COMMISSIONER OF INCOME TAX Vs. DEEPAK NITRITE LTD.

JUDGEMENT

(1.) "(A) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the order of the CIT(A) whereby he allowed assessee's claim of interest expenditure amounting to Rs. 93,04,718 on the funds borrowed for setting up a new unit Taloja Chemical Division at Taloja despite the fact that assessee established altogether a new unit or division itself ?

(2.) IN relation to question No. A, the assessee had claimed interest expenditure on the funds borrowed for setting up a 1996. The AO treated the same as capital expenditure and disallowed the same. The assessee carried the matter in appeal before CIT(A) who deleted the addition. Revenue carried the matter in appeal before the Tribunal, but did not succeed.

(3.) THE assessee in the year under consideration had commissioned a new unit called Taloja Chemical Division, which products called OT, PT, MT etc. The assessee claimed deduction of interest amounting to Rs. 1,52,74,414, out of which a sum of Rs. 93,74,715 was in relation to interest on borrowed funds prior to the date of commissioning of the Taloja unit. The AO called upon the assessee to show cause as to why the entire amount of interest pertaining to the period prior to commissioning of the new unit should not be treated as capital expenditure instead of revenue expenditure as claimed by the assessee. The assessee in its reply stated that it was manufacturing ONCB, PNCB, ONT, PNT and MNT at its Nitro Aromatics Plant at Nandesari. Since the company was facing very stiff competition for marketing its products as a number of manufacturers were producing these products, it went for value added products out of the abovesaid products. Since the assessee did not have any manufacturing facility, it got these products converted into OCA, PCA, to PT and MT from outside parties on job work basis. However, as the finished goods were not of required standards, the assessee went in for an expansion to set up a new unit for which the company adopted the process of hydrogenisation by using hydrogen gas instead of hydrochloric acid or iron ore being used by the parties from whom it was procuring the concerned items on job work basis. Since the hydrogen was not available near its Nitro Aromatics Plant, the company had to go to the source of hydrogen at Taloja. It was, accordingly, contended that it was an expansion of its already existing business, hence, the entire interest of Rs. 93,04,715 incurred during the construction period of the said project should be allowed as revenue expenditure under s. 36(1)(iii) of the Act. The AO held that the interest on borrowings made by the assessee for setting up of the new unit is in the nature of capital expenditure till the date the assessee starts its business. The assessee cannot give different treatment to the same expenditure, one for the purpose of its book results and other for the purpose of taxation. He, accordingly, disallowed the claim towards interest expenses of Rs. 93,04,715.