- Bookmark
- Share
- CaseIQ
Commissioner Of Income-Tax v. Oswal Spinning And Weaving Mills Ltd.
Factual and Procedural Background
The Income-tax Appellate Tribunal, Amritsar Bench, referred two questions to this court concerning the treatment of certain expenses by M/s. Oswal Spinning and Weaving Mills, Ludhiana (the assessee). The first question arose from the assessee’s purchase of machinery on deferred payment terms, which included interest payments. The assessee claimed that the interest paid should be considered part of the machinery's cost, entitling it to depreciation and development rebate. The Income-tax Officer and Appellate Assistant Commissioner rejected this claim, but the Tribunal allowed it.
The second question concerned registration expenses of Rs. 19,607 incurred by the assessee in obtaining a loan of Rs. 5 lakhs from Punjab Financial Corporation for setting up a new unit manufacturing vanaspati ghee. The Income-tax Officer disallowed this expense, holding it was not incurred for carrying on business as the new unit was not set up during the relevant period. The Appellate Assistant Commissioner upheld this disallowance, but the Tribunal deleted the addition.
Legal Issues Presented
- Whether the interest of Rs. 2,55,321 paid by the assessee on the purchase of machinery should be considered as part of the cost of machinery, entitling the assessee to depreciation and development rebate on that sum?
- Whether the Tribunal was correct in deleting the addition of Rs. 19,607 paid by the assessee as registration expenses for raising a loan of Rs. 5 lakhs for the purpose of setting up unit No. 5?
Arguments of the Parties
Assessee's Arguments
- The interest paid on the deferred payment machinery purchase should be capitalized as part of the machinery cost, thus eligible for depreciation and development rebate.
- The registration expenses incurred for obtaining the loan should be treated as business expenditure, even though the new unit was not operational during the relevant period.
- The assessee relied on several precedents supporting capitalization of such interest and allowance of registration expenses as business expenditure.
Department's Arguments
- Interest paid on machinery purchase should not be included in the cost for depreciation purposes.
- Registration expenses for obtaining the loan should be disallowed as the new unit was not set up during the relevant period and hence the expenditure was not for carrying on business.
- Relied on observations from Challapalli Sugars Ltd. case to argue that the position differs when a loan is raised by a running concern versus before commencement of production.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Challapalli Sugars Ltd. v. CIT, [1975] 98 ITR 167 (SC) | Consideration of interest and business expenditure principles. | Found not to support the Department’s contention; observations were in a different context. |
| CIT v. Tensile Steel Ltd., [1976] 104 ITR 581 (Guj) | Support for capitalization of interest as part of machinery cost. | Followed to affirm the assessee’s claim on interest capitalization. |
| Ballarpur Paper and Straw Board v. CIT, [1979] 118 ITR 613 (Bom) | Support for capitalization of interest and related expenses. | Applied to uphold the assessee’s entitlement to depreciation on interest. |
| CIT v. New Central Jute Mills, [1982] 135 ITR 736 (Cal) | Support for capitalization of interest payments. | Relied upon to decide in favour of the assessee. |
| Prem Spinning and Weaving Mills Co. Ltd. v. CIT, [1975] 98 ITR 20 (All) | Recognition of registration expenses for loan as business expenditure. | Applied to support deletion of disallowance of registration expenses. |
| CIT v. Alembic Glass Industries Ltd., [1976] 103 ITR 715 (Guj) | Registration expenses for loan taken by running concern for new unit allowed as business expenditure. | Held directly analogous and supportive of the assessee’s claim. |
| India Cements Ltd. v. Commissioner Of Income Tax, Madras, [1966] 60 ITR 52 (SC) | Principles on loan not being an asset or advantage of enduring nature; expenditure for securing use of money is business expenditure regardless of loan’s purpose. | Applied to conclude registration expenses are business expenditure irrespective of whether new unit was set up. |
Court's Reasoning and Analysis
The court analyzed the first question by examining whether interest paid on deferred machinery purchase could be capitalized as part of the machinery cost. It reviewed several precedents that supported the assessee’s position, concluding that the interest formed part of the cost and thus entitled the assessee to depreciation and development rebate.
Regarding the second question, the court noted that the loan was taken by a running concern for setting up a new unit of a different kind. It relied on precedents that allowed registration expenses associated with obtaining loans to be treated as business expenditure, even if the new unit was not operational during the relevant period. The court emphasized the principle from India Cements Ltd. that the loan itself is not an asset or enduring advantage and that the purpose for which the loan was obtained is irrelevant to the nature of the expenditure. Consequently, the registration expenses were held to be business expenditure and not capital in nature.
The court rejected the Department’s reliance on Challapalli Sugars Ltd., finding the observations cited were inapplicable to the facts of this case.
Holding and Implications
The court answered both questions in the affirmative in favour of the assessee.
The interest of Rs. 2,55,321 paid on the machinery purchase is to be considered as part of the machinery cost, entitling the assessee to depreciation and development rebate. The registration expenses of Rs. 19,607 incurred for obtaining the loan are business expenditure and the Tribunal was correct in deleting the addition disallowing this expense.
The parties were directed to bear their own costs. No broader precedent beyond the application of existing principles was established by this decision.
Gokal chand Mital, J.:— The Income-tax Appellate Tribunal, Amritsar Bench, has referred the following two questions for the opinion of this court:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest of Rs. 2,55,321 paid by the assessee on purchase of machinery should be considered as part of the cost of machinery and that the assessee-company was entitled to depreciation and development rebate on the said sum?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs. 19,607 paid by the assessee on account of registration expenses for raising a loan of Rs. 5 lakhs for the purpose of unit No. 5?”
2. The first question arises out of the following facts. M/s. Oswal Spinning and Weaving Mills, Ludhiana (for short “the assessee”), was carrying on the business of spinning and weaving of woollen yarn, manufacture of civil and military blankets and woollen fabrics, etc. For the purpose of starting a new unit with 928 spindles, for production of woollen yarn, the assessee purchased machinery from M/s. Sant Andrea Navara, Italy, on deferred term basis. The payment for the machinery was to be made in equal yearly instalments, spread over a period of ten years and, while paying the instalments, interest due on the balance price had to be included.
3. In this manner, the assessee paid an amount of Rs. 2,55,321 by way of interest. The assessee claimed that the aforesaid interest paid by it on purchase of machinery should be considered as part of the cost of machinery and that it was entitled to depreciation and development rebate on the said sum. While the Income-tax Officer and the Appellate Assistant Commissioner did not agree with the assessee, the Tribunal agreed with the assessee and gave the necessary relief.
4. The learned counsel for the assessee has relied on the following four decisions—Challapalli Sugars Ltd. v. CIT, [1975] 98 ITR 167, judgment by the Supreme Court, CIT v. Tensile Steel Ltd., [1976] 104 ITR 581 (Guj), Ballarpur Paper and Straw Board v. CIT, [1979] 118 ITR 613 (Bom) and CIT v. New Central Jute Mills, [1982] 135 ITR 736 (Cal). We have gone through the aforesaid decisions and find that they fully support the assessee's case, Following the aforesaid decisions, the first question is answered in favour of the assessee, i.e, in the affirmative.
5. For the decision of the second question, the relevant facts may be noticed. The assessee raised a loan of rupees five lakhs from the Punjab Financial Corporation for the purposes of setting up a unit for manufacturing vanaspati ghee. As already noticed, the assessee hitherto was carrying on only the business of spinning and weaving of woollen yarn, manufacture of civil and military blankets and woollen fabrics, etc., and had never done the business of manufacturing of vanaspati ghee. This was a new venture. In obtaining a loan for the new venture, the assessee incurred registration expenses of Rs. 19,607 and claimed this amount as business expenditure. The Income-tax Officer found that the unit for manufacturing vanaspati ghee had not been set up during the relevant accounting period, although loan of rupees five lakhs had been taken for the purpose and, as a consequence, held that the expenditure was not incurred for carrying on the business of vanaspati ghee and disallowed the claim. This decision was upheld by the Appellate Assistant Commissioner. However, on appeal to the Tribunal, the addition of Rs. 19,607 was deleted after following the decisions in Prem Spinning and Weaving Mills Co. Ltd. v. CIT, [1975] 98 ITR 20 (All) and CIT v. Alembic Glass Industries Ltd., [1976] 103 ITR 715 (Guj).
6. After hearing the learned counsel for the parties, we are of the view that the Tribunal was right in concluding that the registration expenses incurred for obtaining the loan was business expenditure. The decision in Alembic Glass' case, [1976] 103 ITR 715 (Guj) is on all fours with the present case. There also, a loan was taken by a running concern for starting a new industrial unit of a different kind and registration charges incurred in obtaining the loan were allowed as business expenditure. Prem Spinning and Weaving Mills' case, [1975] 98 ITR 20 (All) also fully supports the assessee's case. There, the loan was taken to set up a new unit although of the same kind which the assessee was already running and the registration expenses incurred in obtaining the loan for the new unit were allowed as business expenditure. The facts are slightly different but, on principle, there is no difference because we have to keep in view the rule laid down by the Supreme Court in India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52, which is in the following terms (at p. 63):
“(a) the loan obtained is not an asset or advantage of an enduring nature;
(b) that the expenditure was made for securing the use of money for a certain period; and
(c) that it is irrelevant to consider the object with which the loan was obtained.”
7. Once the loan is not an asset or advantage of an enduring nature, the object with which it was raised would be wholly irrelevant. Therefore, even if the unit for manufacturing vanaspati ghee had not been set up, nevertheless the registration expenses for obtaining the loan would be a business expenditure and not of a capital nature, Moreover, the assessee concerned was already a running concern and was carrying on the business of spinning and weaving of woollen yarn, manufacture of civil and military blankets and woollen fabrics, etc., and the endeavour was to set up a new vanaspati ghee unit.
8. Certain observations made in Challapalli Sugars Limited's case, [1975] 98 ITR 167 (SC) at page 178 of the reported judgment were sought to be relied upon by the Department to show that it would be a different position when a loan is raised by a running concern unlike an assessee when the loan is taken before the commencement of the production. The observations are in a totally different context and in no way support the Department. In any event, the loan in the instant case was taken by a running concern although for setting up a totally new unit of a different kind. Therefore, the loan cannot be taken as an asset or an advantage of enduring nature.
9. For the reasons recorded above, we hold, that the registration expenses of Rs. 19,607 incurred by the assessee was business expenditure and the Tribunal was right in deleting the addition. Accordingly, we answer the second question in the affirmative, i.e, in favour of the assessee and against the Department.
10. The parties are left to bear their own costs.
Alert