. J. REED Shipbuilding 186 Either a model of one side of the ship or an expansion drawing is prepared, on which to set off the edges and butts of the plates. Ibid. 439 An expansion batten is applied to the line on the floor representing the moulding edge of the frame. 1877 THEARLE Theor. Naval Archit. 1. 163 When an expansion drawing is made, the several strakes of plating can be shown upon it, also their thicknesses... It is obviousl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 874 These movements depend not upon alternate expansion and contraction of the tissue.. but, etc. b. of immaterial things. 1682 SIR T. BROWNE Chr. Mor. 19 Spread not into boundless expansions either of designs or desires. 1856 SIR B. BRODIE Psychol. Ing. I. i. 31 A high education may.. have the effect of preventing the full expansion of genius. 1864 D. G. MITCHELL Sev. Stor. 69, I felt.. an unusual expansion. 1879 M. ARNOLD Mixed Ess. Pref. 7 The love of liberty is simply the instinct in man for expansion. c. Comm. and Finance. (a) An extension (of business transactions). (b) An increase in the amount of the circulating medium. More fully expansion of the currency. 1847 CRAIG, Expansion, in commerce, commerce an increase of issue issues of bank notes. 1864 in WEBSTER. 1891 Pall Mall G. 10 Nov. In some directions there has been expansion, so that the 7/1 In losses have been partially neutralized. d. Extension of the territorial rule or sway of a country. 1882 J. R. SEELEY in Macm. Mag. XLVI. 456 (title) The Expansion of England in the Eighteenth Century. 1903 Sun (N.Y.) 1 Dec. 2 When he indorsed the doctrine of expansion "the cheers were pronounced. 5. The amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for extension of existing business or profession (whether capitalized in the books of account or not) for the period beginning from the date on which the capital was borrowed for the acquisition of the asset till the date on which such asset was first put to use. The proposed amendment will take effect from the 1st day of April, 2004 and will, accordingly apply in relation to assessment year 2004-2005 and subsequent years." 55. The Explanatory Notes to the provisions of the Finance Act, 2015 provide the following insight underlying the deletion of that phrase from the Proviso itself: - "16. Alignment of provisions relating to capitalisation of interest and claim of deduction of bad debts with the provisions of the Income Computation and Disclosure Standards (ICDS) 16.1 The Income Computation and Disclosure Standards (ICDS)-IX relating to borrowing costs provides for capitalisation of borrowing costs incurred for acquisition of assets up to the date the asset is put to use. The proviso to clause (iii) of sub-section (1) of section 36 of the Income-tax Act provided for capitalisation of borrowing costs incurred for acquisition of assets for extension of existing business up to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding in the accounts and is required to be written off as irrecoverable as per the provisions of ICDS, it shall be deemed to be written off as irrecoverable in the accounts. 16.6 Applicability: - These amendments take effect from 1st April, 2016 and would accordingly apply to assessment year 2016-17 and subsequent assessment years" 56. The words 'extend', 'extension' and 'expansion' have arisen for interpretation in various judgments, including some of which were cited by Mr. Rai for our consideration. For instance, in United India Insurance Co. Ltd. v. Great Eastern Shipping Co. Ltd (2007) 7 SCC 101 the issue arose in the context of the extension of an existing insurance policy and whether the extended coverage would cover goods in transit. While dealing with this question, the Supreme Court observed: - '17. Learned counsel also referred to Law Lexicon, to give dictionary meaning to the word, 'extend', which reads as follows: "Extend.-This term has a wide variety of meanings and has been defined as follows: To prolong, to continue or continue in any direction: stretch out; to stretch out of reach; to expand; to enlarge or lengthen the bounds or dimensions or; lengthen. And ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) inserted by the Finance Act, 2003 w.e.f. 1 4-2004 relating to assessment year 2004-05 and subsequent years is to disallow interest on moneys borrowed for acquiring a capital asset till the date on which the asset was brought to use even if it is for extension of existing business. 12. After considering the issue, we do not find any substance in the contention of the learned counsel. It would at the first place be quite apt to have a glimpse of the dictionary meanings of the two words. According to Chambers 21st Century Dictionary, the meaning of word Extension, inter alia, is the process of extending something or the state of being extended, an added part that makes the original larger or longer whereas the meaning of the word "expansion" is the act or state of expanding. The distinction between "Extension" and "Expansion" as has been sought to be projected by the assessee does not carry any persuasion as there is no real distinction between the two as suggested by the counsel. Even if the distinction as professed by the learned counsel in the terms "Extension" and "Expansion" is taken to exist still the plea of the assessee does not inspire acceptance as "Expansion" would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tension' are synonymous and even if it be taken as expansion, as contended by the assessee, it is not different from extension of business and consequently the application of the proviso to section 36 (1) (iii) of the Act is justified. In the entirety of facts and circumstances and in view of the machinery not being put to use, the interest expenditure on the utilisation of borrowed funds for the acquisition of new assets, from the date of its acquisition till the date when machinery is put to use, is disallowable. Accordingly, we uphold the order of CIT (A) and dismiss the ground No. 3 raised by the assessee." 13. In view of the above well reasoned observations of the Tribunal and the fact that the judgments relied upon by the learned counsel do not support the case of the assessee being based on individual factual situation involved therein, no substantial question of law arises in this appeal. Accordingly, finding no merit in the appeal the same is dismissed." 58. We are thus of the considered opinion that the question which stands posited would have to answered on an independent evaluation of the scheme of Section 36 (1) (iii) read along with the Proviso and the legislative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The word 'cost', as observed on p. 424 of Simon's Taxes D Third Edition, is not synonymous with 'price'. Other items of expenditure, such for instance as freight or warehouse charges or insurance, must in certain cases be added to the price. The matter has been dealt with in Accountancy by Pickles, 1955 Ed. on p. 944 under the head 'Payment of interest on Construction Capital' as under: xxxx xxxx xxxx 15. It would appear from the above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to subscribe to the view taken by the Andhra Pradesh High Court. The correct view in the matter, in our opinion, has been taken by the Calcutta High Court and we affirm the same." 60. Much before the judgment in Challapalli Sugar, the Supreme Court in India Cements Ltd. vs. CIT (1996) 2 SCR 944 was called upon to answer the question as to when the expenditure incurred by the assessee in obtaining a loan was allowable. The question itself arose in the context of a loan obtained by the assessee from a financial institution and which was secured by a charge on its fixed assets. It appears to have been urged before the Supreme Court that the expenditure would clearly be admissible as a deduction under Section 10 (2) of the Act. India Cements, as would be evident from the recordal of facts which obtained therein, was concerned with a loan taken for an existing business and thus distinct from what prevailed in Challapalli Sugar. The latter was called upon to answer the question in light of a business which was yet to be commenced. 61. It was the aforesaid distinguishing feature which had led the Supreme Court in Challapalli Sugar, to observe that where money is borrowed by a company wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts assessment to income-tax in the relevant assessment year the claim of the assessee to deduction of interest so paid under section 10 (2) (iii) of the Indian Income-tax Act, 1922, was rejected on the ground that the plant and machinery were not used for business in the year of account. The High Court held that the assessee was entitled to deduction claimed even though the plant and machinery were not used in the year of account. While coming to this conclusion, the High Court observed that where the assessee claims deduction of interest paid on capital borrowed under section 10 (2) (iii) of the Indian Income-tax Act, 1922, all that the assessee has to show is that the capital which was borrowed was used for the purpose of the business of the assessee in the relevant year of account. The High Court further observed that it did not matter that the capital was borrowed in order to acquire a revenue asset or a capital asset. Following are the pertinent observations which are made in that judgment: "Before we look at the authorities, it would perhaps be best to turn to the section itself, and the deduction which is permissible under section 10 (2) (iii) is 'in respect of capital bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lore. Thereafter, whatever borrowing was made by the assessee for the purpose of establishing a separate unit at Bangalore, the interest paid on such borrowing would, on the ratio of the above judgment of the Bombay High Court be covered by the provisions of section 10 (2) (iii) for the simple reason that the said borrowing was for the purpose of the business which the assessee carried on, as section 36 (1) (iii) of the Act 1961, with which we are concerned in this reference is equivalent to section 10 (2) (iii) of the Act of 1922. xxxx xxxx xxxx 18. This decision of the Supreme Court makes it clear that where for the purpose of a running business a borrowing is made, then the loan obtained by the said borrowing is not to be considered as an advantage of an enduring nature and that the consideration of the object with which the loan was obtained is irrelevant. If that be so, in this case also it can be said that even if the disputed borrowings were made by the respondent-assessee with the object of establishing a new industrial unit at Bangalore, the interest paid by it on those borrowings cannot be treated as the capital expenditure if it is found that the borrowings in questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to put them in working condition and, therefore, in case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of fixed assets which have been created as a result of such expenditure. 22. It is no doubt true that in the case of Challapalli Sugars Ltd. [[1975] 98 ITR 167 (SC).] the Supreme Court has unequivocally observed that interest paid on the borrowing utilised to bring into existence a fixed asset which has not gone into production goes to add to the cost of installation of that asset. But these observations have been made with reference to a situation wherein it was not possible to contend that the borrowing on which interest was paid was made for the purpose of any business. The company which had made the borrowing in that case had not yet started production, and hence had not commenced any business when it borrowed the amount in question. Therefore, it was not possible to say in that case that the borrowing was made 'for the purposes of the business' to bring the case within the ambit of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o assistance to the revenue. The appellant-company in that case at the time it raised the loan was a running concern. Unlike the assessees in the present appeals, the loan raised by the appellant-company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in???he actual cost of the plant did not arise in that case." 64. As is evident from the aforesaid extracts, in Alembic the High Court found that the decision of the Supreme Court in Challapalli Sugar would have to be appreciated bearing in mind the indubitable fact that the same had been rendered in the context of a business which was yet to commence. It thus held that since the business had yet to commence activities of production, it could not be said that the borrowing was made for the purposes of business as that expression appeared in Section 10 (2) (iii) of the erstwhile income tax legislation. The High Court had then proceeded to notice certain other decisions including that rendered by the Bombay High Court to elucidate the legal position as being that Section 10 (2) (iii) was clearly not concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted or acquired gets utilized in production. This it held bearing in mind not only the language in which Section 10 (2) (iii) of the erstwhile income tax legislation stood couched but also Section 36 (1) (iii) with which we are concerned. This decision, thus, assumes significance in light of it having propounded the principle of interest costs on borrowing not being liable to be countenanced till such time as the asset is put to use. 66. Insofar as the judgment in Monnet Industries is concerned, suffice it to note that the primary question which arose for consideration was whether the establishment of a sugar project could be construed as being part of the same business fold of the assessee. Although the provisions of Section 36 (1) (iii) were duly noticed, the Court in Monnet Industries was principally called upon to examine aspects such as unity of business, commonality of control and interlacing. This becomes apparent from a reading of the following passages of that decision: - "19. Section 36 (1) (iii) of the Act permits an assessee to claim interest paid, as expenditure in respect of, borrowed capital in computing its income under section 28 of the Act in the event the loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses incurred in connection with the business, both for administration and for heads of expenditure such as salary of the staff, postage, staff welfare fund and general charges, were common. xxxx xxxx xxxx 27. Based on the aforesaid tests, let us examine the findings returned by the Tribunal in coming to the conclusion that there is unity of control and management, interlacing and dovetailing of finances. The Tribunal in the instant case found as a fact in paragraphs 30 and 31 of the impugned judgment that there was a common board of directors controlling the ferro alloys plant as well as the sugar plant which operated from the head office located at Delhi, funds for the two plants were common and hence, there was inter-mingling and interlacing of funds, as also the fact, that even though the two divisions were geographically located at different sites, marketing of the final products was carried out under the supervision and control of the same set of executives at the head office. Applying the tests discussed hereinabove to the facts as determined by the Tribunal, we have no difficulty in holding that the sugar plant and the ferro alloys plant were in the same fold of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee's business?" 67. The Court in Monnet proceeded then to record the following conclusions:- "31. The upshot of the aforesaid decisions as applied by the Tribunal in the instant case is that: (i) a loan taken or capital borrowed is, by itself, not a capital asset, nor does it give an advantage of an enduring nature; (ii) as long as a loan was taken or capital was borrowed for the purposes of business, the assessee is entitled to claim interest paid thereon as deduction under section 36 (1) (iii) of the Act; (iii) interest may have to be capitalized after the borrowed capital or loan taken is utilized in bringing into existence an asset at the stage of commencement of business. In other words, after the assessee's business had already commenced then the interest paid on capital borrowed or 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pears to have contended that it would be the provisions of Section 43 (1) as well as Explanation 8 embodied therein which should be taken into consideration for the purposes of answering that question. This submission came to be stoutly rejected with the Supreme Court in unequivocal terms holding that Section 36 (1) (iii) clearly does not envisage a distinction existing between money borrowed to acquire a capital or a revenue asset. It was pertinently observed that all that the provision requires is the assessee having borrowed capital for the purposes of business. It thus held that sub-section (3) is concerned with the user of capital and not the use of the asset which may come into existence. 70. The Supreme Court consequently while interpreting Section 36 (1) (iii), held that the Legislature clearly did not contemplate a distinction being carved out between capital borrowed for a revenue or a capital purpose. It also pertinently held that it would wholly be erroneous to impute the provisions of Section 43 (1) since Section 36 (1) (iii) did not employ the word 'actual cost' at all. In our considered opinion, the soul of Core Healthcare is paragraph 16 and where the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ately came to be cast and inserted in the statute. 72. A Proviso, as is well settled, is intended to carve out and make an exception for a contingency which may otherwise be subject completely to or subsumed in the principal provision. As Core Healthcare explained, the principal part of Section 36 (1) (iii) was not dependent on the character of the asset which was sought to be created or acquired be it revenue or capital. As the Supreme Court pertinently observed, the provision is triggered by the borrowing and not the investment. The Legislature also appears to have borne in consideration the decisions which had been rendered in the context of existing businesses as distinct from those which were yet to commence. 73. Regard must also be had to the ICDS norms which were taken into consideration by Finance Act, 2015 and which recognised the requirement of borrowing costs being capitalised up to the date when the asset is put to use without making any distinction between an extension or expansion of business. The Proviso is thus clearly intended to carve out from the ambit of Section 36 (1) (iii), the borrowing cost of capital between the period when the loan is originally taken ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration of the AO. 77. Indelibly connected with the above would be the issue of whether the assessee could have been extended the benefit of Section 36 (1) (iii) in light of the Tribunal having found that a sum of INR 2789.6 million represented the expenditure incurred by it on installation of towers up to the end of the year and that the process of installation was '...still on at the end of the year'. This issue would have to be examined in light of the stated stand of the appellant itself that it is only when installation is complete that the amount is capitalised and transferred from CWIP account to fixed assets in regular course. 78. It appears to have been contended on behalf of the appellant that the expenditure in question was in connection with CWIP and thus leaving one to draw the impression that the assets were yet to be put to use. However, the Tribunal, unfortunately has confounded the issue by thereafter alluding to the recitals appearing in the Directors Report relating to the enhancement of the appellant's network on account of the addition of 5096 cell sites during the year in question. The findings of the Tribunal rendered in this regard are not only contrad ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
