1976 (11) TMI 14 - HC - Income Tax

Actual Cost, Capital Employed, Central Government, Computation Of Capital, Excess Profits Tax, Income Tax

Issues Involved:
1. Deductibility of depreciation referable to capitalized interest in computing excess profits.
2. Deductibility of voluntary deposits in computing capital employed.
3. Deductibility of special allowances granted by the Central Board of Revenue (CBR) in computing capital employed.

Detailed Analysis:

1. Deductibility of Depreciation Referable to Capitalized Interest:
The first issue concerns whether depreciation amounts related to capitalized interest included in the cost of machinery are deductible in computing excess profits for the chargeable accounting periods ending on March 31, 1942, 1943, 1944, 1945, and 1946. The assessee had borrowed funds for plant extension and capitalized the interest paid on these borrowings, which increased the machinery's cost and consequently the allowable depreciation. The Excess Profits Tax Officer (EPTO) disallowed this additional depreciation, but the Appellate Assistant Commissioner (AAC) reversed this decision, directing that the additional depreciation be deducted. The Tribunal upheld the AAC's decision, emphasizing that the principles for computing profits under the EPT Act should align with those for income-tax purposes unless explicitly stated otherwise. The Supreme Court's decision in Challapalli Sugars Ltd. v. CIT [1975] was referenced, which supported the inclusion of interest paid before production commencement in the actual cost of assets for depreciation purposes. The court concluded that the additional depreciation due to capitalized interest should be allowed as a deduction in determining excess profits, affirming the Tribunal's decision.

2. Deductibility of Voluntary Deposits in Computing Capital Employed:
The second issue pertains to whether a voluntary deposit of Rs. 50,36,928 made by the assessee under Section 10 of the Finance Act, 1942, should be deducted in computing the capital employed for the chargeable accounting periods ending March 31, 1945, and March 31, 1946. The EPTO had deducted this amount from the company's assets, considering it a debt, which reduced the capital employed and adversely affected the assessee. The AAC upheld this computation, equating voluntary deposits with compulsory deposits under the 1943 Ordinance. However, the Tribunal distinguished between voluntary and compulsory deposits, noting that voluntary deposits do not constitute a liability or debt. The court agreed with the Tribunal, stating that voluntary deposits could not be regarded as debts and thus were not deductible in computing the capital employed. Additionally, the court rejected the revenue's alternative contention that the voluntary deposit should be considered money not required for business purposes, noting that such deposits ensured future tax reliefs, thus serving a business purpose.

3. Deductibility of Special Allowances Granted by the CBR:
The third issue involves whether a special allowance of Rs. 95,21,000 granted by the CBR under Section 26(3)(a) of the EPT Act should be deducted from the opening capital while computing the average capital employed for the chargeable accounting period ending March 31, 1946. The CBR had granted this allowance due to the postponement or suspension of renewals and repairs because of hostilities, ensuring the assessee did not suffer due to these postponements. The EPTO deducted this amount from the capital employed, but the Tribunal ruled that the allowance did not reduce the actual profit or capital employed. The court upheld the Tribunal's decision, noting that the CBR could have imposed conditions making the allowance deductible, but it did not. Therefore, the special allowance was not deductible in computing the capital employed for the relevant period.

Conclusion:
The court ruled in favor of the assessee on all three issues:
1. The additional depreciation due to capitalized interest is deductible in computing excess profits.
2. The voluntary deposit of Rs. 50,36,928 is not deductible in computing the capital employed.
3. The special allowance of Rs. 95,21,000 granted by the CBR is not deductible in computing the capital employed.

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