- (1.) THE following questions of law have been referred for the opinion of this Court by the Tribunal,. Chandigarh Bench, "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing depreciation and investment allowance after allowing capitalisation of the amount of interest included in the bill for the purchase of plant and machinery when interest cannot be capitalised in view of Expln. 8 to s. 43(1) of the IT Act ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing expenditure incurred by way of rent of guest -house holding that the deduction of expenditure is admissible under s. 37(1) and the disallowance is not covered by the specific provisions of s. 37(4) r/w s. 37(5) of the IT Act -
(2.) THE facts noticed by the Tribunal are that the assessee had purchased certain plant and machinery during the previous year relevant to the asst. yr. 1986 -87 for Rs. 9,55,000. The AO noticed that the cost price included the amount of interest and the discount charges also. A sum of Rs. 3,13,000 was, therefore, excluded from the cost of "plant" for the purpose of working out depreciation and investment allowance. The AO took the view that capitalisation of interest could not be allowed. The assessee went in appeal with the plea that the "plant" has been purchased under the deferred payment scheme of the Industrial Development Bank of India (IDBI) and whatever cost had been specified in the purchase voucher under that scheme, that was treated as the cost of the plant. The plea was accepted.
(3.) BEFORE the Tribunal the Revenue's plea was that Expln. 8 under s. 43(1) of the IT Act, 1961 (for short, "the Act"), was 1974. As per the said Explanation, where the amount was paid or was payable as interest in connection with the acquisition of any asset, so much of that amount as was relatable to any period after such asset was first put to use, was not to be included in the actual cost of the asset. The Revenue's plea was that the amount of interest was distinct from the cost and, therefore, depreciation as well as investment allowance were rightly allowed, after reducing the cost of the plant by amount of interest. The assessee's plea, however, was that interest formed part of the cost under the deferred payment scheme of the IDBI. It was argued that, in that light, interest could not be treated otherwise except as part of the cost because a composite bill was received by the assessee and payment was made accordingly. A similar question had been examined by the Tribunal in the case reported in Indian Pistons Repco. Ltd. vs. IAC (1988) 30 TTJ (Mad) 502 : (1988) 40 Taxman 139 (Mad)(Mag), wherein it was observed that the amount of interest formed part of cost. The assessee had also placed reliance on the judgment of the Hon'ble Supreme Court in Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC). The Tribunal agreed with the assessee that Expln. 8 below s. 43(1) of the Act was not attracted because interest was not paid as such but as part of cost under a special scheme of the IDBI. On these facts, the Revenue's contention was not accepted. The assessee had claimed expenditure on guest -house at Rs. 73,200. It was noticed that in the asst. yr. 1984 -85 also, a similar question had arisen regarding the payment of rent in respect of the guest -house. The Tribunal took the 1981 -82 also, payment of rent paid for the building owned by the assessee company as an asset and it could not be allowed under s. 37(1), ss. 37(4) and 37(5) of the Act were not, therefore, attracted. The Tribunal found it appropriate to take the same view and held that the payment of rent in respect of the guest -house was allowable as a deduction under s. 37(1) of the Act.;