JUDGMENT:

KAPADIA, J. -- For the sake of convenience we state the facts occurring in Civil Appeal Nos.3952-55 of 2002 Dy. Commr. of Income Tax, Ahmedabad v. M/s. Core Health Care Ltd.

2. These civil appeals are directed against judgment and order dated 25.4.01 delivered by Gujarat High Court in Tax Appeal Nos.449 and 450 of 2000 and in Civil Application Nos.53 and 54 of 2001 whereby the Department's appeals, under Section 260A of the Income-tax Act, 1961, stood dismissed.

3. On 31.12.92 assessee filed its return of income for A.Y. 1992-93 declaring "nil" income. Later on the assessee filed a revised return on 6.8.93 declaring a loss of Rs.1,11,68,543/-. Assessee-company is engaged in the business of manufacturing and sale of intravenous solutions. For the assessment year under consideration assessee claimed deduction towards expenses aggregating to Rs.2,12,05,459/- which included interest on borrowings of Rs.1,56,76,000/-. During the assessment year under consideration assessee had installed new machinery. The A.O. vide assessment order dated 30.3.95 disallowed the amount of Rs.1,56,76,000/- placing reliance on the judgment of this Court in Challapalli Sugars Ltd. & Anr. v. Commissioner of Income-tax, A.P. and Anr. (1975) 98 ITR 167, inter alia, on the ground that during the assessment year under consideration assessee had installed new machinery on which production had not started. On appeal, vide order dated 15.11.96, CIT (A) confirmed the addition of interest amount on borrowings of Rs.1,56,76,000. Therefore, both the authorities, namely, the A.O. and CIT (A) added the said amount of Rs.1,56,76,000/- to the income of the assessee. The matter was carried in appeal by the assessee. Vide order dated 6.6.2000 the Tribunal held that the Department was not justified in adding Rs.1,56,76,000/- to the income of the assessee. In other words, the Tribunal held that the A.O. was not justified in making disallowance of Rs.1,56,76,000/- in respect of borrowings utilized for purchase of machinery. This decision was confirmed by the High Court, hence these civil appeals are filed by the Department.

4. The following question of law has been placed before us for determination: "Whether interest paid in respect of borrowings on capital assets not put to use in the concerned financial year can be permitted as allowable deduction under Section 36(1)(iii) of the Income-tax Act, 1961?"

5. According to the Department, the assessee was not entitled to treat the interest on borrowings as revenue expenditure. According to the Department, in view of Explanation 8 to Section 43(1) of the Income-tax Act, 1961 (for short, "1961 Act') the assessee was not entitled to claim deduction for interest on borrowings, particularly, when the machines were not put to use during the assessment year under consideration. According to the Department, provisions of Section 36(1)(iii) of the 1961 Act were required to be harmoniously construed along with the provisions of Explanation 8 to Section 43(1) regarding actual cost. According to the Department provisions of Section 36(1)(iii) being general in nature had to give way to the special provisions contained in Explanation 8 of Section 43(1) of the 1961 Act.

6. At the outset, we may clarify that before the High Court it was not the case of the Department that a new business was set up or commenced during the assessment year under consideration. It was undisputed before the High Court that three additional machines were installed by the assessee during the assessment year under consideration for the production of intravenous injectibles. It was not in dispute that the assessee had borrowed moneys during the accounting year commencing from 1.4.91 to 31.3.92. 7.

7. We quote hereinbelow Section 36(1)(iii) and Explanation 8 to Section 43(1) of the 1961 Act which r