In the computation of income filed along with revised return, the assessee claimed additional deduction on account of Rs. 1,97,290/- and Rs. 9,80,000/- on account of interest under Section 36(1) (iii) of the Act and upfront fees, respectively. This claim was made on account of loans raised for set up of a new unit at Baddi (HP). In the revised return a detail note was given at Serial No. 9 that the assessee has set up a new unit, for the purpose of which, the assessee incurred expenses on interest of loans and upfront fees of loan raised from financial institutions for establishing a new unit. It was admitted in the return that the new unit had not yet come into commercial production. However, the claim of the assessee was that the same is nothing but expansion of its earlier business under the same management and administration. The assessing officer, keeping in view, the admitted facts that the loan was raised for setting up a new unit for creating a capital asset which was yet come into production, the interest for the period prior to that could not be allowed as revenue expenditure for the purpose, Explanation 8 to Section 43 (1) of the Act which added retrospectively from 1.4.1974 was relied upon. Besides this, number of judgments of different High Courts were also referred to. In appeal, learned CIT(A) accepted the plea of the assessee. While holding in favour of the assessee that the new unit at Baddi(HP) was part and parcel of the existing business of the assessee and it was only expansion of the already existing activity.
Whether on the facts and the circumstances of the case, the Hon’ble Income tax Appellate Tribunal was justified in deleting the addition of Rs. 1,97,290/- on account of interest and Rs. 9,80,000/- on account of upfront fees by ignoring Explanation 8 to Section 43(1)?
Even a conjoint reading of Section 36(1)(iii) as existing prior to the proviso thereto and Section 43(1) explanation 8 clearly shows that any interest paid on the capital borrowed for the acquisition of an asset cannot be allowed as a revenue expenditure. The capital might have been borrowed by an assessee for the purpose of business. However, once it is admitted that a part thereof was used by the assessee for the purpose of acquisition of an asset, which is not in the form of replacement or modernization the interest component thereon upto the date it is first put to use has to be dealt with in terms of provisions of Section 43 (1) explanation 8 as otherwise cost of the asset shown in the balance sheet will not depict its true picture. This is in conformity with law and the accounting principles.
the substantial question of law arising in the present appeal is answered in favour of the revenue and against the assessee. The Division Bench judgment of this Court in Punjab Alkalies’s case (supra) is over-ruled.
In the High Court of Punjab and Haryana at Chandigarh
Income Tax Appeal No. 1 of 2003
Date of Decision: 21.01.2008
