Decided on May 19,1994



T.V. Rqjagopala Rao, Vice-President - (1.) THIS is a departmental appeal for assessment year 1985-86 directed against the order of the C.I.T. (Appeals) - V, Madras, dt. 31-10-1988. There are three grounds in this appeal.
(2.) The first ground is about the disallowance of interest capitalised as having formed part of the actual cost of plant and machinery purchased by the assessee-company by invoking Explanation (8) to Section 43(1) of the I.T. Act 1961. The assessee is a company in which the public are not substantially interested. It carried on business of manufacture and sale of Twist Drills, Reamers, Taps and other tools. For assessment year 1985-86, it returned an income of Rs. 53,08,501 under its income-tax return dated 30-9-85. By the assessment order completed under Section 143(3) dt. 29-2-88 the total income of the assessee was determined at Rs. 1,62,80,524. While making the assessment, some additions and disallowances were made. Admittedly, the assessee acquired certain assets (plant and machinery) making use of the Deferred Payment Guarantee Scheme of the Industrial Development Bank of India (1.D.B.I.). The interest payable over a period of time was capitalised in one lump sum and added to the cost of the assets and depreciation was claimed thereon and that has been disallowed by the Assessing Officer. So also part of the investment allowance on the interest payable after the plant and machinery could be used was also disallowed. The amount of the disallowance over which investment allowance and depreciation was disallowed was seated to be Rs. 20,22,798 in the assessment order. In appeal, the learned C.I.T.(A), purporting to follow the decision of this Tribunal in the case of India Pistons Repco Ltd. v. IAC [1988] 26 ITD 413 (Mad.), allowed the claim of the assessee and ordered that depreciation will be granted on the value of the assets, including the capitalised interest. The Revenue is aggrieved against this relief granted to the assessee and directed ground Nos. 1 to 2.3 over this. India Pistons Repco Ltd. is a sister concern of the assessee-company. The said company along with the assessee had taken advantage of the I.D.B.I. Bills Re-Discounting Scheme for the purpose of purchasing capital assets on deferred payment basis from manufacturers who had arranged for that facility with the I.D.B.I. This facility became available under the bills of the rediscounting scheme of the I.D.B.I. The stated objective of the scheme is two fold. The manufacturers of indigenous machinery capital equipment can push up the sales of their products by offering deferred payment facilities to the prospective purchasers-users. The purchaser-user of the machinery, on the other hand, is enabled to utilise the machinery acquired and repay its cost over a number of years. The methodology of this scheme was that on placing an order with the manufacturer a scheme for the payment of the price in instalments was worked out and each instalment was computed by adding interest at a particular percentage from the date of purchase to the date of payment of the particular instalment. While the instalment of the price was equal, the interest component would naturally be higher with the passage of time and the total amount payable on each date of instalment would be progressively higher. In the previously decided Madras Tribunal's decision, the effect of Explanation 8 to Section 43(1), which was introduced in the statute by Finance Act, 1986 with retrospective effect from 1-4-1974 was considered by the learned Tribunal. It had taken the view that the harmonious way of understanding the scope of the Explanation 8 to Section 43(1) is that it only declares the law as it exists on only one aspect of the matter, viz., that in the case of interest paid on borrowed capital. It cannot be treated as a capital after the date of acquisition of the asset as held by the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. Further in the nature of interest payable under the Deferred Payment Scheme to the IDBI, the Tribunal took the view that it was not interest paid on capital directly borrowed by the assessee separately from any financial institution for the purpose of purchasing any capital asset. The financial arrangement in the case had been made actually only by the manufacturer with the I. D.B.I. No doubt the assessee had the benefit of the arrangement in that the price could be paid in instalments. Yet, all the instalments paid constituted only the actual price of the asset even, if it be something more than what would have been paid if the entire amount had been paid at the time of the purchase itself, without having the deferred payment facility, because the invoice gave only the total price including financial charges. It was also clear that the difference between the total amount of instalments and the actual amount paid was computed by adding the interest payable on the amount over the period of the deferred payment facility, though called financial charges. Yet, what was paid was only the enhanced price. So far as the assessee was concerned, they had not taken any loan from any bank or financial institution for the deferred payment facility. Ultimately the Tribunal no doubt held that the whole of the interest payable should be included to make out the actual cost of the asset under Section 43(1) and despite Explanation 8 introduced with retrospective effect from 1-4-1974, depreciation is held allowable on the whole cost of plant and machinery plus interest, on all the instalments payable, under the Deferred Payment Scheme of the I.D.B.I.
(3.) HOWEVER, the same scheme was differently interpreted by the Bombay High Court in a recent case in CIT v. Rqjaram Bandekar [1993] 202 ITR 514. In the said decision, the order of the Madras Tribunal that Explanation 8 to Section 43(1) did not bring about any change in the existing law on the subject but only reiterated what was the existing law was negatived as incorrect. Analysing the object and effect of Explanation 8 to Section 43(1) of the I.T. Act, 1961, the Bombay High Court had the following to say as per its Headnote of the decision at page 514:- A bare reading of Explanation 8 to Section 43(1) of the Income-tax Act, 1961, inserted with effect from April 1, 1974, shows that it was added with the object of removing doubts with regard to the includibility of interest relatable to any period after the asset has first been put to use, in the computation of its actual cost. By this Explanation, it has been declared by Parliament 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 assets. Parliament, in the above Explanation, has taken full care to couch the Explanation in the widest possible terms to avoid any further controversy in regard to the very same issue on the basis of the manner of payment of interest or time of payment thereof. This has been done by the use of the expression "where any amount is paid or is payable as interest". It will not be correct to say that the legal position in regard to includibility of interest on deferred payment in the computation of the actual cost of an asset did not undergo any change as a result of the insertion of Explanation 8 with retrospective effect and the specific declaration by Parliament made therein that the part of the interest mentioned therein would not be includible in the actual cost. The very purpose of this amendment was to clarify the position in this regard and to set at rest the controversy that had arisen. It is elementary that the decision of the High Court has to be preferred and followed over that of a Tribunal and, therefore, it goes without saying that we are bound to follow the Bombay High Court decision against the Tribunal's decision reported in India Pistons Repco Ltd's case (supra). The learned Bombay High Court had also considered the Karnataka High Court decision in CIT v. Widia (India) Ltd. [1992] 193 ITR 475. They were pleased to find in their judgment commenting upon the Karnataka High Court's decision as follows at page 521 of the reported judgment:- We have carefully considered the above observations. We have also perused the Bills Rediscounting Scheme of the Industrial Development Bank of India. On perusal of the scheme, we find that the above observations of the Karnataka High Court in regard to the IDBI Scheme and the nature of payment thereunder are not correct. Then the Bombay High Court had closely examined the Bills Rediscounting Scheme of the I. D.B.I and the mechanism of the scheme was set out by them at pages 521 & 522, which is as follows:- The intending purchaser-user of indigenous/imported machinery who is not in a position to offer immediately full cash payment for the required machinery approaches the machinery manufacturer/local agent of foreign supplier seeking deferred payment facility. The latter, in order to promote his sales, agrees to supply the machinery subject, to payment of an agreed minimum amount in advance and the balance in half-yearly or yearly instalments. A separate bill/promissory note is drawn/made for each instalment together with interest payable on the deferred instalments. The bills or promissory notes are accepted/guaranteed by/or on behalf of the purchaser-user and delivered to the manufacturer-seller who gets them discounted with his banker thus realising the cost of the machinery; the discount payable by him to his banker is included in the amounts of the bills by way of interest for the period of deferred payment. The manufacturer's/seller's banker in turn takes the discounted bills to the IDBI and gets them rediscounted thus obtaining the amount paid to the manufacturer-seller. The discounting bank takes back the bills from the IDBI against payment, three working days in advance of their due dates and obtains payment thereof from the acceptor/guarantor of the promissory notes. [Emphasis supplied] Ultimately their Lordships of the Bombay High Court clearly observed that the scheme covers both the cost of the machinery and interest. They also held that the Scheme clearly visualised charging of interest and it even makes it obligatory to indicate in the invoice or in the statement, the principal amount and the interest separately. They held that the interest disallowed in the case before them relates to a period subsequent to the date of the machinery was first put to use. That being so, Explanation 8 to Section 43(1) is clearly attracted and in view of the same, the amount of interest cannot be included in the actual cost of the dumpers. Following the latest decision of the Bombay High Court, which we prefer to follow than that of the Karnataka High Court referred to above, we hold that the Assessing Officer is perfectly justified in not granting depreciation on the interest amount which has accrued after the plant and machinery or the asset purchased under the Deferred Payment Scheme of I.D.B.I, after the said asset or plant and machinery was put to use by the assessee-company. Therefore, the order of the first appellate authority is hereby reversed and the order of the Assessing Officer in this regard is restored. The appeal of the Revenue is allowed on this point.;

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