COMMISSIONER OF INCOME TAX Vs. CAP STEEL LIMITED

JUDGEMENT

(1.) THESE references are under section 256(1) of the Income-tax Act, 1961. The common question referred by the Tribunal for the opinion of this court is as follows : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the net interest income should be capitalised in each year ?"

(2.) THE assessee-company borrowed funds from financial institutions for the purpose of installation of plant and machinery and also for construction of buildings. After spending certain amounts, it deposited the excess money available with it in term deposits and earned some interest income out of those deposits. Before the Income-tax Officer, the assessee contended that the interest income should not be brought to tax and that it should be given set off against the interest payable on that part of the borrowings. THE Income-tax Officer did not accept that contention. He held that the gross interest payable should be capitalised along with the other expenses and no deduction of the interest earned was permissible. THE assessee preferred an appeal before the Appellate Assistant Commissioner. THE Appellate Assistant Commissioner held that the interest earned should be allowed as a deduction in the computation of the total income of the assessee. He, however, held that such net interest should not be capitalised.

(3.) SHRI Srinivasan, for the Revenue, contended that in a case like this, only the gross interest requires to be capitalised and not the net interest. In support of the contention, reliance was placed on the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 and in particular, the following portion (at page 175) : "It would appear from the above that the accepted accountancy rule for determining the 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 which have been created as a result of such expenditure. The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary."