TMI Blog1978 (6) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... , etc. It was agreed that the assessee would pay the sale price in ten equal instalments along with interest to the vendor-companies. The first instalment of the principal amount and the interest was to be paid in each case within six months after the final shipment of the plant and machinery, etc., and the remaining instalments were to be paid as specified in the respective agreements. The guarantee clauses of the agreements required the purchaser to furnish a bank guarantee for payment of the cost price. Pursuant to these, the Bank of Tokyo stood as a guarantor for the assessee and the assessee agreed to pay Rs. 7,22,592 to the bank as guarantee commission. The assessee had also to spend Rs. 55,856 as legal costs and stamp charges on the execution of promissory notes in favour of the vendor-companies. For the assessment year 1963-64, relevant to the accounting period ending June 30, 1962, the assessee claimed the following amounts as revenue expenditure : (i) Rs. 55,856 on account of legal costs and stamp charges ; (ii) Rs. 1,63,071 on account of guarantee commission. The ITO rejected this claim on the ground that the aforesaid expenditure was incurred in connection with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was rejected and the Addl. CIT held by his order dated February 23, 1971, that depreciation and development rebate had been wrongly allowed by the ITO for the assessment year 1966-67. He, accordingly, set aside the order of the ITO and directed him to make fresh assessment according to law after giving adequate opportunity to the assessee to produce evidence. Aggrieved by the orders of the Addl. CIT for each of the assessment years in question, the assessee went in appeal before the Tribunal. It was urged before the Tribunal on behalf of the assessee that stamp charges, guarantee commission and interest paid on deferred payment basis constituted part and parcel of the cost price of the plant and machinery and as such depreciation and development rebate were allowable on the same. On behalf of the revenue, it was contended that the jurisdiction of the Tribunal was limited only to the question whether the Addl. CIT had prima facie reason to believe that the impugned order was erroneous in so far as it was prejudicial to the interests of the revenue and that the Tribunal was not competent to go into the merits of the case. In the alternative, it was contended that the guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision by this court : " (i) Whether, in order to adjudicate upon the correctness of the orders of the Additional Commissioner under section 263(1) of the Income-tax Act, 1961, the Tribunal was competent to go into the merits of the case and determine whether the expenditure relating to guarantee commission, stamp charges and interest formed a part of the actual cost of the plant and machinery for the purposes of claiming depreciation and development rebate ? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the expenditure incurred by the assessee on payment of guarantee commission and stamp charges formed a part of the actual cost of the plant and machinery, etc., for the purposes of claiming depreciation and development rebate ? (iii) Whether, on the facts and in the circumstances of the case, and on consideration of the relevant agreements, the Tribunal was correct in holding that the interest on the unpaid price of the plant and machinery on deferred payment basis, did not form a part of the actual cost of the assets to the assessee within the meaning of section 43 of the Income-tax Act, 1961, and that the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee on payment of guarantee commission and stamp charges formed a part of the actual cost of the plant and machinery for the purpose of claiming depreciation and development rebate was correct. He urged that the Tribunal was in error in holding that the interest on unpaid price of plant and machinery on deferred payment basis was not a part of the actual cost of the assets to the assessee. According to him, the assessee was entitled to claim depreciation and development rebate on the amount of interest paid from time to time on the price of plant and machinery, etc. Under the terms of the contract with the purchaser the price was payable by the assessee to the respective vendors of the plant and machinery by instalments at intervals of six months after the final shipment, each instalment was to be of ten per cent. of the price and the whole of the price was to be paid within a period of sixty months after the final shipment. The assessee was also required to pay simple interest at the rate of six per cent. per annum at the time of payment of each instalment on the portion of the price of the contract that remained outstanding for the six months preceding the instalment d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. Applying this test laid down by the Supreme Court, the question of payment of guarantee commission to the bank and stamp charges were necessary items of expenditure to bring such assets into existence and to put them in working condition. As these items of expenditure were necessary to bring into existence the assets and put them in working condition, the Tribunal was right in treating the same as part of the actual cost of plant and machinery for the purposes of claiming depreciation and development rebate. That takes us to the question whether interest on unpaid amount of the cost of the plant and machinery on deferred payment basis formed part of the actual cost of the assets to the assessee. It was urged by Mr. Joshi, on behalf of the revenue, that in Challapalli Sugars Ltd.'s case [1975] 98 ITR 167 (SC), interest was paid before the commencement of production on amounts borrowed by the assessee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence may be made to the decision of the Gujarat High Court in the case of CIT v. Tensile Steel Ltd. [1976] 104 ITR 581. In that case the assessee entered into a contract with a Japanese firm for the purpose of establishing and erecting a plant for high tensile steel wires. For that purpose, a basic agreement was effected between the said parties for providing financial collaboration, supply of plant and machinery and technical know-how. Under the basic agreement the assessee got plant and machinery on deferred payment terms. Twenty per cent. of the cost of plant and machinery was to be paid at the time of signing the contract. Eighty per cent. was to be paid in instalments spread over a period of five years. The rate of interest on deferred payments was to be six per cent. per annum. The payment was to be made in pound sterling and it was specifically agreed that in case of any change in the official rate, the difference caused by the change would be adjusted at the time of payment of each instalment. The assessee included an amount of Rs. 3,65,040 being the interest at six per cent. on the cost of machinery and plant, and an amount of additional interest due to devaluation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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