THE COMMISSIONER OF INCOME TAX vs. VADILAL DAIRY INTERNATIONAL - LTD.

This reference is, in fact, involving cross references, both by the Revenue and the Assessee. The Income Tax Appellate Tribunal, Ahmedabad Bench-C, has referred the following one question at the instance of revenue and six questions at the instance of the assessee, under section 256(2) of the Income Tax Act, 1961 (the Act) for the opinion of this Court. R.A. No. 700/Ahd/1998 (By Revenue)

Whether, the Appellate Tribunal is right in law and on facts in allowing deduction of interest amounting to Rs. 38,92,769/- under section 36(1)(iii) on the funds borrowed for setting up of a new business which is unconnected with the regular business of the assessee? R.A. No. 783/Ahd/1998 (By Assessee)

Whether, in the facts and circumstances of the case the Tribunal was right in law in holding that, the assessee was not entitled to deduction of expenditure of Rs. 32,56,038/- incurred by it?

Whether, in the facts and circumstances of the case the Tribunal was right in law in holding that the expenditure of Rs. 32,56,038/- was in the capital field connected with setting up of a new unit?

Whether, in the facts and circumstances of the case the Tribunal was right in law in holding that because the unit being set up at Sinnar had not started production the expenditure of Rs. 32,56,038/- was not admissible as a deduction under sec. 37 of the Income-tax Act?

Whether, in the facts and circumstances of the case the Tribunal was right in law in holding that, expenditure for foreign travel in the sum of Rs. 11,05,724/- was not an admissible deduction under sec. 37 of the Income-tax Act ?

Whether, in the facts and circumstances of the case the Tribunal was right in law in not accepting the prayer made by the assessee for setting aside the issue as to foreign travel expenditure in sum of Rs. 11,05,724/- for fresh adjudication to the Assessing Officer ?

Whether, in the facts and circumstances of the case the finding of the Tribunal that the foreign travel expenditure of rs. 11,05,724/- was in respect of a unit being set up in Sinnar is not incorrect and contrary to record and as such it could not have been arrived at ?”

The assessee, a limited company, filed return of income on 31.12.1993 showing Nil income for Assessment Year 1993-94. The relevant previous year

As against that, on behalf of respondent – In the Apex Court's decision in the case of Care Ltd. (supra), the Apex Court has stated: “The expression “for the purpose of business” occurring in section 36(1)(iii) indicates that once the test of “for the purpose of business” is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under section 36(1) (iii) of the 1961 Act. This provision makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business which ITR/40/1999 6/12 is carried on by the assessee in the year of account. What clause (iii) emphasises is the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital unlike section 37 which expressly excludes an expense 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”. An assessee is entitled to claim interest paid on borrowed capital provided that capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. Further, the words “actual cost” do not find place in section 36(1)(iii) of the 1961 Act which otherwise find place in sections 32, 32A, etc. of the 1961 Act. The expression “actual cost” is defined in section 43(1) of the 1961 Act which is essentially a definition section which is subject to the context to the contrary.”

In relation to the Proviso under sec. 36(1)(iii) of the Act, the Apex Court has specifically found that the Proviso has been inserted by Finance Act, 2003 and is made operative with effect from 1.4.2004. Therefore, the Proviso has to be read as applicable prospectively with effect from 1.4.2004 only.

In relation to the first three questions at the instance of the assessee, the only issue is whether the expenditure of Rs. 32,56,038/- was in the capital field connected with setting up of new unit or whether the expenditure was admissible as a deduction under under sec. 37 of the Act. The contention on behalf of the applicant – assessee is that the assessee is engaged in the business of manufacturing and selling of ice cream and the unit is operating at Tarapur; about 200 to 250 km away from the existing unit an additional unit for procurement of milk and production of milk products was set up at village Sinnar, District Nasik in State of Maharashtra; that the said unit should be considered as an extension of the same business because procurement of milk was a case of back-ward integration, milk being necessary for making ice-cream. It was contended that in case ITR/40/1999 8/12 CTR (Mad) 250 to submit that merely because the unit is set up at a distant place from existing unit, the new unit does not cease to be an extension of the existing unit. That the business of the assessee remains the same and the expenditure incurred for such a new unit has to be allowed as a revenue expenses.

It was further contended that the assessee had employed staff, there was common administration, there was interconnection, interlacing and inter dependence of the new unit with that of old unit in respect of the financial transactions and hence the new unit was nothing else but expansion of existing business.

The Tribunal has, as noted hereinbefore, agreed with the view expressed by Commissioner (Appeals). The Commissioner (Appeals) had formulated the controversy by posing a question: “Whether on the facts and circumstances of the case the amount related to expenditure other than interest is deductible as revenue expenditure under the provisions of section 37 of the Act ?”

In this connection, the Tribunal has recorded as under: “As regards question/issue No. (iii) we are ITR/40/1999 9/12 of the opinion that the CIT(A) was perfectly justified in holding that the expenditure other than interest which was admittedly related to the setting up of a separate unit at Sinnar for the production/procurement of milk and milk products was in the capital field and was rightly capitalised by the assessee in the books of accounts and was not admissible as deduction under the provisions of sec. 37 which specifically prohibits the claim of deduction of expenditure of personal nature or of capital nature. In this connection we are in complete agreement with the reasoning and conclusion of the CIT(A) as recorded in para 76 to 78 of the impugned order and hold that except for the amount of Rs. 6,36,731/- and which is the interest paid on borrowed funds for investment in the new unit at Sinnar, the assessee it not entitled to any deduction in relation to other expenditure which are admittedly in the capital field connected with the setting up of the new project for the production/procurement of milk and milk products.”

In relation to the submission made by the assessee in relation to common staff etc., the Tribunal has found that neither the Assessing Officer nor Commissioner (Appeals) have recorded any finding while holding that the new unit at Sinnar was a ITR/40/1999 10/12 separate independent unit. The Tribunal also, therefore, has not recorded any finding as to this contention.

In the aforesaid set of facts and circumstances of the case, it is not possible to accept the submissions of the assessee that the new unit was a part of the existing business of the assessee. In fact, the concurrent findings recorded by Commissioner (Appeals) and the Tribunal show that they have categorically held otherwise when it has been observed that the expenditure in question has admittedly been incurred in the capital field connected with setting up of the new project for the production/procurement of milk and milk products. In face of this finding, it is not possible to take any other view of the matter and no error can be found in the impugned order of Tribunal in relation to the expenditure of Rs. 32,56,038/- incurred by the assessee as being capital expenditure which is not entitled to deduction under sec. 37 of the Act considering the plain language of the said provision.

In so far as questions Nos. 4,5 and 6 at the instance of the assessee are concerned, they relate to allowability of foreign travel expenses to the tune of Rs. 11,05,724/-. The finding of the Tribunal in this connection reads as under: “Coming to ground No. 4 relating to foreign traveling expenses of Rs. 11,05,724/- the ITR/40/1999 11/12 claim of the assessee before us is that it not only related to new unit for the production/procurement of milk and milk products at Sinnar but also to the existing ice cream manufacturing unit. However this contention of the assessee's counsel does not appear to be correct because had it been so, then the assessee would never have capitalised this amount under the head capital “work-in-progress”, relating to the unit at Sinnar. It is pertinent to note that before the AO the assessee never corporated which is apparent from the details of opportunities allowed by the AO as recorded at pages 3,4 and 5 of the assessment order. Accordingly, we do not find any merit in the ground wherein prayer is made for setting aside of this amount for fresh adjudication to the AO. Accordingly, this ground is adjudicated against the assessee.”

In light of the aforesaid findings recorded after appreciating the evidence on record no other view is possible. The Tribunal was justified in holding that the expenditure in connection with foreign travel was not allowable on revenue account as the same was capitalised under the head capital “work-in-progress”.

In the result, question referred at the instance of revenue is answered in the affirmative, that is,

In so far as the six questions referred at the instance of assessee are concerned, all the six questions are answered in affirmative, that is, in favour of the revenue and against assessee. The Reference stands disposed of accordingly with no order as to costs. (D.A. MEHTA, J.) (Z.K. SAIYED, J.) mandora/