COMMR.OF I.T.-I,HYD vs. A.P.GAS POWER COR.LTD,HYD

rdrge nrcx couRT FoR THE srATE oF TELANGANA AT HYDERABAD WEDNESDAY ,THE FOUR TEENTH DAY OF SEPTEMBER TWO THOUSAND AND fWerrffV fWO '- ' PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN THE HON'BLE SRI JUSTICE C.V. BHASKAR REDDY tNco ETAXT RIBUN APPE NO:135 03 F Appeal Under Section 260-4 of the lncome Tax Act, 1g61 arising out of the order of the lncome Tax Appellate Tribunal, Hyderabad Bench ,,B,, , Hyderabad in r'T.A. No. 668 r Ht 2ooo dated 31-05-2002 for Assessment year 1997 -98 preferred against the order of the commissioner of rncome Tax ( Appears ) rv Hvderabad dated 8-09-2000 in Appear No. 1 13 / Jc.sRI / crr (A) rv 12000-01. Between: The Commissioner of lncome Tax , Hyderabad _ | AND ...APPELLANT l*i3"t!i ??i5,""9::"o'0"'"tion Ltd , Frat No. 202,2"d Froor, pancom chambers, C.oun_s_e-l for the Appeltant: SRl. B. NARASIMHA SARMA REPRESENTING Ms. K.Mamatha Choudhary Counsel for the Respondent: SRI CHALLA GUNARANJAN The Court made the following: ORDER ..,RESPONDENT

THE HON'BLE THE CHIEF JUSTICE UJJAI BHUYAN AN.D THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY I.T.T.A.No. 135 of 2003 JUDGMENT.. fp"'the Hon'b/e the Chief Justie Ltjjal Bhulan) Heard Mr. R.Narsimha Sarma, learned counsel represcnt-ing N{s. I(.N{amata Choudhan,, learncd counsel for thc appcllant and NIr. Challa Gunaranjan, learned counscl lor thc respondent This appeal has becn preferred under Sccuon 260-A of the 2 Income Tax Act, 1961 (briefly 'thc Act' hercinaftcr) assaihng the legality and correctoess of the order dated 31.05.2002 passed b1'thc Income Tax Appcllate Tribunal, Flydcrabad Rcnch 'B', Flyderabad ffribunal) in I.T.A. No.668/FIyd/2000 for the assessment year 1,997 -98. 3. The followrng substanual questions of law have been proposed by the revenue in the present appeal: 1. Whether on the facts and in the circumstance sof the case the lribunal is lusufied in law in holding that the expenses like financial charges, commissiorr charges, interest etc. incurred during tl.re pre-production pcriod in -t ./

2 connecdon with setttng up of a new unit are allowable as deduction u/s.36 (1)(rii) of the LT.Act ? 2. Whether on the facts and in the ckcumstances of the case the Tribunal is legally justified in holding that the finance charges etc. are allowable as deducrion u/s.36(1)@) of the I.T.Act especially when the entire expenditure is capiralrzed in the books of account duting the pre-operarive period ? 4. On 03.09.2003, the appeal was admitted. 5. -fhus, the question beforc us is whether expenses incurred by during thc pre-producuon period in connection with AN AS SCS SCC setung up o[ anv unit arc allowable deductions under Section 36(1xii, of thc Act. 6. T'o apprcciate the above question, we may briefly refler to the orders passed by the revenue authority 7. Respondent before us is M/s. Andhra Pradesh Gas Power Corporauon Limited, afl assessce under the Act having the status of a Company. -lhe assessment vcar under consideration is 1997 -98. In the assessment proceedrngs [or the said assessment year,. assessing officcr dec[ned to allow interest and revenue expendirure \

-1 /7 / to the extent o1Rs.17,77,25,085.00/- claimed to havc been incurred by the assessee in the pre-production period of the additional/expanded plant oI the asscssec. Holding that asscssee had capitaLized the above expenses, assessing officer uide the assessment order dated 18.03.2000 decLined to extend thc beneFrt both under Secrion 36(1)(tii) as well as under Section 37(1) ol the Act. 'Ihis was carried by the assessee in appeal before the Commissioner of Income Tax (Appeals)-IV, I-Iyderabad (briefly 'CIT(A)' hereinafter) view taken by the assessing officer on principlc, but directed the assessing officcr to work out thc acrual cxpcnditure aftcr apportioning the expenditure to the acual cost of various plants, machineff etc. It was therealter that assessec prelcrred lurthcr 9. In the order dated 31.05.2002, Tribunal recordcd a specific finding of lact that the plaot being set up b,v thc asscssce for rvhich thgxxpenses were incurred was only lor expansion of the existrng -- 8. Bv the appellate order dated 08.09.2000, CI-1'(.\) affirmcd the appeal bclore thc Tribunal.

I plant of the asscssee. In other words, it was not a new unit. In so lar thc intercst paid bv thc assessec,'fribunal held that the same was allowable undcr Scctron 36(1)0x) of the Act. After declining to expenditure incurred 1n 'ptofe ssional consultancy', claim of Rs.17,04,00,835.00 was allowed under Secdon 36(1)(*) of the Act. 10. Section 36(1)(iiD of the r\ct rcads as under: 36. Other deductions:- (1) 1'he deductions provided for in the following clauses shall be allorved in re spect of the matters dealt with therein, in computing the income referred to in Sccuon 28 - [n) the amount of thc interest paid in respect o[ capital borrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect of capital borowed for acquisition of an asset for extension of existing business or profession (whether capital-rsed in the books of account or not); grant relief for an amount o[ Rs. 73,24,250.00 on account of \ \

7 5 for any period begrnning from the date on which the capital was borrowed for acquisition of the as-set till the date on which such asset was fust put to usc, shall not be allowed as deduction. 1,1. From the above, it is evidenr that the amounr of interest paid 1n respect of capital borrowed for the purpose of business OT profession is an allowable deduction. This position has nou'been clarified by the Supreme Court in Depury Commissioner of Income Tax v Core Health Care Ltd1, in the follou,'rr-rg terms: In our view, the above observations have to be confined to the facts in the case of Challapalli Sugars Ltd. v. CIT ((1975) 3 SCC 572). It was a case where the company had n<-rt 1'et startcd production when it borrowed the amount in clucstion. The more appropriate decision applicable to tl-re present case would be the judgment. of this Court in the casc of India Cements Ltd. v. CIT ((1966) 60 ITR 52 (SC)) in which it has been observed that, fbr considering whether payment of interest on borrowing is revenue expenditure or not, the Purpose for which the borrowing is made is irrelevant. in our view, Section 36(1)(il) of the i961 Act has to be read orr its own teffns. It is a Code by itself. ! t 12008) 2 SCC 465

6 Secdon 36(1)(u) attracted when the assessee 1S borrorvs the capital for the pulpose of his business. It d o oes not mattcr wjrether rhe capital is borrowed in rder to acquirc a rcvcnue asset or a capital asset, ecausc of that the section requires is thit the I) assessee must borro[r thc his business..fhis dichoto capital fot the purpose of or a roan and actuar ,I,,:,I:"lr':::r:"T: purchase of a capital asser, seems to proceed on the basis that a rnere tuansacd( by itserr bring any n.*,,,1: ;ij"rff:^H ;': exlstence, and that it is the ffansaction oF investment of the borrowed capital in the purchase of a new asser which brings that asset into existence. The tansaction of borrowing is not the same as the transaction of invesrmenr. If rhis dichoromrr i" r--_. :_ becomes crcar that,rj"Hl,::j":rt:"T;:"; attracts rhe provisions of Secdon 36(l)(ur) of the Act. Thus, rhe dccision of the Bombay High Court in Calico Dyeing & printing Works v. CIT (1953) 34 ITR 265 (Bom)) and rhe ludgment of the Supreme Court India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC)) have been given with reference to the borrowings made for th busrness, wh,e the a..iriolffi. il,.:. #:: Challapalli Sugars Ltd. v. CIT ((1975) 3SCC 572) was given with reference ro the borrowings which I I

7 7 could not be treated as made for the purposes of business as no business had commenced in that case. Therefore, there is no inconsistency berween the above decisions. 12. That being the position, we hnd no merit in this appeal. Appeal is accordingly dismissed. No costs As a sequel, misceilaneous petitions, pending il anr,, stand dismissed ,TRUE COPY// sDi-B.S.CHlRAi{.,eevt JOrNT REGIpTRAR sEcnoN b/rr,".* Toi. fh" lncome Tax Appellate Tribunal , Hyderabad Bench B Hyderabad' i. riil Corris.ion"i bf lncome Tax ( Apieals^) lV , Hvderabg^d.. .^. 5. d; C-C i; 5r.1 a. NlnnnslMHA SARMA, SC for l T. Qept (oPUC) i. 6i',,JcCtiisit. cHnlm cUNARANJAN Advocate toPUC] 5. Two CD CoPies 6. One SPare CoPY A- \\

HIGH COURT DATED:21 10912022 --=a:-- - i, 1Hu c JUDGMENT 2 B Bti u0,2 ITTA.No.135 of 2003 n^A \ 1l .t \(" DISMISSING THE TTTA WITHOUT COSTS );'l \to\.'- /'--) I t,/