Capitalisation of interest. - Income Tax - 1648/CBDT

INSTRUCTION NO. 1648/CBDT Dated: September 12, 1985 It has come to the notice of the Board that certain assessees have resorted to the practice of capitalising the entire amount of interest paid/payable on the money borrowed for the acquisition of plant and machineries etc, and thereby putting forth the claim of investment allowance and depreciation on the total of the principal cost and the capitalised amount of such interest. The pre-commencement interest is quite distinct in character from the post commencement interest. Whereas interest of the former nature forms part of the cost of assets, the latter bears the character of revenue expenditure incidental to the running of business, the board vide their instruction No.820 (F.No.270/15/74-ITJ) dated 31st December 1974 advised that the interest capitalised as pro-commencement expenses could be added to the cost of machinery etc. for the purpose of allowing depreciation and development rebate and this is in conformity with the ratio of supreme court's judgement in the case of Challapalli Sugar Ltd., Vs.CIT(1975)-98 ITR 167. Interest relating to the period after commencement of production or installation of machinery however deserves different treatment as it is a charge on the profit and loss account and is to be considered in the computation of the income of the respective years depending on the system of accounting followed by the assessee. Such interest therefore cannot be capitalised. 2. The assessees who are not observing the distinction between the two types of interest referred to above are doing so obviously for claiming investment allowance over and above the depreciation on such capitalised amount of future interest which otherwise would not have been allowable. Besides by virtue of such capitalisation the claim of depreciation is enhanced in the initial years so as to wipe off eventually the whole of the profits enabling the assessee to enjoy tax holiday not withstanding the restrictive provision of sec. 80VVA which is effective from 1st April, 1985. 3. The board have considered this issue and are of the view that the interest relating to the period after commencement of production or installations of machinery cannot be capitalised and therefore no investment allowance or depreciation can be allowed on the capitalised amount consisting of such interest including future interest. The board accordingly desire that such claims should be rejected by the assessing authorities. 4. The instruction may kindly be brought to the notice of all the officers in your charge.