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2016 Supreme(Guj) 1175
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
K.S. Jhaveri, G.R. Udhwani, JJ.
Commissioner of Income Tax - Appellant
Vs.
Saurashtra Cement Ltd. - Respondent
Tax Appeal No. 1797 of 2005
Decided On : 04-07-2016
Advocate Appeared:
For the Appellant : Pranav G. Desai
For the Respondent: Swati Soparkar
The main legal point established in the judgment is the interpretation of provisions related to business expenditure and the application of principles from previous decisions to determine the allowability of expenses.
Headnote:
Interest Expenses - Income Tax - Section 36(1)(iii), Section 37(1) - 298 ITR 194 (SC), 236 ITR 471, 327 ITR 147 (Gujarat), 274 ITR 465 (Rajasthan) - The court discussed the interpretation of Section 36(1)(iii) and Section 37(1) in relation to interest expenses and contributions to a public welfare fund, emphasizing the use of borrowed capital for business purposes and the nexus between the expenditure and the advancement of the assessee's business. The court's decision was influenced by the principles laid down in the cited cases, leading to the allowance of certain expenses as revenue expenditure.
Fact of the Case:
The revenue challenged the judgment and order of the Income Tax Appellate Tribunal regarding the disallowance of interest expenses, interest income, contribution to a public welfare fund, interest on deferred payment of sales tax liability, expenditure on office work, and payment to a club as business expenditure.
Finding of the Court:
The court found that the expenses were allowable as revenue expenditure based on the interpretation of relevant provisions and previous decisions.
Issues: The issues involved the disallowance of various expenses by the Assessing Officer and the justification for allowing them as business expenditure.
Ratio Decidendi: The court's decision was based on the interpretation of the relevant provisions and the application of principles established in previous judgments.
Final Decision: The court upheld the allowance of the expenses as revenue expenditure based on the interpretation of the legal provisions and previous decisions.
K.S. Jhaveri, J.
1. By way of this appeal, the revenue has challenged the judgment and order of the Income Tax Appellate Tribunal, Rajkot Bench, Rajkot (For short, "the Tribunal") in ITA No. 308/RJT/1999 dated 31.3.2005.
2. At the time of admitting this Appeal, following questions of law were framed by this Court:-
"A. Whether the ITAT is justified in holding that the disallowance of interest expenses of Rs. 8,13,17,574.00 on borrowed funds for modernization/expansion of the business and interest income of Rs. 1,66,38,989.00 earned by temporary deployment of the funds i.e. net sum of Rs. 6,64,78,585.00 concerning the said borrowed funds for modernization/expansion of business by the Assessing Officer is wrong and that the assessee is entitled to allowance of the said net amount of expenses u/s. 36(1)(iii) of the IT Act?
B. Whether ITAT is justified in holding that the interest income of Rs. 1,66,38,989.00 on account of temporary deployment of borrowed fund is required to be allowed as deduction by way of separate deduction over and above interest expenditure of Rs. 8,13,17,585.00 allowed as expenditure by the C.I.T.(A)?
C. Whether the ITAT is justified in holding that the disallowance of Rs. 6,06,013.00 concerning contribution to National Council or Cement and Building Material made by the Assessing Officer is illegal and that the same is required to be allowed as expenditure allowable u/s. 37(1) of the Act as incurred for the purpose of business?
D. Whether the ITAT is justified in holding that the Assessing Officer is not justified in deletion of the sum of Rs. 2,55,33,060.00 being interest on deferred payment of Sales Tax Liability?
E. Whether the ITAT is justified in holding that the amount of Rs. 10,32,527.00 being expenditure incurred on polishing and electrification work of office of the assessee at Bombay not allowed by the Assessing Officer being in the nature of capital expenditure is illegal and the assessee is entitled to allowance of the same?
F. Whether the ITAT is justified in holding that payment made by the assessee of Rs. 6,00,300.00 to Heritage India Club not allowed as expenditure by the Assessing Officer is illegal and the same is required to be allowed as business expenditure?"
3. At the time of hearing of this appeal, it is submitted that the issues involved in this appeal are covered by various decision of the Apex Court and decisions of this Court and other High Courts. It is submitted that so far as the Questions (A) and (B) is concerned, the same is covered by the decision of the Apex Court in the case of Deputy Commissioner of Income Tax v. Core Health Care Ltd. reported in 298 ITR 194 (SC), wherein it is observed as under:-
"8. Interest on moneys borrowed for the purposes of business is a necessary item of expenditure in a business. For allowance of a claim for deduction of interest under the said section, all that is necessary is that firstly, the money, i.e. capital, must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business; and, thirdly, the assessee must have paid interest on the borrowed amount [See: Calico Dyeing & Printing Works v. Commr. of Income-tax, Bombay City-II, (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. This provision makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business which is carried on by the assessee in the year of account. What sub-section (iii) emphasizes is the user of the capital and not the user of the asset which comes into exis
