Pre-use interest capitalises into actual cost of plant and machinery; post-use interest is excluded under Section 43(1).

Interest incurred on deferred payment terms for acquiring plant and machinery up to the date the undertaking is set up is to be capitalised and included in the asset's actual cost. Explanation 8 to Section 43(1) excludes only interest relatable to the period after the asset is first put to use, so the converse position applies to pre-use interest. The analysis follows the principle in Challapalli Sugars Ltd. and confirms that pre-use borrowing or financing cost forms part of actual cost for tax purposes.

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Issues: Whether interest charges incurred on deferred payment terms for acquisition of plant and machinery up to the date of setting up of the undertaking were liable to be capitalised and included in the actual cost of the asset.

Analysis: Explanation 8 to Section 43(1) of the Income-tax Act, 1961, as inserted with retrospective effect from 1-4-1974, clarifies that interest relatable to the period after an asset is first put to use is excluded from actual cost. The provision, read in the context of the memorandum explaining the amendment, supports the converse position that interest incurred up to the date the asset is put to use or the undertaking is set up forms part of the actual cost. The view is also consistent with the principle recognised in Challapalli Sugars Ltd. v. CIT.

Conclusion: The interest incurred up to the date of setting up was required to be capitalised and included in the cost of the plant and machinery, and the assessee succeeded on this point.

Final Conclusion: The determination on the main issue affirmed inclusion of pre-use interest in the actual cost of the asset for tax purposes.

Ratio Decidendi: Interest incurred in connection with acquisition of an asset up to the date it is first put to use is part of the actual cost, whereas interest relatable to the period after first use is excluded by Explanation 8 to Section 43(1) of the Income-tax Act, 1961.

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