1993 (8) TMI 104 - AT - Income Tax

Assessing Officer, Assessment Year, Business Expenditure, Deduction Of Interest, Development Allowance, Interest Payable, Investment Allowance, Previous Year, Purchase Price, Retrospective Amendment

Summary

Issues:
Assessee's claim for deduction of interest payable on purchase of machinery. Treatment of interest amount as part of the cost of machinery. Allowability of full deduction of interest liability. Rectification of order by Commissioner (Appeals) due to retrospective amendment.

Analysis:
The judgment involved four interconnected appeals regarding the deduction of interest payable by the assessee on the purchase of machinery. The first appeal, for the assessment year 1980-81, focused on the assessee's claim for deduction of Rs. 24,44,400 as interest payable in connection with the purchase of a machine from Hindustan Machine Tools Ltd. The assessee had capitalized the interest amount in their books of account and claimed it as a deduction. The Assessing Officer rejected the claim for depreciation and investment allowance on the capitalized amount and only allowed a small portion of the interest as a deduction. The Commissioner (Appeals) agreed that the interest amount formed part of the cost of the machinery, following the decision in Challapalli Sugars Ltd. v. CIT, but did not allow the full deduction of interest based on New Victoria Mills Co. Ltd. v. CIT. The assessee contended that the full interest liability should be deductible as it had accrued entirely during the year. However, the tribunal found the assessee's argument unconvincing.

In a similar case, Ballarpur Paper & Straw Board Mills Ltd., the High Court held that interest on the unpaid price of machinery formed part of the actual cost of the assets. The tribunal applied this decision to the current case, acknowledging that the interest formed part of the cost of machinery. However, due to a retrospective amendment by the Finance Act, 1986, Explanation 8 to section 43(1) was inserted, disallowing such interest as part of the cost of machinery. The tribunal noted that the assessee's claim for full deduction was made under section 36(1)(iii) for interest paid on capital borrowed for business purposes. Since there was no actual borrowing in this case, the tribunal held that only the interest expenditure related to the current year should be allowed as a deduction.

In subsequent appeals, the Commissioner (Appeals) rectified his earlier order to withdraw the depreciation and investment allowance granted to the assessee due to the retrospective amendment. The tribunal upheld the rectification, stating that the Commissioner was duty-bound to rectify the order in light of the amendment. The appeals regarding this issue were rejected by the tribunal.

Overall, the judgment delved into the treatment of interest payable on machinery purchase, the applicability of relevant legal precedents, and the impact of retrospective amendments on the deduction of interest liability, providing a detailed analysis and conclusion on each issue raised in the appeals.