HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 58 / 2016 M/s K.Y. Continental Interiors (p) Limited, E-46A, Road No. 18, VKI, Jaipur. Appellant Versus Income Tax Officer, Ward 4(2) New Central Revenue Building, Statue Circle, Jaipur 302001. Respondent For Appellant(s) : Mr. Gunjan Pathak with Ms. Ishita Rawat & Mr. Aditiya Bohra For Respondent(s) : Mr. K. D. Mathur with Mr. Prateek Kedawat on behalf of Mr. R. B. Mathur HON'BLE MR. JUSTICE K. S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS judgment 23/10/2017 1. By way of this appeal, appellant has challenged judgment and order of Tribunal whereby Tribunal has partly allowed appeal of assessee. 2. This court while admitting appeal on 08.02.2017 framed following questions of law:- 1. Whether Ld. ITAT was correct on facts and in law simultaneously maintaining trading addition of Rs. 12,14,417/- by estimating turnover at Rs. 5,50,00,000/- as against Rs. 4,99,54,718/- declared by Appellant along with addition on account of excess stock of Rs. 27,38,870/- surrendered by Appellant as excess stock being unrecorded sales during servey proceedings? 2. Whether Ld. ITAT has erred in facts in law (2 of 9) [ITA-58/2016] in confirming disallowance of Rs. 27,81,388/- paid to M/s India Bulls Bank Ltd. out of interest expenses by treating it as capital expenditure ignoring that said interest being paid on purchase of machinery in regular course of business, not in connection with extention of business and was put to use in same year ? 3. Counsel for appellant has strongly relied on judgment of jurisdictional High Court in case of Commissioner of Income Tax vs. G. K. Contractor (2009) 19 DTR 0305 wherein it has been held as under:- Admittedly, said amount of Rs. 38,28,086 was shown by assessee in books of account as "market outstanding". According to assessee, payment was outstanding against labour and goods supplied. It is true that on being asked, assessee was not able to explain these entries by producing adequate proof to satisfaction of assessing officer. However, in our considered opinion, even if assessee has failed to discharge his onus of proof in explaining cash credits shown in books of account as "market outstanding", assessing officer having estimated higher profit rate on total contract receipts after rejection of books of account invoking provisions of Section 145(3), no separate additions can be made on account of unexplained cash credit under Section 68 of Act of 1961. We are in complete agreement with view taken by Commissioner (Appeals), confirmed by Tribunal. Thus, no substantial question of law arises for consideration of this Court in this appeal. 4. He further relied on judgment of this Court in D. B. Income Tax Appeal No. 59/2008 Shri Vinod Kumar Goyal V/s Commissioner of Income Tax, Jaipur-II, decided on 05.09.2017 wherein it has been held as under:- 7. Therefore, he contended that in view of decision of Division Bench matter is required to be allowed. (3 of 9) [ITA-58/2016] 8. Counsel for respondent Mr. K.D. Mathur has taken us to finding of AO which reads as under:- With regard to source of cash deposits exceeding Rs. 50,000/- it is submitted that heavy cash balance is generally maintained looking to nature of requirement of business and also due to reasons for maintaining cash balance and also because of reason that assessee required to make labour payment ranging to Rs. 7-8 lacs. Payment to labour are already made in cash and therefore, assessee necessarily has to maintain heavy cash balance. It may kindly be noted that there was huge withdrawals totaling to Rs. 1.21 crore from one account Bank account No. 1455 and Rs. 1.11 crore from other a/c and therefore major deposits of Rs. 14.60 lacs and Rs. 30,57,664/- in these bank accounts out of such heavy receipts was not at all impossible. 9. He further contended that cash flow statement was not properly explained and withdrawal of Rs. 1.21 crores from bank account and Rs. 1.11 crores from other account and deposit has been shown only of 30 to 40 lacs but receipt of this withdrawal was not explained, in that view of matter, Tribunal has rightly reversed view taken by CIT(A). 10. We have heard counsel for both sides and gone through evidence on record. 11. CIT(A) has specifically observed that cash flow statement was produced on record and taking into consideration same he has allowed appeal. However, Tribunal in para 14 has observed contrary view and in view of jurisdictional court judgment, regarding books of accounts of u/s 68, he reversed judgment of CIT(A). 5. With regard to second issue, counsel for appellant has relied upon following decisions wherein it has been held as under:- Deputy Commissioner of Income Tax, Ahmedabad vs. Core Health Care Ltd. (08.02.2008 SC), (2008) 298 ITR 0194 (4 of 9) [ITA-58/2016] 8. Interest on moneys borrowed for purposes of business is necessary item of expenditure in business. For allowance of claim for deduction of interest under said section, all that is necessary is that - firstly, money, i.e. capital, must have been borrowed by assessee; secondly, it must have been borrowed for purpose of business; and, thirdly, assessee must have paid interest on borrowed amount [See: Calico Dyeing & Printing Works v. Commr. of Income-tax, Bombay City-II MANU/MH/0155/1958MANU/MH/0155/1958 : [1958]34ITR265(Bom) . All that is germane is : whether borrowing was, or was not, for purpose of business. expression "for purpose of business" occurring in Section 36(1)(iii) indicates that once test of "for purpose of business" is satisfied in respect of capital borrowed, assessee would be entitled to deduction under Section 36(1)(iii) of 1961 Act. This provision makes no distinction between money borrowed to acquire capital asset or revenue asset. All that section requires is that assessee must borrow capital and purpose of borrowing must be for business which is carried on by assessee in year of account. What Sub-section (iii) emphasizes is user of capital and not user of asset which comes into existence as result of borrowed capital unlike Section 37 which expressly excludes expense of capital nature. legislature has, therefore, made no distinction in Section 36(1)(iii) between "capital borrowed for revenue purpose" and "capital borrowed for capital purpose". assessee is entitled to claim interest paid on borrowed capital provided that capital is used for business purpose irrespective of what may be result of using capital which assessee has borrowed. Further, words "actual cost" do not find place in Section 36(1)(iii) of 1961 Act which otherwise find place in Sections 32, 32A etc of 1961 Act. expression "actual cost" is defined in Section 43(1) of 1961 Act which is essentially definition section which is subject to context to contrary. 11. Before concluding on this point we may state that in this batch of civil appeals we are concerned with assessment years 1992-93, 1993-94, 1995-96 and 1997-98. proviso has since been inserted in Section 36(1)(iii) of 1961 Act. That proviso has been inserted by Finance Act, 2003 w.e.f. 1.4.2004. Hence, said proviso will not apply to facts of present case. Further, in our view said proviso would operate (5 of 9) [ITA-58/2016] prospectively. In this connection it may be noted that by same Finance Act, 2003 insertions have been made by way of proviso in Section 36(1)(viia) by same Finance Act which is also made with effect from 1.4.2004. Same is position with regard to insertion of sub-section after Section 90(2) and before Explanation. This insertion also operates w.e.f. 1.4.04. In short, above amendments have been made by Finance Act, 2003 and all said amendments have been made operational w.e.f. 1.4.04. Therefore, proviso inserted in Section 36(1)(iii) has to be read as prospectively and w.e.f. 1.4.04. In this case, we are concerned with law as it existed prior to 1.4.2004. As stated above, we are not concerned with interpretation or applicability of said proviso to Section 36(1)(iii) w.e.f. 1.4.04 in present case. 12. In case of Challapalli Sugars Ltd. (supra) this Court observed that interest paid on borrowing utilized to bring into existence fixed asset which has not gone into production, goes to add to cost of installation of that asset. It was further observed that if said borrowing was not "for purpose of business" inasmuch as no business had come into existence, it must follow that it was made for purpose of acquiring asset which could be put to use for doing business, and hence interest paid on such borrowing would go to add to cost of assets so acquired. 13. In our view above observations have to be confined to facts in case of Challapalli Sugars Ltd. (supra) . It was case where company had not yet started production when it borrowed amount in question. more appropriate decision applicable to present case would be judgment of this Court in case of India Cements Ltd. v. Commissioner of Income-tax, Madras MANU/SC/0188/1965MANU/SC/0188/1965 : [1966]60ITR52(SC) in which it has been observed that, for considering whether payment of interest on borrowing is revenue expenditure or not, purpose for which borrowing is made is irrelevant. In our view, Section 36 (1)(iii) of 1961 Act has to be read on its own terms. It is Code by itself. Section 36(1)(iii) is attracted when assessee borrows capital for purpose of his business. It does not matter whether capital is borrowed in order to acquire revenue asset or capital asset, because of that section requires is that assessee must borrow capital for purpose of his business. This dichotomy between (6 of 9) [ITA-58/2016] borrowing of loan and actual application thereof in purchase of capital asset, seems to proceed on basis that mere transaction of borrowing does not, by itself bring any new asset of enduring nature into existence, and that it is transaction of investment of borrowed capital in purchase of new asset which brings that asset into existence. transaction of borrowing is not same as transaction of investment. If this dichotomy is kept in mind it becomes clear that transaction of borrowing attracts provisions of Section 36(1)(iii). Thus, decision of Bombay High Court in Calico Dyeing & Printing Works (supra) and judgment of Supreme Court India Cements Ltd. (supra) have been given with reference to borrowings made for purposes of running business, while decision of Supreme Court in Challapalli Sugars Ltd. (supra) was given with reference to borrowings which could not be treated as made for purposes of business as no business had commenced in that case. Therefore, there is no inconsistency between above decisions. Commissioner of Income Tax vs. Tarai Development Corporation Ltd. (16.08.1993 ALLHC), (1994) 205 ITR 0421 5. Clause (iii) of Sub-section (1) of Section 36 is quoted as under : "The amount of interest paid in respect of capital borrowed for purposes of business or profession." 6. We find that in present case, finding has been recorded that assessee was setting up new factory in previous year and it was extension of its existing business and moneys borrowed were for purpose of carrying on business and which could be spent by assessee on any account, either capital or revenue. aforesaid Section 36(1)(iii) provides that amount of interest paid in respect of capital borrowed for purposes of business could be covered under Section 36 for deduction. We find that principle for grant of deduction under similar situation has been laid down by Supreme Court while interpreting provisions of Section 10(2)(xv) of Indian Income Tax Act, 1922, in case of India Cements Ltd. v. CIT. On other hand, decision relied on on behalf of Revenue is reported in Ritz Continental Hotels Ltd. v. CIT but same is not applicable to facts (7 of 9) [ITA-58/2016] and circumstances of present case. We further find that decision of this court in Prem Spinning and Weaving Mills Co. Ltd. v. CIT is also to same effect as we have held above. CIT vs. Sakthi Sugars Ltd., (Madras HC) 339 ITR 0400 19. perusal of details of expenses furnished before us in respect of Baramba unit which were stated to be by way of pre-operation expenses were incurred towards salaries, wages, bonus, contribution to Provident Fund, workmen welfare expenses, power, fuel and water, manufacturing expenses, rent for office building, insurance premium, repairs and maintenance for machinery and building, motor vehicle, office equipment etc., interest on bills cleared, freight and transport, cane development expenses, travelling expenses, other administrative expenses and financial and bank charges. 20. In respect of Dhenkanal Sugar unit, expenses incurred by way of pre-operative expenses for year 1991-92 were towards cane development expenses, travelling expenses, administrative and other expenses, legal and professional charges, electricity charges, rates and taxes, insurance premium, repairs and maintenance charges for building and machinery and motor vehicle and other office equipment maintenance, financial and bank charges, freight and transport, salaries, wages, bonus etc., workmen welfare expenses, interest charges and depreciation. 34. From above decisions test for identifying expenditure as to whether it is revenue expenditure or capital expenditure can be stated as under :- (1) If amount spent was for purpose of bringing into existence new asset or obtaining new advantage, it would be capital expenditure. (2) If on other hand, it is not made for purpose of bringing into existence any such asset or advantage but for running business or working it with view to produce profits, it is revenue expenditure. (3) For instance if interest paid was in respect of asset, which was acquired on outright basis than it was intimately linked with value of asset. That determines character of expenditure and it was capital in nature. (8 of 9) [ITA-58/2016] Keeping about tests in mind, when we examine case on hand, various kinds of expenditures relating to sum of `.6,84,78,570/-, details of which have been mentioned in paragraphs 19 and 20, disclose that all those expenditures were incurred in relevant years for purpose of manufacture of sugar in respective factories with view to earn profits and therefore they are nothing but revenue expenditure only. 36. Since Hon'ble Supreme Court as well as our High Court has made distinction as between investment in respect of asset created and expenses incurred for actual running of business which makes difference as between capital expenditure and revenue expenditure and in case on hand, various expenses referred to at paragraphs 19 and 20 of our order were all expenses incurred for that purpose namely business expenditure, order impugned in this appeal in having allowed such expenditure as revenue expenditure is perfectly justified. 6. Counsel for respondent Mr. Mathur has contended that view taken by CIT(A) has been confirmed by Tribunal therefore, there is concurrent finding and provisions of Section 68 of Income Tax Act would be applicable in addition to provisions of Section 145(3). 7. We have heard counsel for parties. 8. Taking into consideration that amount which is estimated as GP will include undisclosed stock which was main contention if it is not allowed, it will amount to double taxation inasmuch as estimate is already covering in purchase which was not of stock shown in books of account. In that view of matter, while estimating profit it will also include stock. Thus, contention raised is required to be accepted and issue is required to be answered in favour of assessee. 9. On second issue, in view of observations and finding (9 of 9) [ITA-58/2016] of fact recorded by AO that this is capital amount invested in machinery which is running in business and in view of decision of Supreme Court in Core Health Care Ltd. (supra), issue is required to be answered in favour of assessee against department. 10. Hence both issues are answered in favour of assessee and against department. 11. appeal stands allowed. (VIJAY KUMAR VYAS),J. (K.S.JHAVERI),J. B.M.G/Gourav/21 K.Y. Continental Interiors (P) Limited v. Income-tax Officer, Ward 4(2), Jaipur