Paragraph numbers below are the court’s original numbering, recovered from the source text.
8. Interest on moneys borrowed for the purposes of business is a necessary item of expenditure in a business. For allowance of a claim for deduction of interest under the said . section, all that is necessary is that-firstly, the money, i.e. capital, D must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business; and, thirdly, the assessee must have paid interest on the borrowed amount [See: Calico Dyeing & Printing Works v. Commr. of Income- tax; Bombay City-II -(1958) 34 ITR 265]. All that is germane E is : whether the borrowing was, or was not, for the purpose of business. The expression "for the purpose of business" occurring in Section 36(1 )(iii) indicates that once the test of "for the purpose of business" is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under Section 36(1 )(iii) of the 1961 Act. This provision makes no F distinction between money borrowed to acquire a capital asset or a revenue asset. All' ·that the section requires is that the ,…__ assessee must borrow capital and the purpose of the borrowing must be for business which is carried on by the assessee in the year of account. What sub-section (iii) emphasizes is the G user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital unlike Section 37 which expressly excludes an expense of a capital nature. The legislature has, therefore, made no distinction in Section 36(1 )(iii) between "capital borrowed for a H revenue purpose" and "capital borrowed for a capital purpose". DEPUTY COMMNR. OF INCOME TAX, AHMEDABAD v. M/S. CORE HEALTH CARE LTD. [KAPADIA, J.] An assessee is entitled to claim interest paid on borrowed A capital provided that capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. Further, the words "actual cost" do not find place in Section 36(1 )(iii) of the 1961 Act which otherwise find place in Sections 32, 32A etc of the 1961 Act. The B expression "actual cost" is defined in Section 43(1) of the 1961 Act which is essentially a definition section which ls subject to the context to the contrary.
9. In the case of Commissioner of Income-tax v. Associated Fibre and Rubber Industries (P) Ltd. – (1999) C · 236 ITR 471, the Division Bench of this Court held as follows: "Even though the machinery has not been actually used in the business at the time when the assessment was made, the same has to be treated as a business asset as it was 0 purchased only for business purposes. In the circumstances, the interest paid on the amount borrowed for purpose of such machinery is certainly a deductible amount."
10. As stated above, the Department contended before us that the judgments of this Court, prior to insertion of Explanation 8 in Section 43(1) of the 1961 Act, has no application to the present case. According to the Department, Section 36(1 )(iii) of the 1961 Act being general in nature has to give way to special provisions contained in Explanation 8 to F Section 43(1) of the 1961 Act. According to the Department, in none of the earlierjudgments this Court has considered the true scope of Explanation 8 to Section 43(1) vis-a-vis Section 36(1 )(iii) of the 1961 Act. We find no merit in this contention. Section 43 groups together all provisions in the nature of G definitions or interpretations relevant to the computation of income under the head "Profits and Gains of Business". Section 43(1) defines "actual cost". The definition of "actual cost" has been amplified by excluding such portion of the cost as is met directly or indirectly· by any other person or authority. Explanation ~y A 8 has been inserted in Sectio.n 43(1) by Finance Act, 1986 (23 ~— of 1986), with retrospective effect from 1.4. 74. It is important to note that the word "actual cost" would mean the whole cost and not the estimate of cost. "Actual cost" means nothing more than the cost accurately ascertained. The determination of actual cost B in Section 43(1) has relevancy in relation to Section 32(depreciation allowance), Section 32A(investment allowance), Section 33(development rebate allowance), and Section 41 (balancing charge). "Actual cost" of an asset has no relevancy in relation to Section 36(1 )(iii) of the 1961 Act. This c reasoning flows from a bare reading of Section 43(1 ). Section 43 defines certain terms relevant to income from profits and gains of business and, therefore, the said section commences with the words "In Sections 28 to 41 and unless the context otherwise requires" "actual cost" shall mean the actual cost of D the assets to the assessee, reducing by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. In other words, Explanation 8 applies only j. to those Sections like Sections 32, 32A, 33 and 41 which deal with concepts like Depreciation. The concept of Depreciation is not there in Section 36(1 )(iii). That is why the legislature has used the words "unless the context otherwise. requires". Hence, Explanation 8 has no relevancy to Section 36(1)(iii). It has relevancy to the aforementioned enumerated sections. Therefore, in our view Explanation 8 has no application to the facts of the present case.
11. Before concluding on this point we may state that in this batch of civil appeals we are concerned with the assessment years 1992-93, 1993-94, 1995-96 and 1997-98. A proviso has since been inserted in Section 36(1 )(iii) of the 1961 Act. That G proviso has been inserted by Finance Act, 2003 w.e.f. 1.4.2004. Hence, the said proviso will not apply to the facts of the present case. Further, in our view the said proviso would operate prospectively. In this connection it may be noted that by the same Finance Act, 2003 insertions have been made by way of proviso in Section 36(1 )(viia) by the same Finance Act which is also t: i DEPUTY COMMNR. OF INCOME TAX, AHMEDABAD v. MIS. CORE HEALTH CARE LTD. [KAPADIA, J.] .\..~ made with effect from 1.4.2004. Same is the position with regard to insertion of a sub-section after Section 90(2) and before the Explanation. This insertion also operates w.e.f. 1.4.04. In short, the above amendments have been made by Finance Act, 2003 and all the said amendments have been made operational w.e.f. 1.4.04. Therefore, the 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 the law as it existed prior to 1.4.2004. As ~ stated above, we are not concerned with the interpretation or applicability of the said proviso to Section 36(1 )(iii) w.e.f. 1.4.04 . in the present case. c
12. In the case of Challapalli Sugars Ltd. (supra) this Court observed that interest paid on the borrowing utilized to bring into existence a fixed asset which has not gone into production, goes to add to the cost of installation of that asset. It was further observed that if the said borrowing was not "for D the purpose of business" inasmuch as no business had come into existence, it must follow that it was made for the purpose of acquiring an asset which could be put to use for doing business, and hence interest paid on such borrowing would go to add to the cost of the assets so acquired.
13. In our view the above observations have to be confined to the facts in the case of Challapalli Sugars Ltd. (supra). It w'as a case where the company had not yet started production when it borrowed the amount in question. The more appropriate decision applicable to the present case would be the judgment ~ of this court in the case of India Cements Ltd. v. Commissioner of Income-tax, Madras – (1966) 60 ITR 52 in which it has been observed that, for considering whether payment of interest on borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. In our G view, Section 36(1 )(iii) of the 1961 Act has to be read on its own terms. It is a Code by itself. Section 36(1 )(iii) is attracted when the assessee borrows the capital for the purpose of his business. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset, because of H [2008] 2 S.C.R. ~ A that the section requires is that the assessee must borrow the .,_,,,, capital for the purpose of his business. This dichotomy between the borrowing of a loan and ·actual application thereof in the purchase of a capital asset, seems to proceed on the basis that a mere transactiolJ of borrowing does not, by itself bring B any new asset of enduring nature into existence, and that it is . the transaction of investment of the borrowed capital in the purchase of a new asset which brings that asset into existence. The transaction of borrowing is not the same as the transaction r of investment. If this dichotomy is kept in mind it becomes clear c that the transaction of borrowing attracts the provisions of Section 36(1 )(iii). Thus, the decision of the Bombay High Court in Calico Dyeing & Printing Works (supra) and the judgment of the Supreme Court India Cements Ltd. (supra) have been given with reference to the borrowings made for the purposes D of a running business, while the decision of the Supreme Court in Challapalli Sugars Ltd. (supra) was given with reference to the borrowings which could .not be treated as made for the )._ purposes of business as no business had commenced in that case. Therefore, there is no inconsistency between the above decisions. CONCLUSIONS
14. For the above reasons, we hold that A.O. was not justified in making disallowance of Rs.1,56, 76,000/- in respect ·of borrowings utilized for purchase of machines. Accordingly, the above question is answered in favour of the assessee and against the Department. f-
15. Apart from the above question under Section 36(1 )(iii), the present civil appeals are filed by the Department against G the decision of the High Court whereby the High Court has dismissed Civil Application Nos.53 and 54 of 2001 filed by the Department. It may be noted that during the pendency of Tax Appeal Nos.449 and 450 of 2000, the Department had moved the above two civil applications for amendment of its Memo of H Appeal raising substantial questions of law, namely – f DEPUTY COMMNR. OF INCOME TAX, AHMEDABAD "'-1 v. M/S. CORE HEALTH CARE LTD. [KAPADIA, J.] (a) whether advertisement expenses incurred by the A assessee to create a brand image with enduring benefit are allowable as revenue expenditure; (b) whether the Tribunal had erred in granting deduction under Section 35D regarding short-term loan, in view B of Explanation to Section 35D(3) which refers only to i long-term borrowings; (c} whether the Tribunal had erred in directing deduction under Section 80-HH and 80-1 on the miscellaneous income of Rs.26,64, 113 being income on sale of c empty containers?
16. Although the Department had moved the said Civil Application Nos.53 and 54 of 2001 during the. pendency of Tax Appeal Nos.449 and 450 of 2000 well within limitation the High Court without answering the above three questions summarily D rejected Civil Application Nos.53 and 54 of 2001. We are of the view that the High Court had erred in dismissing the above two . civil applications for amendment of the Memo of Appeal in Tax Appeal Nos.449 and 450 of 2000. In our view the above three questions are substantial questions of law and, therefore, the E High Court ought to have decided those questions .
17. Accordingly, we remit the above three questions to the High Court for fresh consideration by it in accordance with law. Accordingly, Civil Appeal Nos.3952-55 of 2002 and Civil Appeal Nos.8509-851 O of 2002 filed by the Department are partly allowed with no order as to costs. R.P. Appeals partly allowed.