Holding

Interest on borrowed capital used for business purposes is deductible under Section 36(1)(iii) irrespective of the asset’s operational status, and neither Explanation 8 nor the 2004 proviso applies; the three substantive questions are remitted to the High Court.

Summary

Core Health Care Ltd., a manufacturer of intravenous solutions, borrowed money in 1991‑92 to install new machinery and claimed a deduction for the interest paid under Section 36(1)(iii) of the Income‑Tax Act. The assessing officer disallowed the deduction, relying on the Challapalli Sugars case, on the ground that the machinery had not yet been put to use. The Tribunal and the Gujarat High Court allowed the deduction, but the Revenue filed civil applications raising three substantial questions of law, which the High Court dismissed without consideration. The Supreme Court held that interest on borrowed capital is deductible under Section 36(1)(iii) if the borrowing was for business purposes, irrespective of whether the asset is operational, and that Explanation 8 to Section 43(1) and the 2004 proviso to Section 36(1)(iii) do not apply to the facts. The Court also remitted the three questions to the High Court for fresh consideration and partly allowed the civil appeals.

Issues considered

Whether interest paid on borrowings for capital assets not yet put to use is allowable as a deduction under Section 36(1)(iii) of the Income‑Tax Act.
Whether Explanation 8 to Section 43(1) restricts the deduction of such interest.
Whether the proviso inserted in Section 36(1)(iii) w.e.f. 1‑April‑2004 applies retrospectively to the assessment years in question.
Whether the High Court erred in summarily dismissing the civil applications raising substantial questions of law.

Legislation cited

Finance Act, 2003s. Proviso to Section 36(1)(iii)
Income Tax Act, 1961s. 260A, s. 32, s. 32A, s. 33, s. 36(1)(iii), s. 37, s. 41, s. 43(1)

Subjects

Income TaxSection 36(1)(iii)Interest deductionCapital assetBusiness purposeExplanation 8ProvisoCivil appealsTax law

Judgment

y
[2008] 2 S.C.R. 6~2 I-
!~

A DEPUTY COMMISSIONER OF INCOME TAX, AHMEDABAD )L.4
.....
v.
MIS. CORE HEALTH CARE LTD.
(Civil Appeal Nos. 3952-3955 of 2002) ,__

FEBRUARY 8, 2008
B r
(S.H. KAPADIA AND 8. SUDERSHAN REDDY, JJ.) I
'---

Income Tax Act, 1961: t
s. 36(1 (iii) - Computation of business income - ~
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 l..
on borrowed capital used for business purpose irrespective of
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
F 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 >--- ~

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 '
~
like 'depreciation' - It has no relevancy to s.36(1)(iii) - Words 1-
'actual cost' as defined in s. 43(1 ), have no relevancy to
~
s. 36(1 )(iii).
H 662
,.
DEPl:JTY COMMNR. OF INCOME TAX, AHMEDABAD 663
v. MIS. CORE HEALTH CARE LTD .
....
~
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
The assessee-respondent in the instant appeals was
-+• 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.
~ of Rs.1,56, 76,000/- to the income of the assessee.
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, F
·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
-'l 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
H
)

664 SUPREME COURT REPORTS · [2008] 2 S.C.R.

A

A HELD: 1.1 Interest on moneys borrowed for the .,..:
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 +
~
borrowed amount. All that is germane is : whether the
borrowing was, or was not, for the purpose of business.
t.
c Section 36(1 )(iii) of the 1961 Act has to be read on its own
terms. It is a Code by itself. Section 36(1 )(iii) is attracted
when the assessee borrows the capital for the purpose ·
of his business. [para 8 and 13) [670-C, D, E; 673-G]
Challapalli Sugars Ltd. & Anr. Vs. Commissioner of
D Income-tax, A. P. and Anr. [1975) 98 ITR 167 - held
inapplicable. ~. -!
Calico Dyeing & Printing Works v. Commr. of Income-
tax, Bombay City-I/ (1958) 34 ITR 265 - approved.
~ "
'I
,
E 1.2 The expression "for the purpose of business"
occurring in Section 36(1 )(iii) indicates that once the test ,_
of "for the purpose of business" is satisfied in respect of
the capital borrowed, the assessee would be entitled to '·
deduction under Section 36(1 )(iii) of the 1961 Act. This
F provision makes no distinction between money borrowed ,;..-
to acquire a capital asset or a revenue asset. All that the
section requires is that the assessee must borrow capital
and the purpose of the borrowing must be for business
which is carried on by the assessee in the year of account.
What sub-section (iii) emphasizes is the user of the capital
G
and not the user of the asset which comes into existence
.>-
as a result of the borrowed capital unlike Section 37 which
expressly excludes an expense of a capital nature. The
legislature has, therefore, made no distinction in Section
36(1 )(iii) between "capital borrowed for a revenue
H
DEPUTY COMMNR. OF INCOME TAX, AHMEDABAD 665
v. MIS. CORE HEALTH CARE LTD.

purpose" and "capital borrowed for a capital purpose". A
The transaction of borrowing is not the same as the
transaction of investment. The transaction of borrowing
attracts the provisions of Section 36(1 )(iii). An assessee
is entitled to claim interest paid on borrowed capital
provided that capital is used for business purpose a
irrespective of what may be the result of using the capital
i which the assessee has borrowed. [para 8 and 13]
[670-E, F, G, H; 671-A; 674-8, C]
India Cements Ltd. v. Commissioner of Income-tax,
Madras (1966) 60 ITR 52; Commissioner of Income Tax vs. C
Associated Fibre and Rubber Industries (P) Ltd. [1999] 236
ITR 471 - relied on. ·
1.3 In the instant case, A.O. was not justified in making
disallowance of Rs.1,56,76,000/- in respect of borrowings D
utilized for purchase of machines. Before the High Court
', it was not the. case of the Department that a new business
was set up- or commenced during the assessment year
under consideration. It was undisputed before the High
Court that three additional machines were installed by the E
assessee during the assessment year under
consideration for the production of intravenous
injectibles. It was not in dispute that the assessee had
borrowed moneys during the accounting year
commencing from 1.4.91 to 31.3.92. [para 6 and 14]
[668-F, G; 674-E] F
2. The instant appeals pertain to the assessment
years 1992-93, 1993-94, 1995-96 and 1997-98. The proviso
inserted in Section 36(1 )(iii) of the 1961 Act w.e.f. 1.4.2004
will not apply to the facts of the case. The said proviso G
would operate prospectively w.e.f. 1.4.04. [para 11] [672-F]
3. Explanation 8 applies only to those Sections like
Sections 32, 32A, 33 and 41 which d~al with concepts like
Depreciation. The concept of Depreciation is not there in
Section 36(1 )(iii). That is why the legislature has used the H
. 666 SUPREME COURT REPORTS [2008] 2 S.C.R.

A words "unless the context otherwise requires". Hence,
Explanation 8 has no relevancy to Section 36(1)(iii) and,
therefore, it has no application to the facts of the instant
case. Similarly, the words "actual cost" do not find place
in Section 36(1)(iii) of the 1961 Act which otherwise find
B place in Sections 32, 32Aetc of the 1961 Act. "Actual cost"
of an asset has no relevancy in relation to Section 36(1 )(iii)
of the 1961 Act. [para 8, 1O] (671-A, 672-B, o; E]
4. Although the Department had moved Civil
Application Nos.53 and 54 of 2001 during the pendency
C of Tax Appeal Nos.449 and 450 of 2000 well within
limitation, the High Court without answering the three
questions raised therein, summarily rejected the said
applications. The High Court erred in dismissing the two
civil applications for amendment of the Memo of Appeal
D in ttle said Tax Appeals. The three questions mentioned
in the judgment are substantial questions of law ahd, .
therefore, the High Court ought to have decided those
questions. Accordingly, the said three questions are
remitted to the High Court for fresh consideration by it in
E accordance with law. [para 16-17] [675-C, D, E]
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.
3952-3955 of 2002.
From the Judgment and Order dated .25.04.2001 of the
F '" High Court of Judicature of Gujarat atAhmedabad in Tax Appeal
Nos. 449 & 450 of 2000 and civil Applications Nos. 53 and 54
of 2001.
WITH
Civil Appeal Nos. 8509-10 of 2002.
G
P. Vishwanatha Shetty, T. Srinivasa Murthy, Gaurav Agrawal
and B.V. Balaram Das for the Appellant.
S. Ganesh, Amar Dave and Rustom B. Hathikhanawala
H '.:~or the Respondent.
DEPUTY COMMNR. OF INCOME TAX, AHMEDABAD 667
v. MIS .. CORE HEALTH CARE LTD. [KAPADIA, J.]

The Judgment of the Court was delivered by A
KAPADIA, J. 1. For the sake of convenience we state the
facts occurring in Civil Appeal Nos.3952-55 of 2002 - Dy.
Commr. of Income Tax, Ahmedabad v. Mis. Core Health Car~
Ltd.
B
2. These civil appeals are directed against judgment and
order dated 25.4.01 delivered by Gujarat High Court in Tax
Appeal Nos.449 and 450 of 2000 and in Civil Application Nos.53
and 54 of 2001 whereby the Department's appeals, under
Section 260A of the Income-tax Act, 1961, stood dismissed. c
3. On 31.12.92 assessee filed its return of income for AY
1992-93 declaring "nil" income. Later on the assessee filed a
revised return on 6.8.93 declaring a loss of Rs.1, 11,68,543/-.
Assessee-company is engaged in the business of
manufacturing and sale of intravenous solutions. F.or the D
assessment year under consideration assessee claimed
deduction towards expenses aggregating to Rs.2, 12,05,459/-
which included interest on borrowings of Rs.1,56,76,000/-,
During the assessment year under consideration assessee had
installed new machinery. The A.O. vide assessment order dated E
30.3.95 disallowed the amount of Rs.1,56, 76,000/- placing
reliance on the judgment of this Court in Challapalli Sugars
Ltd. & Anr. v. Commissioner of Income-tax, A.P. and Anr. -
(1975) 98 ITR 167, inter alia, on the ground that during the
assessment year under consideration assessee had installed F
new machinery on which production had not started. On appeal;
vide order dated 15.11.96, CIT (A) confirmed the addition of
interest amount on borrowings of Rs.1,56,76,000. Therefore,
both the authorities, namely, the A.O. and CIT (A) added the
said amount of Rs.1,56,76,000/-to the income of the assessee.' G
The matter was carried in appeal by the assessee. Vide order,
dated 6.6.2000 the Tribunal held that the Department was not
justified in adding Rs.1,56, 76,000/- to the income of the'
assessee. In other words, the Tribunal held that the A.O. was 1

not justified in making disallowance of Rs.1,56,76,000/- in H
)"/
668 SUPREME COURT REPORTS [2008] 2 S.C.R.

A respect of borrowings utilized for purchase of machinery. This
decision was confirmed by the High Court, hence these civil ~'
appeals are filed by the Department.
4. The following question of law has been placed before
us for determination:
B
"Whether interest paid in respect of borrowings on capital
assets not put to use in the concerned financial year can
be permitted as allowable dE:duction under Secfion
36(1 )(iii) of the Income-tax Act, 1961 ?"
c 5. According to the Department, the assessee was not
entitled to treat the interest on borrowings as revenue
expenditure. According to the Department, in view of
Explanation 8 to Section 43(1) of the Income-tax Act, 1961 (for
short, "1961 Act') the assessee was not entitled to claim
D deduction for interest on borrowings, particularly; when the
machines were not put to use during the assessment year under

-
consideration. According to the Department, provisions of )..

Section 36(1 )(iii) of the 1961 Act were required to be
harmoniously construed along with the provisions of Explanation :

E 8 to Section 43(1) regarding actual cost. According to the
Department provisions of Section 36(1 )(iii) being general in
nature had to give way to the special provisions contained in
Explanation 8 of Section 43(1) of the 1961 Act.
6. At the outset, we may clarify that before the High Court it
F was not the case of the Department that a new business was
set up or commenced during the assessment year under );.--

consideration. It was undisputed before the High Court that three
additional machines were installed by the assessee during the
assessment year under consideration for the production of
G intravenous injectibles. It was not in dispute that the assessee
had borrowed moneys during the accounting year commencing
from 1.4.91 to 31.3.92. ~

7. We quote hereinbelow Section 36(1 )(iii) and
Explanation 8 to Section 43(1) of the 1961 Act which read as
H
DEPUTY COMMNR. OF INCOME TAX, AHMEDABAD 669
v. MIS. CORE HEALTH CARE LTD. [KAPADIA, J.]

follow: A
"OTHER DEDUCTIONS
36. (1) The deductions provided for in the following clauses
shall be allowed in respect of the matters dealt with therein,
in computing the income referred to in Section 28 - B
(iii) the amount of the interest paid in respect of capital,
. l borrowed for the purposes of the bu~iness or profession :
"'I
Provided that any amount of the interest paid, in
respect of capital borrowed for acquisition of an asset for c
extension of existing business or profession (whether'
capitalised 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. ,
D
Explanation : Recurring subscriptions paid
~
periodically by shareholders, or subscribers in Mutual
Benefit Societies which fulfill such conditions as may be
" prescribed, shall be deemed to be capital borrowed within·
the meaning of this clause;" E
"Definitions of certain terms relevant to income from profits
and gains of business or profession.
43. In sections 28 to 41 and in this section, unless the
context otherwise requires - F
·~
(1) "actual cost" means the actual cost of the assets
to the assessee, reduced by that portion of the cost
thereof, if any, as has been met directly or indirectly by any
other person or authority:
G
Provided that where the actual cost of an asset, being a
motor car which is acquired by the assessee after the
31st day of March, 1967, but before the 1st day of March,
1975, and is used otherwise than in a business of running
it on hire for tourists, exceeds twenty-five thousand rupees,
H
v
670 SUPREME COURT REPORTS [2008] 2 S.C.R.

A the excess of the actual cost over such amount shall be ,..-•
ignored, and the actual cost thereof shall be taken to be
twenty-five thousand rupees.
Explahation 8: For the removal of doubts, it is hereby
declared that where any amount is paid or is payable as
B interest in connection with the acquisition of an asset, so
much of such amount as is relatable to any period after
such asset is first put to use shall not be included, and
shall be deemed never to have been included, in the actual
)
\

cost of such asset."
c
8. Interest on moneys borrowed for the purposes of
business is a necessary item of expenditure in a business. For
allowance of a claim for deduction of interest under the said
. section, all that is necessary is that-firstly, the money, i.e. capital,
must have been borrowed by the assessee; secondly, it must
D
have been borrowed for the purpose of business; and, thirdly,
the assessee must have paid interest on the borrowed amount ~
[See: Calico Dyeing & Printing Works v. Commr. of Income-
'(
tax; Bombay City-II -(1958) 34 ITR 265]. All that is germane
is : whether the borrowing was, or was not, for the purpose of
E business. The expression "for the purpose of business" occurring
in Section 36(1 )(iii) indicates that once the test of "for the
purpose of business" is satisfied in respect of the capital
borrowed, the assessee would be entitled to deduction under
Section 36(1 )(iii) of the 1961 Act. This provision makes no
F distinction between money borrowed to acquire a capital asset
,...__
or a revenue asset. All' ·that the section requires is that the
assessee must borrow capital and the purpose of the borrowing
must be for business which is carried on by the assessee in the
year of account. What sub-section (iii) emphasizes is the
G user of the capital and not the user of the asset which
comes into existence as a result of the borrowed capital
unlike Section 37 which expressly excludes an expense
of a capital nature. The legislature has, therefore, made no
distinction in Section 36(1 )(iii) between "capital borrowed for a
H revenue purpose" and "capital borrowed for a capital purpose".
DEPUTY COMMNR. OF INCOME TAX, AHMEDABAD 671
v. M/S. CORE HEALTH CARE LTD. [KAPADIA, J.]

An assessee is entitled to claim interest paid on borrowed A
capital provided that capital is used for business purpose
irrespective of what may be the result of using the capital which
the assessee has borrowed. Further, the words "actual cost" do
not find place in Section 36(1 )(iii) of the 1961 Act which otherwise
find place in Sections 32, 32A etc of the 1961 Act. The B
expression "actual cost" is defined in Section 43(1) of the 1961
Act which is essentially a definition section which ls subject to
the context to the contrary.
9. In the case of Commissioner of Income-tax v.
Associated Fibre and Rubber Industries (P) Ltd. - (1999) C ·
236 ITR 471, the Division Bench of this Court held as follows:
"Even though the machinery has not been actually used in
the business at the time when the assessment was made,
the same has to be treated as a business asset as it was
0
purchased only for business purposes. In the
circumstances, the interest paid on the amount borrowed

- for purpose of such machinery is certainly a deductible
amount."
10. As stated above, the Department contended before E
us that the judgments of this Court, prior to insertion of
Explanation 8 in Section 43(1) of the 1961 Act, has no
application to the present case. According to the Department,
Section 36(1 )(iii) of the 1961 Act being general in nature has to
give way to special provisions contained in Explanation 8 to F
Section 43(1) of the 1961 Act. According to the Department, in
none of the earlierjudgments this Court has considered the true
scope of Explanation 8 to Section 43(1) vis-a-vis Section
36(1 )(iii) of the 1961 Act. We find no merit in this contention.
Section 43 groups together all provisions in the nature of G
definitions or interpretations relevant to the computation of
income under the head "Profits and Gains of Business". Section
43(1) defines "actual cost". The definition of "actual cost" has
A
been amplified by excluding such portion of the cost as is met
\
directly or indirectly· by any other person or authority. Explanation
H
~y

672 SUPREME COURT REPORTS [2008] 2 S.C.R.

A 8 has been inserted in Sectio.n 43(1) by Finance Act, 1986 (23
of 1986), with retrospective effect from 1.4. 74. It is important to ~---
note that the word "actual cost" would mean the whole cost and
not the estimate of cost. "Actual cost" means nothing more than
the cost accurately ascertained. The determination of actual cost

- B in Section 43(1) has relevancy in relation to Section
32(depreciation allowance), Section 32A(investment
allowance), Section 33(development rebate allowance), and
Section 41 (balancing charge). "Actual cost" of an asset has no )
relevancy in relation to Section 36(1 )(iii) of the 1961 Act. This
c reasoning flows from a bare reading of Section 43(1 ). Section
43 defines certain terms relevant to income from profits and
gains of business and, therefore, the said section commences
with the words "In Sections 28 to 41 and unless the context
otherwise requires" "actual cost" shall mean the actual cost of
the assets to the assessee, reducing by that portion of the cost
D
thereof, if any, as has been met directly or indirectly by any other
person or authority. In other words, Explanation 8 applies only j.
to those Sections like Sections 32, 32A, 33 and 41 which deal
with concepts like Depreciation. The concept of Depreciation
is not there in Section 36(1 )(iii). That is why the legislature has
E used the words "unless the context otherwise. requires". Hence,
Explanation 8 has no relevancy to Section 36(1)(iii). It has
relevancy to the aforementioned enumerated sections.
Therefore, in our view Explanation 8 has no application to the
facts of the present case.
F
11. Before concluding on this point we may state that in
this batch of civil appeals we are concerned with the assessment
years 1992-93, 1993-94, 1995-96 and 1997-98. A proviso has
since been inserted in Section 36(1 )(iii) of the 1961 Act. That
proviso has been inserted by Finance Act, 2003 w.e.f. 1.4.2004.
G
Hence, the said proviso will not apply to the facts of the present
case. Further, in our view the said proviso would operate
~
prospectively. In this connection it may be noted that by the same
Finance Act, 2003 insertions have been made by way of proviso
in Section 36(1 )(viia) by the same Finance Act which is also t:
H
"!'
i
DEPUTY COMMNR. OF INCOME TAX, AHMEDABAD 673
v. MIS. CORE HEALTH CARE LTD. [KAPADIA, J.]

.\..~
made with effect from 1.4.2004. Same is the position with regard A
to insertion of a sub-section after Section 90(2) and before the
Explanation. This insertion also operates w.e.f. 1.4.04. In short,
the above amendments have been made by Finance Act, 2003
and all the said amendments have been made operational w.e.f.
1.4.04. Therefore, the proviso inserted in Section 36(1 )(iii) has B
to be read as prospectively and w.e.f. 1.4.04. In this case, we
are concerned with the law as it existed prior to 1.4.2004. As
~ stated above, we are not concerned with the interpretation or
applicability of the said proviso to Section 36(1 )(iii) w.e.f. 1.4.04
. in the present case. c
12. In the case of Challapalli Sugars Ltd. (supra) this
Court observed that interest paid on the borrowing utilized to
bring into existence a fixed asset which has not gone into
production, goes to add to the cost of installation of that asset.
It was further observed that if the said borrowing was not "for D
the purpose of business" inasmuch as no business had come
~ into existence, it must follow that it was made for the purpose of
acquiring an asset which could be put to use for doing business,
~
and hence interest paid on such borrowing would go to add to
the cost of the assets so acquired. E
13. In our view the above observations have to be confined
to the facts in the case of Challapalli Sugars Ltd. (supra). It
w'as a case where the company had not yet started production
when it borrowed the amount in question. The more appropriate
decision applicable to the present case would be the judgment F
~ of this court in the case of India Cements Ltd. v.
Commissioner of Income-tax, Madras - (1966) 60 ITR 52
in which it has been observed that, for considering whether
payment of interest on borrowing is revenue expenditure or not,
the purpose for which the borrowing is made is irrelevant. In our G
view, Section 36(1 )(iii) of the 1961 Act has to be read on its
... own terms. It is a Code by itself. Section 36(1 )(iii) is attracted
when the assessee borrows the capital for the purpose of his
business. It does not matter whether the capital is borrowed in
order to acquire a revenue asset or a capital asset, because of H
~
674 SUPREME COURT REPORTS [2008] 2 S.C.R.

A that the section requires is that the assessee must borrow the .,_,,,,
capital for the purpose of his business. This dichotomy between
the borrowing of a loan and ·actual application thereof in the
purchase of a capital asset, seems to proceed on the basis
that a mere transactiolJ of borrowing does not, by itself bring
B any new asset of enduring nature into existence, and that it is
. the transaction of investment of the borrowed capital in the
purchase of a new asset which brings that asset into existence.
The transaction of borrowing is not the same as the transaction
of investment. If this dichotomy is kept in mind it becomes clear r
c that the transaction of borrowing attracts the provisions of
Section 36(1 )(iii). Thus, the decision of the Bombay High Court
in Calico Dyeing & Printing Works (supra) and the judgment
of the Supreme Court India Cements Ltd. (supra) have been
given with reference to the borrowings made for the purposes
of a running business, while the decision of the Supreme Court
D
in Challapalli Sugars Ltd. (supra) was given with reference
to the borrowings which could .not be treated as made for the
)._
purposes of business as no business had commenced in that
case. Therefore, there is no inconsistency between the above ~

decisions.
E
CONCLUSIONS
14. For the above reasons, we hold that A.O. was not
justified in making disallowance of Rs.1,56, 76,000/- in respect
·of borrowings utilized for purchase of machines. Accordingly,
F the above question is answered in favour of the assessee and
against the Department. f-
15. Apart from the above question under Section 36(1 )(iii),
the present civil appeals are filed by the Department against
the decision of the High Court whereby the High Court has
G
dismissed Civil Application Nos.53 and 54 of 2001 filed by the
Department. It may be noted that during the pendency of Tax
Appeal Nos.449 and 450 of 2000, the Department had moved ~
the above two civil applications for amendment of its Memo of
Appeal raising substantial questions of law, namely -
H
f
DEPUTY COMMNR. OF INCOME TAX, AHMEDABAD 675
v. M/S. CORE HEALTH CARE LTD. [KAPADIA, J.]
"'-1
1 (a) whether advertisement expenses incurred by the A
.
'- assessee to create a brand image with enduring
benefit are allowable as revenue expenditure;
(b) whether the Tribunal had erred in granting deduction
under Section 35D regarding short-term loan, in view
of Explanation to Section 35D(3) which refers only to B

i long-term borrowings;
(c} whether the Tribunal had erred in directing deduction
under Section 80-HH and 80-1 on the miscellaneous
income of Rs.26,64, 113 being income on sale of c
empty containers?
16. Although the Department had moved the said Civil
Application Nos.53 and 54 of 2001 during the. pendency of Tax
Appeal Nos.449 and 450 of 2000 well within limitation the High
... Court without answering the above three questions summarily D
rejected Civil Application Nos.53 and 54 of 2001. We are of the
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view that the High Court had erred in dismissing the above two .
\
civil applications for amendment of the Memo of Appeal in Tax
Appeal Nos.449 and 450 of 2000. In our view the above three
questions are substantial questions of law and, therefore, the E

• High Court ought to have decided those questions .
17. Accordingly, we remit the above three questions to the
High Court for fresh consideration by it in accordance with law.
Accordingly, Civil Appeal Nos.3952-55 of 2002 and Civil Appeal
Nos.8509-851 O of 2002 filed by the Department are partly F
allowed with no order as to costs.
R.P. Appeals partly allowed.

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