1974 (10) TMI 3 - SC - Income Tax

Whether the interest payment represents an element on the actual cost of the machinery, plant, etc., to the assessee and as such depreciation and development rebate are admissible with reference to this amount also - assessee is entitled to depreciation and development rebate with reference to such interest also - benefit of section 5 of the amending Act would be available only in respect of wealth-tax paid and not merely payable

Summary

Issues Involved:
1. Whether interest payments on borrowed money for the installation of machinery and plant can be capitalized and included in the actual cost for the purpose of depreciation and development rebate.
2. Whether wealth-tax payable by the assessee is allowable as a deduction under the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Capitalization of Interest Payments:
The primary issue in Appeals No. 1353 of 1970 and Nos. 1784 and 1785 of 1970 was whether interest paid on borrowed money for acquiring and installing machinery and plant before the commencement of production should be included in the actual cost for depreciation and development rebate purposes.

- Assessee's Argument: The assessee argued that the interest payment should be treated as part of the actual cost of the machinery and plant, thereby qualifying for depreciation and development rebate.
- Revenue's Argument: The revenue contended that such interest payments should be treated as revenue expenditure and not capitalized.

The Supreme Court, after examining the relevant provisions of the Indian Income-tax Act, 1922, and considering the normal rules of accountancy, held that:
- The term "actual cost" should be construed in a commercial sense, including all expenditures necessary to bring the asset into existence and operational condition.
- Interest incurred before the commencement of production on money borrowed for acquiring and installing machinery can be capitalized and added to the cost of the fixed assets.
- This principle aligns with established accounting practices and is supported by provisions in the Companies Act, 1956, and authoritative accounting literature.

Thus, the Supreme Court ruled in favor of the assessee, affirming that interest payments made before the commencement of production should be included in the actual cost of the machinery and plant for the purpose of depreciation and development rebate.

2. Deductibility of Wealth-tax:
The second issue in Civil Appeal No. 1784 of 1970 was whether the wealth-tax payable by the assessee under the Wealth-tax Act, 1957, is allowable as a deduction under the Indian Income-tax Act, 1922.

- Assessee's Argument: The assessee claimed that the wealth-tax payable should be deductible as it was an expense incurred for the business.
- Revenue's Argument: The revenue opposed this, arguing that wealth-tax is not related to business operations and thus should not be deductible.

The Supreme Court referred to its previous decisions, particularly in Travancore Titanium Products Ltd. v. Commissioner of Income-tax and Indian Aluminium Co. Ltd. v. Commissioner of Income-tax, which had conflicting views on the matter. However, subsequent amendments to the Income-tax Act, 1961, clarified that wealth-tax is not deductible in computing business income.

The Court noted:
- Section 40(a)(iia) of the Income-tax Act, 1961, explicitly prohibits the deduction of wealth-tax.
- Section 5 of the Income-tax (Amendment) Act, 1972, provides a saving clause for cases where the Supreme Court had already held that wealth-tax is deductible before July 15, 1972.

Given that the arguments in Civil Appeal No. 1784 were heard along with other cases where the Supreme Court had ruled wealth-tax as deductible before the specified date, the Court concluded that the assessee's case falls within the saving clause of Section 5.

Therefore, the Supreme Court held that the wealth-tax paid by the assessee is deductible, but only for the wealth-tax actually paid, not merely payable.

Conclusion:
- Civil Appeal No. 1353 of 1970: Allowed. The interest payments on borrowed money for acquiring and installing machinery and plant before the commencement of production are to be included in the actual cost for depreciation and development rebate purposes.
- Civil Appeals Nos. 1784 and 1785 of 1970: Dismissed. The wealth-tax paid by the assessee is deductible under the saving clause of the Income-tax (Amendment) Act, 1972, but only for the wealth-tax actually paid.