1997 (9) TMI 146 - AT - Income Tax

Actual Cost, Assessing Officer, Assessment Year, Being Heard, Borrowed Capital, Business Expenditure, Capital Expenditure, Expenditure Incurred

Issues Involved:
1. Disallowance of deduction on guest house expenses.
2. Disallowance of deduction of share issue expenses.
3. Alternative claim of share issue expenses under Section 35D.
4. Disallowance of deduction of interest on deferred credit for purchase of machinery.
5. Leave to supplement, amend, cancel, or modify grounds of appeal.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction on Guest House Expenses:
The first ground of appeal concerns the disallowance of the assessee's claim of deduction for expenditure on a staff house. The assessee claimed a 25% deduction, whereas the Assessing Officer (AO) allowed only 10%. The CIT(A) upheld the AO's decision, finding no basis to increase the allowance to 25%. The assessee argued that expenses covered under sections 30 to 36 should be fully allowed, citing the judgment in CIT v. Tungabhadra Industries Ltd. However, the Tribunal noted that subsequent judgments, including Upper Ganges Sugar Mills Ltd., emphasized that no allowance is intended for guest house expenses incurred after February 28, 1970, under section 37(4). Following these precedents, the Tribunal rejected the assessee's claim.

2. Disallowance of Deduction of Share Issue Expenses:
The second ground of appeal involves the disallowance of share issue expenses amounting to Rs. 2,74,935, deemed capital in nature. The CIT(A) supported this view with judgments from Brooke Bond India Ltd. and Union Carbide India Ltd. The assessee contended that the expenses were for redeemable preference shares aimed at expanding production capacity, thus should not be considered capital expenditure. However, the Tribunal referred to the Supreme Court's decision in Brooke Bond (India) Ltd., which held that such expenses are capital in nature, as they relate to expanding the capital base. Consequently, the Tribunal rejected this ground.

3. Alternative Claim of Share Issue Expenses under Section 35D:
The third ground of appeal was an alternative claim for deduction of share issue expenses under section 35D. The CIT(A) had denied this due to the absence of details. The Tribunal found this unjustified, stating that the assessee should be allowed to furnish necessary information. The Tribunal directed the AO to allow the deduction as admissible under section 35D after providing the assessee a reasonable opportunity to submit the required details.

4. Disallowance of Deduction of Interest on Deferred Credit for Purchase of Machinery:
The fourth ground of appeal pertains to the disallowance of interest on deferred credit for machinery purchase, amounting to Rs. 11,13,819, claimed under section 36(1)(iii). The CIT(A) differed from his predecessor, citing Explanation 8 to section 43(1) and the judgment in CIT v. Rajaram Bandekar, which mandates capitalizing interest until the asset is put to use. The assessee argued that the machinery was for expanding existing production capacity, thus the interest should be treated as revenue expenditure. The Tribunal noted that the assessee had capitalized the interest in its books, aligning with accepted accounting principles. It emphasized that once capitalized, the interest becomes part of the asset's cost, governed by section 43(1) and not section 36(1)(iii). The Tribunal concluded that the assessee cannot claim this interest as revenue expenditure, rejecting this ground.

5. Leave to Supplement, Amend, Cancel, or Modify Grounds of Appeal:
The fifth ground seeks leave to supplement, amend, cancel, or modify the grounds of appeal. As no submissions were made in this regard, the Tribunal found no action necessary.

Conclusion:
The Tribunal partly allowed the appeal, specifically directing the AO to consider the alternative claim under section 35D while rejecting the other grounds.

← Previous Next →