TaxTMI 
TaxTMI 
2018 (8) TMI 50
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assertions made on behalf of the parties concerned, all the five appeals were heard together and disposed of by this common order. Appeal ITA No.1733/Ahd/2014 - A.Y. 1998-99 3. For the sake of convenience, we shall first take Revenue's appeal concerning assessment year 1998-99 as a lead case. 4. The Revenue by way of its ground of appeal has challenged action of the CIT(A) in deleting the disallowance of Rs. 25,83,00,000/- on account of interest expenditure incurred by the assessee. Similar disallowances were made in other assessment years in appeal of different amounts as tabulated on page no.2 of the CIT(A)'s order appealed against, in the similarly placed facts. 5. Briefly stated, the assessee company is engaged in the manufacturing and sales of pharmaceutical products. The Assessing Officer in the course of assessment under section 143(3) read with section 147 of the Act found that the assessee company has claimed an amount of Rs. 25.83 crores on account of interest expenditure as "deferred revenue expenditure" in the books of account but claimed the same as "revenue expenditure" in the statement of income filed with the return of income. In order to exami....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng Officer once again observed that captive power plant was in the process of being set up and the same was not in operation during the assessment years in question. The Assessing Officer again reiterated that the existing line of business of the assessee was manufacturing of various pharmaceutical products and injectibles which are entirely different from generation of power. The Assessing Officer also noted with reference to the annual account that the assessee itself has taken stand that captive power plant (for which the borrowings were made and interest was incurred) was held by company for the purpose of divestment. The Assessing Officer thus concluded that in these facts, it is clear that the assessee never intended to operate the power plant. The Assessing Officer accordingly held that the interest expenditure on borrowings attributable to power plant being set up is required to be capitalised and cannot be allowed as revenue expenditure as wrongly claimed by the assessee. 8. Aggrieved by the second order of the Assessing Officer, the assessee knocked the door of the CIT(A) once again. The CIT(A) after taking note of various submissions made on behalf of the assessee, fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....are to be examined, in accordance with the directions of Hon'ble ITAT, which have been given in Para-5 of the order through which the issue was set aside, are, whether the related plant was used in the appellant's own business and whether captive power plant setup was in the existing line of business or not. The Hon'ble ITAT has also observed the fact that the annual account of the appellant itself mentioned that the captive power plant was held by the appellant company for the purpose of disinvestment was also relevant. Accordingly the Hon'ble ITAT has directed to examine whether the appellant's investment in the captive power plant was in the same line of business or not as the appellant was in the business of manufacturing of various pharmaceutical product and power used by the appellant generated out of the captive power plant made the appellant's business of same line or not. The captive power plant, as the name itself suggest, is normally set up by an industrial unit for generating the power for captive consumption. It is a well known fact that the power is the most essential ingredient for running any industrial unit. The electricity is gener....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... setting up of captive power plant is in the line of business and can be said to be as extension of the existing business of the appellant and the power generated from it would have been used by the appellant for its production facility. The other point which is to be examined is that the appellant had made a remark in the annual account that the plant was held by the company for the purpose of disinvestment. It is noted that the company had started setting up of the plant with a view of generating power for consumption for its own unit, however due to some financial difficulties the appellant did not pursue the further installation of the plant and it was marked for disinvestment. During this process itself the company sold the power plant to IDBI Ltd. and taken back the same on lease. However it appears that due to some financial difficulties the plant could not be started during the year. These facts will not be material as the purpose for which the plant was initially installed was for the expansion of existing unit and therefore, the ratio of allowability of interest will toe applicable on these facts also. The entire issue is apparently covered by the decisi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under the head 'Profits and gains of business'. Section 43(1) defines 'actual cost'. The definition of 'actual cost' has been amplified by excluding such portion of the cost as is met directly or indirectly by any other person or authority. Explanation 8 has been inserted to section 43(1) by the Finance Act, 1986, with retrospective effect from 01.04.1974. It is important to note that the words 'actual cost' would mean the whole cost and not the estimated cost. 'Actual cost' means nothing more than the cost accurately ascertained. The determination of actual cost given in section 43(1) has relevancy in relation to section 32 (depreciation allowance); section 32A (investment allowance); section 33 (development rebate allowance) and section 41 (balancing charge). 'Actual cost' of an asset has no relevancy in relation to section 36(1)(iii). This reasoning flows from a bare reading of section 43(1). Section 43 defines certain terms relevant to income from profits and gains of business and, therefore, the said section commences with the words. 'In sections 28 to 41 arid unless the context otherwise requires' 'actual cost' ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gs that asset into existence. The transaction of borrowing is not the same as the transaction of investment. If this dichotomy is kept in mind it becomes clear that the transaction of borrowing attracts the provisions of section 36(1)(ii). [Para 13]" The decision of Hon'ble Supreme Court mentioned above has been followed in subsequent years in the case of the appellant itself and the claim of interest has been allowed. In view of the above facts and discussion I am of the considered opinion that the interest expenditure on borrowings made for setting up of captive power plant, which was not put to use during the year, is an allowable deduction from the income of the appellant as setting up of captive power plant is in the existing line of business and was for extension of the existing business of the appellant. The disallowance made by the AO is therefore, directed to be deleted." 9. Aggrieved by the reversal of disallowance of interest expense claimed under section 36(1)(iii), the Revenue has preferred appeal before this Tribunal this time. 10. Ld. CIT Departmental Representative (DR) vehemently supported the order of the Assessing Officer giving rise t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nses have been incurred for capital work in progress, the expenditure is without doubt capital in nature. The CIT Departmental Representative accordingly submitted that the CIT(A) has drawn conclusion in favour of the assessee on a wrong footing dehors the facts and thus requires to be set aside and the order of the Assessing Officer requires to be upheld. 11. The ld. counsel for the assessee, on the other hand, strongly supported the order of the CIT(A) appealed against by the Revenue. The learned AR vehemently submitted that the CIT(A) has correctly understood the facts in perspective. The assessee company is engaged in the manufacturing and selling of various pharma products in its plant situated at Sachana. The company has also set up captive power plant at the same location at Sachana. The captive power plant was under installation in the relevant assessment year. Major equipments were obtained. The company borrowed funds to finance this captive power plant. The captive power plant was eventually sold to IDBI Bank and taken back on lease for the purposes of meeting its business requirements. The power plant was set up by the assessee with an objective to supply power to the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ires to be allowed as business expenditure in the light of the decision of Hon'ble Supreme Court in its own case. 11.3 The learned AR emphasised that the proviso to Section 36(1)(iii) of the Act inserted by Finance Act, 2003, w.e.f. 01.04.2004 has been held to be operative prospectively by the Hon'ble Supreme Court. Thus, as per the erstwhile provisions of Section 36(1)(iii) of the Act prior to amendment, interest paid on capital borrowed for expansion of existing business was allowable deduction notwithstanding the fact that the assets in consideration were not put under actual use in the relevant accounting year. The learned AR, thereafter, referred to the decision of the Hon'ble Gujarat High Court in the case of Alembic Glass Industries 103 ITR 715 (Guj) to submit that even if plants are at different allocations still interest expenses are allowable whereas in the instant case, the plant is at the same place. 11.4 The learned AR raised an alternative plea that where the captive power plant was sold to IDBI under the sale and lease agreement in the earlier year, the power plant was no longer owned by the assessee thereafter. Thus, the existing loans continued with the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 36(1)(iii) of the Act. As noticed judicially by precedents, the deduction under s. 36(1)(iii) is dependent on the fact whether capital borrowed is for the purpose of the business of the assessee or not. If it is found that the capital was borrowed for the purpose of business of the assessee, the interest payable thereon is admissible under the said Section. It is immaterial whether the utilization of the borrowed funds is in the nature of capital expenditure or revenue expenditure. If the expenditure is a business expenditure relating to any stage of the business activity carried on by the assessee, it is an admissible deduction under s. 36(1)(iii) of the Act. If the borrowed funds have been utilized for acquisition of asset which is closely related to the carrying on of the business, the interest expenditure has to be regarded as an expenditure for the purposes of business. The assessee, in the instant case, has not started any new business of generation of power but the power plant was sought to be built to assist the rationalisation of costs involved in existing pharmaceutical business. Therefore, the captive power plant in consideration was only an expansion or extension of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in that case had not yet started production and hence, had not yet commenced any business when it borrowed the amount in question. Therefore, it was not possible to say in that case, the borrowing was made for the purposes of business. The Hon'ble Supreme Court in Challapalli Sugars Ltd.'s case (supra) thus observed in the context that if money is borrowed by a newly started company which is in the process of constructing or erecting its plant, the interest incurred before the commencement of production on the borrowed money can be capitalized and added to the cost of fixed assets created as a result of the expenditure. Thus, it will be seen that the case was essentially related to a company, which was newly started and which had not commenced any production or business. In departure, in the instant case, the assessee is carrying on the business as a running concern and the loans raised by the assessee for power plant was not before the commencement of production but at a latter stage. Therefore, in our view of the clear distinction between the case of the assessee vis-à-vis Challapalli Sugars Ltd., there does not appear to be any impediment to the assessee for claiming of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uch borrowing is an allowable expenditure. The existing Section 36(1)(iii) of the Act, as applicable to the assessment years in question, nowhere stipulates that borrowing has to be on Revenue account. Therefore, in terms of erstwhile provisions of Section 36(1)(iii) interest for the period prior to the day on which the asset is put to use is also allowable on revenue account. 12.6 Considering the dictum of law laid down by the Hon'ble Supreme Court in assessee's own case, we do not find any error in the approach of the CIT(A) for allowing the interest claim of the assessee on revenue account. 12.7 We also take note of the plea on behalf of the Revenue that power plant was intended for dis-investment and therefore cannot be regarded as extension of business. We find that such plea lacks both the legal and factual basis. As already noted, the condition that borrowing must have been made for the purpose of business being carried on by the assessee in the previous year is implicit or inbuilt in Section 36(1)(iii) of the Act itself. The captive power plant was intended for pharmaceutical business as per the consistent stand of the assessee since inception. There is no rebuttal on....