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1992 Supreme(Cal) 14
High Court Of Calcutta
Ajit Kumar Sengupta, Shyamal Kumar Sen
COMMISSIONER OF INCOME-TAX - Appellant
Versus
INDIA STEAMSHIP CO.LTD. - Respondent
Income-Tax Reference 45 Of 1990
Decided On : 01/16/1992
A.C.MAITRA, B.D.Halder, J.P.KHAITAN, R.N.BAJORIA
Explanation 8 to Section 43 (1) of the Income-tax Act, 1961, inserted by the Finance Act, 1986, is retrospective in effect from the assessment year 1974-75 and is clarificatory in nature.
Headnote:
INCOME TAX - Capitalisation of interest on deferred payment terms - Whether interest on the balance of the purchase price of the ship on deferred payment basis is includible in the actual cost - Held, no - Explanation 8 to Section 43 (1) of the Income-tax Act, 1961, inserted by the Finance Act, 1986, is retrospective in effect from the assessment year 1974-75 - Explanation is clarificatory in nature and intends to clear up any doubt or ambiguity - Explanation must be deemed to be always in existence - It explains the meaning and intendment of the Act - Interest on deferred payment will be allowed every year as revenue expenditure and not as capital expenditure - Such interest payment cannot be added to the actual cost of the asset for the purpose of allowing depreciation and development rebate.
Fact of the Case:
The assessee-company had been carrying on shipping business for a long time. During the year under reference, it purchased two ships, namely, Indian Venture and Indian Valour. The capital cost of these ships was shown by the assessee at Rs. 4,74,83,585 and Rs. 4,67,88,345, respectively, which included the following expenses: (a) Stage payments for cost of construction (b) Cost of additional equipment (c) Interest prior to delivery (d) Interest on deferred liability (e) Bank commission for deferred payment guarantee (f) Other expenses, namely, travelling and hotel charges of seamen and staffThe assessee claimed development rebate on the entire cost of the two ships. The Income-tax Officer held that since this was an old business, interest on funds borrowed for the purchase of new ships and guarantee commission paid for obtaining the loans and other expenses were to be allowed as business expenses and not to be capitalised in view of the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT.
Finding of the Court:
The Tribunal, however, decided the issue in favour of the assessee following the principles laid down by the Allahabad High court in J. K. Cotton Spinning and Weaving Mills Ltd. [1975] 98 ITR 153 and the Gujarat High Court in Tensile Steel Ltd. [1976] 104 ITR 581. The Tribunal was of the view that the facility of deferred payment of the price was a part of the financial and technical collaboration agreements resulting in spreadover of the payment of actual price over a long period which, in turn, necessarily involved the question of payment of interest also. The Tribunal, therefore, held that the interest payments on deferred instalments of the purchase cost of two vessels were capital expenditure which should be added to the cost of the vessels for the purpose of depreciation and development rebate.
Issues: Whether interest on the balance of the purchase price of the ship on deferred payment basis is includible in the actual cost.
Ratio Decidendi: The Explanation is a part of the main section and it clears the ambiguity, if any, in the main section. The Explanation cannot be read in isolation. The intention of adding the Explanation is that if anything is not clear in the main section, it shall be made clear by adding the Explanation. The Explanation 8 has been added in Section 43 (1) of the Act. The Explanation intends to clarify the position in law as regards the capitalisation of interest paid in connection with the acquisition of an asset after it has been put to use. There is no logic behind the retroactive effect being given to the amendment from the assessment year 1974-75 when, admittedly, the treatment of interest is contrary to the established accountancy principles. The Explanation makes the clarification whereby what was implicit was made explicit. It cannot be that such Explanation will be effective only from a particular assessment year. The Explanation in itself does not, however, make any such provision. It says that, where any amount is paid or is 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, and shall be deemed never to have been included, in the actual cost of such asset. This clearly indicates that the intention of the Legislature is not to apply this Explanation from a particular assessment year. The Explanation being clarificatory in nature and which intends to clear up any doubt or ambiguity must be deemed to be always in existence. It explains the meaning and intend-ment of the Act.
Final Decision: For the reasons aforesaid, we answer the first question in the negative and against the assessee. There will be no order as to costs.
( 1 ) PURSUANT to the decision of the Supreme Court, the following questions of law have been referred under Section 256 (1) of the Income-tax Act, 1961, at the instance of the Revenue for the assessment year 1972-73 :" 1. Whether, on the facts and in the circumstances of the case, the finding and/or conclusion of the Tribunal that the sum of Rs. 1,13,62,848 being the amount of interest payment made by the assessee for purchase of two vessels was spent for the purpose of acquisition of the assessee's business assets and as such the assessee is entitled to capitalise such interest on deferred liability are vitiated in law or are otherwise unreasonable and/or perverse. "
( 2 ) WHETHER, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest payment on loan prior to delivery of the ships amounting to Rs. 7,55,746 and Rs. 8,54,383 and other expenses of Rs. 2,89,616 and Rs. 3,34,844 should be capitalised for the purpose of development rebate ?" 2. The facts of the case are that the assessee-company had been carrying on shipping business for a long time. During the year under reference, it purchased two ships, namely, Indian Venture and Indian Valour, The capital cost of these ships was shown by the assessee at Rs. 4,74,83,585 and Rs. 4,67,88,345, respectively, which included the following expenses :
Indian Venture Indian Valour (Rs.) (Rs.)
(a) Stage payments for cost of construction 3,87,43,843 3,83,10,092 Cost of additional equipment 5,29,284 5,25,295
(c) Interest prior to delivery 8,54,383 7,55,746
(d) Interest on deferred liability 56,81,424 56,81,424
(b) Bank commission for deferred payment guarantee 13,39,807 12,26,172
(e) Other expenses, namely, travelling and hotel charges of
(f) 3,34,844 2,89,616 seamen and staff 4,74,83,585 4,67,88,345
( 3 ) THE assessee claimed development rebate on the entire cost of the two ships. The Income-tax Officer held that since this was an old business, interest on funds borrowed for the purchase of new ships and guarantee commission paid for obtaining the loans and other expenses were to be allowed as business expenses and not to be capitalised in view of the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT.
( 4 ) THE Income-tax Officer further disallowed a sum of Rs. 88,709 in computing the total income of the assessee holding that house rent allowance, car allowance, personal allowance and holiday allowance constituted perquisities for the purpose of Section 40a (5) (ii) of the Income-tax Act, 1961.
( 5 ) IN appeal, the Appellate Assistant Commissioner, after considering the submissions made before him as also going through the facts of the case, held that the assessee was not entitled to capitalise interest on deferred liability in the light of the decision of the Supreme Court in the case of Bombay Steam Navigation Co. (1953) Private Ltd. v. CIT [1965] 56 ITR 52.
( 6 ) THE assessee came up in appeal before the Tribunal. The assessee's couns'el reiterated the same contentions as were advanced before the lower authorities. He urged that it was not the case of interest payment on simple borrowings as held by the lower authorities but was an expenditure relating to the acquisition of a business asset. It was urged that the cost of an asset included not only its actual price but also such incidental charges as sales tax, freight, insurance, transport, installation expenses and interest payment on the capital borrowed for acquisition of such asset. It was asserted that even Section 208 of the Companies Act, 1956, permitted the capitalisation of interest on borrowed capital. Relying on the decision of the Supreme Court in the case of Challapalli Sugars, the assessee's counsel urged that the accepted accountancy rule for determining the cost of a fixed asset was to include all expenditure necessary to bring such asset into existence and to put them in working condition. In case
