TMI Blog1997 (9) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... o 36 are to be allowed in full. In Support of this contention, he placed reliance on the judgment of the Hon'ble Calcutta High Court in the case of CIT v. Tungabhadra Industries Ltd. [1994] 207 ITR 553/76 Taxman 185. He, therefore, argued that expenditure incurred on rent, depreciation, etc., should be allowed. The ld. D.R. argued that in the decision reported in Asstt. CIT v. Trade Links Ltd. [1995] 54 ITD 108, Delhi Bench have held to the contrary after finding support from the judgments of the Hon'ble Calcutta High Court in the cases of Kesoram Industries Cotton Mills Ltd. v. CIT [1991] 191 ITR 518 and CIT v. Upper Ganges Sugar Mills Ltd. [1994] 206 ITR 215/72 Taxman 37. As far as the judgment in the case Tungabhadra Industries is concerned, the same is not with reference to the provisions of section 37(4) of the Act. 2. We have carefully considered the rival submissions. It is true that in the judgment delivered on November 28, 1991 in the case of Tungabhadra Industries Ltd., the Hon'ble Calcutta High Court held that expenditure allowable under sections 30 to 36 cannot be disallowed under the provisions of section 37(3A). However, subsequently, in the judgment delivered on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. CIT [1997] 225 ITR 798/91 Taxman 26. The Hon'ble Apex Court have held that expenditure incurred by a company in connection with the issue of shares, with a view to increase its share capital, is directly related to the expansion of the capital base of the company and the capital expenditure, even though it may incidentally help in the business of the company and in the profit-making. In our view, it would not make any difference that issue pertains to preference shares and not equity shares. The fact remains that even the issue of redeemable preference shares goes to expand the capital base of the company. We, therefore, reject this ground also. 5. The third ground of appeal has been taken up by the assessee as an alternative ground that the ld. CIT(Appeals) was not justified in not allowing the assessee's claim of share issue expenses as an allowable deduction under section 35D of the Act. The ld. CIT(Appeals) has rejected the alternative contention of the assessee on the ground of absence of details. In our view, the assessee having claimed a deduction prescribed by the Statute in relation to expenditure on issue of shares, the ld. CIT(Appeals) was not justified in denying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery. We further asked him as to whether it was his case that the treatment given to the amounts in question in the books of account of the assessee was not in accordance with any acceptable principles of accoutancy. The ld. counsel replied that he did not dispute that capitalisation of expenditure in the books of account is in accordance with well-known principles of accountancy. However, it was so done in the books of account to meet the requirements of the auditors and the company law. It is not the requirement of the Income-tax Act that the expenditure should be treated as capital expenditure and, therefore, the assessee was at liberty to claim deduction of this amount as revenue expenditure in the return of income or in the course of assessment proceedings. 9. According to the ld. counsel of the assessee, the issue stands settled in his favour by the judgment of the Hon'ble Calcutta High Court in the assessee's own case on the Writ filed by the assessee against the issue of notice under section 263 for the assessment year 1982-83. The ld. counsel argued that the Hon'ble Calcutta High Court held that since the assessee was already in business and the new unit constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the amounts in question have been correctly treated as capital expenditure in the books of account. Thirdly, whether the expenditure is governed by the provisions of section 36(1)(iii) of the Act or section 43(1) and various other provisions of the Act relating to the cost of capital assets. 12. Coming now to the first question, it is the admitted position of the assessee that the treatment given by him in its books of account of capitalising the amounts in question is in conformity with the principles of mercantile system of accounting and the same is in accordance with the well-established principle of accountancy. It is, therefore, not necessary for us to examine this question any further. However, with a view to put the matter before us in proper perspective we propose to dwell upon this aspect at some length. At the outset, we wish to state that it is not always true that an expenditure is either capital or revenue. In the first instance, there is no single or uniform method of accounting even under the mercantile system for the measurement of periodic income. Furthermore, there are also no easy yardsticks or parameters on the basis of which the classification between th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the converse is not true. 14. In the case of CIT v. L.G. Balakrishnan Bros. (P.) Ltd. [1974] 95 ITR 284, the Hon'ble Madras High Court have judicially sanctioned the following passage under the head "Interest on Borrowings" in the "Members' Handbook Series, The Institute of Chartered Accountants of India, No. 202.": "The question often arises as to whether interest on borrowings can be capitalised and added to the cost of fixed assets which have been created as a result of such expenditure. The accepted view seems to be that in the case of a newly started company which is in the process of constructing and erecting its plant, the interest incurred before production commences may be capitalised. "Interest incurred" means actual interest paid or payable in respect of borrowings which are used to finance capital expenditure .... Interest on capital during construction paid in accordance with the provisions of section 208 of the Companies Act, 1956, may, however, be capitalised as permitted by that section. Interest on monies which are specifically borrowed for the purchase of a fixed asset may be capitalised prior to the asset coming into production, i.e., during the erection st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that provisions of section 145 are mandatory and the proper method of accounting regularly followed by an assessee is binding on the assessing authorities. As early as in the case of CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 (PC), the Judicial Committee of the Privy Council noted that even if the profit brought out in the accounts is not the true figure for income-tax purpose, the same would be compulsory basis of computation of income if the true figure can be accurately deduced therefrom. Incidentally, this judgment of the Privy Council has been cited and relied upon in a number of judgments delivered thereafter by the Hon'ble Supreme Court and various High Courts in India. 16. In Keshav Mills Ltd. v. CIT [1953] 23 ITR 230, the Hon'ble Supreme Court held that the provisions of section 13 of 1922 Act (corresponding to section 145 of 1961 Act) was compulsory on the income-tax authorities and imposed upon them an obligation to accept the mode of accounting regularly adopted by the assessee except in cases when the proviso to that section came into operation. The profits earned and credited in the books of account were to be taken as the basis for computation of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For this reason, on the same facts and circumstances, the computation of business income may differ depending upon the method of accounting employed. In otherwords, it is not the legal position that on identical facts, the same amount of income should be assessable in the cases of all the assessees. This position has been clearly recognised by the Hon'ble Supreme Court in the case of A. Krishnaswamy Mudaliar that the quantum of allowance permitted to be deducted from the profits and gains of business would differ according to the system of accounting. In the case of CIT v. S.M. Chitnavis [1932] 2 Comp. Cas. 464 (PC), Lord Russel held that if a method of accounting is regularly employed then the assessee ought to get the advantage and suffer disadvantage of that system of accounting, and even though it may happen that in a particular year the revenue may gain in another year the assessee may gain. The Hon'ble Bombay High Court held in the case of CIT v. Tata Iron Steel Co. Ltd. [1977] 106 ITR 363 that if the method of accounting followed by an assessee cannot be said unreasonable, the same has to be given effect to even if a better method can be visualised. 20. There are also cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that decision was heavily relied upon by the UCO Bank's case before Calcutta High Court. After consideration of the matter, the Hon'ble Calcutta High Court held : "The assessee in this case, has not valued stock of shares and securities in its books of account in accordance with the method "cost or market price, whichever is lower". This is an admitted position. If this method is not followed in writing and preparing accounts consistently, the assessee cannot claim a notional method of stock valuation only for computation of income by the tax authorities without following the same method in writing and preparing accounts. Section 145(1) of the Act, 1961, clearly goes against the submissions made on behalf of the assessee. As we have indicated, the assessee's method of accounting as well as the system of stock valuation adopted by him consistently for the purposes of preparing his accounts has to be accepted by the tax authorities. The book results can be rejected by the tax authorities only if the method adopted by the assessee is either defective or if the system adopted does not disclose a proper and true income." From the above decided case, it is clear that an assessee aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gued during the course of hearing before us that there is categorical finding in the judgment of the Hon'ble Calcutta High Court in his own case that interest arising on amounts borrowed for the purchase of capital assets in the case of an existing business has to be allowed under section 36(1)(iii) of the Act. We, therefore, address ourselves to the third question as to whether the expenditure in question in so far as this assessee is concerned is governed by the provisions of section 36(1)(iii) of the Act or section 43(1) and various other provisions of the Act relating to the cost of capital assets. 22. We have most respectfully and carefully perused the judgment dated 6th March, 1991 of the Hon'ble Bench of the Calcutta High Court in Matter No. 738 of 1987 in the case of the assessee in relation to the assessment year 1982-83. This judgment has been delivered on the writ petition filed by the assessee-company against notice under section 263 issued by the CIT. This notice under section 263, inter alia, contained the objection of the ld. CIT (Central-II), Calcutta that the Income-tax Officer erred in allowing interest paid by the assessee on the borrowings made for the acquisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore us. 23. During the course of hearing the ld. counsel of the assessee argued that provisions of section 36(1)(iii) are applicable to the amount of interest paid in respect of capital borrowed for the purposes of the business or profession. This sub-section does not draw any distinction as to whether the expenditure is capital or revenue once the business is already in existence. On consideration we are of the view that this argument may at its best arise only when the deduction claimed is of interest paid on borrowings. In the instant case that is not the situation. The assessee has capitalised this interest and treated it as an integral part of cost of assets to the assessee. Apparently after capitalisation the amount of interest has merged into the cost of assets and thus lost original character. The cost of an asset may comprise of several components, such as freight, insurance, travelling expenses, payment of salaries and wages and so on. However, once these expenses are capitalised, they only represent the cost of the assets. It is significant that under section 43(1) "actual cost" has been defined not merely as the cost of the asset but the cost of the asset to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a matter of record that based on this judgment and the generally accepted principles of accountancy, assessees in a large number of cases capitalised even after commencement of business interest on amounts borrowed for acquisition of plant and machinery and not only claimed depreciation but also development rebate, investment allowance, etc. In a number of cases, this practice was followed even in respect of period after the commencement of the production so much so that the Legislature were called upon to introduce Explanation 8 by the Finance Act, 1986 with retrospective effect from 1-4-1974. 25. On consideration of the matter it appears to us that there is no basis to hold that provisions of section 36(1)(iii) supersede the provisions of section 43(1) relating to "actual cost" insofar as interest paid on borrowings made for acquisition of capital assets is concerned. There is also ample authority for this conclusion in the judgment of honourable Gujarat High Court in the case of Vallabh Glass Works Ltd. . In that case Hon'ble Gujarat High Court have held that commencement of business is not the sole factor on which the nature of expenditure can be decided. Even revenue expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowings for acquisition of capital assets can be treated as revenue expenditure as well as capital expenditure depending upon the view taken by the businessman on overall appraisal of the facts and circumstances of his case. It is also important to bear in mind that while in the present case the appellant finds it more advantageous to press for the deduction under section 36(1)(iii), there may be any number of assessee who may with equal vehemence contest for the capitalisation of similar amounts. The historical background behind the promulgation of the provisions of Explanation 8 to section 43(1) bears this out. 26. In the case of Chhabirani Agro Industrial Enterprises Ltd. v. CIT [1991] 191 ITR 226/58 Taxman 23 (Pat.), the Hon'ble Patna High Court have followed the judgment of Supreme Court in the case of Challapalli Sugars Ltd. and Gujarat High Court judgment in the case of Vallabh Glass Works Ltd. In that case, Hon'ble Patna High Court held that all expenditure necessary to bring capital assets into existence and put them in working condition will form part of its cost. It is wholly irrelevant whether the asset was acquired prior to the commencement of business or subsequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... character and existence and represents integral part of the cost of the acquisition of the assets itself. We, therefore, hold that the contentions of the ld. counsel of the assessee that in view of the provisions of section 36(1)(iii) the amount of interest has to be allowed deduction irrespective of the treatment given in the books of account are not legally tenable and unacceptable. The provisions of section 36(1)(iii) are applicable on interest on borrowings. These provisions have no application on the cost of assets to the assessee which is governed by the provisions of section 43(1) and other allied provisions pertaining to depreciation allowance, etc. 30. In view of the discussion in the foregoing paragraphs we do not see force in this ground of appeal No. 4 of the assessee seeking deduction of the sum of Rs. 11,13,819 under section 36(1)(iii) of the Act. The same is accordingly rejected. 31. Ground of appeal No. 5 seeks leave to supplement, amend, cancel or otherwise modify the grounds of appeal at the time of hearing. No submissions have been made by the assessee in this behalf and, therefore, this ground does not require any further action at our end. 32. In the res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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