1998 (11) TMI 59 - HC - Income Tax

Summary

Issues:
- Claim of depreciation and investment allowance on future interest payable on deferred payment liability
- Interpretation of Section 43(1) of the Income-tax Act, 1961 regarding "actual cost"
- Application of Explanation 8 to section 43(1) in determining the includibility of interest in the actual cost for depreciation and investment allowance

Claim of Depreciation and Investment Allowance:
The case involved a public limited company deriving income from automobile parts manufacturing, disputing the disallowance of depreciation and investment allowance on future interest payable on deferred payment liability for machinery purchase. The Inspecting Assistant Commissioner disallowed the claim, considering it as interest on borrowing. However, the Commissioner and the Tribunal allowed the claim, citing precedents from other cases.

Interpretation of Section 43(1) - "Actual Cost":
The Karnataka High Court in CIT v. Widia (India) Ltd. defined "actual cost" under Section 43(1) as the capitalised amount payable in instalments for capital assets under a deferred payment scheme. The court emphasized that all necessary expenditure to bring assets into existence should be included in the actual cost, supporting the allowance of investment allowance based on enhanced asset cost due to currency rate fluctuations.

Application of Explanation 8 to Section 43(1):
Explanation 8 to section 43(1) clarifies the treatment of interest paid post asset use in the actual cost. The Calcutta High Court in CIT v. India Steamship Co. Ltd. and the Bombay High Court in CIT v. Rajaram Bandekar interpreted this provision to exclude interest payable on deferred payment liability post asset use from the actual cost for depreciation and development rebate purposes. The judgment concurred with the Bombay High Court's decision, holding that interest on deferred payment liability cannot be included in the actual cost for depreciation and investment allowance under Explanation 8.

In conclusion, the court ruled in favor of the Revenue, disallowing the claim for depreciation and investment allowance on future interest payable on deferred payment liability. The judgment emphasized the application of Explanation 8 to section 43(1) in excluding such interest from the actual cost for tax purposes.