TaxTMI 
TaxTMI 
2001 (4) TMI 46
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....acturing activities at factory situated at village Rajpur, Taluka Kadi, District Mehsana, a centrally notified backward area. The assessment year is 199293 and the previous year is the financial year 1991-92. The commercial production had commenced since February, 1988, and the manufacturing capacity has been gradually increased from time to time. During the financial year ended on March 31, 1992, the company installed three more machines (in addition to existing three machines) for the production of LVP and SVP resulting in substantial increased in capacity of the manufactured products. The new machines which were purchased during the previous year are installed at the same location at Rajpur where the company had already carried on its manufacturing operations. On December 31, 1992, the company filed its return declaring nil income for the assessment year 1992-93. A revised return was filed on August 6, 1995, declaring the loss of Rs. 1,11,68,518. The reasons for filing the revised return were mentioned in the note attached to the return of income and the said note reads as under : "Following expenses incurred during the previous year have not been charged to profit and los....
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....sp; 2,38,59,459 ------------ Out of these, the fallowing expenses are directly related to the acquisition/installation of the capital assets : Foreign travelling 8,00,000 Professional fees 3,50,000 Trial runs expenses 14,14,0OO --------- 26,54,000 &nbs....
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....erest expenses are pertaining to setting up of three new machines which are installed for enhancement of existing LVP production and to start a new production line of SVP and that such expenditure had been capitalised by the assessee-comp4ny along with cost of the new machinery. (ii) That such capitalisation by the assessee-company of pre-operative expenses was rightly made and though the treatment of a particular expenditure in the books of account, is neither determinative of the nature of expenditure nor conclusive one way or the other, yet the same cannot be regarded as irrelevant. (iii) That the action of capitalisation of interest expenditure is in consonance with the ratio laid down by the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 and Explanation 8 below section 43(1) of the Income-tax Act, 1961. The Commissioner (Appeals) upheld the reasoning adopted by the Assessing Officer and concluded the issue by stating that once the assessee had capitalised the interest in its books of account it ceases to be interest and there is no question of making a claim for deduction or granting the same. When the matter was originally heard by the Tribun....
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....e three new machines was required to be capitalised, and was rightly capitalised in the books of account by the assessee-company, as the asset had not been put to use. For this proposition strong reliance was placed on Explanation 8 under section 43(1) of the Act. The main plank of the Revenue's case was that as per the accounting principles and the accounting standards prescribed by the Institute of Chartered Accountants of India and the ratio of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, the expenditure incurred by way of interest paid for borrowing had to be capitalised and was rightly capitalised by the assessee-company in its books of account, and in the light of the said position it was not permissible to take a different stand at the stage of computation of total income for the purpose of the Income-tax Act. Reliance was placed on Explanation 8, section 43(1), in support of the aforesaid proposition and it was submitted that the entire legal position prior to the insertion of the said Explanation was now no longer applicable and such interest cannot be now claimed or allowed as deduction. It was submitted that the aspect of commence....
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....referred to in section 28 is to be computed and for this purpose it is stated that the provisions of sections 30 to 43D of the Act will have to be taken into consideration. Section 145 of the Act lays down that income chargeable under the bead "Profits and gains of business or profession" shall be computed in accordance with the system of accounting regularly employed by the assessee. Therefore, the scheme of the Act as it operates and the settled legal position in relation to the scope and ambit of section 5 vis-a-vis section 145 of the Act is that an incoine which has neither accrued nor been received within the meaning of section 5 of the Act cannot be brought to charge even though an entry might have been made in the books treating such receipt as income, because section 145 determines the mode of computing taxable income and does not affect the range/scope or ambit of taxable income. The same is the position in relation to allowability of an item of expenditure : Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) and CIT v. Gujarat Mineral Development Corporation [1981] 132 ITR 377 (Guj). In so far as the applicability of section 36(1)(iii) of the Act is co....
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....against the plain language of the provisions of the Act. The provisions of section 35D of the Act which deal with amortisation of certain preliminary expenses are another pointer to the legislative intent. Sub-section (1) of section 35D lays down that in the case of an assessee, who incurs certain expenditure specified in sub-section (2) of the said section after the prescribed date such expenditure shall be allowed to the extent of 1/10th for each of the ten successive years beginning with the previous year in which the business commences. When one looks at the various items of expenditure specified in sub-section (2) of section 35D it is apparent that all such expenditure is primarily capital in nature. However, clause (d) of sub-section (2) lays down "such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed" and as we have already seen interest in relation to capital borrowed for the purposes of business is an allowable deduction under section 36(1)(iii) of the Act. Therefore, where the Legislature wanted to restrict allowance/deduction of a particular type of expenditure a speci....
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....o use the interest which is paid/payable would never form a part of actual cost. The submission of the Revenue to the effect that by virtue of an Explanation 8 any interest which is paid for a period prior to an asset first being put to use has always necessarily to be capitalised does not flow from a plain reading, Even if one accepts the Revenue's plea that purposive interpretation should be adopted, the said interpretation cannot be said to arise from the wordings of Explanation 8. All that the Legislature has provided is that in a situation where an asset is acquired out of borrowed funds interest relatable to such borrowings, if it is paid or payable after the asset has been first put to use shall not form part of actual cost. We nowhere get any indication in the said provision to the contrary as the Revenue asks us to believe. The aforesaid Explanation 8 nowhere provides that interest pertaining to a period prior to an asset being first put to use will not be allowed as a deduction under section 36(1)(iii) of the Act. Even if we assume for the sake of the argument the submission of the Revenue that interest paid/ payable for the borrowings before an asset is first put to u....
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....uch interest in the 'actual cost' of the asset for the purposes of claiming depreciations investment allowance, etc., under the Income-tax Act. As this was never the legislative intent nor does it conform to accepted accounting practises, with a view to counteracting tax avoidance through this method and placing the matter beyond doubt, the Bill seeks to provide that any amount paid or payable as interest in connection with the acquisition of an asset and relatable to a period after the asset is first put to use shall not form part and shall be deemed never to have formed part of the actual cost of the asset. This amendment will take effect retrospectively from 1st April, 1974, and will, accordingly, apply in relation to the assessment year 1974-75 and subsequent years. (Clause 9)". As can be seen it only states that new Explanation 8 is inserted in relation to the definition of "actual cost" and pertaining to interest paid or payable for acquisition of the asset and relatable to a period after the asset is first put to use. On behalf of the Revenue, our attention was also drawn to Circular No. 461, dated July 9, 1986. The said circular deals with the explanatory notes ....
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....". Therefore, as can be seen Explanation 8 was inserted to counter act tax avoidance by way of claiming depreciations investment allowance, etc., on a larger amount of actual cost. Neither in the Notes on Clauses nor in the Memorandum explaining the provisions in the Finance Bill we find any indication in support of the Revenue's stand that in a converse situation interest has to be capitalised and further that such interest cannot be claimed as deduction under section 36(1)(iii) of the Act. In fact, there is no mention about the deductibility or otherwise under section 36(l)(iii) of the Act. The accepted accounting principle is that where an asset is acquired out of borrowed funds interest paid or payable on such funds constituted the cost of such borrowing and not the cost of the asset acquired with those funds. It is in the light of this principle that the Institute of Chartered Accountants of India has stated in its guidelines that such interest may be capitalised. The same is the ratio of the Supreme Court decision in the case of Challapalli Sugars Ltd. [19751 98 ITR 167. The Revenue wants us to hold that what is permissible, viz., capitalisation of interest, should be r....
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....ion will have to be read in the light of the factual matrix and the question posed before the court. In the present case, there is no controversy between the parties as to computation of cost, and hence, the said decision does not shed any light for cur purpose. Moreover, we have already delineated the distinction between the concept of "cost" and "actual cost". An alternative contention was raised on behalf of the Revenue that in case the assessee has an option-to capitalise or not to capitalise interest paid/payable relatable to borrowing made, even then the deductibility of such interest will have to be restricted. It was submitted that in a case where business has commenced but the asset has not been put to use, a deduction shall not be available under section 36(1)(iii) of the Act, even if the assessee has capitalised the interest in its books of account. That, in a situation where the business has commenced, after the asset has been first put to use the deduction under section 36(1)(iii) would be available even if the assessee has capitalised the interest in its books of account. We have already seen the provisions of section 36(1)(iii) of the Act and they do not make any ....
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.... 60 ITR 52 (SC) in the following terms in Challapalli Sugars Ltd. [1975] 98 ITR 167, 178 (SC) : 'This case too is of no assistance to the Revenue. The appellant-company in that case at the time it raised the loan was a running concern. Unlike the assessees in the present appeals, the loan raised by the appellant-company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in the actual cost of the plant did not arise in that case'. In view of this, we conclude that the decisions of the Bombay High Court in Calico Dyeing and Printing Works v. CIT [1958] 34 ITR 265 and of the Supreme Court in India Cements ltd. [1966] 60 ITR 52, hold the field with equal force, even after the decision in Challapalli Sugars Ltd.'s case [1975] 98 ITR 167 (SC). We can state the ratio of all these three decisions as under: (1) Where a borrowing is made for the purposes of a business, the interest paid on such a borrowing becomes eligible to deduction contemplated by section 10(2)(iii) of the Act of 1922 or section 36(1)(iii) of the Act of 1961. (2) This would be so, eve....
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....precation had been claimed for unused rubberised machinery valued at Rs. 4,80,000. Therefore, the Income-tax Officer held that such machinery had not been used for the business of the assessee, the claim for deduction of interest paid in all the three assessment years was not allowable. The Tribunal found as a matter of fact that the machinery being a business asset, the interest paid on the loan borrowed for purchase of such machinery would certainty be an allowable deduction. It was in this context that the following question of law arose before the apex court: "Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the interest paid by the assessee on loans taken from the bank for the purchase of machinery, which was never used in the assessee's business, is an allowable deduction in computing the total income of the assessee for the assessment years 1972-73 and 1973-74 ?" It is further found that similar application was also filed for 1974-75. Therefore, as can be seen in the facts which were there before the apex court, undisputedly the assessee had borrowed loans from the bank for purchase of machinery, such machi....