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TMI Blog1973 (9) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... e company and an engineer went abroad on various dates and incurred the following expenses: Name Date Expenses incurred L. G. Balakrishnan 31-5-1960 Rs. 10,763 L. G. Varadarajulu from 6-7-1960 to 13-2-1962 15,767 L. G. Nityanandan June 61 to October 61 6,018 (The above amounts were debited to the personal accounts of the respective parties and transferred to plant and machinery account on 31-3-1962). P. Ramachandran (Engineer) Oct. 61 to March 62 9,655 Other payments 509 ---------------- Rs. 42,712 ----------------- The company had expended up to March 31, 1962, a sum of Rs. 6,91,794 for setting up of the factory. Out of this sum, a sum of Rs. 1,92,890 was incurred to import raw materials, chemicals, etc., and the balance of Rs. 4,98,905 was utilised for purchase of machinery. In the year ending on March 31, 1963, the company has paid interest at 6 per cent. on the said sum of Rs. 4,98,905 said to have been borrowed, and this came to Rs. 33,000. In the assessment year 1963-64 corresponding to the previous year ending on March 31, 1963, the assessee claimed depreciation and development rebate on the cost of the plant and machinery which included the following sums: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of the company: "(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 33,000 representing interest on moneys utilised in purchase of machinery could be considered as forming part of the actual cost of the machinery and entitled to depreciation and development rebate ? (2) Whether, on the facts and in the circumstances of the case, the expenses Rs. 42,712 incurred on foreign trips could be considered as part of the actual cost of machinery. (3) Whether, on the facts and in the circumstances of the case, the expenses of Rs. 17,143 representing the payment to foreign collaborators was part of the actual cost of machinery entitled to depreciation and development rebate?" The finding of the Tribunal in relation to the first question is that the machinery has been purchased by the company with borrowed capital and that the sum of Rs. 33,000 represented the interest paid on those borrowings during the previous year. The question is whether such interest can be included in the cost of the machinery so that depreciation and development rebate could be claimed thereon. Both the Appellate Assistant Commissioner and the Tribunal have upheld the claim of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n incurred in connection with the acquisition of the machinery. The reasoning given by the Appellate Assistant Commissioner for upholding the claim of the assessee in this regard is that the money borrowed has been utilised for the purchase of the machinery and, therefore, the interest paid thereon should be capitalised. The Tribunal agreed with this view. The question is whether the interest paid on the amount borrowed for the purchase of the machinery could be capitalised and added to the cost of such machinery, and whether depreciation and development rebate could be claimed on such capitalised value. In Habib Hussein v. Commissioner of Income-tax the Bombay High Court held that the expression "actual cost to the assessee" as used in section 10(5) of the Indian Income-tax Act, 1922, will take in whatever the assessee had in fact expended or laid out for the purpose of acquiring the depreciable assets and that, therefore, the expenditure incurred by the assessee in that case in getting prepared suitable plans and designs for the construction of the cinema theatre, for securing various priorities and permits for scarce materials including cement, steel, piping and petrol for tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest essential to the acquisition of a capital asset ? When a capital asset is acquired by an assessee with his own money he is not required to pay any interest; so it may be argued that payment of interest is not essential to the acquisition of a capital asset but this argument does not bear scrutiny. Employment of an erection engineer may be necessary in one case and may not be necessary in another. From this it cannot said that in an appropriate case the employment of an erection engineer is not essential to the erection of a factory. Similarly, where as cannot acquire a plant except with the aid of a loan, the loan is essential to the acquisition of the plant, and payment of interest being essential the procurement of loan, payment of interest too must be regarded as essential to the acquisition of the plant.... On a general principle there is scarcely any distinction between payment made to a supervisor who supervises the erection of a plant and the payment made by way of interest on the amount borrowed for the acquisition of the capital asset. If payment to a supervisor is an element in the actual cost incurred by the assessee in having the plant, there is no reason why p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10(2)(xv) of the Income-tax Act, 1922. Rejecting that contention the Supreme Court held that the act of borrowing money was incidental to the carrying on of the business and the loan obtained was not an asset or advantage of enduring nature as the expenditure was made for securing the use of money for a certain period. The Supreme Court observed that a loan is a liability and has to be repaid and that, therefore, it is erroneous to consider a liability as an asset or an advantage of an enduring nature. According to the revenue if the interest paid on the money borrowed for the business cannot be treated as a capital expenditure, it cannot for the same reason be treated as cost of the machinery which is a capital asset. Mr. Balasubrahmanyan for the revenue also relied on the decision of the Supreme Court in Sitalpur Sugar Works Ltd. v. Commissioner of Income-tax in support of his contention that depreciation and development rebate cannot be allowed on the interest paid because no tangible asset was acquired nor any improvement was made to the machinery to increase its value by incurring the expenditure. In that case the assessee-company had a sugar factory at Sitalpur. As good quali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel for the company, however, urges that in the matter of ascertaining the "actual cost to the assessee" for the purpose of depreciation and development rebate one must make the distinction between the period before the factory begins to work and later, that the normal commercial and accountancy practice is to capitalise all the expenditure incurred in connection with the acquisition of the machinery and its erection and treat it as the cost of the machinery, that such a commercial and accountancy practice has been accepted all the world over, and that such capitalisation cannot be overlooked by the income-tax authorities. It is also stated that the provisions of the Income-tax Act and the Rules contemplated the inclusion of erection or installation charges as part of the cost of the plant. He refers to Part I to Appendix I to the Income-tax Rules, 1922 and submits that the depreciation is allowed at a certain percentage on the "written down value" of the asset either as factory-wise, plant-wise or item-wise and that if the depreciation is allowed at a certain percentage of the cost of the factory it would necessarily include the erection and installation charges. Mr. Swami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s point out, at page 448, in paragraph 586, that the cost of a unit is not limited to its purchase price but includes such items as customs duty, expenditure incurred in transporting the unit to the place where it is to be installed and during the operation and also the cost of its installation excluding, however, any structural alterations to the building which the installation may have necessitated. It is, however, found that the above passages are with reference to the provisions of the Australian Income-tax Assessment Act which are somewhat different. Apart from saying that the courts have always interpreted the meaning of "cost to the assessee" as including any expenditure incurred by him in connection with the acquisition of the asset, Mr. Swaminathan also says that the commercial and accountancy practice is always to capitalise the expenditure incurred in connection with the acquisition of the machinery so that the depreciation and development rebate could be claimed thereon. It is stated that if expenditure were in fact incurred in connection with the purchase of the machinery long before the factory commences to work, the amounts so incurred cannot either be claimed as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and permits the interest payments to be treated as capital as representing the cost of construction of the work or building or the provision of the plant, as the case may be. It is said that this section has, in a way, given recognition to the commercial and accountancy practice of capitalising the interest payments towards the cost of construction of works or of installation of the plant. The learned counsel for the revenue, however, points out that the commercial or accountancy practice is entirely irrelevant for the purpose of considering the question whether interest payment in this case is part of the actual cost of machinery, and that such a question has to be decided with reference to the relevant provisions of the Income-tax Act and not with reference to the so-called commercial and accountancy practice of capitalising the interest payments as part of the cost of the capital asset. He refers to the following authorities in support of his contention that commercial and accountancy practice has altogether to be ignored. In Commissioners of Inland Revenue v. Alexander Von Glehn & Co. Ltd. Warrington L. J. said: "Now the first thing I desire to say about it is that in my opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nery and that will go to add to his actual cost of the machinery. We are inclined to agree with the decision of the Calcutta High Court in Commissioner of Income-tax v Standard Vacuum Refining Co. of India Ltd., already referred to, though we may not entirely agree with the reasoning given in that case. The decision in Commissioner of Income-tax v. Challapalli Sugars Ltd., which also deals with interest payments made on the capital borrowed for the acquisition of machinery of course takes a different view. In that case it was held that the words "actual cost" in section 10(2)(vi) of the Indian Income-tax Act, 1922, mean the sum of money which a person expends or lays out for acquiring the machinery and that it will not include the payment made towards interest on borrowed capital used for the acquisition of the machinery. But we are of the view that the said decision overlooks the significance of the words "actual cost to the assessee". If the statute has merely used the word "actual cost" then it is possible to say that the interest payments in question cannot come in within the expression. The intention of the legislature in using the expression "actual cost to the assessee" appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lose that the foreign tours were undertaken only for the purpose of getting the collaboration agreement from the West German firm. Sri L. G. Balakrishnan, one of the directors, made a trip to West Germany on May 31, 1960, and had expended Rs. 10,763. The above trip was long before the collaboration agreement which was entered into at Munich on 1st August, 1960, and, therefore, it should be taken that the trip was undertaken only for the purpose of choosing the foreign collaborator. Likewise the travel expenses of Sri L. G. Varadarajulu, another director, for his foreign trip on July 6, 1960, were incurred long before the date of collaboration agreement and, therefore, it should be taken to be only in connection with the collaboration agreement, and not for the purchase of the machinery. The subsequent two foreign trips by the said L. G. Varadarajulu were on March 31, 1961, and February 13, 1962. These trips were long after the collaboration agreement and are claimed to be specifically undertaken for the purpose of purchasing the machinery. On behalf of the revenue it is stated that under clause 4 of the collaborator's agreement, the scheme regarding the selection and purchase of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the expenditure was incurred in connection with the selection, inspection and supervision of the machinery purchased. Therefore, we have to answer question No. 2, technically in favour of the revenue, the result being that the Tribunal has to consider afresh this item of foreign tour expenses in the light of what has been stated above. As regards the third question which relates to the payment of Rs. 17,143 to the foreign collaborators as per the terms of the collaboration agreement dated August 1, 1960, it is seen that the said payment was "for the elaboration of the scheme for the transmitting arrangement of their experiences and all their assistance for the duration of the free consulting period". We agree with the Tribunal that the payment made for getting the technical know-how for erection of the factory for the production of the chains therein could not be considered as part of the actual cost of the plant and machinery. It is true that a scheme comprising of all the machineries required for the manufacture of chains will have to be elaborated and submitted by the collaborators to the assessee, and clause 4 of the agreement also provides that the manufacturer at Fra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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