1974 (10) TMI 3 - SC - Income Tax

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 ... Capitalisation of interest during construction - Actual cost of assets for depreciation and development rebate - Cost of fixed assets as including expenditure necessary to bring assets into existence - Distinction between capital and revenue expenditure for interest - Wealth-tax: deductibility in computing business income and retrospective legislative exclusion with savingCapitalisation of interest during construction - Actual cost of assets for depreciation and development rebate - Cost of fixed assets as including expenditure necessary to bring assets into existence - Interest incurred before commencement of production on money borrowed for acquisition and installation of plant and machinery is part of the actual cost of the assets and may be capitalised for purposes of depreciation and development rebate. - HELD THAT: - The Court held that the phrase 'actual cost' for computing written down value must be construed according to normal commercial accountancy rules. Accepted accounting principles and authorities show that all expenditure necessary to bring fixed assets into existence and to put them in working condition-including actual interest on borrowings used to finance capital expenditure during the construction/erection period-may be capitalised. Section 208 of the Companies Act recognises capitalisation of interest on share capital in analogous circumstances, and the principle is stronger where interest is incurred on loans taken for construction. The Court rejected the contrary view of the Andhra Pradesh High Court, affirmed the approach adopted by the Calcutta High Court and other High Courts, and applied these accountancy and statutory considerations to allow inclusion of precommencement interest in the actual cost for depreciation and development rebate. [Paras 15, 16, 17, 20, 30]Answered in the affirmative - precommencement interest on borrowings for acquisition and installation of plant and machinery is to be included in the actual cost to the assessee for depreciation and development rebate purposes; Civil Appeal No. 1353 of 1970 allowed.Wealth-tax: deductibility in computing business income and retrospective legislative exclusion with saving - Effect of this Court's earlier decision for connected appeals as binding on pending appeal - Whether wealthtax paid by the assessee was deductible in computing business income for the assessment year in question - the assessee's case was covered by the Court's prior decision in connected appeals and thereby fell within the saving in the amending Act; the benefit applies only to wealthtax actually paid. - HELD THAT: - The Court reviewed its precedents and subsequent legislative amendment. While earlier precedent (Travancore Titanium) held wealthtax not deductible, a later larger Bench (Indian Aluminium Co.) held that wealthtax paid by trading companies on assets held for business was deductible. The Incometax Act was then amended to disallow such deductions prospectively but contained a saving provision which preserved deductions where this Court had held, on an appeal in respect of the assessee's assessment year, that wealthtax was deductible before the amending date. Arguments in several appeals were heard together; the Constitution Bench's judgments in the connected appeals disposing the deductibility point before July 15, 1972, governed Civil Appeal No. 1784. Consequently Civil Appeal No. 1784 is covered by the saving in the amending Act, but the saving applies only to wealthtax actually paid (not merely payable). [Paras 26, 27, 28, 29, 30]The assessee's claim falls within the saving in the amending Act and is allowable only in respect of wealthtax actually paid; Civil Appeals Nos. 1784 and 1785 of 1970 dismissed (in favour of the assessee on this point).Final Conclusion: The capitalisation of interest incurred before commencement of production on borrowings for acquisition and installation of plant and machinery is part of the actual cost for depreciation and development rebate and the Court allows the assessee's appeals on that point; the assessee's claim for deduction of wealthtax in Civil Appeal No. 1784 is covered by the saving in the subsequent amendment but only to the extent of wealthtax actually paid. 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.