O/TAXAP/277/2007 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 277 of 2007 M/S. NIRMA LIMITED....Appellant(s) Versus ASSISTANT COMMISSIONER OF INCOME TAX....Opponent(s) Appearance: MRS SWATI SOPARKAR, ADVOCATE for Appellant(s) No. 1 MRS MAUNA M BHATT, ADVOCATE for Opponent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE BIREN VAISHNAV Date : 11/10/2017 ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. This Tax Appeal is filed against judgement of Income Tax Appellate Tribunal dated 30.08.2006. Following two questions were framed at time of admission of appeal. (1) Whether in facts and circumstances of case Income Tax Appellate Tribunal was right in law in holding that interest on Secured Promissory Notes was required to be disallowed when admittedly said interest was in respect of capital borrowed for purposes of business of appellant? (2) Whether in facts and circumstances of case Income Tax Appellate Tribunal was right in law in not allowing expenditure pertaining to Soda Ash and Lab Front projects as revenue expenditure? 2. Regarding first question in case of this very assessee in Tax Page 1 of 5 HC-NIC Page 1 of 5 Created On Fri Nov 03 10:42:17 IST 2017 O/TAXAP/277/2007 ORDER Appeal No. 1219 of 2006 decided on 10.10.2017, we had held in favour of assessee making following observations: 18. Before addressing issue of very nature of transaction, we may clear few peripheral issues. We have noted at some length reasonings recorded by Assessing Officer, CIT(Appeals) and Tribunal. Since all three authorities have reached at same conclusions but by adopting slightly different routes, if we superimpose orders of three authorities below eliminating repetition, following principal objections of Revenue emerge : i) borrowing was for capital expenditure. interest on such borrowing therefore, cannot be allowable deduction. ii) company was in process of setting up new industry. It was not for purpose of expansion or extension of existing business. iii) liability had not accrued and was merely contingent liability. iv) entire transaction was sham and colourable device to avoid tax. 19. We may recall assessee's claim of deduction arises out of section 36(1)(iii) of Act under which while computing income under section 28 of Act, deduction of amount of interest paid in respect of capital borrowed for purposes of business or profession would be deductible expenditure. first objection of Revenue is squarely covered by judgment in case of Core health Care ltd.(supra). While confirming decision of this Court, it was held that for said deduction, all that was necessary was that money i.e. capital must have been borrowed by assessee, that it must have been borrowed for purpose of business and lastly, that assessee must have paid interest on borrowed amount. All that is germane is whether borrowing was, or was not, Page 2 of 5 HC-NIC Page 2 of 5 Created On Fri Nov 03 10:42:17 IST 2017 O/TAXAP/277/2007 ORDER for purpose of business. It was held that provision makes no distinction between money borrowed to acquire capital asset or revenue asset. 3. Regarding second question, issue is covered in favour of assessee by virtue of judgement of this Court in case of Commissioner of Income Tax vs. Nirma Ltd. reported in [2015] 255 Taxmann.com 125, in which, it was observed as under: 15. On due consideration of rival submissions, we notice at this stage that this Court, while adjudicating said issue, had at length discussed same to hold that expansion since was of existing business, tests applied in case of CIT v. Alembic Glass Industries Limited, 103 ITR 715 (Guj) as also in case of Dy. CIT v. Core Health Care Limited, 298 ITR 194 (SC) would have relevance and borrowings were whether capital or revenue expenditure would be of no consequence. Profitable it would be to reproduce these observations made in this respect, which reads thus - sole surviving question No.13 pertains to disallowance of soda ash project interest expenses of Rs.3.33 crores (rounded off) and lab project interest of Rs.12..27 crores (rounded off). Assessing Officer, questioned assessee on these expenses and deleted same on two grounds, firstly that interest was paid by way pre-operative expenditure and secondly assessee had capitalized such expenditure. assessee carried matter in appeal. CIT (Appeals) relying on decision of this Court in case of CIT v. Alembic Glass Industries Ltd., 103 ITR 715 (Guj) held in favour of assessee. In addition to coming to Page 3 of 5 HC-NIC Page 3 of 5 Created On Fri Nov 03 10:42:17 IST 2017 O/TAXAP/277/2007 ORDER conclusion that there was commonality of business it was further held that expenditure was in connection with expansion of existing business. On such ground, expenditure was held allowable. It is this order of CIT (Appeal) which Tribunal upheld in impugned judgment. Having heard learned counsel for parties and having perused documents on record, we notice that CIT (Appeals) and Tribunal concurrently came to conclusion that there was interconnection, inter-lacing and inter-dependence of management, financial and administrative control of various units of Nirma Limited. It was on this ground, Tribunal held that business in question is continuation of existing business and not new business. In this context, decision relied on by authorities below of this Court in case of Alembic Glass Industries Ltd. (supra) laid down tests for ascertaining whether business was part of existing business or assessee was starting new unit. It was held that merely because unit was coming to distant point by itself would not mean that it was new business. If facts as recorded by CIT (Appeals) and Tribunal can be said to have achieved finality, it would emerge that assessee through its existing administrative mechanism started new facility for production of soda ash and had also set up facility for production of material called lab for its captive consumption for purpose of its existing manufacturing business. It is no doubt that assessee is engaged in business of manufacture of soap and soda ash and lab so produced is used by way of captive consumption. When such facts viewed in light of findings of CIT (Appeals) and Tribunal, we have no reason to interfere with ultimate conclusion. Had it been case of entirely new project undertaken by assessee as Page 4 of 5 HC-NIC Page 4 of 5 Created On Fri Nov 03 10:42:17 IST 2017 O/TAXAP/277/2007 ORDER canvassed by counsel for Revenue, serious question of claiming pre-operative expenditure of interest by way of revenue expenditure would arise. However, when authorities below found that it was expansion of existing business, applying tests laid down by this Court in case of Alembic Glass Industries Ltd. (supra), in view of decision of Supreme Court in case of Deputy CIT v. Core Health Care Ltd, 298 ITR 194 (SC), fact whether borrowing is capital or revenue expenditure would be of no consequence. 4. In result, both questions are decided in favour of assessee. Tax Appeal is allowed and disposed of accordingly. (AKIL KURESHI, J.) (BIREN VAISHNAV, J.) Jyoti Page 5 of 5 HC-NIC Page 5 of 5 Created On Fri Nov 03 10:42:17 IST 2017 Nirma Ltd. v. Assistant Commissioner of Income-tax