Actual cost of machinery not reduced by compensation for defective output under income-tax law

A rebate received from a foreign supplier as compensation for low output from defective machinery was not a reduction in the purchase price and therefore did not have to be deducted in computing the machinery's actual cost under section 43(1) of the Income-tax Act, 1961. The Court held that, on the facts, no part of the asset cost was met directly or indirectly by the supplier, and the earlier provision in the 1922 Act did not require a different result. The actual cost of the machinery remained unchanged, and the issue was decided in favour of the assessee.

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Issues: Whether the amount of rebate recoverable from the foreign supplier was required to be deducted in determining the actual cost of the machinery under section 43(1) of the Income-tax Act, 1961.

Analysis: The amount in question was found to represent compensation for low output arising from defective machinery, and not a reduction in the price of the machinery originally supplied. The earlier decision of the Court had already held, on substantially similar facts, that such payment was a revenue receipt and that the actual cost of the machinery was not to be altered. The change in language from the corresponding provision in the Income-tax Act, 1922 did not assist the Revenue, because on the facts no portion of the machinery cost was met directly or indirectly by the foreign supplier.

Conclusion: The rebate was not deductible in computing the actual cost of the machinery, and the issue was answered in favour of the assessee.

Ratio Decidendi: A payment received as compensation for low output or defective machinery, and not as a reduction of the purchase price, does not reduce the actual cost of the asset for purposes of section 43(1) of the Income-tax Act, 1961.

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