9911796707
TMI Blog1974 (5) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... as a separate balance-sheet in respect of the rayon unit which was described as J. K. Rayon branch. The book value of buildings and machinery of the rayon factory was shown at Rs. 3,10,03,636 on which depreciation and development rebate were claimed. The assesseecompany had taken a loan of Rs. 90 lakhs from the U. P. Government for the specific purpose of setting up the rayon factory. The total cost of Rs. 3,10,03,636 upon which depreciation was claimed included a sum of approximately Rs. 25 lakhs consisting of preliminary expenses incurred on the installation of the machinery and interest paid to the U. P. Government and to the foreign suppliers from whom the assessee had purchased machinery on deferred payment basis. The break-up of the sum of Rs. 25 lakhs as set out in the order of the Income-tax Appellate Tribunal is as under : Rs. (1) Interest on loan of Rs. 90,00,000, taken from the Government of U. P. for specified purpose of setting up of the Rayon factory 14,33,471 (2) Interest paid to the foreign suppliers of machinery on deferred payment terms 6,46,040 (3) Fees paid to the U: P. Government for survey of the building and machinery of J. K. Rayon mortgaged wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its and gains. Clause (vi) of sub-section (2) provides for allowance, on account of depreciation of buildings, machinery, plant or furniture which are used for purposes of business and clause (vib) provides for an allowance on account of development rebate on plant and machinery. These two provisions are extracted below : "10(2)(vi) in respect of depreciation of such buildings, machinery, plant and furniture being the property of the assessee, a sum equivalent, where the assets are ships other than ships ordinarily plying on inland waters, to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed." 10(2)(vib) in respect of a new ship acquired or new machinery or plant installed after the 31st day of March, 1954, which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of acquisition of the ship or of the installation of the machinery or plant, equivalent to-- ....... (ii) in the case of machinery or plant installe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry and to put it in working order. This principle is based upon pure commonsense and does not require any authority to support it. But, if one were to look for an authority one would find ample authority in the books of accountancy. It is now well known that a sound system of accounting is as much an integral part of modern business as is the production and sale of the goods. From the accountancy point of view, all preliminary expenses directly connected with acquisition of fixed business assets like buildings, plant, machinery, etc., are to be capitalised and added to the total cost. What type of preliminary expenses are to be capitalised and added to the total cost will be found in the following authorities on accountancy. The Research Committee of the Institute of Chartered Accountants of India have published a book called Statement on Auditing Practices (Members' Handbook Series No. 1, New Delhi, 1964). In this book have been enumerated the preliminary expenses which may be capitalised and added to the cost of the fixed assets utilised in business. The following extracts are relevant : In para. 2.5, page 11, is to be found the following statement : "Fixed assets should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the interest so paid could, in respect of the period in question be charged to capital, i.e., as forming part of the expenditure itself." William Pickles, Accountancy, second edition in conjunction with G.W. Dunkerly (London: Sir Isaac Pitman & Sons. Ltd., 1955) at page 944 says : "Where a company raises share capital and out of the proceeds defrays the expenses of the construction or any works of buildings or provision of plant which cannot be made profitable for a lengthened period, the 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 so paid by way of interest." Arthur W. Homes, Advanced Accounting (Chicago : Richard D. Arwin Inc., 1947) observed at page 353 : "When a company constructs fixed assets for its own use, there arises the question of the costs to be included in the total cost of the asset constructed. The cost of all materials used, including such incidental costs as transportation storage and inspection of the materials should be included ; likewise wages paid to regular employees engaged on the construction and to workers hired specifically for construction purposes. Special cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the net purchase price or construction cost of the asset, transportation, cost of installation, repairs at the time of purchase to a property acquired in a partially worn-out condition, and (in the case of property under construction) taxes, insurance and interest Lastly, Ronald A Iraish, Chartered Accountant (Aust.), Auditing for Students (Australia : The Law Book Co. of Australia Pvt., 1952) observed at page 188 : "The Companies Act of each State provides that where a company issues shares to secure funds for construction of works or building or to provide plant which cannot be made profitable for a lengthened period, the company may pay interest on so much of the capital for the time being paid up, for the period and subject to the restrictions in the Act, and may charge the interest so paid to the capital cost of the works, buildings or plant." Section 208 of the Companies Act which reads as under also permits the capitalisation of interest on borrowed capital : "208. (1) Where any shares in a company are issued for the purpose of raising money to defray the expenses of the construction of any work or building, or the provision of any plant, which cannot be made profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciated by the various authorities on accountancy enumerated above, there is no difficulty in holding that items Nos. 3, 4 and 6 are preliminary expenses incurred in connection with the setting up of the rayon factory before it went into production and as such could be validly capitalised and added to the actual cost. There was, however, a lot of debate with regard to the remaining two items of interest. There is not much difficulty so far as item No. 2 is concerned. The sum of Rs. 6,46,040 has been paid by the company to foreign suppliers of machinery from whom the machinery had been purchased on deferred payment basis. As such, the interest is really the part of the price paid by the company. A seller may break up the price into various components while making out the invoice, such as landed cost, plus margin of profit, plus octroi, plus excise, plus sales tax and plus interest, if the payment is not made at the spot. All these items from the purchaser's point of view are nothing but component parts of the ultimate price which he has to pay. If the assessee-company had made payment in cash, it could have saved the sum of Rs. 6,46,040 paid by way of interest. But as it purchased th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost thereof, if any, as has been met directly or indirectly by Government or by any public or local authority ........ It may be stated here that section 10(5)(c) and the Explanation appended thereto is an exception to the main provision contained in section 10(2)(vi), which permits depreciation on the actual cost to the assessee which in plain language means actual cost incurred by the assessee irrespective of the source from which the funds came to meet such cost. Now in the case of an asset inherited or acquired by gift the assessee would incur no cost and, as such, no depreciation would be allowable. Similarly, if the assessee invests borrowed capital in the acquisition of such assets, the assessee would still be entitled to the depreciation on the entire cost because the source of the capital with which the business assets were acquired is wholly immaterial. The Explanation to section 10(5)(c) clearly envisages a case where the Government or a public or local authority gives some subsidy or grant for the acquisition of an asset. It does not apply to a case where a loan is given for that purpose. Now let us examine the case law on the point. In Commissioner of Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uisition of the asset. In support of this view the learned judges have relied upon the following observations of Lord Atkin in Corporation of Birmingham v. Barnes : "What a man pays for construction or for the purchase of the work seems to me to be the cost to him ; and that whether some one has given him the money to construct or purchase for himself ; or before the event has promised to give him the money after he has paid for the work ; or after the event, has promised or given the money which recoups him what he has spent ......... Here there are no qualifying words, and I think the phrase guides one to the conclusion that expenditure on capital improvements by the person regardless of source will be the same as 'actual cost' to the person also regardless of source." With great respect, the learned judges of the Andhra Pradesh High Court have not correctly appreciated the context in which these remarks were made by Lord Atkin. There the question arose as to what was the "actual cost" to the Birmingham Corporation for purposes of depreciation allowance under the English Income Tax Act of a tramway when a part of the cost was contributed by the Dunlop Company and the Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
