TMI Blog1973 (9) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement, that a lump sum payment of Rs. 17,143 has to be made to the foreign collaborators as an indemnity for the elaboration of the scheme, for transmitting arrangement of their experience and all their assistance for the duration of the free consulting period. The said sum of Rs. 17,143 was paid on October 18, 1960, and this sum was transferred to the plant and machinery account on March 31, 1962. The three directors of the company and an engineer went abroad on various dates and incurred the following expenses: Name Date Expenses incurred L. G. Balakrishnan 31-5-1960 Rs. 10,763 L. G. Varadarajulu from 6-7-1960 to 13-2-1962 15,767 L. G. Nityanandan June 61 to October 61 6,018 (The above amounts were debited to the personal accounts of the respective parties and transferred to plant and machinery account on 31-3-1962). P. Ramachandran (Engineer) Oct. 61 to March 62 9,655 Other payments 509 ---------------- Rs. 42,712 ----------------- The company had expended up to March 31, 1962, a sum of Rs. 6,91,794 for setting up of the factory. Out of this sum, a sum of Rs. 1,92,890 was incurred to import raw materials, chemicals, etc., and the balance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual cost of the machinery and depreciation and development rebate has, therefore, to be allowed thereon, but that in respect of the sum of Rs. 17,143 representing payment to foreign collaborators the decision of the Appellate Assistant Commissioner was right. Both the department and the assessee sought references to this court and the following three questions have been referred, the first two at the instance of the department and the third at the instance of the company: "(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 33,000 representing interest on moneys utilised in purchase of machinery could be considered as forming part of the actual cost of the machinery and entitled to depreciation and development rebate ? (2) Whether, on the facts and in the circumstances of the case, the expenses Rs. 42,712 incurred on foreign trips could be considered as part of the actual cost of machinery. (3) Whether, on the facts and in the circumstances of the case, the expenses of Rs. 17,143 representing the payment to foreign collaborators was part of the actual cost of machinery entitled to depreciation and development rebate?" The finding of the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot, in its very nature, add to the value of the machinery, that the payment of interest is to discharge its liability as a borrower, that such a liability is alien to the concept of cost and, therefore, interest paid to discharge its liability as a borrower cannot be a component of the cost of the machinery. It is contended that liabilities being amounts owed by the company, they are not capable of being assessed as assets even though the liabilities have been incurred in connection with the acquisition of the machinery. The reasoning given by the Appellate Assistant Commissioner for upholding the claim of the assessee in this regard is that the money borrowed has been utilised for the purchase of the machinery and, therefore, the interest paid thereon should be capitalised. The Tribunal agreed with this view. The question is whether the interest paid on the amount borrowed for the purchase of the machinery could be capitalised and added to the cost of such machinery, and whether depreciation and development rebate could be claimed on such capitalised value. In Habib Hussein v. Commissioner of Income-tax the Bombay High Court held that the expression "actual cost to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e acquired by the assessee either out of his own savings or with borrowed capital. When capital asset is acquired with borrowed capital the assessee is ordinarily required to pay interest on such amount borrowed while the capital asset is being acquired, that is to say, until it is fit for the commencement of business... Whatever expenses are essential to the erection of the capital asset are certainly included in the actual cost to the assessee. Is the payment of interest essential to the acquisition of a capital asset ? 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 said that in an appropriate case the employment of an erection engineer is not essential to the erection of a factory. Similarly, where as cannot acquire a plant except with the aid of a loan, the loan is essential to the acquisition of the plant, and payment of interest being essential the procuremen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner of Income-tax. In that case the assessee had obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation by creating a charge on its fixed assets. In connection therewith it spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed the said amount as a business expenditure. The revenue contended that the said expenditure is of a capital nature and, therefore, could not be allowed as a deduction under section 10(2)(xv) of the Income-tax Act, 1922. Rejecting that contention the Supreme Court held that the act of borrowing money was incidental to the carrying on of the business and the loan obtained was not an asset or advantage of enduring nature as the expenditure was made for securing the use of money for a certain period. The Supreme Court observed that a loan is a liability and has to be repaid and that, therefore, it is erroneous to consider a liability as an asset or an advantage of an enduring nature. According to the revenue if the interest paid on the money borrowed for the business cannot be treated as a capital expenditure, it cannot for the same reason be treated as cost of the machinery which is a capital asset. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f discretion on the part of the assessing authority in the matter of grant of allowance and this will lead to inequity and that, therefore, the court had always to take the actual cost of the machinery as the "actual amount" expended for acquiring the same. The learned counsel, however, concedes that the actual cost has to necessarily include the insurance, and freight, if any, which have got a direct relation to the purchase of the machinery. Mr. Swaminathan, learned counsel for the company, however, urges that in the matter of ascertaining the "actual cost to the assessee" for the purpose of depreciation and development rebate one must make the distinction between the period before the factory begins to work and later, that the normal commercial and accountancy practice is to capitalise all the expenditure incurred in connection with the acquisition of the machinery and its erection and treat it as the cost of the machinery, that such a commercial and accountancy practice has been accepted all the world over, and that such capitalisation cannot be overlooked by the income-tax authorities. It is also stated that the provisions of the Income-tax Act and the Rules contemplated the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while dealing with the meaning of "cost price" point out that the cost price does not mean invoice price or purchase price which is the price as between the vendor and purchaser apart from charges for freight, delivery, duty, etc., and that it means cost to the taxpayer including charges in getting it into its existing condition and bringing it to its place. Dealing with the meaning of "cost of unit of property" for purpose of calculating depreciation, the learned authors point out, at page 448, in paragraph 586, that the cost of a unit is not limited to its purchase price but includes such items as customs duty, expenditure incurred in transporting the unit to the place where it is to be installed and during the operation and also the cost of its installation excluding, however, any structural alterations to the building which the installation may have necessitated. It is, however, found that the above passages are with reference to the provisions of the Australian Income-tax Assessment Act which are somewhat different. Apart from saying that the courts have always interpreted the meaning of "cost to the assessee" as including any expenditure incurred by him in connection with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be capitalised. For an existing business, the only interest which may be capitalised is interest paid for financing a completely new unit or a substantial expansion undertaken by the company. Even here only the interest on monies specifically borrowed for the new expansion may be capitalised and that only for the period before production starts." Section 208 of the Indian Companies Act, 1956, contemplates payment of interest on share capital in certain contingencies and permits the interest payments to be treated as capital as representing the cost of construction of the work or building or the provision of the plant, as the case may be. It is said that this section has, in a way, given recognition to the commercial and accountancy practice of capitalising the interest payments towards the cost of construction of works or of installation of the plant. The learned counsel for the revenue, however, points out that the commercial or accountancy practice is entirely irrelevant for the purpose of considering the question whether interest payment in this case is part of the actual cost of machinery, and that such a question has to be decided with reference to the relevant pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factory started functioning and this is in accordance with the normal commercial and accountancy practice. We are not, however, inclined to base our decision on the said commercial or accountancy practice. We are of the view that as the statute has specifically used the expression "actual cost to the assessee" the interest payments made on the amounts borrowed for the purpose of acquiring the machinery can be taken to be an expenditure incurred by the assessee in acquiring the machinery and that will go to add to his actual cost of the machinery. We are inclined to agree with the decision of the Calcutta High Court in Commissioner of Income-tax v Standard Vacuum Refining Co. of India Ltd., already referred to, though we may not entirely agree with the reasoning given in that case. The decision in Commissioner of Income-tax v. Challapalli Sugars Ltd., which also deals with interest payments made on the capital borrowed for the acquisition of machinery of course takes a different view. In that case it was held that the words "actual cost" in section 10(2)(vi) of the Indian Income-tax Act, 1922, mean the sum of money which a person expends or lays out for acquiring the machinery and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the company for the first time in India, and that there can be no doubt that such expenditure is of a capital nature. The Tribunal purported to follow the decision in Habib Hussein's case, and Ambica Mills' case. The learned counsel for the revenue contends that the finding of the Tribunal that foreign tours have been undertaken by the directors and the engineer in connection with the purchase of the machinery is based on no evidence and that in fact the materials in the case disclose that the foreign tours were undertaken only for the purpose of getting the collaboration agreement from the West German firm. Sri L. G. Balakrishnan, one of the directors, made a trip to West Germany on May 31, 1960, and had expended Rs. 10,763. The above trip was long before the collaboration agreement which was entered into at Munich on 1st August, 1960, and, therefore, it should be taken that the trip was undertaken only for the purpose of choosing the foreign collaborator. Likewise the travel expenses of Sri L. G. Varadarajulu, another director, for his foreign trip on July 6, 1960, were incurred long before the date of collaboration agreement and, therefore, it should be taken to be only in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will not enhance the value of the machinery purchased. We are, therefore, of the view that the Tribunal is not justified in taking the entire tour expenses as part of the cost of the machinery and that only such of those expenses which are directly relatable to the selection, inspection and supervision of the machinery that can be taken to add to the cost of the machinery. But we find that the Tribunal has not considered in detail each item of the tour expenses separately to find out whether the expenditure was incurred in connection with the selection, inspection and supervision of the machinery purchased. Therefore, we have to answer question No. 2, technically in favour of the revenue, the result being that the Tribunal has to consider afresh this item of foreign tour expenses in the light of what has been stated above. As regards the third question which relates to the payment of Rs. 17,143 to the foreign collaborators as per the terms of the collaboration agreement dated August 1, 1960, it is seen that the said payment was "for the elaboration of the scheme for the transmitting arrangement of their experiences and all their assistance for the duration of the free consulting ..... X X X X Extracts X X X X X X X X Extracts X X X X
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