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2016 Supreme(Guj) 1184
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
K.S. Jhaveri and G.R. Udhwani, JJ.
Commissioner of Income Tax - Appellant
Vs.
Saurashtra Cement Ltd. - Respondent
Tax Appeal Nos. 1881, 1882 of 2006 and 1774 of 2009
Decided On : 05-07-2016
For the Appellant :Pranav G. Desai, Advocate.
For the Respondent:Swati Soparkar, Advocate.
The main legal point established in the judgment is the allowance of deduction for interest on borrowings for the purposes of business, emphasizing the necessity of interest on borrowed capital and the applicability of the borrowed capital for business purposes.
Headnote:
Interest on borrowings - Income Tax - Section 36(1)(iii), Section 43B - The court discussed the allowance of deduction for interest on borrowings for purchase of new machinery treating as capital expenses and the treatment of interest on borrowings for purchase of investment in shares of subsidiary companies as an allowable business expenditure. The court referred to the decision of Deputy Commissioner of Income Tax v. Core Health Care Ltd. and Commissioner of Income Tax v. Jayendrakumar Hiralal to emphasize that interest on moneys borrowed for the purposes of business is a necessary item of expenditure in a business. The court also discussed the applicability of Explanation 8 to Section 43(1) and held that it has no relevancy to Section 36(1)(iii). The court concluded that 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.
Fact of the Case:
The revenue challenged the judgment and order of the Income Tax Appellate Tribunal, Rajkot Bench, Rajkot in various tax appeals. The questions of law framed by the court pertained to the disallowance of deduction for interest on borrowings, contribution to National Council of Cement and Building Material, club's membership paid in the name of Directors, and deferred sales tax under Section 43B.
Finding of the Court:
The court found that the issues were covered by various decisions of the Apex Court and decisions of this Court and other High Courts. The court referred to specific cases such as Deputy Commissioner of Income Tax v. Core Health Care Ltd. and Commissioner of Income Tax v. Jayendrakumar Hiralal to support its findings.
Issues: The issues involved in the appeals were related to the disallowance of deduction for interest on borrowings, contribution to National Council of Cement and Building Material, club's membership paid in the name of Directors, and deferred sales tax under Section 43B.
Ratio Decidendi: The court relied on the interpretation of Section 36(1)(iii) and Section 43B, as well as the applicability of Explanation 8 to Section 43(1) to determine the allowability of various deductions and expenses. The court emphasized the necessity of interest on moneys borrowed for the purposes of business and the applicability of the borrowed capital for business purposes.
Final Decision: The court disposed of the appeals in accordance with the decisions cited and answered the questions raised for consideration based on the cited decisions.
1. By way of these appeals, the revenue has challenged the judgment and order of the Income Tax Appellate Tribunal, Rajkot Bench, Rajkot (For short, "the Tribunal") in ITA No. 416, 417/RJT/2005 dated 27.4.2006 and in ITA No. 19/RJT/2006 dated 23/12/2008.
2. At the time of admitting Tax Appeal No. 1881 of 2006, following questions of law were framed by this Court:--
"1. Whether ITAT is justified in holding that the disallowance of Rs. 70,89,520.00 in respect of claim of deduction for interest on borrowings for purchase of new machinery treating as capital expenses by the A.O. is required to be deleted and the said amount is required to be treated as revenue expenses as claimed by the assessee?
2. Whether the ITAT is justified in holding that the disallowance of Rs. 6,21,362.00 in respect of claim of deduction for contribution to National Council of Cement and Building Material is required to be deleted and that the assessee is entitled to the allowance of the same?
3. Whether the ITAT is justified in holding that the disallowance of Rs. 50,246.00 in respect of claim of deduction for club's membership paid in the name of Directors is required to be deleted and the assessee is entitled to deduction of the same?
4. Whether the ITAT is justified in holding that disallowance of Rs. 1,53,03,108.00 made under Section 43B in respect of deferred sales tax is required to be deleted?"
3. At the time of admitting Tax Appeal No. 1882 of 2006, following question of law was framed by this Court:--
"Whether the ITAT is justified in holding that the disallowance of Rs. 30,000.00 in respect of claim of deduction for club's membership paid in the name of Directors is required to be deleted and the assessee is entitled to deduction of the same?"
4. At the time of admitting Tax Appeal No. 1774 of 2009, following questions of law were framed by this Court:--
"1. Whether the Tribunal below committed substantial error of law in treating the interest amounting to Rs. 7,08,97,400/- on borrowings for purchase of investment in shares of subsidiary companies as an allowable business expenditure.
2. Whether the Tribunal below committed substantial error of law in treating the project expenses amounting Rs. 1,82,67,690/- as Revenue Expenditure.
3. Whether the Tribunal below committed substantial error of law in holding that the assessee-Company is eligible for deduction in respect of club fees paid in the name of the Directors of the Company as business expenditure.
4. Whether the Tribunal below committed substantial error of law in not at all discussing any of the relevant points involved while passing the impugned order."
5. At the time of hearing of these appeals, 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 Question in respect of claim of deduction for interest on borrowings for purchase of new machinery treating as capital expenses and treating the interest amounting to Rs. 7,08,97,400/- on borrowings for purchase of investment in shares of subsidiary companies as an allowable business expenditure are 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. Th
