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TMI Blog1979 (1) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... finances necessary for acquiring foreign equipment and services required for the Trombay Thermal Project. The assessee-company had also obtained the sanction as required by s. 107 of the Indian Companies Act, 1913, for payment of interest out of capital on the newly issued shares. The Government of India had sanctioned payment of interest at the rate of 4% p.a. for a period not exceeding 3 1/2 years. During the assessment years 1955-56, 1956-57 and 1957-58, the total amount of interest paid on capital raised was Rs. 6,75,501. During the previous year relating to the assessment year 1958-59, this amount of Rs.6,75,501 was allocated to various items of plant and machinery and was thus capitalised. The company claimed depreciation on the val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outgoing for the company irrespective of the profits or reserve. The Tribunal also held that the company was perfectly justified in capitalising the interest paid as a part of the cost of construction. Thus, the Tribunal held in favour of the assessee that the company was entitled to the claim for depreciation for the assessment years in question. The revenue then asked for two questions to be referred to this court. One question was : " Whether, on the facts and in the circumstances of the case, the payment made by the assessee to its shareholders on the issue of new 60,000 ordinary shares in 1953 was by way of dividend or by way of interest as such on the capital ? " The second question was : " Whether, on the facts and in the cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as the second question is concerned, in our view, it is concluded by the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The Supreme Court was dealing with the question as to whether interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery formed part of the " actual cost " of the assets to the assessee within the meaning of the expression in s. 10(5) of the Indian I.T. Act, 1922, and whether the assessee would be entitled to depreciation allowances and development rebate with reference to such interest. The Supreme Court has held in that case that the expression "actual cost" had not been defined and it should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed prior to the assets coming into production, that is, during the erection stage and the Supreme Court pointed out : " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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