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TMI Blog1974 (10) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... amount also?" The matter relates to the assessment year 1959-60, the corresponding accounting year for which ended on June 30, 1958. The assessee is a public limited company engaged in the manufacture and sale of sugar. The company went into production on January 22, 1958. The assessee-company had borrowed considerable sums of money from the Industrial Finance Corporation of India for the installation of machinery and plant. During the relevant year and for the period prior to the commencement of its business the assessee paid Rs. 2,38,614 as interest. The case of the assessee is that the payment of interest added to the cost of machinery and plant to the assessee and as such while calculating depreciation admissible to the assessee, the interest paid should be treated as part of the cost of the machinery and plant to the assessee. The Income-tax Officer rejected the above claim of the assessee and held that the interest paid from year to year was an admissible item of revenue expenditure and no depreciation could be allowed on the capitalised amount of the expenditure incurred on account of interest. No part of the above amount, according to the Income-tax Officer, could be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. of India Ltd. (now known as "Hindustan Petroleum Corporation Ltd."), was incorporated on July 5, 1952, and commenced its business in September, 1954. In June, 1953, it borrowed rupees four crores on debenture at the rate of Rs. 51 per cent. interest from the public. The interest was to run from June, 1953. The above amount together with rupees twelve crores financed by the company was used in setting up a refinery for which plant and machinery were imported from abroad. The refinery started work on September 1, 1954, from which date depreciation began to be calculated. The assessee-company capitalised all the expenses during the period of construction, including the interest amounting to Rs. 23,53,284 which had accrued from the date of borrowing to the date of the commencement of the business on the aforesaid loan and claimed depreciation on the full amount. The Income-tax Officer did not include interest on debentures in arriving at the figure of actual cost and as such rejected the claim of the assessee in this respect. The Appellate Assistant Commissioner agreed with the Income-tax Officer. The Tribunal on further appeal held that the assessee was also entitled to depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down value thereof as may in any case or class of cases be prescribed. "Written down value" has been defined in sub-section, (5) of section 10, in the case of assets acquired in the previous year, the actual cost to the assessee, and in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act or any Act repealed thereby, or under executive orders issued when the Indian Income-tax Act, 1886, was in force. The definition is subject to provisos, but we are not concerned with them. The Explanation which has been added to sub-section (5) reads as under : "Explanation.--For the purposes of this sub-section the expression 'actual cost' means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by Government or by any public or local authority, and any allowance in respect of any depreciation carried forward under clause (b) of the proviso to clause (vi) of sub-section (2) shall be deemed to be depreciation 'actually allowed'." It has not been disputed that so far as the question before us is concerned the legal p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company may pay interest on so much of that share capital as is paid up for the period and may charge to capital the sum paid by way of interest, provided that the restrictions imposed under section 65 of the Companies Act, 1948, are complied with." It is further observed : "The interest so paid is 'capitalised', that is to say, it is treated as part of the cost of construction being added thereto (similarly to legal expenses of acquiring property or brokers' charges on purchasing investments)." In Spicer & Peglar's Practical Auditing, 11th edition, it is observed on pages 190-191, under the head "Interest Payable Out of Capital During Construction" : "Interest on debentures issued for a similar purpose can be charged to capital during the period of construction (Hinds v. Buenos Ayres Grand National Tramways Co. Ltd. )" In Higher Book-keeping & Accounts by Cropper Morris & Fison, seventh edition, it is observed as under : "Capital expenditure over a long period must perforce involve the question of interest as an additional cost. If the work were undertaken by an independent contractor he would, of course, take interest into account when preparing the estimates on which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing it s plant, the interest incurred before production commences may be capitalised. 'Interest incurred' means actual interest paid or payable in respect of borrowings which are used to finance capital expenditure. In no circumstances should imputed interest be capitalism, such as interest on equity or preference capital at a notional rate. Interest on capital during construction paid in accordance with the provisions of section 208 of the Companies Act, 1956, may however, be capitalised as permitted by that section. Interest on monies which are specifically borrowed for the purchase of a fixed asset may be capitalised prior to the asset coming into production, i.e., during the erection stage. However, once production starts, no interest on borrowings for the purchase of machinery (whether for replacement or renovation of existing plant) should be capitalised..." 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 ere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her architect to prepare the plan for his house and to supervise its construction and pays remuneration to that other architect for this purpose, the amount so paid to the other architect shall have to be taken into account in arriving at the figure of actual cost of the house. In case, however, the architect constructing the house himself prepares the plan of the house and supervises its construction, he would naturally be not paying any remuneration to himself for the aforesaid work. The result would be that in the latter event the actual cost of the house would be less compared to the cost of the house in the former event even though the house in all other respects is identical. It would, therefore, follow that for similar fixed assets there can be different actual colts. The fact that there would be a difference in the actual cost of the plant in case its machinery is acquired and installed with the assessee's own money or in case it is acquired and installed with borrowed money does not consequently militate against the answer which we propose to give to the question referred in the three appeals. In the case of Hinds v. Buenos Ayres Grand National Tramways Co. Ltd. a tramwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Corporation of Birmingham v. Barnes (H. M. Inspector of Taxes). The appellant corporation in this case entered into an agreement with a company to lay a tramway track and establish a tramway service to the company's works. By virtue of the work having been completed and the service established by a certain date, the corporation received from the company, in accordance with the terms of the agreement, a specified sum. The corporation also spent considerable sums of money on the renewal of their tramway tracks and received in that connection grants from the Unemployment Grants Committee. These grants were made under certain conditions to local authorities to assist them in carrying out at once approved schemes of public utility on which a substantial number of unemployed persons could be engaged. It was held that the payment by the company and the grant from the Unemployment Grants Committee should not be taken into account in ascertaining the actual cost to the corporation of the tramway track in question for the purpose of computing the allowance due to the corporation for wear and tear of such tracks. Lord Atkin observed in the above case : "What a man pays for constructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest paid on the loan before the commencement of business in the actual cost of the plant did not arise in that case. It may be mentioned that as against the view take by the Andhra Pradesh High Court in the judgment which is the subject-matter of the appeal, three other High Courts have taken the contrary view and have held that interest paid in such circumstances can be capitalised and included in the actual cost of the machinery and plant. The decision of the Calcutta High Court in which the contrary view has been taken is the subject-matter of appeal before us. The view of the Calcutta High Court has been followed by the Madras High Court and the Allahabad High Court. The decision of the Madras High Court is in the case of Commissioner of Income-tax v. L. G. Balakrishnan and Bros. (P.) Ltd., while that of the Allahabad High Court is in the case of Commissioner of Income-tax v. J. K. Colton Spg. & Wvg. Mills Ltd. After giving the matter our consideration, we are unable to subscribe to the view taken by the Andhra Pradesh High Court. The correct view in the matter, in our opinion, has been taken by the Calcutta High Court and we affirm the same. We may now advert to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to section 4 of the amending Act, nothing contained in the Indian Income-tax Act, 1922, shall be deemed to authorise, or shall be deemed ever to have authorised, any deduction in the computation of the income of any assessee chargeable under the head "profits and gains of business, profession or vocation" or "income from other sources" for the assessment year commencing on the 1st day of April, 1957, or any subsequent assessment year, of any sum paid on account of wealth-tax. In view of the above provisions, it is plain that any sum paid on account of wealth-tax cannot be deducted in computing the income of an assessee chargeable under the head "Profits and gains of business, profession or vocation" or "Income from other sources". There is, however, a saving clause contained in section 5 of the amending Act and it reads as under, "Where, before the 15th day of July, 1972 [being the date on which the Income-tax (Amendment) Ordinance, 1972, came into force], the Supreme Court has, on an appeal in respect of the assessment of an assessee for any particular assessment year, held that wealth-tax paid by the assessee is deductible in computing the total income of that year, then no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bruary 1, 1972, in Civil Appeals Nos. 1784, 1694, 1730 and 1831, on the question as to whether the wealth-tax paid by the assessee was a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act. On the conclusion of the arguments on that point, this court found that an additional question arose in Civil Appeal No. 1784 on the point as to whether the interest. payable on loan was part of the actual cost of the assets. The Constitution bench after hearing arguments on this additional point for some time directed that Civil Appeal No. 1784 along with the connected Civil Appeal No. 1785 should be posted for hearing before a Division Bench after pronouncement of judgments in Civil Appeals Nos. 1694, 1730 and 1831. The effect of the above order which was made on February 1, 1972, was that the decision in Civil Appeals Nos. 1694, 1730 and 1831 on the point as to whether the wealth-tax paid by the assessee was a permissible deduction, was also to be the decision in Civil Appeal No. 1784. After the judgments of the Constitution Bench in Civil Appeals Nos. 1694, 1730 and 1831 on March 29, 1972, the question as to whether the wealth-tax paid by the assessee was a permissible ..... 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