1992 (1) TMI 89 - HC - Income Tax

Treatment of Interest Payments on Business Asset Liabilities: Revenue vs. Capital Expenditure Ruling

Commissioner Of Income-Tax Versus India Steamship Co. Limited

Commissioner Of Income-Tax Versus India Steamship Co. Limited - [1992] 196 ITR 917, 68 TAXMANN 381 Issues Involved:1. Capitalization of interest on deferred liability for the purchase of business assets.2. Treatment of interest payment on loans and other expenses for capitalizing purposes for development rebate.Summary:Issue 1: Capitalization of Interest on Deferred LiabilityThe primary question was whether the interest payment of Rs. 1,13,62,848 made by the assessee for the purchase of two vessels could be capitalized as part of the acquisition cost of business assets. The Tribunal had decided in favor of the assessee, stating that the interest payments on deferred installments of the purchase cost of the vessels were capital expenditures. However, the High Court held that the method of capitalizing interest on deferred payments was contrary to established accountancy principles and could not be permitted. The court emphasized that interest on deferred payment should be treated as revenue expenditure, not capital expenditure, and should not be added to the actual cost of the asset for depreciation and development rebate purposes. The court also discussed the retrospective application of Explanation 8 to section 43(1) of the Income-tax Act, 1961, which clarified that interest paid after the asset is put to use should not be included in the asset's actual cost. The court concluded that this Explanation was clarificatory and retrospective in nature, thus applicable even before the assessment year 1974-75. Therefore, the first question was answered in the negative and against the assessee.Issue 2: Treatment of Interest Payment on Loans and Other Expenses for Capitalizing Purposes for Development RebateThe second question addressed whether the interest payment on loans prior to the delivery of ships and other related expenses should be capitalized for the purpose of claiming development rebate. The Tribunal had ruled in favor of the assessee, following the principles laid down by the Allahabad High Court in J. K. Cotton Spinning and Weaving Mills Ltd. and the Gujarat High Court in Tensile Steel Ltd. The High Court agreed with the Tribunal's decision, stating that interest paid on amounts borrowed and other related expenses in connection with the acquisition of ships before their delivery were includible in the actual cost of the ships. Consequently, the second question was answered in the affirmative and in favor of the assessee.