Calcutta High Court
Jct Ltd. vs Deputy Commissioner Of Income Tax And ... on 8 October, 2004
Equivalent citations: (2005)194CTR(CAL)509, [2005]276ITR115(CAL)
Author: D.K. Seth
Bench: D.K. Seth
JUDGMENT D.K. Seth, J.
1. These two appeals by the same assessee for the two respective asst. yrs. 1987-88 and 1988-89 involved identical question of law on identical facts. Therefore, these two appeals have been taken up together for disposal.
The question :
2. In the present case, the assessee who was already continuing with its business, had acquired certain machineries and plants for expansion of the units The payment for such plants and machineries was agreed to be in terms of Deferred Payment Scheme, which included interest. The question now arises is as to whether the interest paid on the borrowed capital, under a Deferred Payment Scheme for acquisition of plants and machineries until the plants and machineries are first put to use, could be deductible under Section 36(1)(iii) or Section 37 of the IT Act, 1961 in computing the assessee's income, as revenue expenditure, though capitalized in the account of the assessee, but on which the assessee did not claim depreciation or development rebate.
The Department treated it as capital expenditure :
3. The AO had held against the assessee and charged the same to be a capital expenditure on which deduction under Section 36(1)(iii) or 37 was held to be impermissible. The CIT(A) affirmed the same. The Tribunal also agreed with the view taken by the CIT(A) and the AO. This view was taken also for earlier years (1986-87) following which the decision in 1987-88 and 1988-89 was given. After Mr. A.K, Roychowdhury had addressed the Court for a few days and the matter was hard-in-part successively, Dr. Pal came in aid of Mr. Roychowdhury and, in fact, the principal argument was advanced by Dr. Pal, crystallizing the submission of Mr. A.K. Roychowdhury. While Mr. M.P. Agarwal represented the Department and opposed the same.
Section 43(1), Expln. 8 : Its objects : Scope :
4. The question seems to be already covered by different decisions of the apex Court and the High Courts and there is no doubt about the position as it stands now. We would refer to the decisions cited by the respective counsel at appropriate stage. Now the question is to be answered on the basis of Expln. 8 to Section 43(1) as was inserted in the IT Act, 1961 through Finance Act, 1986 w.e.f. 1st April, 1974, applicable in relation to the asst. yr. 1974-75 and subsequent years. The object of the said amendment was explained in the Finance Bill, 1986, as it appears from (1986) 158 ITR (St) 88, explaining that "Under the existing provisions of Clause. (1) of that Section, 'actual cost' means the actual cost of the asset to the assessee, reduced by that portion of the cost thereof if any, as has been met directly or indirectly by any other person or authority. The proposed amendment seeks to clarify that any amount paid or payable as interest in connection with the acquisition of an asset and relatable to a period after tile asset is first put to use shall not form part and shall be deemed never to have been formed part of the actual cost of the asset".
4.1. With the above object, Expln. 8 was inserted to Clause. (1) of Section, 43 with the following expression :
"Explanation 8.--For the removal of doubts, it is hereby declared 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 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".
4.2. Much have been made by Dr. Pal out of the situation that the assessee was already carrying on business In course of such business, these plants and machineries were acquired. It is not that the business had not commenced. Therefore, an asset acquired by the assessee in course of his business, when the business has already commenced and such asset was acquired for the expansion of the existing unit, would not be a capital expenditure but a revenue expenditure so far as it relates to the interest paid on the borrowed capital payable according to the Deferred Payment Scheme. Though it has been shown in the account to have been capitalized, but no depreciation and development rebate having been claimed, the assessee was at liberty to claim benefit as business expenditure since the account was maintained for the purpose of the audit under the Companies Act, which would not debar the assessee from showing the account differently for the purpose of IT Act, 1961.
4.3. This contention of Dr. Pal does not seem to cut any ice. The Expln. 8 does not make any difference as to the cost of asset when the assessee had not commenced its business at all incurring the expenditure in Order to establish the business and an acquisition of an asset for the expansion of an existing business since commenced production. The confusion was created time and again without the Expln. 8 being inserted in Section 43(1) in interpreting the definition of 'actual cost' in very many cases, to which we would refer to, since cited by the respective counsel. This clarification became necessary to remove such confusion. The clarification in Expln. 8 was not something new. It was in the nature of declaration of the status of the law, as it existed, however, effective from 1st April, 1974. We are concerned with the asst. yrs 1987-88 and 1988-89, namely after the Expln. 8 was inserted by the Finance Act, 1986 very much applicable to 1987-88 and 1988-89 even without being retrospective. Since Expln. 8 does not make any distinction in between acquisition of asset before the assessee commences his business or the project commences its production and the acquisition of asset for the purpose of expansion after the assessee has commenced his business or an industrial undertaking has commenced production, therefore, we do not think that the argument raised with regard to the commencement of production with the assets acquired would be an irrelevant factor for the purpose of application of Expln. 8.
4.4. Explanation 8 is clear and unambiguous It has crystallized the principle and removed the doubt, which had already been dispelled by various decisions to the effect as is inserted by reason of Expln. 8. Explanation 8 is the quintessence of the judgment operating in the field, particularly, the decision in Challapalli Sugars Ltd. v. CIT and CIT v. Hindustan Petroleum Corporation Ltd., decided by a common judgment, . The asset acquired by an assessee for expansion of its existing business or industry, by reason of Expln. 8 will not stand in a different footing. It. is the actual cost of the asset that has to be ascertained on the cut off date as to when such asset is first put to use. The interest paid in connection with acquisition of asset with the borrowed capital under a Deferred Payment Scheme, until the asset is first put to use is to be treated differently from the interest paid after the asset is first put to use. Explanation 8 makes it clear that such interest paid after the asset is first put to use shall not be added to the actual cost of such asset. Therefore, this interest paid on the borrowed capital under the Deferred Payment Scheme after the machinery is first put to use would be a revenue expenditure, since it could not be treated to be the actual cost of such asset for being capitalized for the purpose of claiming depreciation or development rebate. But so long the machinery is not first put to use, the Expln. 8 would operate conversely. Having regard to the scheme and the law already established, the principle is as clear as the light of the day, It needs no explanation. Neither any cloud does haze the same. If it is specifically clarified that the interest paid after the asset is first put to use would not be included in the actual cost of asset, there would be no alternative but to hold that conversely it means that the interest paid before the asset was first put to use would be included in the actual cost and then it is to be treated as capital expenditure eligible for being capitalized on which depreciation and development rebate would be admissible. Therefore, in this case, we do not think that there is any difference or iota of dispute with regard to the provision, which has been made crystal clear by the decision in Challapalli Sugars (supra).
4.5. The above proposition stands clarified from the decisions cited by Mr. Agarwal. Challapalli Sugars (supra) proceeded on the footing of the 1922 Act wherein the expression 'actual cost' was not defined and the question engaged attention of the Court as to whether interest paid before the commencement of production on the amount borrowed for the acquisition and installation of the plant and machinery can be considered to be part of the actual cost of the asset to the assessee. It was held that so far as the interest after the commencement of production in respect of capital borrowed for the purpose of business is concerned, the same was deductible under Section, 10(2)(iii). While proceeding to determine the question, the apex Court had warned that the Court has to bear in mind that the question arises in the context of profits or gains of the business and computing permissible deductions on account of depreciation and development rebate to the plant and machinery of the assessee. As the expression 'actual cost' was not defined, it was to be construed in the sense, which no commercial man would misunderstand. It was further held that it has to be interpreted in accordance with the normal rules of accountancy prevailing in the commerce and industry. After having discussed the Principle of Accountancy from Simon's Taxes, 3rd Edn., Vol. 8, p. 424; Accountancy by Pickles, 1955 Edn., p. 944, under the head "Payment of interest on construction capital" and the provisions of Section 65 of the Companies Act, 1948; Spicer & Peglar's Practical Auditing, 11th Edn., pp. 190-191, under the head "Interest payable out of capital during construction"; Higher Book Keeping & Accounts by Cropper Morris & Fison, 7th Edn,, the apex Court had held that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such asset into existence and to put them in working condition. In case money is borrowed by a newly started company in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the actual cost of fixed assets which have been created as a result of such expenditure and such rule of accountancy should be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary. Having regard to the above observation, it appears to us that Expln. 8 inserted by the Finance Act, 1986 is a reiteration of the principle laid down in Challapalli Sugars (supra) in Section 43 where actual cost as has been sought to be defined and the definition whereof is not contrary to the ratio decided therein. The apex Court while rendering the decision in Challapalli Sugars (supra), had observed that the decision of the Andhra Pradesh High Court in CIT v. Challapalli Sugars Ltd. did not lay down the law correctly while affirming the contrary view taken by the Calcutta High Court in CIT v. Standard Vacuum Refining Co. of India Ltd. (now Hindustan Petroleum Corporation Ltd.) (1966) 61 ITR 799 (Cal), which was decided along with Challapalli Sugars Ltd. (supra) followed by the Madras High Court in CIT v. L.G. Balakrishnan & Bros. (P) Ltd. ( and Allahabad High Court in CIT v. J.K. Cotton Spg. & Wvg. Mills Ltd: to have been taken the correct view. The same view was followed by the Bombay High Court in Ballarpur Paper & Straw Board Mills Ltd. v. CIT (1979) 118 ITR 613 (Bom), wherein it was held that interest form part of the actual cost for the purpose of depreciation and development rebate; and by the Gujarat High Court in CIT v. Tensile Steel Ltd. since followed in Ballarpur Paper & Straw Board Mills Ltd. (supra). In Tensile Steel Ltd. (supra), it was held that interest incurred on deferred payment was capital expenditure to be added to the actual cost for the purpose of depreciation and development rebate. All these decisions were summarized in CIT. v. India Steamship Co. Ltd. and held that the interest payable on deferred installments of the purchase cost of the asset were capital expenditure to be added to the cost of the asset for the purpose of depreciation and development rebate.
4.6. In CIT v. Rajaram Bandekar (1993) 202 ITR 514 (Bom), the Bombay High Court had held that a bare reading of Expln. 8 to Section 43(1) inserted with the object of removing doubts with regard to the includibility of interest relatable to any period after the asset was first put to use in the computation of its actual cost. The very purpose of this amendment was to clarify the position in this regard and to set at rest the controversy that had arisen. Following Challapalli Sugars Ltd. (supra), it had held that the interest payable for the acquisition of the asset under the Deferred Payment Scheme related to the period subsequent to the date the asset was first put to use cannot be included in the actual cost in view of Expln. 8 to Section 43(1). It has been held in Allied Motors (P) Ltd. v. CIT relied upon by Mr. Agarwal, that every provision has to be construed reasonably. The provisos are inserted to remedy, unintended consequences In fact, it is a settled proposition of law that an Explanation is inserted to clarify the doubt, if there be any, in the form of a declaration in the clarificatory nature to state the law, which we have interpreted as above. In CIT v. Hico Products (P) Ltd. , the apex Court had followed Escorts Ltd. v. Union of India while dealing with Section 35 of the 1961 Act.
Decisions cited on behalf of the appellant: Applicability:
5. On the other hand, this decision cited on behalf of the assessee by Dr. Pal in Escorts Ltd. and Anr. v. Union of India and Ors. (supra) does not indicate anything on. the question, with which we are concerned now. It had dealt with the question as to whether the benefit of deduction can be had by an assessee under two heads, namely one under Section 10(2)(vi) and then under Section 10(2)(xiv) of the 1922 Act or both under Section 32(l)(ii) and Section 35(l)(iv) of the 1961 Act in interpreting the expression "in respect of the same previous year" in Clause (d) of the proviso to Section 10(2)(xiv) of the 1922 Act and Section 35(2)(iv) of the 1961 Act holding that "there is a fundamental, though unwritten, axiom that no legislature could have at all intended a double deduction in regard to the same business outgoing; and, if it is intended, it will be clearly expressed. In other words, in the absence of clear statutory indication to the contrary, the statute should not be read so as to permit an assessee two deductions .....". It was not a case, which was concerned with the question in the context, which we are called upon to answer. Therefore, this, decision does not help Dr. Pal. On the other hand, Mr. Agarwal relying on the said decision contended that the assessee being entitled to capitalize the same may be entitled to depreciation and development rebate, but it cannot claim the same as revenue expenditure. At the same time, he contended that an assessee cannot be allowed to claim benefit unless the deduction is eligible in law. We find substance in the said submission. Unless the law permits deduction or unless the law indicates the characteristic of an expenditure in Order to be eligible for a particular kind of deduction, which must be clear and unambiguous and unless it is supported by law, no deduction can be availed of, even if claimed.
5.1. Dr. Pal relied on CIT v. J.K. Industries (P) Ltd. wherein it was held that when with the capital borrowed, the assessee had acquired a business" asset for the purpose of its own business as also of the companies maintained by it and that it would be conducive to the business of the assessee if all the companies managed by it were housed in the same building, the amounts, paid as interest on the amount borrowed and as municipal taxes, were deductible as revenue expenditure. In that case, the assessee had borrowed certain amount for purchase of a plot of land in Calcutta with the object of constructing a multi-storeyed building for housing its own office as also the offices of several companies managed by it. It had claimed deduction of the interest paid to the bank on the loan as well as the municipal taxes on the land for computing its profits for the asst. yrs, 1961-62 to 1964-65. Admittedly, till then new building was not constructed on the land. In the said case, this Court did not decide the question as to whether the interest paid on the borrowed capital would be includible in the cost of acquiring the asset, therefore, this decision will not help Us in the present context, 5.2. The next decision in CIT v. Rajeeva Lochan Kanoria cited by Dr. Pal is clearly distinguishable inasmuch as, in the said case, the assessee was an individual with an avocation of acquiring and controlling interest in companies and managing, administrating, financing and rehabilitating companies and acquires shares of such companies for business or professional purpose viz., for exercising control over such company and not for earning dividends These grounds were sought to be advanced for the purpose of eligibility of deduction of the investment as an individual assessee. Therefore, this decision does not help us on the question involved.
5.3. Similarly, the decision in Veecumsees v. CIT is distinguishable on facts. In the said case, the assessee was carrying on jewellery business For the purpose of commencing a business of exhibiting cinematographic films, the assessee borrowed capital for constructing the cinema hall. In that case the question as to whether the interest was paid before the commencement of the business was not under consideration. In the said case, it was considered whether the interest paid on the loans obtained for constructing the cinema hall were to be allowed as deduction under Section 36(l)(iii), at the point of time when the said business stood closed. In such circumstances, it was held that the interest was deductible under Section 36(l)(iii) since obtained for the purpose of assessee's business and that the particular part of the business for which the loan was obtained had been transferred or closed down would not alter the fact that the loans had, when obtained, were for the purpose of the assessee's business.
5.4. The decision in CIT v. Siwakami Mills Ltd. cited by Dr. Pal is equally distinguishable. Here also the question as to whether the interest was paid before the asset was first put to use was not under consideration. In that case, it was held that the payment of guarantee commission was unrelated to the working out of the cost of depreciable machinery, plant or other asset but was an expenditure which was incurred in the course of carrying on the business and not prior to the commencement of the business and that the payment was so closely related to the business that it could be viewed as an integral part of the conduct of the business and would be revenue expenditure and that it did neither bring into existence any asset of any enduring nature nor did it bring in any other advantage of enduring benefit, that the acquisition of the machinery on instalment terms was only a business expediency and that the very nature of the expenditure and the time it had been incurred would justify the claim of the expenditure as revenue expenditure. Thus, on facts, it does not appear that this was incurred prior to the machinery being first put to use and as such this decision does not help Dr. Pal.
5.5. The decision in CIT v. Kanoria Investments (P) Ltd. is also equally distinguishable. There the question was that out of the borrowed capital a part of it was invested in purchasing shares In that context, it was held that once the capital had been borrowed for the purpose of business, it is immaterial as to how the borrowed money was applied and the interest payment would be deductible under Section 36(l)(iii) irrespective of the fact that a part of the borrowed capital was invested in shares In this context, it was held that the interest was paid for earning the dividend income out of those shares Therefore, this decision also does not help Dr. Pal.
5.6. The decision in CIT v. Western Bengal Coal Fields Ltd. is also equally distinguishable on facts In that case, the assessee was carrying on business of coal mining as well as boring business and both constituted one and the same business Therefore, the loan obtained for one line of business, namely the coalmines, which was closed down because of the nationalization after which he carried on the boring business, he was entitled to deduction of the interest of the loan obtained for the purpose of carrying on the business in a situation where it was found that there was a common management, common accounts and interlacing of various activities of the assessee and the receipts from different activities which were deposited in the same bank account and were also utilized without any reservation for the other activities of the assessee. In such circumstances, it was held that the assessee was entitled to deduction of interest on the loan obtained from the bank. This case had nothing to do with the payment of interest on the borrowed capital under the Deferred Payment Scheme for a period before the asset was first put to use. Thus, this decision also does not come to the aid of Dr. Pal.
5.7. In CIT v. Associated Fibre & Rubber Industries (P) Ltd. , it was held that the interest paid on the amount borrowed for purchase of machinery was deductible amount. This case did not involve the question with regard to the interest payable before the asset was first put to use and as such this decision does not help Dr. Pal.
5.8. Lastly Dr. Pal relied on Tetron Commercial Ltd. v. CIT.
of this very Bench wherein it was held that whether the deduction under Section 36(l)(iii) is available or not is dependent on the question whether the capital borrowed is for the purpose of the business of the assessee. If it is found that the capital was borrowed for the purpose of business of the assessee, the interest payable thereon is admissible under the said Section. It is immaterial whether the same is in the nature of capital expenditure or revenue expenditure. If the expenditure is in the nature of business expenditure which relates to any stage of the business activity carried on by the assessee, whether isolated transaction or not, it is admissible for deduction under the said Section. A business commences with the activities undertaken even at the preparatory stage for setting up of the business Acquisition of immovable property for being used in the business by borrowed capital entitles the assessee to claim benefit of the Section on the interest paid, thereon, even if the asset acquired is not utilized for the purpose of business in the relevant previous year. In this decision, we had no occasion to deal with the question as to the payment of interest in respect of borrowed capital for acquisition of assets for including the same in the actual cost for the period until it is first put to use, The question relevant for Expln. 8 to Section 43(1) was not under consideration in the said case. That apart, the question with which we are now concerned is limited to the borrowed capital for acquiring an asset in the form of a machinery under the Deferred Payment Scheme until the asset is first put to use. Therefore, the said decision would not be relevant for our present purpose, since the capital was held therein to have been borrowed for the purpose of business, not for the purpose of including the same in actual cost for acquiring any asset for commencing a business and the interest payable on such borrowed capital for the period until the asset was first put to use. Such question not being involved in the said case, this case does not help Dr. Pal in his contention.
Object of the Finance Bill, 2003 : How far relevant:
6. The reference to the Finance Bill, (2003) 260 ITR (St) 36] and its object [(2003) 260 ITR (St) 139], was referred to by Dr. Pal in Order to contend that Section 36 was amended w.e.f. 1st April, 2004 by adding a proviso effective from 1st April, 2004 to be applied in relation to the asst. yr. 2004-05 and subsequent years, clarifying that the interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. The object of insertion of this proviso was explained in the object Clause 15 that under the existing provision contained in Clause (iii) of Sub-section (1) of the said Section (Section 36), deduction of interest is allowed in respect of capital borrowed for the purpose of business or profession in the computation of the income under the head "Profits and gains of business or profession". It was, therefore, proposed to insert a proviso in the said Clause so as to provide that no such deduction shall be allowed in respect of any amount of interest paid in respect of capital borrowed for acquisition of asset for extension of existing business or profession whether capitalized in the books of account or not and such amount of interest for the period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use.
6.1. But this insertion would not be material for the purpose of interpreting Expln. 8 to Section 43(1). On the other hand, this insertion supports the view we have taken in explaining Expln. 8 to Section 43(1), which stand clarified and fortified by reason of insertion of proviso to Section 36(l)(iii) to remove the question of double deduction or alternate deduction under the two heads Conclusion :
7. Having regard to the discussion and the question of law as discussed above, we are of the view that the interest paid on the borrowed capital under the Deferred Payment Scheme for the period relevant till the asset was first put to use would not be eligible for deduction under Section 36(l)(iii) or Section 37 since it is includible in the actual cost of acquisition of the asset till the asset was first put to use, in view of Expln. 8 to Section 43(1). Once the same comes within the purview of Section 43(1), Expln. 8, deduction under Section 36(l)(iii) or 37 cannot be claimed which stands clarified by the insertion of the proviso therein under the Finance Act, 2003. As such the assessee cannot claim any benefit of Section 36(l)(iii) or Section 37 in this case. The learned Tribunal was right in holding against the assessee.
Order ;
8. We, therefore, answer the question raised in both the appeals in the affirmative in favour of the Department and against the assessee. In the result, these two appeals fail and are accordingly dismissed.
8.1. There will, however, be no Order as to costs.
R.N. Sinha, J.
9. I agree.