1969 (9) TMI 23 - HC - Income Tax

Interest paid on borrowed capital - Whether the interest payment of Rs. 2, 38, 614 represents an element of the actual cost of the machinery plant etc. to the assessee and as such depreciation and development rebate are admissible with reference to this amount also - Interest paid on borrowed capital forms part of the actual cost of the machinery to the assessee within the meaning of s. 10(2)(vi) - Reference answered in the negative in favour of the department

Summary

Issues Involved:

1. Whether the interest payment of Rs. 2,38,614 represents an element of the actual cost of the machinery, plant, etc., to the assessee.
2. Whether depreciation and development rebate are admissible with reference to the interest payment amount.

Issue-wise Detailed Analysis:

1. Whether the interest payment of Rs. 2,38,614 represents an element of the actual cost of the machinery, plant, etc., to the assessee:

The core issue revolves around the interpretation of the term "actual cost" under sections 10(2)(vi) and 10(5) of the Income-tax Act, 1922. The assessee, a public limited company engaged in sugar manufacturing, claimed that the interest payment of Rs. 2,38,614 on borrowed capital used for installing machinery should be included in the actual cost of the machinery. The Income-tax Officer rejected this claim, stating that interest paid is a revenue expenditure and not part of the capitalized cost of the machinery. The Appellate Assistant Commissioner disagreed, stating that interest paid during the construction period increases the cost of construction and should be included in the capital cost. The Income-tax Appellate Tribunal upheld this view, noting that all expenditures incurred for acquiring and installing assets should be included in the cost to the assessee.

The High Court, however, concluded that the interest paid on borrowed capital does not form part of the actual cost of the machinery. The court emphasized that the term "actual cost" means the amount expended or laid out by the assessee in acquiring and installing machinery, excluding interest on borrowed capital. The court supported this view by referring to the dictionary meanings of "actual" and "cost" and the statutory provisions indicating that actual cost pertains to the expenditure directly incurred for acquiring the asset. The court also cited the Corporation of Birmingham v. Barnes case, where Lord Atkin stated that the cost to a person is what he has expended, regardless of the source of the money.

2. Whether depreciation and development rebate are admissible with reference to the interest payment amount:

The court examined whether the interest payment could be considered for depreciation and development rebate. It noted that sections 10(2)(vi) and 10(5) allow depreciation on the actual cost of machinery, which does not include interest on borrowed capital. The court observed that the legislature has explicitly allowed deductions for interest on borrowed capital in other sections, such as section 10(2)(iii), but did not include such provisions in sections 10(2)(vi) and 10(5). Therefore, the absence of such a provision indicates that interest paid on borrowed capital should not be included in the actual cost for depreciation purposes.

The court also addressed the argument that accounting practices allow capitalization of interest. It stated that while accounting practices may permit such capitalization, the statutory language of the Income-tax Act does not support this interpretation. The court emphasized that the actual words of the statute must be considered, and the term "actual cost" should not be interpreted to include capitalized interest.

The court reviewed relevant case law, including Calico Dyeing and Printing Works v. Commissioner of Income-tax, G. J. Coelho v. State of Madras, and Habib Hussein v. Commissioner of Income-tax, to support its conclusion. It found that these cases did not support the inclusion of interest in the actual cost for depreciation purposes. The court also disagreed with the decision in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd., which allowed depreciation on capitalized interest, stating that the reasoning in that case was not convincing.

In conclusion, the court held that the interest payment of Rs. 2,38,614 does not represent an element of the actual cost of the machinery, plant, etc., to the assessee. Consequently, depreciation and development rebate are not admissible with reference to this amount. The reference was answered in the negative, in favor of the department and against the assessee, with the assessee required to pay the costs to the department.