High CourtDivision Bench2008-02-08Appeal partly allowed.

Commissioner of Income Tax, ValSAD, Gujarat v. M/s United Phosphororous Ltd.

Case / Petition Number:Civil Appeal No. 1183 of 2008

Neutral Citation:(2008) 2 S.C.R. 658

Case Details & Bench

Court: High Court
Hon'ble Judges: S. H. Kapadia
B. Sudershan Reddy
Judgment Date: 2008-02-08
Court Decision / Holding: Question No.1 is answered in favour of the assessee and against the Department; Question No.2 is remitted to the High Court for reconsideration; the Department's civil appeal is partly allowed with no order as to costs.
Final Disposition: Appeal partly allowed.

Parties to the Case

Appellants / Petitioners

Commissioner of Income Tax, ValSAD, Gujarat

Respondents

M/s United Phosphororous Ltd.

Legal Representation & Advocates

Counsels for Petitioners

• P. Vishwanatha Shetty
• T. Srinivasa Murthy
• Gaurav Agrawal
• B. V. Balaram Das

Counsels for Respondents

• Pardiwala
• Jay Savla
• Reena Bagga

Case Synopsis & Summary

This Supreme Court civil appeal concerns two questions arising from the assessment year(s) under the Income-tax Act, 1961. The Department challenged deductions claimed by the assessee, M/s United Phosphororous Ltd., involving two issues: (i) whether interest paid on borrowings for capital assets not actually used in the relevant financial year can be allowed as a deduction under section 36(1)(iii); and (ii) whether the assessee had an option in law to claim partial depreciation in respect of a block of assets. The Court held on Question 1 that the deduction is permissible, applying the Court’s prior decision in Core Health Care Ltd., which supported allowing such interest deductions even where assets were not put to use in the year. On Question 2, the High Court’s reliance on Mahendra Mills was noted, but since section 34(1) was omitted with effect from 1 April 1988, the matter was remanded to the High Court to determine whether the assessee could claim partial depreciation for a block of assets, and whether Mahendra Mills would apply to the years in question, taking into account the scope of Explanation 5 to section 32(1) as amended by the Finance Act, 2001. Consequently, the appeal is partly allowed: Question 1 decided in the assessee’s favour; Question 2 remitted to the High Court with no costs to be awarded.

Provisions of Law Cited

Section 36(1)(iii) of the Income-tax Act, 1961Section 34(1) of the Income-tax Act, 1961Explanation 5 to Section 32(1) of the Income-tax Act, 1961Section 260A of the Income-tax Act, 1961

Submissions & Arguments

Contentions of Appellants / Petitioners

The Department contended that deduction under section 36(1)(iii) should not be available for interest paid on borrowings for capital assets unless the assets were put to use in the relevant financial year, arguing that such interest does not represent expenditure incurred for the purposes of the business in that year. They relied on the traditional interpretation that deduction is linked to actual utilization of the asset in the year. The Department also argued that the depreciation framework under section 34(1) (and related provisions) could not support a partial depreciation option for a block of assets given the removal of section 34(1) with effect from 1 April 1988, and urged the High Court to distinguish or limit older precedents.

Contentions of Respondents

The assessee contended that interest on borrowings for capital assets not used in the year can be claimed as deduction under section 36(1)(iii), citing Core Health Care Ltd. as precedent. They argued that the purpose of section 36(1)(iii) is to allow deductions on interest costs incurred to finance capital assets, irrespective of whether those assets were employed in income-earning activity in the year. On depreciation, they asserted that the law requires consideration of block-of-assets concepts and that partial depreciation could be permissible under the evolving statutory framework; given the omission of section 34(1), the High Court should determine the availability of any such option and whether Mahendra Mills would apply under current law, while also examining Explanation 5 to section 32(1) as amended by the Finance Act, 2001.

Cited Precedents (2)

Case Name	Citation	Treatment	Explanation
Dy. Commissioner of Income Tax, Ahmedabad v. M/s Core Health Care Ltd.	(2008) 2 SCALE 327	Positive	The Court relies on Core Health Care Ltd. to affirm that interest under section 36(1)(iii) is allowable even when the asset is not used in the year.
Commissioner of Income-tax v. Mahendra Mills & Anr.	(2000) 243 ITR 56	Distinguished	Mahendra Mills was cited as recognizing an option to claim depreciation, but the present case involves a post-1988 regime where section 34(1) was omitted, and the block-of-assets concept was not present there; thus the decision is distinguished and the matter remitted.

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Extracted Judgment Text

Exact text extracted from official judgment records.

[2008) 2 S.C.R. 658 ,._... .. A JT. COMMISSIONER OF INCOME TAX, VALSAO, GUJARAT II. MIS.UNITED PHOSPHOROUS LTD. (Civil Appeal No. 1183 of 2008) B FEBRUARY 8, 2008 [S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] _Income Tax Act, 1961:_ _s.36(1)(iii)_ - _Interest paid in respect of borrowings on_ C _capital assets not put to use in the concerned finanCial year_ - _Held: Can be permitted as allowable deduction under s. 36(1 )(iii)._ _s.34(1) and Expln. 5 to s.32(1)_ - _Option to claim partial_ D _depreciation in respect of block of assets_ - _If available_ - _High Court relied upon_ Mahendra Mills _case, in which it was held that assessee has option to claim depreciation_ - _Held: In_ Mahendra Mills _case, the concept of block of assets was not there -Also, s. 34( 1) has been omitted w. e. f 1. 4. 1988_ - _Hence,_ E _matter remitted to High Court for re-consideration._ . The two questions which arose for consideration in the present appeal are 1) Whether interest paid in respect of borrowings on capital assets not put to use in the concerned financial year can be permitted as allowable F deduction under s.36(1 )(iii) of the Income-tax Act, 1961 and 2) Whether respondent-assessee had an option in law to claim partial depreciation in respect of any block of assets. Partly allowing the appeal, by answering the first question in favour of the assessee and remitting the G second question to the High Court, the Court H HELD: 1. Question No.1 is squarely covered by decision of this Court in favour of the assessee and against the Department in the _Core Health Care Ltd._ case 658 :,.... .. JT. COMMNR. OF INCOME TAX, VALSAD, GUJARAT _v._ M/S. UNITED PHOSPHOROUS LTD . 659 .,__ --'< [Para 4] .(660-D] A _Dy. Commr. of Income Tax, Ahmedabad v. Mis. Core Health Care Ltd._ (2008) 2 SCALE 327 - relied on. . ""' . 2. Regarding Question No.2, the High Court has relied upon the judgment of this Court in the case of s _Mahendra Mills_ in which it has been held that the assessee -+. has an option to claim depreciation. However, s.34(1) of ~ the Income-tax Act, 1961 has been omitted w.e.f. 1.4.88. Therefore, the matter is being remanded to the High Court, with the direction to consider: whether the assessee has C an option in law to claim partial depreciation in respect of block of assets. In the case of _Mahendra Mills_ the concept of block of assets was not there. Substantial question of law did arise for determination before the High Court under s.260A of the 1961 Act, particularly when s.34(1) of the 1961 Act stood omitted w.e.f. 1.4.88. The High Court is D also requested to consider whether the judgment of this Court in the case of _Mahendra Mills_ would apply to the assessment years under consideration. In this connection the High Court is also requested to take into account the scope of Explanation 5 to s. 32(1) of the E 1961 Act, made by the Finance Act, 2001. [Para 5] (660-E-H, 661-A, B] _Commissioner of Income-tax v. Mahendra Mills and Anr._ - (2000) 243 ITR 56 referred to. F CIVILAPPELLATE JURISDICTION: Civil Appeal No. 1183 of 2008 From the Judgment and Order dated 08.01.2002 of the High Court of Judicature of Gujarat atAhmedabad in Tax Appeal No. 2 of 2002. G P. Vishwanatha Shetty, T. Srinivasa Murthy, GauravAgrawal and B.V. Balaram Das for the Appellant. Pardiwala, Jay Savla and Reena Bagga for the Respondent. H SUPREME COURT REPORTS 660 [2008) 2 S.C.R. A The Judgment of the Court was delivered by KAPADIA, J. 1. Delay condoned. - 2. Leave granted. 8 c 3. In this civil appeal filed by the Department two questions of law arise for determination which questions are as follow: - (1) Whether interest paid in respect of. borrowings on capital assets not put to use in the concerned financial year can be permitted as allowable deduction under Section 36(1 )(iii) of the- Income-tax Act, 1961? - (2) VVhether respondent-assessee had an option in law to claim partial depreciation in respect of any block of assets . . o 4. Our answer to the above-mentioned question No.(1) is squarely covered by our decision in favour~of the assessee and against the Department in the case of Dy ... Commr. of Income Tax, Ahmadabad v. Mis. Core Health Care Ltd. in Civil E Appeal· Nos.3952-55 of 2002. 5. Regarding the question No.(2), quoted above, it may be noted that the High Court has relied upon the judgment of this Court in Commissioner of Income-tax v. Mahendra Mills & Anr. - (2000) 243 ITR 56 in which it has been held that the · F assessee has an option to claim depreciation. However, Section 34(1) of the Income-tax Act, 1961 (for short, "1961 Act") has been omitted w.e.f. 1.4.88. Therefore, we are remanding the matter to the High Court after setting aside the impugned order of the High Court on this question, with the direction to the High G Court to consider : whether the assessee has an option in law to claim partial depreciation _in respect of block of assets._ in the case of Mahendra Mills (supra) the concept of block cf assets was not there. In our view, substantial question of law did arise for determination before the High Court under Section 260A of H the 1961 Act, particularly when Section 34(1) of the 1961 Act ) JT. COMMNR. OF INCOME TAX, VALSAD, GUJARAT _v._ 661 MIS.UNITED PHOSPHOROUS LTD. [KAPADIA, J.] stood o.mitted w.e.f. 1..4.88. The High Court is also requested to A consider whether the judgment of this Court in the case of **Mahendra Mills (supra)** would apply to the assessment years under consideration. In this connection the High Court is also requested to take into account the scope of Explanation 5 to Section 32(1) of the 1961 Act, made by the Finance Act, 2001. 8 6. Accordingly question No.(1) is answered in favour of assessee and against the Department and question No.(2) is remitted to the High Court. Consequently the Department's civil appeal is partly allowed with no order as to cost. B.8.8. Appeal partly allowed.[c ]