Income Tax Appellate Tribunal - Delhi
Dalmia Cement (Bharat) Ltd. vs Assistant Commissioner Of Income-Tax on 29 November, 1995
Equivalent citations: [1996]56ITD355(DELHI)
ORDER
B.S. Saluja, Judicial Member
1. The assessee is in appeal against the order of CIT (Central) I, New Delhi made under Section 263 of the Income-tax Act, 1961 on various grounds.
2. The brief facts in this case are that the Assessing Officer allowed deduction in respect of interest claimed including interest of Rs. 1,29,20,298 pertaining to term loans.
2.1 The CIT felt that the interest on term loans and commitment charges for specific projects for the period prior to the commissioning of plant & machinery could not be treated as revenue expenditure and that the view taken by the Assessing Officer was erroneous and prejudicial to the interest of revenue. Accordingly he issued a show-cause notice to the assessee wherein it was mentioned that the assessee claimed interest in respect of cement works at Dalmiapuram. It was further stated in the notice that interest of Rs. 73,87,856 was in respect of term loan obtained for TPD modernisation project at Dalmiapuram. It further mentioned that out of total interest of Rs. 93,48,314 paid on loans from certain Financial Institutions, an amount of Rs. 73,87,856 had been allocated towards cement work at Dalmiapuram for TPD modernisation project and the remaining amount of Rs. 19,60,458 which included commitment charges of Rs. 74,325 had been allocated towards Dalmia Magnetise Corporation at Salem - one of the units of the company. It was further mentioned in the notice that from the Director's Report given in the Annual Report, it was seen that work of modernisation project was not commissioned during the year and that beneficiary plant was installed at Salem for upgrading the quality of raw material. It was also mentioned that the said beneficiary plant was claimed to have been installed on 27-3-1986 and that the claim of depreciation and the investment allowance on the said plant was rejected by the Assessing Officer holding that the said plant was not put to use. It was further mentioned that as the plant was claimed to have been installed at fag end of the year, interest and commitment charges of Rs. 19,60,458 apparently included the interest pertaining to the period prior to the commissioning of modernisation plant at Dalmiapuram and beneficiary plant at Salem. It was further mentioned in the notice that the modernisation plant at Dalmiapuram was for replacing the whole manufacturing process by opting for a new technology and replacing old machines by new machines under new technology and the beneficiary plant at Salem was separate and distinct plant, and therefore the case was not of the type where one or two machines have been added or replaced in old infrastructure. It was, therefore, mentioned that interest on loans specifically taken for the said projects, pertaining to period prior to commissioning of the said projects should have been included in the cost and ought not to have been allowed as deduction by treating the same as revenue expenditure. It was also mentioned in the notice that the AO had not made any query as to why interest pertaining to period prior to commissioning of the said projects should not be capitalised and included in the cost. In view of the foregoing, it was mentioned in the notice that the order dated 6-3-1989 was erroneous insofar as it was prejudicial to the interest of revenue.
2.2 The learned counsel for the assessee advanced the following arguments before the learned CIT, namely-
(i) The order of assessment for 1986-87 was a subject-matter of appeal before CIT(A), IX New Delhi, who heard the appeal and the appellate order was expected at any time and that it would not be proper at this stage to invoke the provisions of Section 263 without awaiting the order of CIT(A). The assessee placed reliance upon the decision of Delhi High Court in the case of CIT v. Mahabir Parshad & Sons [1980] 125 ITR 165.
(ii) It is not correct to say that the AO had not made any enquiry with regard to the nature of interest pertaining to the period prior to the commissioning of the said projects. The assessee referred to the questionnaire issued by the AO vide letter dated 20th July and the information furnished by the assessee vide letters dated 21-8-1988 and 3-3-1988. The assessee argued that the AO was fully satisfied with regard to the explanations furnished in support of the assessee's claim for the admissibility of interest on loans as claimed in the profit and loss and account.
(iii) The interest and commitment charges paid on loan taken for putting up the benefication plant at Salem and for modernisation of cement plant at Dalmiapuram were allowable under the provisions of Section 36(1)(iii) of the Income-tax Act, as the same had been paid on the capital borrowed for the purposes of business. The assessee also distinguished the decision of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 on the basis of the decision of the Hon'ble Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715. The assessee tried to explain the application of the case law in cases where no business was in existence and the cases in which capital was borrowed for the existing business. He also relied on the decisions reported in Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC), India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC), Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265 (Bom.), Addl. CIT v. Aniline Dyestuffs & Pharmaceuticals (P.) Ltd. [1982] 138 ITR 843 (Bom.).
3. The CIT dealt with the arguments of the assessee and held as under:
3.1 He held with reference to the first argument of the assessee that the appellate order by CIT(A) had not yet been passed and there was, therefore, no question of applying the doctrine of merger just because the appeal had been heard. He further held that the issues raised in the notice under Section 263 were not the subject-matter of the appeal. He further referred to the provisions of the Explanation below Sub-section (1) of Section 263, which clarified that the powers of the Commissioner under Section 263 "Shall extend and shall be deemed to have extended to such matters as had not been considered and decided in such appeal."
3.2 With reference to the second argument of the assessee, the CIT observed that there was nothing to show that the AO had called for details of interest on term loans for the period prior to the commissioning of the new projects and the subsequent period. He further observed that the assessee had also not furnished any such details. He, therefore, held that on the basis of the figures of interest paid on fixed deposit, term loans, etc., it could not be said that the AO had applied his mind to the question whether or not the interest paid on term loans for acquiring and installing new machinery, etc., prior to its commissioning was a capital expenditure and had to be treated as part of "actual cost" for the purposes of depreciation etc. He held that apparently, the AO had failed to apply his mind and make enquiries which were called for with regard to the treatment of interest on term loans. The CIT also referred to the Hon'ble Supreme Court's decisions reported in Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 and Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323, wherein it was held that the Commissioner may consider the order of ITO to be erroneous not only if it contained some apparent error of reasoning or of law or of facts on the face of it but also because it was a stereo-typed order which simply accepted what the assessee had stated in his return and failed to make enquiries which were called for in the circumstances of the case.
3.3 With reference to the third argument of the assessee, the CIT observed that there was no doubt, that as per Section 36(1)(iii) the interest paid in respect of capital borrowed for the purposes of business of the assessee was admissible. However, he further observed that the capital may have been borrowed for acquiring a capital asset or stock in trade or to pay off a trading debt or loss. He also observed that the said section did not deal with the treatment to be given to the amount of interest, i e., whether it was revenue in nature or capital in nature. The CIT referred to the details mentioned in the show-cause notice and observed that since the expenditure on purchase of machinery was incurred with a view to avail of an enduring benefit, it was to be treated as a capital expenditure on which depreciation, etc., was allowed in accordance with law. He also observed that the position with regard to interest on term loans for acquiring specific capital asset was no different. He referred to the decision of Hon'ble Supreme Court in the case of State of Madras v. G. J. Coelho [1964] 53 ITR 186, wherein it has observed that in principle there is no distinction between interest paid on capital borrowed for the acquisition of a new business and interest paid on capital borrowed for the purposes of an existing business, and that both are for the purposes of business. He, therefore, held that the interest on term loans which had been paid for two specific projects till the date of the commissioning has to be treated as part of the cost of the projects. In this connection, he also referred to the definition of 'actual cost' as given in Section 43(1) of the Income-tax Act and the guidelines issued by the Institute of Chartered Accountants of India regarding the practice for treating the interest paid or payable in connection with the acquisition of an asset relatable to the period after such asset is first put to use. He further observed that as per the said guidelines, the accounting practice had laid down that interest on moneys which are specifically borrowed for the purchase of fixed assets may be capitalised only relating to the period prior to the assets coming into operation. He also observed that some assessees had, however, resorted to a major change in accounting practice by capitalising the interest paid or payable in connection with the acquisition of an asset relatable to the period after such asset was first put to use, and the said practice was supported by the courts as well. He also observed that since the said practice was not in accordance with the accounting principle and the intention of the Legislature, the definition of actual cost for the purpose of depreciation, etc., was modified and Explanation 8 was inserted below Section 43(1) whereby it was clarified that any amount of interest paid or payable in connection with the acquisition of an asset for any period after such asset was first put to use shall not be included in the actual cost of such assets.
The said Explanation was introduced retrospectively with effect from 1-4-1974. In view of the foregoing, the learned CIT held that interest on term loans and commitment charges for specific projects for the period prior to the commissioning could not be treated as revenue expenditure and that the view taken by the AO was erroneous and prejudicial to the interest of revenue and the provisions of Section 263 were attracted. He, therefore, directed the AO to modify the assessment by treating the amount of interest on term loans for the two new projects and commitment charges as capital in nature. He also directed the AO to recompute the total income and the tax payable on the same and issue fresh notice of demand to the assessee. The assessee is aggrieved.
4. Ground Nos. 1 to 3 urged by the assessee mainly relate to allowability of interest as a deduction under Section 36(1)(iii) of the Income-tax Act, and inapplicability of the provisions of Explanation 8 to Section 43(1).
4.1 The learned counsel for the assessee, Shri Harihar Lal mentioned at the Outset, that he was not pressing Ground No. 1(b) which relates to the jurisdiction of the CIT under Section 263 when the order of the first appellate authority was awaited. The said ground is, therefore, rejected.
4.2 The remaining grounds mainly challenge the order of the learned CIT under Section 263. The learned counsel made almost the same submissions before us as had been made before the learned CIT. The thrust of his arguments was that the business of the assessee was pre-existing during the year under consideration and that the loans were obtained for modernisation and improvement of productivity in pre-existing cement works at Dalmiapuram and Magnetise works at Salem and that the AO had rightly allowed the deduction under Section 36(1)(iii). He invited our attention to the written submissions dated 5-2-1991 filed before the learned CIT, a copy whereof is placed at pages 54-59 of the paper book. In the said written submissions, the assessee relied on the decisions reported in Calico Dyeing & Printing Works case (supra), Aniline Dyestuffs & Pharmaceuticals (P.) Ltd.'s case (supra), Alembic Glass Industries Ltd's case (supra), Challapalli Sugars Ltd. 's case (supra), India Cement Ltd.'s case (supra) and submitted that in the case of the assessee company, the facts were in pari materia with the facts in the case of Alembic Glass Industries Ltd. (supra) and that the assessee-company had been engaged in the business of manufacture and sale of cement at its Dalmiapuram Works and 'Dead-burnt' Magnesite at its Salem Works for several decades. It was further mentioned that the company undertook the modernisation of its cement plant in order to increase its productivity and operational efficiency. It was further mentioned that the machinery and plant installed in the process of modernisation was an integral part of its pre-existing cement works and that similar was position in respect of the beneficiation plant set up by the company in its industrial unit at Salem for manufacture of dead burnt magnesite from raw magnesite ore. It was stressed that no new business was set up by the company in either case and that all the tests laid down in the decision of the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd (supra), for eligibility for deduction under Section 36(1)(iii) of the interest paid on capital borrowed by the assessee for the purpose of its business, including the acquisition of a capital asset for the purposes of such business, were fully satisfied in the case of the assessee-company. The learned counsel reiterated the same proposition before us and relied on the following decisions :
(1) Calico Dyeing & Printing Works case (supra);
(2) G. J. Coelho's case (supra);
(3) Bombay Steam Navigation (1953) (P.) Ltd v. CIT[1965] 56 ITR 52 (SC) ;
(4) India Cements Ltd's case (supra) ;
(5) Challapalli Sugars Ltd.'s case (supra);
(6) Alembic Glass Industries Ltd's case (supra) ;
(7) Madhav Prasad Jatia's case (supra);
(8) Aniline Dyestuffs & Pharmaceuticals (P.) Ltd. s case (supfa) ;
(9) Alembic Chemical Works Co. Ltd v. CIT [1989] 177 ITR 377 (SC) ;
(10) CIT v. National Peroxide Ltd. [1990] 182 ITR 411 (Statues), where it is mentioned that department's SLP against the judgment dated 21-10-1982 of Gujarat High Court in ITA No. 118 of 1982 was dismissed;
(11) CIT v. Modi Industries Ltd (No. 3) [1993] 200 ITR 341 (Delhi).
The learned counsel further submitted that depreciation and investment allowance claimed by the assessee with reference to the said projects were disallowed by the learned CIT on grounds of trial run of machinery and that the assessee claimed before the Tribunal that it was entitled to depreciation due to existing business. In this connection he invited our attention to the orders of the Tribunal in ITA No. 3883 /Del/91 in the case of assessee for the assessment year 1986-87, wherein the Tribunal considered the question of investment allowance and depreciation allowance as also the question whether the plant and machinery had been installed in the course of carrying on its pre-existing business as distinct from the newly commenced business and held in para 63 that the beneficiation plant was the replacement of the existing manual system whereby all the work was done by manual process and that it was not a case where a new plant was set up to carry out the activity not earlier performed in the business of the assessee. The Tribunal, further observed that whatever was earlier performed manually, came to be performed by a machine in which heavy investment was made. The Tribunal further held in paragraph 67 of the said order that from the nature and functions of the Stacker Reclaimer it was clear that the machinery can simultaneously operate along with other operations which was continued by the assessee. It ultimately held that the only reasonable inference could be that the Stacker Reclaimer was put to use during the year under consideration and hence the assessee was entitled to its claim in respect of investment allowance and depreciation. In view of the said decision of the Tribunal, the learned counsel stressed that the plant and machinery was integral part of the pre-existing business and was meant for intermediate stage of production. The learned counsel further invited our attention to paragraphs 11.03 and 11.07 of "PROJECT FINANCING - General Policies & Procedures" issued by the Industrial Finance Corporation of India, and submitted that no "convertibility clause" is required except where the agreement is for the purchase of new plant and machinery. He further submitted that the provisions of Explanation 8 of Section 43(1) only prohibit capitalisation of any amount which is paid or is payable as interest in connection with the acquisition of an asset which is relatable to any period after such asset is first put to use and that the said provisions cannot be invoked inversely for the proposition that any amount paid or payable as interest in connection with the acquisition of an asset which is relatable to any period before such asset is first put to use has to be capitalised as of necessity. He stressed that any such interpretation would clearly run counter to the provisions of Section 36(1)(iii) of the Act under which any interest payable on moneys borrowed by an assessee for the purposes of business which was carried on by him during the relevant previous year is allowable as deduction in the computation of the business profits of the assessee for that year. During the course of hearing, a query was put by the Bench as to whether the learned counsel was aware of the decision of the Hon'ble Calcutta High Court wherein the provisions of Explanation 8 to Section 43(1) had been considered and if not, he may give his reactions to the said decision in writing. The learned counsel has submitted written reply with reference to the decision of the Hon'ble Calcutta High Court in the case of CIT v. India Steamship Co. Ltd. [1992] 196 ITR 917.
5. The learned DR, Shri B.K. Haldhar, defended the orders of the learned CIT and submitted that the orders of the AO allowing deduction of interest on term loans for the period before the assets were put to use were clearly prejudicial to the interests of revenue. He referred to the definition of "actual cost" as given in Section 43(1) read with the provisions of Explanation 8, which was inserted by the Finance Act, 1986, with retrospective effect from 1-4-1974 and submitted that the said provisions of Explanation 8 excluded interest on loan after asset is first put to use. He, therefore, stressed that by negation it means that interest on loans before assets are first put to use ought to be capitalised. He, further submitted that the depreciation, etc., is on actual cost and the benefit of interest so capitalised would be available to the assessee for computing the depreciation on staggered basis. He further submitted that if interest is also allowed to the assessee under Section 36(1)(iii), then the provisions of Explanation 8 will become a nullity as it would mean double deduction to the assessee. He further invited our attention to the observations on 'actual cost' at pages 1835-36 of Volume II of Income-tax Law 4th Edition by Chaturvedi and Pithisaria. The learned DR further relied on the decision of the Hon'ble Punjab and Haryana High Court in the case of CIT v. Oswal Spg. & Wvg. Mills Ltd. [1986] 160 ITR 426 for the proposition that in the case of purchase of machinery on deferred payment basis, interest paid is part of cost of machinery. In this connection, he further invited our attention to the case of CIT v. India Steamship Co. [1990] 182 ITR 146 (St.) where it is mentioned that the Hon'ble Supreme Court have granted special leave to the department's appeal against the order of Hon'ble Calcutta High Court dated 10-5-1982 whereby the High Court had rejected the Department's Reference Application on the question whether interest payments made by the assessee on deferred instalments of purchase price of capital assets (ships) could be capitalised and added to the cost, of the assets for claiming depreciation and development rebate. He further relied on the decision of the Hon'ble Kerala High Court in the case of Periyar & Pareekanni Rubber Ltd. v. CIT [1990] 181 ITR 396. He further submitted that where two views are possible, it is the duty of the AO to follow a view which is favourable to the department.
6. The learned counsel, in his rejoinder, submitted that the decision of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. (supra) was still valid, particularly, the observations at pages 174, 175 and 178 of the said decision. He further submitted that the revenue has laid great stress on the provisions of Explanation 8 and tried to interpret the said provisions in the reverse order and that such interpretation is not proper, having regard to the rules of interpretation. He further stressed that the provisions of Explanation 8 do not modify the provisions of Section 36(1)(iii) where the amount of interest paid in respect of capital borrowed for the purposes of business is allowable as deduction. He, therefore, pleaded that the order passed by the learned CIT under Section 263 be set aside.
7. We have carefully considered the rival submissions and have also perused the orders of the lower authorities. We have also carefully examined the case law relied upon by both the parties. It is observed from the decision of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. (supra) as also the decision of the Hon'ble Calcutta High Court in the case of India Steamship Co. Ltd. (supra) that where the assessee wanted to capitalise the amount of interest paid before the commencement of production on amounts borrowed for the acquisition and installation of plant and machinery, it has been held that he could do so and that he would be entitled to depreciation allowance and development rebate with reference to the amount of interest so capitalised. In the case of Challapalli Sugars Ltd. (supra); there was no definition of the expression "actual cost" and the Hon'ble Supreme Court decided the issue having regard to the guidelines issued by the Institute of Chartered Accountants of India and general principles for calculating the actual cost. The Hon'ble Calcutta High Court, while deciding the case of India Steamship Co. Ltd. (supra), had the occasion to interprete the provisions of Explanation 8 to Section 43(1) of the Income-tax Act, 1961. It held that interest paid on amounts borrowed and other related expenses in connection with the acquisition of ships before such ships were delivered to the assessees were includible in the actual cost of the ships for the purposes of development rebate and it applied the decision of Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. (supra). The Hon'ble Calcutta High Court, further held that under the provisions of Explanation 8, the sum of Rs. 1,13,62,848 being the amount of interest payment made by the assessee for purchase of two vessels. After delivery of the same, could not be capitalised for purposes of claiming development rebate. It is seen from the facts involved in the case of India Steamship Co. Ltd. (supra), that the assessee had claimed development rebate on the entire cost of the two ships, including the interest on funds borrowed and guarantee commission paid for obtaining loans. However, in the present case, before us, the assessee is not claiming capitalisation of the amount of interest paid by it but is claiming it as a deduction under the provisions of Section 36(1)(iii). This shows that the aforesaid decision of the Hon'ble Calcutta High Court and other decisions whereby the claim of the assessee for capitalisation of the amount of interest paid on loans before the capital assets were first put to use was allowed, cannot be applied in the present case. We feel that the submissions made by the learned counsel, particularly, in view of the observations of the Hon'ble Supreme Court, at pages 174,175 and 178 of its decision in the case of Challapalli Sugars Ltd. (supra), have force. At page 174, the Hon'ble Supreme Court has referred to paragraph 2.22 of the "Statement on Auditing Practices" issued by the Institute of Chartered Accountants of India (1974) wherein it is observed that "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 commenced may be capitalised". It is further observed in that para that, "However once production starts, no interest on borrowings for purchase of machinery (whether for replacement or renovation of existing plant) should be capitalised" In view of the said guidelines, the Hon'ble Supreme Court observed, "The accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised. ... The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary". While examining the case of Hinds v. Buenos Ayres Grand National Tramways Co. Ltd. [1906] 2 Ch. 654, 660 (Ch.D.) at page 176, the Hon'ble Supreme Court observed that "There was no general rule of law which compelled companies to charge to revenue account interest on money borrowed for the purposes of constructing works or prohibited them from charging it during construction to capital account". Similarly, while examining its decision in the case of India Cements Ltd. (supra) at page 178, the Hon'ble Supreme Court observed that "The appellant-company in that case at the time it raised the loan was a running concern. Unlike the assessees in the present appeals, the loan raised by the appellant-company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in the actual cost of the plant did not arise in that case." Thus it is clear from the aforesaid observations of the Hon'ble Supreme Court that where the money is borrowed for modernisation and improvement of productivity of an existing business and the assessee does not claim capitalisation of the amount of interest paid by it on borrowed moneys, the situation will be different. In the case of the present assessee, the Tribunal, has already held vide its orders in ITA No. 3883/Del/91 (supra) that it was a case of existing business and the assessee 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 Alembic Glass Industries Ltd. (supra) and the decision of the Hon'ble Delhi High Court in the case of Modi Industries Ltd. (No. 3) (supra). The case law relied upon by the learned DR is clearly distinguishable and actually relates to cases where the machinery had been purchased on deferred payment basis and the claim of the assessee was to include the amount of interest paid in the actual cost of the machinery. In view of the facts and circumstances of the case, we hold 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. We, therefore, hold that the assessee is entitled to deduction under Section 36(1)(iii) on the amount of interest paid in respect of capital borrowed for the purposes of business and that the AO has rightly allowed the claim of the assessee. The order of the learned CIT under Section 263 is, therefore, set aside and the order of the learned AO is restored. However, the Department is free to withdraw any relief given to the assessee in the assessment year 1986-87 with reference to this amount while allowing the claim of the assessee for investment allowance and depreciation.
8. In the result, the appeal is allowed.