JUDGMENT
Dr. B.B. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961 made at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion :
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that interest of Rs. 4,23,453.56 which was included in the total amount payable by the assessee on instalment basis for acquisition of dumpers should be treated as part and parcel of the cost or was entitled to be added on which depreciation and development rebate is admissible ?”
2. The facts relevant for determination of the controversy raised in this reference are in a narrow compass. During the previous year relevant to the assessment year 1974-75, the assessee purchased tow dumpers from Messrs. Hindustan Motors Ltd. The Price of these dumpers was Rs. 16,59,625.52 (Rs. 16,49,915,80 being the cost of dumpers plus Rs. 9,709.32 being the cost of transport and transit/erection insurance). That was the price if the purchase was made on down payment. The assessee purchased these dumpers on deferred payment basis under a scheme prepared by the Industrial Development Bank of India (IDBI). The scheme enabled the purchasers to acquire machinery for their use and repay the cost over a number of years. As a result, the assessee had to pay by way of interest an additional amount of Rs. 4,23,453.56 to avail of the benefit of the deferred payment scheme. The assessee was required to pay the above amount of interest, after adjustment of the advance paid by the assessee, within a period of five years in ten six-monthly instalments. The assessee capitalised the interest so payable under the deferred payment scheme and claimed both depreciation and development rebate on such cost of the dumpers, i.e., the cost including the interest. The Income-tax Officer held that the claim of the assessee was not tenable in view of the fact that the interest which relates to a future period is not allowed to be capitalised. It was also held that such interest was a revenue expenditure which does not result in the acquisition of any asset of enduring benefit. It was, therefore, held that the assessee was not entitled to capitalise the interest and to add the same to the cost of the two dumpers. The Income-tax Officer, therefore, disallowed the assessee’s claim for depreciation to the extent the cost of the two dumpers represented the interest capitalised. The Income-tax Officer also disallowed the assessee’s claim for development rebate on the two dumpers on the ground that the dumpers were road transport vehicles.
3. On appeal, the Appellate Assistant Commissioner affirmed the finding of the Income-tax Officer so far as it related to the disallowance of depreciation to the extent of the cost of the dumpers which represented interest for deferred payment of the price thereof. He, however, held that the dumpers could not be held to be falling in the category of road transport vehicles and, as such, the assessee was entitled to development rebate on the cost of it.
4. The assessee went in further appeal to the Income-tax Appellate Tribunal (for short, “the Tribunal”) against the order of the Appellate Assistant Commissioner in so far as it related to the disallowance of the claim of the assessee for inclusion of interest in the actual cost of the dumpers for the purposes of depreciation and development rebate. The Tribunal, by its order dated September 30, 1976, accepted the contention of the assessee and held that the obligation to pay interest was incurred by the assessee for obtaining deferred payment terms under the contract of purchase of machinery and plant. It was for acquisition of business asset. The facility of deferred payment of price granted by Hindustan Motors Ltd. was a part of the financial agreement resulting in spreadover of the actual price over a long period which in terms, necessarily involved the question of payment of interest also. The Tribunal, therefore, held that the amount of interest payable for the deferred payment facility had to be included in the cost of the dumpers. In that view of the matter, the Tribunal allowed the appeal of the assessee. Hence, this reference at the instance of the Revenue.
5. Counsel for the Revenue fairly stated before us at the outset that there is no dispute in this case about the finding of the Appellate Assistant Commissioner in regard to the allowability of development rebate on the cost of dumpers because the Revenue did not go in appeal to the Tribunal against the same and, as such, it has become final. The only issue for consideration relates to the computation of actual cost of the two dumpers in the hands of the assessee for the purpose of allowability of depreciation and development rebate. In this connection, learned counsel fairly stated that at the time when the appeal was decided by the Tribunal there was a conflict of judicial opinion in regard to the includibility of future interest on assets purchased on instalment systems of payment or order deferred payment schemes in the actual cost of the assets. But that controversy has now been set at rest by Parliament by insertion of Explanation 8 to section 43(1) of the Act by Finance Act, 1986, with retrospective effect from April 1, 1974, and as a result thereof, from the assessment year 1974-75 and onwards, any amount payable as interest in connection with the acquisition of an asset which is relatable to any period after such asset had been first put to use cannot be included in the actual cost of such asset.
6. Learned counsel for the assessee, on the other hand, relied on the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 and submitted that the actual cost for the purpose of section 43(1) of the Act has to be considered in the commercial sense in accordance with the normal rules of accountancy prevailing in commerce and industry. Counsel relied on the definition given in Higher Book-Keeping and Accounts by Cropper Morris and Fison (seventh edition), where it is observed (at page 173 of 98 ITR) :
“Capital expenditure over a long period must perforce involve the question of interest as an additional cost. If the work were undertaken by an independent contractor he would, of course, take interest into account when preparing the estimates on which to base his tender. The final cost of construction work is made up of the cost of the machinery, materials, labour, supervision and establishment charges, plus interest on the capital employed which, but for its employment in that way, would be invested in good securities paying a reasonable rate of interest.”
7. Learned counsel also relied on the decision of the Gujarat High Court in CIT v. Tensile Steel Ltd. [1976] 104 ITR 581. So far as the effect of the insertion of Explanation 8 to section 43(1) of the Act with retrospective effect from April 1, 1974, is concerned, learned counsel submitted that the ratio of the decision of the Supreme Court in Challapalli Sugars Ltd.’s case [1975] 98 ITR 167 and the decision of the Gujarat High Court in CIT v. Tensile Steel Ltd. [1976] 104 ITR 581 has not been affected by the said decision.
8. We have carefully considered the rival submission. This reference relates to the assessment year 1974-75. As such, there is no dispute about the applicability of Explanation 8 to section 43(1) of the Act which has been inserted with retrospective effect from April 1, 1974. What falls for determination, therefore, is the interpretation of section 43(1) of the Act read with Explanation 8 thereof as inserted with retrospective effect from April 1, 1974. Section 43(1) and Explanation 8 thereof read as follows :
“43. In sections 28 to 41 and in section, unless the context otherwise requires –
(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 :
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 1, day of March, 1975, and is used otherwise than in a business of running it on hire for tourists, exceeds twenty-five thousand rupees, 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…..
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.”
9. From a bare reading of Explanation 8, it is evident that this Explanation was inserted for removal of doubts in 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. 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 expression “where any amount is paid or is payable as interest”. The decisions of the Supreme Court in Challapalli Sugars Ltd.’s case [1975] 98 ITR 167 and of the Gujarat High Court in Tensile Steel Ltd.’s case [1976] 104 ITR 581, were rendered prior to the insertion of this Explanation. The order of the Tribunal in this case also had been rendered much before this Explanation was inserted. The effect of this Explanation therefore, could not have been considered in these judgments or by the Tribunal in the present case. 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 as a result of some of the decisions of the different High Courts, the first being the decision of the Allahabad High Court in CIT v. J. K. Cotton Spg. and Wvg. Mills Ltd, [1975] 98 ITR 153. The decision of the Gujarat High Court in Tensile Steel Ltd.’s case [1976] 104 ITR 581, in its application for the year 1974-75 and years subsequent thereto, has to be read in the light of the clarifications contained in the above Explanation. In this connection, counsel for the assessee referred to the latest decision of the Karnataka High Court in CIT v. Widia (India) Ltd. [1992] 193 ITR 475, where also machinery had been purchased by the assessee under the deferred payment scheme of the IDBI. The Karnataka High Court held the ratio of the decision of the Gujarat High Court in Tensile Steel Ltd.’s case [1976] 104 ITR 581, applicable to the facts of that case despite the insertion of Explanation 8 to section 43(1) of the Act with retrospective effect from April 1, 1974. We have perused the above decision of the Karnataka High Court. The following observations of the Court are pertinent (at page 478) :
“It is clear from the statement of facts referred to above that the assessee obtained delivery of machinery, for which purpose negotiable instruments were passed on to the seller in full consideration of the sale transaction. The title vested with the assessee immediately on taking delivery of the machinery. In a case falling under the scheme covered by the IDBI Scheme, the question of postponing the vesting of title does not arise, because for the seller, the IDBI gives the facility of encashing the negotiable instruments on discount. But as between the purchaser and the seller, the transaction is completed on delivery and handing over of the negotiable instruments in question.
There can be no doubt that the totality of the figure of the entire negotiable instruments represents the consideration and the amount actually received by the seller on discounting the negotiable instrument represents the concessional value at the most. In a commercial transaction, there is a distinction between the interest payable on the belated payments and the concession shown in the matter of lump sum payment towards consideration.”
10. It may also be pertinent to note the following explanation in the above judgment (at page 480) :
“But, it is to be noted that this difference is not the amount payable by the assessee in respect of the debt incurred by the assessee. This amount was given up by the seller at the time of encashing the negotiable instrument given to the seller by the assessee. The assessee has parted with the entire amount by handing over the negotiable instruments. The difference arose only because the seller chose to encash the negotiable instruments, because of the facility made available by the IDBI. It cannot be said that every kind of concession results in the payment of interest. Nowhere the contract envisages the payment of interest and it was not the case of the Revenue also that there was any term for the payment of interest specifically.”
11. It was in this context that the Karnataka High Court held that the ratio of the decision of the Gujarat High Court in Tensile Steel Ltd’s case [1976] 104 ITR 581, would be applicable to the facts of that case, even though Explanation 8 to section 43(1) was added in the year 1986 with retrospective effect from April 1, 1974. It was further held that the amount could not be held to be interest at all, either because of any term in the contract or by necessary implication having regard to the contract in question.
12. We have carefully considered the above observations. We have also perused the Bills Rediscounting Scheme of the Industrial Development Bank of India. On perusal of the scheme, we find that the above observations of the Karnataka High Court in regard to the IDBI Scheme and the nature of payment thereunder are not correct. This scheme is intended to help the indigenous machinery manufacture industry to increase their turnover of sale of machinery to users of those items of machinery on deferred payment facility. The mechanism of the scheme, as set out therein, is as follows :
“The intending purchaser-user of indigenous/imported machinery who is not in a position to offer immediately full cash payment for the required machinery approaches the machinery manufacturer/local agent of foreign supplier seeking deferred payment facility. The latter, in order to promote his sales, agrees to supply the machinery subject to payment of an agreed minimum amount in advance and the balance in half-yearly or yearly instalments. A separate bill/promissory note is drawn/made for each installment together with interest payable on the deferred instalments. The bills or promissory notes are accepted guaranteed by/or on behalf of the purchaser-user and delivered to the manufacturer-seller who gets them discounted with his banker thus realising the cost of the machinery; the discount payable by him to his banker is included in the amounts of the bills by way of interest for the period of deferred payment. The manufacturer’s/seller’s banker in turn takes the discounted bills to the IDBI and gets them rediscounted thus obtaining the amount paid to the manufacturer-seller. The discounting bank takes back the bills from the IDBI against payment, three working days in advance of their due dates and obtains payment thereof from the acceptor/guarantor of the promissory notes.”
13. The fact that the supplier charges interest from the purchaser, in addition to the cost of the machinery, is also evident from the following restrictions contained in the said scheme regarding the rate of interest which a manufacturer-seller can charge :
“The manufacturer-seller should not charge the purchaser-user by way of interest for the deferred payment period an amount which is materially higher than the amount paid by the manufacturer-seller himself to his banker by way of discount. If on discounting of the bills, any excess amount is found to have been charges, the same should be refunded to amount is found to have been charges, the same should be refunded to the purchaser through the discounting bank. The Industrial Development Bank of India reserves the right to refuse to rediscount the bills of such manufacturers-sellers who do not strictly comply with this requirement.”
14. In Guideline 9 under the head “Important Guidelines”, it has been further made clear :
“It must be clearly indicated either in the invoice or in a separate statement, how the price of the machinery as shown in the invoice (less any advance payment) has been converted into bills; the principal and the interest in respect of each bill should be indicated separately. The amount (face value) of each bill or promissory not may be rounded off to the nearest rupee.”
15. It is also clear from the above restriction in the Industrial Development Bank of India Scheme that the scheme covers both the cost of the machinery and interest. It has been made clear in clause 13 of the Guidelines that it does not cover erection, commissioning, freight, transportation, handling charges, packing charges, etc. This part is directly settled between the seller and purchaser outside the scheme. Thus, on perusal of the Industrial Development Bank of India Scheme itself, it is not possible in the instant case to say that the promissory notes are issued by the purchaser of the machinery only towards the cost of the machinery and there is no component of interest involved therein. On the other hand, it is evident from the various clauses set out above that the scheme clearly visualises charging of interest. It even makes it obligatory to indicate in the invoice or in the statement the principal amount and the interest separately. Moreover, in the instant case, there is no controversy, as in the Karnataka case, as to whether the amount of Rs. 4,23,453.56 represents the interest or not. On the other hand, it is clear from the statement of the case itself that the cost of the machinery was Rs. 16,59,625.52 only and the amount of Rs. 4,23,453.56 represented interest payable by the assessee on instalment basis for acquisition of the asset under the deferred payment scheme. Thus the question whether the amount in question represented interest or not does not arise in this case. There is also no dispute about the fact that it relates to a period subsequent to the date the machinery was first put to use. That being so, Explanation 8 to section 43(1) is clearly attracted and in view of the same, the amount of interest cannot be included in the actual cost of the dumpers.
16. In the light of the foregoing discussion, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee. Under the facts and circumstances of the case, we make no order as to costs.