TULZAPURKAR, J. - (1.) IN this excess profits tax reference made by the Tribunal to this court under s. 21 of the EPT Act, 1940, three questions have been referred for our determination, viz. : '(1) Whether, on the facts and in the circumstances of the case, in computing the excess profits for the chargeable accounting periods ending 31 -3 -1942, 31 -3 -1943, 31 -3 -1944, 31 -3 -1945 and 31 -3 -1946, the depreciation of Rs. 5,68,898, Rs. 4,85,102, Rs. 4,12,994, Rs. 3,59,759 and Rs. 2,99,298, respectively, referable to capitalised interest included in the cost of machinery, was deductible ? (2) Whether, on the facts and in the circumstance of the case, in computing the capital employed in the assessee's business for the chargeable accounting periods ending 31 -3 -1945 and 31 -3 -1946 voluntary deposit of Rs. 50,36,928 was deductible ? and (3) Whether, on the facts and in the circumstances of the case, the allowance of Rs. 95,21,000 granted by the Central Board of Revenue under s. 26(3)(a) of the EPT Act in determining the excess profits for the year ending 31 -3 -1945 was deductible from the opening capital of the company as on 31 -3 -1945 (1 -4 -1945) while computing the average amount of capital employed by the company in its business for the chargeable accounting period ending 31 -3 -1946 ?'
(2.) ASSESSMENTS in dispute are the assessments under the EPT Act, 1940. The assessee, which is a public limited company, is doing business in the manufacture of steel and the relevant chargeable accounting periods are the financial years ending 31 -3 -1942, 31 -3 -943, 31 -3 -1944, 31 -3 -1945 and 31 -3 -1946. We shall deal with the facts pertaining to each one of these years separately. The first question relates to all the five chargeable accounting periods and the facts giving rise to the question may be stated : The assessee -company had borrowed considerable amount in connection with its scheme of extension of the plant and it had paid interest amounting to Rs. 39,97,000 on the borrowings during the period from 1925 -26 to 1940 -41. This amount of interest was, however, not charged to the profit and loss account in the respective years but was capitalised in suspense account. Subsequently, this amount in the suspense account was allocated to different assets for the first time in the accounts for the year ended March 31, 1942. Consequently, depreciation allowed on plant and machinery for the assessment year 1942 -43, onwards was also correspondingly increased because of this addition to the cost of machinery. In the income -tax assessment this additional depreciation was allowed and such additional depreciation so allowed in the income -tax assessments came to Rs. 5,68,898 for the assessment year 1942 -43, Rs. 4,85,102 for the assessment year 1943 -44, Rs. 4,12,894 for the assessment year 1945 -46 and Rs. 2,99,298 for the assessment year 1946 -47. In the excess profits tax assessment a question was raised whether for the chargeable accounting periods ending March 31, 1942, to March 31, 1946, such additional depreciation which was allowed in income -tax assessments on account of additional cost of machinery consequent upon capitalization of interest was allowable in determining the excess profits for the respective profits. The EPTO disallowed the deduction of this additional depreciation claimed by the assessee and when the matter was carried in appeal by the assessee -company to the AAC, the AAC reversed should be deducted in determining the excess profits for these chargeable accounting periods. In the further appeal to the Tribunal, which was preferred on behalf of the revenue, it was contended on its behalf that the allowance of additional depreciation on capitalized interest was not a normal allowance, that it was given in special circumstances for income -tax purposes and that there was no warrant for allowing the same in determining the excess profits. The Tribunal did not except the contentions that were urged on behalf of the revenue and held that additional depreciation by reason of capitalization of interest should be allowed as a deduction in determining the profit for the purpose of the EPT Act. Joshi for the revenue has raised the self -same contentions before us that were urged on behalf of the revenue before the Tribunal. In our view, the question really depends upon whether there is any difference indicated in the provisions of the EPT Act on the question as to whether such depreciation by reason by capitalization of interest should not be allowed as a deduction in determining the excess profits and, therefor, it will be necessary to consider the scheme of the relevant provisions of the EPT Act and the rules made in Sch. I to that Act for the purpose of determining the excess profits. Before we go to the provisions of the Act, we might refer to a decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT : [1975]98ITR167(SC) , where the question of allowing such depreciation for the purpose of income -tax was considered by the court. In that case, the Supreme Court after considering the meaning of the expression 'actual cost' occurring in s. 10(5) of the Indian I.T. Act, 1922, has taken the view that interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery formed part of the 'actual cost' of the assets to the assessee within the meaning of the expression in s. 10(5) of the 1922 Act and that the assessee would be entitled to depreciation allowance and development rebate with reference to such interest also. The Supreme Court has observed that as the expression 'actual cost' has not been defined, it should be construed in the sense which no commercial man would misunderstand, that for this purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry and that the accepted accountancy rule for determining cost of fixed assets was to include all expenditure necessary to bring such assets into existence and to put them in working condition. It, therefore, held that in case money was borrowed by a newly started company which was in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money could be capitalized and added to the cost of the fixed assets created as a result of such expenditure; in other words, the position with regard to allowing additional depreciation on the amount of interest paid on borrowings made for the purpose of income -tax is made abundantly clear by the Supreme Court in the aforesaid case. The question is whether there is any difference while determining excess profits under the EPT Act and whether while determining such excess profits such additional depreciation on the amount of interest paid on borrowings effected should similarly be deducted or not. On this aspect of the matter, at the outset it may e stated that the charging section under the EPT Act, 1940, is s. 4 under which it had been provided that : 'subject to the provisions of this ACt, there shall, in respect of any business to which this Act applies, be charges, levied and paid on the amount by which he profits during any chargeable accounting period exceed the standard profits a tax (in this Act referred to as 'excess profits tax') which shall, in respect of any chargeable accounting period ending on or before the March 31, 1941, be equal to 50% of that excess and shall in respect of any chargeable accounting period beginning after that date, be equal to such percentage of that excess as may be fixed by the annual Finance Act'. The expression 'standard profits' has been defined in s. 2(2) as meaning 'standard profits as computed in accordance with the provisions of s. 6'. The scheme of s. 6 has been explained by this court in Killick Nixon and Co.'s case : [1945]13ITR445(Bom) as to compare the average amount of capital during the standard period with the average amount of capital during the chargeable accounting period and that for this purpose the figure that is relevant is the average amount of capital for the standard period and not the amount of capital ascertained as in issue on the last date of the standard period. For the purpose of considering the first question it will now be necessary to consider rr. 1 and 3 of Sch. I to the Act, which deal with the manner of computation of excess profits for the purpose of the Act. Under r. 1 it is provided that the profits of a business during the standard period, or during any chargeable accounting period shall be separately computed on the principles on which the profits of a business are computed for the purposes of income -tax under s. 10 of the Indian I.T. Act, 1922. Now the question is whether there is anything in the schedule which says that depreciation to be allowed for excess profits tax purpose will be different from that allowed for income -tax purpose and the only restriction on the allowance for depreciation that is to be found in the schedule is contained in r.3(1) which provides that the principles of adding the allowance of depreciation for any one period to the allowance for depreciation for any subsequent period shall not be followed. in other words, the restriction pertains to disallowing unabsorbed depreciation of earlier years from being carried to the subsequent years, although such carrying forward in regard to unabsorbed depreciation that was claimed by the assessee was depreciation due to it on the written down value of the machinery as determined under s. 10(5) of the I.T. Act and that this depreciation brought forward from the earlier year. If that be so, it is difficult to appreciate as to how the capitalisation of interest could be disallowed in determining the profits for the purpose of EPT. The Tribunal, in our view, was right in allowing such deduction and the question referred to us, therefore, must be answered in the affirmative in favour of the assessee.
(3.) THE second question is confined only to the two chargeable accounting periods ending March 31, 1945 and March 31,1946 and the question relates to computation of capital employed by the assessee in the business in those two years and the question raised is thus : Whether in computing the capital employed in the assessee's business for the chargeable accounting periods the amount of voluntary deposits of Rs. 50,36,928 made by the assessee under s. 10 of the Finance Act, 1942, was deductible or not.;