Commissioner Of Income Tax Jaipur v. M/S Modern Threads (I) Ltd. Jaipur----Respondentconnected With

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 91 / 2006 Commissioner Of Income Tax Jaipur Versus ----Appellant M/S Modern Threads (I) Ltd. Jaipur----RespondentConnected With D.B.INCOME TAX APPEAL No. 432 / 2008 Commissioner Of Income Tax Jaipur ----Appellant VersusM/S Modern Threads (I) Ltd. Jaipur ----RespondentD.B. Income Tax Appeal No. 473 / 2008C I T M/S Modern Syntex Versus ----Appellant ----Respondent Connected With D.B.INCOME TAX APPEAL No. 477 / 2008C I T ----Appellant VersusM/S Modern Syntex ----RespondentD.B.INCOME TAX APPEAL No. 565 / 2008C I T ----Appellant VersusM/S Modern Syntex ----Respondent _____________________________________________________ For Appellant(s) : Mr. R.B. Mathur For Respondent(s) : Ms Parinitoo Jain _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERIHON'BLE MR. JUSTICE VINIT KUMAR MATHURJudgment 04/01/2017 1.By way of these appeals, the Department has challenged thejudgment and order of the Tribunal whereby the tribunal whileconsidering the matter had confirmed the order of C.I.T. (Appeal)and has allowed the appeal preferred by the assessee. 2.This court while admitting the appeals framed the followingsubstantial question of law: Appeal No. 91/2006 Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal wasjustified in holding that the expenditure of Rs.4,56,10,500/- towards interest and financial / bankcharges was revenue expenditure though the saidcharges were pre-operative in nature and paid tothe financial institutions against the loan obtainedfor installing the unit? Appeal No. 432/2008 “(1) Whether in the facts and circumstances of thecase the ITAT and CIT (A) were justified in law andhave acted perversely in holding the expenditure ofRs. 1,03,70,000/- towards interest & financial /bank charges as revenue expenditures when thesaid expenditures were pertaining to interest andbank charges which were pre-operative in natureand wre paid to the financial institutions againstloan obtained for installing the unit and wereenduring in nature? (ii) Whether in the facts and circumstance of thecase the ITAT and CIT(A) were justified in law and have acted perversely in reducing and restrictingthe additions towards advertisement expenditurewhich were related to public issue and were capitalin nature? (iii) Whether in the facts and circumstances of thecase the ITAT and CIT(A) were justified in law andhave acted perversely in deleting the additions ofRs. 20.00 lakhs towards excess processing losswhich was much higher to previous year and theAssessing Officer has made additions after applyingprovisions of sec. 145 of the Act ? “ Appeal No. 473/2008 “(1) Whether in the facts and circumstances ofthe case, the ITAT and CIT (A) were justified inallowing the expenditure of interest payment madetowards interest on loans borrowed to finance thecost of its expansion scheme treating it as revenueexpenditure? have acted perversely in reducing and restrictingthe additions towards advertisement expenditurewhich were related to public issue and were capitalin nature? (iii) Whether in the facts and circumstances of thecase the ITAT and CIT(A) were justified in law andhave acted perversely in deleting the additions ofRs. 20.00 lakhs towards excess processing losswhich was much higher to previous year and theAssessing Officer has made additions after applyingprovisions of sec. 145 of the Act ? “ Appeal No. 473/2008 “(1) Whether in the facts and circumstances ofthe case, the ITAT and CIT (A) were justified inallowing the expenditure of interest payment madetowards interest on loans borrowed to finance thecost of its expansion scheme treating it as revenueexpenditure? (II) Whether in the facts and circumstances of thecase, the ITAT and CIT(A) were justified in law andhave acted perversley in holding the expenditure asrevenue expenditure allowable deductions u/s37(1) when the said expenditure were pertaining toconvertible debentures to be converted into sharesissued for raising capital for unit which has notstarted production and was in the process ofinstallation?” Appeal No. 565/2008 “(i) Whether in the facts and circumstances of thecase, the ITAT and CIT(A) were justified in law andhave not acted perversely in holding theexpenditure towards interest and financial/ Bankcharges as revenue expenditures when the saidexpenditure were pertaining to interet and bankcharges which were pre operative in nature andwere paid to the financial institution against loanobtained for installing the unit and were enduringthe nature? (ii) Whether in the facts and circumstances of thecase, the ITAT and CIT(A) were justified in law andhave not acted perversely in allowing theexpenditure incurred in earlier years treating it asdeferred revenue expenditures?” Appeal No. 477/2008 1. Whether in the facts and circumstances of thecase, the ITAT and CIT(A) were justified in law and have not acted perversely in holding theexpenditure towards interest and financial/ bankcharges as revenue expenditure when the saidexpenditure were pertaining to interest and bankcharges which were pre-operative in nature andwere paid to the financial institution against loanobtained for installing the unit and were enduringthe nature? 2. Whether in the facts and circumstances of thecase, the ITAT and CIT(A) were justified in allowingthe expenditure of interest payment made towardsinterest on loans borrowed to finance the cost of itsexpansion scheme treating it as revenueexpenditure? 3.Since common questions of law are involved in all theseappeals, all these appeals are decided by this common judgment. 4.The brief facts of the case are that the assessee returndeclaring Nil was filed by the assessee on 29.11.1996. order u/s143(3) was passed by the AO on 10.03.1999 determining the lossat Rs. 20,12,63,256/-. During the course of assessmentproceedings the AO observed that assessee has claimed deductionof Rs. 33,20,47,371/- u/s. 36(1) (iii) being payment madetowards interest on loans borrowed to finance the cost of itsexpansion schemes. The AO held these expenses in the nature ofcapital expenditure and disallowed the claims. The assessee alsoclaimed deduction of Rs. 35,92,000/- u/s 37 being paymentincurred on public issue. The AO held that these expenses cannotbe treated as revenue expenditures and as such disallowed thesame. The AO also disallowed the expenditure claimed by theassessee of Rs. 12,57,460/- as the same pertained to earlieryears. The AO observed that even after affording ampleopportunities no evidence to prove that the expenditures were crystallized during the year was submitted by the assessee and assuch the same were disallowed. crystallized during the year was submitted by the assessee and assuch the same were disallowed. 5.Learned counsel for the appellant Mr. Mathur contended thatthe amendment in explanation which was added to proviso 36(1) (iii) of the Income Tax Act, reads as under: “The amount of the interest paid in respect of capitalborrowed for the purposes of the business or profession(whether capitalized in the books of account or not);for any period beginning from the date on which thecapital was borrowed for acquisition of the asset till thedate on which such asset was first put to use, shall notbe allowed as deduction.” 6.In view of the decision of Allahabad High Court in Commissioner of Income Tax & anr. vs. Dhampur Sugar Mills Ltd.Reported in (2014) 360 ITR 82(All) observed as under:- "(5) Whether on the facts and in the circumstances of thecase, the Tribunal is justified in law in confirming the orderof the CIT (A) who deleted Rs.2,58,78,987/-disallowed bythe A.O on account of interest paid against loan which wereutilized for setting up new units treating the same asrevenue expenditure instead of capital expenditure?" “We find that the proviso is explanatory in natureinasmuch as in computing the income the deductionsare for the purposes of business and profession.Where a new business is set up or an existingbusiness is expanded, the amount borrowed forsuch purposes enures to the assessee with enduringbenefit. The assessee, therefore, could not treat iton such borrowed capital as revenue expenses.“ 7. The amount is to be deducted retrospectively and thequestion is required to be answered in favour of the Department. 8.However, learned counsel for the respondent-assessee haspointed out that the issue is by and large covered by the decision of this court in Commissioner of Income Tax Vs. M/S ModernDanim Ltd., D.B. Income Tax Appeal No.94/2006 decided on 20.09.2016 holding as under:- 5.However, in view of the decision of this Court inSecure Meters Ltd. [2010] 321 ITR 611 (Raj) (supra)more particularly holding as under: “At this stage it was contended by the learned Counselfor the Revenue, that a distinction should be drawnbetween the convertible and non-convertible debentures,inasmuch as if the debenture is converted into shares,then it partakes the character of capital, and in thatevent, the expenditure, and would not be revenueexpenditure, and would be capital expenditure. LearnedCounsel for the assessee informs, that though it has notcome on record so far, but as a matter of fact thedebentures issued were of convertible nature. Then, theargued, relying upon the judgment of Calcutta HighCourt in CIT v. East India Hotels Ltd.[2001]252ITR860(Cal), that the expenditure incurred,even in raising loan by convertible debenture would alsobe admissible as revenue expenditure. The Calcutta HighCourt had adopted the reasoning, that conversion ofdebentures results into repayment of loadn and issuanceof shares. This is one aspect of the matter. In our view,the other more important aspect of the matter is, thatthe Hon'ble Supreme Court in Inida Cements case (supra)has clearly excluded this aspect from consideration, byholding, that it is irrelevant to consider the object, withwhich the loan was obtained. Admittedly the debentures when issued is a loan, andtherefore, whether it is convertible, or non-convertible,does not militate against the nature of the debenture,being loan, and therefore, the expenditure incurred wouldbe admissible as revenue expenditure.” 6. Since the SLP against the said judgment alsostands dismissed, in that view of the matter, the samedecision is binding on the parties, therefore, both thequestions are answered in favour of assessee and againstthe Department. 9.Another decision of this court in the case of Commissioner of Income Tax Vs. Hindustan Zinc Limited (2004) 269 ITR 369(Rajasthan) and decision of the Supreme Court in Commissioner Admittedly the debentures when issued is a loan, andtherefore, whether it is convertible, or non-convertible,does not militate against the nature of the debenture,being loan, and therefore, the expenditure incurred wouldbe admissible as revenue expenditure.” 6. Since the SLP against the said judgment alsostands dismissed, in that view of the matter, the samedecision is binding on the parties, therefore, both thequestions are answered in favour of assessee and againstthe Department. 9.Another decision of this court in the case of Commissioner of Income Tax Vs. Hindustan Zinc Limited (2004) 269 ITR 369(Rajasthan) and decision of the Supreme Court in Commissioner of Income Tax Vs. Monnet Industries Ltd. {2013} 350 ITR 304(SC). 10.We have heard learned counsel for the parties andconsidered their arguments. 11.It is true that contention which has been raised is consideredby the Allahabad High court, however, in our view and looking tothe explanation added subsequently, the view taken by theRajasthan High court in Hindustan Zinc Ltd. (supra) is required tobe considered. 12.In view of the law declared in earlier judgment, we decidethe issues in favour of the assessee. Even otherwise explanationto proviso itself has not made it retrospective, it is desirable tomake it prospective only. 13.Accordingly, the issues are answered in favour of assesseeand against the Department. The appeals are dismissed. (VINIT KUMAR MATHUR)J. (K.S. JHAVERI)J. /bm gandhi 56-58 & 141-143