Commissioner Of Income Tax-I, Ludhiana v. M/S Vardhman Polytex Limited, Chandigarh Road, Ludhiana

Income Tax Appeal No. 1 of 2003 1 In the High Court of Punjab and Haryana at Chandigarh Income Tax Appeal No. 1 of 2003 Date of Decision: 21.01.2008 Commissioner of Income Tax-I, Ludhiana. …Appellant. VERSUS M/s Vardhman Polytex Limited, Chandigarh Road, Ludhiana. …Respondent. CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE M.M.KUMARHON’BLE MR. JUSTICE RAJESH BINDAL Present:Sh.. S.K.Garg Narwana, Advocatefor the appellant. Sh. M.S.Syali, Senior Advocate with Sh. Satyen Sethi, Sh. Akshay Bhan and Ms. Mahua C. Kalra, Advocatesfor the respondent. RAJESH BINDAL, J. This matter was placed before us on account of different viewsexpressed by this Court in Commissioner of Income Tax v. OswalSpinning and Weaving Mills Limited (1986) 160 Income Tax Reporter426(P&H) and Commissioner of Income Tax-1, Chandigarh v. PunjabAlkalies and Chemicals Ltd., Chandigarh (2006) 30 Indian TaxationReports 247 (P&H) by a Bench consisting two of us (Adarsh Kumar Goeland Rajesh Bindal, JJ). The order of reference reads as under:- “This is an appeal filed by the Revenue raisingfollowing substantial question of law, arising out of orderdated 8.7.2002 passed by the Income-Tax AppellateTribunal, Chandigarh Bench 'A', (for short 'the Tribunal'), forthe assessment year 1992-93: “i) Whether on the facts and the circumstances of thecase, the Hon'ble Income tax Appellate Tribunalwas justified in deleting the addition of Rs.1,97,290/- on account of interest and Rs.case, the Hon'ble Income tax Appellate Tribunalwas justified in deleting the addition of Rs.1,97,290/- on account of interest and Rs. Income Tax Appeal No. 1 of 2003 2 9,80,000/- on account of upfront fees by ignoringExplanation 8 to Section 43(1)?” The assessee, who is engaged in the business ofyarn, filed its return of income for the year in question on30.12.1992, declaring its taxable income at Rs. 3,59,86,351/.The return was processed under Section 143 (1)(a) of theIncome Tax Act, 1961 (for short 'the Act') on 6.1.1992 at atotal income of Rs. 3,60,04,130/-. The assessee thereafterfiled revised return on 6.8.1993 declaring a taxable incomeof Rs. 3,48,09,071/-. In the computation of income filedalong with revised return, the assessee claimed additionaldeduction on account of Rs. 1,97,290/- and Rs. 9,80,000/-on account of interest under Section 36(1) (iii) of the Act andupfront fees, respectively. This claim was made on accountof loans raised for set up of a new unit at Baddi (HP). In therevised return a detail note was given at Serial No. 9 that theassessee has set up a new unit, for the purpose of which,the assessee incurred expenses on interest of loans andupfront fees of loan raised from financial institutions forestablishing a new unit. It was admitted in the return thatthe new unit had not yet come into commercial production.However, the claim of the assessee was that the same isnothing but expansion of its earlier business under the samemanagement and administration. The assessing officer,keeping in view, the admitted facts that the loan was raisedfor setting up a new unit for creating a capital asset whichwas yet come into production, the interest for the period priorto that could not be allowed as revenue expenditure for thepurpose, Explanation 8 to Section 43 (1) of the Act whichadded retrospectively from 1.4.1974 was relied upon.Besides this, number of judgments of different High Courtswere also referred to. In appeal, learned CIT(A) accepted the plea of the In appeal, learned CIT(A) accepted the plea of the assessee. While holding in favour of the assessee that thenew unit at Baddi(HP) was part and parcel of the existingbusiness of the assessee and it was only expansion of thealready existing activity, the CIT(A) relied upon a judgment ofGujrat High Court in Commissioner of Income Tax vs.Alembic Glass Industries Ltd. [1976] 103 ITR 715, whiledistinguishing a judgment of this Court inCommissioner of Income Tax Appeal No. 1 of 2003 3 Income Tax vs. Oswal Spinning and Weaving Mills Ltd. [1986] 160 ITR 426. The Tribunal, in appeal by the Revenue against theorder of the CIT (A), approved the order passed by the CIT(A). While rejecting the appeal, the Tribunal recordedfollowing findings: “24. On careful consideration of the rival submissions,we find force in the submission advanced on behalfof the assessee and are inclined to uphold theorder of learned Commissioner of Income-tax(Appeals). As is evident from record, the assesseeis carrying on business of manufacturing andspinning of yarn at Ludhiana and setting up a newunit for carrying on similar business at Baddi(HP).The Director's report and balance sheet clearlyreflect that it is expansion of business earliercarried on by the assessee. The new unit at Baddiand old unit have common management andcontrol, common funds interlacing and interconnection. The unit at Baddi cannot be held to bea new business. It is only expansion of oldbusiness. Interconnection of funds is establishednot only from the balance sheet but also from thefact that machinery and plant of old unit has beenmortgaged to finance the new unit. The factualfinding recorded by the learned Commissioner ofIncome-tax (Appeals) could not be challengedbefore us with reference to any material on record.The contention advanced on behalf of the Revenuethat the learned Commissioner of Income-tax(Appeals) did not examine relevant question ofcommon funds and common management andcontrol, is not correct. As noted earlier, the plea onthe above line was raised before the AssessingOfficer and was not refuted in the assessmentorder.The Commissioner of Income-tax (Appeals)also examined the question is depth and decidedthe issue in favour of the assessee after elaboratediscussion. We do not find any error in theapproach of learned Commissioner of Income-tax Income Tax Appeal No. 1 of 2003 4 (Appeals). The view taken in the impugned order isnot only supported by the decision referred to bythe learned Commissioner of Income-tax (Appeals)but is also supported by fourteen decision given inthe paper Books of the assessee, the latest in line,being the decision of Hon'ble Supreme Court in thecase of CIT Vs. Associated Fibre & RubberIndustries (P) Ltd., 236 ITR 471. As it is a case ofexpansion of business, interest paid on borrowedfunds for installation of machinery and upfront feeswere rightly treated as of revenue nature andallowed.We confirm the action of learnedCommissioner of Income-tax (Appeals).” (Emphasis supplied) The provisions relevant for consideration on the issueare extracted below: Other deductions. “Section 36.(1) the deductions provided for in thefollowing clauses shall be allowed in respect of thematters dealt with therein, in computing referred to insection 28- (i)xxxx(ii)xxxx (iii)the amount of the interest paid in respect ofcapital borrowed for the purposes of the business orprofession: (Emphasis supplied) The provisions relevant for consideration on the issueare extracted below: Other deductions. “Section 36.(1) the deductions provided for in thefollowing clauses shall be allowed in respect of thematters dealt with therein, in computing referred to insection 28- (i)xxxx(ii)xxxx (iii)the amount of the interest paid in respect ofcapital borrowed for the purposes of the business orprofession: Provided that any amount of the interest paid, inrespect of capital borrowed for acquisition of anasset for extension of existing business orprofession (whether capitalised in the books ofaccount or not); for any period beginning from thedate on which the capital was borrowed foracquisition of the asset till the date on which suchasset was first put to use, shall not be allowed asdeduction. Explanation.- Recurring subscriptions paidperiodically by shareholders, or subscribers inMutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capitalborrowed within the meaning of this clause;” Definitions of certain terms relevant to incomefrom profits and gains of business or profession.43. In sections 28 to 41 and in this section, unless thecontext otherwise requires- (1) “actual cost” means the actual cost of theassets to the assessee, reduced by that portionof the cost thereof, if any, as has been metdirectly or indirectly by any other person orauthority:assets to the assessee, reduced by that portionof the cost thereof, if any, as has been metdirectly or indirectly by any other person orauthority: Explanation 8.- For the removal of doubts, it ishereby declared that where any amount is paidor is payable as interest in connection with theacquisition of an asset, so much of such amounta is relatable to any period after such asset isfirst put to use shall not be included, and shall bedeemed never to have been included, in theactual cost, of such asset. The undisputed facts in the present case are that theassessee, who was already continuing with its business atLudhiana, started setting up of a new unit at Baddi (HP) forwhich the loans were raised from financial institutions onwhich the assessee was liable to pay interest besidespayment of upfront fee. The new unit being set up at Baddi(HP) had not yet come into commercial production. Thequestion for consideration in the present case is as towhether interest paid on borrowed capital for setting up of anew unit till such time it comes into commercial production,is deductible as the revenue expenditure under Section 36(1)(iii) of the Act while computing the income of theassessee or to be treated as capital expenditure to be addedto the cost of asset. Section 43 of the Act defines certain terms relevant todetermine the income from business or profession. Sub-section (1) thereof provides the definition of actual cost of anasset. Explanation 8 to Section 43(1) of the Act was addedby the Finance Act, 1986 w.e.f. 1.4.1974. The object of thesaid amendment as contained in the Finance Bill, 1986 as itappeared in [1986] 158 ITR (St.) 88 is as under: “Under the existing provisions of clause (1) ofthat section, 'actual cost' means the actual cost of theasset to the assessee, reduced by that portion of thecost thereof, if any, as has been met directly orindirectly by any other person or authority. Theproposed amendment seeks to clarify that anyamount paid or payable as interest in connection withacquisition of an asset and relatable to a period afterthe asset is first put to use shall not form part andshall deemed never to have been formed part of theactual cost of the asset.” “Under the existing provisions of clause (1) ofthat section, 'actual cost' means the actual cost of theasset to the assessee, reduced by that portion of thecost thereof, if any, as has been met directly orindirectly by any other person or authority. Theproposed amendment seeks to clarify that anyamount paid or payable as interest in connection withacquisition of an asset and relatable to a period afterthe asset is first put to use shall not form part andshall deemed never to have been formed part of theactual cost of the asset.” A perusal of Explanation 8 of Section 43(1) of the Actand the object for which the same was inserted withretrospective effect shows that no interest paid or payableby the assessee in connection with the acquisition of theasset for any period after the asset is first put to use shallnot form part (shall form part?) of the actual cost of theasset. The proposition in the present case is just reverse.The natural consequences of Explanation 8 would be that incase of any expansion, interest paid or payable on loansraised in connection with the acquisition of an asset beforethe same is first put to use shall form part of the actual costof the asset. Meaning thereby that it will be capitalised to beadded in the cost of the asset. Addition of Explanation 8 toSection 43(1) of the Act with retrospective effect from1.4.1974 is a clear and ambiguous (unambiguous?). Thesame is in terms of the judgment of Hon'ble the SupremeCourt inM/s Challapalli Sugars Ltd. vs. CIT,[1975] 98ITR 167. In the said case, the expression actual cost underthe Income-tax Act, 1922 was under consideration, whichhad not been defined therein. An identical issue therein wasas to whether interest paid before commencement of Income Tax Appeal No. 1 of 2003 7 production on the amount borrowed for the acquisition andinstallation of plant and machinery has to be considered aspart of the actual cost of the assets. Hon'ble the SupremeCourt held that actual cost has not been defined in the 1922Act, it was to be construed in the sense which nocommercial man would misunderstood. While referring toand relying upon various principles and Rules onaccountancy prevailing in the commerce and industries itwas held that correct method for determination of the costof capital asset is to include all expenditure necessary tobring such asset into existence and to put them in workingcondition. In case money is borrowed by a newly startedcompany in the process of constructing and erecting itsplant, the interest incurred before the commencement ofproduction on such borrowed money can be capitalized andadded to the actual cost of fixed assets which have beencreated as a result of such expenditure and such rule ofaccountancy should be adopted for determining the actualcost of the assets in the absence of any statutory definitionor other indication to the contrary. A perusal of Explanation 8 to Section 43(1) of the Act,referred to above, clearly shows that the same is nothing butreiteration of the principles laid down in M/s ChallapalliSugars' case(supra). The expression does not make any distinctionwhether the asset is acquired by the assessee for setting upof an entirely new business or in the process of expansion ofits existing business or industry. It merely provides fordetermination of actual cost of asset on a date when theasset first is put to use. Unless an asset, which is beingacquired, starts generating income, it cannot be said that thesame is being used for the purpose of business. Once it isestablished that interest paid after asset is put to use is notto be included in the actual cost on asset. There would beno alternate but to hold that the interest paid before theasset was first put to use would be included in the actualcost thereof and has to be treated as capital expenditureand not revenue in nature. The expression does not make any distinctionwhether the asset is acquired by the assessee for setting upof an entirely new business or in the process of expansion ofits existing business or industry. It merely provides fordetermination of actual cost of asset on a date when theasset first is put to use. Unless an asset, which is beingacquired, starts generating income, it cannot be said that thesame is being used for the purpose of business. Once it isestablished that interest paid after asset is put to use is notto be included in the actual cost on asset. There would beno alternate but to hold that the interest paid before theasset was first put to use would be included in the actualcost thereof and has to be treated as capital expenditureand not revenue in nature. In Oswal Spinning's case (supra), this Courtanswered the question as to whether the interest paid by the Income Tax Appeal No. 1 of 2003 8 assessee on purchase of machinery should be consideredas part of the cost of machinery. This Court held that theinterest paid on acquisition of machinery should be treatedas part of the cost of machinery while relying uponChallapalli Sugar Ltd.v. CIT(supra); CIT v. Tensile SteelLtd. (Guj.),[1976] 104 ITR 581; Ballarpur Paper andStraw Boardv. CIT (Bom.), [1979] 118 ITR 613 andCITv.New Central Jute Mills (Cal.), [1982) 135 ITR 736. While dealing with an identical issue, Calcutta High Court in JCT Ltd. Vs. Deputy Commissioner ofIncome-tax and another [2005] 276 ITR 115, decided theissue in favour of the Revenue and against the assessee byholding that even in cases of expansion of existingbusiness, the interest paid or payable on the loans raised foracquisition of new asset would not be termed as revenueexpenditure deductible under Section 36(1)(iii) of the Act.The conclusion drawn in the judgment is extracted below: “Having regard to the discussion and thequestion of law as discussed above, we are ofthe view that the interest paid on the borrowedcapital under the deferred payment scheme forthe period relevant till the asset was first put touse would not be eligible for deduction undersection 36(1)(iii) or section 37 since it isincludible in the actual cost of acquisition of theasset till the asset was first put to use, in viewof Explanation 8 to section 43(1). Once thesame comes within the purview of section 43(1), Explanation 8, deduction under section 36(1)(iii) or 37 cannot be claimed which standsclarified by the insertion of the proviso thereinunder the Finance Act, 2003. As such theassessee cannot claim any benefit of section36(1)(iii) or section 37 in this case. Thelearned Tribunal was right in holding againstthe assessee. Recently this Court had dismissed the appeal of therevenue in the case of Commissioner of Income Tax-1,Chandigarh v. Punjab Alkalies and Chemicals Ltd., Income Tax Appeal No. 1 of 2003 9 (2006) 30 Indian Taxation Reports 247 (P&H) on a similarground raised by the revenue. InVeecumseesv. CIT, (1996) 220 ITR 185, Hon'blethe Supreme Court held that deduction for payment ofinterest on the loans raised for building a cinema theatre,which was ultimately closed, was allowable deduction as theassessee was engaged in a composite business of jewelleryand cinema. The facts of the case are quite different with thefacts of the present case. Keeping in view the earlier judgment of this Court inCommissioner of Income Taxv. Oswal Spinning andWeaving Mills Ltd. (supra) and also the recent judgment ofCalcutta High Court inJCT Ltd.v. Deputy Commissionerof Income-tax and another(supra), addition of proviso inSection 36(1)(iii) of the Act, in our view, the question raisedin the present appeal is required to be heard by a largerBench. Accordingly, we direct that the papers be placedbefore Hon'ble the Acting Chief Justice for constituting alarger Bench”. Keeping in view the earlier judgment of this Court inCommissioner of Income Taxv. Oswal Spinning andWeaving Mills Ltd. (supra) and also the recent judgment ofCalcutta High Court inJCT Ltd.v. Deputy Commissionerof Income-tax and another(supra), addition of proviso inSection 36(1)(iii) of the Act, in our view, the question raisedin the present appeal is required to be heard by a largerBench. Accordingly, we direct that the papers be placedbefore Hon'ble the Acting Chief Justice for constituting alarger Bench”. 2.The facts of the case in detail and relevant provisions of the Acthave already been referred to in the reference order of Division Bench,and the same are not being repeated. 3.It is relevant to add here that proviso to Section 36(1)(iii) wasadded vide Finance Act, 2003 and the explanation 8 to Section 43(1) wasadded by Finance Act, 1986 w.e.f. April 1, 1974. The notes on clauses foraddition of proviso to Section 36(1)(iii) and objects and reasons foramendment of Section 43(1), as reported in (2003) 260 ITR 139 (st.) and(1986) 158 ITR 88 (st.), respectively, are extracted below:- “Clause 15 seeks to amend Section 36 of the Income-tax Act relating to certain other deductions allowed underthat Act. Under the existing provision contained in clause (iii) ofsub-section (1) of the said Section, deduction of interest isallowed in respect of capital borrowed for the purposes ofbusiness or profession in the computation of income underthe head “Profits and gains of business of profession”. It is proposed to insert a proviso in the said clause soas to provide that no such deduction shall be allowed in Income Tax Appeal No. 1 of 2003 10 respect of any amount of interest paid, in respect of capitalborrowed for acquisition of an asset for extension of existingbusiness or profession (whether capitalized in the books ofaccount or not) and such amount of interest is for the periodbeginning from the date on which the capital was borrowedfor acquisition of the asset till the date on which such assetwas first put to use. This amendment will take effect from Ist April, 2004and will, accordingly, apply in relation to the assessmentyear 2004-2005 and subsequent years”. XXXXXXXXXXXXXX“Memorandum explaining the provisions of the Finance Bill, 1986,reported as (1986) 158 ITR (St.) 88, at page 116, reads as under: “MEASURESORCOMBATINGTAXAVOIDANCE AND EVASION” ‘Actual cost’ for the purposes of depreciation,investment allowance, etc. Under the existing provisions of section 43(1) of theIncome-tax Act, ‘actual cost’ means the actual cost of theassets to the assessee reduced by that portion of the costthereof, if any, as has been met directly or indirectly by anyother person or authority. It has been found that certain taxpayers (backed bysome Court decisions, the first of which was rendered onMay 13, 1974) are resorting to a major change in accountingpractice by capitalizing the interest paid or payable inconnection with the acquisition of an asset relatable to theperiod after such asset is first put to use. This capitalizationimplies inclusion of such interest in the ‘actual cost’ of theasset for the purposes of claiming depreciation, investmentallowance, etc. under the Income-tax Act. As this was never the legislative intent nor does itconform to accept accounting practices, with a view tocounteracting tax avoidance through this method andplacing the matter beyond doubt, the Bill seeks to providethat any amount paid or payable as interest in connectionwith the acquisition of an asset and relatable to a periodafter the asset is first put to use shall not form part and shall Income Tax Appeal No. 1 of 2003 11 be deemed never to have formed part of the actual cost ofthe asset. This amendment will take effect retrospectively fromIst April, 1974, and will, accordingly, apply in relation to theassessment year 1974-75 and subsequent years” (sic). As this was never the legislative intent nor does itconform to accept accounting practices, with a view tocounteracting tax avoidance through this method andplacing the matter beyond doubt, the Bill seeks to providethat any amount paid or payable as interest in connectionwith the acquisition of an asset and relatable to a periodafter the asset is first put to use shall not form part and shall Income Tax Appeal No. 1 of 2003 11 be deemed never to have formed part of the actual cost ofthe asset. This amendment will take effect retrospectively fromIst April, 1974, and will, accordingly, apply in relation to theassessment year 1974-75 and subsequent years” (sic). 4.The proposed amendment seeks to clarify that any amount paid orpayable as interest in connection with acquisition of an asset and relatableto a period after the asset is first put to use shall not form part and shallbe deemed never to have been formed part of the actual cost of theasset. 5.In the above factual matrix, the following substantial question of lawis required to be considered by this Court in the present appeal:- “Whether on the facts and the circumstances of the case,the Hon’ble Income tax Appellate Tribunal was justified indeleting the addition of Rs.1,97,290/- on account of ;interestand Rs. 9,80,000/- on account of upfront fees by ignoringExplanation 8 to Section 43(1)?” 6.We have heard Sh. S.K.Garg Narwana, Advocate, for the revenue,Sh. M.S.Syali, Senior Advocate with M/s Satyen Sethi, Akshay Bhan andMs. Mahua C. Kalra, Advocates for the assessee and perused the paperbook. 7.Learned counsel for the revenue while referring to the observationsmade by Division Bench of this Court, as extracted above, submitted thatin the case in hand it is admitted that the assessee had acquired newassets for setting up a new unit. Even if the same was for expansion in theexisting business being carried on by it, the same did not entitle it to claimdeduction of the interest paid on the loans raised for acquisition of thenew assets as a revenue expenditure. In terms of clear provisions ofexplanation 8 to Section 43(1) and Section 36(1)(iii) of the Act, the samewas required to be capitalized towards the cost of the asset. Thequestion that the assessee was setting up a new unit or was carrying outexpansion in the existing unit is not relevant. The only fact relevant is thatnew assets have been created. It is not a case where some replacementwas being made or modernization of the existing plant was made, whichcould be examined from a different angle. It is a clear-cut case wherenew unit was set up at a different location by buying new plant andmachinery, though for producing same type of goods, which the assesseewas already producing. Income Tax Appeal No. 1 of 2003 12 Income Tax Appeal No. 1 of 2003 12 8. He further submitted that even the fact as to whether the unit wasto be set up at a new location or at the same location would also be notmaterial as such. He further submitted that the provisions of Section 36(1)(iii) and 43(1) of the Act cannot be read in isolation as firstly these are partof the same chapter, secondly Section 43 merely contains definition ofcertain terms relevant for determination of income from profits and gainsfrom business or profession. He further submitted that view expressed bythis Court in Punjab Alkalies’s case (supra), whereby the appeal filed bythe revenue on a similar substantial question of law was dismissed inlimine, does not lay down good law and the substantial question raised bythe revenue in the present appeal deserves to be answered in favour ofthe revenue and against the assessee by holding that in the facts &circumstances of the case the interest paid by the assessee on the loanraised for acquisition of new assets upto the date of its coming intoproduction, was to be capitalized and cannot be claimed as revenueexpenditure. He relied upon judgment of Hon’ble the Supreme Court inChallapalli Sugar Limited’s case (supra) and this Court in OswalSpinning’s case (supra). 9.On the other hand, Sh. Syali, learned senior counsel appearing forthe assessee submitted that the appeal does not raise any substantialquestion of law for the reason that concurrent findings of fact recorded byCIT(A) and the Tribunal have not been challenged by claiming any issueon perversity thereof. The appeal to this Court under Section 260 A of theAct, which is akin to Section 100 CPC, would lie only on a substantialquestion of law and once the same is not there, the appeal itself would notbe competent. For the purpose, reliance is placed on Mahalingappa v.C.M. Savitha (2005) 6 SCC 441, Rajeshwari v. Poran Indoria (2005) 7SCC 60, State of Bombay (now Gujarat) v. Jagmohandas (1966) 60ITR 206 (SC), and Ishwar Dass Jain AIR 2000 SC 426. 10.On merits, it is submitted that admittedly the stand of the revenue isnot that a new business was set up. The case of both the parties is thatonly new unit was set up in the same line of production. Meaning therebythe business remains the same. An additional or a new unit in the samebusiness does not involve fresh computation of profits and gains ofbusiness or professional and once the business remains the same, theonly conclusion is that whatever cost is incurred the same shall beallowable as revenue expenses. He further submitted that even where aloan or borrowing is utilized to purchase the capital asset or set up newunit, that does not itself mean that the interest thereon till the newasset/new unit comes into production cannot be claimed as deduction. Income Tax Appeal No. 1 of 2003 13 Income Tax Appeal No. 1 of 2003 13 For the purpose, reliance is placed on India Cements Ltd. v.Commissioner of Income Tax, Madras (1966) 60 ITR 52, SivakamiMills Ltd. v. Commissioner of Income Tax, Madras (1979) 120 ITR211, Bombay Steam Navigation Co. Ltd. v. Commissioner of IncomeTax (1965) 56 ITR 52, Commissioner of Income-tax v. MalayalamPlantations Ltd. (1964) 53 ITR 140, Nathmal Bankatlal Parikh andCompany v. Commissioner of Income Tax, A.P. III (1980) 122 ITR 168.11.Further submission is that there is a distinction between theborrowings made before the commencement of the business as such andafter the commencement of the business. Whereas the interest paidbefore the commencement of the business is to be capitalised, however, ifthe same is after the commencement of the business the same isallowable as a revenue expenses. For the purpose, reliance is placed onChallapalli Sugar Limited’s case (supra), Sivakami Mills’ case (supra),Ritz Continental Hotels Ltd. v. Commissioner of Income-tax Central-II, Calcutta (1978) 114 ITR 554, Addl. Commissioner of Income-Tax,A.P. v. Akkamba Testiles Ltd. (1979) 117 ITR 294, Addl.Commissioner of Income-Tax, A.P. v. Akkamamba Testiles Ltd.(1997) 227 ITR 464, Bombay Steam Navigation Co. (1953) Private Ltd.v. Commissioner of Income-tax, Bombay (1965) 56 Income TaxReports 52, State of Madras v. G.J.Coelho (1964) 53 Income TaxReports 186 and Commissioner of Income Tax v. Dalmia Cement(Bharat) Ltd. (2000) 242 Income Tax Reports 129.12.Still further it is submitted that there is no difference in the legalposition even after insertion of explanation 8 to Section 43 retrospectively,w.e.f. April 1, 1974. Reference has been made to para 18.2 of circular ofthe CBDT bearing No.461 dated July 9, 1986, which reads as under:- “It is an accepted accounting principle that where anasset is acquired out of borrowed funds, the interest paid orpayable on such funds constitutes the cost of borrowing andnot the cost of asset acquired with those funds. It is for thisreason that as per the clear guidelines issued by theInstitute of Chartered Accountants of India, the interest onmoneys which are specifically borrowed for the purchase ofa fixed asset may be capitalized only relating to the periodprior to the asset coming into production, i.e., relating to theerecting state of the asset. However, once the productionstarts, no interest on borrowings for the purchase of suchassets should be capitalized. In spite of these clear Income Tax Appeal No. 1 of 2003 14 guidelines, as also the consistent view of the Department inthis matter, some taxpayers had adopted a contrary stanceand had capitalized such interest”. 13.Relying on above circular of the Board, the submission is that onlyobject of the amendment was to restrict the claim of interest on theborrowings for creation of capital assets after the same is first put to use.Such interest was not to form part of the actual cost of the asset. Theconverse position that for period prior to the asset being first put to useshall form part of the cost of the asset is not provided in the explanation.He further submitted that explanation 8 to Section 43(1) of the Act cannotrestrict the scope of Section 36(1)(iii) as Section 43 merely containsdefinitions, which are limited for grant of depreciation and investmentallowance. 14.Learned senior counsel for the assessee further submitted that infact the position has been made clear by the Legislature itself by addingproviso to Section 36(1)(iii) of the Act which takes care of such a situationand the amendment is w.e.f. April 1, 2004. This clearly means that for theperiod prior thereto, the position is different. The assessment yearinvolved in the present appeal is 1992-93. 14.Learned senior counsel for the assessee further submitted that infact the position has been made clear by the Legislature itself by addingproviso to Section 36(1)(iii) of the Act which takes care of such a situationand the amendment is w.e.f. April 1, 2004. This clearly means that for theperiod prior thereto, the position is different. The assessment yearinvolved in the present appeal is 1992-93. 15.Having heard learned counsel for the parties, we find that there isno merit in the objection raised by learned counsel for the assessee to theeffect that appeal does not raise any substantial question of law in theabsence of challenge to the concurrent findings recorded by the CIT (A)and the Tribunal. In the case in hand with the admitted facts on record,the issue sought to be raised by the revenue is that whenever a new assetis created, may be in the form of expansion of the existing activity, thesame has to be dealt with independently for the purpose of determinationof its actual cost. The component of interest on the loans raised for thepurchase of the asset is to be dealt with considering the same separately.The interest upto the date the asset is first put to use is to be addedtowards the cost of the asset and thereafter the same is to be claimed asrevenue expenditure. This issue raised by the revenue, in our opinion, doarise for consideration in the present appeal even on the basis of theadmitted facts. The perversity is not required to be raised as an issue. Theloan in the present case was not raised for the purpose of running thebusiness for its day to day requirements, rather the same was raised forthe purpose of creating substantial additional assets by creating newcapacity at a new location. Income Tax Appeal No. 1 of 2003 15 16.As far as the contention of the learned counsel for the assessee tothe effect that the provisions of Sections 36 and 43 of the Act are to beread in isolation, we do not find any merit in the same. It is noticed thatboth Section 36 and 43 of the Act form part of the same Chapter, ratherthe same sub-part thereof dealing with profits and gains of business orprofession. Section 43 of the Act contains definitions of certain termsrelevant to the determination of income from profits and gains frombusiness or profession. One of the definition in Section 43(1) is of theterm “actual cost of the asset”. The dispute in the present case is as towhether the interest paid by the assessee on the loans raised foracquisition of new asset, before the same was first put to use, is to beadded towards the cost of the asset or the same is to be granted as arevenue expenditure for the reason that the assessee was already inbusiness. Meaning thereby that in case the claim made by the assesseeis accepted and the interest so suffered by the assessee is allowed as arevenue expenditure the same will not be added towards the cost of theasset. Whereas in case the claim of the revenue is accepted, the samewould result in addition of the component of interest on the borrowedcapital upto the date the asset is first put to use to the cost of the asset,accordingly, Section 43 of the Act cannot be left aside and the claim of theassessee cannot be considered merely by reading one provision of theAct and ignoring the other. The entire scheme of the Act is to be seen andall the provisions of the Act are to be read in conjunction with each otherto achieve the underlined object. Accordingly, while rejecting thecontention of the assessee, we do not subscribe to the view expressed bythe Gujarat High Court in Deputy Commissioner of Income Tax v. Core Healthcare Ltd. (2001) 251 ITR 61 wherein it was held that there is noconnection between Sections 36 and 43 of the Act and the judgment isrendered on that premise. Healthcare Ltd. (2001) 251 ITR 61 wherein it was held that there is noconnection between Sections 36 and 43 of the Act and the judgment isrendered on that premise. 17.As far as the issue on merits is concerned, the object of Income-taxAct is to charge tax on the income earned by an assessee by carrying onhis business. The figure so arrived at should not be distorted by anyfactor. Section 28 provides for charging of income-tax on the profits andgains of business or profession carried on by the assessee under thehead “Profits and Gains of Business or Profession”. The business orprofession is carried out by an assess with certain set up. The businesswould certainly mean the commercial activity being carried on by theassessee. While computing the income under the head “Profits and Gains of Business or Profession” certain deductions have been provided onaccount of expenses incurred by the assessee for earning such income Income Tax Appeal No. 1 of 2003 16 and certain special deductions for promoting the industrial activities.Section 36 of the Act provides for certain deductions while computing theincome assessable under Section 28 of the Act under the head “Incomefrom Profits and Gains of Business or Profession”. Clause (ii) of Section36 (1) of the Act provides for deduction of the amount of interest paid inrespect of capital borrowed for the purpose of business or profession.This, in our view, will not bring within its fold the capital borrowed for thepurpose of setting up of a new unit, may be in the same line, as the samewould not amount to borrowing capital for the purpose of business orprofession but for setting up of a plant, which is not the business of theassessee, rather it is the manufacturing activity. In case the plea raised bythe assessee to the effect that the interest paid by it on the capitalborrowed for the purpose of setting up of new unit is to be treated ascapital borrowed for the purpose of business or profession, the samewould result in distortion of the actual profits earned by the assessee inthe business already being carried on by it. The new unit set up with theborrowed capital, the interest whereon is sought to be claimed as revenueexpenditure, had not yet started contributing to the business carried on bythe assessee. It is only when an asset is first put to use and commercialproduction starts then it starts generating income and it would be in thefitness of things in case the interest on the capital borrowed for thepurpose of acquisition of that asset is allowed as a revenue expenditureonly when such asset starts yielding income and not for any period priorthereto. For the period prior thereto the same has to be capitalised. 18.The issue as to whether the interest component on the capitalborrowed for acquisition of the asset upto the date it is first put to use is tobe added towards the cost of the asset or allowed as a revenueexpenditure was considered by Hon’ble the Supreme Court in ChallapalliSugar Limited’s case (supra). In this case, the assessee sought to raisethe plea that the component of interest before the asset is first put to useis required to be added towards the cost of the asset, which wasaccepted. However, it is evident from the Memorandum explaining theamendment to Section 43 (1) made in 1986 that the issue as regards thecapitalization of interest paid before the asset is first put to use stoodalready settled and was being followed by the assesses. The necessity tocarry out amendment arose for the reason that in some judgments it wasopined that interest even after the date the asset is first put to use is alsoto be capitalized. Amendment was carried out in Section 43(1) by addingexplanation 8 thereto vide Finance Act, 1986 with retrospective effect fromApril 4, 1974. The text of explanation 8 has already been extracted above. Income Tax Appeal No. 1 of 2003 17 Income Tax Appeal No. 1 of 2003 17 The true import thereof is that any amount paid or payable as interest inconnection with an ‘asset’ which is relatable to the period after such assetis first put to use shall not be included in the actual cost of asset. Theposition in the present set of facts is just the converse. In the present casethe dispute is regarding the interest so paid/payable for the period beforethe asset is first put to use. In our view the answer to even this issue isalso implicit in the definition if it is to be given its full meaning. Accordingly,we hold that the interest so paid prior to the date the asset is first put touse is to be added towards the cost of asset and for that purpose reliancecan well be placed on the enunciation of law by Hon’ble the SupremeCourt in Challapalli Sugar Limited’s case (supra), where such claimmade by the assesses at the relevant time to the effect that interest paidon capital borrowed for the purpose of acquisition and installation ofmachinery for the period prior to the commencement of production shouldbe capitalized, was accepted by Hon’ble the Supreme Court afterconsidering its earlier judgment in Indian Cement’s case (supra). Therelevant passages from Challapalli Sugar Limited’s case (supra) areextracted below: “The question: “Whether, on the facts and in the circumstances ofthe case, the assessee was entitled under the provisions ofSections 10 (2) (vi), 10 (2) (via) and 10 (2) (vib) read withSection 10 (5) of the Indian Income-tax Act, 1922, to treatthe sum of Rs. 23,53,284 being the amount of interest paidon monies borrowed as part of the actual cost for thepurposes of depreciation allowances and developmentrebate?” In appeal before us Mr. Palkhivala, on behalf of theassesses in the three appeals, has argued that interest forthe period before the commencement of production onmoney borrowed for the purpose of acquiring and installingthe machinery and plant should be included in the actualcost of the plant and as such capitalized for the purpose. Asagainst that, Mr. Desai, on behalf of the revenue, hassupported the view taken by the Andhra Pradesh HighCourt. After hearing the learned counsel for the parties, weare of the opinion that the submission made by Mr.Palkhivala is well founded”. “It would appear from the above that, whileconsidering the question of deduction on account of Income Tax Appeal No. 1 of 2003 18 depreciation and development rebate, we have to take intoaccount the written down value. Written down value in itsturn depends upon the actual cost of the assets to theassessee. The expression “actual cost” has not beendefined in the Act, and the question which engages ourattention is whether the interest paid before thecommencement of production on the amount borrowed forthe acquisition and installation of the plant and machinerycan be considered to be part of the actual cost of the assetsto the assessee. So far as the interest the commencementof production in respect of capital borrowed for the purposeof business is concerned, the same can be deducted underclause (iii) of sub-section (2) of Section 10 of the Act. depreciation and development rebate, we have to take intoaccount the written down value. Written down value in itsturn depends upon the actual cost of the assets to theassessee. The expression “actual cost” has not beendefined in the Act, and the question which engages ourattention is whether the interest paid before thecommencement of production on the amount borrowed forthe acquisition and installation of the plant and machinerycan be considered to be part of the actual cost of the assetsto the assessee. So far as the interest the commencementof production in respect of capital borrowed for the purposeof business is concerned, the same can be deducted underclause (iii) of sub-section (2) of Section 10 of the Act. In finding the answer to the question mentionedabove, we have to bear in mind that it arises in the contextof profits or gains of business and the permissibledeductions on account of depreciation and developmentrebate relating to the machinery and plant of the assessee.As the expression “actual cost” has not been defined, itshould, in our opinion, be construed in the sense which nocommercial man would misunderstand. For this purpose itwould be necessary to ascertain the connotation of theabove