COMMISSIONER OF INCOME TAX vs. M/S HIGHWAY CYCLES IND. LTD.

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ITA/402/2008HC Punjab & HaryanaPHHC01080391200809 September 2008Author: MR. JUSTICE ADARSH KUMAR GOEL,MR. JUSTICE AJAY TEWARI2 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the proposed substantial question of law did not arise. It relied on the Supreme Court's decision in Deputy Commissioner of Income Tax v. Core Health Care Ltd. (2008) 298 ITR 194(SC). The Supreme Court held that the expression 'for the purpose of business' in Section 36(1)(iii) of the Act means that once the capital borrowed is for the purpose of business carried on by the assessee in the year of account, the deduction is permissible. The provision does not distinguish between money borrowed for acquiring a capital asset or a revenue asset. Therefore, the interest paid on capital borrowed for the purpose of business, even if it pertains to a new unit that has not yet commenced production, is deductible if the business is carried on by the assessee in the year of account. The appeal was dismissed.

What were the facts?

The Revenue has appealed against an order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 2000-2001. The assessee, M/s Highway Cycle Industries Ltd., expanded its business into manufacturing auto components after a demerger effective April 1, 1999. Commercial production for the new venture commenced in December 1999. The Assessing Officer (A.O.) capitalized an interest expense of Rs. 3,45,805/- incurred on a loan for this expansion, arguing it was revenue expenditure related to a new business that had not yet started production. The Commissioner of Income Tax (Appeals) upheld the A.O.'s decision. The ITAT, however, reversed this finding, allowing the deduction.

What were the issues?

1. Whether on the facts and in law, the Hon'ble ITAT is right in allowing a deduction of Rs. 3,45,805/- being interest pertaining to a new business that came into operation in the subsequent Assessment Year, from the income of the existing business, in the relevant Assessment Year? (Question of law and fact, concerning Section 36(1)(iii) of the Income Tax Act, 1961). Assessee's Contention: Not recorded in the judgment. Revenue's Contention: The interest expense relating to a new business unit that had not commenced production should be capitalized and not allowed as a deduction against the income of the existing business in the relevant assessment year.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii),Section 260

AI-generated summary — verify with the full judgment below

In the High Court of Punjab and Haryana at Chandigarh Date of Decision: 09.09.2008 Commissioner of Income tax, Ludhiana ...... Appellant Versus M/s Highway Cycle Industries Ltd., 698, Industrial Area-B, Ludhiana ...... Respondent Coram: Hon'ble Mr. Justice Adarsh Kumar Goel Hon'ble Mr. Justice Ajay Tewari

1.

Whether Reporters of local papers may be allowed to see the judgment?

2.

To be referred to the Reporters or not?

3.

Whether the judgment should be reported in the Digest? Present: Mr.Rajesh Sethi, Advocate for the appellant. **** Ajay Tewari, J. This appeal has been filed by the Revenue under Section 260 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') against the order dated 31.05.2007 passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'B' Chandigarh (hereinafter referred to as 'the Tribunal') in ITA No. 713/Chandi/2006 for the assessment year 2000-2001, proposing following substantial question of law:-

1.

Whether on the facts and in law, the Hon'ble I.T.A.T. is right in law in allowing a deduction of Rs. 3,45,805/- being interest pertaining to a new business that came into operation in the subsequent Asstt. Year, from the income of the existing business, in the relevant Asstt. Year?” The assessee expanded its business by foraying into the manufacture of auto components after demerger w.e.f. 1.4. 99. According to the Assessing Officer (A.O.) the commercial production started in December, 1999 and prior to the commencement of production the assessee had shown interest paid relating to this expansion as revenue expenditure. According to the A.O. the interest paid on loan obtained for the expansion of business was required to be capitalised since new unit had not started production and he accordingly capitalised a sum of Rs. 3,45,805/-. The appeal filed by the assessee was dismissed by the CIT (Appeals). In second appeal the learned Tribunal reversed the finding and that is how revenue is before us. We find the matter covered by the decision of the Hon'ble Supreme Court in Deputy Commissioner of Income Tax v. Core Health Care Ltd., (2008) 298 ITR 194(SC) wherein the Hon'ble Supreme Court held as follows:- “The expression 'for the purpose of business' occurring in s. 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 s. 36(1)(iii). 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 is carried on by the assessee in the year of account.” In view thereof we are of the opinion that the proposed question of law does not arise. The appeal is dismissed. (AJAY TEWARI) JUDGE (ADARSH KUMAR GOEL) JUDGE September 09, 2008 sunita

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