Commissioner Of Income Tax, Ludhiana-I, Ludhiana v. M/S Amrit Soap Co., Ludhiana

IN THE HIGH COURT OF PUNJAB AND HARYANAAT CHANDIGARH ITA No.132 of 2008 (O&M)Decided on : 03.11.2008 Commissioner of Income Tax, Ludhiana-I, Ludhiana. ....Appellant. VERSUS M/s Amrit Soap Co., Ludhiana. ....Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOELHON'BLE MR. JUSTICE L. N. MITTAL Present:Mr. Rajesh Sethi, Sr. Standing counselfor the appellant. ADARSH KUMAR GOEL J.(ORAL) 1.The revenue has preferred this appeal under Section 260A ofthe Income Tax Act, 1961 (the Act) against the order of the Income TaxAppellate Tribunal, Chandigarh Bench 'A', Chandigarh, passed in I.T.A.No.974/Chandi/2004 dated 10.11.2005 for the Asstt. Year 2001-02proposing to raise the following substantial questions of law:- i) Whether on the facts and law, the Hon'ble Income Tax AppellateTribunal was legally justified to allow interest on capital borrowed forconstruction of building during the preoperative period within themeaning of explanation 8 to section 43 of I.T. Act?Tribunal was legally justified to allow interest on capital borrowed forconstruction of building during the preoperative period within themeaning of explanation 8 to section 43 of I.T. Act? ii)Whether on the facts and law, the Hon'ble Income Tax Appellate Tribunal was legally justified to allow interest @ 18% to closerelatives and associated persons covered under Section 40A(2)(b) ascompared to the rate of 15% paid to other creditors? 2.The Assessing Officer has disallowed the claim for deductionunder Section 36(1)(iii) of the Act on account of interest paid on the capitalborrowed for establishing a new unit. It was held that as per explanation 8to Section 43 of the Act, the interest paid for preoperative expenses was notadmissible. The Assessing Officer also disallowed interest amount ofRs.1,66,229/- to persons covered under Section 40A(2)(b) of the Act on theground that the same was excessive. 3.The CIT(A) allowed the claim of the assessee which order hasbeen confirmed by the Tribunal. 4.The Tribunal held:- “The Assessing Officer, however, failed to take intoconsideration that the aforesaid proviso to Section 36(1)(iii)was introduced on the statute book by the Finance Act, 2003,w.e.f. 1.4.2004. Pertinently, there is no mention in theprovision that such proviso has been made to operateretrospectively. As such, the proviso is prospective and isapplicable w.e.f. 1.4.04. It is not applicable to the assessmentyear under consideration, which happens to be assessment year2001-02. This point has been well considered by the ld. CIT(A) and having done so, the ld. CIT(A) has deleted the additionin question. For this reason, no fault can be found with theorder of the CIT(A). In DCIT v. Core Healthcare Ltd. (2001)251 ITR 61 (Guj.), it has been held that apropos section ITA No.132 of 2008 (O&M)-3- 36(1)(iii) of the Income-tax Act, borrowing on capital orrevenue account is not relevant. Where the capital wasborrowed for purchase of machinery to increase production inthe existing business but the machinery was not put to use inthe accounting year such fact was not relevant and the intereston borrowed capital was held deductible. It was held that theassessee was under no obligation to capitalize such interest.No decision to the contrary has been cited on behalf of thedepartment..... ITA No.132 of 2008 (O&M)-3- 36(1)(iii) of the Income-tax Act, borrowing on capital orrevenue account is not relevant. Where the capital wasborrowed for purchase of machinery to increase production inthe existing business but the machinery was not put to use inthe accounting year such fact was not relevant and the intereston borrowed capital was held deductible. It was held that theassessee was under no obligation to capitalize such interest.No decision to the contrary has been cited on behalf of thedepartment..... We are in agreement with the ld. CIT(A). As pointedout by the ld. Counsel for the assessee, the AO was incorrect inmaking the observations which she did. The assessee did infact pay interest @ 18% to outside parties. It is also notdisputed that brokerage had to be paid in advance, includingwhich, the interest rate came to over 18% per annum, i.e.18.02%, to be exact. The contention of the ld. D.R. thatinterest and brokerage are to be considered separately, does nothold water. The brokerage had to be paid on the date of receiptof loan i.e. in advance. It was, therefore, inextricably linkedwith the rate of interest emanating from the loan. Also, it is amatter of record that for the immediately preceding year,interest @ 18% paid to the partners stands allowed by theAssessing Officer. Moreover, it can not be again said, as heldby the Hon'ble Madras High Court in the case of CIT v. Raman& Raman Ltd., 71 ITR 345 (Mad.), as rightly followed by theld. CIT(A), that while allowing a particular expenditure, the 5.As regards question No.(i), it is not disputed that judgment ofthe Gujrat High Court referred to herein above has since been affirmed byHon'ble the Supreme Court in Deputy Commissioner of Income Tax Vs.Core Healthcare Ltd., 298 ITR 194 (SC). The said question thus can notbe held to be substantial question of law. 6.As regards question No.(ii), the Tribunal has recorded a findingof fact that the interest paid was not higher than rate of interest paid to othercreditors. Thus, this question can not be held to be substantial question oflaw. 7.The appeal is dismissed. ( ADARSH KUMAR GOEL )JUDGE November 03, 2008ashish ( L. N. MITTAL ) JUDGE