BILT PAPER HOLDINGS LTD, (FORMERLY ARP LTD) SECUNDERABAD vs. JOINT CIT, SPL RANGE I, HYDERABAD
What did the High Court hold?
The High Court held that the expenditure incurred for modernization and expansion of the company, increasing production capacity and improving product quality, should be treated as capital receipt under Section 36 of the Act, not revenue expenditure. Consequently, interest paid on borrowings for such purposes is also to be treated as capital receipt, following the principle in *Core Health Care Ltd.*. Therefore, substantial questions of law 1 and 2 were answered in favour of the assessee. Regarding the expenditure on issuing debentures, the Court held that as per Section 35D, debentures or debt instruments cannot be deducted as revenue expenditure but must be amortized over five years. This issue was also answered in favour of the assessee. However, concerning the written-back liability of the amalgamated company, Toscana Shoes Limited, the Court upheld the ITAT and CIT(A)'s findings that it is taxable under Section 41(1). This was based on the amendment to Section 41(1) by the Finance Act, 1992, where liabilities transferred at book value result in the benefit of earlier deductions passing to the amalgamated company. Writing back such a liability amounts to remission or cessation of a trading liability, taxable under Section 41(1). This issue was answered against the assessee.
What were the facts?
The assessee, BILT PAPER HOLDINGS LTD (formerly APR Limited), engaged in manufacturing and sales, filed its return for AY 1997-98 declaring a loss. The Assessing Officer assessed total income at Rs. 1,89,14,630/- under Section 143(3). The assessee had claimed finance charges of Rs. 36,64,17,761/- on borrowed capital for machinery purchase during expansion in FY 1994-95 as revenue expenditure. The Assessing Officer disallowed this, treating it as capital expenditure. The CIT(A) and the ITAT upheld the disallowance. The ITAT also confirmed the CIT(A)'s findings regarding disallowance of Rs. 16,33,14,533/- interest on borrowings for modernization-cum-expansion and Rs. 96,90,973/- expenditure relating to debentures, treating them as not deductible revenue expenditure but to be amortized under Section 35D.
What were the issues?
1. Whether, on the facts and circumstances, the ITAT was correct in holding that expenditure incurred on financial charges for raising capital for expansion, replacement of plant/machinery, and modernization is not revenue expenditure under the Act? 2. Whether, on the facts and circumstances, the ITAT was correct in holding that expenditure incurred by way of interest on borrowed capital is capital expenditure? 3. Whether, on the facts and circumstances, the ITAT was correct in holding that expenditure incurred on issuing debentures, admitted as a debt instrument, is not deductible as revenue expenditure but is to be amortized under Section 35D? 4. Whether, on the facts and circumstances, the ITAT was correct in holding that a liability in the books of an amalgamated company (Toscana Shoes Limited) written back by the appellant results in profit taxable under Section 41(1)? Assessee's contentions: The assessee argued that expenditure for expansion, replacement of plant/machinery, and modernization is capital expenditure. It relied on *Deputy Commissioner of Income Tax v. Core Health Care Ltd.* (2008) 2 SCC 465 for the proposition that interest on borrowed capital used for business purposes is deductible under Section 36(1)(iii), irrespective of whether the capital is used for capital or revenue assets. The assessee also contended that debentures, being debt instruments, should be amortized under Section 35D. Revenue's contentions: The revenue relied on cases like *Commissioner of Income-Tax, Tamil Nadu II, Madras v. Madras Auto Services (P) Limited* to argue that expenditure is revenue if it is for the purpose of business and not for acquiring an asset of enduring benefit.
Which sections of the Income-tax Act were involved?
Section 143(3),Section 36(1)(iii),Section 37,Section 35D,Section 41(1)
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
The Court delivered the following: JUDGMENT
IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD THE HON'BLE SRI JUSTICE P.SAM KOSHY AND THE HON'BLE SRI JUSTICE SUDDALA CHALAPATHI RAO ITTA.No.222 OF 2OO8 Dt. zo .02.2026 Between: Bilt Paper Holdings Ltcl Appellant and Joint CIT, SpI. Range I, Hyderabad Respondent JUDGMENT: (Per the Hott'bLe Sn ..il.stice Suddala Cholq)athi R..o) I. The present alrpeal has been liled challenging the orders passed by the Income Ta-x Appellate Tribunal, Hyderabad Bench 'B' in IT4.689 lHyd,r2OOO(AY- 1997-98), dt.26. tt 2OOT, wherein appeal filed by the assessee against the orders passed by CIT(A) rn,as dismissed.
The brief facts of the case are that the appellar-rt/ assessee is a company engaged in the brrsiness of manufacture and sale of l
-- 2 reyon grade pulp, laminated packaging systems, soya bean meal, soya solvent extraction oil, leather footwear, etc., and for the assessment Steat 1997 98, the appellant/ assessee liled return of income on 28.11.1997 declaring a loss of Rs.29,4O,5O,TZgl- and the Assessing Officer completed the assessment under Section 143(3) on the total income of Rs. 1,89,14,630 /- under the provisions of Section 143(3) of the Income Tax Act, 196 1 (for short 'the Act'). 3. it is further contended that the appellant/assessee has gone ahead with the expansion project cluring the financial year 1994- 9S(assessment year 1995-96) and in the course of its expansion. some of the rnachinery was purchased and the appellant/ asse ssee had claimed deduction in resErect of {lnance charges of Rs.36,64,17 ,7 6l I - on borrou.ed capital for the purchase of machinery, rvtrich r.vas a revenue expenditure and the Assessing Officer though admitted it u,as a case of expenditure on the existing business, ho.wever, deleteci the finance charges incurred on the borrowed capital and the said order was challenged before the Commissioner of Income 'I'iui(Appeals) (for short 'CIT(A)1
.) against the disallowance of interest on the borrowed capital, and the CIT(A) ri,as pleased to dismiss the said appeal. 4 . Challenging I he same, the appellant filed an appeal before the learned ITAT and the iearned ITAT considered the said expcnditure as incurred for expansion and hnartcial charges on the capital borrowcd and held that the said financial charges on the borrowed capital are not admissible as revenue expenditure. Further, the arnorrnt of Rs. 16,33,14,533/ paid by the appellant/ assessee towards interest on borrowings for modernization-cum-expansion progralrlme, the learned ITAT treating the said amount as financial charges incurred on the borrou,ed funds and confirmed the findings of the CIT(A) and therefore, sustained the disallou,ance of the said interest as revenue expenditure.
Further, the expenditure of Rs.96,g0,g73/ incurred by the assessce relating to debentures as claimed by the assessee lor deduction under Section 3SD of the Act to be revenue expenciiture, the learned ITAT confirmed the rrndings of the crr(A) ald dismissed the appeal on that ground also.
4 ?.
The appellant/assessee has assailed the order of the learned ITAT in the instant appeal and it was admitted by this Court to consider the following substantia-l question of law "
Wletler on the facts and circumstances of the case, th-e Income Tox Appellate Tibunal uas correct in laut in Lnlding that the expenditure inanned on financial charges uith respect to raising of capital for the purposes of expansion of the eisting business, replacement of plant and machinery and modemization is not reuenue expenditure under th.e prouisions of the Act
Wh.ether on the facts and circumstances of the case the Income Tox Appellate Tibunol u)as coffect in lana in lalding that the expenditure incurred by utay of interest on bonou-ed capital is/ uas capital expenditure
Whetlrcr on the facts and circumstances of the case the Income Tax Appellate Tibunal u)as correct in lou in holdirq that the expenditure incurred on issuing debentures uhich is admittedlg a debt instntment is not deductible os a reuenue expenditure but is to be amortized and considered under Section 35D of lhe Act.
Wlether on tlrc facts and ciranmstonces of the case the Income Tox Appellate Tibunal LUas correct in law in holding that the liabilitg thot stood in the books of M/ s. Toscana Shnes Limited, that amalgamated with the Appellant, uhich was uritten back by the Appellont results in profit taxoble under Section 41 (1) of the Act."
Heard Ms S.Sahithi, learned counsel representing Sri S.Ravi, learned Senior Counsel for appellant and Ms.B.Sapna Reddy, learned Senior Standing Counsel for Income Tax for respondent- State.
5
The learned counsel appearing for the appellant/ assessee contended that once an expenditure is incurred by the assessee for thc purpose ol expansion of the existing business for the replacement ol plant & machinery, it is capital expenditure and contended that the learned ITAT and the CIT(A) under misconception of lau, erroneously held that the said expenditure amounts to revenue expenditure, which is per se illegal and violative of provisions of the Act
The second ground urged by the learned counsel for the appellanL is that the accrued interest on the borrowed capital spent tou'ards replacement of plant & machinerv should also be treated as capital expenditure and does not amount to revenue expenditure
The third ground urged by the learned counsel for the appellant/ assessee that the expenditure on the debentures, 1S admittcdlv a debt instrument, cannot be deducted as revenue expenditurc. but is to be amortized and considered under Section 35D of the Act
6
In support of the said contention, learned counsel for the appellant/ assessee has placed reliance in the case of Deputg Commissioner of Income Tax, Ahmedabad. a. Core Health Cqre Ltd.t wherein the Hontrle Supreme Court held that 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(l)(iii) of the 1961 Act. Further, it was held that the very provision makes no distinction between money borrowed to acquire a capital asset or a revenue asset. AI1 that the section requires is that the asscssee 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, and sub-section (iii) envisages as 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. It is also held that an assessee is entitled to claim interest paid on borrowed capital provided that capital is used for business purpose ' (2008) 2 SCC 465
7 irrespective of *'hat rn ar, be the resurt of using the capital which the assessee has borrou,ed. The Hon,ble Supreme Court after appreciation or zrlr the relevant judgments has categorically herd that the amount, * hich was borro*,ed to*,ards buying of new machinerv rvould be falling under the capitar assets and interest accrued on the said capitat shall also amounts to capital receipt.
Learned counsel appearing for the appellant/assessee further submits that in the instant case, admittedly the amount has been borrou'cd for the purchase of machinerl , as such, said arnount should be treated as a capital amount, so also the accrued interest paid on the said borrouring is also to be treated as capital receipt.
Furthcr, learned counsel contends that the debentures are a debt instrument' *'hicl-r is not deductable as revenue expenditure but it is to be am.rtized and considered under Section 35D of the Act.
Per contra. icarned Senior Standing Counsel appearing for the respondent strltmits that in the case of Commfss ioner Of Income-Tax, Tamil Nadu Ir, Mad,as u. Mad.ras Auto services
8 (P) Limitedz wherein the Hon'ble Supreme Court observed that in order to decide .whether the expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure on a comrnercial point of view and rvhat advantage did the assessee therein get by constructing a building which belonged to somebod5r else and spending money for such construction. It was further observed that the said expenditure has to bring some kind of an enduring benefit to the company as revenue expenditure u,hen rhe expenditure did not bring into existence any capital asset fcr the company and the asset w'hich was created belonged to somebody else. Further, as the company derived an enduring busrness advantage by spending the sajd amount, and in ail cases of this nature, the expenditure has to be looked upon as having been madc for the purpose of conducting the business of the assessee more profitably or more successfully. Further, it is contended that in the said case also, since the asset created by sperrding the said amounts did not belong to the assessee but the assessee got the business advantage of ursing modern premises at a low rent, thus saving considerable revenue expenditure for the , (1998) 99 TTXMAN 575(SC)
9 next 39 years. [t is contended that by obserrring the above facts, the Hon ble supreme Court upheld the decision of both the Tribunal as n,ell as the High Court holding that the said amount which u'as borrou,ed and spent lor the use of business, would be a revenue expenditure and not a capital expenditure. The learned Senior Starding counsel contended that in the instant case though the expenditure has been brought in for purchasing plalt & machinery, it has becn used for the advantage of the company to yield benefit out of its buving, and as such, it would be a revenuc expenditure, but not capital expenditure. 15. l,carned Senior Standing Counsel further placed reliance on the judgment of the Madras High Court in the case of Commissioner of Incorne Tqx u. Ponni Sugo,rs and Chemicq.ls Ltd.s and contended that the subsidy u,hich was given was on revenue count l>ecause it u,as given by way of assistance in carrying on tradc or busincss and it u,as held that subsidy given was to meet recurring expenditure and it was not acquired for the capital asset and it u'as not to meet the part of the costs, it was not granted for produr:tion of or for bringing into any new asset. 3 (2008) 306 ITR 392 (SC) = r74 TAXMANN 575 {SC)
10 16. l,earned Senior Standing Counsel also relied upon the judgment of the Hon'ble Supreme Court in the case of Brooke Bond India Limited. us Commissioner Of Income Taxa and drawing a clue from the said judgment, contended that in the facts of the instant case are in similar lines with the Brook Bonds case (supra), as such the amount borrowed for purchase of the machinery should be treated as revenue expenditure but not capital expenditure.
Learned Senior Standing Counsel thus contended that the learned ITAT and the CIT(A) appreciated the said facts and dismissed the appeals and the said findings are proper and valid and does not warrant the interference of this Court.
We have given earnest consideration to the submission of the Iearned counsel appearing on either side and perused the material on record.
It is an admitted fact that the amount, which was borrowed by the appellant/ assessee rvas used lor modernization of the plant & machinery by replacing the old machinery for expansion of the ( 1997 (10) scc 36
1t existing business and for modernization of the existing unit of the assessee-companv. Admittedl,v, the assessee expanded the existing unit at Kamalapuram to increase the production capacity from 120 CPD to 260 CpD and to improve the quality of the product.
Further, in sinrilar facts of the insta,t case, the Hon,ble Supreme Court in Core Health Care Ltd.,s case(supra) nas categorically helcl as under: "The expression 'for the purpose ol business,, occurring in Scction 36(1)(iii) indicarcs rhar purpose of business" is satisfied the test of "for the respect of the capital oncc ln borrowed, the assessee n,ould be entitled to deduction under Section 36(1)(iii) of thc 196 I Act, This provision makes no distinctior-r betu,ccn moncv borrou,ed to acquire a capital asset or a revenuo asset. AII that the section requires is that the assessee must borros. capital and the purpose of the borrowing must be for bu siness which is carricd on by the assessee in the year o[ uccount_ What sub- section (iii) emphasizes is tht: user o[ t he capital and not the user of the asset qrhich comcs into cxistcncc as a result of the borrowed capital unlike St.ction 37 ,,vhich expressly excludes an expense of a capiral naturc. The legislature has, therefore, madc no distincrron in Scction 36(1)(iii) betrveen ,,capital borrou,ed for a revenue purpose" and ,,capital borrowed for a 12 capital purpose". An assessee is entitled to claim interest paid on borrou,ed capital provided that capital is used for business purposc irrespective of what may be the result of using the capital rrvhich the assessee has borrowed. Further, the words "actual cost' do not find place in Section 36(1)(iii) of the 196 1 Act rvhich otherwise hnd place in Sections 32, 32A etc of the 196 1 Act. The expression "actual cost" is defined in Section a3(1) of the 1961 Act which is essentially a dehnition section which is subject to the context lo the contrary. "
In that viern, of the matter, the expenditure, which was incurred for modernization and expzrnsion of the company in increasing the production capacity from 120CPD to 260 CPD, shall be treated as capital receipt under Section36 of the Act and not as a revenue expenditure. Insofar as the interest paid on the borrowings, the said amount \ rould also be treated as capital receipt in view of the law laid down in the aforementioned judicial precedent. 22 . Furthe r, the j udgments relied on by the learned Senior Standing Counsel for the Income Tax in Ponni Sugars and. Chemicals Ltd's case(supra), Madras Auto Seruices (P) Limited's case(supra), and Brooke Bond India Limited's case(supra), are not applicable to the facts of the present case ald
l3 are distinguishable, as in the instant case, rt is an admitted fact that the amount u,hich rvas borrowed has been used for exparsion and modernizatjon of the plant & machinerv by replacing the old machinery and to incrcase the production capacrty from 120 CpD to 260 CpD of the existing unit. In our considered view, the arnounts borrowed q,ould evidently be a capital receipt and interest paid there upon u,ould als,r be a capital reccipt. Thus, the contention of the learnecl counsel for the appellant/ assessee would be germane and valid. Accordingll., the said substantial questions of lau, No.I & 2 arc ansu.erecl in favour of the appellant/ assessee and against the respondent/ret enue.
Insofar as the .3*r ground of the expenditure incurred on issuing debentures is concerned, in vieu, of Section 35D of the Act, wherein it is specifically envisaged that the dcbentures or any debt instrument cannot be deducted as revenue expenditure, as it constitutes preliminarv expense for capital rarsing, and it has to be necessar,y amortized under Section 35D of the Act into five years. Hence. this point is also ansu.ered in far.our of the appellant/ assessee and against the respondent/ revenue.
As regards the fourth issue, the findings of the learned ITAT and CIT(A) that the liabilig, that originally stood in the books of M / s Toscana Shoes Limited and later carne to the appellant/ assessec upon amalgamation was written back by the appellant on the ground that no deduction in respect of this liability had been allowed in the assessee's own assessment. The learned ITAT upheld the Iindings of the CIT(A) that the said amount is taxable under Section 4 i ( 1), and are sustairrable ir1 vie-.v of the amenCment to Secti'--rn 41(1) by the Finarrce Act, 1992, as all assets ancl liabilities of the amalgamating companv are transferred to the amalgarnated c.-)mpany at book va-[ue. Consequerrtly, the benelit of deductions earlier clairned by the amalgamating company is deemed to pass on to the appellant/ assessee as u'ell. 'lherefore, when the appellant/ assessee writes back the liability that originated in the books of Toscana Shoes Lir.'rited, it amounts to remission or cessation of a trading liability', resulting in a benefit to the assessee in tl-re year of write back, u,hich is taxable under Section 4l (1). In our considered vie*', tfre appellant,/ assessee, canltot l4
I t : II : 5 avoid tax on thls amount' Hence' this point is ansr'r'ered against the appellant/ assessee arid in favour of the respondent/ revenue '
In r,ieu' of the above findings' the appeal is Partl1' allowed setting ilside the order of the learned ITAT in ITA.689/Hyd/2000(AY 1997-g8\' dt'26'rt 2OO7 ' insofar Nos.1 to 3, as noted hereinabove' No order as to costs' sequel, miscellaneous petitions pending' il any' shall S lSSr'lC Asa stand closed To, The lncome Tax One CC to Sri S One CC to Sri B Two CD CoPies Krrrrr l'Sl 1 I | 1.\1r1r-:rlsr l\"1Ir'llr;ttrltc '-,sfAJXt"+'i* ,t 1 2 3 4 ///I SECTION OF FICER App ellate Tribunal, Hyderabad Bench 'B'. HYderaoad Ravi, Senior Advocate [OPUCi Sapna ReddY, Senior SC for lncome Tax tOPUCI M I i I I I 1 II I I
HIGH COURT DATED: 2010212026 oo JUDGMENT ITTA.No.222 of 2008 PARTLY ALLOWING THE APPEAL Jr. t'1' {+,8 s i I urq 21,r, * t (1.
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