Additional machine for carrying out freeze-drying process entitled to enhanced depreciation

Accelerated Freeze Drying Co. Ltd. Vs ACIT (Kerala High Court)

Kerala High Court held that additional machines employed for carrying out the freeze-drying process entitled to enhanced depreciation at 20% under section 32(1)(iia) of the Income Tax Act. Appeal allowed, accordingly.

Facts- Appellant, an exporter of premium food products, is an assessee under the Income Tax Act, 1961. Appellant had for the Assessment year 2013-14 filed returns declaring a total income of Rs.2,42,34,820/-. While completing the assessment u/s. 143(3) of the IT Act, the assessing authority made certain disallowances and assessed the total income at a higher amount of Rs. 2,82,54,559/- and penalty proceedings u/s. 271 (1) (c) of the IT Act were initiated. Appellant challenged the assessment order before the First Appellate Authority which was allowed in part. Since claims under two heads made by the appellant were disallowed by the First Appellate Authority, to the said extent, appellant took up the matter before the Tribunal. The Tribunal dismissed the appeal vide Order dated 14.11.2018 and the said Order is impugned in this appeal.

Conclusion- Held that the activity of ‘accelerated freeze drying’ employed by the appellant in their plants, transforms the raw material into a new and distinct object or article or thing having a different character and brings into existence a new and distinct object or article. The same is different from the processing undertaken in seafood processing plants. Thus, the activity indulged in by the appellant is thus a business of manufacture or production as stipulated under Section 32 (1) (iia) of the IT Act. In so far as there is no dispute that the additional machines for carrying out the freeze-drying process were added during the subject assessment year, the appellant is entitled to the enhanced depreciation at 20% claimed by the appellant under Section 32 (1) (iia) of the IT Act.

Held that that the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purpose, the assessee would, ordinarily be entitled to a deduction of interest on its borrowed loans.

FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT

This appeal is filed challenging the Order dated 14.11.2018 of the Income Tax Appellate Tribunal, Kochi in ITA No.165/Coch/2018-AY 2013-14.

Brief facts:

2. Appellant, an exporter of premium food products, is an assessee under the Income Tax Act, 1961 (IT Act). Appellant had for the Assessment year 2013-14 filed returns declaring a total income of Rs.2,42,34,820/-. While completing the assessment under Section 143(3) of the IT Act, the assessing authority made certain disallowances and assessed the total income at a higher amount of Rs. 2,82,54,559/- and penalty proceedings under Section 271 (1) (c) of the IT Act were initiated. Appellant challenged the assessment order before the First Appellate Authority which was allowed in part. Since claims under two heads made by the appellant were disallowed by the First Appellate Authority, to the said extent, appellant took up the matter before the Tribunal. The Tribunal dismissed the appeal vide Order dated 14.11.2018 and the said Order is impugned in this appeal. The following substantial questions of law are raised for consideration:

“C. Substantial Questions of Law

On the facts and circumstances of the case :

1. Did not the Appellate Tribunal err in law in not following the ratio of binding judgment in Marwell Seafoods case that the activity of the appellant fell within the scope of the words “manufacture or production of any one or more of the articles of things” entitling the appellant to the benefit of Section 32(1)(iia) of the I.T.Act, 1961?

2. Did not the Appellate Tribunal err in law in not considering the legislative intent in using the words “manufacture or production of any one or more of the articles or things” appreciating in Section 32(1)(iia) and other provisions of the I.T. Act, 1961 where entitlement to benefits to assessees were provided, was to attribute the same meaning uniformly to the said words?

3. Did not the Appellate Tribunal err in law in construing that the benefit under S.32(1)(iia) of the I.T. Act was available only if there is “manufacture” and in ignoring the plain words of the statute viz., the words “production of the articles or things” used in the statute ?

4. Did not the Appellate Tribunal err in law in giving a restricted meaning to the words “for the purposes of business” appearing in S.36(1)(iii) of the I.T.Act, 1961 when there was no such statutory mandate to give such a restricted interpretation?

5. Was the Appellate Tribunal correct in refusing the benefits entitled to the appellant after ignoring the plain meaning of the words of the statute?

6. Did not the Appellate Tribunal err in law in not following the well settled and cardinal rule of interpretation of statutes that if same words are used more than once in the same statute, the intention of the legislature must be seen as to give the same meaning to the words at each place where they appear in the statute?

7. Did not the Appellate Tribunal err in not applying its mind to the interpretation of statutory provisions and by not examining the facts of the case especially when the Appellate Tribunal was the last fact finding authority?

8. Did not the Appellate Tribunal err in relying on irrelevant matters and in not considering relevant matters while passing Annexure A4 order ?”

3. We heard Sri.C.K.Karunakaran, learned Senior Advocate on behalf of the appellant and Sri.Jose Joseph, learned Standing counsel for the respondent.

4. The learned Senior Advocate appearing on behalf of the appellant contended that the disallowance of the two heads of the claim was erroneous and legally unsustainable. The said two claims were the following:

(i) Claim for Rs.13,99,176/- as additional depreciation claimed under Section 32 (1) (iia) of the IT Act for new plant and machinery.

(ii) An amount of Rs.11,71,726/- claimed as interest on borrowed funds under Section 36 (1) (iii) of the IT Act.

5. The contentions put forth by the learned Senior Advocate can be briefly summarised as follows:

Contentions on the disallowance for additional depreciation:

• The Tribunal had made the disallowance on the mistaken notion that the appellant is merely another ‘Seafood processing plant’, which the appellant is not.
• The Tribunal had erroneously concluded that the appellant’s plants were engaged in a process akin to the processing of seafood, which led the Tribunal to conclude that “Processing of raw shrimps, fish, etc. would not tantamount to production.”
• The reasoning of the Tribunal that, since the appellant had withdrawn an earlier challenge put forth against a similar Order of the Tribunal concerning 2012-13 and had chosen to pay the income tax for the said year which had similar disallowances, would act as a bar against the present challenge is unsustainable both on law and facts. The amount involved in the said assessment year was too meager and the appeal was not with pursuing. That the principle of estoppel is alien to Income Tax jurisprudence, is trite and settled.
• Appellant is one of the few processing plants in India (and till recently the only such plant in Kerala) that undertakes a unique process known as ‘accelerated freeze drying’ which involves the use of expensive machinery.
• The Tribunal erred in reckoning the appellant as a mere seafood processing plant that undertakes peeling, cleaning, and freezing of seafood. Raw materials received in the appellant’s plants are already cleaned and processed and no pre-processing activities like peeling, deveining, etc. are undertaken by the appellant.
• Seafood is only one among the different raw materials that the appellant uses in its plants to manufacture finished goods. The appellant also uses pepper, lemon grass, curry leaves, vegetables and fruits. So comparing the appellant to a ‘seafood processing unit’ is a mistake.
• The said process of ‘accelerated freeze drying’ undertaken in the appellant’s plant satisfies the requirements of Section 2 (29BA) of the IT Act which defines a “manufacturing process”. It also meets the mandates of Section 32 (1) (iia) of the IT Act under which exemption was claimed and was erroneously disallowed.
• The Tribunal overlooked the specific contentions/averments put forth by the appellant to convey that the process undertaken by it was ‘manufacturing/ production’.
• The value addition that occurs to the raw material once it undergoes the process of ‘accelerated freeze drying’ was not taken note of by the Tribunal though the substantial difference in the average raw material price and the selling price of the products of the appellant, after accelerated freeze-drying had been highlighted. Equating the process with a mere ‘seafood processing’ is thus erroneous.
• The Tribunal failed to appreciate the nature and complexity of the manufacturing process undertaken in the appellant’s plants and the huge capital expenditure required to build and erect sophisticated plants to enable ‘accelerated freeze drying’. Tribunal mistakenly understood it as a mere cleaning, deveining, and freezing process.
• Reliance placed by the ITAT on the dictum of the Supreme Court in various decisions including CIT, Trivandrum v. Relish Goods [(1999) 3 SCC 167] and CIT, Trivandrum v. Kala Cartoons Pvt. Ltd. [(2003) 11 SCC 339] and the judgment of this Court in CIT v. Marwell Sea Foods [1987 (1) KLT 696], CIT v. Bharath Sea Foods (1999 SCC OnLine Ker. 559) and CIT v. Poyilakada Fisheries [1999 (3) KLT 317] is misplaced and erroneous.
• The Tribunal ought to have noted that the dictum in the case of Marwell Sea Foods (supra) had no applicability as it was a decision rendered before the amendment that added Section 2(29 BA) defining ‘manufacture’ to the statute book with effect from 01.04.2009. Further, the question of law involved in the said case and considered by this Court was wholly unrelated to the issue in the case at hand. ITAT thus entirely misconstrued the ratio of the said judgment and applied it to the appellant’s case.

Contentions on the disallowance of interest on borrowed  funds:

• The Tribunal erred in disallowing the claim of interest of Rs.11,71,726/- which had been claimed by the appellant as ‘interest on borrowed funds’ and in holding that no interest was charged by the appellant for the funds lent to M/s Keya Foods International (P) Ltd.
• The Tribunal failed to consider the scope of Section 36 (1) (iii) of the IT Act, which stipulated a deduction for ‘the amount of interest paid in respect of capital borrowed for the purposes of business or profession.’
• Specifically, the Tribunal erred in interpreting the words ‘for the purpose of business’ as used in Section 36 (1) (iii) of the Act and misconstrued the legislative intent behind their use.
• The Tribunal ought to have appreciated that the deduction sought by the appellant was for the cost of borrowed funds, and as long as the appellant had incurred such a cost, such deduction was allowable in law.
• The Tribunal ought to have appreciated that the appellant assessee, by its act of lending money that it had borrowed from M/s. Indo-Nissin Foods (P) Ltd. to M/s.Keya Foods International (P) Ltd. was acting specifically in the interest of the assessee’s business. It was thus an activity that squarely falls within the terms ‘for the purpose of business’ as used in Section 36 (1) (iii) of the Act.
• The Tribunal failed to note that as revealed from the balance sheet of the appellant assessee, it had already borrowed the maximum possible amount from various banks, and all its assets, including personal assets of its promoters, were secured for loans. Since no bank would have provided unsecured debt to the tune of Rs.3,30,00,000/-, and the high interest rates for term loans already availed by the appellant assessee were high, it was financially prudent for the appellant assessee to borrow amounts from M/s. Indo-Nissin Food (P) Ltd. at a reasonable rate of interest, which loan was promptly repaid by the appellant.
• The ITAT ought to have noted the substantial business advantage that had accrued on the appellant assessee, by lending money that it had borrowed from M/s. Indo-Nissin Foods (P) Ltd. to M/s.Keya Foods International (P) Ltd. (formerly known as M/s.Amalgam Speciality Foods (P) Ltd.)
• Due to the receipt of money from the assessee, M/s. Keya Foods International (P) Ltd. could augment its resources and be empowered financially to subscribe to the capital of its subsidiary company, M/s.Keya Speciality Foods (P) Ltd.
• The net effect of the transactions that followed was to augment and improve the monetary standing of the appellant and its subsidiary/ group companies and this was an act of commercial prudence and expediency thus falling with the fours of Section 36 (1) (iii) of the IT Act and thus eligible for deduction.
• The Supreme Court has interpreted the term ‘for the purpose of business’ as used in Section 36 (1) (iii) of the IT Act in various decisions and has held that the relevant aspect to be examined is whether the interest-free funds were extended to the subsidiary out of ‘commercial expediency’. (Reliance is placed on the judgments in A.Builders Ltd. v. Commissioner of Income Tax (Appeals) Chandigarh and another (AIR 2007 SC 482); Hero Cycles (P) Ltd. v. Commissioner of Income Tax (Central) Ludhiana [(2015) 16 SCC 359)].

6. Per contra, the learned Standing Counsel Sri.Jose Joseph appearing for the respondent contended that the Order of the Tribunal does not require any interference as the same has been validly and correctly rendered following settled precedents. Most of the contentions now put forth in the appeal are raised by the appellant assessee for the first time and the same were never raised before the Tribunal or the other authorities. Appellant assessee had a duty to raise the same before the Tribunal and without doing so, an entirely new case has been put forth before this Court based on materials now produced. The contentions put forth raise only factual questions and the same are not questions of law. As regards the uniqueness of the so-called process undertaken by the appellant, the learned Standing Counsel relies on the dictum of the Supreme Court in Relish Goods (supra) and of this Court in Poyilakada Fisheries (supra). Basing on the said dictum he contends that since by the process of ‘accelerated freeze drying’ claimed to have been undertaken by the appellant in its plant, the nature of the product is not altered, the same cannot be termed as ‘manufacture or production’. He contends that there is no change occasioned to the identity of the product and it remains the same, except may be for the fact that the water content thereof has been removed. The said cannot be termed as conferring any ‘value addition’ in its real sense. As regards the disallowance of interest on borrowed funds, the learned Standing Counsel vehemently contends that the chain of transactions indulged in by the appellant assessee and its sister concerns are only a device for profit sharing and that the assessee has not used the borrowed funds for any type of business purpose of itself and has only diverted the said funds to another concern in its group which had used the said amounts for further investments. The funds had been transferred from one company to another in such a way that the profit of each company was reduced and the assessee, which as per its own financial statements had ample resources, had no reason to avail loan from a loss-making company and to advance it to another loss-making company. All these transactions according to the learned Senior Counsel are mere charades and lack any ‘commercial expediency’ entitling the appellant to claim any disallowance under Section 36 (1) (iii) of the Act. The learned Standing Counsel for the department thus seeks a dismissal of the appeal with costs.

7. We have been taken through the relevant material on record including the Assessment Order, Order of the CIT (A), Kochi and the impugned Order of the ITAT in the appeal. We have also perused the affidavit accompanying the interlocutory application and the annexures produced therewith by the appellant assessee in this ITA. We had the benefit of hearing the submissions made by the learned counsel on both sides.

Discussion and finding:

Whether the process of ‘accelerated freeze drying’ could be termed as ‘manufacture’ or ‘production’?

The first challenge raised by the appellant concerns the disallowance of Rs.13,99,176/- claimed as additional depreciation under Section 32 (1) (iia) of the IT Act. Section 32 (1) (iia) of the IT Act, to the extent relevant to our discussion is reproduced hereunder:

“(iia): in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing  or in the business of generation, transmission or distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) :” (emphasis added)

Admittedly the assessee had acquired and installed new machinery and plant for ‘manufacture’ employing the process of ‘accelerated freeze drying’ subsequent to the period mentioned in the above provision. The only question is whether such machinery and plant can be termed to have been used by the appellant assessee while engaging in the commercial activity of ‘manufacture or production of any article or thing’, so that the benefit of deduction as envisaged in Section 32 (1) (iia) of the IT Act would ensure on him. To answer this question, it is necessary to examine the scope of the terms ‘manufacture’ and ‘production’ as used in Section 32 (1) (iia) and to decide whether the activity indulged in by the assessee would come within the said two terms.

9. The term ‘manufacture’ is defined under Section 2(29BA) of the IT Act and it reads as follows:

Section 2(29BA) “‘manufacture’ with its grammatical variations, means a change in a non­living physical object or article or thing,-

(a) resulting in transformation of the object or article or thing into new & distinct object or article or thing having a different name, character and use ; or

(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.” (emphasis added)

10. The word ‘Production’ has not been defined in the IT Act. It will have to be given its dictionary meaning. In the Oxford English Dictionary, New 8th Edn., the meaning of the word ‘Production’ has been stated as “the process of growing or making food, goods or materials in large quantities.”. Can the processing of raw materials like seafood, vegetables, fruits, lemon grass etc., by employing the method of ‘accelerated freeze drying’ as claimed to have been undertaken by the appellant in its plant, be termed as ‘manufacture’ or ‘production’ or is it an activity which is only to be equated with what is signified as ‘processing’ as undertaken in any other Seafood processing plant? If it is just the latter, then as per the settled law, such activity will not tantamount to ‘manufacture’ or ‘production’ and this would disentitle the appellant from relying on Section 32 (1) (iia) of the IT Act and from claiming any deduction thereunder. On the other hand, if the activity viz., ‘accelerated freeze drying’ carried on by the appellant in its plant is ‘manufacture’ which results in the transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use or a new and distinct object or article or thing with a different chemical composition or integral structure, then the appellant would be entitled to invoke and avail the benefit of deduction under Section 32 (1) (iia) of the IT Act.

11. While engaging in the above-said inquiry, it requires to be borne in mind that ‘manufacture’ is a term capable of having connotations beyond its mere semantic meaning. For instance, from the viewpoint of the person engaged in the relevant business, what does ‘manufacture’ connote? When he ventures to enable such activity and incurs capital expense in the said respect, what uniqueness or distinctness does he intend to create/ effect in the commodity, article, or thing? Does it involve a value addition and if so what is the nature, impact, and extent of the same? For instance, from a commercial point of view, raw shrimp and processed shrimp are different. To constitute ‘manufacture’ or ‘production’ in the sense the said words are used in Section 32 (1) (iia), the shrimp when subjected to the ‘accelerated freeze drying’ must lead to a product that is new and distinct from raw shrimp or processed shrimp. It would also suffice, if after the process of ‘accelerated freeze drying’ the chemical composition or integral structure of shrimp is altered thus enabling it to be termed as new or distinct when compared to its original form. Does such an activity or transformation take place in the plant erected by the appellant?

12. It is seen from the records that all along and up till the Tribunal, it has been the specific contention of the appellant that they employ in their plant, the method of ‘accelerated freeze drying’ for processing raw materials including fruits, vegetables, spices and seafood and that they export such freeze-dried products after such value addition. The said process, they had contended, is different from the mere cleaning, deveining, and freezing as undertaken in ordinary seafood processing plants. The end product after such process of accelerated freeze drying is new and distinct and it has a different character and use. The appellant had also specifically contended before the Tribunal that the terms ‘manufacture’ or ‘production’ as used in Section 32 (1) (iia) ought not to be narrowly interpreted to exclude the activity carried out in the plants of the appellant. The Orders issued by the Assessing officer, the CIT (A) and the Tribunal do not, however, reveal that the said contentions put forth by the appellant assessee had been taken note of or that they had engaged in an exercise to ascertain the nature and method of whether the process of ‘accelerated freeze drying’ had any uniqueness which differentiated it from the standard seafood processing. It is seen that they had without a proper application of mind and mechanically followed the dictum as laid down in Relish Goods (supra) and Poyilakada Fisheries (supra) and other cases, which did not strictly apply to the facts of the appellant’s case. Before us, the appellant has further elaborated on their said contentions and convincingly explained that freeze drying is a process in which water is sublimated by the direct transition of water from solid ice to vapour, thus omitting the liquid state. Water is then absorbed from the “dry” layer thus ensuring that the quality of the dried product (biological, nutritional and organoleptic properties) is retained. The product resulting therefrom is unique, new and substantially different from the raw material. We hence have no hesitation in concluding that the activity of ‘accelerated freeze drying’ employed by the appellant in their plants, transforms the raw material into a new and distinct object or article or thing having a different character and brings into existence a new and distinct object or article. The same is different from the processing undertaken in seafood processing plants.

13. The terms ‘manufacture’ or ‘production’ as used in Section 32 (1) (iia) ought not to be narrowly interpreted at all times. Beyond the semantics, the meaning that could be attributed to ‘manufacture’ will be influenced by the viewpoint and actions taken by the person engaged in the relevant business. When a businessman ventures to create a unique or distinct product, the term ‘manufacture’ cannot continue to be understood in a pedantic and narrow sense. It must take its colour and meaning from the uniqueness or distinctness of the commodity, article or thing created and the speciality of the process that leads to its creation.

14. The activity indulged in by the appellant is thus a business of manufacture or production as stipulated under Section 32 (1) (iia) of the IT Act. In so far as there is no dispute that the additional machines for carrying out the freeze-drying process were added during the subject assessment year, the appellant is entitled to the enhanced depreciation at 20% claimed by the appellant under Section 32 (1) (iia) of the IT Act. We find so accordingly and proceed to consider the contentions put forth regarding the second disallowance concerning the deduction on interest paid.

15. Whether the borrowal and lending effected by the assessee reveal ‘commercial expediency’ and augmenting of its ‘business interests’?

The second challenge raised by the appellant concerns the disallowance of Rs.11,71,726/- claimed as interest on borrowed funds under Section 36 (1) (iii). Section 36 (1) (iii) to the extent relevant for our discussion is reproduced hereunder:

“36. Other deductions: – (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 –

xxx

(iii) the amount of interest paid in respect of capital borrowed for the purposes of the business or profession.” (emphasis added)

Thus, to claim a deduction under Section 36 (1) (iii), the amount borrowed must reveal commercial expediency that would further the assessee’s business interests. Was this requirement met in the case of the appellant assessee is the question to be looked into.

16. The appellant assessee had on commercial terms borrowed Rs.3,30,00,000/- from M/s. Indo Nissin Foods (P) Ltd. at 9% interest. An amount of Rs.11,71,726/- had been thus paid towards interest by the appellant. The said borrowed amount of Rs.3,30,00,000/- was later repaid by the assessee back to M/s. Indo Nissin Foods (P) Ltd. on 23.11.2013. Whether that transpired in the interregnum of availing the loan and paying in back could be termed as an act of commercial expediency furthering the assessee’s business interests is the question to be considered.

17. Upon receipt of the above-said loan, the appellant assessee had in the interests of its business extended a loan of Rs.3,30,00,000/- to group company viz., Amalgam Speciality Foods Pvt. Ltd. (subsequently renamed as M/s.Keya Foods International (P) Ltd.). The said entity had used part of that amount so borrowed by it, for investing in the capital of M/s.Keya Speciality Foods (P) Ltd. which is an associate company of the appellant assessee and substantially owned by M/s.Amalgam Speciality Foods Pvt. Ltd. (subsequently renamed as M/s.Keya Foods International (P) Ltd.). By virtue of such capital infusion, M/s.Keya Speciality Foods (P) Ltd., which owned no fixed assets and hence could not make any business borrowings till then, got spruced up and became attractive enough for M/s.Amalgam Speciality Foods Pvt. Ltd. (subsequently renamed M/s.Keya Foods International (P) Ltd.) to increase its paid-up capital in the former. Consequent to this availability of additional capital, there was a substantial increase in the revenue and funds available for the operation of M/s.Keya Speciality Foods (P) Ltd. This in turn attracted investors and the shares of M/s.Amalgam Speciality Foods Pvt. Ltd. (subsequently renamed M/s.Keya Foods International (P) Ltd.) which by now became the owner of the brand Keya Foods was purchased for a total consideration of 24 Crores. Further, the share holding of M/s.Keya Speciality Foods (P) Ltd. in M/s.Amalgam Speciality Foods Pvt. Ltd. (subsequently renamed M/s.Keya Foods International (P) Ltd.) were sold by its purchasers at a lower valuation to Amalgam Foods Ltd. It could be seen from the above-mentioned transactions that substantial commercial benefit had accrued on the appellant assessee its subsidiary and group Companies by availing of the loan of Rs.3,30,00,000/- from M/s. Indo Nissin Foods (P) Ltd. at 9% interest and the appellant was also able to repay the said borrowed amount.

18. The law on the point laid down by the Supreme Court is that where it is obvious that the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purpose, the assessee would, ordinarily be entitled to a deduction of interest on its borrowed loans. This has been reiterated by the Supreme Court in a catena of decisions. In S.A.Builders Ltd. v. CIT (Appeals) (supra), it has been held as follows:

“36. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B) Ltd. [(2002) 254 ITR 377 (Del)] that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximise its profit. The Income Tax Authorities must put themselves in  the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.”

In Hero Cycles (P) Ltd. v. CIT (Central) Ludhiana (supra), the Supreme Court has held that:

“11. Insofar as loans to the sister concern/subsidiary company are concerned, the law in this behalf is recapitulated by this Court in S.A. Builders Ltd. v. CIT [S.A. Builders Ltd. v. CIT, (2007) 1 SCC 781]. After taking note of and discussing on the scope of commercial expediency, the Court summed up the legal position in the following manner: (SCC pp. 787­88, paras 27-31)

“31. It has been repeatedly held by this Court that the expression ‘for the purpose of business’ is wider in scope than the expression ‘for the purpose of earning profits’ vide CIT v. Malayalam Plantation Ltd., (1964) 53 ITR 140 (SC)] , CIT v. Birla Cotton Spg. & Wvg. Mills Ltd., (1971) 3 SCC 344], etc.””

In J.K.Woollen Manufacturers v. CIT [(1969) 1 SCR 525], Supreme Court had held as follows:

“As pointed out by this Court in CIT v. Walchand & Co. Private Ltd. [(1967) 65 ITR 381 : (AIR 1967 SC 1435)] in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Income Tax Department. It is, of course, open to the Appellate Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee.”

19. Looking from the above-settled position of law, it could be seen that the act of availing of loan from M/s. Indo Nissin Foods (P) Ltd. and extending an interest-free loan for the same amount to Amalgam Speciality Foods Pvt. Ltd. (subsequently renamed as M/s. Keya Foods International (P) Ltd.) a group company had augured well for the appellant assessee’s business. The same suited the business interest of the appellant assessee and was a commercially prudent and expedient act. The conclusion arrived at by the AO, which was affirmed by the Tribunal, that “the chain transactions between various sister concerns are a device for profit sharing” is thus contrary to the dictum affirmed by the Supreme Court in the above-mentioned precedents and hence cannot be countenanced.

20. Commercial expediency and augmenting of ‘business interests’ is not confined to the process of making profits. It could also partake myriads of forms of other activities and arrangements which, the businessman in his prudence feels necessary to do, so as to further the course of his commercial endeavour. Taxman may not be able to fathom the same. The tax laws must however be elastic and malleable to accommodate all such legitimate means which are targeted towards the singular purpose of earning profits.

21. As regards the contention that the appeal has put forth an entirely new case based on materials now produced and which the Tribunal or the Assessing Officer had no occasion to consider, a perusal of the Orders passed by the AO, the CIT (A) and the Tribunal reveal that virtually all the contentions now put forth before this Court were raised before the said authorities also. Annex. A1 Order of the AO, reveals that a detailed appreciation, albeit erroneous, had been afforded to the contentions raised. The only additional material now seen produced before us are those along with the interlocutory application filed which are relied on to buttress the contentions already raised and considered. Hence the objection raised that the appellant is raising fresh contentions at this appellate stage cannot be sustained.

Conclusion:

22. In view of the above, the claim for additional depreciation under Section 32 (1) (iia) of the IT Act for new plant and machinery sought by the appellant assessee and the deduction claimed as interest on borrowed funds under Section 36 (1) (iii) are found sustainable in law. The appellant is entitled to seek said deductions and their disallowance by the department is incorrect and unsustainable. Consequently, the above appeal is allowed. All questions of law raised therein, are answered in favour of the assessee and against the revenue.

The IT Appeal is disposed as above.