M.S.SHAH, J. - (1.) THIS petition under Article 226 of the Constitution challenges the notice dt. 31st March, 1994 issued by the ITO (Annex. -A) under Section 148 of the IT Act, 1961 (hereinafter referred to as 'the Act'), r/w Section 147 thereof proposing to reopen assessment of Denish Syntex (P) Ltd. for asst. yr. 1983 -84 on the ground that on account of insertion of Expln. 8 to Section 43(1) as introduced by the Finance Act, 1986, with retrospective effect from 1st April, 1974, the assessee was not entitled to claim depreciation or investment allowance on the capitalisation of interest paid prior to (sic -after) the date on which the machinery was first installed and put to use.
(2.) THE facts leading to filing of the present petition are as under : For asst. yr. 1983 -84 Denish Syntex (P) Ltd. (DSPL) which was subsequently amalgamated with the petitioner -company filed its return of income claiming loss of Rs. 55,82,920. In the said return, the DSPL had stated that the DSPL had calculated investment allowance and depreciation on capitalisation of interest payable on Rs. 33,87,725 over contracted periods on term loans received from the GIIC and GSFC. The DSPL had inserted the following note as Note No. (2) below statement of computation of assessable loss :'(2) The company has calculated investment allowance and depreciation on capitalisation of interest payable of Rs. 33,87,725 (including paid during the year Rs. 8,03,435) over contracted periods on term loans received from GIIC and GSFC, utilised on fixed assets calculated on proportion of term loan and fixed assets, as liabilities accrue or arise at the time of availment of loans'. The assessment of DSPL was framed under Section 143(3) r/w Section 144B of the Act, Against the assessment order dt. 28th Jan., 1984 (Annex. -C), the DSPL preferred an appeal before the first appellate authority, insofar as the assessment order was against DSPL and DSPL succeeded in those proceedings but the same has nothing to do with the controversy involved in the present petition. Thereafter, on 31st March, 1994 the respondent -ITO issued the impugned notice under Sections 147 and 148 of the Act.
(3.) IN response to the notice issued by this Court, affidavit -in -reply dt. 29th April, 1994 came to be filed by the respondent -officer stating that the assessee had capitalised an amount of Rs. 33,87,725 being the interest paid to GIIC and GSFC for the acquisition of fixed assets. The value of the assets was overstated by this extent. The petitioner -company claimed depreciation and investment allowance on the cost of the assets which included the interest capitalised as above. The claim of the assessee was allowed without touching the aspect of capitalisation of interest. This resulted into excess allowance of depreciation and investment allowance. After taking the aforesaid stand, the deponent of the affidavit -in -reply stated as under : 'I submit that upto 1986, there were different views expressed by the Hon'ble Courts on the aspect as to whether the interest in connection with the acquisition of an asset, is to be included in the cost of the assets or to be allowed as revenue expenditure. It is submitted that Expln. 8 to Section 43(1) was introduced by the Finance Act, 1986, with retrospective effect from 1st April, 1974. The Explanation reads as under : 'For the removal of doubts, it is hereby declared that where any amount 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.'It is submitted that with the introduction of the Explanation, the controversy as regards interest, vis -a -vis the actual cost was set at rest. As per the Explanation, any amount which is paid or payable as interest in connection with acquisition of the asset, so much or such amount as is relatable to any period after such asset put to use shall not be included and shall be deemed never to have been included in the actual cost of such asset. In the present case, the petitioner -company had capitalised the interest relevant to the entire contracted period as a result of which the cost of assets is overstated to the extent of Rs. 33,87,725. Because of this overstatement of actual cost, excess depreciation and investment allowance has been allowed to the petitioner -company. In view of these reasons, after obtaining prior approval, I have issued the notice under Section 148 which is legal and valid.' ;