1979 (1) TMI 83 - HC - Income Tax

Court classifies payments to shareholders as interest, not dividends, allowing depreciation claim.

The High Court upheld the Tribunal's decision, affirming payments to shareholders as interest rather than dividends. It allowed the assessee to claim ... Actual Cost, Central Government, Plant And Machinery Issues:1. Characterization of payment to shareholders as interest or dividend.2. Entitlement of the assessee-company to claim depreciation on capitalized interest for assessment years.Analysis:1. The case involved a dispute regarding the nature of payments made by the assessee to its shareholders upon issuing new ordinary shares in 1953. The company raised new share capital to finance the Trombay Thermal Project and obtained government sanction for interest payment on the newly issued shares. The Income Tax Officer (ITO) contended that the interest payments were akin to dividends and should not be considered part of the actual cost assessed. However, the Appellate Tribunal held that capitalizing the interest paid was justified and did not alter the nature of the capital cost. The High Court concurred with the Tribunal, emphasizing the distinction between shareholder rights to dividends and interest under the Indian Companies Act. The Court held that the Tribunal's decision was correct, and the first question raised by the revenue did not warrant a reference.2. The second issue pertained to whether the assessee-company was entitled to claim depreciation on the capitalized interest for the relevant assessment years. The High Court relied on the Supreme Court's decision in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, which established that interest paid before the commencement of production could be capitalized and added to the cost of fixed assets. The Supreme Court's interpretation of the term 'actual cost' in commercial accountancy principles guided the decision. The High Court noted that the provision in s. 208 of the Companies Act, 1956, analogous to s.107 of the Indian Companies Act, 1913, supported capitalizing interest on money raised for construction purposes. Therefore, the Court answered the second question in the affirmative, allowing the assessee to claim depreciation on the capitalized interest for the assessment years in question.In conclusion, the High Court upheld the Tribunal's decision, affirming the characterization of payments to shareholders as interest and allowing the assessee to claim depreciation on the capitalized interest. The judgment was based on statutory provisions and established commercial accountancy principles, ensuring consistency in the treatment of interest payments in capital cost calculations.