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TMI Blog1975 (10) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... hing and erecting a plant for high tensile steel wires required for prestressed concrete construction. For that purpose, a basic agreement was effected between the aforesaid parties for providing financial collaboration, supply of plant and machinery and furnishing technical know-how. Under that basic agreement, it was, inter alia, agreed that C. Itoh & Company Ltd. and Kobe Steel Works Limited would supply required machinery and equipment as well as technical know-how concerning their installation and operation for which a separate sales contract was to be executed between the parties. Pursuant to this understanding arrived at under the basic agreement, a sales contract was executed on the same day, i.e., 25th March, 1961, between the assessee-company, C. Itoh & Company Ltd., and Kobe Steel Works Limited. According to article 4 of the sales contract the aforesaid two Japanese companies agreed to supply the machinery and plant and equipment for a consideration of Stg. pound 2,76,960 CIF Bombay or for Stg. pound 2,59,840 for Kobe. It was specifically agreed that should there be any change in the official rate of IMF any time till the final instalment was paid, the difference caused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was agreed between the assessee-company and the foreign suppliers that for the supply of plant and machinery on credit terms offered to the assessee-company, an additional amount of Rs. 3,65,040 was to be paid by the assessee-company as interest at the rate of 6% on the outstanding balances of the principal amount. The relevant assessment years with which we are concerned in these three references are respectively 1964-65, 1965-66, 1966-67 and 1967-68 to 1969-70. The assessee-company went into actual production September 1, 1963. It appears that the assessee-company had by that time incurred an expenditure of Rs. 9,09,493 out of which it capitalised expenditure of Rs. 4,51,676. It should be noted that according to the sales contract, the payment was to be made in Stg. pounds and it was specifically agreed between the parties that in case of any change in the official rate of international Monetary Fund at any time till the final instalment was paid, the difference caused by the change would be adjusted at the time of payment of each instalment due. On account of devaluation of rupee by the Government of India on 6th June, 1966, the assessee-company was required to pay an additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with this order of the Additional Commissioner went in appeal before the Appellate Tribunal. Meanwhile, for the subsequent assessment years, namely, 1965-66 and 1966-67, with which we are concerned in Income-tax Reference No. 136 of 1974, the Income-tax Officer excluded the amount of Rs. 1,65,040 from the written down value of the machinery and plant. The assessee-company, therefore, carried the matter in appeal before the Appellate Assistant Commissioner, who upheld the order of the Income-tax Officer and dismissed the appeal. The assessee-company, therefore, carried the matter to the Tribunal. Similarly, for asessment years 1967-68 to 1969-70, the income-tax Officer did not allow the claim of the assessee-company for adding Rs. 3,65,040 to the cost of machinery and plant and also disallowed the additional claim of Rs. 32,291 which was the payment of additional amount of interest due to devaluation of rupee. The assessee-company carried the matter in appeal before the Appellate Assistant Commissioner who dismissed the appeal and affirmed the order of the Income-tax Officer. The Appellate Assistant Commissioner allowed the payment of interest as revenue expenses. The assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and in the circumstances of the case, the Appellate Tribunal was correct in holding that the amount of interest of Rs. 3,97,331 interest element included in the total amount payable by the assessee on instalment basis for the acquisition of plant and machinery in question from the foreign collaborators should be treated as part and parcel of the cost of plant and machinery, or was entitled to be added to the cost of plant and machinery on which depreciation and development rebate is admissible ? " At the hearing of these three references both the sides requested us to reframe the question in Income-tax Reference No. 78 of 1975, because it has not been properly framed. We agree with the suggestion made by both the sides as it appears clearly from the frame of the question that it has been indifferently raised. We, therefore, frame the following questions in this reference so as to bring out clearly the dispute between the parties (1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the amount of Rs. 3,65,040 was capital expenditure on which depreciation is admissible and not revenue expenditure ? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest were not well-founded, and having regard to all the facts and circumstances which have been established in the case the only inescapable conclusion which could be reached, as has been done by the Tribunal, was that the so-called amount of interest was a part and parcel of the price of the plant and machinery supplied by the foreign suppliers. In the alternative, it was urged on behalf of the assessee-company that in any case having regard to the mercantile system of accounts maintained by the assessee-company the liability of payment of interest was already incurred in fact and in law in the calendar year 1962, when the property, namely, machinery and plant, were transferred to the assessee-company and the question of actual payment of interest was entirely irrelevant so far as the larger question of the nature of payment is concerned. It is in the context of these rival contentions of the parties that we have been called upon to determine the nature of the payment. We have set out the relevant terms and conditions on which the foreign collaborators entered into the basic agreement as well as the sales contract with the assessee-company for purposes of setting up and esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of the basic agreement and the sales contract, guaranteed that the assessee-company would pay pound 1,67,778 in instalments as detailed in the said letter, and in case of their failure to do so in spite of notice of demand having been served by C. Itoh & Company Ltd., would make immediate payment in pound sterling at the bank designated by the suppliers. The two invoices bearing Nos. 193 and 201 of October 10, 1962, and November 26, 1962, respectively, also refer to this deferred payment arrangement consisting of the payment of instalments on account of principal and interest as detailed in the said two invoices. The aggregate amount to be paid, according to these two invoices by way of deferred payments, was pound 1,67,778 as guaranteed by the Industrial Finance Corporation of India. The assessee-company has having regard to the respective instalments executed promissory note in favour of the suppliers to pay the said amount. The assessee-company has also filed the summary from their books to show that they have debited to the plant and machinery account the amount of Rs. 39 lakhs being the price of plant and machinery and Rs. 3,65,040 being the amount of interest on 31st D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire principal amount at a time without waiting for the period to expire over which deferred payments were spread over. This contention which has impressed the Additional Commissioner is also sought to be pressed into service at the time of hearing of these references. We do not think that this contention is well-founded for the obvious reason that the assessee-company could not have paid the entire principal amount at a time since it involved the release of foreign exchange by the Government of India. The entire deal, in our opinion, should be viewed as a package deal by which the foreign suppliers agreed to enter into financial and technical collaboration with the assessee-company which as a part of such agreement received plant and machinery on deferred payment terms. It is no doubt true that for extending this facility of payment of price on deferred terms it was agreed between the assessee-company and the foreign suppliers that the assessee-company should pay interest on the outstanding balance from time to time. But having regard to the entire arrangement between the parties as evidenced by the basic agreement and the sales contract coupled with the approval by the Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since it is for all intents and purposes spent for the acquisition of an asset with a view to initiate business. It was, therefore, urged on behalf of the revenue that the present ease would be governed by the ratio of the decision of the Supreme Court in Bombay Steam Navigation Co.(1953) Private Ltd. v. Commissioner of Income-tax . In that case the assessee-company was incorporated on August 10, 1953, and it entered into a contract with the Scindia Steam Navigation Company Ltd. with which the Bombay Steam Navigation Company Ltd. was amalgamated to purchase certain steamers, launches, boats, etc., for a consideration of Rs. 80 lakhs. It was agreed between the parties to the said agreement that the price of the assets sold would be satisfied by allotment to the Scindias of 29,900 shares credited as fully paid up of the, face value of Rs. 100 each in the share capital of the assessee-company and the balance would be treated by the assessee-company as a loan granted by the Scindias. The agreement provided for payment of interest at 6% on the unpaid balance of the purchase price. For the assessment years 1955-56 and 1956-57, the Income-tax Officer, Bombay, disallowed the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as interest was for purposes of acquiring the plant and machinery, and, consequently, of capital nature. A transaction has to be viewed from the angle of commercial trading and expediency. The arrangement with which we are concerned in these references is to be viewed as a whole. The financial collaboration as well as the technical collaboration which were agreed upon by the assessee-company and the foreign suppliers should be viewed as a whole and as a part of such financial and technical collaboration agreement, it was, inter alia, agreed between the parties that the foreign suppliers should supply machinery and plant and the payment of price was to be made in parts and which consequently provided for the payment of the balance amount on deferred payment basis. The Tribunal was, therefore, right in considering the arrangement as a whole and reaching the conclusion that the payment of interest as part and parcel of the payment of price of the plant and machinery. It was then said on behalf of the revenue that out of the interest nothing was acquired and it was only with a view to get deferred payment terms that the obligation was incurred. We cannot accede to this submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciples to the facts of this case, the answer seems clear that the payment of interest is revenue expenditure. No new asset is asset is acquired with it, no enduring benefit is obtained. Expenditure incurred was part of circulating or floating capital of the assessee. In ordinary commerical practice payment of interest would not be termed as capital expenditure. " We do not think that this observation can be of much assistance to the revenue because here in the case before us there was no commencement of business at all. The liability to pay interest was incurred under the agreements and it was to the effect that the interest at the rate of 6% was to be paid on the balance of the price the payment of which was agreed to be deferred over a period of five years. It was, therefore, urged on behalf of the revenue that in any case the interest which has been paid after the assessee-company went into production cannot be allowed to be capitalised and it was pointed out to us that the first instalment of the balance of price of pound 1,40,400 was to be paid one year after the date of shipment, and accordingly the first instalment of the balance of the price as well as the interest at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of machinery (whether for replacement or renovation of existing plant) should be capitalised ........" The Supreme Court therafter deduced the following principle : " It would appear from the above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary ." It was urged on behalf of the revenue placing reliance on the above observation that the interest paid after the assessee-company went into production cannot be allowed to be considered as a part of the cost of plant and machinery and consequently cannot be allowed to be capitalised. In our opin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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