Decided on September 12,1974



Gopalan Nambiyar, J. - (1.) THE Income-tax Appellate Tribunal, Cochin Bench, has stated the following question of law and referred the same for our opinion, namely : "Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the expenditure of Rs. 53,49,374 was part of the actual cost of the plant and machinery to the assessee under Section 43(1) of the Income-tax Act, 1961, for purposes of development rebate as claimed by the assessee ? "
(2.) THE assessee is a limited company engaged in the manufacture of caustic soda, and incorporated in 1951. It had an old 40 tonne plant for the purpose. A new 60 tonne caustic soda plant was acquired and installed by the company and commenced production from November 15, 1967. For the accounting year ending March 31, 1968 (assessment year 1968-69), the Income-tax Officer allowed depreciation on the full cost of the new machinery and plant as claimed by the assessee. But regarding development rebate, he noted that the actual cost of the plant, according to the assessee's claim, included a sum of Rs. 32,65,605 as interest on loans arid other charges for the project up to November 15, 1967. We are not concerned with the rest of the items claimed. This amount Was rejected by the officer as not forming part of the " actual cost " for the purpose of development rebate. Similarly, in respect of a rectifier plant forming part of plant and machinery the book-cost for installation was Rs. 25,99,861. This included proportionate interest charges on loans to the extent of Rs. 4,70,740. THE Income-tax Officer disallowed this amount as not forming part of the " actual cost " to the assessee. On appeal, the Appellate Assistant Commissioner concurred in rejecting the claim for interest under these two heads. On further appeal, the Tribunal held that the assessee's claim for inclusion of interest as part of the actual cost to the assessee for the purpose of development rebate was valid, arid upheld the same. THE assessee's appeal was allowed. THE question of law, noticed above, was formulated and sent up to this court for opinion. Section 33 of the 1961 Act provides for development rebate and it is enough to notice broadly that the same is allowed at a certain per cent. of the " actual cost to the assessee ". Section 43(1) states that actual cost means the actual cost to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. Section 43(1) of the Income-tax Act, 1961, defines "actual cost " as follows : " 'Actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority." Section 10(2)(vi) of the Indian Income-tax Act of 1922 is the precursor of this section. Sub-section (5) of the said section explains the meaning of certain expressions used in Sub-section (2). The same contained an Explanation which laid down the meaning of the expression "actual cost". Under the said Explanation the term means actual cost reduced by that portion which had been met by the Government or any public or local authority.
(3.) IN the light of the above provisions, we have to decide the question whether, when an assessee erects a plant, or machinery or building with borrowed capital, the interest paid on the loan or capital borrowed, is part of the " actual cost to the assessee " for erecting the same. There appears to be a conflict of judicial opinion on the point. IN Birmingham Corporation's case1 the question arose under the English law regarding the allowable deduction on the cost of certain constructions. It was held that, on the terms of the English rule, this could be allowed at a certain rate of the " actual cost to the assessee ". Both the aspects of the expressions underlined, namely, " actual cost " and " to the assessee " were elucidated by the House of Lords. Lord Atkin, who spoke for the House, observed : " The word ' actual ' itself gives me no assistance. It serves, as counsel suggested, to give emphasis to the word following. It is to be the cost, the whole cost, and nothing but the cost. It removes any question of estimate, and in cases where the plant has been purchased for a lump sum together with factory premises it may give rise to a difficult question of fact. The word 'actual' is used in the same emphatic sense in rule 3 in respect of actual wages, actual expenditure and actual loss. I do not read actual cost to mean anything more than cost accurately ascertained. But it is said that the words ' to the person ' in the phrase ' actual cost to the person ' plainly indicate that the section is intending to confine the relief to an aggregate equal to the sum of money which the person has defrayed out of his own resources, the cost of the burden which has ultimately fallen upon him. I confess I do not think that this is the natural meaning of the words. What a man pays for construction or for the purchase of the work seems to me to be the cost to him ; and that whether someone has given him the money to construct or purchase for himself ; or before the event has promised to give him the money after he has paid for the work ; or after the event has promised or given the money which recoups him what he has spent." The observations of Lord Atkin are found quoted in most of the judgments on this part of the law. In Commissioner of Income-tax v. Poona Electric Supply Co, Ltd., [1946] 14 ITR 622 (Bom), a Division Bench of the Bombay High Court (Kania and Chagla JJ.) had to consider the question whether contributions received from the Government by the assessee, an electric supply company, were part of the capital cost of constructing the new supply line, or were trading receipts. It was held that they were capital receipts and not trading receipts, and, therefore, not assessable to tax in the hands of the assessee. It was further held that the contributions formed part of " the actual cost to the assessee" within the meaning of Section 10(5) of the Indian Income-tax Act, 1922. Chagla J., who delivered the judgment of the court, noticed the English decision in Birmingham Corporation v. Barnes, 1935 3 ITR Eng Cas 26, 19 TC 195 (HL), and observed that the scheme of depreciation in the English Act is slightly different from that under our Act. It was held that the Government contribution could not be excluded from the actual cost to the assessee. In Habib Hussein v. Commissioner of Income-tax, 1963 48 ITR 859 Bench of the Bombay High Court had to consider the extent of the depreciation allowance which could be claimed by the assessee in that case, in respect of a cinema theatre and several depreciable assets acquired or erected by it, for the purpose of carrying on its business of running the "Liberty Cinema". The assessee, for starting its business, had entered into an agreement with the owner of the plot of land on 4th June, 1948. The owner agreed to help the assessee to prepare suitable plans for the cinema theatre and other buildings, obtained permission from the municipality for constructing an additional sixth floor, and procure the necessary finance to enable the assessee to complete the construction of a modern theatre and other buildings and process the matters at every stage. In consideration of the services and assistance rendered by the owner, the assessee agreed to give the owner a sum of Rs. 3,30,000 within a period of five years by 20 quarterly instalments of Rs. 16,500 each. The amount of Rs. 3,30,000 was debited by the assessee at the close of the accounting year, 31st March, 1950. For the assessment years 1950-51, 1951-52 and 1952-53, the assessee claimed that the sums should be included in the actual cost of all depreciable assets for the purpose of determining the depreciation allowance under Section 10(2)(v) of the Act. It was held by the Bombay High Court that the expenditure incurred in getting prepared suitable plans and designs for the construction oi the cinema theatre and for getting various priorities and permits for scarce material, etc., were liable to be included in the " actual cost " of the depreciable assets to the assessee, and, therefore, such portion of the remuneration should be included in the cost of the depreciable assets. It was further observed that the services rendered by the owner for the acquisition and to enable the assessee to complete a modern cinema theatre could not be treated as connected with the acquisition of the depreciable assets.;

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