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K.S.B. Pump Ltd. Vs. Second Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)14ITD377(Mum.)
AppellantK.S.B. Pump Ltd.
RespondentSecond Income-tax Officer
Excerpt:
.....the underlying principle was stated thus : where the assessee claims deduction of interest paid on capital borrowed under section 10(2)(vi) of the [indian] income-tax act, all that the assessee has to show is that the capital which was borrowed was used for the purposes of the business of the assessee in the relevant year of account. it does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset. if the capital is used in the year of account and the use is for the purpose of the business of the assessee, it is immaterial whether the user of the capital actually yielded profit or not and it is not open to the department to reject the claim of the assessee in respect of interest paid on that capital merely because the use of the capital is.....
Judgment:
1. This appeal by the assessee relates to the assessment year 1979-80.

The assessee is a Public Limited Company, engaged in the business of manufacture and sale of pumps. The assessee had two manufacturing units, one at Pune and the other at Ahmednagar where there was a foundry. The third unit was being set up at Chinchwad in the calendar year 1978 with which we are concerned. That unit was a new division known as 'Power Project Division'. The assessee's claim for relief under Section 80J of the Income-tax Act, 1961 ('the Act'), was partly allowed by the Commissioner (Appeals). Against the rejection of the balance, the assessee has raised first ground in the memorandum of appeal. However, that ground was expressly given up by the assessee at the time of hearing of the appeal before us.

2. In connection with the setting up of the unit at Chinchwad for manufacture of pumps, which are slightly different from the pumps already manufactured by the assessee, the assessee had borrowed large amounts from the Central Bank of India (CBI) and other financial institutions. In the relevant accounting year, the assessee paid Rs. 8,18,752 as interest and commitment charges. The details are as under :A. (1) Interest on term loan of Rs. 24 lakhs 2,09,862.54 from the CBI US $ 3,34,444.91 1,66,104.30 7,69,195.51 of Rs. 30 lakhs 49,556.37 ------------ 3. The assessee claimed deduction of said amount of Rs. 8,18,752. The ITO rejected the claim with the following observations : The assessee-company has claimed deduction of ... interest and commitment charges of Rs. 8,18,752 in respect of new industrial unit, i.e., Power Project Division. It is seen that the said new unit has not started any production in the previous year relevant to this assessment year, i.e., the assessment year 1979-80. Hence, the said claim was not allowable in this year and as such disallowed.

4. In the appeal filed by the assessee, the Commissioner (Appeals) held that Section 36(1)(iii) of the Act, under which deduction was being claimed would apply when capital was borrowed. In the present case, the assessee had obtained 'credit facility' for the purchase of capital assets and as such interest paid was not interest on borrowed capital with the result that deduction could not be claimed under Section 36(1)(iii). As regards commitment charges, the Commissioner (Appeals) observed that they did not come within the ambit of Section 36(1)(iii) and as such were not allowable. The Commissioner (Appeals) then considered the question whether these deductions were allowable under Section 37(1) of the Act. He held that since the main purpose was to purchase fixed capital assets like machinery, etc., the interest and commitment charges would be in the capital field and as such deduction as revenue expenditure was not allowable under Section 37(1). He, accordingly, confirmed the disallowance.

5. The ground raised by the assessee in the memorandum of appeal is that the Commissioner (Appeals) had erred in confirming the disallowance of deduction of Rs. 8,18,752.

6. We may mention at the outset that the view expressed by the Commissioner to the effect that in this case there was mere grant of credit facilities and no borrowing of the capital from the bank and financial institutions is ex facie unsustainable. Indeed, this was not the stand taken by the department. As a result of grant of credit facilities, there has been borrowings from the banks and financial institutions and the interest, has mentioned above, has been paid along with commitment charges. The main grievance of the department is that since the capital has been borrowed for acquiring capital assets of a new unit, which had not started production in the relevant accounting year, the payment of interest would be in the capital field and not allowable as deduction.

7. We are unable to agree with the above contention, which had found favour with the learned Commissioner (Appeals). This is not a case of a new business being set up by the assessee, so that pre-commencement expenses could not be allowed as revenue deduction. This is a case of expansion of business. The assessee has been carrying on business of manufacturing pumps for several years. The assessee set up new unit in pursuance of the scheme for expansion. The production in the new unit is to be of pumps although of different variety. In the prospectus of the assessee-company, there is mention about future plans of expansion.

It is mentioned therein that the assessee-company proposed to invest Rs. 241.50 crores on modernisation and expansion programmes. Details of capital outlay are given in the prospectus. As regards sources of finance, it is mentioned that the assessee proposed to raise additional equity and obtain term loans from ICICI/LIC/CBI and foreign exchange loans from ICICI. There is also mention about raising of money from internal accruals and deposits and bank borrowings. The industrial licence has been obtained in the assessee-company's name. The voluminous evidence in the form of documents produced by the assessee indicate that this is a case of expansion of existing business by starting a new unit manufacturing different types of pumps.

8. On the above facts, the principle laid down by the Bombay High Court in Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265 would apply.

In that case, the assessee-firm, which had carried on the business of bleaching, dyeing and printing cloth, borrowed money in the year of account in order to extend its business, purchased land and erected additional plant and machinery and paid interest on the borrowed capital. In its assessment to income-tax in the relevant assessment year, the claim of the assessee to deduction of the interest so paid under section I0(2)(iii) of the Indian Income-tax Act, 1922, was rejected on the ground that the plant and machinery were not used for the business in the year of account. This rejection was found to be erroneous by the High Court. It held that the assesses was entitled to the deduction claimed even though the plant and machinery were not used in the year of account. The underlying principle was stated thus : Where the assessee claims deduction of interest paid on capital borrowed under Section 10(2)(vi) of the [Indian] Income-tax Act, all that the assessee has to show is that the capital which was borrowed was used for the purposes of the business of the assessee in the relevant year of account. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset. If the capital is used in the year of account and the use is for the purpose of the business of the assessee, it is immaterial whether the user of the capital actually yielded profit or not and it is not open to the department to reject the claim of the assessee in respect of interest paid on that capital merely because the use of the capital is unremunerative. (p. 265) The ratio of the above decision applies squarely to the facts of this case. It is not the department's case that the capital borrowed had been used for non-business purposes.

It is indeed common ground that it is used for business purposes and the claim is sought to be rejected on the grounds that the capital was used to acquire capital assets and the business had not commenced in the relevant accounting year. Both these facts are irrelevant as far as application of ratio of that decision is concerned because, as already emphasised, this is not a case of a company incurring pre-commencement expenses of a new business ; this is the case of a company which is already in business and the expenses are incurred on installing plant and machinery in the course of expansion of business.

9. We are further supported in the view which we have taken by another decision of the Bombay High Court, which is reported in Addl. CIT v.Aniline Dyestuffs & Pharmaceuticals (P.) Ltd. [1982] 138 ITR 843. In that case, the assessee had been manufacturing dyestuffs. It started a new industrial undertaking to manufacture dyes (intermediates) for the manufacture of dyestuffs. Dyes intermediates had hitherto been purchased in the market. The project had not gone into production during the relevant year. It was held that new undertaking cannot be said to be entirely different from existing business with the result that interest on capital borrowed for new project was allowable. In our case also, the new undertaking for manufacturing pumps was not different from existing business. Hence, on the principle laid down in this decision, interest on borrowed capital was allowable although the project had not gone into production in the relevant year.

10. The learned departmental representative strongly relied on the decision of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52 and also decisions of the Calcutta High Court in CIT v. Fort Gloster Industries Ltd. [1971] 79 ITR 48 and that of the Bombay High Court in CIT v. Tata Hydro Electric Power Supply Co. (P.) Ltd. [1979] 118 ITR 716. The last mentioned decision is not quite in point. As regards other two decisions, we would refer to the decision of the Gujarat High Court in CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715, wherein the entire case law on the subject, including the decision of the Supreme Court in the case of India Cements Ltd. (supra), were reviewed and the following propositions were laid down : (1) Where a borrowing is made for the purposes of a business, the interest paid on such a borrowing becomes eligible to deduction contemplated by Section 10(2)(ii) of the Act of 1922 or Section 36(1)(vi) of the Act of 1961.

(2) This would be so, even if the capital is invested in order to acquire a revenue asset or a capital asset, because the act of borrowing capital is distinct from the act of investment of that capital to acquire an asset.

(3) However, the business for which an asset of enduring nature is purchased with the borrowed capital should not be separate or distinct from the business for the purposes of which the capital is borrowed if deduction under Section 10(2)(ii) is to be allowed.

(4) If there is no existing business with reference to which the capital is borrowed and the borrowed capital is invested to purchase a new asset of enduring nature, then the interest paid on such borrowing till the asset so purchased goes into production, increases the cost of the installation of the said asset, and hence should be treated as capital expenditure not covered by Section 10(2)(ii) of the Act of 1922 or Section 36(1)(vi) of the Act of 1961. (p. 727) 11. Applying the above principles to the facts found in this case, it is obvious that the interest in question is allowable as deduction under Section 36(1)(vi).

12. The learned Commissioner (Appeals) has referred to the decisions of the Supreme Court in Bombay Steam Navigation Co. (1953) (P.) Ltd. v.CIT [1965] 56 ITR 52 and Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 and he seems to imply that in these two decisions, the principle laid down by the Bombay High Court in Calico Dyeing & Printing Works' case (supra) has been modified. Out of these two decisions, the decision in Challapalli Sugars Ltd.'s case (supra) has already been considered in the decision of the Gujarat High Court in the case of Alembic Glass Industries Ltd. (supra) and the other decision does not lay down any principle which militates against the view already expressed. For all these reasons, we hold that the interest in question was allowable as deduction under Section 36(1)(iii). We direct the ITO to grant said deduction.

13. As regards commitment charges on LIC loan paid by the assessee, we are of the opinion that they constitute payment over and above the payment of interest. They have been paid in the course of borrowings effected for expansion of existing business and as such they are allowable as revenue expenditure under Section 37(1). We direct the ITO to allow the same.


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