THE COMMISSIONER OF INCOME TAX-3 MUMBAI vs. DBS CORPORATE SERVICES PVT LTD

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.4700 OF 2010 The Commissioner of Income Tax-3, Aayakar Bhavan, M.K.Road, Mumbai-400020. ..Appellant. v. M/s. DBS Corporate Services Pvt. Ltd., 213, Raheja Chambers, Nariman Point, Mumbai-400 021. ..Respondent. Mr.Vimal Gupta for the Appellant. Mr. Percy Pardiwalla, Sr. Counsel with Mr .Atul K. Jasani for the Respondent. CORAM : S.J.VAZIFDAR & M.S. SANKLECHA, JJ.

DATE : 04th September, 2012. JUDGMENT (Per M.S. SANKLECHA.J.): This appeal by the revenue under Section 260A of the Income Tax Act, 1961 (“the Act”) challenges an order dated 19/11/2008 passed by the Income Tax Appellate Tribunal (the Tribunal) in Income Tax Appeal No.791/M/06 (respondent-assessee's appeal) and 910/M/06 (appellant-revenue's appeal) relating to the assessment year 1999-2000. 2) Being aggrieved, the revenue has formulated the following questions of law for consideration of this Court. ASN 1/11 ITXA-4700.doc CNR No : HCBM020118992009 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:52:49

a) Whether on the facts and circumstances of the case and in law, the Tribunal is justified in allowing Rs.2,98,235/- out of interest paid on borrowed loans on a pro-rata basis in respect of capital expenditure in respect of existing business? b) Whether on the facts and circumstances of the case and in law, the Tribunal is justified in allowing Rs.1,39,20,104/- in respect of repairs and maintenance charges treating it as revenue in nature? c) Whether on the facts and circumstances of the case and in law, the Tribunal is right in deleting charging interest u/s. 234D in respect of proportionate interest paid on loans borrowed and utilized for capital work in progress and advance against the capital work in progress and advance against the capital expenses? ASN 2/11 ITXA-4700.doc Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:52:49

Regarding Question (a) : 3) The respondent-assessee is engaged in the business of operating business centres. During the assessment years 1999-2000 the respondent-assessee had debited an amount as interest of Rs.1.38 crores on borrowed funds of Rs.8.14 crores. The respondent assessee in the aggregate had funds of Rs.41.65 crores as on 31/3/1999.The capital work in progress declared by the respondent-assessee was Rs.89.49 lacs. The Assessing Officer was of the view that the proportionate interest paid on borrowed funds would have been utilized for capital work in progress and therefore, should be disallowed. The respondent-assessee pointed out to the Assessing Officer that no proportionate interest on the said capital expenditure can be disallowed even if the borrowed funds are utilized for capital expenditure in view of Section 36(1)(iii) of the Act as it stood during assessment year 1999-2000. The Assessing officer by his order dated 30/3/2005 did not accept the respondent-assessee's submission and disallowed the proportionate interest of Rs.2.98 crores out of the total interest paid as being attributable to the payment of interest on funds borrowed for capital expenditure. 4) In first appeal the CIT (Appeals) by his order dated 28/4/2005 upheld the order of the Assessing Officer by holding that the ASN 3/11 ITXA-4700.doc Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:52:49

disallowance of interest is relatable to work in progress and the respondent had itself capitalized all expenses related to the new project (under construction). 5) On second appeal, the Tribunal held that the deductibility of interest in respect of funds borrowed for capital expenditure for the period prior to assessment year 2005-06 is covered by the decision of the Apex Court in the matter of Dy. Commissioner of Income Tax Vs. Core Health Care Ltd. reported in 298 ITR 194 and the interest paid is deductable under Section 36(1) (iii) of the Act. 6) Section 36(1)(iii) of the Act during the relevant assessment year reads as under : “36(1)The deduction provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (i)......... (ii)------ (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: [Provided that any amount of the interest paid, in ASN 4/11 ITXA-4700.doc Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:52:49

respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.] Explanation-Recurring

subscriptions

paid periodically by share-holders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;” 7) Mr. Vimal Gupta, Counsel for the appellant-revenue submits that the proportionate interest paid on borrowed funds utilized for new project is not deductable under Section 36(1)(iii) of the Act to the extent the funds have been utilized for capital expenditure. Mr. Gupta submits that on identical facts the Apex Court in the matter of Challapalli Sugar Ltd. v. CIT reported in 98 ITR 167 has disallowed the interest paid on funds utilized for capital expenditure. Therefore, it is ASN 5/11 ITXA-4700.doc Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:52:49

submitted that the question of law as framed be admitted and considered. 8) On the other hand,Mr. Percy Pardiwalla, Counsel for the respondent submits that we are concerned for the assessment year 1999-2000. The interest paid on borrowed funds has to be allowed in terms of Section 36(1)(iii) of the Act which provides that deduction should be allowed in respect of payment of interest on amounts borrowed even in respect of capital used for the purposes of business or profession. Mr. Pardiwalla points out that the construction work in respect of which borrowed funds were utilized was only to set up a new project of their business centres. These funds have not been utilized to establish a new business but have been utilized to establish new business centre which is a part of its running business. Consequently the expenditure incurred on payment of interest for borrowed funds which have been used for the purpose of respondent's business is a deductable expense as held by the Supreme Court in the matter of Core health Care Ltd. (supra) . 9) The assessment year involved in the present proceeding is 1999-2000. At that point of time any amount of interest paid on borrowed funds even in respect for utilization for capital purposes would be allowed as a deduction provided the same is for the purposes ASN 6/11 ITXA-4700.doc Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:52:49

of the business. The decision of the Supreme Court in the matter of Core Health Care Limited (supra) concludes the issue in favour of the respondent-assessee. In the above case, the decision of the Apex Court in the matter of Challapalli Sugar Ltd. (supra) was considered and distinguished on the ground that the interest in that case was paid on borrowed funds utilized to bring into existence a fixed asset of a business which had not gone into production. In Challapalli Sugars Ltd. case, the Court observed that the borrowing was not for the purpose of business inasmuch as no business had come into existence. In the present facts, there could be no dispute that the respondent-assessee was in the business of running business centres and the borrowed capital on which interest was paid was utilized for the purpose of constructing/establishing further business centres. The Apex Court in the matter of Core health Care Limited (supra) had observed that under Section 36(1)(iii) of the Act it does not matter whether borrowed funds are used for capital purposes. All that the section contemplates is that the amount must be borrowed for the purposes of business. The Court held that there is a difference between borrowing of a loan and actual utilization/acquisition of the loan for the purpose of a capital asset. Borrowing of a loan does not bring into existence an asset of enduring nature. The investment on the ASN 7/11 ITXA-4700.doc Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:52:49

borrowed capital brings into existence an asset of an enduring nature. The Court observed that a transaction of borrowing is not the same as a transaction of investment. Consequently, the interest paid has to be allowed as deduction under section 36(1)(iii) of the Act as in existence during the assessment year 1999-2000. In view of the above, question (a) raises no substantial question of law and is therefore, dismissed. Regarding Question (b) : 10) During the assessment year 1999-2000, the respondent- assessee had sought allowance of expenses on account of repairs and maintenance aggregating to Rs.1.39 crores. During the course of the assessment proceedings the Assessing officer was of the view that the expenditure on repairs and maintenance was capital in nature and therefore,the expenses incurred have to be capitalized and cannot be allowed as a revenue expenditure. In view of the above, in his order dated 30/3/2005, the Assessing Officer added an amount of Rs.1.39 crores to the respondent-assessee's income for assessment year 1999-2000 after disallowing the expenses on account of repairs and maintenance. 11) In appeal, the Commissioner of Income Tax (Appeals) by his order dated 30/11/2005 allowed the respondent-assessee's appeal on the ground that the same had been allowed for the assessment ASN 8/11 ITXA-4700.doc Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:52:49

years 1998-99 and 2000-01. 12) The revenue filed an appeal to the Tribunal. By an order dated 19/11/2008, the Tribunal dismissed the revenue's appeal and held that expenses for repairs and maintenance are revenue in nature. This view had been taken by the Tribunal earlier for the assessment year 2001-02 was followed. 13) Mr. Vimal Gupta, Counsel for the revenue submits that the expenses for repairs and maintenance were in fact expenses of capital nature and was not in the nature of current repairs as contemplated under Section 30 of the Act. Mr. Gupta invited our attention to the fact that the amount spent on renovation during the year was to the extent of Rs.1.54 crores and this quantum by itself is evidence of the fact that this expenditure cannot be said to be for current repairs. Consequently, he submits that the Tribunal erred in having allowed the expenses for repairs and maintenance as an expenditure for current repairs. On the other hand, Mr. Pardiwalla submits that the expenses incurred by the respondent were essentially in the nature of renovation of various buildings where they are running their business centres. According to Mr. Pardiwalla none of these expenses resulted in acquisition of any new asset and the repairs and maintenance of existing building was an on going process carried out by it so as to ASN 9/11 ITXA-4700.doc Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:52:49

augment the revenue in running its business centres. Consequently, he submits that the order of the Tribunal ought not to be interfered with. 14) We find that the appellant is in the business of running business centres. Such business centres are required to be kept in proper condition with appropriate ambiance. Therefore, expenses on account of repairs and maintenance is an on going process for a business such as the one run by the respondent assessee. Further, the quantum of amount spent can never be a factor by itself to conclude that the expenses are of a capital nature and not expenses on revenue account. In fact, this Court in the matter of Shorrock Spinning and Manufacturing Co. Ltd. v. CIT reported in 30 ITR 338 had observed that where the expenditure is incurred for preserving an existing asset and does not bring a new asset into existence it cannot be treated as capital expenditure. In this case also the expenses are incurred not for bringing any new asset into existence and therefore the expenditure is incurred not on capital but revenue account. 15) In view of the above, question (b) also does not raise a substantial question of law and the same is dismissed. Regarding Question (c) : 16) This question is purely consequential to the questions (a) and (b). As questions (a) and (b) are dismissed as not raising any ASN 10/11 ITXA-4700.doc Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:52:49

substantial question of law, question (c) is also dismissed. 17) The appeal is dismissed. No order as to costs. ( M.S. SANKLECHA, J. ) ( S. J. VAZIFDAR, J.) ASN 11/11 ITXA-4700.doc Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:52:49 Powered by TCPDF (www.tcpdf.org)