Interest as part of machinery cost permits claim for depreciation and development rebate; relief limited to wealth-tax actually paid.

Interest incurred on borrowed funds is treated as part of the actual cost of machinery and plant, entitling the assessee to claim depreciation and development rebate calculated with reference to that interest; the inclusion of interest in capital cost therefore increases allowable capital allowances. A separate rule limits the benefit under the amending provision to situations where wealth-tax has been actually paid, so entitlement does not arise merely from wealth-tax being payable but unpaid.

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Issues: (i) Whether interest paid on money borrowed for acquisition and installation of plant and machinery accruing before commencement of production can be capitalised as part of the actual cost of the assets for the purposes of depreciation and development rebate; (ii) Whether wealth-tax payable by the assessee is deductible in computing income under the provisions of the Income-tax Act.

Issue (i): Whether pre-commencement interest on loans taken to acquire and install plant and machinery forms part of the 'actual cost' of the assets for computing written down value and thereby entitles the assessee to depreciation and development rebate.

Analysis: The Court examined the statutory scheme for computing profits or gains of business under section 10 and the definition of 'written down value' which depends on the 'actual cost' of assets. In absence of a statutory definition, the Court applied normal commercial and accountancy principles and authoritative accountancy texts and auditing guidance which treat all expenditure necessary to bring assets into existence and put them in working condition as part of cost, including interest on borrowings used to finance construction where the company is newly started and construction precedes production. The Court also noted statutory recognition in section 208 of the Companies Act, 1956 for capitalising interest in specified circumstances, and considered precedents and authorities distinguishing cases where borrowing occurs after commencement of business. Applying these principles, the Court held that interest incurred before production commences on monies borrowed specifically for acquisition and installation can be capitalised as part of actual cost.

Conclusion: In favour of the Assessee. Pre-commencement interest on loans for acquisition and installation of plant and machinery may be capitalised as part of the actual cost for purposes of depreciation and development rebate.

Issue (ii): Whether wealth-tax payable by the assessee is allowable as a deduction in computing income under the Income-tax Act.

Analysis: The Court reviewed prior decisions including Travancore Titanium and Indian Aluminium and subsequent legislative amendment by the Income-tax (Amendment) Act, 1972 inserting a provision disallowing deduction of sums paid on account of wealth-tax, with a saving clause (section 5) preserving Supreme Court decisions delivered before 15 July 1972 in respect of particular assessment years. The Court examined the hearing schedule and interlocutory directions which meant that the Constitution Bench decisions delivered on 29 March 1972 (in connected appeals) governed the question in the present appeal, thereby bringing the assessee's case within the saving provision. The Court clarified that the saving applies only to wealth-tax actually paid (not merely payable).

Conclusion: In favour of the Assessee (limited): the assessee's claim for deduction of wealth-tax is covered by the saving provision in the amending Act and is allowable only to the extent of wealth-tax actually paid prior to the cut-off date, not merely payable.

Final Conclusion: The Court affirms that accountancy principles permitting capitalisation of interest incurred before commencement of production on borrowings for construction or installation govern the meaning of 'actual cost' for depreciation and development rebate; and that, on the facts and timing of the connected decisions and statutory saving, the assessee's claim for deduction of wealth-tax is preserved only for wealth-tax actually paid.

Ratio Decidendi: In the absence of statutory definition, 'actual cost' for depreciation includes all expenditure necessary to bring an asset into existence and put it in working condition; accordingly interest on borrowings specifically used to finance construction or installation before commencement of production may be capitalised and included in that actual cost.

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