TMI Blog1988 (1) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... e prescribed. The stated objective of the scheme is twofold. The manufacturers of indigenous machinery capital equipment can push up the sales of their products by offering deferred payment facilities to the prospective purchaser-users. The purchaser-user of the machinery, on the other hand, is enabled to utilise the machinery acquired and repay its cost over a number of years. The manufacturer, of course, get the value of the machinery within a few days of the delivery of the machinery by discounting with his banker, the bills of exchange/promissory notes arising out of sale of the machinery. The methodology of this scheme was that on placing on order with the manufacturer a scheme for the payment of the price in installments was worked out and each installment was computed by adding interest at a particular percentage from the date of purchase to the date of payment of the particular installment. While the installment of the price was equal, the interest component would naturally be higher with the passage of time and the total amount payable on each date of installment would be progressively higher. Bills of exchange are to be drawn by the purchaser for each amount of installmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se Duty at 8% 7,744.00 --------- 1,04,544.00 CST at 4 per cent - Subject to receipt of 'C' form. 4,181.76 ----------- 1,08,725.76 Less : Advance received 4,725.76 ----------- 1,04,000.00 Financial Charges 46,800.00 ----------- AMOUNT PAYABLE AGAINST 10 BILLS OF EXCHANGE. 1,50,800.00 (Rupees One Lakh Fifty Thousand Eight Hundred only)." ----------- ----------------------------------------------------------------------------------------------- (b) The total sum of Rs. 1,50,800 was made up under the following Scheme : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,800.00 84.00 ------------------------------------------------------------------- TOTAL 1,04,000.00 1,50,800.00 ----------------------------------------------------------------------------------------------- FOR HINDUSTAN MACHINE TOOLS LIMITED Sd/- (R. Venkatesan) Jr.Commercial Officer." (c) TAFE drew up Bills of Exchange as given below : No. 1 "Rs. 11,300 Place : Madras; Date : Dec. 24, 1979 NINE months after date (inclusive of days of grace) pay to HMT Limited, Bangalore or order the sum of Rupees ELEVEN THOUSAND THREE HUNDRED ONLY inclusive of interest at 10.5 per cent per annum for value received. For Tractors and Farm Equipment Ltd. Sd/- Secretary To Central Bank of India Addison Buildings, Mount Road, Madras-2 Accepted payable at United Commercial Bank, Bangalore or at the Industrial Development Bank of India, Banagalore. Accepted. (Seal) For CENTRAL BANK OF INDIA (Addison Buildings Branch, Madras-2) Sd/- Accountant Sd/- Branch Manager. 4. The case of the assesses is that the total amounts of the installments inclusive of the interest component was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted in accordance with the method of accounting regularly employed by the assessees. Sections 28 to 41 lay down the rules for the computation of such profits and gains of a business chargeable to income-tax. Certain deductions such as depreciation and certain allowances such as investment allowance are based on the actual cost of the business assets acquired by the assessee. Section 43(1) of the Act defines 'actual cost' to mean the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. 8. The Allahabad High Court in the case of CIT v. J. K. Cotton Spg. Wvg. Mills Ltd. [1975] 98 ITR 153 held on 19-5-1974 that the expression 'actual cost' to the assessee in section 10(2) (vib) of the Indian Income-tax Act, 1922, which is in pari materia with section 43(1) of the Income-tax Act, 1961, means not the value of the assets but what the assessee has actually paid for it because the Legislature can be presumed to have used the expression 'actual cost' fully aware of the meaning assigned to it in commercial practice and must be understood to have used it in the same sense. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law as stated by the Supreme Court in Challapalli Sugars Ltd.'s case. The Explanation introduced in the section is in the nature of a declaratory act. Blackstone, J. in Nicol v. Verelst [1779] 26 ER 751 said "declaratory statutes do not prove the law was otherwise before, but rather the reverse." Coleridge, CJ. said in Jones v. Bennet [1890] 63 LT 705 that a declaratory Act means to declare the law or to declare that which has always been the law, and there having.been doubts which have arisen, Parliament declares what the law is and enacts that it shall continue to be what it then is. It is in this context that we have seen what was the law declared by the Supreme Court above and we have to see what was the intention of Parliament in enacting this Explanation, whether it was a departure from the law stated above or not. 12. The Finance Minister stated in his Budget Speech [1986] 158 ITR Journal 4 at 15 para 108, "(a) Investment allowance and depreciation is claimed on the basis of actual cost. In the present few years a number of companies have been using an accounting practice of capitalising the entire amount of interest on the moneys borrowed for acquiring of plant and mach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 13. From the above extracts it would be clear that the intention was to exclude interest on borrowed capital which related to the period after the asset was first put to use. The reference to the judgment dated 13-5-1974 in the Memorandum above is obviously to the decision of the Allahabad High Court in J. K. Cotton Spg. Wvg. Mills Ltd.'s case. In that case, there were two claims for interest - one for interest paid to State Government on a loan taken for setting up of the factory and the other, interest paid to suppliers of machinery.on deferred payment terms. With regard to the first item, it was interest paid in the calendar years 1959 and 1960 relevant to the assessment years 1960-61 and 1961-62 on loan of Rs. 90 lakhs given by the Government to set up the factory. The plant went into production on 1-8-1959. The Allahabad High Court held that if the sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt parts of the ultimate price which he has to pay. If the assessee-company had made payment in cash, it could have saved the sum of Rs. 6,46,040 paid by way of interest. But as it purchased the machinery on deferred payment basis, it had to pay interest also which clearly is a part of the ultimate price which the company had to pay." This view has not been shown to be at variance with any accepted principles or practice of accountancy. It may be noted that the statement of auditing practice quoted above did not relate to a situation such as this but was concerned only with interest paid on borrowed capital as such. Thus factually this situation of price paid in deferred payment terms is quite different from interest paid on capital borrowed for acquiring assets and there is nothing in Explanation 8 to state that the law is altered with reference to this situation. Moreover, as seen above, the mischief sought to be suppressed was the resort to the major change in the accounting practice by capitalising interest relating to the period after the asset is put to use. Such a change in accountancy practice can refer only to interest paid on capital borrowed to acquire assets considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated as a capital after the date of acquisition of the assets as held by the Supreme Court itself in Challapalli Sugars Ltd.'s case. But in the case of purchase of asset on deferred payment basis the entire price paid will remain as actual cost inclusive of interest component as the Explanation 8 has neither specifically nor by necessary implication changed the accepted treatment as such by the accounting principles. The purposive approach to statutory interpretation enjoins a Judge to impute to Parliament an intention not to impose a prohibition inconsistent with the objects which the statute was designed to achieve, though the draftsman has omitted to incorporate in express words any reference to that intention [See the case of CIT v. K. S. Vaidyanathan [1985] 153 ITR 11 (Mad.) (FB) at 33]. Section 145 requires the computation of profits of business to be in accordance with the regular system of accountancy. In the absence of any direct words to that effect we cannot assume any intention to disregard the known and regular principles of accountancy contrary to the provisions of that section. Thus, from any point of view the Explanation 8 cannot apply to any payment other than int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a price of the goods. We can recall the observation of Goddard, LJ. in Love v. Norman Wright (Builder) Ltd. [1944] 1 All. ER 618 at 620 : "Where an article is taxed, whether by purchase tax, customs duty, or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consideration, though made up of cost plus profit plus tax. So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up, or whether he seller has included tax or not.". In the same way the price of the goods is what it is because of the deferred payment facility, and the extra amount though computed by taking the interest payable for the deferred period, as a measure of the enhancement, does not really represent interest paid by the purchaser to the manufacturer or any financial institution on capital borrowed. 16. The other argument of the revenue that the interest component should be treated as interest to an unpaid sell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate, the amount itself is not payable with interest at that rate, so much so it is a case where no interest is specified on the amount for which the bill is drawn and it attracts section 80 by which interest is payable only from the date the bill is due @ 6 per cent p. a. till date of payment because interest as such becomes payable only on demand from the date the bill is due. See Gopalan v. Lacshminarasamma ILR 1940 Mad. 382. This is enough to show up in contrast interest payable on the amount of the bill and the interest included in the amount to enhance the price of the asset. It is the former which is the nature of interest which accrues per diem while the latter is an amount ascertained to enhance the price to compensate for deferred payment. Therefore, the price of the goods purchased under the deferment scheme was the price that was negotiated to be the total amount of the instalments and that total amount constituted the actual cost of the asset purchased. This is the view we have taken in the case of Widia (India) Ltd. v. ITO [IT Appeal No. 481 (Bang.) of 1983, dated 20-3-1985] (to which one of us was a party) and from which we are not persuaded to differ. 17. Even if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 977. The agreement itself was a memorandum of settlement made u/s 18(1) of the Industrial Disputes Act between the workmen and management of Simpson Co. Ltd. Such a settlement is enforceable under sec. 29 of the Industrial Disputes Act. The assessee claims that under sec. 2(k) of the Industrial Disputes Act the workmen could negotiate their conditions of service which would include a demand to set up a Death Relief Fund and hence this agreement was a liability under the law which was required to be allowed in spite of the provisions of section 40A (9) introduced by the Finance Act, 1984. On the other hand, the contention of the revenue is that this provision has been brought into force for disallowing such expenditure and should, therefore, be given effect to. The finance minister stated as follows : "Another undesirable practice notices is the tendency of some corporate bodies to make large contributions to the so-called welfare funds. I further understand that utilisation of these funds is discretionary and subject to no discipline. I am, therefore, providing that deductions will be available only in respect of contributions so such funds as are established under statute or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent required under any other law. 37. With a view to avoiding litigation regarding the allowability of claims for deduction in respect of contributions made in recent years to such trusts, the proposed amendment is being made retrospectively from 1st April 1980, and will, accordingly, apply in relation to the assessment year 1980-81 and subsequent years." [Clause 10(c)] These statements indicate that it was the misuse by certain employers of setting up funds and keeping them under their own control which was sought to be put an end to by this amendment. The amendment itself reads as follows : "40A (9). No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust company, association of persons, body of individuals, society, registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force." The question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8-85 to disallow interest component out of the actual cost of the assets acquired. As held above, such an exclusion is untenable. Besides, the assessment has been the subject-matter of appellate order dated 16-5-95 and, therefore, the order under section 263 is also without jurisdiction inasmuch as the CIT could not interfere with an assessment which had already merged with the appellate order. Hence, the order of the CIT is cancelled. This appeal is allowed. 24. ITA No. 1559/Mds/85 : We direct the actual cost to be taken without exclusion of the interest and we delete the disallowance of the contribution made to Death Relief Fund. The assessee has not pressed the claim for depreciation and investment allowance. This appeal is partly allowed. 25. ITA No. 1560/Mds/85 : We direct the actual cost to be taken without exclusion of the interest and we.delete the disallowance of the contribution made to Death Relief Fund. The assessee has not pressed the claim for depreciation and investment allowance. This appeal is partly allowed. 26. ITA No. 2336/Mds/85 : We direct the actual cost to be taken without exclusion of the interest and we delete the disallowance of the contribution mad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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