The Commissioner Of Income Tax-I, Chennai v. M/S.carborandum Universal Ltd., 29 Rajaji Salai, Chennai-600 001

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 2.2.2006 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA T.C.(A) Nos.81 & 82 of 2006 The Commissioner of Income Tax-I,Chennai..Appellant in both the T.Cs. Vs. M/s.Carborandum Universal Ltd.,29 Rajaji Salai,Chennai-600 001 ..Respondent in both the T.Cs. Appeals under Section 260A of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, Madras 'A' Benchdated 19.11.2004 in ITA Nos.2266 and 2267/Mds/96 for the assessmentyears 1994-95. For Appellant:Mr.J. Narayanaswamy (Delivered by P.P.S.JANARTHANA RAJA,J.) The above tax case appeals are directed against the order of theIncome-tax Appellate Tribunal in ITA Nos.2266 and 2267/Mds/96 dated19.11.2004, raising the following substantial questions of law: "1. Whether in the facts and circumstances of the case, theTribunal was right in deleting the addition towards theelement of the customs duty on the closing stock. https://hcservices.ecourts.gov.in/hcservices/ 2. Whether in the facts and circumstances of the case, theTribunal was right in deleting the addition towards theelement of the customs duty on the closing stock. 3. Whether on the facts and circumstances of the case thetribunal was right in holding that the interest paid on theborrowed capital prior to the commencement of theproduction was allowable as revenue expenditure." 2. The Revenue is the appellant. The assessment year involvedin the appeals is 1994-95. The assessee filed a return of income on28.11.1994, showing the total income at Rs.3,50,25,940/-. The casewas processed on 7.4.95 determining the total income atRs.3,51,67,020/-. During the accounting year under consideration, theassessee has started 3 projects viz., Hydel Project, Bonded expansionproject and EMD expansion project. The assessee had incurredsubstantial amount of capital expenditure on the establishment of theabove projects. For the purpose of incurring capital expenditure inthe project, the assessee borrowed funds from outside and paidinterest at Rs.2,39,61,676. The interest amount of Rs.2,39,61,676/-was capitalised by the assessee in the books. However, whilecomputing the income for the purpose of income tax, the assesseeclaimed to the extent of Rs.2,39,61,676/-, as revenue expenditure.The Assessing Officer made disallowance of interest relating to thethree new projects by relying on the ratio of the Supreme Court inthe case of Chellapalli Sugars reported in 98 ITR 574, on the groundthat the interest was paid before the commencement of the productionand the same was capitalised and not allowed as revenue expenditure.Further, the Assessing Officer included the Excise and Customs dutyin the value of the closing stock. 3. Aggrieved by the said order, the assessee filed appeal to theCommissioner of Income Tax (Appeals). The Commissioner of Income Tax(Appeals), allowed the appeal partly. Hence, both the Revenue and theassessee preferred appeals before the Income Tax Appellate Tribunal.The Income Tax Appellate Tribunal allowed both the issues in favourof the assessee. 4. The issue involved in questions 1 and 2 is covered againstthe Revenue by the decision of this Court in the case of COMMISSIONEROF INCOME TAX Vs.ENGLISH ELECTRICT CO.OF INDIA LTD.(243 ITR 512).Hence the order of the Tribunal is in confirmity with law. 5. In respect of Question No.3, the assessee claimed deductionunder Section 36(1)(iii) of the Act, which reads as follows: "36(1)(iii) The amount of the interest paid in respect ofcapital borrowed for the purposes of the business orprofession" From a very reading of the above clause, it is clear that threeconditions are required to be specified to enable the assessee toclaim deduction in respect of interest on borrowed money, which areas follows: 1. There should be borrowal of money by the assessee; 2. It must be for the purpose of business; and 3. The interest must be paid on the borrowed money. 5. In respect of Question No.3, the assessee claimed deductionunder Section 36(1)(iii) of the Act, which reads as follows: "36(1)(iii) The amount of the interest paid in respect ofcapital borrowed for the purposes of the business orprofession" From a very reading of the above clause, it is clear that threeconditions are required to be specified to enable the assessee toclaim deduction in respect of interest on borrowed money, which areas follows: 1. There should be borrowal of money by the assessee; 2. It must be for the purpose of business; and 3. The interest must be paid on the borrowed money. In this case, both the authorities below had given a concurrentfinding that the assessee borrowed money for the purpose of expansionof the projects and paid interest on the borrowed money. Hence, theclaim of the assessee under Section 36(1)(iii) of the Act is inconfirmity with law. 6. In view of the foregoing conclusions, we do not find anyerror or infirmity in the order of the Tribunal and no substantialquestions of law arise for consideration of this Court. Hence, wedismiss the above tax cases. No costs. msk Sd/Asst.Registrar /true copy/ Sub Asst.Registrar To1. The Assistant Registrar,Income Tax Appellate Tribunal, Rajaji Bhavan, Besant Nagar, Chennai-90. 2. The Commissioner of Income Tax (Appeals) V, 121, Mahatma Gandhi Road, Chennai-600 034. 3. The Deputy Commissioner of Income-tax, Spl. Range I, Madras. +1 CC to Mr.Pushya Sitaraman, Advocate, SR No.4823 AK(CO)BG/27.2.2006