Pre-production interest counts in actual cost for depreciation, while wealth-tax deduction is limited to amounts actually paid.

Pre-production interest on borrowed money used to acquire and install machinery and plant is included in the asset's actual cost for depreciation and development rebate, because actual cost is understood in commercial terms and covers expenditure needed to bring the fixed asset into working condition. Wealth-tax deduction in business income is confined by the saving clause to wealth-tax actually paid, not merely payable, so the broader claim for amounts not paid fails. The result is that capitalised pre-commencement interest is allowed for tax purposes, while wealth-tax relief is limited to tax actually paid.

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Issues: (i) Whether interest paid on borrowed money before commencement of production for acquiring and installing machinery and plant forms part of the actual cost of the assets for depreciation and development rebate; (ii) Whether wealth-tax paid or payable by the assessee is deductible in computing business income, and whether the saving provision in the amending Act applies.

Issue (i): Whether interest paid on borrowed money before commencement of production for acquiring and installing machinery and plant forms part of the actual cost of the assets for depreciation and development rebate

Analysis: The expression "actual cost" in the depreciation provisions is not exhaustively defined and must be understood in the commercial sense. Accepted accountancy practice treats interest incurred during the construction and erection period, before production commences, as part of the cost of bringing fixed assets into existence and into working condition. The statutory recognition given to capitalisation of interest under section 208 of the Companies Act, 1956 supports the same principle where borrowings are used for construction of plant and machinery. The Court held that there is no reason to distinguish between interest on share capital and interest on borrowed money for this purpose.

Conclusion: Yes. Pre-production interest on borrowed money used for acquisition and installation of machinery and plant is part of the actual cost, and depreciation and development rebate are admissible on that amount in favour of the assessee.

Issue (ii): Whether wealth-tax paid or payable by the assessee is deductible in computing business income, and whether the saving provision in the amending Act applies

Analysis: Wealth-tax was subsequently made non-deductible by the amendment inserting the relevant disallowance in the business income provisions of the Income-tax Act, 1961, but the amending Act preserved prior determinations where the Supreme Court had already held, before the cutoff date, that wealth-tax paid was deductible. That saving provision was confined to wealth-tax actually paid, and not merely provisioned for or payable. The Court treated the earlier connected decisions as operating to bring the assessee within the saving clause only to the extent of wealth-tax paid.

Conclusion: Deduction was available only for wealth-tax actually paid, not merely payable; to that extent the assessee's claim succeeded, but the wider claim failed.

Final Conclusion: The Court upheld capitalisation of pre-production interest for actual cost, while limiting any wealth-tax deduction to amounts actually paid under the saving clause, resulting in a mixed outcome across the connected appeals.

Ratio Decidendi: In the absence of a statutory definition to the contrary, "actual cost" for depreciation purposes includes interest incurred before commencement of production on borrowings used to acquire and install fixed assets, and a saving clause for deduction of wealth-tax applies only to tax actually paid, not merely payable.

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