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

The matter relates to the assessment year 1959-60, the corresponding accounting year for which ended on June 30, 1958. The assessee is a public limited company engaged in the manufacture and sale of sugar. The company went into production on January 22, 1958. The assessee company had borrowed considerable sum of money from the Industrial Finance Corporation of India for the installation of machinery and plant. During the relevant year and for the period prior to the commencement of its business the assessee paid Rs. 2, 38, 614 as interest. The case of the assessee is that the payment of interest added to the cost of machinery and plant to the assessee and as such while calculating depreciation admissible to the assessee, the interest paid should be treated as part of the cost of the machinery and plant to theincome)-tax officer rejected the above claim of the assessee and held that the interest paid from year to year was an admissible item of revenue expenditure and no depreciation could be allowed on the capitalised amount of the expenditure incurred on account of interest. No part of the above amount, according to the income tax , officer, should be taken as expenditure attributable to the erection of the machinery or other assests. The Appellate Assistant Commissioner on appeal reversed the decision of the income- tax officer on this aspect. The Appellate Assistant Commissioner held that during the period of construction when money was borrowed for the purpose of purchasing and installing the machinery, the payment of interest was the "cost of maintaining the borrowal", and as such could be included as part of the capital cost. On further appeal the Income-tax Appellate Tribunal held that the cost to the assessee must include all expenditure which it had to incur for acquiring and installing the asset. The interest paid or payable during the period of acquisition and installation could, therefore, be considered as part of the cost to thequestion reproduced above was then referred to the High Court. The High Court held that where a plant is constructed out of borrowed money, the interest on the loan up to the date of the commencement of the business could not be capitalised or treated as part of the actual cost of thequestion arises in civil appeals Nos. 1784 and 1785 of 19 70 which have been filed by the Commissioner of Income-tax on certificate against the judgment of the Calcutta High Court whereby the High Court answered the following question in reference under section 66(1) of the Act for assessment years 1955-56 and 1959-60 against the revenue and in favour of the assesseecivil appeal No. 1784 of 1970, which relates to the assessment year 1959-60, the following additional question was also answered by the High Court against the revenue and in favour of theassessee company in these two appeals, M/s Standard Vacuum Refining Co. of India Ltd. (now known as Hindustan Petroleum Corporation Ltd.), was incorporated on July 5, 1952 and commenced its business in September 1954. In June 1953 it borrowed rupees four crores on debenture at-the. rate of Rs. 5 1/4 per cent interest from the public. The interest was to run from June 1953. The above amount together with rupees twelve crores financed by the company was used in setting up a refinery for which plant and machinery were imported from abroad. The refinery started work on September 1, 1954, from which date depreciation began to be calculated. The assessee company capitalised all the expenses during the period of construction, including the interest amounting to Rs. 23, 53, 284 which had accrued from the date of borrowing to the date, of the commencement of the business on the aforesaid loan and claimed depreciation on full amount. The income-tax officer did not include interest on debentures in arriving at the figure of actual cost and as such rejected the claim of the assessee in this respect. The Appellate Assistant Commissioner agreed with the Income tax officer. The Tribunal on further appeal held that the assessee was also entitled to depreciation on the capitalised interest of Rs. 23, 53, 284 paid to the debenturerelevant facts so far as the second question in civil appeal No. 1784 of 1970 is concerned were as follows. Ile assessee, company filed a return showing an income of rs. 1, 52, 88, 497 for the assessment year 1959-60, the relevant accounting year f or which was the calendar year 1958. In arriving at the above figure of the income, the assessee claimed a sum of Rs. 5, 04, 000 representing the provision for wealth-tax payable by it for the previous year relevant to the date of valuation, viz., December 31, 1958. The income-tax officer held that the provision for the payment of wealth tax did not amount to expenditure laid out wholly and exclusively for the purposes of the business. The Appellate Assistant Commissioner agreed with the in come-tax officer. On second appeal the Appellate Tribunal held that the above amount could be allowed at the time when actual payment was made.The High Court, as already mentioned, answered both the questions in favour of the assessee and against the revenue.This judgment would dispose of all the three civil appeals.

Reasoning:
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.