SUPREME COURT OF
Deputy Commissioner
of Income-tax
v.
Core Health Care Ltd.
S.H.
Kapadia and B. Sudershan Reddy, JJ.
Civil Appeal Nos. 3952
to 3955 of 2002
February 8, 2008
Section 36(1)(iii),
read with Explanation 8 to section 43(1), of the Income-tax Act, 1961 -
Interest on borrowed capital - Assessment year 1992-93 - Whether proviso
inserted in section 36(1)(iii) with effect from 1-4-2004 has to be read as
prospectively - Held, yes - Whether what section 36(1)(iii) emphasizes on is
user of capital and not user of asset which comes into existence as a result of
borrowed capital, unlike section 37(1) which expressly excludes an expense of a
capital nature - Held, yes - Whether Legislature has, therefore, made no
distinction in section 36(1)(iii) between ‘capital borrowed for a revenue
purpose’ and ‘capital borrowed for a capital purpose’ and an 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 such
borrowed capital - Held, yes - Whether Explanation 8 to section 43 as well as
concept of determination of ‘actual cost’ have no application to section
36(1)(iii) as this section does not incorporate concept of depreciation - Held,
yes - Assessee had a running business of manufacturing and selling of
intravenous solutions - It installed new machineries on which production was
not started during relevant year - Assessee claimed deduction of interest on
borrowings made for purchasing these machineries - Whether assessee’s
claim was to be allowed - Held, yes
Facts
The
assessee-company was engaged in the business of manufacturing and sale of
intravenous solutions. During the assessment year under consideration, the
assessee had installed new machinery and claimed deduction of interest on
borrowings. The Assessing Officer disallowed the amount on the ground that
during the year assessee had installed new machinery on which production was
not started. On appeal, the Commissioner (Appeals) confirmed the addition of
interest amount to the income of the assessee. On appeal, the Tribunal held
that the department was not justified in adding the amount to the income of the
assessee. This decision was confirmed by the High Court.
On appeal to
the Supreme Court,
Held
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, 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. CIT (1958) 34 ITR 265]. All that is germane
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). This provision makes no distinction
between money borrowed to acquire a capital asset and 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 on is the 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 revenue purpose’ and ‘capital borrowed for a
capital purpose’. An assessee is entitled to claim interest paid on borrowed
capital provided that the 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 a place in section 36(1)(iii), otherwise find place in sections 32,
32A, etc. The expression ‘actual cost’ is defined in section 43(1) which is
essentially a definition section and is subject to the context to the contrary.
[
Section 43 groups
together all provisions in the nature of 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 8 has been inserted to
section 43(1) by the Finance Act, 1986, with retrospective effect from
1-4-1974. It is important to note that the words ‘actual cost’ would mean the
whole cost and not the estimated cost. ‘Actual cost’ means nothing more than
the cost accurately ascertained. The determination of actual cost given 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(l)(iii). This 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 the assets to the
assessee, reduced 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 to sections like sections 32, 32A, 33 and 41 which deal
with concepts like depreciation. The concept of depreciation is not there in
section 36(l)(iii). That is why the Legislature has used
the words ‘unless the context otherwise requires’. Hence, Explanation 8 has no
relevancy to section 36(l)(iii).
It has relevancy to the aforementioned enumerated sections. Therefore,
Explanation 8 had no application to the facts of the instant case. [
A proviso has since
been inserted in section 36(l)(iii).
That proviso has been inserted by the Finance Act, 2003 with effect from
1-4-2004. Hence, the said proviso will not apply to the facts of the instant
case. Further, 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(l)(viia),
which is made effective from 1-4-2004. Same is the position with regard to
insertion of a sub-section after section 90(2). This insertion also operates
with effect from 1-4-2004. In short, the above amendments have been made by the
Finance Act, 2003 and have been made operational with effect from 1-4-2004.
Therefore, the proviso inserted in section 36(l)(iii)
has to be read as prospectively and with effect from 1-4-2004. In this case,
the law concerned was as it existed prior to 1-4-2004. [
Section 36(l)(iii) 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 all 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 transaction of borrowing does not, by
itself, bring any new asset of an enduring nature into existence, and that it
is the transaction of investment of the borrowed capital for the purchase of a
new asset which brings that asset into existence. The transaction of borrowing
is not the same as the transaction of investment. If this dichotomy is kept in
mind it becomes clear that the transaction of borrowing attracts the provisions
of section 36(1)(iii).
[
The Assessing Officer
was not justified in making disallowance of interest in respect of borrowings
utilized for purchase of machinery. [