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TMI Blog1979 (1) TMI 166X X X X Extracts X X X X X X X X Extracts X X X X ..... eal. It is contended that relying on the decision of the Calcutta High Court in the case of CIT vs. Fort Gloster Industries Ltd. (1) which was referred to by the Madras High Court with approval in the case of CIT vs. R.G. Balakrishnan and Bros. (P) Ltd. (2) which judgment in its turn was approved of by the Supreme court in the case of Challapalli Sugars Ltd. vs. CIT(3) that the expenditure of Rs. 19,231 which was paid to the Bank as guarantee commission was rightly disallowed as capital expenditure. 4. The ld. counsel for the assessee on the other hand referred to an order of the Tribunal in ITA. Nos. 1197 1198 (Mds)/77-78 dated 22nd July, 1978 and submitted that the expenditure was rightly allowed as revenue expenditure. His submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fining Co. Of India Ltd. At page 803 it is stated that 'Actual cost' to the assessee includes all costs essential to the acquisition of a capital asset. The Bombay High Court in Habib Hussein vs. CIT at page 875 "The dictionary meaning of the word 'cost' is 'what is laid out or suffered to obtain anything'. In our opinion therefore the meaning of the expression 'actual cost to the assessee as used in sub-s. (5) of s.10 of the Act would be what the assessee has in fact expended or laid out for the purpose of acquiring the depreciable assets." The Calcutta High Court in CIT vs. Lothian Jute Mills Co. Ltd. At page 636 stated: "It would therefore appear that in using, the expression 'actual cost to the assessee" the legislature wanted to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chinery the assessee had ordered for and this sum should be treated as part of the assessee's "actual cost." In the case of Challapalli Sugars Ltd. vs. CIT the Supreme Court has observed as under: In statement on Auditing Practices issued by the Institute of Chartered Accountants of India (1974) it is observed in paragraph 2.5 as under: 2.5 Fixed Assets should be valued at cost and depreciation should be written off on a proper and consistent basis. Cost included all expenditure necessary to bring the assets into existence and to put them in working condition. By way of illustration the following may be mentioned: (i) Legal charges and stamp duties in the case of Land. (ii) Architects fees in the case of buildings, (iii) Wages, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 determing the actual cost of the assets in the absence of any statutory definition or other indication to the contrary". From the above observations it may perhaps be argued that in respect of interest on borrowings capitalisation of expenditure incurred as actual cost should be restricted ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciable assets and it should be treated as part of the assessee's actual cost of the machinery. In the case of Fort Gloster Industries there is no material to suggest that it was machinery being purchased prior to the concern coming into existence. On the other hand it is well known that this company was a very old concern (founded as far back as 1890; sources Kothary's Economic Industries Guide of India 1976). We have referred to the balance of payments which the assessee had to make to acquire new machinery as evidence from the published accounts. The cost of machinery ran to several lacs. In such cases whatever may be the stage at which the machinery is acquired we consider that items of expenditure in a case like this such as guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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