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THE COMMISSIONER OF INCOME TAX- I Versus CADILA PHARMACEUTICALS LTD

Disallowance under section 36(1)(iii) - interest free advances given to the sister concern - Held that:- Interest free loan given to the sister concerns is permissible and therefore, the Commissioner (Appeals) has rightly deleted the disallowance made by the Assessing Officer under section 36(1)(iii) of the I.T. Act. See Commissioner of Income-tax v. Raghuvir Synthetics Ltd.[2013 (7) TMI 806 - GUJARAT HIGH COURT] - Disallowance of preoperative expenses of new business - Held that:- Entry in .....

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SWATI SOPARKAR, ADVOCATE ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) By way of this appeal under section 260A of the Income-tax Act, 1961, the appellant-revenue has challenged the order of the Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal ) whereby the Tribunal has dismissed the appeal preferred by the revenue and confirmed the order of the Commissioner of Income-tax (Appeals). 2. While admitting the appeal, this court has framed the following substantial que .....

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iled its return of income on 30.11.1997. The Assessing Officer completed the assessment under section 143(3) of the Income-tax Act, 1961. While finalizing the assessment, the Assessing Officer observed that the assessee had not charged interest on the advances given to associate concerns. He further observed that the interest was not proved to have been incurred for the purpose of business in accordance with section 36(1)(iii) of the Act. He, therefore, made disallowance of the claim of the asse .....

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ns to its sister concerns even though there was no surplus fund available with it. Further, the assessee failed to prove that the interest incurred was for the purpose of business in accordance with section 36(1)(iii). Hence the Assessing Officer has disallowed interest expenditure of ₹ 34,74,048/- under section 36(1)(iii) of the Act. 4.1 So far as claim of pre-operative expenditure is concerned, the learned counsel for the appellant has taken us to the order of the Assessing Officer, part .....

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ssee company has incurred the total expenditure of ₹ 1,03,88,194.28 as per details given herein below: S.No. Description Amount Rs. 1 For the purpose of manufacturing Soft Gelatine Capsule at Kadi 4,58,500.00 2 For the purpose of expanding the existing business of formulation at Dholka 64,53,450.00 3 Telecommunication business 11,87,360.00 4 For the purpose of manufacturing Human Insulin 22,88,829.00 Total 1,03,88,194.00 Your assessee company relies upon the following grounds in order to c .....

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s of 37(1), the expenditure which is of the revenue nature is allowable under the provisions of the Income-tax Act. As may be observed from the above expenses, all the expenses are of revenue nature and pertaining to business of the company. Therefore, it should be allowed. (iii)Your kind attention is drawn to the judicial decision in the case of Hindustan Machine Tools 175 ITR 212 (Kara). In the said case, the Karnataka High Court was faced with the question whether the revenue expenditure incu .....

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the above cases, there is total and complete unity, interlacing, interdependence and interconnection of management, financial and administrating aspects. Therefore, all the divisions would be considered to be one business and therefore, all the expenses incurred on all the divisions would be allowable as business expenditure. 4.2 The learned counsel for the appellant contended that the Assessing Officer after considering the explanation of the assessee and various decisions as well as the provi .....

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red to be deducted under section 37. In my view, expenditure of identical nature cannot be regarded as revenue expenditure for one purpose and capital expenditure for another. If an expenditure is capital for the purpose of working out depreciation, it cannot be regarded as revenue expenditure for other purposes. An expenditure of a capital nature would remain a capital expenditure for all purposes irrespective of the claim which the appellant may make. It is also seen that what is capital expen .....

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had to be granted under section 37 of the Income-tax Act. He has further observed that whether a particular expenditure is revenue expenditure or not has to be decided on well established principles. The test to be applied for finding out whether a particular expenditure is revenue expenditure or not is to find out whether the expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit earning process. Any expenditure incurred .....

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re incurred for carrying on the business of integral part of profit earning process. Therefore, these expenses should be treated as revenue in nature, irrespective of entries in the books of accounts. Moreover, the ratio of CIT vs. Vallabh Glass Works Ltd. (1982) 137 ITR 389 (Guj.) is directly applicable in this case, whose decision is a binding decision for the officers working in Gujarat chares. The Commissioner (Appeals) held that the Assessing Officer was not justified in disallowing the exp .....

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should be allowed as revenue expenses in view of above discussion and the same is deleted. 4.4 The learned counsel for the appellant-revenue has contended that all the expenses have been incurred for the acquisition of capital assets and though all the observations are made in favour of the department, the Commissioner (Appeals) restricted the claim to ₹ 11,87,360/- which finding the Tribunal has upheld. Therefore, the order of the Commissioner (Appeals) and that of the Tribunal are requi .....

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₹ 1,03,88,194/- to ₹ 11,87,360/- out of preoperative expenses of new business is concerned, this issue is covered by the decisions in the case of Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income-tax (Central), Calcutta reported in 82 ITR 363 (SC) and in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-tax reported in 227 ITR172 (SC) and the decision of this court in the case of Commissioner of Income-tax v. Nirma Ltd., reported in 2 .....

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issue on the decision of CIT v. Alembic Glass Industries Limited, 103 ITR 715 (Guj) as also in case of Dy. CIT v. Core Health Care Limited, 298 ITR 194 (SC) would have no bearing. 14. Learned senior advocate Shri Soparkar has empathetically urged that both the authorities in the earlier year and in the present year had held the issue in favour of the assessee pointing out that this expenditure was in connection of expansion of the existing business. The Court on elaborate discussion had confirme .....

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n case of Dy. CIT v. Core Health Care Limited, 298 ITR 194 (SC) would have relevance and the borrowings were whether capital or revenue expenditure would be of no consequence. Profitable it would be to reproduce these observations made in this respect, which reads thus - The sole surviving question No.13, pertains to disallowance of soda ash project interest expenses of ₹ 3.33 crores (rounded off) and lab project interest of ₹ 12..27 crores (rounded off). The Assessing Officer, quest .....

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t the expenditure was in connection with the expansion of the existing business. On such ground, the expenditure was held allowable. It is this order of the CIT (Appeal) which the Tribunal upheld in the impugned judgment. Having heard the learned counsel for the parties and having perused the documents on record, we notice that CIT (Appeals) and the Tribunal concurrently came to the conclusion that there was interconnection, interlacing and inter-dependence of the management, financial and admin .....

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distant point by itself would not mean that it was a new business. If the facts as recorded by the CIT (Appeals) and the Tribunal can be said to have achieved finality, it would emerge that the assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called lab for its captive consumption for the purpose of its existing manufacturing business. It is no doubt that the assessee is engaged in .....

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