Actual cost for depreciation excludes interest on borrowed capital used to acquire machinery, despite capitalisation practice.

The article explains that, for depreciation and development rebate purposes, "actual cost" covers expenditure directly and intimately connected with acquisition and installation of machinery, such as freight, transport, erection and supervision. It distinguishes interest on borrowed capital used to finance the purchase: that interest is paid on the borrowing itself and is not part of the machinery's acquisition or installation cost. It also notes that accounting practice allowing capitalisation of interest cannot override the statutory language, and that where Parliament intended interest deductions or treatment, it provided for them expressly. On that reasoning, interest on borrowed capital is excluded from actual cost.

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Issues: Whether interest paid on borrowed capital used for acquisition and installation of machinery before commencement of business forms part of the assessee's "actual cost" for purposes of depreciation and development rebate.

Analysis: The expression "actual cost" in the depreciation provisions was held to mean the amount expended by the assessee in acquiring and installing the asset. Expenditure directly and intimately connected with acquisition and installation, such as freight, transport, erection, supervision and similar costs, may enter into actual cost. Interest paid on borrowed capital was distinguished from such acquisition costs because it is paid on the borrowing itself and is not a direct or intimate part of the machinery's acquisition or installation. The Court also held that accounting practice permitting capitalisation of interest could not override the statutory language, and that express deductions for interest in other provisions showed that, where intended, the legislature made such allowance specifically.

Conclusion: Interest on borrowed capital used to acquire machinery does not form part of the machinery's actual cost for depreciation purposes, and the question was answered against the assessee and in favour of the Revenue.

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