ORDER
S.C. Tiwari, A.M.
1. The first ground of appeal relates to the disallowance of the assessee’s claim of deduction on account of expenditure incurred in respect of staff house. The assessee claimed deduction to the extent of 25 per cent. whereas the AO estimated the allowable expenditure to the extent of 10 per cent. only. The learned CIT(A) found that there was no material to indicate that 10 per cent. allowed by the AO was not a fair estimate and that allowance should be raised to 25 per cent. as claimed by the assessee. During the course of hearing before us the learned counsel for the assessee argued that disallowance out of guest house expenses under the provisions of s. 37(4) can be made of such expenditure only which pertains to s. 37. Items of expenses of such nature as are covered by the provisions of ss. 30 to 36 are to be allowed in full. In support of this contention, he placed reliance on the judgment of the hon’ble Calcutta High Court in the case of CIT vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal). He, therefore, argued that expenditure incurred on rent, depreciation, etc. should be allowed. The learned Departmental Representative argued that in the decision reported in Asstt. CIT vs. Trade Links Ltd. (1995) 54 ITD 108 (Del), Delhi Bench have held to the contrary after finding support from the judgments of the hon’ble Calcutta High Court in the cases of Kesoram Industries & Cotton Mills Ltd. vs. CIT (1991) 191 ITR 518 (Del) and the CIT vs. Upper Ganges Sugar Mills Ltd. (1994) 206 ITR 215 (Cal). As far as the judgment in the case of Tungabhadra Industries (supra) is concerned, the same is not with reference to the provisions of s. 37(4) of the Act.
2. We have carefully considered the rival submissions. It is true that in the judgment delivered on 28th November, 1991, in the case of Tungabhadra Industries Ltd. (supra) the hon’ble Calcutta High Court held that expenditure allowable under ss. 30 to 36 cannot be disallowed under the provisions of s. 37(3A). However, subsequently, in the judgment delivered in 11th February, 1993, in the case of CIT vs. Upper Ganges Sugar Mills (supra) the hon’ble Calcutta High Court held that the language of sub-s. (4) of s. 37 is quite emphatic and provides that no allowance at all is intended in respect of any expenditure incurred after 28th February, 1970, on the maintenance of any residential accommodation in the nature of a guest house. Their lordships further held that no allowance of depreciation is also permissible for such guest house or any assets in such guest house. In the order of the Tribunal in the case of Asstt. CIT vs. Trade Links Ltd. (supra), the Delhi Bench held the view that the decision of CIT vs. Chase Bright Steel Ltd. (1989) 177 ITR 124 (Bom), has been differed from by the hon’ble Calcutta High Court. After detailed consideration expenditure incurred on rent and depreciation on the guest house was held to be disallowable under ss. 37(4) and (5). In their judgment reported in United Catalysts (India) Ltd. vs. CIT, the hon’ble Kerala High Court have also held the view that every expenditure towards the maintenance of a guest house is disallowable under the provisions of s. 37(4). Respectfully following these decisions, we reject this ground.
3. The second ground of appeal is directed against the authorities below not allowing deduction of share issue expenses amounting to Rs. 2,74,935 on the ground that the same is inadmissible being of capital nature. The learned CIT(A) has held this view deriving support from the judgments of the hon’ble Calcutta High Court reported in Brooke Bond India Ltd. vs. CIT (1983) 140 ITR 272 (Cal), Union Carbide (I) Ltd. vs. CIT (1987) 165 ITR 678 (Cal) and Kesoram Industries & Cotton Mills Ltd. vs. CIT (1992) 196 ITR 845 (Cal). During the course of hearing before us, the learned counsel for the assessee argued that the facts of his case were distinguishable inasmuch as the expenditure was incurred on issue of redeemable preference shares. These preference shares were issued with a view to generate funds for expansion of production capacity. At the assessee’s business as well as manufacturing had already commenced, expenditure incurred on share issue could not be held to be of capital nature.
4. We have carefully considered these contentions of the assessee. The matter has now also been decided by the hon’ble Supreme Court in the case of Brooke Bonds (India) Ltd. vs. CIT (1997) 225 ITR 798 (SC). The hon’ble apex Court have held that expenditure incurred by a company in connection with the issue of shares, with a view to increase its share capital, is directly related to the expansion of the capital base of the company and is capital expenditure, even though it may incidentally help in the business of the company and in profit-making. In our view, it would not make any difference that issue pertains to preference shares and not equity shares. The fact remains that even the issue of redeemable preference shares goes to expand the capital base of the company. We, therefore, reject this ground also.
5. The third ground of appeal has been taken up by the assessee as an alternative ground that the learned CIT(A) was not justified in not allowing the assessee’s claim of share issue expenses as an allowable deduction under s. 35D of the Act. The learned CIT(A) has rejected the alternative contention of the assessee on the ground of absence of details. In our view, the assessee having claimed a deduction prescribed by the statute in relation to expenditure on issue of shares, the learned CIT(A) was not justified in denying this deduction on the ground of absence of details. We, therefore, direct the AO to allow the assessee such deduction as may be admissible under the provisions of s. 35D after allowing the assessee a reasonable opportunity to furnish all necessary information.
6. Ground of appeal No. 4 is directed against the authorities below disallowing the assessee’s claim of deduction of interest on deferred credit for purchase of machineries. The assessee claimed deduction of a sum of, Rs. 11,13,819 under the provisions of s. 36(1)(iii). He also placed reliance on the fact that similar deduction had been allowed by the CIT(A) for the asst. yr. 1985-86. The present CIT(A) however differed from his predecessor on the ground of Expln. 8 to s. 43(1) with retrospective effect from 1st April, 1974 and the judgment of the hon’ble Bombay High Court in relation thereto in the case of the CIT vs. Rajaram Bandakar (1993) 202 ITR 514 (Bom). He also held that otherwise too the accepted accountancy rule for determining the cost of fixed assets was to include all expenditure necessary to bring such assets into existence and to put them in working condition.
7. During the course of the hearing before us the learned counsel for the assessee argued that the assessee was already carrying out the business of manufacturing nylon filament yarn. The machinery purchased by the assessee was in the nature of replacements or for expansion of existing production capacity. As the assessee was already in business and had commenced production, the expenditure incurred on interest on borrowings made for acquisition of machinery was allowable as revenue expenditure. He further argued that on these facts Expln. 8 to s. 43(1) had no application. He placed reliance on the memorandum explaining provisions in the Finance Bill, 1986, pertaining to introduction of Expln. 8 (1986) 158 ITR 116 (St.). It was argued that this Explanation has been intended to curb the practice of capitalisation of interest even after the asset is first out to use whereas his case he has claimed revenue expenditure.
8. During the course of hearing we specifically asked the learned counsel of the assessee as to how he could claim deduction of this expenditure as revenue expenditure whereas in his own books of accounts the same has been capitalised and treated as part of cost of machinery. We further asked him as to whether it was his case that the treatment given to the amounts in question in the books of account of the assessee was not in accordance with any acceptable principles of accountancy. The learned counsel replied that he did not dispute that capitalisation of expenditure in the books of account is in accordance with well-known principles of accountancy. However, it was so done in the books of account to meet the requirements of the auditors and the company law. It is not the requirement of the IT Act that the expenditure should be treated as capital expenditure and, therefore, the assessee was at liberty to claim deduction of this amount as revenue expenditure in the return of income or in the course of assessment proceedings.
9. According to the learned counsel of the assessee, the issue stands settled in his favour by the judgment of the hon’ble Calcutta High Court in the assessee’s own case on the writ filed by the assessee against the issue of notice under s. 263 for the asst. yr. 1982-83. The learned counsel argued that the hon’ble Calcutta High Court held that since the assessee was already in business and the new unit constituted part of the same business, the assessee was entitled to claim deduction of interest under s. 36(1)(iii) irrespective of the fact that the assets acquired out of the amount borrowed had not actually been put to use. In view of this judgment of the hon’ble Calcutta High Court in the case of the assessee himself the decision of the Tribunal D-Bench, Calcutta, for the asst. yr. 1985-86 allowing the Department’s appeal on this point was clearly erroneous and, therefore, need not be followed in the present appeal.
10. The learned Departmental Representative argued that the CIT(A) differed from his predecessor in the asst. yr. 1985-86 on account of Expln. 8 to s. 43(1) which implies that interest paid on borrowed capital is to be capitalised till such time the assets in question are first put to use. This view is vindicated by the order of the Tribunal in the assessee’s own case for the asst. yr. 1985-86 whereby the order of the earlier CIT(A) was reversed. As far as the judgment of the hon’ble Calcutta High Court in the case of the assessee was concerned the same has been delivered in the writ petition filed by the assessee against the notice under s. 263 issued by the CIT which was set aside. The provisions of Expln. 8 to s. 43(1) have not been considered in that judgment and, therefore, it cannot be inferred from that judgment that Expln. 8 to s. 43(1) is not applicable. In view of this submission, we requested the learned counsel of the assessee to furnish copy of the notice under s. 263 for the asst. yr. 1982-83 which constituted the subject-matter of writ petition filed by the assessee and which was set aside by the order of the hon’ble High Court. On perusal of this notice it is seen that no reference has been made in the show-cause notice under s. 263, dt. 23rd February, 1987, to the provisions of Expln. 8 to s. 43(1).
11. We have carefully considered the rival contentions. In our view, there appear to be three basic questions which need to be answered before deciding the appellant’s claim of deduction one way or the other. First, whether the assessee has correctly treated the amounts in question as capital expenditure in the books of account. Secondly, whether the assessee is entitled to claim in his income-tax assessment deduction of these amounts as revenue expenditure in spite of the fact that the amounts in question have been correctly treated as capital expenditure in the books of account. Thirdly, whether the expenditure is governed by the provisions of s. 36(1)(iii) of the Act or s. 43(1) and various other provisions of the Act relating to the cost of capital assets.
12. Coming now to the first question, it is the admitted position of the assessee that the treatment given by him in its books of account of capitalising the amounts in question is in conformity with the principles of mercantile system of accounting and the same is in accordance with the well-established principle of accountancy. It is, therefore, not necessary for us to examine this question any further. However, with a view to put the matter before us in proper perspective we propose to dwell upon this aspect at some length. At the outset, we wish to state that it is not always true that an expenditure is either capital or revenue. In the first instance, there is no single or uniform method of accounting even under the mercantile system for the measurement of periodic income. Furthermore, there are also no easy yardstick or parameters on the basis of which the classification between the revenue and the capital receipts and expenditure may be made with certainty in all cases. The Courts in India have repeatedly noted the complexities arising in the process of distinction between the revenue and the capital and have time and again emphasised that caution should be applied while deciding the issues related to this classification. In large majority of the cases in which the dispute as to the nature of receipt or expenditure arises are borderline cases. If there is a question as to whether the expenditure incurred on construction of factory premises is capital or revenue, or for that matter if the question is whether the cost of raw material is to be treated as capital or revenue, there may not be much difficulty. However, between these two extremes there may lie several cases where the balance may more or less equally weigh in favour of treating the expenditure as either capital or revenue. In the case of D. P. Chirania & Co. vs. CIT (1978) 112 ITR 12 (Kar), the hon’ble High Court held that there may be many cases where a conclusion one way or the other way with equal propriety be reached. In the case of Ford & McDonald Ltd. vs. CIT (1964) 54 ITR 133 (All), the hon’ble Allahabad High Court held that in judging of the nature of an expenditure to which one cannot apply an empirical or subjective standard, the expenditure has to be judged from the point of view of a businessman himself treats a particular amount of expenditure, whether as a revenue expenditure or as a capital expenditure. The fact that in borderline cases it would be equally legitimate to treat an expenditure as capital or revenue appears to be arising from the fact that the distinction between capital and revenue expenditure is originally not a legal question and basically it represents a problem of accountancy. In the field of accounts, more than one correct answer to a given problem is not uncommon. The accounting practices under the overall umbrella of the mercantile system do admit of certain amount of diversity. As far as the tax law in India is concerned, this diversity has been recognised and respected in the provisions of s. 145 of IT Act, 1961.
13. In the case of CIT vs. Vallabh Glass Works Ltd. (1982) 137 ITR 389 (Guj), the hon’ble Gujarat High Court have held that expenditure of revenue nature may, under certain circumstances, be treated as capital expenditure, but the converse is not true.
14. In the case of CIT vs. L. G. Balakrishnan & Bros. (P) Ltd. (1974) 95 ITR 284 (Mad), the hon’ble Madras High Court have judicially sanctioned the following passage under the head “Interest on Borrowings” in the “Members” Handbook Series, The Institute of Chartered Accountants of India, No. 202″ :
“The question often arises as to whether interest on borrowings can be capitalised and added to the cost of fixed assets which have been created as a result of such expenditure. The accepted view seems to be that in the case of a newly started company which is in the process of constructing and erecting its plant, the interest incurred before production commences may be capitalised.
“Interest incurred” means actual interest paid or payable in respect of borrowings which are used to finance capital expenditure …. Interest on capital during construction paid in accordance with the provisions of s. 208 of the Companies Act, 1956, may, however, be capitalised as permitted by that section. Interest on monies which are specifically borrowed for the purchase of a fixed asset may be capitalised prior to the asset coming into production, i.e., during the erection stage. However, once production starts, no interest on borrowings for the purchase of machinery (whether for replacement or renovation of existing plant) should be capitalised. For an existing business, the only interest which may be capitalised is interest paid for financing a completely new unit or a substantial expansion undertaken by the company. Even here only the interest on monies specifically borrowed for the new expansion may be capitalised and that only for the period before production starts.”
From the above passage, it would be seen that there is well-established accountancy practice to capitalise interest on borrowings for the purchase of fixed assets, for the period upto the asset coming into production. This practice may also be followed even in the case of an existing business when a completely new unit is being set up or a substantial expansion is undertaken. There is of course the rider that capitalisation of interest should cease on and after the commencement of production.
15. We may now come to the second question which is the main plank of the argument of the learned counsel of the assessee, i.e., whether the assessee is entitled to claim in his income-tax assessment deduction of these amounts as revenue expenditure in spite of the fact that the amounts in question have been correctly treated as capital expenditure in the books of account maintained and annual accounts published by the assessee-company. The question goes to the root of the income-tax assessment proceedings. As per s. 4 which is the charging section levy of income-tax has been envisaged as an annual tax “in respect of the total income of the previous year of every person”. “Total income” has been defined under s. 2(45) to mean the amount of income computed in the manner laid down in the Act. Sec. 145 lays down the manner of computation of income chargeable under the heads “Profits and gains of business or profession” and “Income from other sources” to be in accordance with the method of accounting regularly employed by the assessee. The only exception to this general principle is the cases where the method employed is such that the income cannot properly be deduced therefrom or where the AO is not satisfied about the correctness or the completeness of the accounts of the assessee. There are any number of Court pronouncements where it has been held that provisions of s. 145 are mandatory and the proper method of accounting regularly followed by an assessee is binding on the assessing authorities. As early as in the case of CIT vs. Sarangpur Cotton Mfg. Co. Ltd. (1938) 6 ITR 36 (PC), the Judicial Committee of the Privy Council noted that even if the profit brought out in the accounts is not the true figure for income-tax purpose, the same would be compulsory basis of computation of income if the true figure can be accurately deduced therefrom. Incidentally, this judgment of the Privy Council has been cited and relied upon in a number of judgments delivered thereafter by the hon’ble Supreme Court and various High Courts in India.
16. In Keshav Mills Ltd. vs. CIT (1953) 23 ITR 230 (SC), the hon’ble Supreme Court held that the provisions of s. 13 of 1992 Act corresponding to s. 145 of 1961 Act was compulsory on the IT authorities and imposed upon them an obligation to accept the mode of accounting regularly adopted by the assessee except in cases when the proviso to that section came into operation. The profits earned and credited in the books of account were to be taken as the basis for computation of income.
17. In CIT vs. A. Ramaswamy Mudaliar & Ors. (1964) 53 ITR 122 (SC), the Supreme Court reiterated that the ITO is bound to compute the profits by appropriate adjustments from the accounts maintained by an assessee where a system of account is regularly employed.
“The only departure made by s. 13 of the Indian IT Act from the legislation in England is that whereas under the English legislation the Commissioner is not obliged to determine the profits of a business venture, according to the method of accounting adopted by the assessee, under the Indian IT Act, prima facie, the ITO has for the purpose of ss. 10 and 12 to compute the income, profits and gains in accordance with the method of accounting regularly employed by the assessee. If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profit may properly be deduced, the ITO is bound to compute the profits in accordance with the method of accounting. But where in the opinion of the ITO the profits cannot properly be deduced from the system of accounting adopted by the assessee, it is open to him to adopt a more suitable basis for computation of the true profits.”
18. In the case of Md. Umer vs. CIT (1975) 101 ITR 525 (Pat), the hon’ble Patna High Court have categorically stated at p. 530, “once, therefore, the method of accounting employed by the assessee has been regularly employed and income, profits and gains can properly be deduced from such regularly employed method of accounting, that is the end of the matter for the purpose of proviso to sub-s. 1 of s. 145”.
19. Significantly, the provisions of s. 145(1) presupposes that there can be more than one method of accounting the income from which may be properly deducible. These provisions would make no sense if always there is one method of accounting the income from which alone may be properly deducible. In the case of ongoing business, the profit or loss made by the businessman from that business, as aptly described in the case of Sunil Siddhartbhai vs. CIT (1985) 156 ITR 509 (SC) at p. 521 of ITR remains in the “womb of future”. The measurement of periodic income is, to that extent, a matter of estimation on the basis of certain acceptable principles of accounting. For this reason, on the same facts and circumstances, the computation of business income may differ depending upon the method of accounting employed. In other words, it is not the legal position that on identical facts the same amount of income should be assessable in the cases of all the assessees. This position has been clearly recognised by the hon’ble Supreme Court in the case of CIT vs. A. Ramaswamy Mudaliar & Ors. (supra) that the quantum of allowance permitted to be deducted from the profits and gains of business would differ according to the system of accounting. In the case of CIT vs. Chitnavis (1932) (2) Co.’s case 464 Lord Russel held that if a method of accounting is regularly employed then the assessee ought to get the advantage and suffer disadvantage of that system of accounting, and even though it may happen that in a particular year the Revenue may gain in another year the assessee may gain. The hon’ble Bombay High Court held in the case of CIT vs. Tata Iron & Steel Co. Ltd. (1977) 106 ITR 363 (Bom) that if the method of accounting followed by an assessee cannot be said unreasonable, the same has to be given effect to even if a better method can be visualised.
20. There are also clear authorities to the effect that it is not open to an assessee to set up in his IT return a claim altogether at variance to the books of account maintained by the assessee. As a matter of fact, this issue has been decided as early as in the case of CIT vs. Sarangpur Cotton Co. (supra) at p. 40 the judgment records :
“Their Lordships are clearly of opinion that the section relates to a method of accounting regularly employed by the assessee for his own purposes – in this case for the purpose of the company’s business – and does not relate to a method of making up the statutory return for assessment to income-tax. Secondly, the section clearly makes such a method of accounting a compulsory basis of computation unless in the opinion of the ITO, the income, profits and gains cannot properly be deduced therefrom. It may well be that, though the profit brought out in the accounts is not the true figure for income-tax purpose the true figure can be accurately deduced therefrom.”
Thus, the hon’ble Judicial Committee decided way back in 1937 that an assessee cannot ask for two different methods one for writing books of accounts for the purpose of his business and another for having his tax liability determined under the IT Act. Along the same lines, decisions were given by Allahabad High Court in the case of Smt. Singaribai (1945) 13 ITR 224 (All) and Madras High Court in the case of Bangalore Woollen Cotton & Silk Mills Co. Ltd. (1950) 18 ITR 453 (Mad), though the question before them was as to whether an assessee writing books of accounts under mercantile system of accounting can ask for cash system for the purpose of his income-tax assessment. This issue has recently been categorically determined in the judgment of hon’ble Calcutta High Court in the case of CIT vs. UCO Bank (1993) 200 ITR 68 (Cal). In that case UCO Bank after having followed a particular method of valuation of shares and securities in his books of accounts insisted upon valuation of the same in the IT return under the method “cost or market price, whichever is lower”. The basis on which these assets were valued in the books of accounts and another basis which was followed in the return of income were both consistent with the mercantile system of accounting. In fact the case of Chainrup Sampatram vs. CIT (1953) 24 ITR 481 (SC), the later method has been upheld and that decision was heavily relied upon by the UCO Bank before Calcutta High Court. After consideration of the matter, the hon’ble Calcutta High Court held :
“The assessee in this case, has not valued stock of shares and securities in its books of account in accordance with the method “cost or market price, whichever is lower”. This is an admitted position. If this method is not followed in writing and preparing accounts consistently, the assessee cannot claim a notional method of stock valuation only for computation of income by the tax authorities without following the same method in writing and preparing accounts. Sec. 145(1) of the IT Act, 1961, clearly goes against the submissions made on behalf of the assessee.
As we have indicated, the assessee’s method of accounting as well as the system of stock valuation adopted by him consistently for the purposes of preparing his accounts has to be accepted by the tax authorities. The book results can be rejected by the tax authorities only if the method adopted by the assessee is either defective or if the system adopted does not disclose a proper and true income.”
From the above decided case, it is clear that an assessee after having made entries in the books of accounts consistent with the method of accounting followed by him cannot be permitted to seek assessment of his income for income-tax purposes on a different basis on the ground that another basis may also be permissible under the method of accounting followed by the assessee or has been upheld in certain judgments of a High Court or Supreme Court. To this extent, the entries made in his books of accounts are as much binding as the method of accounting itself. It is only when the entries made in the books of account are erroneous or contrary to the correct legal position, the same are not conclusive or decisive of the matter, as held by the hon’ble Supreme Court in the case of Kedarnath Jute Mills vs. CIT (1971) 82 ITR 363 (SC) and several other judgments. This position is also inbuilt in the provisions of s. 145(1) itself that where the method of accounting is followed is such that income cannot be properly deduced therefrom, the AO may compute income upon such basis and in such manner as the AO may determine. In short, for obtaining a treatment in the assessment proceedings at variance with the books of account maintained by the assessee, it has to be necessarily shown that the treatment as given or entries as made in the books of account are either erroneous or contrary to the correct legal position.
21. In the foregoing paragraphs we have dealt with the first two questions viz., whether the assessee has correctly treated the amounts in question as capital expenditure in the books of accounts and whether the assessee is entitled to claim in his income-tax assessment deduction of these amounts as revenue expenditure in spite of the fact that the amounts have been correctly treated as capital expenditure in the books of accounts. We have arrived at the conclusions that the treatment given by the assessee to these amounts as integral part of cost of assets is in accordance with accepted principles of accountancy and that being so, the assessee is not entitled to claim in his assessment deduction of these amounts as revenue expenditure for the reason only that it was otherwise permissible to do so. It would, therefore, appear that the ground of appeal No. 4 taken by the assessee in this appeal is liable to be rejected at this stage itself. However, the learned counsel of the assessee has argued during the course of hearing before us that there is categorical finding in the judgment of the hon’ble Calcutta High Court in his own case that interest arising on amounts borrowed for the purchase of capital assets in the case of an existing business has to be allowed under s. 36(1)(iii) of the Act. We, therefore, address ourselves to the third question as to whether the expenditure in question insofar as this assessee is concerned is governed by the provisions of s. 36(1)(iii) of the Act or s. 43(1) and various other provisions of the Act relating to the cost of capital assets.
22. We have most respectfully and carefully perused the judgment dt. 6th March, 1991 of the hon’ble Bench of the Calcutta High Court in Matter No. 738 of 1987 in the case of the assessee in relation to the asst. yr. 1982-83. This judgment has been delivered on the writ petition filed by the assessee-company against notice under s. 263 issued by the CIT. This notice under s. 263, inter alia, contained the objection of the learned CIT (Central II), Calcutta, that the ITO erred in allowing interest paid by the assessee on the borrowing made for the acquisition of the capital assets, such as plant and machinery for the new unit being get up by the assessee-company for production of Nylon-6 filament yarn at Hoshiarpur, Punjab. According to the learned CIT, this expenditure being interest paid on borrowings specifically made for the purpose of acquisition of capital assets which were not put into use was capital expenditure and could not have been allowed as revenue expenditure in the computation of business income of the assessee-company. We have not been informed what treatment had been given to this expenditure in the books of the assessee relating to the asst. yr. 1982-83. At any rate, it is quite clear that the learned CIT, Calcutta, did not make an issue that the assessee after having correctly capitalised the expenditure in his books of accounts in accordance with well-established principles of accountancy cannot at the same time claim deduction of the expenditure as revenue expenditure in the income-tax assessment proceedings. He objected to the deduction on the short ground that there being a new unit it was necessary that the capital assets were also put to use in the previous year. As the treatment given in the books of account was not part of the notice under s. 263 or of the submissions made by the parties before the hon’ble Single Bench, it did not form the subject-matter of the decision of the hon’ble Calcutta High Court in Matter No. 738 of 1987 in their constitutional writ jurisdiction. We, therefore, hold that this judgment does not constitute any authority to support the assessee’s arguments that irrespective of the treatment given in the books of account the assessee is entitled to claim deduction of the expenditure as revenue expenditure in his income-tax assessments. It may also be mentioned that in the notice under s. 263, the learned CIT did not rely upon Expln. 8 to s. 43(1) which had been inserted by the Finance Act, 1986, with retrospective effect from 1st April, 1974. The same was not referred to by the parties during the course of their submissions before the hon’ble Single Bench. Accordingly, the hon’ble Court did not also have occasion to consider the meaning and effect of Expln. 8 to s. 43(1). We, therefore, hold that the judgment of the hon’ble Calcutta High Court in Matter No. 738 of 1987 is not of much assistance to the assessee in the proceedings before us.
23. During the course of hearing the learned counsel of the assessee argued that provisions of s. 36(1)(iii) are applicable to the amount of interest paid in respect of capital borrowed for the purposes of the business or profession. This sub-section does not draw any distinction as to whether the expenditure is capital or revenue once the business is already in existence. On consideration we are of the view that this argument may at its best arise only when the deduction claimed is of interest paid on borrowings. In the instant case that is not the situation. The assessee has capitalised this interest and treated it as an integral part of cost of assets to the assessee. Apparently after capitalisation the amount of interest has merged into the cost of assets and thus lost original character. The cost of an asset may comprise of several components, such as freight, insurance, travelling expenses, payment of salaries and wages and so on. However, once these expenses are capitalised, they only represent the cost of the assets. It is significant that under s. 43(1) “actual cost” has been defined not merely as the cost of the asset but the cost of the asset to the assessee. It is also important to remember that in the case of Challapalli Sugar Mills Ltd. (1975) 98 ITR 167 (SC) the hon’ble Supreme Court have clearly held that the expression “actual cost” would be inclusive of other expenses in accordance with the normal rules of accountancy. They also placed reliance on the observations at p. 424 of “Simon’s Taxes”, 3rd Edn., Vol. 8 that the word “cost” is not synonymous with “price”. After the finalisation of accounts, this sum of Rs. 11,13,819 no longer represented interest paid on borrowings. On the contrary, it merged into cost of plant and machinery acquired by the assessee. In the final account as prepared by the assessee there is no recognition of this sum of Rs. 11,13,819 as interest paid on borrowings but the expenditure has been recognised as having been defrayed in relation to acquisition of the plant and machinery. We are, therefore, unable to appreciate how the provisions of s. 36(1)(iii) come into picture at all in relation to this expenditure of Rs. 11,13,819.
24. In the impugned order the learned CIT(A) has placed emphasis on the provisions of Expln. 8 to s. 43(1). From this Explanation, it follows that upto the date of commencement of production, interest can be legitimately capitalised and included in the “actual cost”. It appears to us that this entire debate based on Expln. 8 to s. 43(1) is not necessary because it is not the case of the assessee that the expenditure in question cannot be treated to have gone into making of the actual cost. Even otherwise well-established principles of accountancy do accept the inclusion of interest on borrowings for the purpose of acquisition of capital asset in computation of cost of capital asset even in the cases of existing business. We have already cited in this order in para 14 the passage appearing under the head “Interest on Borrowings” in the “Member’s Handbook Series, the Institute of Chartered Accountants of India, No. 202” which has been judicially sanctified in the judgment of the hon’ble High Court in the case of CIT vs. L. G. Balkrishna & Bros. (P) Ltd. (supra). There is also ample authority for this position in the judgment of the hon’ble Supreme Court in the case of Challapalli Sugar Mills Ltd. vs. CIT (supra) even though the case before them was in respect of period prior to the commencement of the business. It is also a matter of record that based on this judgment and the generally accepted principles of accountancy, assessees in a large number of cases capitalised even after commencement of business interest on amounts borrowed for acquisition of plan and machinery and not only claimed depreciation but also development rebate, investment allowance, etc. In a number of cases, this practice was followed even in respect of period after the commencement of the production so much so that the legislature were called upon to introduce Expln. 8 by the Finance Act, 1986, with retrospective effect from 1st April, 1974.
25. On consideration of the matter, it appears to us that there is no basis to hold that provisions of s. 36(1)(iii) supersede the provisions of s. 43(1) relating to “actual cost” insofar as interest paid on borrowings made for acquisition of capital assets is concerned. There is also ample authority for this conclusion in the judgment of hon’ble Gujarat High Court in the case of CIT vs. Vallabh Glass Works Ltd. (supra). In that case hon’ble Gujarat High Court have held that commencement of business is not the sole factor on which the nature of expenditure can be decided. Even revenue expenditure incurred in connection with the acquisition of a capital asset may sometime be treated as capital expenditure at the option of the assessee. Expenditure of a revenue nature may, under certain circumstances, be treated as a capital expenditure but the converse is not true. To quote :
“The proposition that all expenditure including the one incurred in connection with the acquisition of a capital asset after the commencement of business by an assessee is revenue in nature and it could be treated as capital expenditure only if an assessee chose to do so, is too wide a proposition to accept. Any expenditure incurred in acquiring a capital asset would be necessarily be capital in nature. Expenditure of a revenue nature may, under certain circumstances, be treated as a capital expenditure but the converse is not true.
Commencement of business is not the sole factor on which the nature of expenditure can be decided. If the argument of Mr. J. P. Shah, learned counsel for the assessee-company, is accepted, any expenditure incurred by the assessee-company after the commencement of the business, whether such an expenditure is incurred for the acquisition of a capital asset or for any other purpose, would be a revenue expenditure. There is no authority to support this proposition which, in our opinion, does not appear to be sound. It is true that a revenue expenditure incurred in connection with the acquisition of a capital asset may sometimes be treated as capital expenditure at the option of the assessee. For example, if the assessee borrows money to purchase plant and machinery and pays interest on the money borrowed after installation of the plant and machinery and commencement of its business, in such a case, the assessee may have an option to treat the expenditure incurred on the payment of interest as either revenue expenditure or capital expenditure. This would be so for the obvious reason that payment of interest ultimately forms part of cost of acquisition of the capital asset, namely, plant and machinery.”
If, therefore, follows that both the provisions of s. 36(1)(iii) and the provisions of s. 43(1) co-exist. In these circumstances, the option exercised in the books of account would be decisive. In the realm of accountancy, more than one correct answer is not uncommon. In the case of an existing business, the interest paid on borrowings for acquisition of capital assets can be treated as revenue expenditure as well as capital expenditure depending upon the view taken by the businessman on overall appraisal of the facts and circumstances of this case. It is also important to bear in mind that while in the present case the appellant finds it more advantageous to press for the deduction under s. 36(1)(iii), there may be any number of assessee who may with equal vehemence contest for the capitalisation of similar amounts. The historical background behind the promulgation of the provisions of Expln. 8 to s. 43(1) bears this out.
26. In the case of Chhabirani Agro Industrial Enterprises Ltd. vs. CIT (1991) 191 ITR 226 (Pat), the hon’ble Patna High Court have followed the judgment of Supreme Court in the case of Challapalli Sugars Ltd. (supra) and Gujarat High Court judgment in the case of CIT vs. Vallabh Glass Works Ltd. (supra). In that case, hon’ble Patna High Court held that all expenditure necessary to bring capital assets into existence and put them in working condition will form part of its cost. It is wholly irrelevant whether the asset was acquired prior to the commencement of business or subsequent to such commencement.
27. In the case of Ballarpur Paper & Straw Board Mills vs. CIT (1979) 118 ITR 613 (Bom), the assessee-company was already carrying on the business of manufacturing paper. It entered into agreement with a German company and a French company for the purchase of new plant and machinery for setting up a new unit. During the relevant assessment years, the assessee capitalised the amounts of interest, guarantee commission, stamp charges, etc., and treated the same as part of the cost price of the machinery and claimed depreciation and development rebate in respect of the same. After consideration of the matter, hon’ble Bombay High Court held that these expenses being expenditure necessary to bring assets into existence and to put them in working condition were rightly treated as capital expenditure by the assessee-company.
28. In the case of CIT vs. India Steamship Co. Ltd. (1992) 196 ITR 917 (Cal), the assessee-company had been carrying on shipping business for a long time. During the relevant year, the company purchased two ships and capitalised various expenses including interest payments on loans. The assessee claimed that interest payments of loans prior to the delivery of the ships amounting to Rs. 7,55,746 and Rs. 8,54,383 and other expense of Rs. 2,89,616 and Rs. 3,34,844 should be capitalised for purposes of development rebate. It also claimed that the sum of Rs. 1,13,62,848 being the interest payment made after delivery of the ships should also be capitalised for purposes of development rebate. After detailed consideration of the accountancy principles and the decided cases, the hon’ble Calcutta High Court held that interest paid on amounts borrowed and other related expenses in connection with the acquisition of ships before such ships were delivered to the assessee were includible in the actual cost of the ships.
29. From the discussion in the foregoing paragraphs it follows that provisions of s. 36(1)(iii) do not require that the interest on loans taken for acquisition of fixed assets should necessarily be treated as revenue expenditure in every case after the business has come into existence. If the interest is capitalised in the books of account and treated part of actual cost, the provisions of s. 36(1)(iii) would not be applicable because the amount of interest paid no longer retains its separate character and existence and represents integral part of the cost of the acquisition of the assets itself. We, therefore, hold that the contentions of the learned counsel of the assessee that in view of the provisions of s. 36(1)(iii) the amount of interest has to be allowed deduction irrespective of the treatment given in the books of account are not legally tenable and unacceptable. The provisions of s. 36(1)(iii) are applicable on interest on borrowings. These provisions have no application on the cost of assets to the assessee which is governed by the provisions of s. 43(1) and other allied provisions pertaining to depreciation allowance, etc.
30. In view of the discussion in the foregoing paragraphs we do not see force in this ground of appeal No. 4 of the assessee seeking deduction of the sum of Rs. 11,13,819 under s. 36(1)(iii) of the Act. The same is accordingly rejected.
31. Ground on appeal No. 5 seeks leave to supplement, amend, cancel or otherwise modify the grounds of appeal at the time of hearing. No submissions have been made by the assessee in this behalf and, therefore, this ground does not require any further action at our end.
32. In the result, this appeal is partly allowed.