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Ballarpur Paper and Straw Board Mills Ltd. Vs. Commissioner of Income-tax, Vidarbha and Marathwada, Nagpur - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 276 of 1973
Judge
Reported in[1979]118ITR613(Bom)
ActsIncome Tax Act, 1961 - Sections 254 and 263(1)
AppellantBallarpur Paper and Straw Board Mills Ltd.
RespondentCommissioner of Income-tax, Vidarbha and Marathwada, Nagpur
Appellant AdvocatePal, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
.....- whether expenditure relating to guarantee commission, stamp charges and interest formed part of actual cost of plant and machinery for purpose of claiming depreciation and development rebate - interest paid to foreign suppliers for machinery on deferred payment terms was treated as forming part of actual cost of assets - interest paid on unpaid price of plant and machinery on deferred payment basis formed part of actual of assets to the assessee within meaning of section 43 - for purpose of claiming depreciation and development rebate it has to be treated as part of actual cost of plant and machinery - held, expenditure incurred by assessee on payment of guarantee commission, stamp charge and interest formed on part of actual cost of plant can be treated as revenue expenditure. - ..........of guarantee commission; (ii) rs. 5,28,348 on account of payment of interest to the vendors of the plant machinery, etc. 5. the ito held that the payment of guarantee commission was of capital nature. he also held that payment of interest was in connection with the arrangement for the purchase of the machinery and plant, etc., and so it was capital expenditure. the findings of the ito were confirmed in appeal by the aac. the assessee accepted the said decision of the aac and did not prefer any appeal to the income-tax appellate tribunal for any of the two years. accordingly, during the assessment years 1965-66 and 1966-67, relevant to the accounting periods ending on june 30, 1964, and june 30, 1965, respectively, the assessee capitalised the amounts of interest, guarantee commission,.....
Judgment:

Kantawala, C.J.

1. This reference is made wherein some of the question are referred to us at the instance of the assessee, while the others are referred to at the instance of the revenue.

2. Ballarpur Paper & Straw Mills Ltd., the assessee, is a public limited company carrying on the business of manufacturing paper. They started this business in the year 1953. With a view to expand this business and increase its daily capacity, the assessee entered into two agreements with Messrs. Klonee-Collin Gmbh, Dortmund, West Germany, and Messrs, Empacel, Paris, France, on May 11, 1960, and May 16, 1960, for the purchase of new plant, machinery and equipments from them. Under the terms of the agreements, the assessee had to pay DM 1,67,91,350 to Messrs. Klonee-Collin Gmbh and pounds 5,77,612 to Messrs. Empacel Company, as price of the plant and machinery, etc. It was agreed that the assessee would pay the sale price in ten equal instalments along with interest to the vendor-companies. The first instalment of the principle amount and the interest was to be paid in each case within six months after the final shipment of the plant and machinery, etc., and the remaining instalments were to be paid as specified in the respective agreements. The guarantee clauses of the agreements required the purchaser to furnish a bank guarantee for payment of the cost price. Pursuant to these, the Bank of Tokyo stood as a guarantor for the assessee and the assessee and the assessee agreed to pay Rs. 7,22,592 to the bank as guarantee commission. The assessee had also to spend Rs. 55,856 as legal costs and stamp charges on the execution of promissory notes in favour of the vendor-companies.

3. For the assessment year 1963-64, relevant to the accounting period ending June 30, 1962, the assessee claimed the following amounts as revenue expenditure :

(i) Rs. 55,856 on account of legal costs and stamp charges;

(ii) Rs. 1,63,071 on account of guarantee commission. The ITO rejected this claim on the ground that the aforesaid expenditure was incurred in connection with the acquisition of plant and machinery, etc., that this expenditure brought into existence capital assets and so the same was of capital nature. On appeal, the finding of the ITO was confirmed by the AAC.

4. For the assessment year 1964-65, relevant to the accounting period ending June 30, 1963, the assessee claimed allowance for the following amounts as revenue expenditure :

(i) Rs. 1,59,079 on account of guarantee commission;

(ii) Rs. 5,28,348 on account of payment of interest to the vendors of the plant machinery, etc.

5. The ITO held that the payment of guarantee commission was of capital nature. He also held that payment of interest was in connection with the arrangement for the purchase of the machinery and plant, etc., and so it was capital expenditure. The findings of the ITO were confirmed in appeal by the AAC. The assessee accepted the said decision of the AAC and did not prefer any appeal to the Income-tax Appellate Tribunal for any of the two years. Accordingly, during the assessment years 1965-66 and 1966-67, relevant to the accounting periods ending on June 30, 1964, and June 30, 1965, respectively, the assessee capitalised the amounts of interest, guarantee commission, stamp charges, etc., and treated the same as part of the cost price of the machinery and claimed depreciation and development rebate in respect of the same. The ITO allowed this claim for each of the assessment year in question.

6. On January 21, 1971, the Addl. CIT, Nagpur, issued a notice to the assessee to show cause on or before January 25, 1971, as to why depreciation and development rebate should not be disallowed. The assessee made an application for extension of time to furnish the explanation but the said application was rejected. The Addl. CIT, ultimately, held by his order dated January 25, 1971, that depreciation and development rebate were not admissible with reference to the capitalised amounts of interest, guarantee commission and stamp charges. He, accordingly, set aside the order of the ITO for the assessment year 1965-66 and directed him to make fresh assessment after giving reasonable opportunity to the assessee to produce correct figures and any other evidence.

7. The Addl. CIT issued a similar show-cause notice to the assessee on February 11, 1971, for the assessment year 1966-67. A request of the assessee to extend time for furnishing explanation was rejected and the Addl. CIT held by his order dated February 23, 1971, that depreciation and development rebate had been wrongly allowed by the ITO for the assessment year 1966-67. He, accordingly, set aside the order of the ITO and directed him to make fresh assessment according to law after giving adequate opportunity to the assessee to produce evidence.

8. Aggrieved by the orders of the Addl. CIT for each of the assessment years in question, the assessee went in appeal before the Tribunal. It was urged before the Tribunal on behalf of the assessee that stamp charges, guarantee commission and interest paid on deferred payment basis constituted part and parcel of the cost price of the plant and machinery and as such depreciation and development rebate were allowable on the same.

9. On behalf of the revenue, it was contended that the jurisdiction of the Tribunal was limited only to the question whether the Addl. CIT had prima facie reason to believe that the impugned order was erroneous in so far as it was prejudicial of the interests of the revenue and that the Tribunal was not competent to go into the merits of the case. In the alternative, it was contended that the guarantee commission, stamp charges and the amount of interest in question did not constitute part and parcel of the cost price of the plant and machinery and to depreciation and development rebate were not allowable in respect of the same. The Tribunal rejected the contention raised on behalf of the revenue as regards its competence to go into the merits of the case. It held that since an appeal lay to the Tribunal against the order of the CIT passed under s. 263(1) of the I.T. Act, the Tribunal had jurisdiction to adjudicate upon the correctness of the order. On merits, it held that the orders of the ITO for the assessment years in question allowing depreciation and development rebate in respect of expenditure on guarantee commission and stamp charges were took the view that the assessee incurred the expenditure relating to guarantee commission and stamp charges for the acquisition of the plant and machinery and as such the same must be considered to be a part of the cost price of the new assets. According to the Tribunal, the Addl. CIT had not given any cogent reason for holding that the expenditure incurred in relation to the guarantee commission and stamp charges did not form part of the actual cost of the plant and machinery. Accordingly, the Tribunal upheld the orders of the ITO for the assessment years in question allowing depreciation and development rebate in respect of expenditure on guarantee commission and stamp charges.

10. So far as the amount of interest paid on purchase of plant and machinery, etc., on deferred payment basis was concerned, it took the view that such expenditure in respect of payment of interest was in effect revenue expenditure. According to the Tribunal, payment of interest was not essential for acquisition of the assets in question and so the amount of interest cannot be considered to be a part of the actual cost of the assets of the assessee. It held that the interest paid by the assessee on the unpaid price of the plant and machinery was allowable as revenue expenditure and remanded the case to the CIT, as directed in the order.

11. Aggrieved by the order of the Tribunal, both the assessee as well as the revenue made applications for reference to the court and as a result of these applications the following seven questions were referred by the Tribunal nor decision by this court :

'(i) Whether, in order to adjudicate upon the correctness of the orders of the Additional Commissioner under section 263(1) of the Income-tax Act, 1961, the Tribunal was competent to go into the merits of the case and determine whether the expenditure relating to guarantee commission, stamp charges and interest formed a part of the actual cost of the plant and machinery for the purposes of claiming depreciation and development rebate

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the expenditure incurred by the assessee on payment of guarantee commission and stamp charges formed a part of the actual cost of the plant and machinery, etc., for the purposes of claiming depreciation and development rebate

(iii) Whether, on the facts and in the circumstances of the case, and on consideration of the relevant agreements the Tribunal was correct in holding that the interest on the unpaid price of the plant and machinery on deferred payment basis, did not form a part of the actual cost of the assets the assessee within the meaning of section 43 of the Income-tax Act, 1961, and that the same was allowable as revenue expenditure

(iv) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in considering the alternative ground raised by the assessee that the interest on the unpaid sale price of the plant and machinery, on deferred payment basis, should be treated as revenue expenditure

(v) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that payment for interest was not essential for the acquisition of the plant and machinery and so it could not be considered to be a part of the actual cost of the assets to the assesse e

(vi) Whether the finding to the Tribunal that payment of interest was not essential for the acquisition of plant and machinery is not based upon any material

(vii) Was the Tribunal, in view of its finding that the interest on unpaid price of the assets was allowable as revenue expenditure, correct in directing the Additional Commissioner of Income-tax to re-decide the question whether the orders of the Income-tax Officer allowing depreciation and development rebate in respect of the amount of interest were prejudicial to the interests of revenue within the meaning of section 263(1) of the Income-tax Act, 1961 ?'

12. Mr. Joshi, on behalf of the revenue, urged that the Tribunal was not competent to go into the merits of the case and determine whether the expenditure relating to guarantee commission, stamp charges and interest formed a part of the actual cost of the plant and machinery for the purposes of claiming depreciation and development rebate. He has also urged that the expenditure incurred by the assessee on payment of guarantee commission and stamp charges did not form a part of the actual cost of plant and machinery, etc., for the purpose of claiming depreciation and development rebate. So far as the finding of the Tribunal on the question of interest on unpaid notice of the plant and machinery was concerned, he supported the said finding.

13. On the other hand, it has been urged by Dr. Pal, on behalf of the assessee, that the Tribunal was fully justified in going into the merits of the case of determine whether the interest formed a part of the actual cost of the plant and machinery for the purposes of claiming depreciation and development rebate. He submitted that the finding of the Tribunal that the expenditure incurred by the assessee on payment of guarantee commission and stamp formed a part of the actual cost of the plant and machinery for the purpose of claiming depreciation and development rebate was correct. He urged that the Tribunal was in error in holding that the interest on unpaid price of plant and machinery on deferred payment basis was not a part of the actual cost of the assets to the assessee. According to him, the assessee was entitled to claim depreciation and development rebate on the amount of interest paid from time to time on the price of plant and machinery, etc.

14. Under the terms of the contract with the purchaser the price was payable by the assessee to the respective vendors of the plant and machinery by instalments at intervals of six months after the final shipment, each instalment was to be of ten per cent. of the price and whole of the price was to be paid within a period of sixty months after the final shipment. The assessee was also required to pay simple interest at the rate of six per cent. per annum at the time of payment of each instalment on the portion of the price of the contract that remained outstanding for the six month of each instalment comprising a part of the price and part of the interest. In the aggregate DM 1,67,450 were payable by way of price and DM 27,70,589.25 payable by way of interest as provided in clause (d) of term 'E' of the agreement with Messrs. Klonee-Collin, Gmbh. Similar payments were to be made under the contract with the other vendor.

15. Coming to question No. 1 above referred to, the argument of Mr. Joshi, on behalf of the revenue, was that the Tribunal was not justified in going into the merits of the case and determine whether the expenditure relating to guarantee commission, stamp charges and interest formed or did not form part of the actual of the plant and machinery for the purpose of claiming depreciation and development rebate. It is not possible for us to accept the contention urged on behalf of the revenue. If the order of the Addl. CIT was subject to appeal, then the Tribunal was fully justified in going into the merits of the decision given by the Addl. CIT as regards the claim for depreciation and development rebate with reference to the amounts of interest, guarantee commission and stamp charges. Our attention has not been drawn by Mr. Joshi to any specific provision of the Act or the Rules which would justify the submission that the Tribunal had no jurisdiction to go into the merits of the case and decide the question whether the expenditure relating to guarantee commission, stamp charges and interest formed part of the actual cost of the plant and machinery for the purpose of claiming depreciation and development rebate.

16. So far as question No. 2 is concerned, we find that the question has been covered by the decision of the Supreme Court. By this question the revenue wanted to challenge the correctness of the decision of the Tribunal on the question whether the expenditure incurred by the assessee on payment of guarantee commission and stamp charges formed part and parcel of the actual cost of the plant and machinery, etc., for the purposes of claiming depreciation and development rebate. In Challapalli Sugars Ltd. v. CIT : [1975]98ITR167(SC) , the Supreme Court took the view that as the expression 'actual cost' has not been defined, it should be construed in the same 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. Applying this test laid down by the Supreme Court, the question of payment of guarantee commission to the bank and stamp charges were necessary items of expenditure to bring such assets into existence and to put them in working condition. As these items of expenditure were necessary to bring into existence the assets and put them in working condition, the Tribunal was right in treating the same as part of the actual cost of plant and machinery for the purposes of claiming depreciation and development rebate.

17. That takes us to the question whether interest on unpaid amount of the cost of the plant and machinery on deferred payment basis formed part of the actual cost of the assets to the assessee.

18. It was urged by Mr. Joshi, on behalf of the revenue, that in Challapalli Sugars Ltd.'s case : [1975]98ITR167(SC) , interest was paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery and that is why it was treated as part of the actual cost of the assets to the assessee. However, in the present case, interest was payable under the contract and as the amount of price was to be paid by instalments every six months, such interest became payable even after the company started production and, therefore, the amount of such interest formed a part of the revenue expenditure.

19. Reference was also made by him to the decision of the Supreme Court in Bombay Steam Navigation Co. [1953] P. Ltd. v. CIT : [1965]56ITR52(SC) . In that case, the Supreme Court has pointed out thus (pp. 59, 60) :

'It is not easy ordinarily to evolve a test for ascertaining whether in a given case expenditure is capital or revenue, for the determination of the question must depend upon the facts and circumstances of each case. The court has to consider the nature and ordinary course of business and the objects for which the expenditure is incurred...... The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.'

20. On the facts of the case, the Supreme Court took the view that the interest paid by the assessee in that case was business expenditure and was allowable as a deduction under s. 10(2) (xv) of the Indian I.T. Act, 1922. It was found that the interest was paid on the unpaid balance of consideration for the assets acquired in the normal course and the same was to be regarded as expenditure for the purpose of the business which was carried on in the accounting periods.

21. In the present case, if regard be had to the terms of the contract with the foreign vendors, the payment of interest was an integral part of the payment of the price. The new unit was set up and plant and machinery was improved for being installed in the new unit. Under the terms of the contract, the payment of interest formed part of the actual price. When such is the case, the interest paid has to be regarded as actual cost of the plant and machinery.

22. Reference may be made to the decision of the Gujarat High Court in the case of CIT v. Tensile Steel Ltd. : [1976]104ITR581(Guj) . In that case the assessee entered into a contract with a Japanese firm for the purpose of establishing and erecting a plant for high tensile steel wires. For that purpose, a basic agreement was effected between the said parties for providing financial collaboration, supply of plant and machinery and technical know-how. Under the basic agreement the assessee got plant and machinery on deferred payment terms. Twenty per cent. of the cost of plant and machinery was to be paid at the time of signing the contract. Eighty per cent. was to be paid in instalments spread over a period of five years. The rate of interest on deferred payments was to be six per cent. per annum. The payment was to be made in pound sterling and it was specifically agreed that in case of any change in the official rate, the difference caused by the change would be adjusted at the time of payment of each instalment. The assessee included an amount of Rs. 3,65,040 being the interest at six per cent. on the cost of machinery and plant, and an amount of additional interest due to devaluation of the rupee in determining the actual cost of plant and machinery for purposes of depreciation and development rebate. The revenue contended that the interest paid would not form part of the actual cost of plant and machinery and in any event the interest paid after the assessee-company went into production cold not be capitalised. The Gujarat High Court took the view that the obligation of payment of interest was incurred for obtaining deferred payment terms under the contract of purchase of machinery and plant. In other words, it was for the acquisition of an asset without which the assessee-company could not have commenced its business. The facility of deferred payment of price granted by the foreign suppliers was a part of the financial and technical collaboration agreements resulting in spread-over of the payment of the actual price over a long period which in turn necessarily involved the question of payment of interest also. The assessee was maintaining its accounts on the mercantile basis and when it debited the price of plant of machinery the interest was also incurred. The fact that part of the interest was paid after the assessee-company went into production was immaterial. The Gujarat High Court took the view that the sums of Rs. 3,62,040 and Rs. 32,291 were capital expenditure which could be added to the cost of the machinery for the purpose of depreciation and development rebate.

23. As in the case before the Gujarat High Court, in the present case, on far as the new unit that was set up by the assessee was concerned, it could not be worked out unless the assessee acquired the assets. As the price to be paid to the foreign vendor was spread over a period of sixty months, it meant that facility of deferred payment of price was granted by the foreign supplier. Such facility necessarily involved the question of payment of interest. In such a case, the interest paid formed part of the actual cost that was to be paid to the foreign suppliers for supply of machinery.

24. To the same effect is the view taken by the Allahabad High Court in the case of CIT v. J. K. Cotton Spinning and Weaving Mills Ltd. [1952] 98 ITR 153. In that also interest paid to the foreign suppliers for machinery on deferred payment terms was treated as forming part of the actual cost of the assets for the purpose of claiming depreciation and development rebate. Such was the view taken having regard to the well recognised commercial and accountancy principles. Thus, in our opinion, not only the amount paid by way of guarantee commission and stamp charges formed part of the actual cost of plant and machinery, but even the interest paid on the unpaid balance of consideration of the plant and machinery by reason of deferred payment basis also formed part of the actual cost of the assets to the assessee.

25. Thus, our answers to the question referred to are as under :

Question No. 1 : In the affirmative.

Question No. 2 : In the affirmative.

Question No. 3 : In the affirmative. The interest paid on unpaid price of plant and machinery on deferred payment basis formed part of the actual of the assets to the assessee with in the meaning of s. 43 of the I.T. Act, 1961, and for the purpose of claiming depreciation and development rebate it has to be treated as part of the actual cost of plant and machinery.

26. In view of our answers to questions Nos. 2 and 3 above, questions Nos. 4 to 7 do not arise for determination. The revenue shall pay the costs of the assessee.


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