TaxTMI 
TaxTMI 
2025 (3) TMI 659
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....sallowance of depreciation to the tune of Rs. 5,10,79,752/- claimed on account 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 t....
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....l founded on Section 36 (1) (iii) of the Act. It is under these heads that the TPO had inter alia made additions apart 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 obligat....
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....urred by the assessee and a sum was notionally estimated and capitalized for the purpose of depreciation. Section 32 (1) provides for 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 bein....
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....d include appropriate provisions which may be made in respect of obligations incurred. It was his submission that the provisions which the assesee 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 hea....
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.... had, on a due review of the various precedents rendered in the context of a provision being made as well as the Accounting Standards which apply had come to explain the meaning to be ascribed to the phrase '....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). ....
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.... 8. Other Accounting Standards specify whether expenditures are treated as assets or as expenses. These issues are not addressed in this Standard. Accordingly, this Standard neither prohibits nor requires capitalisation of the costs recognised when a provision is made. xxxx xxxx xxxx Definitions 10. The following 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 pres....
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....uired 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 should be recognised. Present Obligation 15. In almost all cases it will be clear whether a past event has given rise to a present obligation. In rare cases, for example in a lawsuit, it may be disputed either whether certain events have occurred or whether those events result in a present obligation. In such a case, an enterprise determines 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 res....
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.... discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote (see paragraph 68). xxxx xxxx xxxx Reliable Estimate of the Obligation 24. The use of estimates is an essential part of the preparation of financial statements and does not undermine their reliability. This is especially true in the case of provisions, which by their nature involve a greater degree of estimation than most other items. Except in extremely rare cases, an enterprise will be able to determine a range of possible outcomes and can therefore make an 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 extr....
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....t does not exceed the liability (paragraphs 46 and 47). The expected reimbursement is not recognised as an asset (paragraph 46). No disclosure is required. The reimbursement is disclosed together with the amount recognised for the reimbursement (paragraph 67(c)). The expected reimbursement is disclosed (paragraph 67(c)).' xxxx xxxx xxxx Illustration 3: Offshore Oil field An enterprise operates an offshore oil field where its licensing agreement requires it to remove the oil rig at the end of production and restore the seabed. Ninety per cent of the eventual costs relate to the removal of the oil rig and restoration of damage caused by building it, and ten per cent arise through the extraction of 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 outf....
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....on would be undertaken only if there is no longer some oil to be explored or drawn out and, therefore, it cannot be said that the provision made for the three Assessment Years presently at the beginning of the Contract period was irrational or an disallowable expenditure. The question of commercial expediency is a usual business and the economic decision to be taken by the Assessee and not by the Revenue Authorities and therefore the provision made on a reasonable bias, cannot be disallowed under section 37 (1) of the Act, unless it can be said to be have no connection with the business of the Assessee. The words wholly and exclusively for the purpose of business is a sufficient safeguard and check and balance by the Revenue Authorities to test and verify the creation 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 t....
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.... as it stood in the Proviso to Section 36 (1) (iii) ultimately come to be deleted by Finance Act, 2015 with effect from 01 April 2016. However, and since in the present appeal we are concerned with AY 2009-10, we would have to proceed on the basis of the Proviso existing and governing the applicability of Section 36 (1) (iii) of the Act. 17. Insofar as the creation of assets is concerned, the Tribunal had taken note of the contention of the appellant in the following terms: - '21. After considering the rival submissions and perusing the relevant material on record, it is first necessary to understand the nature of the capital work-in-progress capitalised in the balance sheet at Rs.2789 million. On a pertinent query, the Id. A.R submitted that this amount represents the 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 co....
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....t having connectivity because of lack of the coverage of adequate existing towers, the service provider will, naturally, be going in 'for extension of existing business.' With such a setting up of new towers, the service provider will increase its customer base within the existing Circle, which is nothing but an extension of existing business. 25. When we advert to the facts of the instant case, it emerges that the assessee was successful in increasing its customer base by setting up new towers, cost of which has been classified as capital work-in progress. It is evident from the assessee's Director's Report for the year under consideration which records that: "the company has also witnessed a good level of increase in the subscriber base in all the three Circles (UPE, Rajasthan and Haryana) in 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 ....
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....ts innovative and user friendly services. Keeping in line with the latest global technology, the company introduced a variety of Value Added Services ("VAS"), and expanded its data business on blackberry & Vodafone Live. The Company has also witnessed a good level of increase in the subscriber base in all the circles in which it operates. The Company, in line with its group's initiatives launched the "happy to help" customer service initiative and many Value Added Services like Voice mail, election pack, Amar Chitra Katha, full song downloads, portfolio tracker and various 'Alert' services which was met with overwhelming response. The Company has also witnessed a good level of increase in the subscriber base in all the three circles (UPE, Rajasthan and Haryana) in 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 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 br....
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....nds, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. In that case, the AO recorded a finding that a sum of Rs. 213 crore was invested by the assessee out of its own funds and Rs. 1.74 crore out of borrowed funds. Accordingly, disallowance of interest was made to the tune of Rs. 2.40 crore. The assessee argued that no part of interest bearing funds had gone into investment in those two companies in respect of which the AO made disallowance of interest. It was also argued that income from operations of the company was Rs.418.04 crore and the assessee had also raised capital of Rs. 7.90 crore, apart from receiving interest free deposit of Rs.10.03 crore. The assessee submitted before the first appellate authority that the balance-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 cont....
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....has interest free funds as well as interest bearing funds at its disposal, then the presumption would be that investment were made from interest free funds at its disposal. Similar view has been taken by the Hon'ble Delhi High Court in CIT vs. Tin Box Company (2003) 260 JTR 637 (Del), holding that when the capital and interest free unsecured loan with the assessee far exceeded the interest free loan advanced to the sister concern, disallowance of part of interest out of total interest paid by the assessee to the bank was not justified. 30. The legal position set out in the preceding para is applicable if an assessee has a common pool of funds and some part is investment in the disputed amount. This proposition does not hold water, if a specific borrowing is made for making such an investment. When we turn to the facts of the instant case, we find that even though the shareholders' fund is more than the investment in CWIP, but no detail of secured loan is available. 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 o....
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....it could be said to have been estimated on a scientific basis. While dealing with that question and on a review of the various provisions contained in AS-29, the Court held as follows: - '11. AS 29 further states that 'provisions' are distinguishable 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.' However a 'provision' is recognised only where: '(a) an enterprise has a present obligation as a result of a past event: (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. 12. If these conditions are not met, no provision should be recognised." 13. Appendix A to AS-29 sets out in a tabular the summary of the AS. The provisions which are recognised and those that are not are set out 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....
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....nti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." xxxx xxxx xxxx 18. On facts, in Bharat Earth Movers (supra), the Supreme Court was satisfied that the provision made by the Assessee for meeting the liability "incurred by it under leave encashment scheme proportionate with the entitlement earned by the employees of the company... is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability" and that 'the liability is not a contingent liability.' The decision acknowledged that where a scheme for leave encashment is floated by a company, the number of employees and their entitlements to leave encashment can be estimated with a reasonable degree of certainty. It would be a case of a 'known' liability. 19. In Commissioner of Income Tax v. Vinitec Corporation P. Ltd. (supra) the question for consideration was whether a provision for future warranty expenditure is a contingent liability. On facts, it was not in dispute that the warranty clause was part of the sale document and ....
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....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 whether a provision made with respect to possible warranty claims connected with the sale of goods, could be said to be an actual, accrued or contingent liability. It appears to have been urged by the Revenue in that case that since in the relevant year no claim for replacement had been received, the assessee could not have made any provision in its books of accounts. 26. The Supreme Court in Rotork proceeded to lucidly explain the concept of a provision as understood in accounting practise and the distinction which one must recognise between a positive obligation and a contingent liability. We thus deem it apposite to extract the following passages from that decision: - "22. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognised when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of reso....
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....d 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 Supreme Court in Rotork, in light of the aforenoted basic precepts, upheld the provision which the assessee had made upon noticing that the statistical data was indicative of return of defective parts and it was on the basis of the said historical data that the assessee had made a provision. It thus found the action of the assessee, in the facts of that case to be justified. 28. As we view AS-29, we find that the said standard defines a provision to be a liability which can be measured by using a substantial degree of estimation. A 'liability' is defined by AS-29 as a present obligation arising from past events and the settlement of which is expected to result in an outflow of resources from the enterprise. Similarly, an 'obligating event' is defined to mean one which creates an obligation and which leaves the enterprise with no realistic alternative except to settle that obligation. Of significance, is the meaning ascribed to the expressions 'present' and 'possible' o....
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....nd 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 asset restoration cost and which would undoubtedly result in an outflow of resources. A present obligation is defined by AS-29 as being one whose existence is considered probable on the Balance Sheet date. A possible obligation, on the other hand, is defined to be one which is not considered probable. Thus, as long as one is able to discern a positive obligation being placed upon an enterprise and its existence is considered as probable as distinguished from a certainty and in respect of which a reliable estimate can be made, it would permit the creation of a provision. Thus, as long as the probability of the obligation being liable to be discharged is found to exist, the requirements of AS-29 would stand attracted. This position comes even more to the fore when one views Para 15 and which while elaborating upon the concept of a present obligation speaks of the enterprise, upon the available evidence, being of the opinion that it is more likely than not, that a ....
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....se 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 estimated the cost likely to be incurred based on past experience and the inevitability or, to put it differently, the evident probability of such a cost being incurred. The contractual covenant cast a duty upon the assessee to remove the BTS equipment in such a manner that the aesthetics/structural design/architecture of the building is not disturbed. It was also placed under a positive obligation to restore the premises to its original state at its own cost. The respondents, however, would contend that the aforesaid liability was contingent upon damage 'if any' that may be caused. In our considered opinion, the view so taken is clearly untenable for the following reasons. 35. We are of the firm view that the usage of the phrase 'if any damage is caused' in the lease agreement cannot be construed as detracting from the right of the assessee to provision for a liability which flowed from an existing obligation and the occurrence of which was not liable to b....
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.... 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 event and which in turn creates an obligation in praesenti pertaining to a liability which is probable and ascertainable. Thus, the only facets which are left to conjecture are the exact timing and the amount of outflow that may occur. 37. A contingent liability on the other hand is concerned with a possible obligation and which may or may not arise since it would be dependent upon the occurrence or non-occurrence of an uncertain future event. These are liabilities which are neither considered probable nor can they be reasonably estimated. The obligation and outflow which is spoken of in connection with contingent liabilities are prefaced by the words 'possible', 'one or more uncertain future events' and where the occurrence or non-occurrence of those events is itself unclear and uncertain. A contingent liability is one where both the obligation as well as the occurrence of the event which would trigger the same are to be found in the realm of con....
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.... 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 appellant was thus clearly entitled to succeed on this point. 42. That then takes us to the issue of Section 36 (1) (iii) and whether the interest burden borne by the assessee in respect of the capital borrowed was liable to be permitted as a deduction in computing its income. According to the respondents, since the capital borrowed was for the purposes of extension of an existing business or profession, the interest borne on borrowed capital would not be deductable during the period when the capital was initially borrowed and till such time and date as the asset is first put to use. 43. The aforenoted submission proceeds on the basis of the Proviso, as it stood at the relevant time and prior to the amendments which came to be made therein by virtue of Finance Act, 2015. It is pertinent to note that the Proviso in its original form had come to be inserted by Finance Act, 2003. In order to highlight the modifications which came to be made....
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....uctions 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 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 any mode of payment other than cash] 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 (57 of 1972) and approved by the Central Government; or any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1....
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....itation 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 of existing facilities. This becomes evident from the following extract of that work:- "Extension- 'An increase in length of time specified in contract (e.g. of expiration date of lease, or due date of note). See also Grace period. A part constituting an addition or enlargement, as an annex to a building or an extension to a house. Addition of something smaller than that to which it is attached; to cause to reach or continue as from point to point; to lengthen or prolong. That property of a body by which it occupies a portion of space. Network Stove Co. v. Gray & Dudley., D.C.Tenn., 39 F. Supp.992, 993." 48. The Advanced Law Lexicon of P. Ramanatha Aiyar explains the meaning of the word 'Extension' as follows: - "Extension- 'the act of extending or stretching out; enlargement in any ....
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....nce 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 must in each case be gathered from the context, which is owing to the fact that it is essentially a relative term, referring to something already begun; hence, in a concrete sense, it has no persistent meaning, although abstractly it always implies increase or amplification as distinguished from inception; as, for instance, "the extension of a man's business," or "of his line of credit," or "of the due time of his debts." Extension in space may be in any direction. It is not confined to mere linear prolongation. Middlesex & S. Traction Co. v. Metlar, 56 A. 142, 70 N.J.L. 98, 41 Vroom 98, reversed Metlar v. Middlesex & Somerset Traction Co., 63 A. 497, 72 N.J.L. 524, 43 Vroom 524. N.M. 1924. "Extend," means to make mo....
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..... 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 obviously impossible to calculate the position of the centre of gravity from an expansion. 2. concr. Anything that is spread out; an expanse; esp. the expanse of heaven, the firmament. 1611 BIBLE Gen. i. 6 Let there be a firmament [marg. expansion) in the midst of the waters. 1659 PEARSON Creed (1839) 70 This house of God..is not all of the same materials.. there is a vast difference between the heavenly expansions. 1760 BEATTIE Lucretius 1. 6 All that lies Beneath the starr'd expansion of the skies. 1833 LAMB Elia Ser. 1. xxvi. (1865) 211 Less time. than it took to cover the expansion of his broad moony face.. with expression. a 1845 Hood Kilmansegg cxl....
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.... (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 amount or degree of dilatation. 1790 BLAGDEN in Phil. Trans. LXXX. 322 The whole expansion of pure spirit from 30° to 100% of Fahrenheit's thermometer, is not less than th of its whole bulk at 30°. 1816 J. SMITH Panorama Sc. Art II. 32 Taking a proportional part of the difference of the two expansions. 1875 URE Dict. Arts II. 391 8.v., The expansion of the solid corresponding to two degrees of the thermometer, is twice the expansion which corresponds to one degree. 6. concr. a. An expanded or dilated portion. b. A prod....
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.... 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 the date the asset is put to use. However, the provisions of ICDS-IX do not make any distinction between the asset acquired for extension of business or otherwise. 16.2 Therefore, there was an inconsistency between the provisions of proviso to clause (iii) of sub-section (1) of section 36 of the Income-tax Act and the provisions of ICDS-IX. The general principles for capitalisation of borrowing cost requires capitalisation of borrowing cost incurred for acquisition of an....
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....ding 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 it is sometimes used as equivalent to the word 'exceed' (as) to extend the bounds of jurisdiction." Learned counsel also referred to K.J. Aiyar's Judicial Dictionary wherein the word 'extend' has been defined as follows: "Extend.-The word 'extend' in an enactment is not quite analogous to 'shall come into force'. Where it is laid down in an Act that it extends to a certain area it does not necessarily mean that ....
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....earned 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 wider and embrace "Extension" within it. The Tribunal had recorded a finding of fact that there was extension of the assessee's business as it had purchased the assets for the same by borrowing capital from the banks and, therefore, it was not entitled to deduction under section 36 (1) (iii) of the Act. The relevant observations of the Tribunal, in para Nos. 20 and 21 of t....
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....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 intendment underlying the insertion of that amendment in the Act. We are thus of the firm view that it would be imprudent and unwise to base our answer solely on the purported difference which Mr. Jolly sought to advocate based on the usage of word 'extension' in Section 36 (1) (iii) as contrasted with 'expansion' as appearing in other parts of the st....
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....ot 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 expenditure. The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary. 16. We have already referred to Section 208 of the Companies Act which makes provision for payment of interest on ....
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....R 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 which is yet to commence operations, the interest burden which accrues thereon in the pre-commencement of production stage would be liable to be capitalized and added to the cost of the fixed asset. It is this underlying distinction which appears to weighed upon the Supreme Court to disting....
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....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 borrowed for the purposes of the business, profession or vocation, the amount of the interest paid'. Now it will be noticed that the sub-section makes no distinction between capital borrowed in order to acquire a revenue asset and capital borrowed ....
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....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 question were for the purpose of its running business. Now, it cannot be disputed that the borrowings were for the purpose of business which the assessee was already running at Baroda, when it decided to establish a new industrial....
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....cement 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 section 10 (2) (iii) of the Indian Income-tax Act, 1922 (which is equivalent to section 36 (1) (iii) of the Act of 1961). If the said borrowing was not 'for the purpose of business' inasmuch as no business ....
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....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 concerned with whether the capital borrowed was to acquire a revenue or a capital asset. The High Court thus held that the aforenoted provision would be triggered immediately upon capital ....
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....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 taken i.e., "capital borrowed" and the interest paid thereon is for the purposes of business. It is important to note that we are not....
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....re 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 business. 28. This brings us to the other issue, which is, whether financial char....
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.... 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 Insurance Company (supra) wou....
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....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 held t....
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.... 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 til....
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....he consideration 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 onl....