TMI Blog1995 (11) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... f term loan obtained for TPD modernisation project at Dalmiapuram. It further mentioned that out of total interest of Rs. 93,48,314 paid on loans from certain Financial Institutions, an amount of Rs. 73,87,856 had been allocated towards cement work at Dalmiapuram for TPD modernisation project and the remaining amount of Rs. 19,60,458 which included commitment charges of Rs. 74,325 had been allocated towards Dalmia Magnesite Corporation at Salem - one of the units of the company. It was further mentioned in the notice that from the Director's Report given in the Annual Report, it was seen that work of modernisation project was not commissioned during the year and that beneficiary plant was installed atSalemfor upgrading the quality of raw material. It was also mentioned that the said beneficiary plant was claimed to have been installed on 27-3-1986 and that the claim of depreciation and the investment allowance on the said plant was rejected by the Assessing Officer holding that the said plant was not put to use. It was further mentioned that as the plant was claimed to have been installed at fag end of the year, interest and commitment charges of Rs. 19,60,458 apparently included t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefication plant at Salem and for modernisation of cement plant at Dalmiapuram were allowable under the provisions of section 36(1)(iii) of the Income-tax Act, as the same had been paid on the capital borrowed for the purposes of business. The assessee also distinguished the decision of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 on the basis of the decision of the Hon'ble Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715. The assessee tried to explain the application of the case law in cases where no business was in existence and the cases in which capital was borrowed for the existing business. He also relied on the decisions reported in Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC), India Cements Ltd v. CIT [1966] 60 ITR 52 (SC), Calico Dyeing Printing Works v. CIT [1958] 34 ITR 265 (Bom.), Addl. CIT v. Aniline Dyestuffs Pharmaceuticals (P.) Ltd [1982] 138 ITR 843 (Bom.). 3. The CIT dealt with the arguments of the assessee and held as under : 3.1 He held with reference to the first argument of the assessee that the appellate order by CIT(A) had not yet been passed and there was, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not deal with the treatment to be given to the amount of interest, i.e., whether it was revenue in nature or capital in nature. The CIT referred to the details mentioned in the show-cause notice and observed that since the expenditure on purchase of machinery was incurred with a view to avail of an enduring benefit, it was to be treated as a capital expenditure on which depreciation, etc., was allowed in accordance with law. He also observed that the position with regard to interest on term loans for acquiring specific capital asset was no different. He referred to the decision of Hon'ble Supreme Court in the case of State of Madras v. G.J. Coelho [1964] 53 ITR 186, wherein it has observed that in principle there is no distinction between interest paid on capital borrowed for the acquisition of a new business and interest paid on capital borrowed for the purposes of an existing business, and that both are for the purposes of business. He, therefore, held that the interest on term loans which had been paid for two specific projects till the date of the commissioning has to be treated as part of the cost of the projects. In this connection, he also referred to the definition of 'ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el for the assessee, Shri Harihar Lal mentioned at the outset, that he was not pressing Ground No. 1 (b) which relates to the jurisdiction of the CIT under section 263 when the order of the first appellate authority was awaited. The said ground is, therefore, rejected. 4.2 The remaining grounds mainly challenge the order of the learned CIT under section 263. The learned counsel made almost the same submissions before us as had been made before the learned CIT. The thrust of his arguments was that the business of the assessee was pre-existing during the year under consideration and that the loans were obtained for modernisation and improvement of productivity in pre-existing cement works at Dalmiapuram and Magnesite works at Salem and that the AO had rightly allowed the deduction under section 36(1)(iii). He invited our attention to the written submissions dated5-2-1991filed before the learned CIT, a copy whereof is placed at pages 54-59 of the paper book. In the said written submissions, the assessee relied on the decisions reported in Calico Dyeing Printing Works case, Aniline Dyestutfs Pharmaceuticals (P.) Ltd's case, Alembic Glass Industries Ltd's case, Challapalli Sugars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the Tribunal that it was entitled to depreciation due to existing business. In this connection he invited our attention to the orders of the Tribunal in ITA No. 3883 / Del / 91 in the case of assessee for the assessment year 1986-87, wherein the Tribunal considered the question of investment allowance and depreciation allowance as also the question whether the plant and machinery had been installed in the course of carrying on its pre-existing business as distinct from the newly commenced business and held in para 63 that the beneficiation plant was the replacement of the existing manual system whereby all the work was done by manual process and that it was not a case where a new plant was set up to carry out the activity not earlier performed in the business of the assessee. The Tribunal, further observed that whatever was earlier performed manually, came to be performed by a machine in which heavy investment was made. The Tribunal further held in paragraph 67 of the said order that from the nature and functions of the Stacker Reclaimer it was clear that the machinery can simultaneously operate along with other operations which was continued by the assessee. It ultimately hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the interests of revenue. He referred to the definition of "actual cost" as given in section 43(1) read with the provisions of Explanation 8, which was inserted by the Finance Act, 1986, with retrospective effect from 1-4-1974 and submitted that the said provisions of Explanation 8 excluded interest on loan after asset is first put to use. He, therefore, stressed that by negation it means that interest on loans before assets are first put to use ought to be capitalised. He, further submitted that the depreciation, etc., is on actual cost and the benefit of interest so capitalised would be available to the assessee for computing the depreciation on staggered basis. He further submitted that if interest is also allowed to the assessee under section 36(1)(iii), then the provisions of Explanation 8 will become a nullity as it would mean double deduction to the assessee. He further invited our attention to the observations on 'actual cost' at pages 1835-36 of Volume II of Income-tax Law 4th Edition by Chaturvedi and Pithisaria. The learned DR further relied on the decision of the Hon'ble Punjab and Haryana High Court in the case of CIT v. Oswal Spg. Wvg. Mills Ltd [1986] 160 ITR 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that he could do so and that he would be entitled to depreciation allowance and development rebate with reference to the amount of interest so capitalised. In the case of Challapalli Sugars Ltd; there was no definition of the expression "actual cost" and the Hon'ble Supreme Court decided the issue having regard to the guidelines issued by the Institute of Chartered Accountants of India and general principles for calculating the actual cost. The Hon'ble Calcutta High Court, while deciding the case of India Steamship Co. Ltd, had the occasion to interpret the provisions of Explanation 8 to section 43(1) of the Income-tax Act, 1961. It held that interest paid on amounts borrowed and other related expenses in connection with the acquisition of ships before such ships were delivered to the assessees were includible in the actual cost of the ships for the purposes of development rebate and it applied the decision of Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. The Hon'ble Calcutta High Court, further held that under the provisions of Explanation 8, the sum of Rs. 1,13,62,848 being the amount of interest payment made by the assessee for purchase of two vessels. After deli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... National Tramways Co. Ltd. [1906] 2 Ch. 654, 660 (Ch.D.) at page 176, the Hon'ble Supreme Court observed that " There was no general rule of law which compelled companies to charge to revenue account interest on money borrowed for the purposes of constructing works or prohibited them from charging it during construction to capital account ". Similarly, while examining its decision in the case of India Cements Ltd at page 178, the Hon'ble Supreme Court observed that " 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." Thus it is clear from the aforesaid observations of the Hon'ble Supreme Court that where the money is borrowed for modernisation and improvement of productivity of an existing business and the assessee does not claim capitalisation of the amount of interest paid by it on borrowed moneys, the situation will be di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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