Interest on Capitalization of Plant & Machinery Purchase Allowed for Depreciation

The High Court held that depreciation and investment allowance could be allowed after capitalizing interest in the purchase of plant and machinery under section 43(1) of the Income-tax Act. The court ruled that the interest formed part of the cost and was not paid separately, thus not falling under Explanation 8. Additionally, the court disallowed the deduction for rent of a guest house under section 37(1), following precedent and citing specific provisions of the Income-tax Act. The judgment favored the Revenue in this case.

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Issues involved:
The judgment involves two main issues:
1. Whether depreciation and investment allowance can be allowed after capitalization of interest included in the bill for the purchase of plant and machinery u/s Explanation 8 to section 43(1) of the Income-tax ActRs.
2. Whether expenditure incurred by way of rent of guest house is admissible as a deduction u/s section 37(1) and not covered by specific provisions of section 37(4) and 37(5) of the Income-tax ActRs.

Issue 1:
The Tribunal found that interest formed part of the cost under the deferred payment scheme of the IDBI, and hence, depreciation and investment allowance were rightly allowed after reducing the cost of the plant by the amount of interest. The Tribunal relied on the judgment in Indian Pistons Repco. Ltd. v. IAC [1988] and Challapalli Sugars Ltd. v. CIT [1975]. The High Court agreed with the assessee that Explanation 8 under section 43(1) was not attracted in this case, as interest was not paid separately but as part of the cost under a special scheme. The court cited similar views by different High Courts in relevant cases.

Issue 2:
Regarding the expenditure on the guest house, the Tribunal allowed the payment of rent as a deduction under section 37(1) of the Income-tax Act. The Tribunal referred to its previous decisions where similar deductions were allowed. The High Court, however, referred to its judgment in a previous case involving the same assessee for the assessment year 1982-83, where the question was answered against the assessee. Following the precedent set in that case and the judgment in Britannia Industries Ltd. v. CIT [2005], the High Court answered the question against the assessee and in favor of the Revenue.

The High Court disposed of the reference accordingly after considering the arguments presented by both parties and examining the relevant facts and legal provisions.

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