Court rules interest on deferred purchase consideration not part of asset cost for depreciation or deduction claims

The court ruled in favor of the Revenue, affirming that the interest paid on the deferred purchase consideration cannot be included in the asset's cost for depreciation or deduction claims. The decision was based on Explanation 8 to section 43(1) of the Income-tax Act, which dictates that such interest payments are to be treated as revenue expenditure. The court emphasized the importance of this statutory provision in determining the nature of deferred interest payments, ultimately denying the company's claim for capitalization.

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Issues:
1. Classification of deferred interest payment as revenue or capital expenditure for a textile processing unit.

Analysis:
The case involved a public limited company engaged in textiles processing, questioning the treatment of deferred interest payment related to a loan for purchasing machinery in a textile processing unit. The company claimed the deferred interest should be capitalized and added to the machinery's cost for income computation purposes. The Assessing Officer, however, treated the deferred interest as revenue expenditure based on a Supreme Court decision. The Commissioner of Income-tax (Appeals) allowed capitalization based on a Bombay High Court decision. The Income-tax Appellate Tribunal, following precedents, held the interest as revenue expenditure, disallowing the capitalization claim.

The key argument by the company's counsel was based on a Bombay High Court decision, contending that the interest should be capitalized. However, the court rejected this argument due to a change in statutory law introduced by the Finance Act, 1986. The court referred to Explanation 8 to section 43(1) of the Income-tax Act, which states that interest paid in connection with an asset acquisition, after the asset's first use, cannot be included in the asset's actual cost for depreciation or deduction purposes. The court upheld the Tribunal's decision, emphasizing that under Explanation 8, the interest paid cannot form part of the asset's cost, justifying the revenue expenditure treatment.

In conclusion, the court ruled in favor of the Revenue, affirming that the interest paid on the deferred purchase consideration cannot be included in the asset's cost for depreciation or deduction claims. The court's decision was based on the statutory provision of Explanation 8 to section 43(1) of the Income-tax Act, rendering the interest payment treatment as revenue expenditure appropriate. The court answered the referred question of law in the affirmative against the assessee, highlighting the applicability and significance of the statutory provision in determining the nature of the deferred interest payment.

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