COMMISSIONER OF INCOME TAX vs. KAYAL SYNTEX LTD.

Facts

The Revenue is in appeal against the order of the Income Tax Appellate Tribunal (ITAT) dated February 18, 2005. The ITAT had set aside the order of the CIT(Appeals) and deleted the remaining addition made by the Assessing Officer. The dispute pertains to Assessment Years 1997-98 and 1996-97. The assessee, Kayal Syntex Ltd., claimed an expenditure of Rs. 37,04,458/- as revenue expenditure. The Assessing Officer treated this expenditure as capital in nature. The CIT(Appeals) partially deleted the addition. The ITAT, however, deleted the entire remaining addition, leading to the present appeals by the Revenue.

Held

The High Court held that the substantial question of law raised in the appeal was required to be answered in favour of the assessee. The Court referred to the Supreme Court's decision in Deputy Commissioner of Income Tax vs. Core Health Care Ltd. (Supra). The reasoning was that Section 36(1)(iii) of the Income Tax Act, 1961, does not differentiate between money borrowed to acquire a capital asset or a revenue asset. The sole requirement of the section is that the assessee must borrow capital, and the purpose of borrowing must be for the business carried on by the assessee in the year of account. The Court found no inconsistency with other Supreme Court decisions like Challapalli Sugars Ltd. and India Cements Ltd. when read in light of the specific facts. Consequently, the impugned judgment and order passed by the ITAT were confirmed, and the Tax Appeals were dismissed.

Key Issues

1. Whether the Appellate Tribunal was right in law and on facts in upholding the addition on account of revenue expenditure being capital in nature under Section 37 of the Income Tax Act, 1961? Assessee's Contention: The assessee argued that the issue is covered 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 an assessee is entitled to claim interest paid on borrowed capital if the capital is used for business purposes, irrespective of the outcome of its use. The 'actual cost' of an asset is irrelevant to Section 36(1)(iii). The Supreme Court in Core Health Care Ltd. held that Section 36(1)(iii) makes no distinction between money borrowed to acquire a capital asset or a revenue asset; it only requires that the assessee must borrow capital for the purpose of business carried on by the assessee. Revenue's Contention: The Revenue, represented by learned Senior Counsel, was not in a position to dispute the assessee's submission or point out any contrary decision.