1. These appeals are disposed of by a common order as they raise a common point with reference to the meaning of Explanation 8 to Section 43(7) of the Income-tax Act, 1961.
2. The assessees are companies which had taken advantage of the IDBI Bills Rediscounting Scheme for the purpose of purchasing capital assets on deferred payment basis from manufacturers who had arranged for that facility with the IDBI. This facility became available under the Bills Rediscounting Scheme of the Industrial Development Bank of India. The scheme v, as introduced in April, 1965 in terms of the powers vested in the Industrial Development Bank of India under Section 9(1)(b) of its Statute which authorises it to accept discount or re-discount bills of exchange and promissory notes of industrial concerns subject to such conditions as may be prescribed. The stated objective of the scheme is twofold. The manufacturers of indigenous machinery capital equipment can push up the sales of their products by offering deferred payment facilities to the prospective purchaser-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 manufacturer, of course, gets the value of the machinery within a few days of the delivery of the machinery by discounting with his banker, the bills of exchange/promissory notes arising out of sale of the machinery. 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. Bills of exchange are to be drawn by the purchaser for each amount of instalment inclusive of interest and tender the same on delivery of the machinery. The manufacturer is required to present the bills for discounting at the bank of the purchaser within two months. The bank may present the bills for re-discounting with the IDBI. In this scheme it will be apparent that the bills are guaranteed by the purchaser's bank and the actual arrangement is only between the IDBI and the seller while the purchaser may have the benefit of the terms of deferred payment of the price. It is a specific condition of the scheme that the manufacturer-seller should not charge the purchaser by way of interest for the deferred payment period an amount which is materially higher than the amount paid by the manufacturer-seller himself to his banker by way of discount and if on discounting of the bills, a,ny excess amount is found to have been charged, the same should be refunded to the purchaser through the discounting bank. All the assessees before us have availed themselves of the facility under the scheme to purchase capital assets on deferred payment basis.
3. (a) A transaction of TAFE (one of the assessees before us) with HMT will illustrate this scheme. TAFE purchased one Radial Drilling Machine Type RM 62 from HMT under Invoice No. DPS 10092, dated 30-12-1979 reproduced below :--------------------------------------------------------------Sl. No. Description Qnty. Rate Unit Amount --------------------------------------------------------------------------------------------------HMT Radial Drilling MachineNo. 7663.
1 No. 91,100.00 Special Accessories :Central Excise Duty at 8% 7,744.00 -----------receipt of 'C' form.
4,181.76 -----------Less : Advance received 1,08,725.76 4,725.76 4,725.76 -----------Financial Charges 46,800.00 -----------10 BILLS OF EXCHANGE. 1,50,800.00 ----------- (Rupees One Lakh Fifty Thousand Eight Hundred only).
(b) The total sum of Rs. 1,50,800 was made up under the following Scheme :Name of Customer : M/s. Tractors & Farm Equipment Ltd., Madras-11,Type of Machine : RADIAL DRILLING MACHINE MODEL RM 62 (Machine No. I)--------------------------------------------------------------------Sl. No. Usance Principal Discount- Instal- Face Stampof Bill Month Amount ing ment value of Duty charges Bill-------------------------------------------------------------------- 1 2 3 4 5= 3 + 4 6 7-------------------------------------------------------------------- Rs. Ps.
Rs. Ps.
Rs. Ps. Rs. Ps. Rs. Ps. 10.
60 10,400.00 20,800.00 84.00 ----------------------------------------------------- TOTAL 1,04,000.00 1,50,800.00 ----------------------------------------------------- NINE months after date (inclusive of days of grace) pay to HMT Limited, Bangalore or order the sum of Rupees ELEVEN THOUSAND THREE HUNDRED ONLY inclusive of interest at 10.5 per cent per annum for value received.
Accepted payable at United Commercial Bank, Bangalore or at the Industrial Development Bank of India, Bangalore.
4. The case of the assessees is that the total amounts of the instalments inclusive of the interest component was the actual cost of the assets purchased within the meaning of Section 43(1). An Explanation has been added by the Finance Act, 1986 with effect from 1-4-1974 to the effect that interest paid in connection with acquisition of an asset shall not be included in the actual cost of an asset. According to the assessees even this Explanation will not enable the revenue to exclude the interest component of price because the interest component was part of the price and not an independent liability to pay interest especially because under the Bills of Exchange the assessee had to pay the whole amount which was due. It was also contended that the intention in enacting this Explanation was only to exclude interest on actual loans taken for the purpose of purchasing the capital asset and could not apply to a case as the present one where the assessees had not taken any loans. In the alternative it was argued that if it is treated as interest it had accrued on the date of purchase and the entire interest so accrued should be allowed as a deduction with reference to the instalment plan.
5. On the other hand, it was contended on behalf of the revenue that interest component was a distinct component on each instalment of price because the interest was on unpaid price. It was submitted that general rule was that interest paid on capital borrowed after commencement of business cannot be capitalised and it was only the wrong accounting practice of capitalising interest which was sought to be corrected by the Explanation. It was also submitted that interest does not accrue on the date of purchase but only when each instalment was due and hence the exclusion of the interest component was in accordance with the law as it stood.
6. On a consideration of the rival submissions, we are of the opinion that the assessees are entitled to succeed on this point. The most firmly established rules for construing an enactment is the Heydon's rules according to which it is necessary to consider how the law stood when the statute to be considered was passed, what the mischief was for which the old law did not provide, and the remedy provided by the statute to cure that mischief. (See Craies on Statute Law, 7th Edition, page 96). Such analysis shows the assessees' claim to be valid.
7. Section 145 provides that income chargeable under the head 'Profits and gains of business' shall be computed in accordance with the method of accounting regularly employed by the assessees. Sections 28 to 41 lay down the rules for the computation of such profits and gains of a business chargeable to income-tax. Certain deductions such as depreciation and certain allowances such as investment allowance are based on the actual cost of the business assets acquired by the assessee. Section 43(1) of the Act defines 'actual cost' to mean the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.
8. The Allahabad High Court in the case of CIT v. J.K. Cotton Spg. and Wvg. Mills Ltd. [1975] 98 ITR 153 held on 19-5-1974 that the expression 'actual cost' to the assessee in Section 10(2)(vib) of the Indian Income-tax Act, 1922, which is in part materia with Section 43(7) of the Income-tax Act, 1961, means not the value of the assets but what the assessee has actually paid for it because the Legislature can be presumed to have used the expression 'actual cost' fully aware of the meaning assigned to it in commercial practice and must be understood to have used it in the same sense. Thus that decision held that the assessee was entitled to include all the items such as interest paid on loans taken for the purpose of setting up of the factory, interest paid on foreign suppliers of machinery on deferred payment terms, other expenses like wages, salary etc. as part of the actual cost of the assets for the purpose of depreciation. It may be noted that the Court observed that as the entire loan from the State Government was utilised for the purpose of setting up of the factory and became part of the cost of the factory, the interest paid for borrowing such capital was also part of the cost. The Allahabad High Court did not follow the decision of the Andhra Pradesh High Court in the case of CIT v.Challapalli Sugars Ltd. [1970] 77 ITR 392.
9. That decision of Andhra Pradesh High Court was subsequently reversed by the Supreme Court on 31-10-1974 in the case reported as Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. It was a case of borrowal of capital for setting up a factory and the Supreme Court held : As the expression 'actual cost' has not been defined, it should be construed in the sense which no commercial man would misunderstand.
For this purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure.
10. In this situation, the Finance Act, 1986 introduced an Explanation to Section 43(1) with effect from 1-4-1974 which reads as follows : Explanation 8.-For the removal of doubts, it is hereby declared 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 asset.
11. We shall first see whether this Explanation alters the law as stated by the Supreme Court in Challapalli Sugars Ltd.'s case (supra).
The Explanation introduced in the section is in the nature of a declaratory act. Blackstone, J. in Nicol v. Verelst [1779] 26 ER 751 said "declaratory statutes do not prove the law was otherwise before, but rather the reverse." Coleridge, CJ. said in Jones v. Bennet [1890] 63 LT 705 that a declaratory Act means to declare the law or to declare that which has always been the law, and there having been doubts which have arisen, Parliament declares what the law is and enacts that it shall continue to be what it then is. It is in this context that we have seen what was the law declared by the Supreme Court above and we have to see what was the intention of Parliament in enacting this Explanation, whether it was a departure from the law stated above or not.
12. The Finance Minister stated in his Budget Speech [1986] 158 ITR Journal 4 at 15 para 108, (a) Investment allowance and depreciation is claimed on the basis of actual cost. In the present few years a number of companies have been using an accounting practice of capitalising the entire amount of interest on the monies borrowed for acquiring of plant and machinery. This artificially inflates the cost of the assets and the net worth of the company. We are clarifying that the capitalisation of interest paid or payable will not be allowed after the asset is first put to use.
Clause 9 seeks to insert a new Explanation 8 to Clause (7) of Section 43 of the Income-tax Act relating to the definition of actual cost.
Under the existing provisions of Clause (1) of that section, 'actual cost' means the actual cost of the asset to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. The proposed amendment seeks to clarify that any amount paid or payable as interest in connection with the acquisition of an asset and relatable to a period after the asset is first put to use shall not form part and shall be deemed never to have formed part of the actual cost of the asset.
This amendment will take effect retrospectively from 1st April, 1974, and will, accordingly, apply in relation to the assessment year 1974-75 and subsequent years.
The Memorandum Explaining this provision ([1986] 158 ITR St. 107 at 116) stated as follows : Actual cost' for the purposes of depreciation, investment allowance, etc.
Under the existing provisions of Section 43(1) of the Income-tax Act 'actual cost' means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.
It has been found that certain taxpayers (backed by some Court decisions, the first of which was rendered on May 13, 1974) are resorting to a major change in accounting practice by capitalising the interest paid or payable in connection with the acquisition of an asset relatable to the period after such asset is first put to use. This capitalisation implies inclusion of such interest in the 'actual cost' of the asset for the purposes of claiming depreciation, investment allowance, etc., under the Income-tax Act.
As this was never the legislative intent nor does it conform to accepted accounting practices, with a view to counteracting tax avoidance through this method and placing the matter beyond doubt, the Bill seeks to provide that any amount paid or payable as interest in connection with the acquisition of an asset and relatable to a period after the asset is first put to use shall not form part and shall be deemed never to have formed part of the actual cost of the asset.
This amendment will take effect retrospectively from 1st April, 1974, and will, accordingly, apply in relation to the assessment year 1974-75 and subsequent years. (Clause 9).
13. From the above extracts it would be clear that the intention was to exclude interest on borrowed capital which related to the period after the asset was first put to use. The reference to the judgment dated 13-5-1974 in the Memorandum above is obviously to the decision of the Allahabad High Court in J.K. Cotton Spg. & Wvg. Mills Ltd.'s case (supra). In that case, there were two claims for interest-one for interest paid to State Government on a loan taken for setting up of the factory and the other, interest paid to suppliers of machinery on deferred payment terms. With regard to the first item, it was interest paid in the calendar years 1959 and 1960 relevant to the assessment years 1960-61 and 1961-62 on loan of Rs. 90 lakhs given by the Government to set up the factory. The plant went into production on 1-8-1959. The Allahabad High Court held that if the sum of Rs. 90 lakhs can be said to be a part of the cost of the factory, there is no reason why the interest paid for borrowing such capital should also not be a pa,rt of the cost. It would at once be apparent that this was at variance with the statement of law given by the Supreme Court later as well as the accountancy practice and principles extracted in that judgment itself that interest cannot be capitalised after the date of production. The accountancy practice is stated in para 2.22 of the Statement on Auditing Practices issued by the Institute of Chartered Accountants as follows : Interest on monies which are specifically borrowed for the purchase of a fixed asset may be capitalised prior to the assets coming into production, i.e., during the erection stage. However, once production starts, no interest on borrowings for the purchase of machinery (whether for replacement or renovation of existing plant) should be capitalised.
In this context we may also usefully refer to another decision of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52 where it was held that interest paid on loan or mortgage of fixed assets in a running business should not be capitalised. This shows that the Explanation introduced was with reference to interest on borrowed capital which was to be bifurcated as interest payable before setting up of the factory and capitalised, and interest paid after the use of the machinery and treated as revenue expenditure. The law that prevails today is the law declared by the Supreme Court in Challapalli Sugars Ltd.'s case (supra) and Explanation 8 merely restates the same.
14. The other item in J.K. Cotton Spg. & Wvg. Mills Ltd.'s case (supra) was interest paid to foreign suppliers of machinery on deferred payment terms. The Allahabad High Court held : There is not much difficulty so far as item No. 2 is concerned. The sum of Rs. 6,46,040 has been paid by the company to foreign suppliers of machinery from whom the machinery had been purchased on deferred payment basis. As such, the interest is really the part of the price paid by the company. A seller may break up the price into various components while making out the invoice, such as landed cost, plus margin of profit, plus octroi, plus excise, plus sales tax and plus interest, if the payment is not made at the spot. All these items from the purchaser's point of view are nothing but component parts of the ultimate price which he has to pay. If the assessee-company had made payment in cash, it could have saved the sum of Rs. 6,46,040 paid by way of interest. But as it purchased the machinery on deferred payment basis, it had to pay interest also which clearly is a part of the ultimate price which the company had to pay.
This view has not been shown to be at variance with any accepted principles or practice of accountancy. It may be noted that the statement of auditing practice quoted above did not relate to a situation such as this but was concerned only with interest paid on borrowed capital as such. Thus factually this situation of price paid in deferred payment terms is quite different from interest paid on capital borrowed for acquiring assets and there is nothing in Explanation 8 to state that the law is altered with reference to this situation. Moreover, as seen above, the mischief sought to be suppressed was the resort to the major change in the accounting practice by capitalising interest relating to the period after the asset is put to use. Such a change in accountancy practice can refer only to interest paid on capital borrowed to acquire assets considered by the Supreme Court in Challapalli Sugars Ltd.'s case (supra) and held to be capital up to date of commencement of production with reference to accepted accountancy practice. In this context a reference to the Guidance Note of the Research Committee of the Institute of Chartered Accountants of India on Treatment of Interest on Deferred Payments reveals the attempt in paras 4 and 5 :- 4. The views of the Research Committee with regard to the treatment of interest paid during the construction period have been judicially considered and approved by the Supreme Court of India in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC). It is, therefore, a well recognised principle that interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery forms part of the 'actual cost' of the asset for the purpose of claiming depreciation, development rebate, investment allowance, etc., under the Income-tax Act.
5. As regards interest payable after the date of commencement of production on instalments relating to assets purchased on deferred payment terms or on monies borrowed for the purpose of acquiring fixed assets, a view has been expressed in some quarters that interest payable on the unpaid purchase price which is deferred and is payable in yearly instalments is an integral part of the price and the liability for such payment arises when the agreement for purchase is made. It is, therefore, argued that such interest will form part of the cost of the asset if the agreement for the purchase of the asset is executed before commencement of production or before setting up a new unit.
Significantly this refers only to interest on borrowed capital as such and interest on unpaid price given directly to the supplier of the assets and not to a situation with which we are now concerned. The object of the Explanation was therefore to dissuade assessees from changing the accountancy practice to get over the Supreme Court judgment and get the benefit even after commencement of production on the basis of the changed accountancy practice. In these circumstances, the only harmonious way of understanding the scope of the Explanation 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 assets as held by the Supreme Court itself in Challapalli Sugars Ltd.'s case (supra). But in the case of purchase of asset on deferred payment basis the entire price paid will remain as actual cost inclusive of interest component as the Explanation 8 has neither specifically nor by necessary implication changed the accepted treatment as such by the accounting principles. The purposive approach to statutory interpretation enjoins a Judge to impute to Parliament an intention not to impose a prohibition inconsistent with the objects which the statute was designed to achieve, though the draftsman has omitted to incorporate in express words any reference to that intention [See the case of CIT v. K.S. Vaidyanathan [1985] 153 ITR 11 (Mad.) (FB) at 33].
Section 145 requires the computation of profits of business to be in accordance with the regular system of accountancy. In the absence of any direct words to that effect we cannot assume any intention to disregard the known and regular principles of accountancy contrary to the provisions of that section. Thus, from any point of view the Explanation 8 cannot apply to any payment other than interest on capital actually borrowed for acquiring any assets.
15. We now come to the other aspect of the case whether the transactions entered into by the assessees could be regarded as payment of interest on capital borrowed, for, only in such an event it could be excluded by applying the provisions of Explanation 8. Admittedly, it was not interest paid on capital directly borrowed by the assessees separately from any financial institution for the purpose of purchasing any capital asset. The financial arrangement in these cases has been made actually only by the manufacturer with the IDBI. No doubt, the assessee has the benefit of the arrangement in that the price can be paid in instalments. Yet, all the instalments paid constitute 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 gives only the total price including financial charges. It is 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 for the period of the deferred payment facility though called financial charges. Yet, what is paid is only the enhanced price so far as the assessees were concerned because they have not taken any loan from any bank or financial institution for the deferred payment facility. Moreover, as pointed out on behalf of the assessees the scheme of instalment payment and the bills of exchange show the interest amount separately only because the IDBI has insisted that the manufacturer shall not charge anything more than the interest that the manufacturers had to pay to the IDBI for this facility. In other words, the increased price is only the shifting of the burden to pay interest by the manufacturer on to the purchaser. But such a shifting will not make the additional burden of interest payable by the assessee-purchasers either to the manufacturer or to the IDBI. An analogous case is that of the manufacturer showing the excise duty and sales tax payable by the manufacturer separately in the invoice and requiring the purchaser to pay it. In such a case also the amount reimbursed to the manufacturer by the purchaser is not excise duty or sales tax paid by the purchaser but it is only the extra price of the goods. We can recall the observation of Goddard, LJ. in Love v. Norman Wright (Builders) Ltd. [1944] 1 All. ER 618 at 620: Where an article is taxed, whether by purchase tax, customs duty, or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consideration, though made up of cost plus profit plus tax. So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up, or whether the seller has included tax or not.
In the same way the price of the goods is what it is because of the deferred payment facility, and the extra amount though computed by taking the interest payable for the deferred period, as a measure of the enhancement, does not really represent interest paid by the purchaser to the manufacturer or any financial institution on capital borrowed.
16. The other argument of the revenue that the interest component should be treated as interest to an unpaid seller is also untenable.
Under Section 45 of the Sale of Goods Act, the seller of goods is deemed to be an unpaid seller even if the whole of the price has not been paid or tendered or a bill of exchange or other negotiable instrument has been received as conditional payment and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise. In the present case, the scheme itself envisages the discharge of the price by tendering the bill of exchange unconditionally because it has to be guaranteed by the assessee's bank. It is only when the bill of exchange is received as conditional payment that the seller could be regarded as unpaid seller.
But where the seller has taken the negotiable instrument as absolute payment he is no longer an unpaid seller and therefore has no rights against the goods. Again, the scheme provides for the bank to re-discount the bills with the IDBI, so much so the IDBI is the holder in due course. Under the Negotiable Instruments Act the IDBI as a holder has the right to further negotiate the bills or to sue on the bill in its own name and the holder in due course may at his option select the defendant or defendants as he may judge best for the recovery of the money. Hence, it is not necessary that the assessee-purchaser should be directly sued by the holder of the bill for recovering the money due. We find in this case that the assessee-purchaser was of course liable to pay the total amount, though each one of the holders of the bills may on negotiation receive some discounted amounts which need not be based on the interest pro rata.
The discount may be based on the interest for the period of deferment as a measure but the discount itself cannot represent interest on any specific capital borrowed by the assessee-purchaser. It is to be noted that the bills under the IDBI Rediscounting Scheme do not provide for payment of an amount with running interest but only provide for the payment of the total amount which is stated to be inclusive of interest. This is also very significant. Section 79 of the Negotiable Instruments Act provides that where interest at a specified rate is expressly made payable in the instrument, such interest shall be calculated from the date of instrument until the date of payment at that rate. Here even though the amount is inclusive of interest at a certain rate, the amount itself is not payable with interest at that rate, so much so it is a case where no interest is specified on the amount for which the bill is drawn and it attracts Section 80 by which interest is payable only from the date the bill is due @ 6 per cent p.a. till date of payment because interest as such becomes payable only on demand from the date the bill is due. See Gopalan v.Lacshminarasamma ILR 1940 Mad. 382. This is enough to show up in contrast interest payable on the amount of the bill and the interest included in the amount to enhance the price of the asset. It is the former which is the nature of interest which accrues per diem while the latter is an amount ascertained to enhance the price to compensate for deferred payment. Therefore, the price of the goods purchased under the deferment scheme was the price that was negotiated to be the total amount of the instalments and that total amount constituted the actual cost of the asset purchased. This is the view we have taken in the case of Widia (India) Ltd. v. ITO [IT Appeal No. 481 (Bang.) of 1983, dated 20-3-1985] (to which one of us was a party) and from which we are not persuaded to differ.
17. Even if it were to be held that the amount outstanding represented the unpaid price and the increase represented the interest on unpaid price, it has been held by the Supreme Court in the case of Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT [1965] 56 ITR 52 that an agreement to pay the balance of consideration due by the purchaser did not in truth give rise to a loan. The same view has been taken in CIT v. Tensile Steel Ltd. [1976] 104 ITR 58 (Guj.) and Ballarpur Paper & Straw Board Mills Ltd. [1979] 118 ITR 613 (Bom.). The Andhra Pradesh High Court has also reiterated the position in CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 at 170 that interest paid along with each of the instalments of unpaid purchase money was agreed to be part of the sale consideration and cannot be treated as a separate source of income.
18. To sum up, the enhanced price due to the facility given by the IDBI Scheme for deferred payment is quite distinct from either interest paid on capital borrowed or interest paid on unpaid price. No commercial man would misunderstand the one for the other and normal rules of accountancy prevailing in commerce and industry do not require the enhanced price to be split up into basic price and the measure of enhancement treating it as interest so as to artificially reduce the actual cost of the asset.
19. We are, therefore, convinced that neither the Explanation 8 required interest paid on deferred payment to be excluded from the actual cost nor was the interest component of the total price paid by the assessee "interest" as such covered by that Explanation so as to be left out of the computation of actual cost. In other words, Explanation 8 to Section 43(1) introduced with effect from 1-4-1974, has nothing to do with the enhanced price of goods sold under the IDBI Scheme of 1965 either in law or on facts and could not be invoked to disallow the part of such price which is the actual cost of the asset as if it were interest on "borrowed capital in computing the actual cost of the asset. In this view it is unnecessary to consider the alternate argument that such interest should be allowed as revenue expenditure at the time of purchase itself.
20. The next common point relates to the claim of deduction of the contribution made to the Death Relief Fund set up by the assessees.
This fund had been set up by the assessees by an agreement dated 2-9-1977. The agreement itself was a memorandum of settlement made Under Section 18(1) of the Industrial Disputes Act between the workmen and management of Simpson & Co. Ltd. Such a settlement is enforceable under Section 29 of the Industrial Disputes Act. The assessee claims that under Section 2(k) of the Industrial Disputes Act the workmen could negotiate their conditions of service which would include a demand to set up a Death Relief Fund and hence this agreement was a liability under the law which was required to be allowed in spite of the provisions of Section 40A(9) introduced by the Finance Act, 1984.
On the other hand, the contention of the revenue is that this provision has been brought into force for disallowing such expenditure and should, therefore, be given effect to. The Finance Minister stated as follows : Another undesirable practice noticed is the tendency of some corporate bodies to make large contributions to the so-called welfare funds. I further understand that utilisation of these funds is discretionary and subject to no discipline. I am, therefore, providing that deductions will be available only in respect of contributions to such funds as are established under statute or an approved provident fund, superannuation fund or gratuity fund. I am making this change with retrospective effect to avoid unnecessary litigation.
Sub-clause (c) seeks to insert a new Sub-section (9) in Section 40A. The proposed Sub-section provides that no deduction shall be allowed in the computation of taxable profits in respect of any sum paid by the assessee as an employer towards the setting up of, or as contribution to, any fund or trust for any purpose, except where such sum is paid or contributed (within the limits laid down under the relevant provisions) to a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes and to the extent required by or under any other law.
35. Sums contributed by an employer to a recognised provident fund, an approved superannuation fund and an approved gratuity fund are deducted in computing his taxable profits. Expenditure actually incurred on the welfare of employees is also allowed as deduction.
Instances have come to notice where certain employers have created irrevocable trusts, ostensibly for the welfare of employees, and transferred to such trusts substantial amounts by way of contribution. Some of these trusts have been set up as discretionary trusts with absolute discretion to the trustees to utilise the trust property in such manner as they may think fit for the benefit of the employees, without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees. Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposit.
36. With a view to discouraging the creation of such trusts, the Bill seeks to make a provision that no deduction shall be allowed in the computation of taxable profits in respect of any sums paid by the taxpayer as an employer towards the setting up of, or as contribution to, any fund or trust for any purpose, except where such sum is paid or contributed (within the limits laid down under the relevant provisions) to a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purpose of and to the extent required under any other law.
37. With a view to avoiding litigation regarding the allowability of claims for deduction in respect of contributions made in recent years to such trusts, the proposed amendment is being made retrospectively from 1st April, 1980, and will, accordingly, apply in relation to the assessment year 1980-81 and subsequent years.
[Clause 10(c)] These statements indicate that it was the misuse by certain employers of setting up funds and keeping them under their own control which was sought to be put an end to by this amendment. The amendment itself reads as follows : 40A(9). No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society, registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under Clause (iv) or Clause (v) of Sub-section (1) of Section 36, or as required by or under any other law for the time being in force.
The question is whether the settlement in the present case could be regarded as a fund required to be set up by or under any other law for the time being in force. It is not the case of the assessee that it was required by any law but that it was required to be set up under the Industrial Disputes Act. Except for contending that the Industrial Disputes Act itself does not require the setting up of a Death Relief Fund, the revenue is unable to controvert the situation that that Act provides for settlement of industrial disputes which is to be strictly enforced and if a settlement is entered into providing for the setting up of a Death Relief Fund then it is a fund which was required to be set up under the Industrial Disputes Act. See Thompson v. North Eastern Marine Engg. Co. [1903] 1 KB 428, where it was held that compensation settled by agreement between employer and workmen was compensation paid under the Workmen's Compensation Act. Moreover, a purposive approach referred to in para 14 requires us to take note of the memorandum set out above that it was only concerned with funds set up without any scheme whereas in the present case it was a genuine fund set up with a proper scheme for the benefit of the employees, the funds being deposited with the banks and the assessees having no control over it.
The revenue referred to the decision in the case of Sree Saraswathi Mills Ltd. [IT Appeal No. 1367 (Mad.) of 1985, dated 4-11-1987]. But that appears to be a case where there was no settlement but only the voluntary creation of a fund by the employers and there is no mention of any scheme to administer it. In the circumstances we are satisfied that the exception provided to Section 40A(9) applied to the present case and the contribution made to the Death Relief Fund could not be disallowed. The assessee pointed out that even if the contribution is to be disallowed, the actual payment should be allowed Under Section 40A(10). But that situation does not arise in the view that we have taken.
21. The third common point is with reference to the claim for deduction of surtax liability. This has been rightly disallowed in view of the decision in CIT v. Sudarshan Chemical Industries (P.) Ltd. [1986] 159 ITR 629 (Bom.).
23. IT A No. 2519/Mds/85 : In this case the Commissioner has made an order under Section 263 on 26-8-85 to disallow interest component out of the actual cost of the assets acquired. As held above, such an exclusion is untenable. Besides, the assessment has been the subject-matter of appellate order dated 16-5-85 and, therefore, the order under Section 263 is also without jurisdiction inasmuch as the CIT could not interfere with an assessment which had already merged with the appellate order. Hence, the order of the CIT is cancelled.
This appeal is allowed.
24. IT A No. 1559/Mds/85 : We direct the actual cost to be taken without exclusion of the interest and we delete the disallowance of the contribution made to Death Relief Fund. The assessee has not pressed the claim for depreciation and investment allowance. This appeal is partly allowed.
25. IT A No. 1560/Mds/85 : We direct the actual cost to be taken without exclusion of the interest and we delete the disallowance of the contribution made to Death Relief Fund. The assessee has not pressed the claim for depreciation and investment allowance. This appeal is partly allowed.
26. IT A No. 2336/Mds/85: We direct the actual cost to be taken without exclusion of the interest and we delete the disallowance of the contribution made to Death Relief Fund. The claim for enhanced depreciation made by the assessee is also justified in view of the decision of the Tribunal in Rajapalayam Mills Ltd. v. ITO [1986] 18 ITD 114 (Mad.) (SB). We direct accordingly. This appeal is allowed.
27. IT A No. 2036lMdsl85 : We direct the actual cost to be taken without deducting interest and allow the claim for enhanced depreciation in view of the decision of the Tribunal in Rajapalayam Mills Ltd.'s case (supra). This appeal is allowed.
28. IT A No. 2384/Mds/85 : We direct the actual cost to be taken without excluding the interest and allow the claim for enhanced depreciation in view of the decision of the Tribunal in Rajapalayam Mills Ltd.'s case (supra). This appeal is allowed.
29. IT A No. 1939/Mds/85 : The actual cost is to be taken without exclusion of the interest and we delete the disallowance of the contribution made to Death Relief Fund. This appeal is allowed.
30. IT A No. 1940/Mds/85 : The actual cost is to be taken without deducting the interest and contribution to Death Relief Fund is to be allowed. The surtax liability is to be disallowed. This appeal is partly allowed.
31. IT A No. 273/Mds/85 : We allow the actual cost to be taken without deduction of interest. There is another claim for deduction of guarantee commission paid in respect of the purchase of the capital asset as a revenue expenditure. This claim has to be allowed in view of the decision of the Madras High Court in the case of Sivakami Mills Ltd. v. CIT [1979] 120 ITR 211. This appeal is allowed.
32. IT A No. 17lMds/85 : The actual cost is to be taken without deduction of interest. The surtax liability is to be disallowed. This appeal is partly allowed.
33. IT A No. 23I6lMdsl85 : The actual cost is to be taken without exclusion of interest and contribution to Death Relief Fund is to be allowed. The surtax liability has to be disallowed. The enhanced depreciation claim has to be allowed in view of the decision of the Tribunal in Rajapalayam Mills Ltd.'s case (supra). This appeal is partly allowed.
34. IT A No. 1776/Mds/85 : The actual cost has been rightly taken without deduction of interest. This appeal is dismissed.
35. IT A No. 1360/Mds/85 : The actual cost was rightly taken without deduction of interest. There is another claim for deduction of bonus paid to the workmen. The CIT (Appeals) found that incentive bonus was paid for the co-operation of the workers for uninterrupted and smooth working and better productivity in the mills, in addition to the bonus under the Payment of Bonus Act. In view of the decision of the Madras High Court in the case of CIT v. Sivanandha Mills Ltd. [1985] 156 ITR 629 as well as the recent decision in the case of CIT v. Srivilliputhur Co-operative Mills Ltd. [Tax Case Petition Nos. 453 and 454 of 1986, dated 29-1-1987], this expenditure is to be treated as an expenditure laid out for the purposes of the business and allowed under Section 37, since it cannot be regarded as bonus. Hence, the order of the CIT (Appeals) allowing the deduction is confirmed. This appeal is dismissed.