TMI Blog2018 (8) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... aining control over the asset by way of lease would not, in our view, change the character of claim. Thus, we do not find any infirmity in the order of the CIT(A) in adjudicating the issue in favour of the assessee. We also take note of significant plea raised on behalf of the assessee that the assessee executed sale & lease back – equipment lease agreement with Industrial Development Bank of India on 26.09.1996 relevant to AY 1997-98. We thus also find merit in the alternative plea raised in this regard that where the equipment was sold and company is not the owner of the asset at all, the interest on subsisting loans/borrowing cannot be attributed any longer to the assets so divested. While the power generation asset has been sold, the subsisting loans/borrowings has remained and continued in the books of accounts and used for the purpose of existing and ongoing business of the assessee company in revenue account. Thus, interest on loan amount presently used in ongoing pharma business is allowable otherwise also. - Decided against revenue - ITA Nos.1733, 1734, 1735, 1736 And 1737/Ahd/2014 - - - Dated:- 20-6-2018 - SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER AND Ms. MADHUMITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which were held by the company for divestment. Interest payable on borrowings for such power plant projects was claimed as allowable expenditure despite its capitalisation or a different treatment in the books of account. The Assessing Officer, however, observed that the assessee has wrongly claimed deduction of interest concerning power project which is different from its main stream of business of pharmaceutical products. The Assessing Officer also noted that the expenditure was pre-operative in nature pertaining to assets before it being put to use. The Assessing Officer accordingly invoked Explanation-8 to Section 43 of the Act and held that interest paid prior to the date of such asset being put to use but requires to be capitalised. Accordingly interest claim on borrowings attributable to power projects was disallowed in the hands of the assessee in the first round of proceedings. The CIT(A) in turn vide its order dated 23.03.2007 confirmed the rejection of claim of interest. The CIT(A) observed that the captive power plant set up by the assessee was entirely a new venture and it has no relation with the existing pharmaceutical business of the assessee. It was thus observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench of ITAT Ahmedabad in the case of Nirma Limited and held that set up of captive power plant can be said to be expansion of the extension business. The CIT(A) also referred to the decision of the Hon ble Supreme Court in assessee s own case relevant to A.Y. 1992-93 to hold that Explanation-8 to Section 43(1) concerning determination of actual costs has no application while determining eligibility of interest in relation to section 36(1)(iii). The CIT(A) also observed that in view of the interpretation rendered by the Hon ble Supreme Court in own case of the assessee, the proviso inserted to section 36(1)(iii) by Finance Act 2003 w.e.f. 01.04.2004 requiring capitalisation of interest would operate prospectively and no application to various assessment years in question. The CIT(A) accordingly allowed the claim of the assessee. The relevant operative paragraph of the order of the CIT(A) in the second round of proceeding is reproduced as under :- 3.8 Decision: - I have carefully considered the facts of the case, the submission of the appellant, the findings given by the AO and the directions of Hon'ble ITAT Ahmedabad while setting aside the issue, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if a manufacturing company is using X material for production of certain product and it installs a unit for production of material X, it would be backward integration of the production unit and should accordingly be considered as the expansion in the same line of business. The appellant has pointed out to a judgement of Hon'ble ITAT Ahmedabad in the case of Nirma Ltd. in ITA number 1823/AHD/2001 for A.Y. 1997-98. In that case the company had installed a Soda Ash Project and, LAB project and claimed the expenses as revenue on the ground that the project constituted one and the same business. It was claimed by the company that this was the expansion of the existing business, because major production of soda ash and benzene(LAB) were to be consumed for in-house production. The Hon'ble ITAT allowed the claim of the appellant in respect of interest as well as other expenses with respect to soda ash project and LAB project. In the present case also the power which would have been produced by the captive power plant and was meant to be used in the production by the appellant company and accordingly it was one kind of extension of the existing business. In a case decided by Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the said section, all that is necessary is. that - firstly, the money, i.e., capital must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business; and, thirdly, the assessee must have paid interest on the borrowed amount [See : Calico Dyeing Printing Works v. CIT (1958) 34 ITR 265]. All that is germane is : Whether the borrowing was, or was not, for the purpose of business. The expression 'for the purpose of business' occurring in section 36(1)(iii) indicates that once the test of 'for the purpose of business' is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under section 36(1)(iii). This provision makes no distinction between money borrowed to acquire a capital asset and a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business which is carried on by the assessee in the year of account. What sub-section (iii) emphasizes on is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital, unlike section 37 which expressly excludes an ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not there in section 36(1)(iii). That is why the Legislature has used the words 'unless the context otherwise requires'. Hence, Explanation 8 has no relevancy to section 36(1)(iii). It has relevancy to the aforementioned enumerated sections. Therefore, Explanation 8 had no application to the facts of the instant case. [Para 10]. A proviso has since been inserted in section 36(1)(iii). That proviso has been inserted by the Finance Act, 2003 with effect from 01.04.2004. Hence, the said proviso will not apply to the facts of the instant case. Further, the said proviso would operate prospectively. In this connection, it may be noted that by the same Finance Act, 2003, insertions have been made by way of proviso in Section 36(1)(viia), which is made effective from 01.04.2004. Same is the position with regard to insertion of a subsection after section 90(2). This insertion also operates with effect from 01.04.2004. In short, the above amendments have been made by the Finance Act, 2003 and have been made operational with effect from 01.04.2004. Therefore, the proviso inserted in section 36(1)(iii) has to be read as prospectively and with effect from 01.04.2004. In this cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rogress and has not been completed or put to use till the end of the various assessment years in question. It was thereafter contended that the power plant for which the borrowings, giving rise to the interest expenses were made, were not connected with the existing pharmaceutical business of the assessee. In this situation, the interest costs attributable to the power plant unconnected to the existing business is required to be capitalised as rightly done by the Assessing Officer. Ld. CIT DR thereafter insisted that in view of the undisputed fact that the assessee company had intended to divest its investment made in the power plant, the interest attributable to the set up of power plant cannot be set off against the income arising from pharmaceutical operations. It was vehemently submitted that the captive power plant was entirely a new line of business which was only in the process of being set up and thus interest attributable to such a new activity cannot be accepted as permissible deduction within the ambit and scope of section 36(1)(iii) in view of the decision of the Hon ble Supreme Court in the case of Chellapalli Sugar Mills (supra). Ld. CIT DR thus forcefully contend tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power plant produces electricity which is intended to be used in the manufacturing of pharma products, it is obviously part of the same business and thus, allowable under s. 36(1)(iii) of the Act. It was pointed out that it is ostensible that the power plant would reduce the electricity expenses and thereby the cost of pharma product would be lower. The learned AR thereafter forcefully submitted that, notably, there is unity of management, control, administration and finance etc. 11.1 Regarding intention expressed towards divestment, the learned AR submitted that due to the financial crunch, the assessee was not in a position to complete the project and therefore, intended to divest the same to cut the costs. It was submitted that non-completion of power project per se will not make any difference as long as the borrowings were found to be made for advancement of business. The learned AR thereafter referred to the sale and lease agreement entered into with the IDBI Bank and submitted that the captive power plant sold was taken back on lease basis for captive consumption of power to be generated from the power plant. 11.2 The learned AR, thereafter, referred to the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave carefully considered the rival submissions and perused the orders of the authorities below and all other documents and materials referred to and relied upon in the course of hearing before us. The substantive issue involved for adjudication is allowability of interest expenditure incurred by the assessee on borrowed funds utilized for installation of captive power plant which has not been put to use during the assessment years in question. It is the case of the assessee that it wanted to install a captive power plant for generation of electricity for the purposes of its on-going and existing pharmaceutical business. In order to implement the captive power plant, it obtained certain loans from banks and financial institutions. The interest on borrowed funds has been claimed as revenue expenditure for the purpose of taxation in departure with the position taken in the books of account where it has been treated as a capital item. The AO has refused to accept the claim of the assessee towards interest expenditure on borrowed funds as a revenue expenditure on the broad grounds, namely; (i) the plant has not been installed and the assets have not been put to use (ii) there was no gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, it may be regarded as an integral part of revenue earning process and thus, a revenue expenditure. 12.3 The claim of the assessee is that the power plant is nothing but the expansion of its existing pharmaceutical business under the same management and administration and at the same place where the pharma unit is in operation. 12.4 The AO, keeping in view, the fact that loan was raised for setting up a power plant which is akin to creating a capital asset, which is yet to come into production of power, has disallowed the interest for the period prior to its being put to use as revenue expenditure. For doing so, Explanation 8 to Section 43(1) of the Act was relied upon. It is the case on behalf of the Revenue that in the light of the decision of Hon ble Supreme Court in case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, all expenditures including interest which has been incurred to bring power plant into existence and to put in operation is required to be capitalised and cannot be claimed as revenue expenditure. We are not impressed by such approach of the AO. The issue is required to be examined in the light of the plea of the assessee that erection of power plant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Guj). The Hon ble Supreme Court explained that the expression for the purpose of business occurring in Section 36(1)(iii) indicates that once the test for the purpose of business is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under s. 36(1)(iii). This provision makes no distinction between the money borrowed to acquire a capital asset or a revenue asset. All that the Section requires is that the assessee must borrow capital and purpose of borrowing must be for business which is carried on by the assessee for the year of account. In view of the decision of the Hon ble Supreme Court what is relevant for the purpose of Section 36(1)(iii) is the user of capital and not the user of the asset which comes into existence as a result of borrowed capital. Hon ble supreme Court also took cognizance of Explanation 8 to Section 43(1) inserted by the Finance Act, 1986 with retrospective effect from 1st April, 1974 and held that the aforesaid Explanation has no relevancy to Section 36(1)(iii). Significantly, in the instant case, we are concerned for various assessment years prior to the insertion of proviso of Section 36(1)(iii) of the Act added ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on revenue account. The power plant ultimately taken back on lease is nothing but the expansion/incidence of existing business. Thus, dis-investment and gaining control over the asset by way of lease would not, in our view, change the character of claim. Thus, we do not find any infirmity in the order of the CIT(A) in adjudicating the issue in favour of the assessee. 12.8 This apart, we also take note of significant plea raised on behalf of the assessee that the assessee executed sale lease back equipment lease agreement with Industrial Development Bank of India on 26.09.1996 relevant to AY 1997-98. We thus also find merit in the alternative plea raised in this regard that where the equipment was sold and company is not the owner of the asset at all, the interest on subsisting loans/borrowing cannot be attributed any longer to the assets so divested. While the power generation asset has been sold, the subsisting loans/borrowings has remained and continued in the books of accounts and used for the purpose of existing and ongoing business of the assessee company in revenue account. Thus, interest on loan amount presently used in ongoing pharma business is allowable otherwis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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