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THE COMMISSIONER OF INCOME TAX Versus TORRENT PHARMACEUTICALS LTD

2016 (6) TMI 1040 - GUJARAT HIGH COURT

Interest paid on the nonconvertible debentures portion disallowed - ITAT deleted the addition - Held that:- the issue involved in these two matters is squarely covered by a decision of this Hon'ble Court in case of Deputy CIT V. Core Health Care Ltd., [2001 (4) TMI 46 - GUJARAT High Court ] which has been confirmed by the Hon'ble Apex Court as reported in case of Deputy Commissioner of Income Tax v. Core Health Care Ltd., [2008 (2) TMI 8 - SUPREME COURT OF INDIA ] wherein the interest paid on th .....

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, they are heard and decided together by this common judgment. 2. The appellantrevenue has challenged the order dated 03/11/2016 made by the ITAT in ITA No.1044/Ahd/2001 for the assessment year 1997-98 by filing Tax Appeal No.787 of 2007; whereas the Tax Appeal No.797 of 2007 has been filed challenging the order dated 03/11/2016 made by the ITAT in ITA No.886/Ahd/2001 for the assessment year 1996-97. 3. Tax Appeal No.787 of 2007 was admitted on the following question of law: (C ) Whether the App .....

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8377; 6,41,29,925/- out of interest paid on nonconvertible portion of debentures, which according to the Assessing Officer gave an enduring benefit to the assessee? 5. Learned Counsel for the appellant has submitted that the learned Tribunal has committed serious error of law by not considering the issue of interest paid on nonconvertible debentures capitalized and debited in working capital in progress. 6. On the other hand, learned Counsel for the respondent has submitted that the issue involv .....

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e learned Counsel for the parties and having considered the decision as referred in earlier paragraph, this Court is of the view that issue is now squarely covered by not only the decision of this Court, but also confirmed by the Apex Court. Relevant discussion made in the said decision reads thus: 7. We quote hereinbelow Section 36(1)(iii) and Explanation 8 to Section 43(1) of the 1961 Act which read as follow: "OTHER DEDUCTIONS 36. (1) The deductions provided for in the following clauses .....

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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. Explanation : Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;" "43. Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sect .....

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unning it on hire for tourists, exceeds twentyfive thousand rupees, the excess of the actual cost over such amount shall be ignored, and the actual cost thereof shall be taken to be twentyfive thousand rupees. Explanation 8: For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall .....

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owed amount [See: Calico Dyeing & Printing Works v. Commr. Of Incometax, Bombay CityII #(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) of the 1961 Act. T .....

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a capital nature. The legislature has, therefore, made no distinction in Section 36(1)(iii) between "capital borrowed for a revenue purpose" and "capital borrowed for a capital purpose". An assessee is entitled to claim interest paid on borrowed capital provided that capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. Further, the words "actual cost" do not find place in Section 36(1)(iii) .....

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at the time when the assessment was made, the same has to be treated as a business asset as it was purchased only for business purposes. In the circumstances, the interest paid on the amount borrowed for purpose of such machinery is certainly a deductible amount." 10. As stated above, the Department contended before us that the judgments of this Court, prior to insertion of Explanation 8 in Section 43(1) of the 1961 Act, has no application to the present case. According to the Department, .....

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ome under the head "Profits and Gains of Business". Section 43(1) defines "actual cost". The definition of "actual cost" has been amplified by excluding such portion of the cost as is met directly or indirectly by any other person or authority. Explanation 8 has been inserted in Section 43(1) by Finance Act, 1986 (23 of 1986), with retrospective effect from 1.4.74. It is important to note that the word "actual cost" would mean the whole cost and not the es .....

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ines certain terms relevant to income from profits and gains of business and, therefore, the said section commences with the words "In Sections 28 to 41 and unless the context otherwise requires" "actual cost" shall mean the actual cost of the assets to the assessee, reducing 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 Sections 32, 32A, 3 .....

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il appeals we are concerned with the assessment years 1992-93, 1993-94, 1995-96 and 1997-98. A proviso has since been inserted in Section 36(1)(iii) of the 1961 Act. That proviso has been inserted by Finance Act, 2003 w.e.f. 1.4.2004. Hence, the said proviso will not apply to the facts of the present case. Further, in our view 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 .....

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oncerned with the law as it existed prior to 1.4.2004. As stated above, we are not concerned with the interpretation or applicability of the said proviso to Section 36(1)(iii) w.e.f. 1.4.04 in the present case. 12. In the case of Challapalli Sugars Ltd. (supra) this Court observed that interest paid on the borrowing utilized to bring into existence a fixed asset which has not gone into production, goes to add to the cost of installation of that asset. It was further observed that if the said bor .....

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when it borrowed the amount in question. The more appropriate decision applicable to the present case would be the judgment of this court in the case of India Cements Ltd. v. Commissioner of Incometax, Madras # (1966) 60 ITR 52 in which it has been observed that, for considering whether payment of interest on borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. In our view, Section 36(1)(iii) of the 1961 Act has to be read on its own terms. It is a .....

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