Commissioner of Income Tax Vs. Anang Polyfil Pvt. Ltd. - Court Judgment

Excerpt:
(i) direct taxation - interest payable - explanation 8 of finance act, 1986 and income tax rules, 1962 - whether tribunal justified in holding that entire interest payable by assessee in installments financed by icici was liable to be added to cost of machinery in computation for depreciation and investment allowance - interest paid in connection with acquisition of asset for period after asset is first put to use cannot be included in actual cost of such asset either for depreciation or investment allowance as per explanation 8 - accrual of liability is with reference to relevant future years and not confined merely to year in which asset is purchased or first put to use - question referred answered in negative. (ii) depreciation - item 10a of income tax rules, 1962 - whether appellate tribunal (at) justified in holding that depreciation at 30% was allowable in respect of cost of diesel engine set for generating electricity - 30% depreciation allowed on renewable energy devices specified in sub-items of item 10a - generator sets running on wind energy included in 10a (xiii) - generator sets running on diesel do not fall under item 10a (xiii) - assessee entitled to claim depreciation at normal rate of 10% - held, at erred in allowing depreciation at higher rate of 30%. - - hence,explanation 8 will be clearly attracted and the interestpaid or payable in connection with the acquisition of theasset for the period after the asset is first put to usecannot be included in the actual cost of such asseteither for the purpose of depreciation or investmentallowances. sub-item (xv) refers to electricallyoperated vehicles which thereby do not consume theconventional fuel like petrol or diesel.m.s. shah, j. 1. in this reference at the instance of the revenueunder section 256(1) of the income-tax act, 1961('the act' for short), the following questions have beenreferred for our opinion for the assessment years 1982-83and 1983-84 :1. whether on the facts and in thecircumstances of the case, the tribunalwas right in law in holding that entireinterest payable by the assessee inthe instalments financed by icici wasliable to be added to the cost ofmachinery in the computation fordepreciation and investment allowance ? 2. whether, on the facts and in thecircumstances of the case, the appellatetribunal was right in law in holding thatdepreciation at 30% was allowable inrespect of cost of diesel engine set forgenerating electricity ?' 2. we have heard mr manish r bhatt, learned standingcounsel for the revenue. though served, none appears forthe respondent-assessee.3. as far as the first question in concerned, thefacts, broadly stated, are as under :-the assessee had purchased machinery under ascheme of payment by instalments financed by the icici.under this scheme, the assessee drew usance bills spreadover five years guaranteed by the assessee's bank andgave them to the seller for getting them discounted withthe icici and obtaining 90% payment for the order while10% was required to be paid in advance by the assessee.the icici would then present these bills to theassessee's bank on the due dates of the instalments. theassessee was expected to provide sufficient finance tothe bank, failing which it was bank's responsibility tohonour those bills. the bills duly discharged would thenbe handed over to the assessee by the bank after theassessee paid the bank. no rebate or concession wasallowed to the assessee even if the payment for the billswas made in advance of the date of maturity. this wasbecause the bills were already discounted with the iciciwhere no corresponding rebate was possible. even therate of interest was contractual for the entire periodirrespective of the bank rate. the income-tax officer did not allow theassessee's claim to capitalize this interest on theground that the assessee had purchased the machinery andthen paid for it on obtaining the loan. he alsoconcluded that the interest payable in future could notbe allowed as deduction as the liability did not pertainto the year. the cit (a) held that in this case thebusiness had commenced after the installation of themachinery purchased by the assessee. the icici creditwas obtained specifically for the purchase of machineryand the liability to pay interest on the credit accruedas soon as the agreement was reached with the icici.therefore, according to him, the entire interest was tobe capitalized and included in the cost of machinery.accordingly, the cit(a) directed the ito to allowdepreciation and investment allowance on the cost ofmachinery as increased by the interest payable to theicici. the cit(a) also held that deduction from thetotal income for the interest paid to icici amounting tors.2,77,527/- allowed by the ito was wrong and that thiswas to be added to the total income. in revenue's appeal, the tribunal held that theinstalments constituted the actual price and what wascredit was only enhanced price so far as the assessee wasconcerned. for this reasoning, the tribunal relied uponthe order of the madras bench of the tribunal in indiapistons repco ltd. vs. iac, (1988) 26 itd 413.accordingly, the tribunal held that the assessee's claimfor depreciation and investment allowance on the costincluding the interest element in the instalments has tobe allowed. hence, this reference at the instance of therevenue. 4. at the hearing of this reference, mr manish rbhatt, learned standing counsel has invited our attentionto the decision of the madras high court in cit vs.india pistons ltd., : [2000]242itr672(mad) wherein the madrashigh court reversed the decision of the madras bench ofthe tribunal upon which the tribunal in instant case hadplaced reliance. the learned counsel has furthersubmitted that the decision of the supreme court inchallapalli sugars ltd. vs . cit, : [1975]98itr167(sc) wasconcerned with the interest paid before the commencementof production on amounts borrowed by the assessee for theacquisition and installation of plant and machinery and,therefore, the apex court had held that such interestpaid before the commencement of production forms part ofthe 'actual cost' of the assets to the assessee withinthe meaning of the expression in section 10(5) of theindian income-tax, 1922, but in the facts of the instantcase that decision would otherwise also not be applicablebecause the legislature has added explanation 8 tosection 43(1) of the income-tax act, 1961 by finance act,1986 with retrospective effect from 1.4.1974.5. having heard the learned counsel for the revenue,there being no appearance on behalf of therespondent-assessee, we are of the view that there isconsiderable substance in the submissions of mr bhatt,learned counsel for the revenue. by finance act, 1986,the following explanation was added as explanation 8 withretrospective effect from 1.4.1974 :-'explanation 8 - for the removal of doubts, it ishereby declared that where any amount is paid oris payable as interest in connection with theacquisition of an asset, so much of such amountas is relatable to any period after such asset isfirst put to use shall not be included, and shallbe deemed never to have been included, in theactual cost of such asset.'in the instant case, the interest in questionrequired to be paid by the assessee was for the periodafter the asset in question was first put to use. hence,explanation 8 will be clearly attracted and the interestpaid or payable in connection with the acquisition of theasset for the period after the asset is first put to usecannot be included in the actual cost of such asseteither for the purpose of depreciation or investmentallowances. the reasoning of the tribunal that as soonas the agreement is entered, there is accrual ofliability to pay interest, cannot be accepted. uponexecution of the agreement, the accrual of liability iswith reference to the relevant future years and theaccrual of liability is not confined merely to the yearin which the asset is purchased or first put to use.as rightly pointed out by mr bhatt, apart fromthe fact that challapalli sugars ltd. case (supra) wasconcerned with the payment of interest for the periodprior to the date of acquisition of the asset, therelevant provisions of section 10(2) of the indianincome-tax act, 1922 did not contain any explanationwhich is now to be found as explanation 8 to section43(1) of the indian income-tax act, 1961 and whichexplanation was inserted by the finance act, 1986 withretrospective effect from 1.4.1974. the decision of themadras high court in india pistons ltd. (supra) hasrightly taken into account the insertion of the saidexplanation 8. similar view has also been taken by thebombay high court in cit vs . rajaram bandekar, : [1993]202itr514(bom) .we are in respectful agreement with the aforesaidview of the bombay and madras high courts.in view of the above discussion, our answer toquestion no.1 is in the negative i.e. in favour of therevenue and against the assessee.6. coming to question no.2, the relevant facts areas under :-the assessee had claimed that cost of dieselengine set for generating electricity was allowable asrevenue expenditure. this plea was rejected by the ito.the alternative plea of the assessee was thatdepreciation at 30% should be allowed on the cost of saiddiesel engine under item 10a of the table in part i ofappendix i to the income-tax rules, 1962. that alternateplea was also rejected by the ito. the assessee filedappeal before the cit(a). the cit(a) confirmed the orderof the ito rejecting the claim that cost of diesel enginewas allowance as revenue expenditure. the cit(a),however, partly accepted the alternate claim of theassessee and directed the ito to allow depreciation atthe rate of 10% as against the rate of 30% claimed by theassessee. the assessee filed cross objections before thetribunal. the tribunal relied on its decision in thecase of borad dyeing co. vs. ito, 27 ttj (jp) 582 andallowed depreciation at the rate of 30%.7. mr bhatt, learned standing counsel for therevenue has invited our attention to the table of ratesat which depreciation is admissible in part i of appendixi to the income-tax rules, 1962, particularly to itemno.10a. item 10a reads as under :-'10a renewable energy devices, being - (i) flat plate solar collectors (ii) concentrating and pipe type solarcollectors (iii) solar cookers (iv) solar water heaters and systems (v) air/gas/fluid heating systems (vi) solar crop driers and systems (vii) solar refrigeration, cold storages air-conditions systems (viii) solar stills and desalinationsystems (ix) solar power generating system (x) solar pumps based on solarthermal and solar photovoltaicconversion (xi) solar photovoltaic modules andpanels for water pumping andother applications (xii) wind mills and any speciallydesigned devices which run onwind mills (xiii) any special devices includingelectric generators and pumpsrunning on wind energy (xiv) biogas plants and biogas engines (xv) electrically operated vehiclesincluding battery powered orfuelcell powered vehicles. (xvi) agricultural and municipal wasteconversion devices producingenergy (xvii) equipment for utilizing oceanwaves and thermal energy (xviii) machinery and plant used in themanufacture of any of the abovesub-items. a bare perusal of the aforesaid item clearlyindicates that the higher rate of 30% depreciation isallowed on renewable energy devices as specified in thesub-items of item 10a. sub-items (i) to (xi) refer toequipments for generating solar energy. sub-items (xii)and (xiii) refer to wind energy. sub-item (xiv) refersto biogas energy. sub-item (xv) refers to electricallyoperated vehicles which thereby do not consume theconventional fuel like petrol or diesel. sub-item (xvi)also refer to energy produced by conversion ofagricultural or municipal wastes. sub-item (xvii) refersto energy generated by utilizing ocean waves and sub-item(xviii) refers to machinery and plant used formanufacture of the above sub-items. accordingly, all thesub-items only refer to renewable energy devices i.e.devices for generating non conventional energy. however,sub-item (xiii) would need some explanation which readsas under :- '(xiii) any special devices including electricgenerators and pumps running on windenergy.'although at the first blush it may appear thatthis sub-item includes electric generators and,therefore, diesel sets for generating electrical energymay fall under this sub-item, on proper scrutiny it wouldappear that what is contemplated is electric generatorsrunning on wind energy and pumps running on wind energy.hence, generator sets running on diesel would not fallunder sub-item (xiii).in view of the above analysis of item no.10a inthe table in part i of appendix i to the income-taxrules, 1962, we are of the clear view that the dieselgenerator sets do not fall under item no.10a so as toentitle the assessee to claim depreciation at the higherrate of 30%, but it would be allowable at the normal rateof 10% which was the rate at which the commissioner ofincome-tax (appeals) had allowed depreciation to theassessee.in view of the above discussion, our answer toquestion no.2 is also in the negative i.e. in favour ofthe revenue and against the assessee. 8. the reference accordingly stands disposed of.