Commissioner Of Income Tax Chennai v. M/S. Tractors And Farms Equipments Ltd., Chennai 34

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 06.02.2007 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MRS.JUSTICE CHITRA VENKATARAMAN T.C.(R)Nos.175 and 176 of 2003 Commissioner of Income TaxChennai...Applicant Vs.M/s. Tractors and FarmsEquipments Ltd.,Chennai 34...Respondent ----- M/s. Tractors and FarmsEquipments Ltd.,Chennai 34. Reference under Section 256(1) of the Income Tax Act, 1961 at theinstance of the revenue arising out of the order of the Income TaxAppellate Tribunal, Madras 'C' Bench dated 14.01.1998 in ITA Nos.4500 &4501/Mds/1989 for the assessment years 1982-83 and 1985-1986. against theorder of the officer of the Commissioner of ;Income _Tax (Appeals) Vmadras -34 dated 13.9.89 in IT Appeal. No. 70 and 69/89-90 against theproceedings of the Deputy Commissioner of Income tax Special Range 1Madras 34 in G.I. No. I-T/82-83/47-004-CT-7442 and GI. No.I-T/85-86/47-004CT-7442 dated 13.4.89. For applicant :Mrs. Pushya Sitaraman, Sr.SC.for IT For Respondent : Mr. R. Venkatnarayanan forM/s. Subbaraya Aiyar----- J U D G M E N T (Delivered by P.D. DINAKARAN, J.) At the instance of the Revenue, the Income-tax Appellate Tribunal hasstated a case and referred the following question of law, which is commonin both tax cases: "Whether, on the facts and in the circumstances ofthe case, the Appellate Tribunal was right in law inholding that the interest paid under deferred paymentscheme under which certain assets acquired is capitalin nature and investment allowance is allowable on thesame?" https://hcservices.ecourts.gov.in/hcservices/ 2.1. The assessment years with which we are concerned are 1982-83 and1985-86. The assessee is a company. The assessee claimed investmentallowance on the interest paid under the deferred payment scheme throughwhich certain assets were acquired, which was negatived by the assessingofficer. 2.2. The Commissioner of Income-tax (Appeals) allowed investmentallowance holding that the interest accrued under the deferred paymentscheme is capital expenditure. The Appellate Tribunal upheld the order ofthe Commissioner of Income-tax (Appeals). 2.3. While giving effect to the said order, the assessing officerfound that the requisite reserve had not been created, and denied thebenefit obtained by the assessee in terms of the above order of theAppellate Tribunal. 2.4. On appeal, the Commissioner of Income-tax (Appeals) acceptedthe contention of the assessee that the assessee should be afforded anopportunity to make good the shortfall in the creation of reserve, andremitted the matter to the assessing officer. On further appeal, theAppellate Tribunal confirmed the same. 2.5. At the instance of the Revenue, the Appellate Tribunal hasstated a case and referred the above mentioned question of law. 3. Undisputedly, the assessee purchased capital assets on deferredpayment basis from the manufacturer availing the facility extended byI.D.B.I. Bank called, "I.D.B.I. Bills Rediscounting Scheme". Under thescheme, the purchaser utilised the machinery acquired from the date ofpurchase and the manufacturer got the value of the machinery within a fewdays of the delivery of the machinery. The payment of price in instalmentswas worked out and each instalment was computed by adding interest. Whilethe instalments of the price were equal, the interest component would behigher with the passage of time. The manufacturer was required topresent the bill at the bank of the purchaser for discounting within twomonths and the bank, in turn, would present the bill for rediscountingwith I.D.B.I. 4. According to the assessee, the total amount of the instalmentsincluding the interest is the actual cost of the assets purchased withinthe meaning of section 43(1) of the Income-tax Act, 1961 (in short "theAct"), the relevant portion of which reads as under: 4. According to the assessee, the total amount of the instalmentsincluding the interest is the actual cost of the assets purchased withinthe meaning of section 43(1) of the Income-tax Act, 1961 (in short "theAct"), the relevant portion of which reads as under: "43(1). 'actual cost' means the actual cost of the assets to theassessee, reduced by that portion of the cost thereof, if any,as has been met directly or indirectly by any other person orauthority." 5. On the other hand, the Revenue contends that the interest paidon capital borrowed after commencement of business cannot be capitalised.In this connection, it is relevant to refer the Explanation-8 to section43(1) as follows: "Explanation 8.--For the removal of doubts, it is herebydeclared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of suchamount as is relatable to any period after such asset is firstput to use shall not be included, and shall be deemed never tohave been included, in the actual cost of such asset". 6. The Appellate Tribunal, however, on the facts of the case heldthat the amount paid by the assessee as interest is not actually an'interest amount' paid on capital directly borrowed from the financialinstitution for the purpose of purchasing the capital asset and theinstalments paid constituted only the actual price of the asset sincethe invoice shows the total price including the financial charges.According to the Tribunal, the enhanced price due to the facility given bythe I.D.B.I. Scheme for deferred payment is quite distinct from eitherinterest paid on capital borrowed or interest paid on unpaid price andhence, Explanation 8 to section 43(1) of the Act has nothing to do withthe enhanced price of goods sold under the I.D.B.I. Scheme. 7. In our view, Explanation 8 to section 43(1) of the Act, insertedwith effect from April 1, 1974, should not be construed in the way asadopted by the Appellate Tribunal. A reading of the Explanation 8 tosection 43(1) of the Act shows that it was added with the object ofremoving doubts with regard to the includibility of interest relatable toany period after the asset has first been put to use, in the computationof its actual cost. By this Explanation, it has been declared byParliament that "where any amount is paid or is payable as interest" inconnection with the acquisition of an asset "so much of such amount as isrelatable to any period after such asset is first put to use shall not beincluded and shall be deemed never to have been included," in the actualcost of such assets. The Parliament, in the above Explanation, has takenfull care to couch the Explanation in the widest possible terms to avoidany further controversy in regard to the very same issue on the basis ofthe manner of payment of interest or time of payment thereof. This hasbeen done by the use of the expression "where any amount is paid or ispayable as interest". It will not be correct to say that the legalposition in regard to includibility of interest on deferred payment in thecomputation of the actual cost of an asset did not undergo any change as aresult of the insertion of Explanation 8 with retrospective effect and thespecific declaration by Parliament made therein that the part of theinterest mentioned therein would not be includible in the actual cost.The very purpose of this amendment was to clarify the position in thisregard and to set at rest the controversy that had arisen, vide CIT v.Rajaram Bandekar (202 ITR 514 – Bombay High Court). 8. Applying the ratio laid down by the Bombay High Court in CIT v.Rajaram Bandekar, cited supra, this Court in CIT v. India Pistons Ltd.(242 ITR 672), held as follows: 8. Applying the ratio laid down by the Bombay High Court in CIT v.Rajaram Bandekar, cited supra, this Court in CIT v. India Pistons Ltd.(242 ITR 672), held as follows: "In the instant case, depreciation has been claimed oninterest payable on a deferred payment scheme which isidentical to the facts involved in the case decided by theBombay High Court reported in CIT v. Rajaram Bandekar [1993]202 ITR 514. We concur with the view taken by the BombayHigh Court.We hold that the amount of interest could not beincluded in the actual cost for the purpose of depreciationand development rebate applying Explanation 8 to section 43 https://hcservices.ecourts.gov.in/hcservices/ (1) of the Income-tax Act, 1961. The view taken by theTribunal is not justified." 9. The above view has also been followed by this Court in CIT v. L.G.Balakrishnan and Brothers Ltd. (247 ITR 131). 10. This Court in C.I.T. v. Textool Co. Ltd. (263 ITR 523) also heldthat in view of Explanation 8 to section 43(1) any amount paid as interestin connection with the acquisition of an asset shall not be included andshall never be deemed to have been included as part of the actual cost ofthe asset. 11. In this view of the matter, we hold that the amount of interestpayable on deferred payment scheme could not be included in the actualcost for the purpose of investment allowance applying Explanation 8 tosection 43(1) of the Act, and the Appellate Tribunal is not correct inholding that the interest paid under deferred payment scheme is capital innature and investment allowance is allowable on the same. Accordingly, the common question of law referred to us is answered inthe negative, in favour of the Revenue and against the assessee. No costs. Sd/Asst. Registrar /true copy/ Sub Asst.Registrar To 1.The Assistant Registrar,Income Tax Appellate TribunalMadras.Income Tax Appellate TribunalMadras. 2.The Secretary, Central Board of Direct Taxes, New Delhi.of Direct Taxes, New Delhi. 3.The Commissioner of Income-Tax (Appeals-V), Madras.Tax (Appeals-V), Madras. 4.The Deputy Commissioner of Income-tax, Special Range I, Madras. of Income-tax, Special Range I, Madras. 5. The ITAT C Bench, Madra.s + One cc to Mr. R. Venkataraman Advocate SR 7084+ One cc to Mrs. Pusya Sitaraman Advocate SR 7521KU (co)sg 13/3/07 T.C..Nos.175 & 176 of 2003 6.2.2007