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2015 (8) TMI 718 - DELHI HIGH COURT

2015 (8) TMI 718 - DELHI HIGH COURT - [2016] 381 ITR 222 - 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 Ex .....

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is that the assessee must borrow the capital for the purpose 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 borrow .....

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n favour of the Assessee - ITA No. 62/2007 - Dated:- 31-7-2015 - 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 id .....

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he Respondent Assessee in Srinagar, Goa and Mumbai. The Assessee 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 expen .....

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f capital and revenue in the ratio of 75% and 25% did not appear 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, lea .....

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the absence of such details, the AO was justified in adding 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 operatio .....

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usiness as revenue expenditure. 9. The decision of this Court 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 discussin .....

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e 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 conclus .....

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under Section 28 of the Act, it can be claimed as a deduction 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) .....

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or not); for any period beginning from the date on which the 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 .....

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upreme 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 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 .....

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