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1986 Supreme(P&H) 10
PUNJAB & HARYANA HIGH COURT
S.P.Goyal and Gokal Chand Mital JJ.
Commissioner Of Income-tax
Versus
Oswal Spinning And Weaving Mills Ltd.
Income tax Reference No. 96 of 1977,
Decided On : JANUARY 13, 1986
Interest paid on purchase of machinery is part of the cost of machinery and that the assessee is entitled to depreciation and development rebate on the said sum. Registration expenses incurred for obtaining a loan are business expenditure.
Headnote:
INCOME TAX - Depreciation and development rebate - Interest paid on purchase of machinery - Registration expenses for raising loan - Whether allowable as business expenditure.
Fact of the Case:
The assessee, a spinning and weaving mill, purchased machinery on deferred terms, paying interest on the balance price. It claimed depreciation and development rebate on the interest paid. The assessee also incurred registration expenses for raising a loan to set up a new vanaspati ghee unit, which was not yet operational during the relevant accounting period. The Income-tax Officer disallowed both claims, but the Tribunal allowed them.
Finding of the Court:
The court held that the interest paid on the purchase of machinery was part of the cost of machinery and that the assessee was entitled to depreciation and development rebate on the said sum. The court also held that the registration expenses incurred for obtaining the loan were business expenditure.
Issues: 1. Whether the interest paid on purchase of machinery should be considered as part of the cost of machinery and that the assessee-company was entitled to depreciation and development rebate on the said sum? 2. Whether the Tribunal was right in law in deleting the addition of Rs. 19,607 paid by the assessee on account of registration expenses for raising a loan of Rs. 5 lakhs for the purpose of unit No. 5?
Ratio Decidendi: 1. The court relied on several precedents holding that interest paid on purchase of machinery is part of the cost of machinery and that the assessee is entitled to depreciation and development rebate on the said sum. 2. The court held that the registration expenses incurred for obtaining the loan were business expenditure, following the rule laid down by the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52, which states that a loan is not an asset or advantage of an enduring nature and that the object with which it was raised is irrelevant.
Final Decision: The court answered both questions in the affirmative, in favor of the assessee.
Gokalchand Mital, J.
1. The Income-tax Appellate Tribunal, Amritsar Bench, has referred the following two questions for the opinion of this court:
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest of Rs. 2,55,321 paid by the assessee on purchase of machinery should be considered as part of the cost of machinery and that the assessee-company was entitled to depreciation and development rebate on the said sum ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs. 19,607 paid by the assessee on account of registration expenses for raising a loan of Rs. 5 lakhs for the purpose of unit No. 5 ?"
2. The first question arises out of the following facts. M/s. Oswal Spinning and Weaving Mills, Ludhiana (for short "the assessee"), was carrying on the business of spinning and weaving of woollen yarn, manufacture of civil and military blankets and woollen fabrics, etc. For the purpose of starting a new unit with 928 spindles, for production of woollen yarn, the assessee purchased machinery from M/s. Sant Andrea Navara, Italy, on deferred term basis. The payment for the machinery was to be made in equal yearly instalments, spread over a period of ten years and, while paying the instalments, interest due on the balance price had to be included. In this manner, the assessee paid an amount of Rs. 2,55,321 by way of interest. The assessee claimed that the aforesaid interest paid by it on purchase of machinery should be considered as part of the cost of machinery and that it was entitled to depreciation and development rebate on the said sum. While the Income-tax Officer and the Appellate Assistant Commissioner did not agree with the assessee, the Tribunal agreed with the assessee and gave the necessary relief.
3. The learned counsel for the assessee has relied on the following four decisions--Challapalli Sugars Ltd., v. CIT [1975] 98 ITR 167, judgment by the Supreme Court, CIT v. Tensile Steel Ltd. [1976] 104 ITR 581 (Guj), Ballarpur Paper and Straw Board v. CIT [1979] 118 ITR 613 (Bom) and CIT v. New Central Jute Mills [1982] 135 ITR 736 (Cal). We have gone through the aforesaid, decisions and find that they fully support the assessees case. Following the, aforesaid decisions, the first question is answered in favour of the assessee, i.e., in the affirmative.
4. For the decision of the second question, the relevant facts may be noticed. The assessee raised a loan of rupees five lakhs from the Punjab Financial Corporation for the purposes of setting up a unit for manufacturing vanaspati ghee. As already noticed, the assessee hitherto was carrying on only the business of spinning and weaving of woollen yarn, manufacture of civil and military blankets and woollen fabrics, etc., and had never done the business of manufacturing of vanaspati ghee. This was a new venture. In obtaining a loan for the new venture, the assessee incurred registration expenses of Rs. 19,607 and claimed this amount as business expenditure. The Income-tax Officer found that the unit for manufacturing vanaspati ghee had not been set up during the relevant accounting period, although loan of rupees five lakhs had been taken for the purpose and, as a consequence, held that the expenditure was not incurred for carrying on the business of vanaspati ghee and disallowed the claim. This decision was upheld by the Appellate Assistant Commissioner. However, on appeal to the Tribunal, the addition of Rs. 19,607 was deleted after following the decisions in Prem Spinning and Weaving Mills Co., Ltd. v. CIT [1975] 98 ITR 20 (All) and CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj).
5. After hearing the learned counsel for the parties, we are of the view that the Tribunal was right in concluding that the registration expenses incurred for obtaining the loan was business expenditure. The decision in Alembic Glass case [1976] 1
