TMI Blog2004 (10) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... ve assessment years 1987-88 and 1988-89 involved identical question of law on identical facts. Therefore, these two appeals have been taken up together for disposal. The question: In the present case, the assessee who was already continuing with its business had acquired certain machineries and plants for expansion of the units. The payment for such plants and machineries was agreed to be in terms of deferred payment scheme, which included interest. The question now arises as to whether the interest paid on the borrowed capital, under a deferred payment scheme for acquisition of plants and machineries until the plants and machineries are first put to use, could be deductible under section 36(1)(iii) or section 37 of the Income-tax Act, 1961 in computing the assessee's income, as revenue expenditure, though capitalized in the account of the assessee, but on which the assessee did not claim depreciation or development rebate. The Department treated it as capital expenditure: The Assessing Officer had held against the assessee and charged the same to be a capital expenditure on which deduction under section 36(1)(iii) or 37 was held to be impermissible. The Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the situation that the assessee was already carrying on business. In the course of such business, these plants and machineries were acquired. It is not that the business had not commenced. Therefore, an asset acquired by the assessee in the course of his business, when the business has already commenced and such asset was acquired for the expansion of the existing unit, would not be a capital expenditure but a revenue expenditure so far as it relates to the interest paid on the borrowed capital payable according to the deferred payment scheme. Though it has been shown in the account to have been capitalized, no depreciation and development rebate having been claimed, the assessee was at liberty to claim benefit as business expenditure since the account was maintained for the purpose of the audit under the Companies Act, which would not debar the assessee from showing the account differently for the purpose of the Income-tax Act, 1961. This contention of Dr. Pal does not seem to cut any ice. Explanation 8 does not make any difference to the cost of asset when the assessee had not commenced its business at all incurring the expenditure in order to establish the business and an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this interest paid on the borrowed capital under the deferred payment scheme after the machinery is first put to use would be a revenue expenditure, since it could not be treated to be the actual cost of such asset for being capitalized for the purpose of claiming depreciation or development rebate. But so long as the machinery is not first put to use, Explanation 8 would operate conversely. Having regard to the scheme and the law already established, the principle is as clear as the light of the day. It needs no explanation. Neither any cloud does haze the same. If it is specifically clarified that the interest paid after the asset is first put to use would not be included in the actual cost of asset, there would be no alternative but to hold that conversely it means that the interest paid before the asset was first put to use would be included in the actual cost and then it is to be treated as capital expenditure eligible for being capitalized on which depreciation and development rebate would be admissible. Therefore, in this case, we do not think that there is any difference or iota of dispute with regard to the provision, which has been made crystal clear by the decision in Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual cost of the assets in the absence of any statutory definition or other indication to the contrary. Having regard to the above observation, it appears to us that Explanation 8 inserted by the Finance Act, 1986 is a reiteration of the principle laid down in Challapalli Sugars [1975] 98 ITR 167 (SC) in section 43 where actual cost as has been sought to be defined and the definition whereof is not contrary to the ratio decided therein. The apex court while rendering the decision in Challapalli Sugars [1975] 98 ITR 167, had observed that the decision of the Andhra Pradesh High Court in CIT v. Challapalli Sugars Ltd. [1970] 77 ITR 392 did not lay down the law correctly while affirming the contrary view taken by the Calcutta High Court in CIT v. Standard Vacuum Refining Co. of India Ltd. (now Hindustan Petroleum Corporation Ltd.) [1966] 61 ITR 799, which was decided along with Challapalli Sugars Ltd. [1970] 77 ITR 392 followed by the Madras High Court in CIT v. L.G. Balakrishnan and Bros. (P.) Ltd. [1974] 95 ITR 284 and the Allahabad High Court in CIT v. J.K. Cotton Spinning and Weaving Mills Ltd. [1975] 98 ITR 153 to have taken the correct view. The same view was followed by the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the assessee by Dr. Pal in Escorts Ltd. v. Union of India [1993] 199 ITR 43 (SC) does not indicate anything on the question with which we are concerned now. It had dealt with the question as to whether the benefit of deduction can be had by an assessee under two heads, namely, one under section 10(2)(vi) and then under section 10(2) (xiv) of the 1922 Act or both under section 32(1)(ii) and section 35(1)(iv) of the 1961 Act in interpreting the expression "in respect of the same previous year" in clause (d) of the proviso to section 10(2)(xiv) of the 1922 Act and section 35(2)(iv) of the 1961 Act holding that "there is a fundamental, though unwritten, axiom that no Legislature could have at all intended a double deduction in regard to the same business outgoing; and, if it is intended, it will be clearly expressed. In other words, in the absence of clear statutory indication to the contrary, the statute should not be read so as to permit an assessee two deductions . . ." It was not a case, which was concerned with the question in the context, which we are called upon to answer. Therefore, this decision does not help Dr. Pal. On the other hand, Mr. Agarwal relying on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of eligibility of deduction of the investment as an individual assessee. Therefore, this decision does not help us on the question involved. Similarly, the decision in Veecumsees v. CIT [1996] 220 ITR 185 (SC) is 14 distinguishable on the facts. In the said case, the assessee was carrying on jewellery business. For the purpose of commencing a business of exhibiting cinematographic films, the assessee borrowed capital for constructing the cinema hall. In that case the question as to whether the interest was paid before the commencement of the business was not under consideration. In the said case, it was considered whether the interest paid on the loans obtained for constructing the cinema hall were to be allowed as deduction under section 36(1)(iii), at a point of time when the said business stood closed. In such circumstances, it was held that the interest was deductible under section 36(1)(iii) since obtained for the purpose of the assessee's business and that the particular part of the business for which the loan was obtained had been transferred or closed down would not alter the fact that the loans, when obtained, were for the purpose of the assessee's business. The decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an obtained for the purpose of carrying on the business in a situation where it was found that there was a common management, common accounts and interlacing of various activities of the assessee and the receipts from different activities which were deposited in the same bank account and were also utilized without any reservation for the other activities of the assessee. In such circumstances, it was held that the assessee was entitled to deduction of interest on the loan obtained from the bank. This case had nothing to do with the payment of interest on the borrowed capital under the deferred payment scheme for a period before the asset was first put to use. Thus, this decision also does not come to the aid of Dr. Pal. In CIT v. Associated Fibre and Rubber Industries (P.) Ltd. [1999] 236 ITR 471 (SC), it was held that the interest paid on the amount borrowed for purchase of machinery was a deductible amount. This case did not involve the question with regard to the interest payable before the asset was first put to use and as such this decision does not help Dr. Pal. Lastly Dr. Pal relied on Tetron Commercial Ltd. v. CIT [2003] 261 ITR 19 422 (Cal) of this very Bench wherein i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom April 1, 2004, to be applied in relation to the assessment year 2004-05 and subsequent years, clarifying that the interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not), for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. The object of insertion of this proviso was explained in the object of clause 15 that under the existing provision contained in clause (iii) of sub-section (1) of the said section (section 36), deduction of interest is allowed in respect of capital borrowed for the purpose of business or profession in the computation of income under the head "Profits and gains of business or profession". It was, therefore, proposed to insert a proviso in the said clause so as to provide that no such deduction shall be allowed in respect of any amount of interest paid, in respect of capital borrowed for acquisition of asset for extension of existing business or profession whether capitalized in the books of account or not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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