1. ' D.N. BARUAH, J.---At the instance of the Revenue, the following question has been referred by the Income-tax Appellate Tribunal under section 256(1) of the Income Tax Act, 1961, for short "the Act", for the opinion of this Court: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of interest received should not be considered for being taxed as revenue but has to be set off against interest payments and the balance alone had to be capitalised?"
2. ' The facts for the purpose of answering this question are: ' The assessee is Government of Manipur undertaking. The present question relates to the assessm ent years 1982-83 to 1985-86. During that period, the assessee derived income from interest. The assessee did not disclose the income from interest on the ground that interest received was adjusted against the interest paid and the balance was capitalised. The Assessing Officer treated such interest income as income from other sources and assessed it. On appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer. Yet another appeal was filed by the assessee before the Income-tax Appellate Tribunal. The Tribunal directed the Assessing Officer to adjust the interest. Thereafter, the Revenue requested the Tribunal to refer the above question for the opinion of this Court. Hence, the present reference.
3. ' We have heard Mr. U. Bhuyan, learned junior standing counsel appearing on behalf of the Revenue, and none appears on behalf of the assessee. Mr. Bhuyan submits that in the facts and circumstances of case the order given by the Tribunal directing the Assessing Officer to recompute the interest and total income is not permissible.
4. ' This Court had occasion to deal with and answer a similar question in CIT v. Assam Plantation Crops Development Corporation Ltd. (1996) 221 ITR 392 (Income-tax Reference No,45 of 1990). In the said decision, this Court held that interest accrued on the amount received for the purpose of plantation which was deposited on fixed deposit was liable for tax. This Court followed the decision in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC). In Challapalli Sugars Ltd. (1975) 98 ITR 167 (SC), the question that arose was whether interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery would form 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 Act, 1922, and whether the assessee would be entitled to depreciation allowance and development rebate with reference to such interest also.
5. The Supreme Court after noticing the Statement on Auditing Practices issued by the Institute of Chartered Accountants of India and higher Book-keeping and Accounts by Cropper Morris and Fison, seventh edition, held that the accepted accountancy rule for determining cost of fixed assets was to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money was borrowed by a newly started company which was in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money could be capitalized and added to the cost of the fixed assets created as a result of such expenditure. This rule of accountancy, the Apex Court held, should be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary. Therefore, the Supreme Court held that interest incurred during the period of construction of plant should be treated as an addition to the cost of the project unless of course the loan was borrowed for working capital purposes. Such interest would go into the capitalisation amount.
6. ' In view of the decision rendered by the Apex Court in Challapalli Sugars Ltd. (1975) 98 ITR 167, in our opinion, the present question is squarely covered by the said decision. Accordingly, we answer the question in the negative, against the assessee and in favour of the Revenue.
7. ' A copy of this judgment under the signature of the Registrar and the seal of the High Court shall be transmitted to the Income-tax Appellate Tribunal.
8. ' In the facts and circumstances of the case, there will be no direction as to costs.