Commissioner of Income Tax, Ludhiana-I, Ludhiana v. M/s Amrit Soap Co., Ludhiana

Mr. Rajesh Sethi, Sr. Standing counsel for the appellant. ADARSH KUMAR GOEL J.(ORAL)

The revenue has preferred this appeal under Section 260A of the Income Tax Act, 1961 (the Act) against the order of the Income Tax Appellate Tribunal, Chandigarh Bench 'A', Chandigarh, passed in I.T.A. No.974/Chandi/2004 dated 10.11.2005 for the Asstt. Year 2001-02 proposing to raise the following substantial questions of law:- i) Whether on the facts and law, the Hon'ble Income Tax Appellate Tribunal was legally justified to allow interest on capital borrowed for construction of building during the preoperative period within the meaning of explanation 8 to section 43 of I.T. Act? ii) Whether on the facts and law, the Hon'ble Income Tax Appellate ITA No.132 of 2008 (O&M) -2- Tribunal was legally justified to allow interest @ 18% to close relatives and associated persons covered under Section 40A(2)(b) as compared to the rate of 15% paid to other creditors?

The Assessing Officer has disallowed the claim for deduction under Section 36(1)(iii) of the Act on account of interest paid on the capital borrowed for establishing a new unit. It was held that as per explanation 8 to Section 43 of the Act, the interest paid for preoperative expenses was not admissible. The Assessing Officer also disallowed interest amount of Rs.1,66,229/- to persons covered under Section 40A(2)(b) of the Act on the ground that the same was excessive.

The CIT(A) allowed the claim of the assessee which order has been confirmed by the Tribunal.

The Tribunal held:- “The Assessing Officer, however, failed to take into consideration that the aforesaid proviso to Section 36(1)(iii) was introduced on the statute book by the Finance Act, 2003, w.e.f. 1.4.2004. Pertinently, there is no mention in the provision that such proviso has been made to operate retrospectively. As such, the proviso is prospective and is applicable w.e.f. 1.4.04. It is not applicable to the assessment year under consideration, which happens to be assessment year 2001-02. This point has been well considered by the ld. CIT (A) and having done so, the ld. CIT(A) has deleted the addition in question. For this reason, no fault can be found with the order of the CIT(A). In DCIT v. Core Healthcare Ltd. (2001) 251 ITR 61 (Guj.), it has been held that apropos section ITA No.132 of 2008 (O&M) -3- 36(1)(iii) of the Income-tax Act, borrowing on capital or revenue account is not relevant. Where the capital was borrowed for purchase of machinery to increase production in the existing business but the machinery was not put to use in the accounting year such fact was not relevant and the interest on borrowed capital was held deductible. It was held that the assessee was under no obligation to capitalize such interest. No decision to the contrary has been cited on behalf of the department..... We are in agreement with the ld. CIT(A). As pointed out by the ld. Counsel for the assessee, the AO was incorrect in making the observations which she did. The assessee did in fact pay interest @ 18% to outside parties. It is also not disputed that brokerage had to be paid in advance, including which, the interest rate came to over 18% per annum, i.e.

18.02%, to be exact. The contention of the ld. D.R. that interest and brokerage are to be considered separately, does not hold water. The brokerage had to be paid on the date of receipt of loan i.e. in advance. It was, therefore, inextricably linked with the rate of interest emanating from the loan. Also, it is a matter of record that for the immediately preceding year, interest @ 18% paid to the partners stands allowed by the Assessing Officer. Moreover, it can not be again said, as held by the Hon'ble Madras High Court in the case of CIT v. Raman & Raman Ltd., 71 ITR 345 (Mad.), as rightly followed by the ld. CIT(A), that while allowing a particular expenditure, the ITA No.132 of 2008 (O&M) -4- revenue cannot act as a businessman.”

As regards question No.(i), it is not disputed that judgment of the Gujrat High Court referred to herein above has since been affirmed by Hon'ble the Supreme Court in Deputy Commissioner of Income Tax Vs. Core Healthcare Ltd., 298 ITR 194 (SC). The said question thus can not be held to be substantial question of law.

As regards question No.(ii), the Tribunal has recorded a finding of fact that the interest paid was not higher than rate of interest paid to other creditors. Thus, this question can not be held to be substantial question of law.