820/CBDT. - Income Tax - 820/CBDT

INSTRUCTION NO. 820/CBDT Dated : December 31, 1974 In the above cited cases question arose as to whether interest on funds borrowed for the purpose of acquiring plant, machinery etc. Which had been capitalised as pro-commencement expenses could be added to the cost of machinery etc. for the purpose of allowing depreciation and development rebate. In the case of M/s.Standard Vacuum Refining Co. (now known as Hindustan Petroleum Corporation), Calcutta, High Court had answered the reference in favour of the assessee and against the Department. In the case of Challapalli Sugar Mills the A.P. High Court had answered the reference in favour of the Department and against the assessee. Department appealed against the decision of Calcutta High Court and the assessee appealed against the decision of Andhra Pradesh High Court. Both these appeals were heard together and have been disposed of by a common judgment dated 31st October, 1974 by the Supreme Court. 2. The court found that the expression 'cost' has not been defined in the Act and therefore, the expression should be construed in the sense in which no commercial man would misunderstand. Therefore, the Court found it necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The Court then referred to passage at page 944 of Accountancy by Pickles 1955 Edition and also Spicer Pegler's Practical Auditing 11th Edition pages 190-191. The Court further referred to section 203(1) of the Companies Act, 1956 as also to paras 2.22 and 2.5 of the Statement on Auditing Practices issued by the Institute of Chartered Accountants of India, 1974. The Court held:- " 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". The Court found that section 208(1) of Companies Act 1956 gives statutory recognition to the principal of capitalising the interest in case the interest is paid on money raised to defray expenses of the construction of any work or building or the provisions of any plant in contingencies mentioned in that section even though such money constitutes share capital. The Court held that the same principle should hold good if interest is paid on money not raised by way of share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provisions of any plant and that the reason indeed would be stronger in case such interest is paid on money taken on loan for meeting the above expenses. The Court also took notice of the judgments of Madras High Court in CIT Vs I.G.Balakrishnan and Bros (P) Ltd. (95-ITR-284) and that of Allahabad High Court in CIT Vs J.K.Cotton Spinning and Weaving Mills decided on 13th May, 1974 and held that they were unable to subscribe to the view taken by Andhra Pradesh High Court and that the correct view in the matter has been taken by Calcutta High Court. Accordingly, our appeal was dismissed and that of the assessee allowed. 3. Steps may, therefore, be taken to withdraw all appeals/references pending on this point. The judgment may also be brought to the notice of all Income Tax Officers.