2007 (2) TMI 115 - HC - Income Tax

Investment Allowance - Assessee claim for investment allowance in respect of the interest payable under a deferred payment scheme through which certain assets were acquired - Held that interest paid under deferred payment scheme could not included in the actual cost for the purpose of investment allowance

Summary

Issues:
Whether interest paid under a deferred payment scheme for acquiring assets is capital in nature and eligible for investment allowance.

Analysis:
The case involved the assessment years 1982-83 and 1985-86 where the assessee, a company, claimed investment allowance on interest paid under a deferred payment scheme for acquiring assets. Initially, the assessing officer denied the claim, but the Commissioner of Income-tax (Appeals) allowed it, stating that the interest accrued under the scheme is capital expenditure. The Appellate Tribunal upheld this decision.

Subsequently, the assessing officer found that the requisite reserve had not been created and denied the benefit to the assessee. On appeal, it was decided that the assessee could rectify the shortfall in the reserve creation. The Appellate Tribunal confirmed this decision and referred the question of law to the High Court.

The scheme involved the purchase of capital assets on a deferred payment basis, with instalments including interest being higher over time. The assessee argued that the total amount of instalments, including interest, constituted the actual cost of the assets as per section 43(1) of the Income-tax Act, 1961. However, the Revenue contended that interest paid on capital borrowed post-business commencement cannot be capitalized, citing Explanation 8 to section 43(1).

The Appellate Tribunal held that the interest paid was not directly related to capital borrowed and that the enhanced price due to the deferred payment scheme was distinct from interest on capital borrowed. The High Court disagreed, emphasizing the purpose of Explanation 8 to avoid controversy regarding interest inclusion in asset cost. Citing previous judgments, the High Court ruled that interest on deferred payment could not be included in the actual cost for investment allowance, contrary to the Tribunal's decision.

In conclusion, the High Court answered the question in the negative, favoring the Revenue and against the assessee, stating that interest paid under the deferred payment scheme is not capital in nature and not eligible for investment allowance.