2004 (2) TMI 47 - HC - Income Tax

1. Whether, Tribunal was right in holding that entire interest payable by the assessee in the instalments financed by the ICICI was liable to be added to the cost of machinery in the computation for depreciation and investment allowance? - 2. Whether Tribunal was right in holding that depreciation at 30 per cent. was allowable in respect of cost of diesel engine set for generating electricity? - Both questions are answered in negative i.e., in favour of the Revenue and against the assessee.

Summary

Issues:
1. Whether interest payable by the assessee in instalments financed by ICICI should be added to the cost of machinery for depreciation and investment allowance.
2. Whether depreciation at 30% is allowable for the cost of a diesel engine set for generating electricity.

Analysis:

Issue 1:
The case involved the question of whether interest payable by the assessee in instalments financed by ICICI should be added to the cost of machinery for depreciation and investment allowance. The Revenue contended that the interest paid or payable after the asset is first put to use cannot be included in the actual cost of the asset for depreciation or investment allowance. The Tribunal had allowed the assessee's claim for depreciation and investment allowance on the cost, including the interest element in the instalments. The High Court referred to Explanation 8 added to section 43(1) of the Income-tax Act, 1961, by the Finance Act, 1986, which clarified that interest payable after the asset is first put to use should not be included in the actual cost of the asset. The court agreed with the Revenue's argument, citing relevant case law and upheld that the interest paid for the period after the asset is first put to use cannot be included in the actual cost of the asset.

Issue 2:
The second issue revolved around the claim of the assessee for depreciation at 30% for the cost of a diesel engine set for generating electricity. The Income-tax Officer rejected the claim, allowing depreciation at 10% instead. The Commissioner of Income-tax (Appeals) partly accepted the claim, directing depreciation at 10%. The Tribunal, however, relied on its decision in a previous case and allowed depreciation at 30%. The High Court analyzed the relevant provisions regarding depreciation rates for renewable energy devices under item No. 10A of the Income-tax Rules, 1962. The court concluded that diesel generator sets did not fall under item No. 10A for claiming depreciation at a higher rate of 30%. Therefore, the court held that depreciation at the normal rate of 10% was allowable, in line with the Commissioner of Income-tax (Appeals) decision.

In conclusion, the High Court ruled in favor of the Revenue for both issues, stating that the interest payable after the asset is first put to use cannot be included in the actual cost of the asset, and diesel generator sets do not qualify for higher depreciation rates under item No. 10A of the Income-tax Rules, 1962.