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The Tax Publishers2012 TaxPub(DT) 2015 (Ker-HC) : (2012) 046 (I) ITCL 0532 : (2012) 344 ITR 0625 INCOME TAX ACT, 1961 --Capital or revenue expenditure--Expenditure on expansion of existing businessPre-operation expenditure in respect of new industrial unit--Assessee was engaged in the manufacture of rubber chemicals. During the previous years relevant for the impugned assessment years, the new industrial unit was set up in the same line of business by way of expansion of production. Assessee claimed deduction towards various items of expenditure incurred in the setting OP of the new factory as a revenue expenditure. However, AO on verifying the accounts noticed that in the balance-sheet assessee which showed in its books of account the entire pre-operation expenditure as a capital expenditure, claimed the same as revenue expenditure for the purpose of deduction under the Act. Section 37 prohibits granting of any deduction which is of a capital nature. Therefore, the entire expenditure incurred for setting up of new industrial unit was capial in nature Tribunal held that pre-operation expenditure incurred by assessee for setting up of a new industrial unit by way of expansion of production was allowable as revenue expenditure. Held: Business expenditure of a revenue nature allowable under section 37 were those incurred for carrying on existing business and not investments made for setting up of a new plant for operation in future. Therefore, the entire expenditure incurred for setting up of new industrial unit, though under expansion scheme, for the manufacture of very same product, was capital in nature. Income Tax Act, 1961 Section 37(1) INCOME TAX ACT, 1961 --Business deduction under sdection 36(1)(iii)--Interest on borrowed capitalInterest attributable to borrowed money utilized for purchase--Assessee ws engaged in settiong u9p of a new industrial unit by way of expansion of production. Assessee claimed deduction of interest on term loan borrowed for acquisition of plant and machinery. AO was of the view that interest paid on borrowed funds for acquisition of plant and machinery and other capital goods-up to the date of commissioning should be treated as part of actual cost on which assessee was entitled to depreciation and other eligible, deductions on, the capital employed and under no circumstance interest on borrowed funds could be allowed as deduction in the computation of income of the previous year in which such plant and machinery was not put to use. Tribunal allowed the interest expenditure under section 36(1)(iii). Held: Interest on borrowed funds for the acquisition o capital asset was not allowable as revenue expenditure untio the asset was put to use and accrued interest until the case was put to use by assessee would only form part of actual cost for the purpose of depreciation and other allowances allowable under the Act. The amendment in section 36 with effect from 1-4-2003 was clarificatory in nature and the position was the same even for the period prior to that but the tribunal's order were consistent with the decision of Supreme Court in core Health Care Ltd's (2008) 298 ITR 194 (SC), therefore, appeals filed by revenue was dismissed. Income Tax Act, 1961 Section 36(1)(iii) IN THE KERALA HIGH COURT C. N. RAMACHANDRAN NAIR & P. S. GOPINATHAN JJ. CIT v. Merchem Ltd. I. T. A. No. 402 of 2009 A.Y. 1996-97, 1997-98 29 January, 2010 Appellantby : Jose Joseph, Standing Counsel for Income-tax, Respondentby : R. Vijayaraghavan and Saji Varghese SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 2015 (Ker-HC) : (2012) 046 (I) ITCL 0532 : (2012) 344 ITR 0625

INCOME TAX ACT, 1961

--Capital or revenue expenditure--Expenditure on expansion of existing businessPre-operation expenditure in respect of new industrial unit--Assessee was engaged in the manufacture of rubber chemicals. During the previous years relevant for the impugned assessment years, the new industrial unit was set up in the same line of business by way of expansion of production. Assessee claimed deduction towards various items of expenditure incurred in the setting OP of the new factory as a revenue expenditure. However, AO on verifying the accounts noticed that in the balance-sheet assessee which showed in its books of account the entire pre-operation expenditure as a capital expenditure, claimed the same as revenue expenditure for the purpose of deduction under the Act. Section 37 prohibits granting of any deduction which is of a capital nature. Therefore, the entire expenditure incurred for setting up of new industrial unit was capial in nature Tribunal held that pre-operation expenditure incurred by assessee for setting up of a new industrial unit by way of expansion of production was allowable as revenue expenditure. Held: Business expenditure of a revenue nature allowable under section 37 were those incurred for carrying on existing business and not investments made for setting up of a new plant for operation in future. Therefore, the entire expenditure incurred for setting up of new industrial unit, though under expansion scheme, for the manufacture of very same product, was capital in nature.

Income Tax Act, 1961 Section 37(1)

INCOME TAX ACT, 1961

--Business deduction under sdection 36(1)(iii)--Interest on borrowed capitalInterest attributable to borrowed money utilized for purchase--Assessee ws engaged in settiong u9p of a new industrial unit by way of expansion of production. Assessee claimed deduction of interest on term loan borrowed for acquisition of plant and machinery. AO was of the view that interest paid on borrowed funds for acquisition of plant and machinery and other capital goods-up to the date of commissioning should be treated as part of actual cost on which assessee was entitled to depreciation and other eligible, deductions on, the capital employed and under no circumstance interest on borrowed funds could be allowed as deduction in the computation of income of the previous year in which such plant and machinery was not put to use. Tribunal allowed the interest expenditure under section 36(1)(iii). Held: Interest on borrowed funds for the acquisition o capital asset was not allowable as revenue expenditure untio the asset was put to use and accrued interest until the case was put to use by assessee would only form part of actual cost for the purpose of depreciation and other allowances allowable under the Act. The amendment in section 36 with effect from 1-4-2003 was clarificatory in nature and the position was the same even for the period prior to that but the tribunal's order were consistent with the decision of Supreme Court in core Health Care Ltd's (2008) 298 ITR 194 (SC), therefore, appeals filed by revenue was dismissed.

Income Tax Act, 1961 Section 36(1)(iii)

IN THE KERALA HIGH COURT

C. N. RAMACHANDRAN NAIR & P. S. GOPINATHAN JJ.

CIT v. Merchem Ltd.

I. T. A. No. 402 of 2009

A.Y. 1996-97, 1997-98

29 January, 2010

Appellantby : Jose Joseph, Standing Counsel for Income-tax,

Respondentby : R. Vijayaraghavan and Saji Varghese