Commissioner of Income Tax vs Punjab Tractors Ltd. (No. 2)

The following questions of law have been referred for the opinion of this Court by the Income Tax Appellate Tribunal,. Chandigarh Bench, Chandigarh, arising out of its order dated February 28, 1995, in I.T.A. No. 135/Chandi/90, in respect of the assessment year 1986-87:

Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in allowing depreciation and investment allowance after allowing capitalisation of the amount of interest included in the bill for the purchase of plant and machinery when interest cannot be capitalised in view of Explanation 8 to Section 43(1) of the Income Tax Act?

Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in allowing expenditure incurred by way of rent of guest house holding that the deduction of expenditure is admissible u/s 37(1) and the disallowance is not covered by the specific provisions of Section 37(4) read with Section 37(5) of the Income Tax Act?

The facts noticed by the Tribunal are that the assessee had purchased certain plant and machinery during the previous year relevant to the assessment year 1986-87 for Rs. 9,55,000. The Assessing Officer noticed that the cost price included the amount of interest and the discount charges also. A sum of Rs. 3,13,000 was, therefore, excluded from the cost of "plant" for the purpose of working out depreciation and investment allowance. The Assessing Officer took the view that capitalisation of interest could not be allowed. The assessee went in appeal with the plea that the "plant" has been purchased under the deferred payment scheme of the Industrial Development Bank of India (IDBI) and whatever cost had been specified in the purchase voucher under that scheme, that was treated as the cost of the plant. The plea was accepted.

Before the Tribunal the Revenue''s plea was that Explanation 8 u/s 43(1) of the Income Tax Act, 1961 (for short, "the Act"), was attracted. The said Explanation had been inserted by the Finance Act, 1986, with retrospective effect from April 1, 1974. As per the said Explanation, where the amount was paid or was payable as interest in connection with the acquisition of any asset, so much of that amount as was relatable to any period after such asset was first put to use, was not to be included in the actual cost of the asset. The Revenue''s plea was that the amount of interest was distinct from the cost and, therefore, depreciation as well as investment allowance were rightly allowed, after reducing the cost of the plant by amount of interest. The assessee''s plea, however, was that interest formed part of the cost under the deferred payment scheme of the IDBI. It was argued that, in that light, interest could not be treated otherwise except as part of the cost because a composite bill was received by the assessee and payment was made accordingly. A similar question had been examined by the Tribunal in the case reported in Indian Pistons Repco. Ltd. v. IAC [1988] 40 Taxman 139 , wherein it was observed that the amount of interest formed part of cost. The assessee had also placed reliance on the judgment of the hon''ble Supreme Court in Challapalli Sugar Ltd. Vs. The Commissioner of Income Tax, A.P., Hyderabad, . The Tribunal agreed with the assessee that Explanation 8 below Section 43(1) of the Act was not attracted because interest was not paid as such but as part of cost under a special scheme of the IDBI. On these facts, the Revenue''s contention was not accepted.

The assessee had claimed expenditure on guest house at Rs. 73,200. It was noticed that in the assessment year 1984-85 also, a similar question had arisen regarding the payment of rent in respect of the guest house. The Tribunal took the view, vide order dated November 29, 1994, in I.T.A. No. 454/(Chandi)/of 1989, that payment of rent had to be allowed. In the assessment year 1981-82 also, payment of rent paid for the building owned by the assessee-company as an asset and it could not be allowed u/s 37(1), Sections 37(4) and 37(5) of the Act were not, therefore, attracted. The Tribunal found it appropriate to take the same view and held that the payment of rent in respect of the guest house was allowable as a deduction u/s 37(1) of the Act.

We have heard learned Counsel for the parties and perused the record.

We proceed to answer the questions referred as under:

Question No. 1:

We are of the view that the Tribunal has rightly followed the judgment of the hon''ble Supreme Court in Challapalli Sugar Ltd. Vs. The Commissioner of Income Tax, A.P., Hyderabad, , wherein it was observed (page 175):

It would appear from the above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary.

Explanation 8 has rightly been held not to be attracted when interest was not paid as such but only as a part of cost under the scheme of the IDBI. A similar view has been expressed by the different High Courts in Widia (India) Limited Vs. The Chief Commissioner of Income Tax, , Commissioner of Income Tax Vs. Widia (India) Ltd., SLP (C) No. 7272 of 1993 dismissed on April 19, 1993) and Commissioner of Income Tax, Gujarat Vs. Tensile Steel Ltd., .

The question is, accordingly, answered against the Revenue and in favour of the assessee.

Question No. 2:

The issue involved in this question has been gone into by this Court in '' the case of the assessee for the assessment year 1982-83, in our judgment dated September 18, 2006, in ITR No. 392 of 1995 - Commissioner of Income Tax Vs. Punjab Tractors (No. 1), wherein following the judgment of the hon''ble Supreme Court in Britannia Industries Ltd. Vs. Commissioner of Income Tax, West Bengal, Kolkata and Another, , we have answered the question against the assessee.

Accordingly, the question referred is answered against the assessee and '' in favour of the Revenue.

Reference is disposed of accordingly.