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TMI Blog2001 (4) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... ries on its manufacturing activities at factory situated at village Rajpur, Taluka Kadi, District Mehsana, a centrally notified backward area. The assessment year is 199293 and the previous year is the financial year 1991-92. The commercial production had commenced since February, 1988, and the manufacturing capacity has been gradually increased from time to time. During the financial year ended on March 31, 1992, the company installed three more machines (in addition to existing three machines) for the production of LVP and SVP resulting in substantial increased in capacity of the manufactured products. The new machines which were purchased during the previous year are installed at the same location at Rajpur where the company had already carried on its manufacturing operations. On December 31, 1992, the company filed its return declaring nil income for the assessment year 1992-93. A revised return was filed on August 6, 1995, declaring the loss of Rs. 1,11,68,518. The reasons for filing the revised return were mentioned in the note attached to the return of income and the said note reads as under : "Following expenses incurred during the previous year have not been charged to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. As the issue regarding allowability of interest was not there in the Revenue's appeal before the Tribunal, there cannot be any decision by the Income-tax Appellate Tribunal on the same and hence in Tax Appeal No. 450 of 2000, the question has been erroneously proposed by the Revenue and formulated. Tax Appeal No. 450 of 2000, is thus infructuous and is, therefore, dismissed as such. The claim of sum of Rs. 1,56,76,000 being interest paid towards borrowings made for the purpose of acquiring new machineries is the only item in dispute before us. Before adverting to the finding of the Tribunal we may briefly recapitulate the stand of the Revenue as appearing from the order of the Assessing Officer and the Commissioner (Appeals). (i) That the interest expenses are pertaining to setting up of three new machines which are installed for enhancement of existing LVP production and to start a new production line of SVP and that such expenditure had been capitalised by the assessee-comp4ny along with cost of the new machinery. (ii) That such capitalisation by the assessee-company of pre-operative expenses was rightly made and though the treatment of a particular expenditure in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch we are called upon to adjudicate. The undisputed facts recorded by the Tribunal are that three additional machines were installed by the assessee-company for manufacture of similar items and that such installation was not for the purpose of starting any new business, but was for the purpose of a new unit of the existing business, which forms part of the same business. Therefore, this is not a case where a new business was being set up or commenced. In fact, learned counsel for the Revenue did not dispute this position, but his say was that the interest was paid in relation to a period prior to the point of time when the assets were put to use, viz., though the assessee-company carried on the business yet the interest in relation to the three new machines was required to be capitalised, and was rightly capitalised in the books of account by the assessee-company, as the asset had not been put to use. For this proposition strong reliance was placed on Explanation 8 under section 43(1) of the Act. The main plank of the Revenue's case was that as per the accounting principles and the accounting standards prescribed by the Institute of Chartered Accountants of India and the ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset." The charge of income-tax has been prescribed in section 4 of the Act, wherein it is laid down that income-tax at the prescribed rate shall be charged for assessment year in respect of the total income of the previous year. The scope of total income has been laid down in section 5 of the Act. Section 28 lays down as to what income shall be chargeable to income-tax under the head "Profits and gains of business or profession". Section 29 of the Act specifies as to bow the income referred to in section 28 is to be computed and for this purpose it is stated that the provisions of sections 30 to 43D of the Act will have to be taken into consideration. Section 145 of the Act lays down that income chargeable under the bead "Profits and gains of business or profession" shall be computed in accordance with the system of accounting regularly employed by the assessee. Therefore, the scheme of the Act as it operates and the settled legal posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be "not being expenditure of the nature described in sections 30 to 36". Therefore, there is a specific provision dealing with interest paid/payable in respect of the borrowings incurred for the purposes of business and hence the general provision viz., section 37 of the Act cannot come into play. Therefore, whether the interest is paid for a borrowing which is utilised for acquisition of capital asset or which is utilised for a revenue purpose loses its distinction and if that be so the stand adopted by the Revenue that in respect of interest which is capitalised, after the commencement of the business but before an asset is first put to use cannot be allowed as a revenue deduction under section 36(1)(iii) of the Act is against the plain language of the provisions of the Act. The provisions of section 35D of the Act which deal with amortisation of certain preliminary expenses are another pointer to the legislative intent. Sub-section (1) of section 35D lays down that in the case of an assessee, who incurs certain expenditure specified in sub-section (2) of the said section after the prescribed date such expenditure shall be allowed to the extent of 1/10th for each of the ten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope for such application. The term "actual cost" is applicable only in relation to an asset as against the phrase "capital borrowed" used in clause (iii) of section 36(1) of the Act. The term "capital borrowed" in the said provision is of a much wider import than the phrase "actual cost". We have already extracted Explanation 8 hereinbefore. It only lays down that where an amount is paid/payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use, shall not be included in the actual cost of such asset. The scope and ambit of this Explanation, on a plain reading is restricted to a situation where after asset is first put to use the interest which is paid/payable would never form a part of actual cost. The submission of the Revenue to the effect that by virtue of an Explanation 8 any interest which is paid for a period prior to an asset first being put to use has always necessarily to be capitalised does not flow from a plain reading, Even if one accepts the Revenue's plea that purposive interpretation should be adopted, the said interpretation cannot be said to arise from the wordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'Actual, cost' for the purposes of depreciations investment allowance, etc. Under the existing provisions of section 43(1) of the Income-tax Act, 'actual cost' means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. It has been found that certain taxpayers (backed by some court decisions, the first of which was rendered on May 13, 1974) are resorting to a major change in accounting practice by capitalising the interest paid or payable in connection with the acquisition of an asset relatable to the period after such asset is first put to use. This capitalisation implies inclusion of such interest in the 'actual cost' of the asset for the purposes of claiming depreciations investment allowance, etc., under the Income-tax Act. As this was never the legislative intent nor does it conform to accepted accounting practises, with a view to counteracting tax avoidance through this method and placing the matter beyond doubt, the Bill seeks to provide that any amount paid or payable as interest in connection with the acquisition of an asset and relatable to a period a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the Department in this matter, some taxpayers had adopted a contrary stance and had capitalised such interest. The first decision in favour of this stance had been rendered on May 13, 1974, in the case of CIT v. J. K Cotton Spinning and Weaving Mills Ltd. [1975] 98 ITR 153 (All). This decision as well as the subsequent decisions were contrary to the legislative intent. Hence, in order to enable the Government to collect the tax legitimately due to it for the earlier years, a clarificatory amendment to this provision has been made retrospectively from 1st April, 1974, and will, accordingly, apply in relation to the assessment year 1974-75 and subsequent years. [Section 9 of the Finance Act]". Therefore, as can be seen Explanation 8 was inserted to counter act tax avoidance by way of claiming depreciations investment allowance, etc., on a larger amount of actual cost. Neither in the Notes on Clauses nor in the Memorandum explaining the provisions in the Finance Bill we find any indication in support of the Revenue's stand that in a converse situation interest has to be capitalised and further that such interest cannot be claimed as deduction under section 36(1)(iii) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll have to be read in the context of the controversy which was there before the court whereby the court was called upon to determine what would be the cost of stock-in-trade, i.e., raw material, received by the assessee free of charge and whether the same was deductible while computing the total income. The question posed before the court was (page 316) : "(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the cost price of milk powder, and soya flour received by the Union from the UNICEF free of charge is not deductible in the computation of the total income ?" The observations at pages 323 and 324 of the said decision will have to be read in the light of the factual matrix and the question posed before the court. In the present case, there is no controversy between the parties as to computation of cost, and hence, the said decision does not shed any light for cur purpose. Moreover, we have already delineated the distinction between the concept of "cost" and "actual cost". An alternative contention was raised on behalf of the Revenue that in case the assessee has an option-to capitalise or not to capitalise i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167." Thereafter, the court analysed the decision of the Bombay High Court in the case of Calico Dyeing and Printing Works [1958] 34 ITR 265 and of the Supreme Court in India Cements Ltd. [1966] 60 ITR 52 and held as follows : " . . . the decision of the Supreme Court in Challapalli Sugars Ltd. [1975] 98 ITR 167 was given with reference to the borrowings which could not be treated as made for the purposes of business, as no business had yet been commenced. Thus, there is no incompatibility between these decisions. The Supreme Court itself has distinguished its earlier decision in India Cements Ltd. [1966] 60 ITR 52 (SC) in the following terms in Challapalli Sugars Ltd. [1975] 98 ITR 167, 178 (SC) : 'This case too is of no assistance to the Revenue. The appellant-company in that case at the time it raised the loan was a running concern. Unlike the assessees in the present appeals, the loan raised by the appellant-company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in the actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) of the Act as well as the impact of Explanation 8 under section 43(1) of the Act, because in the entire decision, according to him, there was no mention about any provision. His submission was that the decision should be treated as sub silentio. This contention cannot be upheld for the simple reason that can be seen from the facts as were before the apex court. The assessee therein had claimed the interest paid on the amount borrowed for purchase of machinery as a deductible item of expenditure. The Income-tax Officer had noted that the assessee had included a note in the schedule of fixed assets appended to its balance-sheet as on March 31, 1973, that no deprecation had been claimed for unused rubberised machinery valued at Rs. 4,80,000. Therefore, the Income-tax Officer held that such machinery had not been used for the business of the assessee, the claim for deduction of interest paid in all the three assessment years was not allowable. The Tribunal found as a matter of fact that the machinery being a business asset, the interest paid on the loan borrowed for purchase of such machinery would certainty be an allowable deduction. It was in this context that the following quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 43(1) of the Act was on the statute. Mr. Joshi, learned counsel for the Revenue, vehemently contended that the decision of the apex court as well as this court in relation to allowability under section 36(1)(iii) of the Act did not hold the field after the insertion of Explanation 8 under section 43(1) of the Act. However, as we have already discussed hereinbefore the said Explanation 8 does not in any way curtail the scope of section 36(1)(iii) of the Act. As laid down by the apex court in the case of Ambika Prasad Mishra v. State of U. P., AIR 1980 SC 1762 ; [1980] 3 SCC 719 (page 1764 of AIR 1980 SC) : "Every new discovery or argumentative novelty cannot undo or compel reconsideration of a binding precedent ... a decision does not lose its authority 'merely because it was badly argued, inadequately considered and fallaciously reasoned' . . ." Similarly in the case of Kesho Ram and Co. v. Union of India [1989] 3 SCC 151, it is stated by the Supreme Court thus : "The binding effect of a decision of this court does not depend upon whether a particular argument was considered or not, provided the point with reference to which the argument is advanced subsequently was actually d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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