JT. COMMISSIONER OF INCOME TAX, VALSAD, GUJARATversusM/S.UNITED PHOSPHOROUS LTD.

                           [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)
                         FEBRUARY 8, 2008
B
       [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
        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
H                                  658

                                                                                    ..
                    JT. COMMNR. OF INCOME TAX, VALSAD, GUJARAT v.             659
                            M/S. UNITED PHOSPHOROUS LTD .
    .,__
         --'<       [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
     660          SUPREME COURT REPORTS                 [2008) 2 S.C.R.


A           The Judgment of the Court was delivered by
            KAPADIA, J. 1. Delay condoned.
           · 2. Leave granted.
           3. In this civil appeal filed by the Department two questions
8    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
c                 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.
                                                                  c
B.8.8.                                  Appeal partly allowed.