1965 (8) TMI 91 - HC - Income Tax

Interest on Debentures for Refinery Construction Qualifies as Actual Cost for Tax Purposes

Commissioner of Income-Tax (Central), Calcutta Versus Standard Vaccum Refining Co. of India Limited

The court held that the interest paid on debentures for constructing a refinery constitutes part of the actual cost for depreciation allowances and ... - Issues Involved:1. Whether the interest paid on monies borrowed for setting up a refinery can be treated as part of the actual cost for the purposes of depreciation allowances and development rebate under sections 10(2)(vi), 10(2)(via), and 10(2)(vib) read with section 10(5) of the Indian Income-tax Act, 1922.Issue-wise Detailed Analysis:1. Treatment of Interest Paid on Borrowed Monies as Part of Actual Cost:The core issue revolves around whether the interest amounting to Rs. 23,53,284, paid on debentures issued for borrowing funds during the construction period of a refinery, can be included in the actual cost of the refinery for the purposes of depreciation allowances and development rebate.Arguments and Analysis:- Revenue's Argument: The revenue contended that the interest paid to debenture holders for procuring the loan should not be considered part of the actual cost of the refinery. According to them, the actual cost includes expenses for procuring materials and services for setting up the capital asset, but not the cost of procuring the funds.- Assessee's Argument: The assessee argued that the interest paid during the construction period should be capitalized and included in the actual cost of the refinery. They had capitalized all expenses incurred during construction, including the interest, and claimed depreciation on the full amount.Legal and Commercial Principles:- Depreciation and Development Rebate: These are allowed on the written-down value of the capital asset, which, as per section 10(5)(a), means the actual cost to the assessee. The court noted that capital assets could be acquired with either the assessee's own savings or borrowed capital. When acquired with borrowed capital, the interest paid until the asset is fit for business commencement is considered an essential expense.- Commercial Practice: The court referred to commercial practices and principles of accountancy, citing Cropper's Higher Book-keeping and Accounts, which supports the capitalization of interest paid on borrowed capital during construction as part of the cost of construction. The court emphasized that interest paid on debentures issued for setting up a plant is regarded as an element of actual cost in commercial practice.Supporting Case Law:- Hinds v. Buenos Ayers Grand National Tramways Co. Ltd. [1906] 2 Ch. 654: The court referenced this case, where it was held that there is no general rule of law compelling companies to charge interest on borrowed money for construction against revenue. Companies can charge such interest to capital account during construction.Conclusion:The court concluded that the interest paid on debentures issued for the purpose of constructing the refinery forms part of the actual cost incurred by the assessee in acquiring the capital asset. This interest must be considered for the purposes of depreciation and development rebate. The question was answered in the affirmative, favoring the assessee, and the assessee was awarded costs from the revenue.Judgment:The judgment was delivered affirmatively, stating that the interest paid on borrowed monies during the construction period should be included in the actual cost for depreciation allowances and development rebate. The assessee's claim was upheld, and the court ruled in favor of the assessee.