Pudumjee Pulp and Paper Mills Ltd. vs Commissioner of Income Tax

Dr. B.P. Saraf, J.—By this reference u/s 256(1) of the income tax Act, 1961 (''the Act'') made at the instance of the assessee, the following three questions have been referred by the Tribunal to this Court for opinion : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that expenditure interest, guarantee commission and commitment charges incurred in respect of machinery for manufacturing natural tracing paper under the scheme of ICICI loan constitutes capital expenditure and part of cost of machinery ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the additional liability interest of loan installment on machinery payable in the accounting period, on account of fluctuations in foreign exchange rates is capital expenditure and constitutes part of cost of machinery in terms of section 43 A of income tax Act, 1961 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provision made by the assessee in respect of unpaid installments of amounts payable for cost of machinery worked out on the basis of ruling foreign exchange rate as on the last date of accounting period, being notional, is neither revenue nor capital expenditure ?"

So far as question No. 2 is concerned, the counsels for the parties are agreed that the controversy is covered in favour of the revenue by the decision of this Court in the assessee''s own case Padamjee Pulp and Paper Mills Ltd. Vs. Commissioner of Income Tax, . In view of the above, the second question is answered in the affirmative and in favour of the revenue. So far as question No. 3 is concerned, the counsels for the parties are agreed that the controversy therein now stands concluded by the decision of this Court in the assessee''s own case - Padamjee Pulp & Paper Mills Ltd. ''s case (supra) in favour of the assessee. In view of the above, question No. 3 is answered in the negative and in favour of the assessee. The only question left for consideration is question No. 1. The controversy therein is whether the Tribunal was justified in holding that interest, guarantee commission and commitment charges incurred by the assessee in respect of machinery for manufacturing natural tracing paper under the scheme of ICICI loan, constitutes capital expenditure and part of cost of machinery.

Mr. Pardiwala, the learned counsel for the assessee, submits that the expenditure by way of interest incurred by the assessee is a revenue expenditure and that the Tribunal was not justified in treating the same as capital expenditure. Dr. Balasubramanian, the learned counsel for the revenue, submitted before us that the above controversy has become more or less academic due to long lapse of time. It is stated by Dr. Balasubramanian that the above controversy pertains to the assessment year 1978-79. The Tribunal held the expenditure to be capital expenditure and part of the cost of the machinery. Long 20 years have passed and the assessee must have been given depreciation on the cost of the machinery including the above amounts during all these years, as a result of which the assessee must have got full deduction by way of depreciation for the above amount. In a situation like this, according to Dr. Balasubramanian, no fruitful purpose would be served at this stage in going into the controversy as to whether the expenditure in question constitutes capital expenditure or the revenue expenditure.

We have carefully considered the submission of Dr. Balasubramanian. It is clear from the question itself that the Tribunal has held that the expenditure in question constituted capital expenditure and part of the cost of the machinery. That being so, the assessee is entitled to depreciation on the cost of the machinery inclusive of the above amounts. That being so, no fruitful purpose would be served by deciding whether the expenditure can be treated as the revenue expenditure. In that view of the matter, we do not think it necessary to answer question No. 1. The same is, therefore, returned unanswered.

We, however, make it clear that if no depreciation is allowed by the department on the above amount which has been held by the Tribunal to be the part of the cost of the machinery, the assessee will be entitled to point out the same to the Tribunal and to seek a direction to the revenue to grant depreciation permissible in accordance with law. The reference is disposed of accordingly. No order as to costs.