DEPUTY COMMISSIONER OF INCOME TAX, AHMEDABAD versus M/S. CORE HEALTH CARE LTD.

Citation: [2008] 2 S.C.R. 662 · Decided: 08-02-2008 · Supreme Court of India · Bench: S.H. KAPADIA · Disposal: Case Partly allowed

Judgment (excerpt)

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[2008] 2 S.C.R. 6~2 
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A 
DEPUTY COMMISSIONER OF INCOME TAX, AHMEDABAD 
)L.4 . 
.... 
v. 
MIS. CORE HEALTH CARE LTD. 
(Civil Appeal Nos. 3952-3955 of 2002) 
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B 
FEBRUARY 8, 2008 
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(S.H. KAPADIA AND 8. SUDERSHAN REDDY, JJ.) 
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Income Tax Act, 1961: 
s. 36(1 (iii) -
Computation of business income -
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c Deduction towards interest paid in respect of capital borrowed 
for purpose of business -Assessee borrowed money in 1991-
1992 for installation of new machinery - Claimed deduction 
towards interest paid on amount borrowed - A. 0. disallowed 
deduction holding that production on new machinery had not 
D started - /TAT and High Court allowed the claim - HELD: An 
assessee is entitled to claim deduction towards interest paid 
on borrowed capital used for business purpose irrespective of 
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the result of using the capital borrowed - Once the test "for the 
purpose of business" is satisfied in respect of the capital 
E borrowed, assessee would be entitled to deduction u/s 36(1)(iii) 
- The provision makes no distinction between money borrowed 
to acquire capital asset or revenue asset - What clause (iii) 
emphasizes is user of capital and not user of asset which 
comes into existence as a result of borr.owed capital unlike 
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s. 37 which expressly excludes an expense of a capital nature 
-Proviso to clause (iii) inserted ins. 36(1) w.e.f 1.4.2004 would 
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not be applicable on facts of instant case. 
s. 36(1)(iii), proviso and s.43(1); Explanation 8 - HELD: 
Proviso to s.36(1)(iii) inserted w.e.f 1.4.2004, would operate 
G prospectively - Explanation 8 to s. 43(1) applies only to 
sections like ss. 32, 32A, 33 and 41 which deal with concepts 
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like 'depreciation' - It has no relevancy to s.36(1)(iii) - Words 
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'actual cost' as defined in s. 43(1 ), have no relevancy to 
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s. 36(1 )(iii). 
H 
662 
,. 
DEPl:JTY COMMNR. OF INCOME TAX, AHMEDABAD 
663 
v. MIS. CORE HEALTH CARE LTD . 
.... 
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Amendment Applications in Tax Appeals before High 
A 
Court - Filed within time - Raising substantial questions of 
law - Summarily rejected by High Court without answering the 
questions of law - The questions remitted to High Court for its 
consideration in accordance with law -
Practice and 
Procedure. 
B 
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The assessee-respondent in the instant appeals was 
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engaged in the business of manufacturing and sale of 
intravenous solutions. For the assessment year under 
consideration it claimed deduction of Rs.1,56, 76000/- paid 
as interest on borrowings made for installation of new c 
machinery during the year 1991-1992. The A.O., relying 
on Challapalli Sugars Ltd. case*, disallowed the deduction 
claimed holding that during the assessment year under 
consideration production on the new machinery had not 
started. The A.O. and the CTT(A) added the said amount D. 
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of Rs.1,56, 76,000/- to the income of the assessee. 
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However, the TribLJnal held that the A.O. was not justified 
in making the disallowance. The assessee filed Tax 
Appeals before the High Court. Subsequently, the 
assessee filed Civil Applications 53 and 54 of 2001 in the E 
Tax Appeal Nos.449 and 450 of 2000 before the High Court 
raising additional grounds involving substantial questions 
of law. The High Court dismissed the appeals filed by the 
Revenue .and confirmed the order of the Tribunal. It also 
rejected Civil Applications 53 and 54 of 2001 summarily, 
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·without considering the additional grounds and the 
substantial questions of law on merits. 
The question for consideration before the Court was: 
whether interest paid in respect of borrowings on capital 
·assets not put to use in the financial year concerned can G 
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be permitted as allowable deduction under Section 
36(1 )(iii) of the Income-tax Act, 1961? 
Answering the question in favour of the assessee 
and partly allowing the appeals, the Court 
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664 
SUPREME COURT REPORTS 
· [2008] 2 S.C.R. 
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HELD: 1.1 Interest on moneys borrowed for the 
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purposes of business is a necessary item of expenditure 
in a business. For allowance of a claim for deduction of 
interest under Section 36 of the Income Tax Act, 1961, all 
that is necessary is that - firstly, the money, i.e. capital, 
B must have been borrowed by the assessee; secondly, it 
must have been borrowed for the purpose of business; 
and, thirdly, the assessee must have paid interest on the 
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borrowed amount. All that is germane is : whether the 
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borrowing was, or was not, for the purp

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