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COMMISSIONER OF INCOME TAX Versus TORRENT PHARMACEUTICALS LTD

Disallownace of interest paid to nonconvertible debenture portion of public issue - Held that:- CIT (A) deleting the disallownace made by the A.O. in respect of interest paid to nonconvertible debenture portion of public issue came to be confirmed, as also considering the decision in case of Core Health Care Ltd. (2008 (2) TMI 8 - SUPREME COURT OF INDIA ), this Court while adopting the said view does not think it proper to discuss the issue elaborately and accordingly answer the question in favo .....

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d during the course of assessment proceedings that the assessee claimed Special advertisement expenditure amounting to ₹ 39,49,930/- , however the AO allowed 1/5th of the expenditure and made disallowance of ₹ 31,59,944/- . In the assessment order, an amount of ₹ 13,62,000/- was disallowed in respect of travelling and medical expenses of the Chairman. That in the assessment order, an amount of ₹ 5,44,23,397/- was disallowed in respect of interest paid on nonconvertible de .....

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r, the matter was carried before the ITAT and it had upheld the order of the CIT (A) which has given rise to this appeal. 3. While admitting this appeal, several questions were posed for consideration, however the appeal came to be admitted on the following question of law: Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT (A) in deleting the disallownace of ₹ 5,44,397/- made by the Assessing Officer in respect of interest paid to nonconv .....

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as come to the conclusion that the claim of interest of ₹ 5,44,23,397/- is a capital expenditure not admissible under Section 36 (1) (iii) or Section 37 of the Act. He, therefore, contended that the question may be answered in favour of the department. 5. On the other hand, learned Senior Counsel Mr.Soparkar for the assessee has contended that the ITAT has rightly confirmed the order of the CIT(A) making deletion in respect of interest paid on nonconvertible debenture portion of public iss .....

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298 ITR 194 (SC) and submitted that the issue raised in this appeal is squarely covered. Learned Senior Counsel has relied upon the following paragraphs of the decision of the Hon'ble Apex Court: 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 7. We quote hereinbelow Section 36(1)(iii) and Explanation 8 to Section 43(1) of the 1961 Act which read as follow: 36. (1) The deductions provided for in the fo .....

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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. 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;" "Definitions of certain terms relevant to income from profits and gains of business or professio .....

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business of running 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 inclu .....

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the borrowed 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 196 .....

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ense of 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 .....

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siness 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 Depart .....

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of income 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 .....

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43 defines 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, .....

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of civil 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 Se .....

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are concerned 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 sa .....

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ction 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 i .....

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