Interest on Borrowings for Acquisition of Capital Assets allowable u/s 36(1)(iii)

PCIT Vs Vodafone Shared Services Ltd. (Gujarat High Court)

The interest paid in respect of the borrowings for acquisition of capital assets is allowable under Section 36(1)(iii) of the Act regardless of the fact that the capital assets acquired were not put to use in the concerned financial year in question.

In this case the Tribunal has placed reliance on the decision of the Supreme Court in the case of Care Healthcare Ltd.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

1. This tax appeal under Section 260A of the Income Tax Act, 1961 (for short “the Act, 1961”) is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad, Bench “C”, Ahmedabad dated 28th May, 2019 in the ITA No.162/Ahd/2016 for the A.Y.2010-11.

2. The Revenue has proposed the following two questions of law for the consideration of this Court;

“(A) Whether the Appellate Tribunal has erred in law and on facts by upholding the decision of the CIT(A) in deleting the disallowance of depreciation of Rs.20,58,80,087/-?

(B) Whether the Appellate Tribunal has erred in law in deleting the disallowance of interest expense of Rs.28,57,419/-?”

3. We admit this appeal on the first question of law as proposed, but with little modification, which reads thus;

“Whether the Appellate Tribunal has erred in law and on facts in upholding the decision of the CIT (A) in deleting the addition of the amount of disallowance of depreciation of Rs.20,58,80,087/- for acquiring the license of application software?”

4. So far as the second question, as proposed by the revenue is concerned, we take notice of the following findings recorded by the Tribunal;

“6.5 In view of the decision rendered in similar circumstances in the case of Vodafone West Ltd, we are of the view that the assessee is entitled for claim of interest expenditure in revenue account in terms of section 36(1)(iii) of the Act. Noticeably, the pre-amended proviso to section 36(1)(iii) applicable for the relevant assessment year in question (prior to its amendment by Finance Act, 2015) prohibited claim of interest on revenue account only where capital was borrowed for acquisition of an asset for extension of existing business or profession and therefore, so long as the capital borrowed resulted in acquisition of asset without resulting in extension of existing business per se, the deterrence embodied in proviso was not applicable and consequently the claim was governed by main provision of section 36(1)(iii) of the Act. In view of the aforesaid position of law subsisting for the assessment year 2010- 11 in question, we do not see any infirmity in the action of the CIT(A) in upholding the claim of the assessee under S.36(1) (iii) on revenue account.

6.5. An enunciation of law in this regard is available in Vardhman Polytex Ltd. vs. CIT (2012) 25 taxamnn.com 281(5C) wherein the Hon’ble Supreme Court also referred to another decision of Hon’ble Supreme Court in the case of Care Healthcare Ltd. and answered the issue in favour of assessee. It was held that interest paid in respect of borrowings for acquisition of capital assets is an allowable deduction under S.36(1)(iii) of the Act regardless of the fact that the capital assets acquired were not put to use in the concerned Financial Year in question. In the light of position of law explained by the Hon’ble Supreme Court, we decline to interfere with the order of the CIT (A). Ground raised by the Revenue is dismissed. “

5. Thus, the Tribunal has placed reliance on the decision of the Supreme Court in the case of Care Healthcare Ltd. Relying on Care Healthcare Ltd., the Tribunal has taken the view that the interest paid in respect of the borrowings for acquisition of capital assets is allowable under Section 36(1)(iii) of the Act regardless of the fact that the capital assets acquired were not put to use in the concerned financial year in question.

6. We, therefore, dismiss this appeal so far as the second question of law, as proposed by the Revenue, is concerned.