COMMISSIONER OF INCOME TAX DELHI Vs. SHARPEDGE LTD

JUDGEMENT

(1.) Pursuant to the direction given by this Court, following question has been referred for opinion of this Court under Section 256(2) of the Income Tax Act, 1961 (in short, the 'Act') by Income Tax Appellate Tribunal, Delhi Bench 'A', New Delhi (in short, the Tribunal'):

(2.) Factual position, as indicated in the statement of case, is as follows: Assessee is a public limited company, which was at the relevant point of time, that is, for the assessment year 1971-72 carrying on the business of manufacture and sale of razor blades. Directorate of Industries had allotted Factory Shed No. 34 in Okhla Industrial Estate to assessee in March, 1957 on rental basis. In 1970, assessee acquired another Factory Shed No. 36 in the same industrial estate. Thereafter, Directorate of Industries offered both sheds to the company on hire-purchase basis for 15 years commencing from 1/9/1962. Assessee was also given an option under the scheme to buy the sheds on outright purchase basis. Assessee exercised its option to have outright purchase and got a rebate of Rs. 18,506.00 on hire-purchase price, on payment of interest for unexpired portion of the period of 15 years fixed under the scheme. Assessee company was required to pay Rs. 1,77,607.00 inclusive of interest of Rs. 36,725.00 on the instalments of hire-purchase scheme relating to the period from 1/9/1962 to 31/7/1969. Total amount of interest paid by assessee was Rs. 73,449.00 for both the sheds. Assessee claimed deduction in respect of the same. Income Tax Officer disallowed the claim but no reason was indicated for such disallowance. Assessee preferred appeal before Appellate Assistant Commissioner (in short, 'AAC'). The said Authority asked Income Tax Officer to indicate reasons on the basis of which the disallowance was made. Income Tax Officer indicated its reasons vide letter dated 1/7/1974. Assessee took the stand that disallowance was unjustified and under the hire-purchase scheme, allottees were given an option to buy sheds on outright purchase basis. The assessee-company opted to buy the sheds and got a rebate. But it was required to pay interest on the un-expired period of hire- purchase from 1/9/1969 to 31/7/1977. It had paid interest on the amount fixed for sale on the instalments under the hire-purchase scheme for the previous period that is, 1/9/1962 to 31/7/1969. The amount, thus, paid in respect of unexpired interest of both the sheds was debitable to profit and loss account and was allowable as a deduction. Reliance was placed on decisions of the Apex Court in M/s. Bombay Steam Navigation Co. (P) Ltd. v. Commissioner of Income Tax, Bombay, (1965) 56 ITR 52 and Slate of Madras v. G.J. Coelho, (1964) 53 ITR 186. AAC accepted the stand of assessee and held that the amount of Rs. 73,449.00 was allowable as business expenditure. Matter was carried before the Tribunal by Revenue. The Tribunal upheld AAC's conclusions inter alia held as follows: It was only after the allottees exercised the option and got the sheds on outright purchase basis as business assets that they were required to pay interest. The shifting of the basis to outright purchase was evidently necessary to carry on the business of the assessee more effectively."

(3.) The application filed by Revenue under Section 256(1) of the Act was rejected and thereafter being moved, under Section 256(2) of the Act, this Court directed reference of the question, as set out above.