1995 (11) TMI 130 - AT - Income Tax

Summary

Issues Involved:
1. Allowability of interest as a deduction under section 36(1)(iii) of the Income-tax Act.
2. Applicability of the provisions of Explanation 8 to section 43(1) of the Income-tax Act.
3. Jurisdiction of the CIT under section 263 when the order of the first appellate authority was awaited.

Detailed Analysis:

1. Allowability of Interest as a Deduction Under Section 36(1)(iii):
The assessee argued that the interest and commitment charges paid on loans taken for the modernization of cement plant at Dalmiapuram and the beneficiation plant at Salem were allowable under section 36(1)(iii) of the Income-tax Act. The CIT, however, contended that the interest on term loans for the period before the commissioning of the plant and machinery should be capitalized and not treated as revenue expenditure. The CIT held that the AO had failed to apply his mind and make necessary inquiries regarding the treatment of interest on term loans.

The Tribunal noted that the assessee's business was pre-existing and the loans were obtained for modernization and improvement of productivity in pre-existing units. The Tribunal cited several decisions, including those in Calico Dyeing & Printing Works, Aniline Dyestuffs & Pharmaceuticals (P.) Ltd, and Alembic Glass Industries Ltd, to support the view that interest on borrowed capital for existing business purposes could be treated as revenue expenditure. The Tribunal concluded that the AO had rightly allowed the deduction under section 36(1)(iii).

2. Applicability of Explanation 8 to Section 43(1):
The CIT argued that Explanation 8 to section 43(1) clarified that interest paid or payable in connection with the acquisition of an asset for any period after such asset is first put to use should not be included in the actual cost of such assets. The CIT interpreted this to mean that interest paid before the assets were first put to use should be capitalized.

The Tribunal, however, held that the provisions of Explanation 8 could not be interpreted in reverse order to mandate the capitalization of interest paid on borrowings before the assets were put to use. The Tribunal emphasized that the interest paid in respect of capital borrowed for the purposes of business was allowable as a deduction under section 36(1)(iii). The Tribunal referred to the decision in Challapalli Sugars Ltd. and noted that the accounting practice and legislative intent did not support the CIT's interpretation. The Tribunal concluded that the AO had correctly allowed the interest deduction under section 36(1)(iii).

3. Jurisdiction of the CIT Under Section 263:
The assessee argued that it was improper for the CIT to invoke section 263 while the order of the first appellate authority was awaited. The CIT countered that the appellate order had not yet been passed and the issues raised under section 263 were not the subject matter of the appeal. The CIT referred to the Explanation below sub-section (1) of section 263, which extends the Commissioner's powers to matters not considered and decided in the appeal.

The Tribunal rejected the assessee's ground regarding the jurisdiction of the CIT under section 263, as the appellate order had not been issued and the issues under section 263 were distinct from those in the appeal.

Conclusion:
The Tribunal held that the assessee was entitled to the deduction of interest under section 36(1)(iii) for the capital borrowed for business purposes. The provisions of Explanation 8 to section 43(1) did not necessitate the capitalization of interest paid before the assets were put to use. The Tribunal set aside the CIT's order under section 263 and restored the AO's order, allowing the interest deduction. The appeal was allowed in favor of the assessee.