IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 06.02.2007
CORAM
THE HON'BLE MR.JUSTICE P.D.DINAKARAN
AND
THE HON'BLE MRS.JUSTICE CHITRA VENKATARAMAN
T.C.(R)Nos.175 and 176 of 2003
Commissioner of Income Tax
Chennai. .. Applicant
Vs.
M/s. Tractors and Farms
Equipments Ltd.,
Chennai 34. .. Respondent
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Reference under Section 256(1) of the Income Tax Act,
1961 at the instance of the revenue arising out of the order
of the Income Tax Appellate Tribunal, Madras 'C' Bench dated
14.01.1998 in ITA Nos.4500 & 4501/Mds/1989 for the
assessment years 1982-83 and 1985-1986.
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For applicant : Mrs. Pushya Sitaraman, Sr.SC.for IT
For Respondent : Mr. R. Venkatnarayanan for
M/s. Subbaraya Aiyar
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J U D G M E N T
(Delivered by P.D. DINAKARAN, J.)
At the instance of the Revenue, the Income-tax
Appellate Tribunal has stated a case and referred the
following question of law, which is common in both tax
cases:
“Whether, on the facts and in the
circumstances of the case, the Appellate
Tribunal was right in law in holding
that the interest paid under deferred
payment scheme under which certain
assets acquired is capital in nature and
investment allowance is allowable on the
same?”
2.1. The assessment years with which we are concerned
are 1982-83 and 1985-86. The assessee is a company. The
assessee claimed investment allowance on the interest paid
under the deferred payment scheme through which certain
assets were acquired, which was negatived by the assessing
officer.
2.2. The Commissioner of Income-tax (Appeals) allowed
investment allowance holding that the interest accrued under
the deferred payment scheme is capital expenditure. The
Appellate Tribunal upheld the order of the Commissioner of
Income-tax (Appeals).
2.3. While giving effect to the said order, the
assessing officer found that the requisite reserve had not
been created, and denied the benefit obtained by the
assessee in terms of the above order of the Appellate
Tribunal.
2.4. On appeal, the Commissioner of Income-tax
(Appeals) accepted the contention of the assessee that the
assessee should be afforded an opportunity to make good the
shortfall in the creation of reserve, and remitted the
matter to the assessing officer. On further appeal, the
Appellate Tribunal confirmed the same.
2.5. At the instance of the Revenue, the Appellate
Tribunal has stated a case and referred the above mentioned
question of law.
3. Undisputedly, the assessee purchased capital assets
on deferred payment basis from the manufacturer availing the
facility extended by I.D.B.I. Bank called, “I.D.B.I. Bills
Rediscounting Scheme”. Under the scheme, the purchaser
utilised the machinery acquired from the date of purchase
and the manufacturer got the value of the machinery within a
few days of the delivery of the machinery. The payment of
price in instalments was worked out and each instalment was
computed by adding interest. While the instalments of the
price were equal, the interest component would be higher
with the passage of time. The manufacturer was required to
present the bill at the bank of the purchaser for
discounting within two months and the bank, in turn, would
present the bill for rediscounting with I.D.B.I.
4. According to the assessee, the total amount of the
instalments including the interest is the actual cost of the
assets purchased within the meaning of section 43(1) of the
Income-tax Act, 1961 (in short “the Act”), the relevant
portion of which reads as under:
“43(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.”
5. On the other hand, the Revenue contends that the
interest paid on capital borrowed after commencement of
business cannot be capitalised. In this connection, it is
relevant to refer the Explanation-8 to section 43(1) as
follows:
“Explanation 8.–For the removal of doubts, it is
hereby declared that where any amount is paid or
is payable as 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”.
6. The Appellate Tribunal, however, on the facts of the
case held that the amount paid by the assessee as interest
is not actually an ‘interest amount’ paid on capital
directly borrowed from the financial institution for the
purpose of purchasing the capital asset and the instalments
paid constituted only the actual price of the asset since
the invoice shows the total price including the financial
charges. According to the Tribunal, the enhanced price due
to the facility given by the I.D.B.I. Scheme for deferred
payment is quite distinct from either interest paid on
capital borrowed or interest paid on unpaid price and hence,
Explanation 8 to section 43(1) of the Act has nothing to do
with the enhanced price of goods sold under the I.D.B.I.
Scheme.
7. In our view, Explanation 8 to section 43(1) of the
Act, inserted with effect from April 1, 1974, should not be
construed in the way as adopted by the Appellate Tribunal.
A reading of the Explanation 8 to section 43(1) of the Act
shows that it was added with the object of removing doubts
with regard to the includibility of interest relatable to
any period after the asset has first been put to use, in the
computation of its actual cost. By this Explanation, it has
been declared by Parliament that “where any amount is paid
or is payable as 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 assets. The
Parliament, in the above Explanation, has taken full care to
couch the Explanation in the widest possible terms to avoid
any further controversy in regard to the very same issue on
the basis of the manner of payment of interest or time of
payment thereof. This has been done by the use of the
expression “where any amount is paid or is payable as
interest”. It will not be correct to say that the legal
position in regard to includibility of interest on deferred
payment in the computation of the actual cost of an asset
did not undergo any change as a result of the insertion of
Explanation 8 with retrospective effect and the specific
declaration by Parliament made therein that the part of the
interest mentioned therein would not be includible in the
actual cost. The very purpose of this amendment was to
clarify the position in this regard and to set at rest the
controversy that had arisen, vide CIT v. Rajaram Bandekar
(202 ITR 514 – Bombay High Court).
8. Applying the ratio laid down by the Bombay High
Court in CIT v. Rajaram Bandekar, cited supra, this Court in
CIT v. India Pistons Ltd. (242 ITR 672), held as follows:
“In the instant case, depreciation has
been claimed on interest payable on a
deferred payment scheme which is identical to
the facts involved in the case decided by the
Bombay High Court reported in CIT v. Rajaram
Bandekar [1993] 202 ITR 514. We concur with
the view taken by the Bombay High Court.
We hold that the amount of interest
could not be included in the actual cost for
the purpose of depreciation and development
rebate applying Explanation 8 to section
43(1) of the Income-tax Act, 1961. The view
taken by the Tribunal is not justified.”
9. The above view has also been followed by this Court
in CIT v. L.G. Balakrishnan and Brothers Ltd. (247 ITR 131).
10. This Court in C.I.T. v. Textool Co. Ltd. (263 ITR
523) also held that in view of Explanation 8 to section
43(1) any amount paid as interest in connection with the
acquisition of an asset shall not be included and shall
never be deemed to have been included as part of the actual
cost of the asset.
11. In this view of the matter, we hold that the amount
of interest payable on deferred payment scheme could not be
included in the actual cost for the purpose of investment
allowance applying Explanation 8 to section 43(1) of the
Act, and the Appellate Tribunal is not correct in holding
that the interest paid under deferred payment scheme is
capital in nature and investment allowance is allowable on
the same.
Accordingly, the common question of law referred to us
is answered in the negative, in favour of the Revenue and
against the assessee. No costs.
atr/na
To
1. The Assistant Registrar,
Income Tax Appellate Tribunal
Madras.
2. The Secretary, Central Board
of Direct Taxes, New Delhi.
3. The Commissioner of Income-
Tax (Appeals-V), Madras.
4. The Deputy Commissioner
of Income-tax, Special Range I,
Madras.