{"id":10074,"date":"2007-02-06T00:00:00","date_gmt":"2007-02-05T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-ms-tractors-and-farms-on-6-february-2007"},"modified":"2018-03-17T19:48:05","modified_gmt":"2018-03-17T14:18:05","slug":"commissioner-of-income-tax-vs-ms-tractors-and-farms-on-6-february-2007","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-ms-tractors-and-farms-on-6-february-2007","title":{"rendered":"Commissioner Of Income Tax vs M\/S. Tractors And Farms on 6 February, 2007"},"content":{"rendered":"
Madras High Court<\/div>\n
Commissioner Of Income Tax vs M\/S. Tractors And Farms on 6 February, 2007<\/div>\n
       \n\n  \n\n  \n\n \n \n           IN THE HIGH COURT OF JUDICATURE AT MADRAS\n                              \n                      DATED: 06.02.2007\n                              \n                            CORAM\n                              \n            THE HON'BLE MR.JUSTICE P.D.DINAKARAN\n                             AND\n         THE HON'BLE MRS.JUSTICE CHITRA VENKATARAMAN\n\n                              \n               T.C.(R)Nos.175 and 176 of 2003\n                              \n\n\nCommissioner of Income Tax\nChennai.                           ..   Applicant\n\n                           Vs.\n\nM\/s. Tractors and Farms\nEquipments Ltd.,\nChennai 34.                        ..   Respondent\n\n                            -----\n                              \n      Reference under Section 256(1) of the Income Tax  Act,\n1961 at the instance of the revenue arising out of the order\nof the Income Tax Appellate Tribunal, Madras 'C' Bench dated\n14.01.1998   in  ITA  Nos.4500  &  4501\/Mds\/1989   for   the\nassessment years 1982-83 and 1985-1986.\n                            -----\n                              \n     For applicant  :    Mrs. Pushya Sitaraman, Sr.SC.for IT\n                              \n     For Respondent :    Mr. R. Venkatnarayanan for\n                         M\/s. Subbaraya Aiyar\n                            -----\n\n                              \n                       J U D G M E N T\n<\/pre>\n
              (Delivered by P.D. DINAKARAN, J.)<\/p>\n
       At  the  instance  of  the  Revenue,  the  Income-tax<\/p>\n
Appellate  Tribunal  has  stated a  case  and  referred  the<\/p>\n
following  question  of law, which is  common  in  both  tax<\/p>\n
cases:\n<\/p>\n
               “Whether, on the facts and  in  the
\n         circumstances of the case, the  Appellate
\n         Tribunal  was  right in  law  in  holding
\n         that  the  interest paid  under  deferred
\n         payment   scheme  under   which   certain
\n         assets acquired is capital in nature  and
\n         investment allowance is allowable on  the
\n         same?”<\/p><\/blockquote>\n
      2.1.  The assessment years with which we are concerned<\/p>\n
are  1982-83  and 1985-86.  The assessee is a company.   The<\/p>\n
assessee  claimed investment allowance on the interest  paid<\/p>\n
under  the  deferred  payment scheme through  which  certain<\/p>\n
assets  were acquired, which  was negatived by the assessing<\/p>\n
officer.\n<\/p>\n<\/p>\n
      2.2.  The Commissioner of Income-tax (Appeals) allowed<\/p>\n
investment allowance holding that the interest accrued under<\/p>\n
the  deferred  payment  scheme is capital  expenditure.  The<\/p>\n
Appellate  Tribunal upheld the order of the Commissioner  of<\/p>\n
Income-tax (Appeals).\n<\/p>\n<\/p>\n
      2.3.  While  giving  effect to  the  said  order,  the<\/p>\n
assessing officer found that the requisite reserve  had  not<\/p>\n
been  created,  and  denied  the  benefit  obtained  by  the<\/p>\n
assessee  in  terms  of  the above order  of  the  Appellate<\/p>\n
Tribunal.\n<\/p>\n<\/p>\n
       2.4.  On  appeal,   the  Commissioner  of  Income-tax<\/p>\n
(Appeals) accepted the contention of the assessee  that  the<\/p>\n
assessee should be afforded an opportunity to make good  the<\/p>\n
shortfall  in  the  creation of reserve, and   remitted  the<\/p>\n
matter  to  the  assessing officer. On further  appeal,  the<\/p>\n
Appellate Tribunal confirmed the same.<\/p>\n
      2.5.  At  the  instance of the Revenue, the  Appellate<\/p>\n
Tribunal  has stated a case and referred the above mentioned<\/p>\n
question of law.\n<\/p>\n<\/p>\n
      3. Undisputedly, the assessee purchased capital assets<\/p>\n
on deferred payment basis from the manufacturer availing the<\/p>\n
facility  extended by I.D.B.I. Bank called, “I.D.B.I.  Bills<\/p>\n
Rediscounting  Scheme”.  Under  the  scheme,  the  purchaser<\/p>\n
utilised  the machinery acquired from the date  of  purchase<\/p>\n
and the manufacturer got the value of the machinery within a<\/p>\n
few  days  of the delivery of the machinery. The payment  of<\/p>\n
price in instalments was worked out and each instalment  was<\/p>\n
computed by adding interest.  While the instalments  of  the<\/p>\n
price  were  equal, the interest component would  be  higher<\/p>\n
with the passage of time.  The manufacturer was required  to<\/p>\n
present   the  bill  at  the  bank  of  the  purchaser   for<\/p>\n
discounting  within two months and the bank, in turn,  would<\/p>\n
present the bill for rediscounting with  I.D.B.I.<\/p>\n
      4.  According to the assessee, the total amount of the<\/p>\n
instalments including the interest is the actual cost of the<\/p>\n
assets purchased within the meaning of section 43(1) of  the<\/p>\n
Income-tax  Act,  1961 (in short “the  Act”),  the  relevant<\/p>\n
portion of which reads as under:\n<\/p>\n<\/p>\n
     “43(1). ‘actual cost’ means the actual cost of the
\n     assets to the assessee, reduced by that portion of
\n     the cost thereof, if any, as has been met directly
\n     or indirectly by any other person or authority.”<\/p><\/blockquote>\n
      5.  On  the other hand, the Revenue contends that  the<\/p>\n
interest    paid on capital borrowed  after commencement  of<\/p>\n
business cannot be capitalised.  In this connection,  it  is<\/p>\n
relevant  to  refer the Explanation-8 to  section  43(1)  as<\/p>\n
follows:\n<\/p>\n<\/p>\n
     “Explanation 8.–For the removal of doubts, it  is
\n     hereby  declared that where any amount is paid  or
\n     is  payable  as  interest in connection  with  the
\n     acquisition of an asset, so much of such amount as
\n     is  relatable  to any period after such  asset  is
\n     first  put to use shall not be included, and shall
\n     be  deemed  never  to have been included,  in  the
\n     actual cost of such asset”.<\/p><\/blockquote>\n
     6. The Appellate Tribunal, however, on the facts of the<\/p>\n
case  held that the amount paid by the assessee as  interest<\/p>\n
is  not  actually  an  ‘interest  amount’  paid  on  capital<\/p>\n
directly  borrowed  from the financial institution  for  the<\/p>\n
purpose  of purchasing the capital asset and the instalments<\/p>\n
paid   constituted only the actual price of the asset  since<\/p>\n
the  invoice  shows the total price including the  financial<\/p>\n
charges.  According to the Tribunal, the enhanced price  due<\/p>\n
to  the  facility given by the I.D.B.I. Scheme for  deferred<\/p>\n
payment  is  quite  distinct from either interest  paid   on<\/p>\n
capital borrowed or interest paid on unpaid price and hence,<\/p>\n
Explanation 8 to section 43(1) of the Act has nothing to  do<\/p>\n
with   the  enhanced price of goods sold under the  I.D.B.I.<\/p>\n
Scheme.\n<\/p>\n<\/p>\n
      7. In our view, Explanation 8 to section 43(1)  of the<\/p>\n
Act,  inserted with effect from April 1, 1974, should not be<\/p>\n
construed  in the way as adopted by the Appellate  Tribunal.<\/p>\n
A  reading of the Explanation 8 to section 43(1) of the  Act<\/p>\n
shows  that it was added with the object of removing  doubts<\/p>\n
with  regard  to the includibility of interest relatable  to<\/p>\n
any period after the asset has first been put to use, in the<\/p>\n
computation of its actual cost.  By this Explanation, it has<\/p>\n
been  declared by Parliament that “where any amount is  paid<\/p>\n
or   is   payable  as  interest”  in  connection  with   the<\/p>\n
acquisition  of  an  asset “so much of  such  amount  as  is<\/p>\n
relatable to any period after such asset is first put to use<\/p>\n
shall not be included and shall be deemed never to have been<\/p>\n
included,”   in  the  actual  cost  of  such   assets.   The<\/p>\n
Parliament, in the above Explanation, has taken full care to<\/p>\n
couch  the Explanation in the widest possible terms to avoid<\/p>\n
any further controversy in regard to the very same issue  on<\/p>\n
the  basis of the manner of payment of interest or  time  of<\/p>\n
payment  thereof.   This has been done by  the  use  of  the<\/p>\n
expression  “where  any  amount is paid  or  is  payable  as<\/p>\n
interest”.   It  will not be correct to say that  the  legal<\/p>\n
position  in regard to includibility of interest on deferred<\/p>\n
payment  in the computation of the actual cost of  an  asset<\/p>\n
did  not undergo any change as a result of the insertion  of<\/p>\n
Explanation  8  with retrospective effect and  the  specific<\/p>\n
declaration by Parliament made therein that the part of  the<\/p>\n
interest  mentioned therein would not be includible  in  the<\/p>\n
actual  cost.   The  very purpose of this amendment  was  to<\/p>\n
clarify  the position in this regard and to set at rest  the<\/p>\n
controversy  that  had arisen, vide CIT v. Rajaram  Bandekar<\/p>\n
(202 ITR 514 – Bombay High Court).\n<\/p>\n<\/p>\n
      8.  Applying  the ratio laid down by the  Bombay  High<\/p>\n
Court in CIT v. Rajaram Bandekar, cited supra, this Court in<\/p>\n
CIT v. India Pistons Ltd. (242 ITR 672), held as follows:<\/p>\n
               “In  the instant case, depreciation  has
\n         been   claimed  on  interest  payable   on   a
\n         deferred payment scheme which is identical  to
\n         the  facts involved in the case decided by the
\n         Bombay  High Court reported in CIT v.  Rajaram
\n         Bandekar  [1993] 202 ITR 514.  We concur  with
\n         the view taken by the Bombay High Court.\n<\/p><\/blockquote>\n
               We  hold  that  the amount  of  interest
\n         could  not be included in the actual cost  for
\n         the  purpose  of depreciation and  development
\n         rebate   applying  Explanation  8  to  section
\n         43(1)  of the Income-tax Act, 1961.  The  view
\n         taken by the Tribunal is not justified.”<\/p><\/blockquote>\n
      9. The above view has also been followed by this Court<\/p>\n
in CIT v. L.G. Balakrishnan and Brothers Ltd.<\/a> (247 ITR 131).<\/p>\n
      10. This Court in C.I.T. v. Textool Co. Ltd. (263  ITR<\/p>\n
523)  also  held that in view of Explanation  8  to  section<\/p>\n
43(1)  any  amount paid as interest in connection  with  the<\/p>\n
acquisition  of  an  asset shall not be included  and  shall<\/p>\n
never  be deemed to have been included as part of the actual<\/p>\n
cost of the asset.\n<\/p>\n<\/p>\n
     11. In this view of the matter, we hold that the amount<\/p>\n
of  interest payable on deferred payment scheme could not be<\/p>\n
included  in  the actual cost for the purpose of  investment<\/p>\n
allowance  applying Explanation 8 to section  43(1)  of  the<\/p>\n
Act,  and  the Appellate Tribunal is not correct in  holding<\/p>\n
that  the  interest  paid under deferred payment  scheme  is<\/p>\n
capital  in nature and investment allowance is allowable  on<\/p>\n
the same.\n<\/p>\n<\/p>\n
      Accordingly, the common question of law referred to us<\/p>\n
is  answered  in the negative, in favour of the Revenue  and<\/p>\n
against the assessee. No costs.\n<\/p>\n
atr\/na<\/p>\n
To<\/p>\n
1.   The Assistant Registrar,
\n Income Tax Appellate Tribunal
\n Madras.\n<\/p>\n
2.   The Secretary, Central Board
\n of Direct Taxes,  New Delhi.\n<\/p>\n
3.   The Commissioner of Income-\n<\/p>\n
 Tax (Appeals-V), Madras.\n<\/p>\n
4.   The Deputy Commissioner
\n of Income-tax, Special Range I,
\n Madras.<\/p>\n","protected":false},"excerpt":{"rendered":"
Madras High Court Commissioner Of Income Tax vs M\/S. Tractors And Farms on 6 February, 2007 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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[8,13],"tags":[],"class_list":["post-10074","post","type-post","status-publish","format-standard","hentry","category-high-court","category-madras-high-court"],"yoast_head":"\nCommissioner Of Income Tax vs M\/S. 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