P.J. Goradia, Accountant Member - (1.) THESE four appeals are interconnected and, therefore, they were heard together and are being disposed of by this common order.
(2.) We shall first take up the assessee's appeal in I.T.A. No. 1024 (Bom.)/1985 for the assessment year 1980-81. This appeal arises out of the order dated 20-12-1984 passed by the learned Commissioner of Income-tax (Appeals) VIII, Bombay (Shri Raghu Nath). The issue agitated is in connection with the assessee's claim for deduction of an amount of Rs. 24,44,400 being the full amount of interest payable in connection with the purchase of one machine from Hindustan Machine Tools Ltd. (HMT for short), Bombay. The assessee is already in business of manufacturing and is regularly assessed to tax. In February 1979, the assessee had placed an order for puchase of one machine from HMT Ltd. As per the proforma invoice dated 11-3-1980, the cost of the machine (inclusive of central excise duty @ 8% and central sales-tax @ 4%) was stated to be Rs. 33,49,531.48. The assessee had made advance payment of Rs. 3,49,531.48. Therefore, the balance amount of Rs. 30,00,000 was payable under Industrial Development Bank of India (IDBI for short) Deferred Payment Scheme. On the basis of IDBI Deferred Payment Scheme, the assessee made arrangement with Grindlays Bank Ltd., Bombay for the acceptance of usance bills payable at the end of every six months of different amounts aggregating to Rs. 54,44,400 (inclusive of Rs. 30,00,000 being the balance amount of the cost of machinery). The assessee accordingly raised usance bills favouring HMT Ltd. and payable on various date during the period of seven years and the bills were accepted by Grindlays Bank Ltd. making them payable on Andhra Bank Ltd., Hyderabad or IDBI, Hyderabad. The amount of interest payable was worked out at the rate of 10.5 per cent for part of the period initially and thereafter at 10 per cent for the remaining period of seven-year duration. Accordingly, the first usance bill was drawn for Rs. 2,32,600 and each successive bill having been drawn on higher amount and the last bill drawn was for a sum of Rs. 7,14,300. Thus the aggregate amount payable under the various usance bills was determined at Rs. 54,44,400, made up of an amount of Rs. 30,00,000 being the balance amount of the cost of machinery and interest amount of Rs. 24,44,400. In consideration of the acceptance of bills by the Grindlays Bank Ltd. the assessee had also issued counter-indemnity indemnifying the Bank against various risk factors and also undertaking to supply funds to the Bank to meet the acceptance as the usance bills matured from time to time. The assessee, in the books of account, capitalised the entire amount of interest of Rs. 24,44,400 by adding the same to the cost of the machinery purchased. Depreciation and investment allowance was also provided in the books of account and claimed in the statement of income. While filing the statement of income, the assessee also made claim for full deduction of the interest liability of Rs. 24,44,400 The Assessing Officer rejected the claim for the depreciation and investment allowance on the capitalised amount of Rs. 24,44,400. He also rejected the assessee's claim for full deduction of interest payable by the assessee during the seven-year duration of deferred credit. However, he allowed by way of deduction a sum of Rs. 2,178 being the interest payable on such credit, for the period ending on 31 -3-1980. Accordingly, he did not allow the interest liability in respect of the period of credit after the close of the previous year.
(3.) IN the first appeal, the Commissioner (Appeals) agreed with the assessee's contention that the interest amount formed part of the cost of the machinery and, therefore, directed the Assessing Officer to grant depreciation and investment allowance. He supported his conclusion on the basis of the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. With regard to the claim of the assessee for deduction of the amount of interest liability in its entirety, he agreed with the decision taken by the Assessing Officer on the basis of the case of New Victoria Mills Co. Ltd. v. CIT [1966] 61 ITR 395 (All.).;