1993 (1) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Inclusion of interest in the cost of dumpers for depreciation and development rebate.
2. Applicability of Explanation 8 to section 43(1) of the Income-tax Act, 1961.

Summary:

1. Inclusion of Interest in the Cost of Dumpers for Depreciation and Development Rebate:
The assessee purchased dumpers on a deferred payment basis, incurring additional interest of Rs. 4,23,453.56. The assessee capitalized this interest and claimed depreciation and development rebate on the total cost, including the interest. The Income-tax Officer disallowed this claim, stating that interest for future periods cannot be capitalized and is a revenue expenditure. The Appellate Assistant Commissioner affirmed this disallowance but allowed the development rebate, stating dumpers were not road transport vehicles. The Tribunal, however, accepted the assessee's contention, holding that interest incurred for deferred payment terms should be included in the cost of the dumpers.

2. Applicability of Explanation 8 to Section 43(1) of the Income-tax Act, 1961:
The Revenue did not dispute the development rebate but contested the inclusion of interest in the cost of dumpers for depreciation. The Tribunal's decision was based on judicial opinions before the insertion of Explanation 8 to section 43(1) by the Finance Act, 1986, with retrospective effect from April 1, 1974. Explanation 8 clarifies that interest payable for periods after an asset is first put to use cannot be included in the actual cost of the asset. The court noted that the decisions in Challapalli Sugars Ltd. and Tensile Steel Ltd. were rendered before this Explanation and thus did not consider its effect. The Karnataka High Court's decision in Widia (India) Ltd. was also discussed, but the court found that the IDBI Scheme clearly involved interest charges, which must be separated from the principal cost of the machinery.

Conclusion:
The court concluded that Explanation 8 to section 43(1) applies, and the interest amount cannot be included in the actual cost of the dumpers. The question was answered in the negative, in favor of the Revenue and against the assessee. No order as to costs was made.