M/S K.y. Continental Interiors (P) Limited, E-46A, Road v. Income Tax Officer, Ward 4(2) New Central Revenue Building,Statue Circle, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 58 / 2016 M/s K.Y. Continental Interiors (p) Limited, E-46A, Road No. 18, VKI, Jaipur. ----Appellant Versus Income Tax Officer, Ward 4(2) New Central Revenue Building,Statue Circle, Jaipur 302001. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Gunjan Pathak with Ms. Ishita Rawat &Mr. Aditiya Bohra For Respondent(s) : Mr. K. D. Mathur with Mr. Prateek Kedawat on behalf of Mr. R. B. Mathur _____________________________________________________ HON'BLE MR. JUSTICE K. S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS judgment 23/10/2017 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal haspartly allowed the appeal of the assessee. 2.This court while admitting the appeal on 08.02.2017 framed the following questions of law:- “1. Whether the Ld. ITAT was correct on facts andin law simultaneously maintaining the tradingaddition of Rs. 12,14,417/- by estimatingturnover at Rs. 5,50,00,000/- as against Rs.4,99,54,718/- declared by the Appellant alongwith addition on account of excess stock of Rs.27,38,870/- surrendered by the Appellant asexcess stock being unrecorded sales duringservey proceedings?”in law simultaneously maintaining the tradingaddition of Rs. 12,14,417/- by estimatingturnover at Rs. 5,50,00,000/- as against Rs.4,99,54,718/- declared by the Appellant alongwith addition on account of excess stock of Rs.27,38,870/- surrendered by the Appellant asexcess stock being unrecorded sales duringservey proceedings?” 2. Whether the Ld. ITAT has erred in facts in law in confirming the disallowance of Rs. 27,81,388/-paid to M/s India Bulls Bank Ltd. out of interestexpenses by treating it as a capital expenditureignoring that the said interest being paid onpurchase of machinery in regular course ofbusiness, not in connection with extention ofbusiness and was put to use in the same year”? 3.Counsel for the appellant has strongly relied on the judgment of jurisdictional High Court in the case of Commissioner of Income Tax vs. G. K. Contractor (2009) 19 DTR 0305 wherein it has beenheld as under:- “ Admittedly, the said amount of Rs. 38,28,086was shown by the assessee in the books ofaccount as "market outstanding". According to theassessee, the payment was outstanding againstthe labour and goods supplied. It is true that onbeing asked, the assessee was not able to explainthese entries by producing the adequate proof tothe satisfaction of the assessing officer. However,in our considered opinion, even if the assessee hasfailed to discharge his onus of proof in explainingthe cash credits shown in the books of account as"market outstanding", the assessing officer havingestimated the higher profit rate on total contractreceipts after rejection of the books of accountinvoking the provisions of Section 145(3), noseparate additions can be made on account ofunexplained cash credit under Section 68 of theAct of 1961. We are in complete agreement withthe view taken by the Commissioner (Appeals),confirmed by the Tribunal. Thus, no substantialquestion of law arises for consideration of thisCourt in this appeal.” 4.He further relied on the judgment of this Court in D. B. Income Tax Appeal No. 59/2008 Shri Vinod Kumar Goyal V/s Commissioner of Income Tax, Jaipur-II, decided on05.09.2017 wherein it has been held as under:- “7.Therefore, he contended that in view ofthe decision of Division Bench the matter isrequired to be allowed. 8. Counsel for the respondent Mr. K.D. Mathur hastaken us to finding of the AO which reads asunder:- 4.He further relied on the judgment of this Court in D. B. Income Tax Appeal No. 59/2008 Shri Vinod Kumar Goyal V/s Commissioner of Income Tax, Jaipur-II, decided on05.09.2017 wherein it has been held as under:- “7.Therefore, he contended that in view ofthe decision of Division Bench the matter isrequired to be allowed. 8. Counsel for the respondent Mr. K.D. Mathur hastaken us to finding of the AO which reads asunder:- “With regard to the source of cash depositsexceeding Rs. 50,000/- it is submitted thatheavy cash balance is generally maintainedlooking to the nature of the requirement of thebusiness and also due to the reasons formaintaining the cash balance and also becauseof the reason that the assessee required tomake labour payment ranging to Rs. 7-8 lacs.Payment to the labour are already made in cashand therefore, the assessee necessarily has tomaintain heavy cash balance. It may kindly benoted that there was huge withdrawals totalingto Rs. 1.21 crore from one account Bankaccount No. 1455 and Rs. 1.11 crore from othera/c and therefore major deposits of Rs. 14.60lacs and Rs. 30,57,664/- in these bank accountsout of such heavy receipts was not at allimpossible.” 9.He further contended that the cash flowstatement was not properly explained and thewithdrawal of Rs. 1.21 crores from bank account andRs. 1.11 crores from other account and deposit hasbeen shown only of 30 to 40 lacs but the receipt ofthis withdrawal was not explained, in that view of thematter, the Tribunal has rightly reversed the viewtaken by the CIT(A). 10.We have heard counsel for both the sides andgone through the evidence on record. 11. The CIT(A) has specifically observed that thecash flow statement was produced on record andtaking into consideration the same he has allowed theappeal. However, the Tribunal in para 14 has observedcontrary view and in view of the jurisdictional courtjudgment, regarding books of accounts of u/s 68, hereversed the judgment of CIT(A).” 5. With regard to second issue, counsel for the appellant hasrelied upon the following decisions wherein it has been held asunder:- “Deputy Commissioner of Income Tax,Ahmedabad vs. Core Health Care Ltd.(08.02.2008 – SC), (2008) 298 ITR 0194 10.We have heard counsel for both the sides andgone through the evidence on record. 11. The CIT(A) has specifically observed that thecash flow statement was produced on record andtaking into consideration the same he has allowed theappeal. However, the Tribunal in para 14 has observedcontrary view and in view of the jurisdictional courtjudgment, regarding books of accounts of u/s 68, hereversed the judgment of CIT(A).” 5. With regard to second issue, counsel for the appellant hasrelied upon the following decisions wherein it has been held asunder:- “Deputy Commissioner of Income Tax,Ahmedabad vs. Core Health Care Ltd.(08.02.2008 – SC), (2008) 298 ITR 0194 8. Interest on moneys borrowed for the purposes ofbusiness is a necessary item of expenditure in abusiness. For allowance of a claim for deduction ofinterest under the said section, all that is necessaryis that - firstly, the money, i.e. capital, must havebeen borrowed by the assessee; secondly, it musthave been borrowed for the purpose of business;and, thirdly, the assessee must have paid intereston the borrowed amount [See: Calico Dyeing &Printing Works v. Commr. of Income-tax, BombayCity-II MANU/MH/0155/1958MANU/MH/0155/1958 :[1958]34ITR265(Bom) . All that is germane is :whether the borrowing was, or was not, for thepurpose of business. The expression "for thepurpose of business" occurring in Section 36(1)(iii)indicates that once the test of "for the purpose ofbusiness" is satisfied in respect of the capitalborrowed, the assessee would be entitled todeduction under Section 36(1)(iii) of the 1961 Act.This provision makes no distinction between moneyborrowed to acquire a capital asset or a revenueasset. All that the section requires is that theassessee must borrow capital and the purpose ofthe borrowing must be for business which is carriedon by the assessee in the year of account. WhatSub-section (iii) emphasizes is the user of thecapital and not the user of the asset which comesinto existence as a result of the borrowed capitalunlike Section 37 which expressly excludes anexpense of a capital nature. The legislature has,therefore, made no distinction in Section 36(1)(iii)between "capital borrowed for a revenue purpose"and "capital borrowed for a capital purpose". Anassessee is entitled to claim interest paid onborrowed capital provided that capital is used forbusiness purpose irrespective of what may be theresult of using the capital which the assessee hasborrowed. Further, the words "actual cost" do notfind place in Section 36(1)(iii) of the 1961 Act whichotherwise find place in Sections 32, 32A etc of the1961 Act. The expression "actual cost" is defined inSection 43(1) of the 1961 Act which is essentially adefinition section which is subject to the context tothe contrary. 11. Before concluding on this point we may statethat in this batch of civil appeals we are concernedwith the assessment years 1992-93, 1993-94,1995-96 and 1997-98. A proviso has since beeninserted in Section 36(1)(iii) of the 1961 Act. Thatproviso has been inserted by Finance Act, 2003w.e.f. 1.4.2004. Hence, the said proviso will notapply to the facts of the present case. Further, inour view the said proviso would operate 11. Before concluding on this point we may statethat in this batch of civil appeals we are concernedwith the assessment years 1992-93, 1993-94,1995-96 and 1997-98. A proviso has since beeninserted in Section 36(1)(iii) of the 1961 Act. Thatproviso has been inserted by Finance Act, 2003w.e.f. 1.4.2004. Hence, the said proviso will notapply to the facts of the present case. Further, inour view the said proviso would operate prospectively. In this connection it may be notedthat by the same Finance Act, 2003 insertions havebeen made by way of proviso in Section 36(1)(viia)by the same Finance Act which is also made witheffect from 1.4.2004. Same is the position withregard to insertion of a sub-section after Section90(2) and before the Explanation. This insertionalso operates w.e.f. 1.4.04. In short, the aboveamendments have been made by Finance Act, 2003and all the said amendments have been madeoperational w.e.f. 1.4.04. Therefore, the provisoinserted in Section 36(1)(iii) has to be read asprospectively and w.e.f. 1.4.04. In this case, we areconcerned with the law as it existed prior to1.4.2004. As stated above, we are not concernedwith the interpretation or applicability of the saidproviso to Section 36(1)(iii) w.e.f. 1.4.04 in thepresent case. 12. In the case of Challapalli Sugars Ltd. (supra)this Court observed that interest paid on theborrowing utilized to bring into existence a fixedasset which has not gone into production, goes toadd to the cost of installation of that asset. It wasfurther observed that if the said borrowing was not"for the purpose of business" inasmuch as nobusiness had come into existence, it must followthat it was made for the purpose of acquiring anasset which could be put to use for doing business,and hence interest paid on such borrowing would goto add to the cost of the assets so acquired. 13. In our view the above observations have to beconfined to the facts in the case of ChallapalliSugars Ltd. (supra) . It was a case where thecompany had not yet started production when itborrowed the amount in question. the moreappropriate decision applicable to the present casewould be the judgment of this Court in the case ofIndia Cements Ltd. v. Commissioner of Income-tax,Madras MANU/SC/0188/1965MANU/SC/0188/1965 :[1966]60ITR52(SC) in which it has been observedthat, for considering whether payment of interest onborrowing is revenue expenditure or not, thepurpose for which the borrowing is made isirrelevant. In our view, Section 36 (1)(iii) of the1961 Act has to be read on its own terms. It is aCode by itself. Section 36(1)(iii) is attracted whenthe assessee borrows the capital for the purpose ofhis business. It does not matter whether the capitalis borrowed in order to acquire a revenue asset or acapital asset, because of that the section requires isthat the assessee must borrow the capital for thepurpose of his business. This dichotomy between the borrowing of a loan and actual applicationthereof in the purchase of a capital asset, seems toproceed on the basis that a mere transaction ofborrowing does not, by itself bring any new asset ofenduring nature into existence, and that it is thetransaction of investment of the borrowed capital inthe purchase of a new asset which brings that assetinto existence. The transaction of borrowing is notthe same as the transaction of investment. If thisdichotomy is kept in mind it becomes clear that thetransaction of borrowing attracts the provisions ofSection 36(1)(iii). Thus, the decision of the BombayHigh Court in Calico Dyeing & Printing Works(supra) and the judgment of the Supreme CourtIndia Cements Ltd. (supra) have been given withreference to the borrowings made for the purposesof a running business, while the decision of theSupreme Court in Challapalli Sugars Ltd. (supra)was given with reference to the borrowings whichcould not be treated as made for the purposes ofbusiness as no business had commenced in thatcase. Therefore, there is no inconsistency betweenthe above decisions. Commissioner of Income Tax vs. TaraiDevelopment Corporation Ltd. (16.08.1993 –ALLHC), (1994) 205 ITR 0421 5. Clause (iii) of Sub-section (1) of Section 36 isquoted as under : "The amount of the interest paid in respect ofcapital borrowed for the purposes of the business orprofession." 6. We find that in the present case, the finding hasbeen recorded that the assessee was setting up anew factory in the previous year and it was anextension of its existing business and moneysborrowed were for the purpose of carrying on thebusiness and which could be spent by the assesseeon any account, either capital or revenue. Theaforesaid Section 36(1)(iii) provides that theamount of interest paid in respect of capitalborrowed for the purposes of the business could becovered under Section 36 for deduction. We findthat the principle for the grant of deduction under asimilar situation has been laid down by the SupremeCourt while interpreting the provisions of Section10(2)(xv) of the Indian Income Tax Act, 1922, inthe case of India Cements Ltd. v. CIT. On the otherhand, the decision relied on on behalf of theRevenue is reported in Ritz Continental Hotels Ltd.v. CIT but the same is not applicable to the facts and circumstances of the present case. We furtherfind that the decision of this court in Prem Spinningand Weaving Mills Co. Ltd. v. CIT is also to thesame effect as we have held above. CIT vs. Sakthi Sugars Ltd., (Madras HC) 339ITR 0400 19. A perusal of the details of the expensesfurnished before us in respect of Baramba unitwhich were stated to be by way of pre-operationexpenses were incurred towards salaries, wages,bonus, contribution to Provident Fund, workmenwelfare expenses, power, fuel and water,manufacturing expenses, rent for office building,insurance premium, repairs and maintenance formachinery and building, motor vehicle, officeequipment etc., interest on bills cleared, freight andtransport, cane development expenses, travellingexpenses, other administrative expenses andfinancial and bank charges. 20. In respect of Dhenkanal Sugar unit, theexpenses incurred by way of pre-operativeexpenses for the year 1991-92 were towards canedevelopment expenses, travelling expenses,administrative and other expenses, legal andprofessional charges, electricity charges, rates andtaxes, insurance premium, repairs and maintenancecharges for building and machinery and motorvehicle and other office equipment maintenance,financial and bank charges, freight and transport,salaries, wages, bonus etc., workmen welfareexpenses, interest charges and depreciation. 34. From the above decisions the test for identifyingan expenditure as to whether it is a revenueexpenditure or capital expenditure can be stated asunder :- 20. In respect of Dhenkanal Sugar unit, theexpenses incurred by way of pre-operativeexpenses for the year 1991-92 were towards canedevelopment expenses, travelling expenses,administrative and other expenses, legal andprofessional charges, electricity charges, rates andtaxes, insurance premium, repairs and maintenancecharges for building and machinery and motorvehicle and other office equipment maintenance,financial and bank charges, freight and transport,salaries, wages, bonus etc., workmen welfareexpenses, interest charges and depreciation. 34. From the above decisions the test for identifyingan expenditure as to whether it is a revenueexpenditure or capital expenditure can be stated asunder :- (1) If the amount spent was for the purpose ofbringing into existence a new asset or obtaining anew advantage, it would be a capital expenditure. (2) If on the other hand, it is not made for thepurpose of bringing into existence any such asset oradvantage but for running the business or workingit with a view to produce the profits, it is a revenueexpenditure. (3) For instance if the interest paid was in respect ofthe asset, which was acquired on an outright basisthan it was intimately linked with the value of theasset. That determines the character of theexpenditure and it was capital in nature. Keeping the about tests in mind, when we examinethe case on hand, the various kinds of expendituresrelating to the sum of `.6,84,78,570/-, the detailsof which have been mentioned in paragraphs 19 and20, disclose that all those expenditures wereincurred in the relevant years for the purpose ofmanufacture of sugar in the respective factorieswith a view to earn profits and therefore they arenothing but revenue expenditure only. 36. Since the Hon'ble Supreme Court as well as ourHigh Court has made a distinction as betweeninvestment in respect of an asset created andexpenses incurred for the actual running of thebusiness which makes the difference as betweencapital expenditure and revenue expenditure and inthe case on hand, the various expenses referred toat paragraphs 19 and 20 of our order were allexpenses incurred for that purpose namely businessexpenditure, the order impugned in this appeal inhaving allowed such expenditure as revenueexpenditure is perfectly justified. “ 6.Counsel for the respondent Mr. Mathur has contended thatthe view taken by the CIT(A) has been confirmed by Tribunaltherefore, there is concurrent finding and provisions of Section 68of the Income Tax Act would be applicable in addition to provisionsof Section 145(3). 7.We have heard counsel for the parties. 8.Taking into consideration that the amount which is estimatedas GP will include the undisclosed stock which was the maincontention if it is not allowed, it will amount to double taxationinasmuch as estimate is already covering in the purchase whichwas not of stock shown in the books of account. In that view ofthe matter, while estimating profit it will also include the stock.Thus, the contention raised is required to be accepted and theissue is required to be answered in favour of the assessee. 9. On the second issue, in view of the observations and finding of the fact recorded by the AO that this is capital amount investedin machinery which is running in business and in view of decisionof Supreme Court in Core Health Care Ltd. (supra), the issue isrequired to be answered in favour of the assessee against thedepartment. 10. Hence both the issues are answered in favour of theassessee and against the department. 11. The appeal stands allowed. (VIJAY KUMAR VYAS),J. (K.S.JHAVERI),J. B.M.G/Gourav/21