Capitalised interest cannot form part of actual cost for depreciation under the deferred payment scheme.

Interest capitalised as part of the purchase price under a deferred payment arrangement could not be included in the actual cost of machinery for depreciation purposes. Explanation 8 to section 43(1) was applied broadly to exclude any amount paid as interest in connection with acquisition of an asset from actual cost, and the seller's invoicing method, including a consolidated bill, did not change the true character of the payment. Earlier interpretations of Explanation 8 were followed, and the interest component was held not to form part of the depreciable cost.

---

---

Issues: Whether interest capitalised as part of the purchase price under a deferred payment scheme could be included in the actual cost of the asset for depreciation, in view of Explanation 8 to section 43(1) of the Income-tax Act.

Analysis: The assessee had borrowed funds for acquiring machinery and capitalised the future interest payable on the loan. The statutory bar in Explanation 8 to section 43(1) is wide enough to exclude any amount paid as interest in connection with the acquisition of an asset from the actual cost of that asset. The form of invoicing by the seller, including issuance of a consolidated bill, does not alter the true character of the payment if it represents interest. The earlier decisions construing Explanation 8 were followed.

Conclusion: The interest component could not be capitalised as part of the actual cost for depreciation. The question was answered in the negative, in favour of the Revenue and against the assessee.

---