Case: Challapalli Sugar Ltd Vs. The Commissioner Of Income Tax, A.P. Hyderabad

or vocation" or "Income from other sources". There is, however, a saving clause contained in section 5 of the amending Act and it reads as under:"Where, before the 15th day of July, 1972 being the date on which the Income tax (Amendment) Ordinance, 1972 came into force, the Supreme Court has, on an appeal in respect of the assessment of an assessee for any particular assessment year, held that wealth- tax paid by the assessee is deductible in computing the total income of that year, then, nothing contained in sub clause (iia) of clause (a) of section 40, or sub-section (IA) of section 58, of the principal Act, as amended by this Act, or, as the case may be, section 4 of this Act, shall apply to the assessment of such assessee for that particular year."29. Mr. Palkhivala submits that the case of the assessee in respect of the second question in civil appeal No. 1784 is covered by section 5 of the amending Act reproduced above.30. To appreciate the above submission, we may observe that civil appeals Nos. 1784 and 1785 of 1970 along with civil appeals Nos. 1694 and 1730 of Indian Aluminium Co. and civil appeal No. 1831 of 1970 of Standard Vacuum Oil Co. were argued before the Constitution Bench on February 1, 1972. The Court reserved judgments in civil appeals No. 1694 and 1730 of Indian Aluminium CO. and civil appeal No. 1831 of standard Vacuum Oil Co. As an additional question relating to the inclusion of interest in the calculation of the actual cost arose in civil appeals Nos. 1784 and 1785 of 1970, the Court after hearing some arguments on that point in these appeals directed that they be heard by a Division Bench after the pronouncement of judgment in civil appeals No. 1694, 1730 and 1831. Judgments in those three appeals, i.e. two appeals of Indian Aluminium Co. and one of Standard Vacuum Oil Co. were pronounced on March 29, 1972. The decision in the appeals in the case of Indian Aluminium Co. is reported, as already mentioned, in (1972)84 ITR 735 , while that in the case of Standard Vacuum Oil Co. is reported in (1972) 86 ITR 1 .31. The submission made by Mr. Palkhivala is that even though no final order was pronounced in civil appeal No. 1784 before July 15, 1972, the effect of the judgment in the other three civil appeals Nos. 1694, 1730 and 1831, which were heard along with civil appeal No. 1784 on the point as to whether the wealth-tax paid by the assessee was a permissible deduction, was that this Court held that the same was to be the decision on that point in civil appeal No. 1784. As against that, Mr. Desai contend s that there was no finding by this Court before July 15, 1972 in civil appeal No. 1784 that the wealth tax paid by the assessee was deductible in computing the total income of the assessee.32. There is, in our opinion, force in the submission of Mr. Palkhivala. As stated above, arguments were heard together on February 1, 1972 in civil appeals Nos. 1784, 1694, 1730 and 1831 on the question as to whether the wealth-tax paid by the assessee was a permissible deduction under section 10(2) (xv) o f the Indian Income-tax Act. On the conclusion of the arguments on that point, this Court found that an additional question arose in civil appeal No. 1784 on the point as to whether the interest payable on loan was part of the actual cost of the assets. The Constitution Bench after hearing arguments on this additional point for some, time directed that civil appeal No. 1784 along with the connected civil appeal 1785 should be posted for hearing before a Division Bench after pronouncement of judgment in civil appeals Nos. 1694, 1730 and 1831. The effect of the above order which was made on February 1, 1972 was that the decision in civil appeals Nos. 1694, 1730 and 1831 on the point as to whether the wealth-tax paid by the assessee was a permissible deduction, was also to be the decision in civil appeal No. 1784. After the judgments of the Constitution Bench in civil appeals Nos. 1694, 1730 and 1831 on March 29, 1972 the question as to whether the wealth-tax paid by the assessee was a permissible deduction under section 10(2)(xv) of the Act no longer remained subject of controversy in civil appeal No. 1784 as the decision on that point in the three appeals was also to govern the decision in appeal No. 1784. It is no doubt true that civil appeal No. 1784 was not disposed of before July 15, 1972 but that fact would not prevent the case of the assessee in that appeal being covered by section 5 of. the amending Act. What is necessary to at tract that section is that this Court should have held before July 15, 1972 on an appeal in respect of an assessment of the assessee for any particular assessment year that the wealth-tax paid by the assessee is deductible in computing the total income of that at year. Once that is the effect of a decision given by this Court fore July 15, 1972 the fact that the judgment in which the above finding is recorded is given in other appeals, which are heard together along with the appeal of the assessee and the further fact that assessees appeal is not disposed of before July 15, 1972 would not take the case of the assessee out of the purview of section 5. We would, therefore, hold that the case of the assessee in civil appeal No. 1784 is covered by section 5 of the amending Act.33. We, however, make it clear that the benefit of section 5 of the amending Act so far as the second question in civil appeal No. 1784 is concerned would be available only in respect of wealth-tax paid and not merely payable.34.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]After hearing the learned counsel for the parties, we are of the opinion that the submission made by Mr. Palkhivala isfinding the answer to the question mentioned above, we have to bear in mind that it arises in the context of profits or gains of business and the permissible deductions on account of depreciation and development rebate relating to the machinery and plant of the assessee. As the expression "actual cost" has not been defined, it should, in our opinion, be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the above, expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The word "cost", as observed on page 424 of Simons Taxes B Third Edition, is not synonymous with "price". Other items of expenditure, such for instance as freight or warehouse charges or insurance, must in certain cases be added to thewould appear from the above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to thehave already referred to section 208 of the Companies Act which makes provision for payment of interest on Share capital in , certain contingencies. Clause (b) of sub- section (1) of that section provides that in case interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sum so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus , gives statutory recognition to the principle of capitalising the interest in case the interest is paid on money raised to defray expenses of the construction of any work or building or the provision of any plant. in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way of share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision of any plant. The reason indeed would be stronger in case, such interest is paid on money taken on loan for meeting the above expenses.Desai has argued that if the interest paid on loan incurred for the purpose of acquisition and installing the machinery of a plant is to be taken into account in considering the actual cost of the plant, the result would be that the actual cost would be higher if the machinery for the plant is acquired and installed with borrowed money compared to the cost of such plant in case the money spent for the acquisition and installation of the above machinery is that which belongs to the assessee. This undoubtedly is so but it is inevitable and should not detract from the conclusion at which we have arrived. Let us take the case of an architect constructing his house. In case the architect engages another architect to prepare the plan for his house and to supervise its construction and pays remuneration to that other architect for this purpose, the amount so paid to the other architect shall have to be taken into account in arriving at the figure of actual cost of the house. In case, however, the architect constructing the house himself prepares the plan of the house and supervises its construction, he would naturally be not paying any remuneration to himself for the aforesaid work The result would be that in the latter event the actual cost of the house would be less compared to the cost of the house in the former event even though the house in all other respects is identical. It would therefore, follow that for similar fixed assets there can be different actual costs. The fact that there would be a difference in the actual cost of the plant in case its machinery is acquired and installed with the assessees own money or in case it is acquired and installed with borrowed money does not consequently militate against the answer which we propose to give to the question referred in the threesubmission made by Mr. Palkhivala is that even though no final order was pronounced in civil appeal No. 1784 before July 15, 1972, the effect of the judgment in the other three civil appeals Nos. 1694, 1730 and 1831, which were heard along with civil appeal No. 1784 on the point as to whether the wealth-tax paid by the assessee was a permissible deduction, was that this Court held that the same was to be the decision on that point in civil appeal No. 1784. As against that, Mr. Desai contend s that there was no finding by this Court before July 15, 1972 in civil appeal No. 1784 that the wealth tax paid by the assessee was deductible in computing the total income of theis, in our opinion, force in the submission of Mr. Palkhivala. As stated above, arguments were heard together on February 1, 1972 in civil appeals Nos. 1784, 1694, 1730 and 1831 on the question as to whether the wealth-tax paid by the assessee was a permissible deduction under section 10(2) (xv) o f the Indian Income-tax Act. On the conclusion of the arguments on that point, this Court found that an additional question arose in civil appeal No. 1784 on the point as to whether the interest payable on loan was part of the actual cost of the assets. The Constitution Bench after hearing arguments on this additional point for some, time directed that civil appeal No. 1784 along with the connected civil appeal 1785 should be posted for hearing before a Division Bench after pronouncement of judgment in civil appeals Nos. 1694, 1730 and 1831. The effect of the above order which was made on February 1, 1972 was that the decision in civil appeals Nos. 1694, 1730 and 1831 on the point as to whether the wealth-tax paid by the assessee was a permissible deduction, was also to be the decision in civil appeal No. 1784. After the judgments of the Constitution Bench in civil appeals Nos. 1694, 1730 and 1831 on March 29, 1972 the question as to whether the wealth-tax paid by the assessee was a permissible deduction under section 10(2)(xv) of the Act no longer remained subject of controversy in civil appeal No. 1784 as the decision on that point in the three appeals was also to govern the decision in appeal No. 1784. It is no doubt true that civil appeal No. 1784 was not disposed of before July 15, 1972 but that fact would not prevent the case of the assessee in that appeal being covered by section 5 of. the amending Act. What is necessary to at tract that section is that this Court should have held before July 15, 1972 on an appeal in respect of an assessment of the assessee for any particular assessment year that the wealth-tax paid by the assessee is deductible in computing the total income of that at year. Once that is the effect of a decision given by this Court fore July 15, 1972 the fact that the judgment in which the above finding is recorded is given in other appeals, which are heard together along with the appeal of the assessee and the further fact that assessees appeal is not disposed of before July 15, 1972 would not take the case of the assessee out of the purview of section 5. We would, therefore, hold that the case of the assessee in civil appeal No. 1784 is covered by section 5 of the amendinghowever, make it clear that the benefit of section 5 of the amending Act so far as the second question in civil appeal No. 1784 is concerned would be available only in respect of wealth-tax paid and not merely payable.