M/S. DEEPAK NITRITE LTD. vs. JOINT COMMISSIONER OF INCOME TAX [ASSESSMENT]

Facts

The assessee, M/s. Deepak Nitrite Ltd., filed these Tax Appeals challenging the orders of the Income Tax Appellate Tribunal (ITAT) for Assessment Years (AY) 1991-92, 1995-96, and 2001-02. The appeals arise from the disallowance of interest expenses claimed by the assessee on borrowed funds. The ITAT had partly allowed appeals filed by both the assessee and the Revenue. The assessee's contention is that the borrowed funds were used for business purposes, making the interest deductible. The procedural history involves assessment proceedings, appeals to the CIT(A), and subsequent appeals to the ITAT, culminating in these High Court appeals. The amounts in dispute are Rs. 26,39,697/-, Rs. 7,75,000/-, and Rs. 9,48,054/-.

Held

The High Court held that the Tribunal was not right in disallowing the interest expenses claimed by the assessee. The Court found that the issue was squarely covered by the Supreme Court's decision in *Deputy Commissioner of Income-tax vs. Core Health Care Ltd.*, which held that Section 36(1)(iii) of the Income-tax Act, 1961, allows deduction of interest on borrowed capital if the capital is used for business purposes, regardless of whether it's for a capital or revenue purpose. The Court noted that the Supreme Court's decision was later upheld when an SLP against it was dismissed. The Tribunal had relied on a previous decision which was subsequently reversed by the Apex Court. Therefore, the questions of law framed were answered in favour of the assessee. Specifically, the Tribunal was wrong in disallowing interest of Rs. 26,39,697/- (Tax Appeal No. 426/2007), Rs. 7,75,000/- (Tax Appeal No. 427/2007), and Rs. 9,48,054/- (Tax Appeal No. 428/2007) on borrowings used for establishing plants and for extension of business. The appeals were allowed.

Key Issues

The Tribunal had to decide the following substantial questions of law: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the interest of Rs. 26,39,697/- (in Tax Appeal No. 426/2007), Rs. 7,75,000/- (in Tax Appeal No. 427/2007), and Rs. 9,48,054/- (in Tax Appeal No. 428/2007), treating the amounts borrowed for bringing assets into existence for establishing plants for manufacturing ONCB, PNCB, ONT, and PNT? 2. Whether the extension of the plant is for the extension of the existing business? Assessee's Contentions: The assessee argued that the issue is concluded by the Supreme Court's decision in *Deputy Commissioner of Income-tax vs. Core Health Care Ltd.* (2008) 298 ITR 194 (SC). They contended that Section 36(1)(iii) of the Income-tax Act, 1961, allows deduction of interest on borrowed capital used for business, irrespective of whether the capital is used for acquiring a capital asset or a revenue asset. The emphasis is on the user of the capital for business, not the nature of the asset created. The actual cost of the asset is irrelevant for Section 36(1)(iii). Revenue's Contentions: No specific contentions for the Revenue are recorded in the judgment, other than their role as the opponent.