Case Note & Summary
The Commissioner of Income Tax appealed against the order of the Income Tax Appellate Tribunal (ITAT) which allowed the respondent-assessee, Zuari Industries Ltd., to treat interest of Rs.1,97,91,197/- paid on borrowings for setting up an Argon Gas Plant as revenue expenditure, even though the amount was capitalized in the books and the plant had not yet commenced operations. Additionally, the ITAT allowed the assessee to treat a payment of Rs.7,09,10,000/- to Texmaco as deferred revenue expenditure, to be amortised over 8 years. The High Court of Bombay at Goa dismissed the appeal, holding that the ITAT was justified in both findings. The court noted that the interest was paid on borrowings used for the plant, and the capitalization in books did not change the character of the expenditure as revenue. Regarding the Texmaco payment, the court found that the ITAT correctly allowed amortisation as deferred revenue expenditure, as the payment was for a benefit spread over several years. The appeal was dismissed with no order as to costs.
Headnote
A) Income Tax - Revenue Expenditure vs Capital Expenditure - Interest on Borrowings - Interest of Rs.1,97,91,197/- paid on borrowings for setting up Argon Gas Plant, capitalized in books, held to be revenue expenditure even before plant operation - ITAT justified in allowing deduction as revenue expenditure (Para 1)
B) Income Tax - Deferred Revenue Expenditure - Amortisation - Payment of Rs.7,09,10,000/- to Texmaco allowed as deferred revenue expenditure amortised over 8 years - ITAT justified in allowing amortisation (Para 1)
Issue of Consideration
Whether interest of Rs.1,97,91,197/- paid on borrowings capitalized in books for setting up Argon Gas Plant is revenue expenditure before plant operation; Whether Rs.7,09,10,000/- paid to Texmaco as deferred revenue expenditure amortised over 8 years is allowable
Final Decision
Appeal dismissed. ITAT order upheld. No order as to costs.
Law Points
- Interest on borrowings for setting up a plant before commencement of commercial production is revenue expenditure
- Payment to Texmaco as deferred revenue expenditure amortised over 8 years is allowable
Case Details
2020 LawText (BOM) (01) 123
Tax Appeal No. 51 of 2008
Ms. Amira Razaq (for Appellant), Mr. Madhur Agarwal with Mr. P. Arolkar (for Respondent)
Commissioner of Income Tax
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Nature of Litigation
Tax Appeal by Revenue against ITAT order allowing deductions
Remedy Sought
Revenue sought to set aside ITAT order allowing interest on borrowings as revenue expenditure and payment to Texmaco as deferred revenue expenditure
Filing Reason
Revenue aggrieved by ITAT order allowing deductions
Previous Decisions
ITAT allowed the assessee's claim for interest on borrowings as revenue expenditure and payment to Texmaco as deferred revenue expenditure amortised over 8 years
Issues
Whether interest of Rs.1,97,91,197/- paid on borrowings capitalized in books for setting up Argon Gas Plant is revenue expenditure before plant operation
Whether Rs.7,09,10,000/- paid to Texmaco as deferred revenue expenditure amortised over 8 years is allowable
Submissions/Arguments
Appellant/Revenue argued that interest capitalized in books should be treated as capital expenditure
Respondent/Assessee argued that interest is revenue expenditure and payment to Texmaco is deferred revenue expenditure
Ratio Decidendi
Interest on borrowings for setting up a plant, even if capitalized in books, is revenue expenditure if the plant has not commenced operations. Payment for deferred revenue expenditure can be amortised over the period of benefit.
Judgment Excerpts
Whether on the facts and in the circumstances of the case the ITAT was justified in holding that interest of Rs.1,97,91,197/- paid on borrowings, capitalized in the books of account for setting up of Argon Gas Plant as a revenue expenditure, even before putting the said plant into operation ?
Whether on the facts and in the circumstances of the case, the ITAT was justified in holding that the amount of Rs.7,09,10,000/- paid to Texmaco, as deferred revenue expenditure allowing the payment to be amortised for a period of 8 years ?
Procedural History
Assessee filed return for AY 1995-96 on 2 Nov 1995, revised on 27 Mar 1997. Assessment completed. ITAT allowed deductions. Revenue appealed to High Court. Appeal admitted on 23 June 2008 on substantial questions of law. Reserved on 22 Nov 2019, pronounced on 2 Jan 2020.
Acts & Sections
- Income Tax Act, 1961: 143(2), 142(1)
