1. These two appeals are filed by the assessee-company, Indian Rare Earths Ltd., against the orders of the Commissioner (Appeals), in this case for the assessment years 1976-77 and 1977-78. The main contention in these appeals is common to both the assessment years and involves basically the same facts. Both the appeals were, therefore, heard together, consolidated and disposed of by one single order for the sake of convenience.
2. The common ground of appeal is that the Commissioner (Appeals) erred in holding that the ITO was justified in disallowing the interest paid by the assessee to the Government of India on the loan obtained by the assessee-company for its Orissa project.
3. The facts of the case relevant to the aforesaid common ground may be summarised as under: The assessee-company, Indian Rare Earths Ltd., is a public sector undertaking, which carries on the business of extracting from beach sands by separation method, minerals such as ilmenite, monazite, rutile, zircon, sillimanite, garnet, etc. In the course of the assessment proceedings for the assessment year 1976-77, the assessee-company claimed, inter alia, deduction of an amount of Rs. 7,480 representing interest at the rate of 10 1/2 per cent per annum on a loan of Rs. 1,30,00,000 obtained by the assessee-company from the Government on 30-3-1976 for its project at Orissa. This amount of interest, although capitalised in the books of the assessee-company, was claimed as an admissible revenue expenditure.
The ITO, however, did not entertain the claim on the reasoning that the Orissa project was a new project which was still incomplete and that, therefore, the assessee-company had rightly capitalised such interest. For the same reasons, the ITO disallowed the assessee's claim for deduction of interest of Rs. 15,45,819 for the subsequent assessment year, i.e., 1977-78. The assessee challenged this decision of the ITO before the Commissioner (Appeals) with the argument that the interest in question was deductible under Section 36(1)(iii) of the Income-tax Act, 1961 ('the Act') having been paid in respect of capital borrowed for the purpose of the business of the assessee-company. Apparently, certain judicial decisions were cited before the Commissioner (Appeals) in this behalf. The latter, however, held that in his opinion, there was distinction between the assessee's case and the cases cited before him; according to him, 'that distinction consists in the fact that the Orissa project is a new project which is incomplete, and in this case the appellant itself has capitalised the interest amount vide pare 4 of the assessment order'. In this view, he confirmed the disallowance and observed that since he had held that the amounts in question were rightly capitalised, the assessee-company may be allowed depreciation as may be due in accordance with the law. Hence, the present appeals by the assessee-company to the Tribunal.
Before us Shri S.E. Dastur, the learned counsel for the assessee-company, at the outset of the hearing explained the nature of the assessee-company's business which is of extraction of minerals such as ilmenite, rutile, monazite, zircon, etc., by separating them from the beach sands. He pointed out that for this purpose, the assessee already had mineral separation plants operating in Kerala and Tamil Nadu. He submitted that the company felt the need for another mineral separation plant for the extraction of the same kind of minerals in another part of India in view of the gradual depletion of the reserves of minerals in the western coast of India. The company, therefore, proposed to set up a new mineral separation unit in Orissa in view of the possibility of obtaining such minerals in the coastal areas there. For this purpose, it had to raise financial resources, including a loan from the Government. It is the interest on the loan of Rs. 1,30,00,000 so obtained that the assessee had paid the interest in question for two months in the accounting year relevant to the assessment year 1976-77 and for the full year for the assessment year 1977-78. Shri Dastur argued that inasmuch as the capital, in respect of which the interest in question is claimed, was borrowed in the course and for the purpose of the same business of the assessee-company, the latter was entitled to the deduction of such interest under Section 36(1)(iii). For this proposition, Shri Dastur placed reliance upon the decision given by the Bombay High Court in Calico Dyeing & Printing Works v. CIT  34 ITR 265, and the Supreme Court decision in the case of India Cements Ltd. v. CIT  60 ITR 52.
The learned counsel, however, laid special stress on the decision of the Gujarat High Court in CIT v. Alembic Glass Industries Ltd.  103 ITR 715, the facts of which case are very similar to those of the assessee-company in the present appeals. In the case of Alembic Glass Industries Ltd. (supra), the assessee, a glass manufacturing company, was a going concern at Baroda, who, in order to expand its business, proposed to establish a new separate glass producing unit at Bangalore. For this purpose, the company borrowed funds on which it had to pay interest which it claimed as deduction under Section 36(1)(iii). The Gujarat High Court, following the ratio decidendi of the Bombay High Court in the case of Calico Dyeing & Printing Works (supra), held that the assessee's claim was admissible under Section 36(1)(iii). The Court found support for this decision in the view taken by the Supreme Court in India Cements Ltd. (supra) and also explained how the Supreme Court decision in Challapalli Sugars Ltd. v. CIT  98 ITR 167 was distinguishable on facts and that such distinction was made by the Supreme Court itself in its decision in India Cements Ltd. (supra).
Relying on the said exposition of the law by the Gujarat High Court, Shri Dastur urged that as long as the capital borrowed was used for the purposes of the current business of the assessee, the interest on such borrowed capital would be an admissible deduction under Section 36(1)(iii) irrespective of the fact that the borrowed funds were used for the purchase of capital assets and that it was also immaterial that the capital assets so acquired were not used in the relevant accounting year; for, he said the emphasis was on the user of the borrowed capital and not on the assets acquired with such borrowed capital so far as the admissibility of interest under Section 36(1)(iii) was concerned.
4.1 Shri Anjani Kumar, the learned departmental representative, on the other hand, sought to support the department's case on the ground that the funds received by the assessee-company from the Government did not represent 'capital borrowed' within the meaning of Section 36(1)(iii) since it was only an advance by the Government, who owned the assessee-company, a public sector undertaking. He argued that the funds so made available to the assessee-company represent capital 'provided' by the Government and not borrowed by the assessee and, therefore, the interest claimed by the assessee was not an admissible deduction under Section 36(1)(iii). For this argument, the learned departmental representative relied on the decision of the Punjab and Haryana High Court in Pepsu Road Transport Corpn. v. CIT  130 ITR 18. He also reiterated the argument of the ITO and the Commissioner (Appeals) that the Orissa project was a new business and a totally new undertaking and, therefore, the judicial decisions cited on behalf of the assessee-company are not applicable to the assessee's case.
5. We have given careful thought to the submissions made and arguments put forth from both sides in the context of the facts and circumstances of the assessee-company's case and the relevant case law and we have come to the following conclusion: It is common ground that the assessee-company has been operating two mineral separation plants at Chavara in Kerala and Manavalakurichi in Tamil Nadu over the last 17 years for the separation of minerals from the beach sand, mined from the western coastal area. It cannot be gainsaid that with the gradual depletion of the reserves of minerals in the western coast beach sands, the assessee-company had to look for similar deposits of minerals in other beaches in India with a view to extending or expanding the assessee-company's operations in the context of the domestic requirement and export demands of the minerals such as ilmenite, monazite, etc. The proposal to set up a new mineral separation unit in Orissa was, thus, only an extension of the assessee's current business and could not be described as a new business undertaking as sought to be made out by the ITO and the Commissioner (Appeals). In this regard, we find that the ratio decidendi of the Gujarat High Court in the case of Alembic Glass Industries Ltd. (supra) clearly applies to the assessee's case. We are not impressed by the argument of the learned departmental representative that the amount of Rs. 1,30,00,000 received by the assessee from the Government for its Orissa project, was not capital borrowed but capital 'provided'; for, it is evident from the relevant documents including the narration in the assessee-company's balance sheet that the amount in question was a 'loan' from the Government and it was secured on the assets of the assessee-company. We, therefore, agree with the learned counsel for the assessee that the funds obtained by the assessee-company from the Government for its Orissa project was capital borrowed for the purpose of the assessee's running business and, consequently, the amount of interest paid in respect of such capital borrowed was admissible as a deduction under Section 36(1)(iii) in computing the assessee's business income for the assessment years 1976-77 and 1977-78. The assessee, thus succeeds so far as its common'ground of appeal for the said assessment years is concerned.
5.1 to 11. [These paras are not reproduced here as they involve minor issues.]