M. S. Sanklecha, J. :
This appeal by the Revenue under s. 260A of the IT Act, 1961 ("the Act") challenges an order dt. 19th Nov., 2008 passed by the Income Tax Appellate Tribunal (the Tribunal) in IT Appeal No. 791/Mum/06 (respondent-assessee's appeal) and 910/Mum/06 (appellant-revenue's appeal) relating to the asst. yr. 1999-2000.
2. Being aggrieved, the revenue has formulated the following questions of law for consideration of this Court.
"(a) Whether on the facts and circumstances of the case and in law, the Tribunal is justified in allowing Rs. 2,98,235 out of interest paid on borrowed loans on a pro rata basis in respect of capital expenditure in respect of existing business
(b) Whether on the facts and circumstances of the case and in law, the Tribunal is justified in allowing Rs. 1,39,20,104 in respect of repairs and maintenance charges treating it as revenue in nature
(c) Whether on the facts and circumstances of the case and in law, the Tribunal is right in deleting charging interest under s. 234D in respect of proportionate interest paid on loans borrowed and utilized for capital work in progress and advance against the capital work in progress and advance against the capital expenses "
Regarding Question (a) :
3. The respondent-assessee is engaged in the business of operating business centres. During the asst. yrs. 1999-2000 the respondent-assessee had debited an amount as interest of Rs. 1.38 crores on borrowed funds of Rs. 8.14 crores. The respondent assessee in the aggregate had funds of Rs. 41.65 crores as on 31st March, 1999 capital work in progress declared by the respondent-assessee was Rs. 89.49 lacs. The AO was of the view that the proportionate interest paid on borrowed funds would have been utilized for capital work in progress and therefore, should be disallowed. The respondent-assessee pointed out to the AO that no proportionate interest on the said capital expenditure can be disallowed even if the borrowed funds are utilized for capital expenditure in view of s. 36(1)(iii) of the Act as it stood during asst. yr. 1999-2000. The AO by his order dt. 30th March, 2005 did not accept the respondent-assessee's submission and disallowed the proportionate interest of Rs. 2.98 crores out of the total interest paid as being attributable to the payment of interest on funds borrowed for capital expenditure.
4. In first appeal the CIT(A) by his order dt. 28th April, 2005 upheld the order of the AO by holding that the disallowance of interest is relatable to work in progress and the respondent had itself capitalized all expenses related to the new project (under construction).
5. On second appeal, the Tribunal held that the deductibility of interest in respect of funds borrowed for capital expenditure for the period prior to asst. yr. 2005-06 is covered by the decision of the apex Court in the matter of Dy. CIT vs. Core Health Care Ltd. (2008) 215 CTR (SC) 1 [LQ/SC/2008/289] : (2008) 3 DTR (SC) 49 : (2008) 298 ITR 194 (SC) [LQ/SC/2008/289] and the interest paid is deductable under s. 36(1)(iii) of the Act.
6. Sec. 36(1)(iii) of the Act during the relevant assessment year reads as under :
"36 Other deductions.—(1) The deduction provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in s. 28—
(i) to (ii)……….
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.
Explanation—Recurring subscriptions paid periodically by share-holders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;"
7. Mr. Vimal Gupta, counsel for the appellant-revenue submits that the proportionate interest paid on borrowed funds utilized for new project is not deductable under s. 36(1)(iii) of the Act to the extent the funds have been utilized for capital expenditure. Mr. Gupta submits that on identical facts the apex Court in the matter of Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC) has disallowed the interest paid on funds utilized for capital expenditure. Therefore, it is submitted that the question of law as framed be admitted and considered.
8. On the other hand, Mr. Percy Pardiwalla, counsel for the respondent submits that we are concerned for the asst. yr. 1999-2000. The interest paid on borrowed funds has to be allowed in terms of s. 36(1)(iii) of the Act which provides that deduction should be allowed in respect of payment of interest on amounts borrowed even in respect of capital used for the purposes of business or profession. Mr. Pardiwalla points out that the construction work in respect of which borrowed funds were utilized was only to set up a new project of their business centres. These funds have not been utilized to establish a new business but have been utilized to establish new business centre which is a part of its running business. Consequently the expenditure incurred on payment of interest for borrowed funds which have been used for the purpose of respondent's business is a deductable expense as held by the Supreme Court in the matter of Core health Care Ltd. (supra).
9. The assessment year involved in the present proceeding is 1999-2000. At that point of time any amount of interest paid on borrowed funds even in respect for utilization for capital purposes would be allowed as a deduction provided the same is for the purposes of the business. The decision of the Supreme Court in the matter of Core Health Care Ltd. (supra) concludes the issue in favour of the respondent-assessee. In the above case, the decision of the apex Court in the matter of Challapalli Sugars Ltd. (supra) was considered and distinguished on the ground that the interest in that case was paid on borrowed funds utilized to bring into existence a fixed asset of a business which had not gone into production. In Challapalli Sugars Ltd. case (supra), the Court observed that the borrowing was not for the purpose of business inasmuch as no business had come into existence. In the present facts, there could be no dispute that the respondent-assessee was in the business of running business centres and the borrowed capital on which interest was paid was utilized for the purpose of constructing/establishing further business centres. The apex Court in the matter of Core Health Care Ltd. (supra) had observed that under s. 36(1)(iii) of the Act it does not matter whether borrowed funds are used for capital purposes. All that the section contemplates is that the amount must be borrowed for the purposes of business. The Court held that there is a difference between borrowing of a loan and actual utilization/acquisition of the loan for the purpose of a capital asset. Borrowing of a loan does not bring into existence an asset of enduring nature. The investment on the borrowed capital brings into existence an asset of an enduring nature. The Court observed that a transaction of borrowing is not the same as a transaction of investment. Consequently, the interest paid has to be allowed as deduction under s. 36(1)(iii) of the Act as in existence during the asst. yr. 1999-2000. In view of the above, Question (a) raises no substantial question of law and is therefore, dismissed. Regarding Question (b) :
10. During the asst. yr. 1999-2000, the respondent-assessee had sought allowance of expenses on account of repairs and maintenance aggregating to Rs. 1.39 crores. During the course of the assessment proceedings the AO was of the view that the expenditure on repairs and maintenance was capital in nature and therefore, the expenses incurred have to be capitalized and cannot be allowed as a revenue expenditure. In view of the above, in his order dt. 30th March, 2005, the AO added an amount of Rs. 1.39 crores to the respondent-assessee's income for asst. yr. 1999-2000 after disallowing the expenses on account of repairs and maintenance.
11. In appeal, the CIT(A) by his order dt. 30th Nov., 2005 allowed the respondent-assessee's appeal on the ground that the same had been allowed for the asst. yrs. 1998-99 and 2000-01.
12. The Revenue filed an appeal to the Tribunal. By an order dt. 19th Nov., 2008, the Tribunal dismissed the Revenue's appeal and held that expenses for repairs and maintenance are revenue in nature. This view had been taken by the Tribunal earlier for the asst. yr. 2001-02 was followed.
13. Mr. Vimal Gupta, counsel for the revenue submits that the expenses for repairs and maintenance were in fact expenses of capital nature and was not in the nature of current repairs as contemplated under s. 30 of the Act. Mr. Gupta invited our attention to the fact that the amount spent on renovation during the year was to the extent of Rs. 1.54 crores and this quantum by itself is evidence of the fact that this expenditure cannot be said to be for current repairs. Consequently, he submits that the Tribunal erred in having allowed the expenses for repairs and maintenance as an expenditure for current repairs. On the other hand, Mr. Pardiwalla submits that the expenses incurred by the respondent were essentially in the nature of renovation of various buildings where they are running their business centres. According to Mr. Pardiwalla none of these expenses resulted in acquisition of any new asset and the repairs and maintenance of existing building was an on going process carried out by it so as to augment the revenue in running its business centres. Consequently, he submits that the order of the Tribunal ought not to be interfered with.
14. We find that the appellant is in the business of running business centres. Such business centres are required to be kept in proper condition with appropriate ambiance. Therefore, expenses on account of repairs and maintenance is an on going process for a business such as the one run by the respondent assessee. Further, the quantum of amount spent can never be a factor by itself to conclude that the expenses are of a capital nature and not expenses on revenue account. In fact, this Court in the matter of New Shorrock Spg. & Mfg. Co. Ltd. vs. CIT (1956) 30 ITR 338 (Bom) [LQ/BomHC/1956/62] had observed that where the expenditure is incurred for preserving an existing asset and does not bring a new asset into existence it cannot be treated as capital expenditure. In this case also the expenses are incurred not for bringing any new asset into existence and therefore the expenditure is incurred not on capital but revenue account.
15. In view of the above, Question (b) also does not raise a substantial question of law and the same is dismissed. Regarding Question (c) :
16. This question is purely consequential to the Questions (a) and (b). As Questions (a) and (b) are dismissed as not raising any substantial question of law, Question (c) is also dismissed.
17. The appeal is dismissed. No order as to costs.