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2016 (5) TMI 723 - BOMBAY HIGH COURT

2016 (5) TMI 723 - BOMBAY HIGH COURT - TMI - Pre commencement interest on capital borrowed for a new glass manufacturing unit - Revenue or capital expenditure - ITAT allowed as revenue - Held that:- CIT (A) and the Tribunal have rendered a finding of fact that the Respondent–Assessee was carrying on business of glass manufacturing plant at Jambusar in Gujarat and setting up the new business was a mere expansion of its existing business. Further, both the Authorities also found that as a matter o .....

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does not give rise to any substantial question of law. Thus, not entertained.

Expenses pertaining to closed down Thane unit incurred after closure of unit - ITAT allowed the claim u/s 37 - Held that:- CIT (A) and the Tribunal have rendered a concurrent finding of fact that the closure of the manufacturing unit at Thane was on account of statutory compulsion. Further, the business of manufacturing at Thane had not ceased but had been shifted to other locations/units of the RespondentA .....

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penditure was incurred with regard to carrying on its business and thus allowable under Section 37(1) of the Act.

Investment in tax free bonds out of the own funds - non utilization of borrowed funds - Held that:- We find that the CIT(A) as well as the Tribunal have come to concurrent findings of fact that the investment made in the shares, mutual funds and tax free bonds were not made out of borrowed funds but out of the RespondentAssessee's own funds. The Revenue has not been able t .....

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March, 2013 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order is in respect of Assessment Year 199899. 2. This appeal raises the following questions of law for our consideration : ( a) Whether on the facts and circumstances of the case and in law, the Tribunal was justified in allowing the aggregated expenses of ₹ 15,25,73,928/on account of VRS payments, gratuity payments and payment on account of other terminal benefits as revenue expenditure? (b) Whether on .....

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37 of the Income Tax Act, 1961? (d) Whether on the facts and circumstances of the case and in law, the Tribunal is justified in holding that the entire investment in tax free bonds were made out of the own funds and there was no utilization of borrowed funds without appreciating the fact that assessee had failed to establish the direct nexus of the said investment with interest free fund? 3. Regarding question (a): (i) Ms. Bharucha, the learned counsel for the Revenue very fairly states that th .....

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pondentAssessee is in the business of manufacturing pharmaceuticals, bulk drugs and glass bottles. During the subject assessment year the RespondentAssessee sought to expand its glass business and for that purpose set up and commissioned a new plant to manufacture glass bottles at Jambusar in Gujarat. (ii) In its Return of Income the RespondentAssessee claimed interest paid of ₹ 21.70 crores on loan taken for the purposes of setting up a new glass manufacturing plant as a revenue expenditu .....

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nto use. Thereafter it is alone allowed as Revenue expenditure. The Assessing Officer also relied upon a subsequent event viz. the glass manufacturing activity of the RespondentAssessee was spun of as a separate company to hold it is a separate business. Besides holding that the three activities viz. pharmaceutical, bulk drugs and glass bottles of the RespondentAssessee are not interlinked by common Management, funds and control. (iii) Being aggrieved, the RespondentAssessee filed an appeal to t .....

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termingling of funds. In the above view, CIT(A) deleted the disallowance made by the Assessing Officer of ₹ 21.70 crores on account of interest. (iv) On further appeal by the Revenue, the Tribunal on consideration of the facts came to the conclusion that the setting up of a new glass manufacturing plant at Jambusar, Gujarat was an expansion of the existing business of the RespondentAssessee. Thus upheld the order of the CIT (A). (v) Ms. Bharucha, the learned counsel for the Revenue in supp .....

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so in view of the decision of the Supreme Court in Deputy Commissioner of Income Tax Vs. Core Health Care Ltd. 298 ITR 194 wherein on almost an identical fact situation, in the context of deduction of interest on borrowed capital under Section 36(1)(iii) of the Act, the Apex Court held as under:- According to the Department, section 36(1)(iii) of the 1961 Act being general in nature has to give way to special provisions contained in Explanation 8 to section 43(1) of the 1961 Act. According to t .....

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is met directly or indirectly by any other person or authority. Explanation 8 has been inserted in section 43(1) by the Finance Act, 1986 (23 of 1986), with retrospective effect from April 1, 1974. It is important to note that the words actual cost would mean the whole cost and not the estimate of cost. Actual cost means nothing more than the cost accurately ascertained. The determination of actual cost in section 43(1) has relevancy in relation to section 32 (depreciation allowance), section 32 .....

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cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. In other words, Explanation 8 applies only to those sections like section 32, 32A, 33 and 41 which deal with concepts like depreciation. The concept of depreciation is 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 .....

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as a matter of fact there was a functional integrity between all the three business viz. Pharma business, bulk drugs business and glass manufacturing business with interlinking of management and funds. This finding of fact rendered by the Tribunal has not been shown to be perverse or arbitrary. (vii) In the above view, the issue as urged before us is settled by the Apex Court in Core Health Services (supra). Moreover the finding of fact rendered by the CIT(A) and the Tribunal about glass manufa .....

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istration. The closure of its Thane plant resulted in shifting of its manufacturing activity at Thane to other units of the RespondentAssessee shifted at Mahad, Pithampur and Hyderabad all of which resulted in expenditure to the extent of ₹ 2.84 crores. (ii) In its return of income the petitioner had inter alia claimed an amount of ₹ 2.84 crores (Rs.1.29 crores staff cost + ₹ 1.54 crores other corpus) as deduction under Section 37 of the Act. The Assessing Officer by his order .....

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e business which was closed at Thane plant had been shifted to other manufacturing units of the RespondentAssessee. Besides reliance was placed upon the decision of the Apex Court in K. Ravindranathan Nair Vs. Commissioner of Income Tax 247 ITR 178 to allow the RespondentAssessee s appeal by order dated 22nd May, 2011 and delete the disallowance of ₹ 2.84 crores done by the Assessing Officer. (iv) Being aggrieved, the Revenue carried the issue in appeal to the Tribunal. The Tribunal found .....

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nt of statutory compulsion. Further, the business of manufacturing at Thane had not ceased but had been shifted to other locations/units of the RespondentAssessee. Moreover the CIT (A)as well as the Tribunal had by applying the decision of the Apex Court in K. Ravindranathan Nair (supra) concluded that the business of manufacturing drugs at different units constituted a single business and closing down of one unit and shifting its activity to other units, would be expenditure incurred was for th .....

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Regarding question no.(d): (i) In the subject assessment year the RespondentAssessee had made an investment of ₹ 38.32 crores in shares, mutual funds and tax free bonds. The Assessing Officer during the course of assessment found that of the total funds available with the Respondent for the relevant period, 57% were borrowed funds. Therefore applying the aforesaid ratio the Assessing Officer by order dated 28th February, 2001 concluded that an amount of ₹ 21.82 crores out of ₹ .....

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