Actual cost of machinery includes necessary acquisition expenses; wealth-tax remains outside allowable business deduction.

Wealth-tax paid by an assessee is discussed as not constituting an allowable business deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The note also explains that, for development rebate, "actual cost" of machinery includes expenditure that is essential and incurred as a necessary incident of acquiring the capital asset. On that basis, guarantee commission paid to secure supply of machinery is treated as part of the real cost of acquisition where the supplier required a bank guarantee. The discussion therefore distinguishes between a non-deductible wealth-tax payment and acquisition-related expenditure forming part of machinery cost.

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Issues: (i) Whether wealth-tax paid by the assessee in the relevant previous years was allowable as a deduction; (ii) Whether guarantee commission paid to secure supply of machinery formed part of the actual cost of the new machinery for development rebate.

Issue (i): Whether wealth-tax paid by the assessee in the relevant previous years was allowable as a deduction.

Analysis: The claim fell for consideration under section 10(2)(xv) of the Indian Income-tax Act, 1922. The question was answered by applying the binding principle that wealth-tax paid by an assessee is not an allowable business deduction.

Conclusion: The issue was decided against the assessee.

Issue (ii): Whether guarantee commission paid to secure supply of machinery formed part of the actual cost of the new machinery for development rebate.

Analysis: The expression "actual cost" was treated as including expenditure that was essentially necessary to acquire the capital asset. Since the foreign supplier insisted upon a guarantee, the assessee obtained the bank guarantee for consideration, and the commission paid was held to be expenditure incurred as a necessary incident of acquiring the machinery. That amount was therefore treated as part of the real cost of acquisition for the purpose of section 10(2)(vib) of the Indian Income-tax Act, 1922, read with section 10(5).

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The reference was disposed of by rejecting the deduction claim for wealth-tax, while accepting the inclusion of the guarantee commission in the actual cost of the machinery for development rebate.

Ratio Decidendi: For the purpose of development rebate, "actual cost" includes expenditure that is essential and incurred as a necessary incident to acquiring the capital asset.

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