1975 (10) TMI 18 - HC - Income Tax

Interest on deferred payments and currency devaluation costs qualify as capital expenditure

The High Court upheld the Tribunal's decision that interest on deferred payments and additional interest due to currency devaluation should be considered ... Bonus Shares, High Court, Income Tax Act, Supreme Court Issues Involved:1. Whether the payment of interest on deferred payments for plant and machinery should be considered as capital expenditure.2. Whether the additional amount of interest paid due to the devaluation of the rupee should be considered as capital expenditure.Issue-Wise Detailed Analysis:1. Payment of Interest on Deferred Payments as Capital Expenditure:The core issue pertains to whether the interest paid on deferred payments for the acquisition of plant and machinery should be treated as capital expenditure. The assessee-company entered into a contract with Japanese companies to establish a plant for high tensile steel wires. The payment terms included a combination of immediate payment, equity shares, and deferred payments with interest. The Income-tax Officer initially allowed the interest to be capitalized, but the Additional Commissioner later revised this, treating the interest as revenue expenditure. The Tribunal, however, concluded that the interest was part and parcel of the cost of the machinery, thus capital expenditure. The Tribunal's decision was based on the overall agreement of financial and technical collaboration, which included deferred payment terms as an integral part of the cost of the machinery. The High Court upheld this view, stating that the payment of interest, being part of the cost of acquiring the asset, should be treated as capital expenditure.2. Additional Interest Due to Devaluation of Rupee as Capital Expenditure:The second issue involves the additional interest paid due to the devaluation of the rupee. The assessee-company had to pay an extra amount due to the devaluation, which it sought to capitalize. The Income-tax Officer disallowed this, treating it as revenue expenditure. The Tribunal, however, allowed the capitalization of this additional interest, considering it part of the cost of the machinery. The High Court agreed with the Tribunal, stating that the additional interest paid due to devaluation is also part of the cost of acquiring the asset and should be treated as capital expenditure.Conclusion:The High Court upheld the Tribunal's decision that both the interest on deferred payments and the additional interest due to devaluation should be treated as capital expenditure. This allows the assessee-company to capitalize these amounts and claim depreciation and development rebate. The court emphasized that the entire arrangement, including financial and technical collaboration, should be viewed as a whole, and the interest payments were integral to the acquisition of the plant and machinery. The Commissioner was directed to pay costs of the references to the assessee.