Construction-period interest can form part of actual cost for depreciation and development rebate where borrowing is essential to acquire the asset.

Interest on borrowed capital used during the construction period formed part of the refinery's actual cost for depreciation and development rebate purposes, because the borrowing was essential to acquire and establish the capital asset and commercial accountancy practice permitted capitalisation until the plant was ready for production. Interest paid after commencement of business was treated differently and excluded from actual cost because it was not part of the cost of setting up the plant. The reference was answered in favour of the assessee.

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Issues: Whether interest paid on monies borrowed during the construction period of a refinery forms part of the actual cost of the capital asset for the purposes of depreciation allowance and development rebate.

Analysis: The expression "actual cost" in section 10(5) was treated as the actual expenditure incurred by the assessee in acquiring the capital asset. Interest paid on borrowed capital used for construction was held to be an expenditure essential to the acquisition of the plant, because the loan itself was necessary to procure the asset and the interest was part of the cost of obtaining and employing that finance during the construction period. The Court also relied on ordinary commercial principles and accountancy practice, which permit capitalisation of such interest until the asset is ready for production. Interest paid after commencement of business was distinguished because it is not part of the cost of establishing the plant.

Conclusion: The interest paid on the debentures during the construction period formed part of the actual cost of the refinery and had to be included for depreciation and development rebate purposes; the answer to the reference was in the assessee's favour.

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