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TMI Blog1969 (9) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... ustrial 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. No part of the above amount can, therefore, be taken as expenditure which can be attributed to the erection of the machinery or other assets on which depreciation is allowable, said the Income-tax Officer. Aggrieved by that order of the Income-tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner, Vijayawada. The appellate authority by its order dated 30th March, 1963, di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (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 is entitled to certain deductions by way of certain allowances and one such allowance is depreciation allowance in respect of machinery, the property of the assessee. The allowance allowable is at a certain prescribed percentage on the written down value. There are three purposes for which it becomes necessary to ascertain the original actual cost to the assessee of the asset in respect of which depreciation allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cinema theatre, the said term would include the payment made to a third party for assistance in preparing plans for the construction and for securing permits, priorities, import licences and foreign exchange for the materials. It will include a profit paid by him to a contractor if one has been employed. In other kinds of assets, other sorts of expenditure might be included. No hard and fast rule can be laid down as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 services rendered or supervision made by technicians to select and erect the machinery and expenses incurred in that behalf. Because while interest is paid not on the acquisition of the asset but on borrowed capital and the fact that the borrowed money has gone into the acquisition of the plant may be a factor but is certainly not directly or intimately connected with the acquisition of the asset itself. The interest paid theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 respect of borrowings which are used to finance capital expenditure. In no circumstances should imputed interest be capitalised, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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-tax is a case which pertains to section 10(2)(iii) and renders us no assistance in this enquiry. In that case, the assessee-firm, which carried on the business of bleaching, dyeing and printing cloth, borrowed money in the year of account in order to extend its business, purchased land and erected additional plant and machinery and paid interest on the borrowed capital. In its assessment to income-tax in the relevant assessment year the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 including cement, steel and petrol for transport, in securing import licences for 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 borrowed moneys on debentures in June, 1953, interest to run from that date, and utilised the amount along with other moneys financed by it for setting up a refinery which started work on September 1, 1954. All expenses incurred during the period of construction including a sum of Rs. 23,53,284 being the interest which had accrued on the aforesaid debentures from the date of the borrowing to the date of commencement of the business were capitalised an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riate 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 similarity that example bears with the payment of interest is not quite clear. Merely because a person is hard pressed for money and has necessarily to borrow for the purpose of acquiring an asset, that by itself need not drive one to the conclusion that payment of interest since it became essential to a particular person forms part of acquisition cost of the machine. We have already indicated and we are supported by an English authority of the House of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 expressed our opinion in that behalf. This is all the reasoning which the learned judges have given to reach the conclusion to which they reached that interest paid on borrowed capital forms part of the actual cost of the machinery to the assessee within the meaning of section 10(2)(vi). With profound respect to the learned judges who expressed that opinion, we find it very difficult to accept that view as correctly interpreting section 10(2)(vi) read with section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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