TMI Blog1974 (10) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... wered the following question on reference made to it under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as "the Act"), against the assessee and in favour of the revenue : "Whether the interest payment of Rs. 2,38,614 represents an element on 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?" The matter relates to the assessment year 1959-60, the corresponding accounting year for which ended on June 30, 1958. The assessee is a public limited company engaged in the manufacture and sale of sugar. The company went into production on January 22, 1958. The assessee-company had borrowed considerable sums of money from the Industrial Finance Corporation of India for the installation of machinery and plant. During the relevant year and for the period prior to the commencement of its business the assessee paid Rs. 2,38,614 as interest. The case of the assessee is that the payment of interest added to the cost of machinery and plant to the assessee and as such while calculating depreciation admissible to the assessee, the interest paid should be tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1959-60, the following additional question was also answered by the High Court against the revenue and in favour of the assessee : "Whether the wealth-tax payable by the assessee under the provisions of the Wealth-tax Act of 1957 is allowable as a deduction under section 10(1) or under section 10(2)(xv) of the Indian Income-tax Act, 1922 ?" The assessee-company in these two appeals, M/s. Standard Vacuum Refining Co. of India Ltd. (now known as "Hindustan Petroleum Corporation Ltd."), was incorporated on July 5, 1952, and commenced its business in September, 1954. In June, 1953, it borrowed rupees four crores on debenture at the rate of Rs. 51 per cent. interest from the public. The interest was to run from June, 1953. The above amount together with rupees twelve crores financed by the company was used in setting up a refinery for which plant and machinery were imported from abroad. The refinery started work on September 1, 1954, from which date depreciation began to be calculated. The assessee-company capitalised all the expenses during the period of construction, including the interest amounting to Rs. 23,53,284 which had accrued from the date of borrowing to the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that section provides that such profits or gains shall be computed after making the allowances specified therein. Clause (vi) of that sub-section deals with deductions on account of depreciation and provides, inter alia, that deductions would be permissible in respect of depreciation of machinery or plant used for the purpose of business and, being the property of the assessee, of a sum equivalent to such percentage on the written down value thereof as may in any case or class of cases be prescribed. "Written down value" has been defined in sub-section, (5) of section 10, in the case of assets acquired in the previous year, the actual cost to the assessee, and in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act or any Act repealed thereby, or under executive orders issued when the Indian Income-tax Act, 1886, was in force. The definition is subject to provisos, but we are not concerned with them. The Explanation which has been added to sub-section (5) reads as under : "Explanation.--For the purposes of this sub-section the expression 'actual cost' means the actual cost of the assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Capital" as under : In the ordinary course of affairs no dividends may be paid unless such dividends are paid out of profits : interest on debentures (being a charge) is, however, payable whether profits are earned or not. Where company raises share capital and out of the proceeds defrays the expenses of the construction of any works or buildings or provisions 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 paid by way of interest, provided that the restrictions imposed under section 65 of the Companies Act, 1948, are complied with." It is further observed : "The interest so paid is 'capitalised', that is to say, it is treated as part of the cost of construction being added thereto (similarly to legal expenses of acquiring property or brokers' charges on purchasing investments)." In Spicer Peglar's Practical Auditing, 11th edition, it is observed on pages 190-191, under the head "Interest Payable Out of Capital During Construction" : "Interest on debentures issued for a similar purpose can be charged to capital during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of machinery, and (iv) Interest on borrowings to the extent specified in paragraph 2.22." Relevant part of paragraph 2.22 reads as under : "2.22. The question often arises as to whether interest on borrowings can be capitalised and added to the fixed assets which have been created as a result of such expenditure. The accepted view seems to be that in the case of a newly started company which is in the process of constructing and erecting it s plant, the interest incurred before production commences may be capitalised. 'Interest incurred' means actual interest paid or payable in respect of borrowings which are used to finance capital expenditure. In no circumstances should imputed interest be capitalism, such as interest on equity or preference capital at a notional rate. Interest on capital during construction paid in accordance with the provisions of section 208 of the Companies Act, 1956, may however, be capitalised as permitted by that section. Interest on monies which are specifically borrowed for the purchase of a fixed asset may be capitalised prior to the asset coming into production, i.e., during the erection stage. However, once production starts, no i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would be higher, if the machinery for the plant is acquired and installed with borrowed money compared to the cost of such plant in case the money spent for the acquisition and installation of the above machinery is that which belongs to the assessee. This undoubtedly is so but it is inevitable and should not detract from the conclusion at which we have arrived. Let us take the case of an architect constructing his house. In case the architect engages another architect to prepare the plan for his house and to supervise its construction and pays remuneration to that other architect for this purpose, the amount so paid to the other architect shall have to be taken into account in arriving at the figure of actual cost of the house. In case, however, the architect constructing the house himself prepares the plan of the house and supervises its construction, he would naturally be not paying any remuneration to himself for the aforesaid work. The result would be that in the latter event the actual cost of the house would be less compared to the cost of the house in the former event even though the house in all other respects is identical. It would, therefore, follow that for similar fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the period of construction ; and that is what they are out of pocket during the construction of that mile of line. Now, it seems to me that the company are entitled--I do not say that they are bound to do it--if they think fit to charge in their accounts as the cost of that mile of line not only pound 10,000, but the pound 10,000 and the interest on it during the period of construction. Mr. Desai has referred to the decision of the House of Lords in the case of Corporation of Birmingham v. Barnes (H. M. Inspector of Taxes). The appellant corporation in this case entered into an agreement with a company to lay a tramway track and establish a tramway service to the company's works. By virtue of the work having been completed and the service established by a certain date, the corporation received from the company, in accordance with the terms of the agreement, a specified sum. The corporation also spent considerable sums of money on the renewal of their tramway tracks and received in that connection grants from the Unemployment Grants Committee. These grants were made under certain conditions to local authorities to assist them in carrying out at once approved schemes of public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset or an advantage of enduring nature. This court accordingly held that the amount of Rs. 84,633 was an allowable expenditure, This case too is of no assistance to the revenue. The appellant-company in that case at the time it raised the loan was a running concern. Unlike the assessees in the present appeals, the loan raised by the appellant-company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in the actual cost of the plant did not arise in that case. It may be mentioned that as against the view take by the Andhra Pradesh High Court in the judgment which is the subject-matter of the appeal, three other High Courts have taken the contrary view and have held that interest paid in such circumstances can be capitalised and included in the actual cost of the machinery and plant. The decision of the Calcutta High Court in which the contrary view has been taken is the subject-matter of appeal before us. The view of the Calcutta High Court has been followed by the Madras High Court and the Allahabad High Court. The decision of the Madras High Court is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iia) was inserted and was deemed always to have been inserted in clause (a) of section 40 of the Income-tax Act, 1961, as under : "(iia) any sum paid on account of wealth-tax. An Explanation was added to the above sub-clause, but it is not necessary to reproduce the same. Section 40 of the Income-tax Act, 1961, specifies the amounts which shall not be deducted, in computing the income chargeable under the head "profits or gains of business or profession". According to section 4 of the amending Act, nothing contained in the Indian Income-tax Act, 1922, shall be deemed to authorise, or shall be deemed ever to have authorised, any deduction in the computation of the income of any assessee chargeable under the head "profits and gains of business, profession or vocation" or "income from other sources" for the assessment year commencing on the 1st day of April, 1957, or any subsequent assessment year, of any sum paid on account of wealth-tax. In view of the above provisions, it is plain that any sum paid on account of wealth-tax cannot be deducted in computing the income of an assessee chargeable under the head "Profits and gains of business, profession or vocation" or "Income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a permissible deduction was that this court held that the same was to be the decision on that point in Civil Appeal No. 1784. As against that, Mr. Desai contends that there was no finding by this court before July 15, 1972, in Civil Appeal No. 1784 that the wealth-tax paid by the assessee was deductible in computing the total income of the assessee. There is, in our opinion, force in the submission of Mr. Palkhivala. As stated above, arguments were heard together on February 1, 1972, in Civil Appeals Nos. 1784, 1694, 1730 and 1831, on the question as to whether the wealth-tax paid by the assessee was a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act. On the conclusion of the arguments on that point, this court found that an additional question arose in Civil Appeal No. 1784 on the point as to whether the interest. payable on loan was part of the actual cost of the assets. The Constitution bench after hearing arguments on this additional point for some time directed that Civil Appeal No. 1784 along with the connected Civil Appeal No. 1785 should be posted for hearing before a Division Bench after pronouncement of judgments in Civil Appeals Nos. 1694 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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