Coimbatore Pioneer Mills Ltd. vs Commissioner of Income Tax

N.V. Balasubramanian, J.—At the instance of the assessee, the Appellate Tribunal has stated a case and referred the following question of

law for the opinion of this court u/s 256(1) of the Income Tax Act, 1961 :

Whether, on the facts and in the circumstances of the case, the deferred interest payment relating to loan raised for purchase of machinery installed

in ''textiles processing unit'' was revenue in nature and does not form part of the actual cost of plant and machinery ?

The assessee is a public limited company engaged in manufacture and processing of textiles. The assessment year involved is 1979-80 and the

relevant previous year ended on December 31, 1978. The assessee filed a return of income for the assessment year 1979-80 declaring a total

income of Rs. 19,08,600. The Inspecting Assistant Commissioner of Income Tax (Assessment), Range-II, Coimbatore, determined the total

income of the assessee at Rs. 34,96,070. The assessee during the course of the relevant previous year set up a new textile processing unit and

installed certain plant and machinery. The assessee claimed that the deferred interest of Rs. 1,64,355 relating to the money borrowed for the textile

processing unit should be capitalised, and should be added to the cost of the machinery for the purpose of computation of its income. The result of

such treatment of the amount would be that the assessee would claim depreciation on the amount capitalised and the assessee would also be

entitled to higher deduction u/s 80J of the Act. The Assessing Officer, however, held that the deferred interest charges should be regarded only as

a revenue expenditure and allowed the same following the decision of the Supreme Court in the case of BOMBAY STEAM NAVIGATION CO.

(1953) PRIVATE LTD. Vs. COMMISSIONER OF Income Tax, BOMBAY., wherein the Supreme Court has held that the deferred interest

charges should be regarded as revenue in nature. The Assessing Officer also found that in respect of two other yarn units set up by the assessee in

the earlier years, the deferred interest charges was treated as revenue expenditure. Consequently, the Assessing Officer partially disallowed the

claim of the assessee of depreciation allowance and relief u/s 80J and completed the assessment.

The assessee preferred an appeal before the Commissioner of Income Tax (Appeals) against the order of the Assessing Officer holding that the

deferred interest charges should be allowed as a revenue expenditure. The Commissioner of Income Tax (Appeals) stated that the interest paid on

the unpaid purchase money can be capitalised and it is at the option of the assessee to claim the same as revenue expenditure or as capital

expenditure. The Commissioner of Income Tax (Appeals) following the decision of the Bombay High Court in the case of Ballarpur Paper and

Straw Board Mills Ltd. Vs. Commissioner of Income Tax, Vidarbha and Marathwada, Nagpur, held that the assessee had opted to capitalise the

interest charges and, therefore, the assessee would be entitled to claim that the amount should be capitalised and the assessee would be entitled to

claim depreciation on the interest amount paid on the deferred purchase consideration.

The Revenue preferred an appeal before the Income Tax Appellate Tribunal. The Appellate Tribunal following the decision of the Supreme

Court in the case of BOMBAY STEAM NAVIGATION CO. (1953) PRIVATE LTD. Vs. COMMISSIONER OF Income Tax, BOMBAY.,

and a decision of this court in the case of Sivakami Mills Ltd. Vs. Commissioner of Income Tax, held that the interest paid on the deferred

purchase consideration should be regarded only as revenue expenditure, and it is not open to the assessee to claim it as a capital expenditure. It is

this order of the Appellate Tribunal that is the subject-matter of the tax case reference.

Mr. P. P. S. Janarthana Raja, learned counsel appearing for the assessee, contended that on the basis of the decision of the Bombay High Court

in the case of Ballarpur Paper and Straw Board Mills Ltd. Vs. Commissioner of Income Tax, Vidarbha and Marathwada, Nagpur, the interest

paid on the purchase consideration should be capitalised and the Appellate Tribunal was not correct in holding that it should be regarded as

revenue expenditure. He sought to distinguish the decision of this court in the case of Sivakami Mills Ltd. Vs. Commissioner of Income Tax, on the

ground that the decision related to the question of payment of guarantee commission and that case was not a case dealing with interest payment.

We are not able to accept the contention of learned counsel for the assessee due to the change in the statutory law. Explanation 8 to Section

43(1) of the Income Tax Act was introduced by the Finance Act, 1986, with retrospective effect from April 1, 1974, and under the said

Explanation it is declared that for the removal of doubts, where money is paid as interest in connection with the acquisition of an asset, so much of

such amount as is relatable to any period after such asset is first put to use, shall not be included and shall be deemed never to have been included

in the actual cost of such asset. Explanation 8 to Section 43(1) of the Act makes it clear that the interest paid on the deferred purchase

consideration cannot be included as part of the cost of the asset either for claiming depreciation or for claiming deduction u/s 80J of the Act.

Hence, on a different reasoning arrived at by us the view of the Appellate Tribunal that the interest paid in connection with the acquisition of an

asset cannot be included as part of the actual cost of the asset is justified and is perfectly in order. Hence, it is not necessary for us to go into the

question that the decision of this court in the case of Sivakami Mills Ltd. Vs. Commissioner of Income Tax, would apply to the facts of this case.

Since on the basis of Explanation 8 to Section 43(1) of the Act, which is admittedly applicable to the facts of the case, the interest paid cannot be

added as part of the cost of the assets, the question referred to us is liable to be answered in the affirmative and against the assessee. Accordingly,

we answer the question of law referred to us in the affirmative and against the assessee. No costs.