2008 (11) TMI 43 - HC - Income Tax

Appeal dismissed; unified control and intermingled funds require interest capitalization or allow business deduction under s.36(1)(iii) up to Rs.3,50,83,472.

HC dismissed the appeal and upheld the Tribunal's factual findings that the ferro alloys and sugar enterprises were under unified control with ... Nature of Interest on monies borrowed for setting up sugar plant - revenue Or capital expenditure - assessee set up Ferro Alloys Plant in 1991 & sugar plant in 1995 - HELD THAT:- In the instant case, the Tribunal has returned the finding that there is a unity of control and management, in respect of the ferro alloys plant as well as the sugar plant and there is also intermingling of funds and dove-tailing of businesses. In these circumstances it cannot be said that the respondent/assessee had not commenced its business and hence, interest would have to be capitalized in terms of the ratio of the judgment in the case of Challapalli Sugars Ltd [1974 (10) TMI 3 - SUPREME COURT]. If that is not so then, the only other conclusion that is possible on these facts, is that, the interest was paid by the respondent/assessee on 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. These being the findings of fact, we do not consider it fit to interfere with the impugned judgment of the Tribunal. Accordingly, we hold that there is no question of law, much less a substantial question, which arises for consideration. In the result, the appeal is dismissed. Issues Involved:1. Whether the expenditure of Rs 5,66,79,270/- incurred in setting up a sugar plant should be classified as revenue or capital expenditure.2. Whether the sugar plant constitutes the 'same business' as the ferro alloys business.3. Whether the financial charges (interest on borrowed capital) of Rs 3,50,83,472/- should be allowed as a deduction under Section 36(1)(iii) of the Income Tax Act.Issue-wise Detailed Analysis:1. Classification of Expenditure:The primary issue was whether the expenditure of Rs 5,66,79,270/- incurred by the assessee for setting up a sugar plant should be treated as revenue expenditure or capital expenditure. The Tribunal and CIT(A) both concluded that the expenditure was revenue in nature because the sugar plant was part of the same business fold as the ferro alloys business. The Tribunal, however, allowed only the financial charges of Rs 3,50,83,472/- as revenue expenditure and remanded the balance amount of Rs 2,15,95,798/- to the Assessing Officer for further verification.2. Same Business Determination:The Tribunal examined whether the sugar plant constituted the 'same business' as the ferro alloys business. The Tribunal noted several factors indicating unity of business, such as common management, common financial resources, and interlacing of funds. The Tribunal applied established tests from various Supreme Court rulings, including the interconnection, interlacing, interdependence, and unity of control. The Tribunal concluded that the sugar plant was merely an extension of the existing business of ferro alloys, thus qualifying it as the 'same business.'3. Deduction of Financial Charges:The Tribunal allowed the deduction of financial charges (interest on borrowed capital) amounting to Rs 3,50,83,472/- under Section 36(1)(iii) of the Act. The Tribunal and the High Court both relied on the principle that interest on borrowed capital is deductible if it is for the purpose of business, irrespective of whether the borrowed funds were used to acquire a capital asset. The High Court cited precedents, including the Supreme Court's rulings in Prithvi Insurance and Produce Exchange Corporation, to affirm that as long as the borrowed capital was used for business purposes within the same business fold, the interest paid on it is deductible.Conclusion:The High Court upheld the Tribunal's findings, affirming that the sugar plant and the ferro alloys plant were part of the same business. Consequently, the financial charges of Rs 3,50,83,472/- were correctly allowed as a deduction under Section 36(1)(iii) of the Act. The appeal by the Revenue was dismissed, and no substantial question of law was found to warrant interference with the Tribunal's judgment.