Commissioner of Income Tax vs Dalmia Cement (Bharat) Ltd.

D.K. Jain, J.—By this petition u/s 256(2) of the Income Tax Act, 1961 (for short ''the Act''), the Revenue seeks a direction to the Income Tax Appellate Tribunal (for short the Tribunal) to state the case and refer the following questions, stated to be one of law, for the opinion of this Court :

"Whether the ITAT was correct in :-

(1) setting aside the order of the CIT u/s. 263 of the Act and restoring the order of the AO ;

(2) holding that the provisions of Explanation-8 to Section 43(1) cannot be interpreted in the reverse order so as to capitalise the amount of interest paid on borrowings and include the same in the actual cost of the machinery;

(3) applying Explanation-8 to Section 43(1) of the Act to the facts and circumstances of the case;

(4) not appreciating the true importance of the provisions of Section 43(1) which provide that any amount of interest paid or payable in connection with the acquisition of an asset for any period before such asset was put to use could be included in the actual cost of such asset."

The petition pertains to the assessment year 1986-87 for which the relevant previous year ended on 31st March, 1986. Assessment for the said assessment year was completed on 6th March, 1989 on a total income of Rs. 9,63,04,480/- as against the returned income of Rs.1,24,50,341/-. However, on examination of the assessment records for the relevant year, the Commissioner of Income Tax felt that the Assessing Officer had allowed deduction for Rs. 93,48,314/-, claimed by assessed as interest paid on term loans from financial institutions. Out of the said claim an amount of Rs. 73,87,856/- was allocated towards cement works at Dalmiapuram for TPD modernisation project and the balance amount of Rs.19,60,458/-, which included commitment charges of Rs.74,325/-, was allocated towards Dalmia Magnesite Corporation at Salem, one of the units of the assessed company, for installation of a beneficiation plant for processing and purification of raw magnesite ore.

According to the Commissioner, since modernisation of plants at Dalmiapuram and Salem involved replacement of the whole manufacturing process by opting for new technology and machinery and at Salem Beneficiation plant was separate and distinct unit, the interest on loans specifically raised for these projects, should have been included in the cost of the new plant, particularly when it pertained to the period prior to the commissioning of these projects. Observing that the Assessing Officer had wrongly allowed the said amount of interest as revenue expenditure without making any enquiries, which should not have been done in the light of Explanation-8 to Section 43(1) of the Act, the Commissioner came to the conclusion that the view taken by the Assessing Officer was erroneous and prejudicial to the interest of the revenue. He, accordingly, set aside the assessment and directed the Assessing Officer to modify the same by treating the said amount of interest as capital in nature.

Being aggrieved, the assessed took the matter in appeal to the Tribunal. Relying on the observations of the Supreme Court in Challapalli Sugar Ltd. Vs. The Commissioner of Income Tax, A.P., Hyderabad, , India Cements Ltd. Vs. Commissioner of Income Tax, Madras, , inter alia, to the effect that it is only the interest incurred before the commencement of the production, in a separate and distinct unit which had no connection with the existing business with reference to which the capital was borrowed, that can be capitalised and added to the cost of the fixed assets, and drawing support from the decisions of the Gujarat High Court and of this Court respectively in Commissioner of Income Tax, Gujarat II Vs. Alembic Glass Industries Ltd., and Commissioner of Income Tax Vs. Modi Industries Ltd., , wherein it was held that when the funds are raised for expansion/extension of the existing business, the interest paid on such borrowing was allowable as revenue expenditure, the tribunal came to the conclusion that the assessed was entitled to claim deduction for the said amount of interest u/s 36 of the Act. The Tribunal rejected the contention of the revenue that the provisions of Explanation-8 to Section 43(1) could be interpreted in the reverse order so as to capitalise the amount of interest in question. Having found that the amount of interest paid in respect of the capital borrowed for the purpose of business had been rightly allowed in the assessment order, the Tribunal set aside the order of the Commissioner passed u/s 263 of the Act. While doing so, the Tribunal observed as follows :

"In the case of the present assessee, the Tribunal, has already held vide its orders in ITA No. 3883/Del/91 that it was a case of existing business and the assessed was entitled to depreciation and investment allowance on the machineries installed in Dalmiapuram and Salem. The learned counsel''s plea that the moneys had been borrowed for modernisation and improvement of productivity with reference to the existing business further gets support from the decision of the Hon''ble Gujarat High Court in the case of Commissioner of Income Tax, Gujarat II Vs. Alembic Glass Industries Ltd., and the decision of the Hon''ble Delhi High Court in the case of Commissioner of Income Tax Vs. Modi Industries Ltd., ."

Revenue''s application u/s 256(1) of the Act having been dismissed, the present petition has been filed.

We have heard Mr. R.D. Jolly, learned senior standing counsel for the Revenue and Mr. Harihar Lal, learned counsel for the assessee.

It is evident from the format of the proposed questions that the stand of the Revenue that in the light of Explanation-8 to Section 43(1) of the Act, the amount of interest on borrowed capital should have been capitalised is entirely based on the presumption that the capital was borrowed for the purpose of setting up a new unit and the interest pertains to the pre-production period. Though at first blush, the argument of learned counsel for the Revenue that since the proposed questions involve the interpretation of the said Explanation ,these are questions of law appeared to be attractive, yet on further reflection it is not so. Having carefully perused the order of the Tribunal in assessor�s earlier appeal (ITA No. 3883/91), wherein the question of allowability of depreciation allowance and investment allowance in respect of the same machinery had come up and the Tribunal had decided the issue in favor of the assessee, we are of the view that in the light of the facts found by the Tribunal in that appeal, answer to the questions proposed would be of academic interest only.

Explanation-8 to Section 43(1) of the Act, which merely intends to clarify the position in law as regards capitalisation of interest paid in connection with the acquisition of an asset after it has been put to use, was inserted by Section 9 of the Finance Act, 1986, with retrospective effect from 1st April, 1974. The said Explanation declares, for the removal of doubt, that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after the said asset is first put to use is not to be included is to be deemed never to have been included in actual cost of the said asset.

Based on the said clarification, the case of the Revenue is that if the amount of interest in connection with the acquisition of an asset, which is relatable to any period after the said asset has been put to use cannot be capitalised then, as a necessary corollary, the interest payable in connection with the acquisition of an asset before it goes into production has to be capitalised. However, as noted above, in view of the facts found by the Tribunal in ITA No. 3883.91, the said Explanation is of no avail to the revenue. In the instant case, as is evident from the afore-extracted portion of its order, while accepting the contention of the assessed that the money had been borrowed for modernisation and improvement of productivity of the existing business, the Tribunal has relied on its earlier order in ITA No. 3883/91, wherein it was held that it was a case of existing business and the assessed was entitled to depreciation and investment allowance on the machinery installed in Dalmiapuram and Salem. Thus, the finding arrived at by the Tribunal in respect of the same machinery in its earlier order is that the loan was raised for modernisation and improvement of productivity with reference to the existing business . This is a pure finding of fact, which has not been specifically challenged by the Revenue in any of the proposed questions. In our view, in the light of these facts, which have attained finality, the Tribunal was justified in applying the principle of law laid down by this Court in Modi Industries'' case (supra) and holding that the interest incurred by the assessed on the borrowings utilised for the purpose of TPD modernisation project at Dalmiapuram and beneficiation plant at Salem was for the purposes of assessor�s business and as such allowable as revenue expenditure. In this view of the matter, no fault can be found with the impugned order declining reference on the proposed questions.

Accordingly, the petition is dismissed with costs, quantified at Rs. 1,000/-.