2001 (4) TMI 46 - HC - Income Tax

Interest on borrowings for machinery deductible under s.36(1)(iii) before asset use; capitalisation doesn't bar deduction

HC dismissed the appeals and upheld the Tribunal's allowance of interest under s.36(1)(iii) on borrowings for acquisition of machinery even though the ... Interest on borrowing - acquisition of capital assets u/s 36(1)(iii) - acquiring new machineries - Whether, the Appellate Tribunal has substantially erred in law in allowing as deduction, interest on borrowing made for acquisition as capital assets, though pertaining to period prior to the commencement of production, u/s 36(1)(iii) of the Act ? - HELD THAT:-Neither in the Notes on Clauses nor in the Memorandum explaining the provisions in the Finance Bill we find any indication in support of the Revenue's stand that in a converse situation interest has to be capitalised and further that such interest cannot be claimed as deduction under section 36(1)(iii) of the Act. In fact, there is no mention about the deductibility or otherwise under section 36(l)(iii) of the Act. It was submitted that in a case where business has commenced but the asset has not been put to use, a deduction shall not be available under section 36(1)(iii) of the Act, even if the assessee has capitalised the interest in its books of account. That, in a situation where the business has commenced, after the asset has been first put to use the deduction under section 36(1)(iii) would be available even if the assessee has capitalised the interest in its books of account. We have already seen the provisions of section 36(1)(iii) of the Act and they do not make any distinction between the borrowing utilised to acquire a capital asset or otherwise. In fact, the phrase used in the said provision is 'capital borrowed'. Therefore, the distinction about the interest having been capitalised or not loses its significance, inasmuch as if the capital is borrowed for the purposes of business, the interest is allowable as a deductible item of expenditure under section 36(1)(iii) while computing the income under section 28 of the Act. There is no other prescription in the provisions and we are not inclined to read any such prescription as proposed by the Revenue. There is no cut-off point : before or after asset being put to use provided in section 36(1)(iii) and we cannot read the same. Undisputedly the assessee had borrowed loans from the bank for purchase of machinery, such machinery had not been used in the assessee's business for the years under consideration, the assessee had paid interest on such loans, no depredation was claimed on such machinery and claimed deduction of interest paid. The machinery was treated as a business asset, it was purchased only for the purposes of business and hence interest paid on the borrowing was held to be a deductible amount. Hence, it is clear that: (i) business had commenced, (ii) machinery had not been put to use, (iii) interest was paid on borrowing made for purchase of such machinery, (iv) interest was held to be allowable deduction. Apparently, the expenditure in question is for the acquisition of the capital asset and therefore, being capital in nature the provisions of section 37 could not be pressed into service and thus the only provision under which the assessee could claim deduction and can be allowed is section 36(1)(iii) of the Act. Thus, the Revenue's contention that the provisions of section 36(1)(iii) have not been taken into consideration is not borne out from the facts as were there before the apex court. Not only that, the situation wherein the Revenue wants that Explanation 8 of section 43(1) of the Act would override the provisions of section 31(1)(iii) of the Act was also present before the apex court, inasmuch as in a running business though the machinery had been acquired and interest paid on borrowing for such acquisition, the machinery had not been put to use. Mr. Joshi, learned counsel for the Revenue, vehemently contended that the decision of the apex court as well as this court in relation to allowability under section 36(1)(iii) of the Act did not hold the field after the insertion of Explanation 8 under section 43(1) of the Act. However, as we have already discussed hereinbefore the said Explanation 8 does not in any way curtail the scope of section 36(1)(iii) of the Act. As laid down by the apex court in the case of Ambika Prasad Mishra v. State of U. P., [1980 (5) TMI 100 - SUPREME COURT]. We, therefore, dismiss these appeals and hold that there was no error in law committed by the Tribunal in allowing as deduction, interest on borrowing for acquisition of capital asset, though pertaining to a period prior to the commencement of production under section 36(1)(iii) of the Act. Issues Involved:1. Allowability of interest on borrowing made for acquisition of capital assets u/s 36(1)(iii) of the Income-tax Act, 1961.2. Treatment of capitalized expenses in the books of account.3. Applicability of Explanation 8 under section 43(1) of the Income-tax Act, 1961.Summary:Issue 1: Allowability of Interest on Borrowing u/s 36(1)(iii)The core issue was whether the interest on borrowings made for the acquisition of capital assets, pertaining to the period before the commencement of production, is allowable as a deduction u/s 36(1)(iii) of the Income-tax Act, 1961. The Tribunal concluded that the interest payment of Rs. 1,56,76,000 was allowable as a deduction under section 36(1)(iii). The High Court upheld this view, emphasizing that the interest paid in respect of capital borrowed for the purposes of business is allowable, regardless of whether the borrowing is for acquiring a capital asset or for revenue purposes.Issue 2: Treatment of Capitalized ExpensesThe assessee had capitalized certain expenses, including interest, in its books of account but later claimed them as revenue expenses in the revised return. The Assessing Officer and the Commissioner (Appeals) disallowed these claims, stating that once capitalized, these expenses could not be deducted as revenue expenses. However, the Tribunal, supported by the High Court, found that the treatment of expenses in the books of account is not determinative of their nature for tax purposes.Issue 3: Applicability of Explanation 8 under Section 43(1)The Revenue argued that Explanation 8 under section 43(1) mandates the capitalization of interest paid before an asset is first put to use. The High Court clarified that Explanation 8 only prevents the inclusion of interest paid after the asset is first put to use in the actual cost of the asset. It does not preclude the deduction of interest under section 36(1)(iii) for the period before the asset is put to use. The Court emphasized that the provisions of section 36(1)(iii) and Explanation 8 under section 43(1) operate in different fields and should not be conflated.Conclusion:The High Court dismissed the appeals, confirming that the Tribunal did not err in allowing the deduction of interest on borrowings for the acquisition of capital assets under section 36(1)(iii) of the Income-tax Act, 1961. The Court held that the interest is deductible even if it pertains to a period before the asset is put to use, provided the borrowing is for the purposes of business. There was no order as to costs.