1985 (6) TMI 74 - AT - Income Tax

Tax Appeals: Interest disallowance, deduction denial, expenses disallowed, capital subsidy treatment

The appeals were partly allowed in the case. The disallowance of interest under Section 40A(8) of the IT Act was not upheld except for a minor ... - Issues Involved:1. Disallowance of interest under Section 40A(8) of the IT Act.2. Computation of capital for the purpose of deduction under Section 80J of the IT Act.3. Disallowance of expenses incurred on digging out two tube wells.4. Deductibility of capital subsidy from the cost of fixed assets as per Section 43(1) of the IT Act for the purposes of depreciation.Detailed Analysis:1. Disallowance of Interest under Section 40A(8) of the IT ActThe first common ground in these appeals relates to the disallowance of interest under Section 40A(8) of the IT Act. The assessee claimed payment of interest to various parties during the assessment years 1980-81 to 1983-84. The ITO held that in respect of payment of interest to certain parties, the amounts were received by the assessee by way of deposit, and hence, as per provisions of Section 40A(8) of the IT Act, 15% of the interest paid to these persons was to be disallowed. The assessee argued that the interest was paid mainly to the directors and shareholders on their current accounts and, therefore, no disallowance of interest under Section 40A(8) of the Act was called for. The CIT(A), after considering the assessee's contentions, reduced the amount of disallowance under Section 40A(8) of the Act for each of the years. The Tribunal, relying on the decision of the Madras Bench of the Tribunal in the case of Shivraj Motors Ltd. vs. ITO, held that the amounts received from the directors and shareholders of a private limited company do not constitute deposits either within the meaning of the Companies Act or under the provisions of Section 40A(8) of the Act. Therefore, except for a disallowance of Rs. 119 in respect of the assessment year 1980-81, in respect of M/s Saurabh Potteries & Ceramics, no disallowance of interest under Section 40A(8) of the IT Act was called for.2. Computation of Capital for the Purpose of Deduction under Section 80J of the IT ActThe next common ground in these appeals relates to the computation of capital for the purpose of allowing deduction under Section 80J of the IT Act. The assessee company claimed deduction under Section 80J on the basis of the capital employed, including borrowed moneys. The ITO and the CIT(A), however, held following the decision of the Hon'ble M.P. High Court in CIT vs. Anand Bahri Steel & Wire Products that for the purpose of allowing deduction under Section 80J of the IT Act, borrowed capital had to be excluded. The ld. counsel for the assessee conceded that in view of the recent decision of the Hon'ble Supreme Court of India in the case of Lohia Machines Ltd. & Ors. vs. Union of India & Anr., the assessee would not be entitled to claim deduction under Section 80J of the IT Act in respect of borrowed capital. Accordingly, the Tribunal did not find any merit in this ground taken by the assessee in respect of the assessment years 1980-81, 1982-83, and 1983-84.3. Disallowance of Expenses Incurred on Digging Out Two Tube WellsThe next ground taken by the assessee, which relates only to the assessment year 1982-83, is with regard to the finding of the CIT(A) wherein he upheld the decision of the ITO in disallowing expenses incurred on digging out two tube wells amounting to Rs. 41,900. The ITO found that the assessee-company claimed expenditure of Rs. 41,900 on digging out two tube wells, which proved unsuccessful. The ITO rejected the assessee's claim on the ground that the intention behind incurring the said expenditure was to acquire a capital asset, i.e., a tube well. The CIT(A) accepted the alternative contention of the assessee and directed the ITO to treat the cost of the two unsuccessful tube wells as part and parcel of the cost of plant and machinery and allow depreciation as per rules. The Tribunal, relying on the decision of the Allahabad High Court in the case of CIT vs. Panchkura Co-operative Sugar Factory, upheld the disallowance of Rs. 41,900 incurred by the assessee in digging the two tube wells which turned out to be dry.4. Deductibility of Capital Subsidy from the Cost of Fixed Assets as per Section 43(1) of the IT Act for the Purposes of DepreciationThe last ground of the assessee, which relates to the assessment year 1983-84, is against the findings of the CIT(A) wherein he held that the capital subsidy of Rs. 6,05,400 received by the assessee was deductible from the cost of fixed assets as per provisions of Section 43(1) of the IT Act for the purposes of allowing depreciation. The assessee-company received capital subsidy from the government to meet the cost of the project of Kalani Cold Storage. The IAC (Asstt.) reduced the cost of the fixed assets of the assessee-company by the amount of capital subsidy received for the purpose of allowing depreciation as per provisions of Section 43(1) of the Act. The CIT(A) upheld the action of the IAC (Asstt.). The Tribunal, referring to the Special Bench decision in the case of Pioneer Match Work vs. ITO, held that the amount of capital subsidy received by the assessee has not met any portion of the asset nor was it utilised for the purchase of any particular fixed asset and, hence, it should not have been reduced from the cost of the assets for the purposes of allowing depreciation. Consequently, the Tribunal reversed the decisions of the CIT(A) and of the IAC (Asstt.) in the matter and directed that for the purposes of allowing depreciation, etc., the amount of capital subsidy received by the assessee from the government should not be reduced from the cost of the assets.ConclusionIn the result, all the appeals are partly allowed.