IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No 47 of 1992 For Approval and Signature: HON'BLE MR.JUSTICE M.S.SHAH and HON'BLE MR.JUSTICE A.M.KAPADIA ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals? -------------------------------------------------------------- COMMISSIONER OF INCOME TAX Versus ANANG POLYFIL PVT.LTD. -------------------------------------------------------------- Appearance: 1. INCOME TAX REFERENCE No. 47 of 1992 MR MANISH R BHATT for Petitioner No. 1 SERVED BY RPAD - (N) for Respondent No. 1 -------------------------------------------------------------- CORAM : HON'BLE MR.JUSTICE M.S.SHAH and HON'BLE MR.JUSTICE A.M.KAPADIA Date of decision: 12/02/2004 ORAL JUDGEMENT (Per : HON'BLE MR.JUSTICE M.S.SHAH) In this reference at the instance of the revenue under Section 256(1) of the Income-tax Act, 1961 ("the Act" for short), the following questions have been referred for our opinion for the assessment years 1982-83 and 1983-84 : 1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that entire interest payable by the assessee in the instalments financed by ICICI was liable to be added to the cost of machinery in the computation for depreciation and investment allowance ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that depreciation at 30% was allowable in respect of cost of diesel engine set for generating electricity ?" 2. We have heard Mr Manish R Bhatt, learned standing counsel for the revenue. Though served, none appears for the respondent-assessee. 3. As far as the first question in concerned, the facts, broadly stated, are as under :- The assessee had purchased machinery under a scheme of payment by instalments financed by the ICICI. Under this scheme, the assessee drew usance bills spread over five years guaranteed by the assessee's bank and gave them to the seller for getting them discounted with the ICICI and obtaining 90% payment for the order while 10% was required to be paid in advance by the assessee. The ICICI would then present these bills to the assessee's bank on the due dates of the instalments. The assessee was expected to provide sufficient finance to the bank, failing which it was bank's responsibility to honour those bills. The bills duly discharged would then be handed over to the assessee by the bank after the assessee paid the bank. No rebate or concession was allowed to the assessee even if the payment for the bills was made in advance of the date of maturity. This was because the bills were already discounted with the ICICI where no corresponding rebate was possible. Even the rate of interest was contractual for the entire period irrespective of the bank rate. The Income-tax Officer did not allow the assessee's claim to capitalize this interest on the ground that the assessee had purchased the machinery and then paid for it on obtaining the loan. He also concluded that the interest payable in future could not be allowed as deduction as the liability did not pertain to the year. The CIT (A) held that in this case the business had commenced after the installation of the machinery purchased by the assessee. The ICICI credit was obtained specifically for the purchase of machinery and the liability to pay interest on the credit accrued as soon as the agreement was reached with the ICICI. Therefore, according to him, the entire interest was to be capitalized and included in the cost of machinery. Accordingly, the CIT(A) directed the ITO to allow depreciation and investment allowance on the cost of machinery as increased by the interest payable to the ICICI. The CIT(A) also held that deduction from the total income for the interest paid to ICICI amounting to Rs.2,77,527/- allowed by the ITO was wrong and that this was to be added to the total income. In revenue's appeal, the Tribunal held that the instalments constituted the actual price and what was credit was only enhanced price so far as the assessee was concerned. For this reasoning, the Tribunal relied upon the order of the Madras Bench of the Tribunal in India Pistons Repco Ltd. vs. IAC, (1988) 26 ITD 413. Accordingly, the Tribunal held that the assessee's claim for depreciation and investment allowance on the cost including the interest element in the instalments has to be allowed. Hence, this reference at the instance of the revenue. 4. At the hearing of this reference, Mr Manish R Bhatt, learned standing counsel has invited our attention to the decision of the Madras High Court in CIT vs. India Pistons Ltd., (2000) 242 ITR 672 wherein the Madras High Court reversed the decision of the Madras Bench of the Tribunal upon which the Tribunal in instant case had placed reliance. The learned counsel has further submitted that the decision of the Supreme Court in Challapalli Sugars Ltd. vs. CIT, (1975) 98 ITR 167 was concerned with the interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery and, therefore, the Apex Court had held that such interest paid before the commencement of production forms part of the "actual cost" of the assets to the assessee within the meaning of the expression in section 10(5) of the Indian Income-tax, 1922, but in the facts of the instant case that decision would otherwise also not be applicable because the legislature has added Explanation 8 to Section 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 the respondent-assessee, we are of the view that there is considerable substance in the submissions of Mr Bhatt, learned counsel for the revenue. By Finance Act, 1986, the following Explanation was added as Explanation 8 with retrospective effect from 1.4.1974 :- "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." In the instant case, the interest in question required to be paid by the assessee was for the period after the asset in question was first put to use. Hence, Explanation 8 will be clearly attracted and the interest paid or payable in connection with the acquisition of the asset for the period after the asset is first put to use cannot be included in the actual cost of such asset either for the purpose of depreciation or investment allowances. The reasoning of the Tribunal that as soon as the agreement is entered, there is accrual of liability to pay interest, cannot be accepted. Upon execution of the agreement, the accrual of liability is with reference to the relevant future years and the accrual of liability is not confined merely to the year in which the asset is purchased or first put to use. As rightly pointed out by Mr Bhatt, apart from the fact that Challapalli Sugars Ltd. case (Supra) was concerned with the payment of interest for the period prior to the date of acquisition of the asset, the relevant provisions of Section 10(2) of the Indian Income-tax Act, 1922 did not contain any explanation which is now to be found as Explanation 8 to Section 43(1) of the Indian Income-tax Act, 1961 and which explanation was inserted by the Finance Act, 1986 with retrospective effect from 1.4.1974. The decision of the Madras High Court in India Pistons Ltd. (Supra) has rightly taken into account the insertion of the said Explanation 8. Similar view has also been taken by the Bombay High Court in CIT vs. Rajaram Bandekar, (1993) 202 ITR 514. We are in respectful agreement with the aforesaid view of the Bombay and Madras High Courts. In view of the above discussion, our answer to question No.1 is in the negative i.e. in favour of the revenue and against the assessee. 6. Coming to question No.2, the relevant facts are as under :- The assessee had claimed that cost of diesel engine set for generating electricity was allowable as revenue expenditure. This plea was rejected by the ITO. The alternative plea of the assessee was that depreciation at 30% should be allowed on the cost of said diesel engine under item 10A of the Table in Part I of Appendix I to the Income-tax Rules, 1962. That alternate plea was also rejected by the ITO. The assessee filed appeal before the CIT(A). The CIT(A) confirmed the order of the ITO rejecting the claim that cost of diesel engine was allowance as revenue expenditure. The CIT(A), however, partly accepted the alternate claim of the assessee and directed the ITO to allow depreciation at the rate of 10% as against the rate of 30% claimed by the assessee. The assessee filed cross objections before the Tribunal. The Tribunal relied on its decision in the case of Borad Dyeing Co. vs. ITO, 27 ITJ (JP) 582 and allowed depreciation at the rate of 30%. 7. Mr Bhatt, learned standing counsel for the revenue has invited our attention to the Table of rates at which depreciation is admissible in Part I of Appendix I to the Income-tax Rules, 1962, particularly to item No.10A. Item 10A reads as under :- "10A Renewable energy devices, being - (i) Flat plate solar collectors (ii) Concentrating and pipe type solar collectors (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 desalination systems (ix) Solar power generating system (x) Solar pumps based on solar thermal and solar photovoltaic conversion (xi) Solar photovoltaic modules and panels for water pumping and other applications (xii) Wind mills and any specially designed devices which run on wind mills (xiii) Any special devices including electric generators and pumps running on wind energy (xiv) Biogas plants and biogas engines (xv) Electrically operated vehicles including battery powered or fuelcell powered vehicles. (xvi) Agricultural and municipal waste conversion devices producing energy (xvii) Equipment for utilizing ocean waves and thermal energy (xviii) Machinery and plant used in the manufacture of any of the above sub-items. A bare perusal of the aforesaid item clearly indicates that the higher rate of 30% depreciation is allowed on renewable energy devices as specified in the sub-items of Item 10A. Sub-items (i) to (xi) refer to equipments for generating solar energy. Sub-items (xii) and (xiii) refer to wind energy. Sub-item (xiv) refers to biogas energy. Sub-item (xv) refers to electrically operated vehicles which thereby do not consume the conventional fuel like petrol or diesel. sub-item (xvi) also refer to energy produced by conversion of agricultural or municipal wastes. Sub-item (xvii) refers to energy generated by utilizing ocean waves and sub-item (xviii) refers to machinery and plant used for manufacture of the above sub-items. Accordingly, all the sub-items only refer to renewable energy devices i.e. devices for generating non conventional energy. However, sub-item (xiii) would need some explanation which reads as under :- "(xiii) Any special devices including electric generators and pumps running on wind energy." Although at the first blush it may appear that this sub-item includes electric generators and, therefore, diesel sets for generating electrical energy may fall under this sub-item, on proper scrutiny it would appear that what is contemplated is electric generators running on wind energy and pumps running on wind energy. Hence, generator sets running on diesel would not fall under sub-item (xiii). In view of the above analysis of item No.10A in the Table in Part I of Appendix I to the Income-tax Rules, 1962, we are of the clear view that the diesel generator sets do not fall under item No.10A so as to entitle the assessee to claim depreciation at the higher rate of 30%, but it would be allowable at the normal rate of 10% which was the rate at which the Commissioner of Income-tax (Appeals) had allowed depreciation to the assessee. In view of the above discussion, our answer to question No.2 is also in the negative i.e. in favour of the revenue and against the assessee. 8. The reference accordingly stands disposed of. (M.S. Shah, J.) (A.M. Kapadia, J.) sundar/-