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Commissioner of Income Tax Versus Bharat Hotels Limited

2015 (8) TMI 718 - DELHI HIGH COURT

Interest expenditure incurred in relation to construction of various hotel projects - revenue v/s capital expenditure - Held that:- In Deputy Commissioner of Income-Tax v. Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT OF INDIA] the Supreme Court came to the conclusion that Explanation 8 of Section 43(1) only applied to provisions like "Sections 32, 32A, 33 and 41 which deal with concepts like depreciation." It was observed that Explanation 8 of Section 43 (1) had no relevance to Section 3 .....

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se of his business. This dichotomy between the borrowing of a loan and actual application thereof in the purchase of a capital asset, seems to proceed on the basis that a mere transaction of borrowing does not, by itself bring any new asset of enduring nature into existence, and that it is the transaction of investment of the borrowed capital in the purchase of a new asset which brings that asset into existence. The transaction of borrowing is not the same as the transaction of investment. If th .....

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015 - S Muralidhar And Vibhu Bakhru, JJ. For the Petitioner : Mr N P Sahni, Senior Standing Counsel with Mr Nitin Gulati, Junior Standing Counsel For the Respondents : Mr Ajay Vohra, Senior Adv. with Ms Bhavita Kumar & Adv. Mr Prakash Kumar, Adv. ORDER 1. This appeal pertains to the Assessment Year ('AY') 2000-2001. 2. It is not in dispute that Questions 1 and 2 framed by the Court by the order dated 20th November 2007 are identical to Question Nos.6, 1 and 3 in ITA No.69-73/2001 whi .....

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essee had borrowed loans for the said projects. It had shown them as works in progress. In para 7.1 of the Assessment order dated 28th March 2003, the Assessing Officer (AO) noted that 75% of the total interest of ₹ 1.54 crores paid on the term loan obtained from the Jammu and Kashmir Bank amounting to ₹ 1,15,77,137 was capitalised. The balance of ₹ 38,59,046/- was charged to the profit and loss account as revenue expenditure. According to the AO, the Assessee did not provide a .....

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ppear to be unjustified. The addition was accordingly deleted. 6. The Department's appeal being ITA No.4137/Del/2003 was dismissed by the ITAT by the impugned order dated 2nd June 2006. The ITAT was of the view that the hotel projects in Srinagar, Goa and Mumbai were in the nature of expansion of the business of the Assessee and the interest paid on loans was allowable as revenue expenditure. 7. It is contended by Mr N. P. Sahni, learned Senior Standing Counsel appearing for the Appellant, t .....

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g the entire amount of interest claimed as revenue expenditure. 8. In reply, it is pointed by Mr Ajay Vohra, learned Senior Counsel appearing for the Assessee, that the applicable provision is Section 36 (1) (iii) of the Act which at the relevant time, i.e. prior to the insertion of the proviso thereto with effect from 1st April 2004, allowed as deduction the amount of interest paid on loans borrowed for the purposes of business operation. Mr. Vohra referred to the decisions in Commissioner of I .....

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rt in Commissioner of Income Tax v. Monnet Industries Ltd. (supra) contains a detailed analysis of the legal position. There the Assessee had set up a ferro alloys manufacturing plant in 1991 in Raipur. During the years 1994-95 and 1995-96 it set up a sugar manufacturing plant in Uttar Pradesh and raised loans for that purpose. The Assessee, inter alia, claimed as revenue expenditure, the payment of interest on the loans. After discussing the decisions of the Supreme Court in India Cements Ltd. .....

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duction 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 t .....

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ion under Section 36(1)(iii) of the Act." 10. The order dated 29th August 2012 of the Supreme Court dismissing the Revenue's appeal against the above decision of this Court is reported as Commissioner of Income Tax v. Monnet Industries Ltd. 350 ITR 304. 11. With effect from 1st April, 2004, a proviso was inserted under Section 36 (1) (iii) of the Act. The said provision together with the proviso now reads as under: "36 (1) The deductions provided for in the following clauses shall .....

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he capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction." 12. In Deputy Commissioner of Income-Tax v. Core Health Care Ltd.(supra), the Supreme Court interpreted the aforementioned provision in light of Explanation 8 to Section 43(1) of the Act. In that case too, the question that arose was whether the Assessee which had installed a new machinery on which production had not yet started could claim the int .....

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ection 43(1) only applied to provisions like "Sections 32, 32A, 33 and 41 which deal with concepts like depreciation." It was observed that Explanation 8 of Section 43 (1) had no relevance to Section 36 (1) (iii). On the facts of that case since the AYs in question were prior to 1st April 2004, the Supreme Court concluded that the proviso to Section 36 (1) (iii) of the Act would not apply. The Supreme Court on the facts of the case stated that appropriate precedent applicable was India .....

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