TMI Blog1965 (8) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 per cent. interest from the public, the interest to run from June, 1953. This sum together with rupees twelve crores financed by the company were used in setting up the refinery for which plant and machinery were imported from abroad. The refinery started work on the 1st September, 1954, from which date depreciation began to be calculated. The assessee-company had capitalised all the expenses incurred during the period of construction including the interest of ₹ 23,53,284, which had accrued from the date of borrowing to the date of the commencement of the business on the aforesaid debenture loan and claimed that depreciation must be allowed on the full amount. The only point for consideration is whether the aforesaid sum of ₹ 23,53,284, paid as interest from the date of borrowing to the date of the commencement of business on the aforesaid debentures, that is to say, during the period of the setting up of the refinery can be said to form part of the actual cost of the refinery. The argument on behalf of the revenue is that, as the said sum was paid to the debentureholders for procuring the loan, it cannot enter into the cost of construction. In other words, acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it cannot be said that in an appropriate case the employment of an erection engineer is not essential to the erection of a factory. Similarly, where an assessee cannot acquire a plant except with the aid of a loan, the loan is essential to him for the acquisition of the plant, and payment of interest being essential to the procurement of loan, payment of interest too must be regarded as essential to the acquisition of the plant. It is contended on behalf of the revenue that in that case when interest is paid even after the commencement of business such interest too must be added to the cost of the plant. The short answer is that such interest is paid after the plant has been established and hence, it cannot form part of the cost of establishing the plant. On 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 payment of interest should not be an element in such cost. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and such interest is paid on share capital raised on debentures issued for obtaining a capital asset, he does so according to commercial principles. Therefore, in our opinion, in the instant case, if we apply the principles of accountancy and for the matter of that the ordinary commercial principles there is no reason for excluding the interest paid on the debenture issued till the plant is ready for production from the actual cost of construction. On behalf of the assessee reference has been made to the case of Hinds v. Buenos Ayers Grand National Tramways Co. Ltd. [1906] 2 Ch. 654, 660, in support of the contention that in the instant case interest on debentures certainly forms part of the cost to the assessee within the meaning of section 10(5)(a). In that case, a tramway company, for the purpose of converting its undertaking to a system of electric traction, issued conversion debenture stock. The directors passed resolutions that the interest on this stock should be treated as part of the cost of construction, and chargeable to capital account during the construction of the works. The company commenced the works and were carrying them out themselves without employing a contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at interest, during construction, to capital account. On behalf of the revenue it is conceded that the interest paid on the debentures issued is certainly chargeable to capital account but that the interest cannot form part of the cost of construction for the purpose of depreciation and development rebate. If the interest paid is chargeable to capital account, if it is paid on borrowings made for the purpose of having a capital asset, it is difficult to understand why interest should not be taken into consideration in determining the actual cost to the assessee in acquiring the capital asset. Interest may be paid as a consideration for procuring the money for the purpose of construction, but if the procuration of the money is necessary for the purpose of construction and if the money so spent represents cost of construction, the interest paid on such money, in our opinion, should be added in order to determine the actual cost. The actual cost is the money so spent plus interest actually paid thereon. The Explanation to sub-section (5) of section 10 says that for the purpose of this sub-section, the expression actual cost means the actual cost of the assets to the assessee r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the plot on the 4th June, 1948, by which the latter agreed to help the assessee in getting prepared suitable plans and designs for the cinema theatre and other buildings, in obtaining permission from the Bombay Municipality for constructing an additional sixth floor, in procuring the required finance to enable the assessee to complete the construction of a modern theatre and other buildings, in procuring various priorities and permits for scarce materials including cement, steel and petrol for transport, in securing import licences and the various goods for the purpose of the cinema theatre, in securing foreign exchange facilities to enable the assessee to import from abroad the goods required for the purpose of the theatre and other buildings and to advise the assessee from time to time during the course of construction of the cinema theatre and buildings. In consideration of the aforesaid services and assistance rendered by the owner of the plot, the assessee agreed to pay to the owner a sum of ₹ 3,30,000 within a period of five years by twenty quarterly instalments of ₹ 16,500. The amount of ₹ 3,30,000 was debited by the assessee at the close of the account ..... X X X X Extracts X X X X X X X X Extracts X X X X
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