TMI Blog1969 (9) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... the manufacture and sale of sugar. The company went into production from January 22, 1958. Its first accounting period which relates to 1959-60 assessment year ended on June 30, 1958. The company claimed depreciation and development rebate on the sums which they paid by way of interest. The payment of interest was Rs. 2,38,614. It appears that the company borrowed considerable sums of money from the Industrial Finance Corporation of India for the installation of machinery and other assets. It is on this borrowed capital that the interest was paid. The interest related to the period prior to the commencement of the business from the date of the borrowing. The assessee contended that this payment of interest added to the cost of machinery, plant, etc., to the assessee and as such while calculating depreciation admissible to the assessee the interest paid should be treated as a part of the cost of the machinery, plant, etc., to the assessee. The Income-tax Officer rejected this claim holding that interest paid from year to year is an admissible item of revenue expenditure. No depreciation, however, can be allowed on the capitalised amount of the expenditure incurred under interest. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to sub-section (5), however, it appears that it is meant for the purpose of that sub-section. It states : "......the expression 'actual cost' means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by Government or by any public or local authority, and any allowance in respect of any depreciation carried forward under clause (b) of the proviso to clause (vi) of sub-section (2) shall be deemed to be depreciation 'actually allowed '. " It becomes immediately plain that this is a restricted definition of the term and is not very useful for the present enquiry. Section 43(1) is the new provision for Explanation 1 to sub-section (5) of section 10 of the old Act. It is almost on the same lines and does not render much assistance in reaching the conclusion on the problem before us. We have, therefore, to find out the true meaning of this term and its scope in the context of other provisions of the Act read with section 10 itself. Now, the provisions of sections 10 indicate that in the computation of the tax payable by an assessee under the head " Profits and gains of business " the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry provision, i.e., section 10(2)(vi), permits an allowance to the assessee carrying on trade or business in respect of diminution in the value of their plant or machinery by reason of wear and tear. The assessee makes a deduction obviously from the profits and the deduction would be based on the value of the machinery and its expected life. The phrase " actual cost ", therefore, plainly indicates that the section is intended to confine the relief to an aggregate equal to the sum of money which the person has expended out of his own resources, called cost, of which the burden has ultimately fallen upon him. In other words, what a person expends on machinery seems to us to be the actual cost to him of acquiring and installing that machinery. The term therefore guides one to the conclusion that all expenditure on the machinery by the assessee will be the actual cost to the assessee. The actual cost therefore to the assessee is what he in fact expends or lays out for acquiring and installing the asset, in this case the machinery. It is true that such an expenditure would vary from assets to assets and would depend upon its nature and availability. For example, in a case of cost of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t capital which he used in acquiring the assets on which the depreciation is claimed. In Corporation of Birmingham v. Barnes, Lord Atkin observed at page 30 : " 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." The learned Lord observed further at page 311 : " Here there are no qualifying words, and I think the phrase guides one to the conclusion that the expenditure on capital improvements by the person, regardless of source, will be the same as actual cost to the person, also regardless of source ". We do not find any valid and compelling reason to hold that where a plant is constructed out of borrowed moneys, interest paid on the loan up to the date of commencement of the business can be capitalised and treated as part of the actual cost of the plant. In our view, it would not be correct to treat the interest paid on the borrowed capital on par with the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (5) of section 10 in regard to other matter to make this matter also very clear. Wherever the legislature wanted the interest on borrowed capital to be given as deduction, the legislature expressly provided for it. The absence of any provision in this behalf, therefore, is meaningful and supports the view which we have taken. It was then argued that the accounting practice permits the capitalisation of interest and treats it as part of the cost incurred in acquiring the assets. Reliance in this behalf was placed on an extract appearing at page 15 of Members' Handbook Series No. 1 issued by the Institute of Chartered Accountants of India (Statement on Auditing Practices). Paragraph 2.19 at page 15 reads : " Interest on borrowings : The question often arises as to whether interest on borrowings can be capitalised and added to the cost of 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 its plant, the interest incurred before production commences may be capitalied. 'Interest incurred' means actual interest paid or payable in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar meaning in it, then the words are to be construed as having that particular meaning which may differ from the ordinary or popular meaning. But section 10 is not legislated for any particular trade, business or commerce. It is a general legislation applicable to all those who get caught in its net. That apart, " actual cost " does not appear to be a technical business, trade or commercial term used as, such and is known and understood in the way in which it is now sought to mean. The above-said extract does not make any claim of that sort. Furthermore, in order that an alleged trade, business or commercial use of a term shall prevail, it must appear, that such commercial meaning is the result of established usage in business, trade or commerce and that, at the time of the passage of the Act, such usage was definite, uniform and general and not particular, local or personal. No such case, in our view, is made out in this case. Moreover, we feel that the interpretation we have placed on the said term is more agreeable to the object and intention of the legislature. Let us then examine the authorities cited at the Bar. Calico Dyeing and Printing Works v. Commissioner of Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case was exclusively upon the language of the particular enactment, which fell for their Lordships' consideration and cannot be said to render any assistance to us. No observation in the said judgment is also useful for our purpose. Then comes Habib Hussein v. Commissioner of Income-tax. It is upon this decision that the two tribunals below have mainly relied. In that case, the assessee obtained a licence from the owner of a plot to enter upon the land and erect a cinema theatre, business premises and residential quarters on the land, on payment of a rental of Rs. 4,200 per month. For the purpose of erection of the theatre and starting the business, the assessee entered into an agreement with the owner of the plot, who was an influential businessman, 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 includin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmission amount which the assessee had paid for procuring the capital which went into the construction of the property. It was categorically observed : It is clear that the services mentioned in clauses (b), (c), (e) and (j) cannot be said to be in any manner connected with the acquisition of the depreciable assets." This decision supports the view which we have taken that not every item of expenditure which is indirectly or remotely connected would go as part of the cost of the asset but it is only those items which are directly and intimately connected with the acquisition of an asset that may be included in the term " actual cost " within the meaning of section 10(2)(vi). That is why their Lordships, while allowing some items, rejected the others. This decision, however, is not authority for the proposition that interest paid on the borrowed capital also comes within the term " actual cost " to the assessee. The only decision which takes the view which can be said to be contrary to our view is Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. We have, therefore, very closely and carefully examined this decision. In that case, the assessee-company bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny quarrel. Their Lordships, however, further observed : " When a capital asset is acquired by an assessee with his own money he is not required to pay any interest ; so it may be argued that payment of interest is not essential to the acquisition of a capital asset but this argument does not bear scrutiny. Employment of an erection engineer may be necessary in one case and may not be necessary in another. From this 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." With due respect to the learned judges, we find it very difficult to see the similarity between the instances mentioned. It may be that for the purpose of erection of a factory, consultation of an engineer in a particular case may not be necessary. But then since no cost on account is incurred it will not be computed towards interest. What ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cement of the business ? It cannot be actual cost before the commencement of the business and subsequent thereto become a borrowed capital for the purpose of business within the meaning of section 10(2)(iii). We do not, therefore, consider that this aspect should have any impact upon the question which falls for our consideration in this case. Their Lordships further stated : " 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." We have already stated that these two instances have very little in common between them, and as we are clearly of the opinion that the source of the capital is not relevant for the purpose of this enquiry, this reasoning also does not impress us much. Their Lordships then referred to the practice prevailing in the commercial circles to which we have already made reference and expre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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