1973 (9) TMI 5 - HC - Income Tax

Inclusion of Interest in Machinery Cost Upheld; Foreign Tour Expenses Remanded for Review

The court upheld the inclusion of interest on borrowed capital in the actual cost of machinery for depreciation and development rebate. It remanded the ... Depreciation and Development Rebate - Whether interest paid on money borrowed for the purchase of land and machinery, foreign tour expenses prior to setting up of factory and payment to foreign collaborator as indemnity form part of actual cost for the purpose of depreciation and development rebate - We, agree with the Tribunal that the said sum cannot be taken to be a part of the cost of the machinery and that the assessee is not entitled to depreciation and development rebate thereon Issues Involved:1. Whether the sum of Rs. 33,000 representing interest on borrowed capital could be considered as forming part of the actual cost of machinery and entitled to depreciation and development rebate.2. Whether the expenses of Rs. 42,712 incurred on foreign trips could be considered as part of the actual cost of machinery.3. Whether the expenses of Rs. 17,143 representing the payment to foreign collaborators was part of the actual cost of machinery entitled to depreciation and development rebate.Detailed Analysis:1. Interest on Borrowed Capital (Rs. 33,000)The Tribunal found that the machinery was purchased using borrowed capital, and the interest paid on these borrowings during the previous year amounted to Rs. 33,000. The question was whether this interest could be included in the cost of the machinery for the purpose of claiming depreciation and development rebate.The Tribunal and the Appellate Assistant Commissioner upheld the company's claim, relying on the Calcutta High Court's decision in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. The statutory provisions under Sections 32, 33, and 43 of the Income-tax Act were analyzed, indicating that the actual cost includes all expenses directly related to the acquisition of the asset.The court reviewed various legal precedents, including the Bombay High Court's decision in Habib Hussein v. Commissioner of Income-tax and the Calcutta High Court's decision in Commissioner of Income-tax v. Fort Gloster Industries Ltd., which supported the inclusion of interest as part of the actual cost. The court also considered the Supreme Court's decision in India Cements Ltd. v. Commissioner of Income-tax, which distinguished between a loan as a liability and an asset.Ultimately, the court agreed with the Tribunal's view, holding that the interest paid on borrowed capital used for acquiring the machinery should be capitalized and included in the actual cost of the machinery. Therefore, the first question was answered in the affirmative and against the revenue.2. Foreign Tour Expenses (Rs. 42,712)The Tribunal accepted the company's claim that the foreign tour expenses incurred by the directors and an engineer were part of the actual cost of the machinery, allowing depreciation and development rebate on these expenses. The Tribunal's reasoning was that the tours were necessary for the acquisition of the plant and machinery, involving preliminary talks and visits to various factories abroad.However, the revenue contended that the tours were primarily for securing the collaboration agreement, not for purchasing machinery. The court found that while some trips might have been necessary for the acquisition and inspection of machinery, others were not directly related to the purchase.The court concluded that only those expenses directly related to the selection, inspection, and supervision of the machinery could be considered part of the cost. Since the Tribunal had not separately analyzed each item of the tour expenses, the court directed the Tribunal to reconsider this item in light of the above observations. Thus, the second question was technically answered in favor of the revenue.3. Payment to Foreign Collaborators (Rs. 17,143)The payment of Rs. 17,143 to the foreign collaborators was for 'the elaboration of the scheme for the transmitting arrangement of their experiences and all their assistance for the duration of the free consulting period.' The Tribunal agreed with the Appellate Assistant Commissioner that this payment was not part of the actual cost of the plant and machinery.The court concurred, stating that the payment was for obtaining technical know-how and not directly related to the acquisition of the machinery. The scheme for the purchase of machinery suggested by the collaborators was part of the technical know-how, not a commission or brokerage for purchasing machinery. Therefore, the third question was answered in the negative and against the assessee.Conclusion:The court upheld the Tribunal's decision on the first and third questions, allowing the interest on borrowed capital to be included in the actual cost but rejecting the inclusion of the payment to foreign collaborators. The second question was remanded to the Tribunal for a detailed analysis of the foreign tour expenses. The revenue was awarded costs from the assessee, with counsel's fee set at Rs. 250.