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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 28TH DAY OF MAY, 2021
PRESENT
THE HON'BLE MR. JUSTICE SATISH CHANDRA SHARMA
AND
THE HON'BLE MR. JUSTICE NATARAJ RANGASWAMY
I.T.A. NO.219 OF 2020
BETWEEN:
COFFEE DAY GLOBAL LIMITED NO. 23/2, COFFEE DAY SQUARE, VITTAL MALLYA ROAD, BENGALURU-560001 REPRESENTED HEREIN BY ITS DIRECTOR MRS. MALAVIKA HEGDE ...APPELLANT
(BY SRI. SURYANARAYANA T., ADVOCATE)
AND:
DEPUTY COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE 1(3), 3RD FLOOR, CR BUILDING, QUEEN’S ROAD, BENGALURU-560001.
DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-2(1)(1), BANGALORE,
BMTC BUILDING, KORAMANGALA 6TH BLOCK, BENGALURU-560085
ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE-2(1)(1) BANGALORE BMTC BUILDING, KORAMANGALA 6TH BLOCK, BENGALURU-560085. …RESPONDENTS
(BY SRI K.V. ARAVIND, ADVOCATE)
THIS APPEAL IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961, ARISING OUT OF THE ORDER DATED: 24.02.2020 PASSED IN ITA NOs.3040 AND 3041/BANG/2018, FOR THE ASSESSMENT YEARS 2013-2014 AND 2014-2015 PRAYING THIS HON`BLE COURT TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED IN THE APPEAL AND ALLOW THE APPEAL AND SET ASIDE THE IMPUGNED COMMON ORDER PRONOUNCED ON 24.02.2020 PASSED BY THE TRIBUNAL IN ITA Nos.3040 AND 3041/BANG/2018 (ANNEXURE- C) TO THE EXTENT QUESTIONED HEREIN, AND ETC.
THIS APPEAL COMING ON FOR FINAL HEARING THIS DAY, NATARAJ RANGASWAMY J.,
DELIVERED THE FOLLOWING:
JUDGMENT
This appeal is filed by the assessee challenging the order dated 24.02.2020 passed by the Income Tax Appellate Tribunal in ITA Nos.3040 and 3041/Bang/2018 in respect of the assessment years 2013-14 and 2014-15 respectively. By the aforesaid order, the Income Tax
Appellate Tribunal (henceforth referred to as ‘the Tribunal’) partly allowed the appeals filed by the revenue and upheld the disallowance of a sum of Rs.1,46,80,683/- ordered by the Assessing Officer under Section 36(1)(iii) of the Income Tax Act, 1961 (for short, ‘the Act’).
Briefly stated, the appellant filed its NIL return for assessment year 2013-14 which was taken up for assessment. The Assessing Officer passed an order of assessment dated 10.03.2016 disallowing a sum of Rs.1,46,80,683/-, which was interest on the borrowed capital on the ground that it was utilized towards work in progress. In respect of the assessment year 2014-15, the appellant filed its return of income declaring a loss of Rs.1,15,86,245/- which was taken up for scrutiny and an order of assessment dated 05.12.2016 was passed disallowing a sum of Rs.1,37,31,128/- which was a interest on borrowed capital. The assessee filed appeals before the Commissioner of Income Tax (Appeals) [henceforth referred to as ‘CIT(A)’]. CIT(A) passed an order dated
23.07.2018 in respect of the assessment year 2013-14 and set aside the disallowance by relying upon its own order in the case of the appellant for the assessment years 2011-12 and 2012-13. The CIT(A) in respect of the assessment year 2014-15, by its order dated 23.07.2018, allowed the appeal on the same terms as in respect of the assessment year 2013-14. Aggrieved by the aforesaid orders, the revenue filed appeals before the Tribunal. The Tribunal followed the order passed by the Coordinate Bench of the Tribunal in the case of appellant for the assessment year 2010-11 and reversed the order of the CIT(A) and upheld the disallowance made by the Assessing Officer.
The appeal was admitted to consider the following substantial question of law: Whether on the facts, in the circumstances and on the grounds and contentions urged, the Tribunal was correct in upholding the disallowance of interest on capital as attributable to capital work-in-progress relying on the proviso to Section 36(1)(iii) when the said proviso was inapplicable to
the case of the appellant and no part of the borrowed capital was utilized for investment in work in progress in any event?
The learned counsel for the appellant contended that in respect of the assessment of the appellant for the assessment year 2010-11, the very same substantial question of law came up for consideration before this Court in ITA No.315/2018 connected with ITA No.388/2018 and ITA No.313/2018. A coordinate Bench of this Court after considering the appeals held:
“9. It is well settled legal proposition that where interest free funds are available to the assessee and were sufficient to meet its investment, the presumption is that the investments were made from interest free funds available with the assessee. [See: RELIANCE INDUSTRIES LTD., SUPRA]. The assessee had made investment by way of share application money in one of its foreign subsidiaries i.e., A.N.Coffeeday. The investment which was made as on 31.03.2009 and 31.03.2010 was for an amount of Rs.14,32,75,766/- and Rs.17,47,54,752/- respectively. The assessee held its own funds to
the extent of Rs.17,47,54,752/- which were far in excess of the investment made in A.N.Coffeeday. Therefore, the presumption in law arises that the investments were made out of non interest bearing funds and burden was on revenue to show that investments were made out of borrowed funds. The revenue has not discharged the aforesaid burden. Therefore, it has to be presumed that the investments were made from interest free funds which were available with the assessee. It is also noteworthy that for Assessment Year 2008-09, the Commissioner of Income Tax (Appeals) had recorded a finding that investments made during the aforesaid Assessment Year including investments in A.N.Coffeeday as on 31.03.2009 were made out of the funds of the assessee, with reference to claim of disallowance under Section 14A read with Rule 8D(ii) of the Rules and therefore, the same conclusion ought to have been applied to Section 36(1)(iii) as well. Therefore, in the fact situation of the case, the remand by the tribunal to the Assessing Officer to examine whether the investments were made out of the funds of the assessee or from borrowed funds, is not warranted as the Assessing Officer for the Assessment Year 2009-10, the Assessing Officer on examination of the details furnished by the assessee had accepted the contention that
investment was made by the assessee out of the funds owned by it.
The Supreme Court in RADHASOAMI SATSANG Vs. COMMISSIONER OF INCOME- TAX’ (1992) 60 TAXMAN 248 (SC) has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through the different Assessment Years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. For the aforementioned reasons, the substantial question of law No.1 is answered in the negative and in favour of the assessee.
Now we may advert to the claim of the assessee in respect of upholding the disallowance of Rs.7,97,70,326/- as interest on capital attributable to capital work in progress relying on proviso Section 36(1)(iii) of the Act. The assessee is in the business of manufacture and trade in coffee and allied products. It has more than 1000 coffee shops with brand name 'Café Coffee Day'. The assessee had capital work in progress of Rs.59,41,92,500/- as on 31.03.2010 which represented various coffee shops being set
up which were in different stages. The Assessing Officer disallowed the interest on borrowed capital to the extent of Rs.7,97,70,326/- has been attributable to work in progress on the ground that the same will have to be capitalized along with cost of fixed asset. The order passed by the Assessing Officer was upheld by the Commissioner of Income Tax (Appeals) and the tribunal upheld the disallowance on the ground that in terms of proviso to Section 36(1)(iii) which was incorporated in the At with effect form 01.04.2004 the interest cost ought to have been capitalized.
It is pertinent to mention here that prior to amendment of Section 36(1)(iii) vide Finance Act, 2003, it is a well settled proposition of law that interest on borrowed capital utilized for the purpose of business or profession has be allowed irrespective of the fact that is towards extension or expansion. In this connection, reference may be made to decision of the High Court of Delhi in Monnet Industries Ltd. supra, which was upheld by the Supreme Court in a decision in (2012) 25 taxmann.com 236 (SC). In CIT VS. UP ASBESTOS LTD. supra Allahabad High Court held that were the assessee increased the capacity of its manufacturing plant, the proposed business was not an individual business but vertical expansion of present business. Therefore, Section
36(1)(iii) was amended by Finance Act, 2003 by inserting a proviso to curtail the deduction insofar as interest on borrowed capital is relatable to extension of existing business, which reads as under:
(1) The deductions 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—
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :
The word 'expansion' and 'extension' connote different meaning and legislature in its wisdom has used the terms differently under various provisions of the Act itself and therefore, the words cannot be used synonymously. In this connection reference may be made to Section 80- IC(2)(b) and Section 80-IE(2)(ii) where the expression 'expansion' is used and 'substantial expansion' is defined as increase in investment in plant and machinery by a specified percentage of book value of plant and machinery. In Section 35D(1)(ii) and proviso to Section 36(1)(iii) (prior to
its amendment in the year 2015), the legislature has employed the expression 'extension'. Therefore, prior to its amendment the extension of business was covered under Section 36(1)(iii) of the Act and not the expansion of business. In the instant case, the assessee has set up new coffee shops, which amounts to expansion of business and therefore, the bar under the proviso Section 36(1)(iii) is not applicable. It is only after the amendment of Section 36(1)(iii) of the Act with effect from 01.04.2016 the proviso can be attracted to the case of expansion of business which is not applicable to the facts of the case as the case of the assessee pertains to Assessment Year 2010-11.”
The learned counsel for the revenue did not dispute the aforesaid position of law as declared by a Coordinate Bench of this Court. Consequently, the substantial question of law framed in the present appeal is squarely covered by the Judgment of this Court dated 12.03.2021 passed in ITA No.315/2018 and connected appeals.
Hence the appeal is allowed. The substantial question of law framed by this Court is answered in favour of the assessee and against the revenue. In the result, the order passed by the Tribunal in ITA Nos.3040 and 3041/Bang/2018 dated 24.02.2020 to the above extent is quashed.
Sd/- JUDGE
Sd/- JUDGE
sma