P.D. Desai, J.
1. The assessment year involved in this reference is assessment year 1967-68, the relevant previous year being the calendr year 1966. The assessee is a public limited company. It runs a textile mill. In order to expand its spinning capacity and to renovate and modernnise some of the sections of the mill, the assessee negotiated to import machineries from various foreign countries. The purchase price of such machinery was determined in foreign currencies and the payment therefor had to be made in such currencies. In order to enable it to make payment accordingly, the assessee entered into an agreement with the Industrial Credit and Investment Corporation of India Ltd. (ICICI) on June 25, 1965, where-under the ICICI agreed to lend to the assessee the requisite foreign currencies at agreed intervals and the assessee agreed to repay the loan in the same currencies in agreed instalments commencing from June 1, 1967. In the calendar years 1965 and 1966, the assessee acquired and installed some of the imported machineries in its textile unit. Some time in the middle of the relevant previous year, that is to say, on June 6, 1966, there was devaluation of the Indian rupee. As a result of the devaluation, the liability of the assessee in respect of the repayment of the instalments of loans borrowed by it from the ICICI for acquiring and installing the machineries in the calendar years 1965 and 1966 increased by Rs. 13,41,158 and an entry to that effect was made in the machinery account in the books of account of the assessee which were maintained according to the mercantile system.
2. In the course of the proceedings for assessment to income-tax for the relevant assessment year, the assessee contended that the actual cost of the machinery to the assessee had increased on account of devaluation and that the whole of the additional liability incurred by it as aforesaid was required to be taken into account for the purpose of allowing depreciation allowance and that for the purpose of allowing development rebate the additional liability to the tune of Rs. 8,67,437, which was relatable to the machineries acquired in the calendar year 1966 (previous year) was required to be taken into account. The Income-tax Officer, while allowing the claim for depreciation allowance, took into account the whole of the said additional liability. However, so far as the claim for development rebate was concerned, the Income-tax Officer totally ignored the same.
3. The matter was carried by the assessee in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that since the machinery was acquired and installed prior to devaluation, the said additional liability could be taken into account only for the purposes of granting depreciation allowance in view of section 43A(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). However, no part of such additional liability could be taken into account for the purpose of allowing development rebate having regard to the provisions of section 43A(2). The appeal of the assessee was, therefore, dismissed.
4. On further appeal carried by the assessee, the Income-tax Appellate Tribunal concurred in the decision given by the lower authorities. It held that the additional liability incurred by the assessee could not be taken into account for the allowance of development rebate inasmuch as : (i) the machineries were acquired before devaluation and additional liability subsequently arising on account of devaluation could not add to the original cost of acquisition; (ii) no instalment of loan was repayable in the year of account and the question of recomputation of the cost of the machinery in view of the additional liability did not arise; (iii) the additional liability could not be taken into account as it was not relatable to the cost of the acquisition of machineries but to repayment of loan taken form the ICICI; and (iv) section 43A, which was a specific provision dealing with increased and decreased liability on account of devaluation, permitted such factor to be taken into account only for allowance of depreciation allowance and excluded it from consideration so far as development rebate was concerned. As an alternative contention, the assessee had also urged before the Tribunal that the additional expenditure which it had to incur on account of devaluation ought to have been allowed as revenue expenditure under section 37 of the Act. The Tribunal rejected even this alternative contention and dismissed the appeal.
5. At the instance of the assessee, the Tribunal has referred the following two questions for the opinion of this court :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee would not be entitled to development rebate on the additional liability it incurred as a result of devaluation
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in rejecting the contention of the assessee that the additional liability as a result of devaluation is deductible from business profits either under section 28 or 37 of the Income-tax Act, 1961 ?'
6. At the outset it may be made clear that on behalf of the assessee it was stated at the bar that the second question was not pressed. Under the circumstances, it is not necessary to express any opinion on the said question.
7. In order to answer the first question, it would be necessary to refer briefly to the relevant provisions of the Act. Section 14 classifies income under various heads for the purposes of charge of income-tax and computation of total income. One of the heads of income enumerated is 'Profits and gains of business or profession'. Section 28 specifies the income which is chargeable to income-tax under the said head. Section 29 provides that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. Section 32 provides for depreciation allowance. Broadly speaking, it provides that in respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, depreciation shall be allowed at such percentage on the written down value thereof as may be prescribed subject, however, to the provisions of section 34. Section 33 deals with development rebate with which we are directly concerned and at the material time its relevant portion read as under :
'33. (1) In respect of a new ship acquired or new machinery or plant (other than office appliances or road transport vehicles) installed after the 31st day of March, 1954, which is owned by the assessee and is wholly used for the purposes of the business carried on by him, a sum by way of development rebate, equivalent to - .......
(iii) in the case of machinery or plant installed after the 31st day of March, 1961 - .......
(c) where the machinery or plant is installed after the 31st day of March, 1965, - .........
(B) for the purposes of any other business, -
(a) twenty per cent. of the actual cost of the machinery or plant to the assessee, where it is installed before the 1st day of April, 1970, and..... shall, subject to the provisions of section 34, be allowed as a deduction in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year.'
8. Section 34 prescribes the conditions subject to which depreciation allowance and development rebate can be allowed and since nothing turns upon it in the present case, we shall skip the details. Section 43 defines, subject to to the context, certain expressions used in section 28 to 41. Sub-section (1) defines 'actual cost' to mean 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. There is a proviso and there are certain Explanations to the said sub-section which are not relevant for the purposes of this case and they need not be read. Then comes section 43A which is relevant for the purposes of this case. It reads and always read as under :
'43A. (1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or of repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or as the case may be, deducted from, the actual cost of asset as defined in clause (1) of section 43 or the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35 or in section 35A or in clause (ix) of sub-section (1) of section 36, or, in the case of a capital asset (not being a capital asset referred to in section 50), the cost of acquisition thereof for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital assets as aforesaid.'
Explanation 1. - In this sub-section, unless the context otherwise requires, -
(a) 'rate of exchange' means the rate of exchange determined or recognised by the Central Government for the conversion of Indian currency into foreign currency or foreign currency into Indian currency;
(b) 'foreign currency' and 'Indian currency' have the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1947 (7 of 1947).
Explanation 2. - Where the whole or any part of the liability aforesaid is met, not by assessee, but, directly or indirectly, by any other person or authority, the liability so met shall not be taken into account for the purposes of this sub-section.
Explanation 3. - Where the assessee has entered into a contract with an authorised dealer as defined in section 2 of the Foreign Exchange Regulation Act, 1947 (7 of 1947), for providing him with a specified sum in a foreign currency on or after a stipulated future date at the rate of exchange specified in the contract to enable him to meet the whole or any part of the liability aforesaid, the amount, if any, to be added to, or deducted from, the actual cost of the asset or the amount of expenditure of a capital nature, or, as the case may be, the cost of acquisition of the capital asset under this sub-section shall, in respect of so much of the sum specified in the contract as is available for discharging the liability aforesaid, be computed with reference to the rate of exchange specified therein.
(2) The provisions of sub-section (1) shall not be taken into account in computing the actual cost of an asset for the purpose of the deduction on account of development rebate under section 33.'
9. Having read the relevant statutory provisions, let us now turn to the agreement entered into between the assessee and the ICICI,. On a scrutiny of the said agreement, the following broad features emerge :
(a) the ICICI agreed to grant a loan in foreign currencies equivalent to U. S. doller 390,000 (about Rs. 18.60 lakhs) to enable the assessee to meet the cost of a part of the equipment which it had to import from abroad in order of expand its spinning capacity and to renovate and modernise some of its manufacturing and processing departments;
(b) the actual amount of loan advanced in foreign currencies as aforesaid was determined by the International Bank for Reconstruction and Development (IBRD) in terms of a loan agreement between IBRD and ICICI;
(c) if IBRD was able to provide to ICICI one or more of the foreign currencies required only after purchasing such foreign currency with some other currency, then the part of the loan so provided was repayable in that currency and the amount so repayable was to be the amount paid by IBRD on such purchase;
(d) the repayment of the principal amount of loan and the payment of interest, redemption premium and commitment charges was to be made by the assessee in foreign currencies;
(e) the principal amount of the loan was to be repaid in 19 instalments beginning with June 1, 1967, and ending with June 1, 1976;
(f) in case ICICI exercised the option to accept repayment, whether of principal, interest, commitment charges or redemption premium in rupees in lieu of foreign currencies, the rupee sum was to be determined by actual cost to ICICI of purchasing with rupees the respective amounts of the foreign currencies becoming due and payable; and
(g) the assessee agreed to use the proceeds of the loan solely for the purpose of the project undertaken by it.
10. It is against the background of the statutory provisions set out above, and the agreement in question that the first question referred to us for our opinion will require to be answered.
11. The contention urged on behalf of the assessee in support of the reference was :
(i) that as a result of devaluation, which took place in the middle of the year of account, its liability to repay the loan and to make payment of other charges incidental to the loan, as expressed in terms of rupees, went up by Rs. 8,67,437 and that to that extent the actual cost of the imported machinery to the assessee increased;
(ii) that the said increased liability, which would be spread over the various instalments payable from the next succeeding accounting years, was actually reflected in the books of account of the assessee, which were maintained according to the mercantile system, in the current year and the assessee was, therefore, entitled to development rebate on the actual cost of the machinery acquired during the year as revised by taking into account the additional liability incurred by reason of devaluation; and
(iii) that the deduction as aforesaid was available to it on the plain terms of section 33, without having resort to section 43A, and the provisions of section 43A(2) could not, therefore, be pressed into service to deny to the assessee the benefit which was available to it under section 33.
12. The contention on behalf of the revenue, on the other hand, was :
(i) that the additional liability arose, after the machinery was installed and production had commenced, not on account of any payment which the assessee was required to make for the purchase of the machinery, but in order to repay the principal amount and other incidental charges to the ICICI from whom the assessee had borrowed monies in foreign currencies to pay the purchase price, and, therefore, such additional liability could not be taken into account in computing the actual cost of the asset to the assessee; and
(ii) that section 43A, which contains a non-obstante clause and which is a special provision occupying the field relating to increased liability on account of change in the rate of exchange at any time after acquisition of a capital asset, must be treated as having superseded the provisions of section 33 and, therefore, even if such increased liability was comprehended within the meaning of the expression 'actual cost' occurring in section 33, the special provision of section 43A must prevail over section 33 and, having regard to the provisions of sub-section (2) of section 43A, such increased liability cannot be taken into account in computing the actual cost of an asset for the purpose of deduction on account of development rebate.
13. In order to resolve this controversy, it would be necessary to ascertain first as to on what basis precisely a deduction on account of development rebate is available. Under section 33, the deduction on account of development rebate is worked out on the basis of certain percentage of 'the actual cost of the machinery or plant to the assessee'. The words 'actual cost' occurring in the said section are defined in section 43(1) but the definition merely says that they mean 'the actual cost of the asset to the assessee' minus the reduction to be effected in case a portion of the cost is met (directly or indirectly) by any other person or authority. The Explanations to the sub-section also do not throw any further light. What then is the true connotation of the words 'actual cost' and what items of expenditure incurred by an assessee in the entire process of the acquisition of an asset can legitimately be comprehended within the said term The question is no longer open to doubt or debate since there is an authoritative pronouncement on the subject.
14. In Challapalli Sugars Ltd. v. Commissioner of Income-tax : 98ITR167(SC) , the Supreme Court was concerned with the question whether the interest paid before the commencement of production on the amount borrowed for the acquisition and installation of the plant and machinery can be considered to be part of the actual cost of the assets to the assessee for the purposes of allowing depreciation allowance and development rebate. The Supreme Court at the outset observed (page 173) :
'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.'
15. The Supreme Court then proceeded to ascertain the connotation of the said expression in accordance with the normal rules of accountancy prevailing in commerce and industry. It went on to point out that (page 173) :
'The word 'cost', as observed on page 424 of Simon's Taxes, third edition, vol. B, 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 the price.'
16. Reference was then made to several standard books on accountancy which showed that expense incurred by a company in payment of interest on paid-up share capital raised for defraying the expenses of the construction of any works or buildings or provision of plant, which cannot be made profitable for a lengthened period, may be capitalised, that is to say, it may be treated as part of the cost of construction, similarly to legal expenses incurred on acquiring property or brokers' charges on purchasing investments. The final cost of construction work is accordingly made up of the cost of the machinery, materials, labour, supervision and establishment charges plus interest on the capital employed, which, but for its employment in that way, would be invested in good securities paying a reasonable rate of interest. Interest which could be taken into account in computing actual cost included not only actual interest paid but also interest payable in respect of borrowings which were used to finance capital expenditure. In other words, according to normal rules of accountancy as explained in those standard books, all expenditure incurred by a newly started company, before the production commences which is necessary to bring a capital asset into existence and to put it in working condition, is to be taken into account in computing the cost of such asset. Having referred to this recognised accountancy practice, the Supreme Court observed as under - See : 98ITR167(SC) :
'It would 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 contructing 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 the contrary.'
17. The Supreme Court then referred to clause (b) of sub-section (1) of section 208 of the Companies Act, 1956, which makes provision for payment of interest on share capital in certain contingencies. It was pointed out that the said provision gave 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, even though such moneys constituted share capital. The Supreme Court observed (page 175) :
'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.'
18. Having explained the true meaning of the words 'actual cost' as aforesaid, the Supreme Court proceeded to examine the two cases before it. In the first case, the assessee-company had commenced production on January 22, 1958. It had borrowed considerable sums of money from the Industrial Finance Corporation of India for installation of machinery and plant. During the relevant year and for the period prior to the commencement of its business, the assessee had paid a sum of Rs. 2,38,614 as interest on the said loan and the question was whether the amount paid as and by way of interest as aforesaid represented an element in the actual cost of the machinery, plant etc., to the assessee and, as such, depreciation and development rebate were admissible with reference to the said amount also. In the second case, the assessee-company had commenced its business in September, 1954. In June, 1953, it had borrowed certain amount on debenture from the public, on which interest was to run from the date of borrowal. The amount so borrowed was used along with the finance internally generated by the company in setting up a refinery for which plant and machinery were imported from abroad and which started working on September 1, 1954. The assessee-company capitalised all the expenses during the period of construction, including interest amounting to Rs. 23,53,284 which had accrued from the date of borrowing to the date of borrowing to the date of the commencement of the business on the aforesaid loan. The question which arose in the context of these facts was whether the assessee was entitled to treat the sum of Rs. 23,53,284 being the amount of interest paid on moneys borrowed, as part of the actual cost for the purposes of depreciation allowances and development rebate. The Supreme Court, in the light of the interpretation placed by it upon the words 'actual cost', held that the interest incurred before the commencement of production on money borrowed for the purpose of acquiring and installing the machinery and plant could be validly capitalized and added to the cost of the fixed assets created as a result of such expenditure. Accordingly, it held in the facts and circumstances of the cases before it that both the assessee-companies were entitled to treat the amounts of interest in question paid on money borrowed by them as part of the actual cost of the machinery and plant to them for the purposes of claiming depreciation allowance and development rebate.
19. It would thus appear to be well settled that the expression 'actual cost' in the context of the statutory provisions under consideration must be understood in the sense in which no commercial man would misunderstand. The word 'cost' is not synonymous with 'price'. Besides the price of machinery or plant, it takes in many other items of expenditure such for instance as freight, warehouse or insurance charges, legal expenses incurred in connection with its acquisition and interest incurred before the commencement of production on capital contributed or borrowed to acquire such asset. In other words, in determining the actual cost of a fixed asset, all expenditure necessary to bring such asset into existence and to put it in working condition may legitimately be taken into account.
20. Let us now proceed to examine the question under consideration in the light of this well-settled legal position. In the present case, the assessee entered into an agreement with ICICI on June 25, 1965, where-under the latter agreed to lend monies to the assessee in foreign currencies to pay the price of the imported machinery and the assessee agreed to pay back the monies in the same currencies in which they were borrowed. Besides, the assessee also agreed to pay interest, redemption premium, commitment charges, etc., in foreign currency. Even if ICICI exercised the option to accept payment in rupees in lieu of foreign currencies, the rupee sum was to be determined by the actual cost to ICICI of purchasing with rupees the respective amounts of the foreign currencies becoming due and payable. It is not in dispute that in the calendar years 1965 and 1966, the assessee had borrowed moneys in foreign currency from its loan account with ICICI and that it had purchased and installed some machinery with the aid of such funds. In the midst of the relevant previous year, devaluation of the Indian rupee took place and as a result thereof the liability of the assessee in respect of the repayment of the loan, relatable to the machinery acquired and installed in the previous year, increased by Rs. 8,67,437. The assessee was maintaining its accounts according to the mercantile system and it made an entry in its books of account in respect of such additional liability although the first instalment of repayment of loan was to commence from June 1, 1967. The claim of the assessee was that for the purpose of allowing development rebate, the additional liability in the sum of Rs. 8,67,437, which was relatable to the cost of the machinery acquired in the calendar year 1966 (previous year) was required to be taken into account. The claim was disallowed on the grounds set out earlier. The question, therefore, is whether the additional liability, which the assessee incurred on account of devaluation of rupee in the midst of the relevant previous year, in relation to the repayment of loan, which it had borrowed for acquiring the imported machinery during the said year, constituted an element in the actual cost of such machinery to the assessee for the purpose of allowing development rebate under section 33.
21. It appears to us that the answer to the question posed above cannot but be in favour of the assessee. The assessee had to pay for the imported machinery acquired by it during the course of the relevant previous year in foreign currency. It was not possessed of the foreign currency of its own and it had, therefore, to borrow the requiste amount of foreign currency from ICICI. The loan was thus borrowed for acquiring a capital asset and its repayment and all costs incidental thereto will, therefore, partake the character of capital expenditure. The repayment of the loan had to be made from the next succeeding year in foreign currency or in the rupee equivalent of the cost of purchasing such currency. In either case, the actual cost of the imported machinery to the assessee had to be determined in terms of rupees for the purpose of its own accounts. Since the devaluation took place in the midst of the year of account, to the extent to which repayment obligation in respect of machinery purchased during the said year remained outstanding, the additional cost of repayment in terms of rupees can legitimately be considered by a commercial man as enhancing the cost of the corresponding machinery purchased. The assessee maintained its accounts according to the mercantile system and it was therefore, justified in debiting in its books of account the additional repayment obligation in the sum of Rs. 8,67,437 which it incurred as aforesaid and in claiming that it should be taken into account in determining the cost of acquisition of the machinery acquired and installed in the year 1966.
22. The Tribunal was, however, of the view-and it is also the contention of the revenue before us-that since the increased liability on account of devaluation was incurred by the assessee merely in respect of the repayment of loan and payment of incidental charges to ICICI and that too after the machinery was acquired and installed, it had no bearing in working out the actual cost of the machinery to the assessee. The view-point, in other words, was that before any increase in liability on account of devaluation can be taken into account in determining the actual cost of the asset, it must be shown that : (1) it is incurred in relation to the payment of purchase price proper of the asset to suppliers inasmuch as once the purchase price is fully paid-even with borrowed foreign currency-any subsequent devaluation resulting in increased liability in respect of the repayment of loan cannot affect the purchase, and (ii) it is incurred before the asset was acquired. The revenue urged that these conditions are not satisfied herein. We are unable to agree. There are two prongs of this argument and let us examine each of them separately.
23. The first prong of the argument makes an artificial distinction which is unrealistic and it also suffers from the fallacy of equating 'cost' with 'price'. The loan, in a case like the present, is borrowed in order to pay the price of the machinery in foreign currency. It is an unavoidable incident of purchase of machinery from a foreign market where price has to be paid in the currency which is current in such market. Employment of such borrowed monies for acquiring a capital asset and incidental expenditure incurred for the purpose of such borrowing prior to the commencement of production must be deemed to be capital outlay, having regard to the well settled principles. Whether someone had advanced the foreign currency to make the purchase of machinery or money was found by the assessee itself for the said purpose, is a matter of no consequence and it does not render the expenditure incurred by the assessee on that account any-the-less capital outlay. If, therefore, as a result of devaluation, the very liability in respect of repayment of monies thus borrowed for capital outlay increases, can it not be legitimately taken into account in determining the actual cost of the machinery regard being had to the fact that 'cost' is not equivalent to 'price'
24. The revenue relied on the decision in State of Madras v. G. J. Coelho : 53ITR186(SC) and India Cements Ltd. v. Commissioner of Income-tax : 60ITR52(SC) in order to urge that by procuring a loan the assessee could not be said to have obtained an asset or an advantage of enduring nature and that it was irrelevant to consider the object with which the loan was obtained and that, therefore, any increased liability in respect of such loan cannot be capitalised. We are unable to read in the said two decisions anything which can support the revenue. In Coelho's case : 53ITR186(SC) , the Supreme Court held, in the facts and circumstances of the case, that interest paid by the assessee on monies borrowed for the purpose of purchasing plantations was not capital expenditure as no new asset was acquired nor enduring benefit obtained as a result of the payment of interest and that it was an expenditure laid out and expended wholly and exclusively for the purpose of plantations. In the said decision itself, however, it was reiterated that outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment and that expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. If these tests are applied to the borrowing in the present case, it would be apparent that the assessee having acquired with it machinery, which was an equipment of enduring benefit to its manufacturing activity, the entire outlay including interest and other incidental charges which had to be incurred will be capital in nature. The decision in India Cements Ltd.'s case : 60ITR52(SC) is not helpful to the revenue because in that case the incidental expenses in respect of which the claim was made were incurred in respect of a loan which was obtained by the assessee partly to pay off a prior debt which they had incurred in order to purchase a capital asset and partly for augmenting the working funds of the company. It is in the context of those facts that it was held that : (a) the loan obtained was not an asset or advantage of an enduring nature; (b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was held to be revenue expenditure. In Challapalli's case : 98ITR167(SC) , the Supreme Court referred to the decision in India Cements Ltd.'s case : 60ITR52(SC) and pointed out that the loan in that case was obtained not before the commencement of the production but at a later stage and that, therefore, the incidental expenses could not have been capitalised. In the present case, these features are not present. In our opinion, therefore, neither of the decisions on which the revenue relies is helpful to it.
25. The second prong of the argument is equally untenable and in advancing the same, the terms of the loan and the circumstances under which the liability increased are totally ignored. It was agreed between the parties at the time of the original loan transaction that the repayment was to be in the same currency and that in case ICICI agreed to accept payment in rupees in lieu of foreign currencies, the rupee sum was to be determined by the actual cost to ICICI of purchasing with rupees the respective amounts of foreign currencies becoming due and payable. Therefore, the increased liability on account of devaluation arose as an integral part of the original arrangement between the parties. The assessee, who maintained its accounts according to the mercantile system, can be said to have incurred such liability when it started drawing upon the loan account to make the purchase of machinery irrespective of whether such liability was quantified and disbursed later. Such increased liability was indeed brought into debit in the books of account of the assessee in the year of account as soon as it was crytallised but on that account it cannot be said that it was incurred after the date of purchase and installation of the machinery. The very basis of this submission is, therefore, unfounded.
26. It is true, as observed by the Tribunal, that the instalments of repayment were to start the next year and that in the year of account no instalment was payable. However, the assessee, as earlier stated, was maintaining its accounts according to the mercantile system and it was, therefore, entitled to bring into debit the expenditure amount for which a legal liability had been incurred before it was actually disbursed. The view of the Tribunal that the increased liability cannot be taken into account in recomputing the original cost on that ground, therefore, proceeds on a total misconception.
27. It might be stated that it was also urged on behalf of the revenue during the course of the arguments that since the entire increased liability had come into existence after the production had commenced, the assessee could not be allowed to capitalise the same and to recompute the original cost of the machinery on that basis. Now, in the first place, the Tribunal has not found as to what was the date of the commencement, if any, of the production in respect of the new machinery installed in the relevant previous year. In fact, on a close reading of the statement of the case and the order of the Tribunal, it is not even clear whether all the machinery necessary to commence production was fully installed in the year in question so that the newly established unit could have gone into production. Schedule II of the loan agreement which is part of the statement of the case contains a recital that 'the commercial production from the new equipment is expected to commence from January, 1967'. This argument, therefore, is misconceived. In the next place, an argument precisely in these terms does not appear to have been advanced before the Tribunal and it cannot be said to arise out of its order. In the last place, even assuming that the machinery in question had gone into production prior to the date of devaluation, the contention aforesaid founded on such eventuality cannot assist the revenue for the very reasons which we have just given. The increased liability on account of devaluation was within the contemplation of the parties as an integral part of the original transaction and the assessee must be held to have incurred such liability in respect of each instalment no sooner it started drawing upon the loan account, since the assessee maintained its accounts according to mercantile system. We do not think, therefore, that even on this ground it can be said that the increased liability could not be taken into account in determining the actual cost.
28. The foregoing discussion would show that the additional liability in respect of repayment of loan borrowed by the assessee for acquiring imported machinery during the relevant previous year, which was incurred as an integral part of the original transaction, can legitimately be taken into account as enhancing the cost of the corresponding machinery purchased and it should, therefore, be taken into consideration in determining the actual cost of such machinery to the assessee for the purpose of allowing development rebate under section 33. There is no need to resort to section 43A(1) and the provisions of section 43A(2) cannot, therefore, be pressed into service to deny to the assessee the benefit which was available to it under the provisions of section 33 itself.
29. In the view which we are taking we are supported by the decision of this court in Commissioner of Income-tax v. Tensile Steel Ltd. : 104ITR581(Guj) . In that case, two Japanese firms had agreed to supply to the assessee plant and machinery and technical knowhow for the purpose of manufacturing high tensile steel wires. Under the agreement, 40% of the value of the plant and machinery was to be set off against equity participation, 20% was to be paid on the contract coming into effect and the balance was to be paid in ten instalments spread over a period of five years. The rate of interest on deferred payments was to be 6% per annum and at that rate the interest payable worked out to Rs. 3,65,040. The payment was to be made in pounds sterling and it was specifically agreed between the parties that in case of any change in the official rate of IMF at any time till the payment of the final instalment, the difference would be adjusted at the time of payment of each instalment. The assessee-company went into production on September 1, 1963. By that time, it had capitalised expenditure of Rs. 4,51,676 which included a sum of Rs. 3,65,040 being the interest on the deferred payment payable from November, 1963. In the course of assessment proceedings for assessment year 1964-65, the Income-tax Officer allowed the capitalisation and depreciation allowance and development rebate were granted thereon. In revision, the Additional Commissioner of Income-tax took the view that since the payment of interest was to start after the assessee-company went into production, the sum of Rs. 3,65,040 could not have been allowed to be capitalised and no depreciation allowance and development rebate could have been allowed on the said sum. Meanwhile, on account of devaluation of rupee on June 6, 1966, the assessee-company was required to incur additional liability of Rs. 4,62,851 including interest liability of Rs. 32,291 in respect of the aforesaid transaction. The assessee capitalised this additional amount in the previous year relevant to the assessment year 1967-68 and claimed depreciation allowance thereon. The claim for depreciation on the amount of additional interest was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner. Before the Tribunal, the assessee succeeded in respect of both the amounts of interest, namely, Rs. 3,65,040 and Rs. 32,291. The matter ultimately came to this court and two questions arose for its consideration. First, whether the amounts of Rs. 3,65,040 and Rs. 32,291 were capital expenditure or revenue expenditure and, secondly, whether depreciation allowance could be allowed on those amounts. It was urged on behalf of the revenue before this court that the first instalment of the repayment of the principal amount together with interest thereon and the subsequent instalments were to commence after the assessee-company went into production, and that, therefore, the interest could not be capitalized. This court found that the assessee who was maintaining its books of account on mercantile system had debited to the plant and machinery account on December 31, 1962, the price of the plant and machinery and the amount of interest amounting to Rs. 3,65,040. Similarly, the assessee-company debited in the same account on March 31, 1967, the additional amount of Rs. 4,62,851 (including the interest amount of Rs. 32,291) which it had become liable to pay by reason of devaluation. This court observed that the entire deal between the parties was required to be viewed as a package deal by which the foreign suppliers agreed to enter into financial and technical collaboration with the assessee-company, which as a part of such agreement, received plant and machinery on deferred payment terms. Each instalment of payment was a composite instalment comprising of the principal and interest amount. Under the circumstances, it could not be said that interest was not a part and parcel of the original price, the payment of which was agreed to be spread over a period of five years. The obligation of payment of interest was incurred for obtaining deferred payment terms under the contract of purchase of machinery and plant, which in turn was a part of the financial and technical collaboration agreements, resulting in spread-over of the payment of the actual price over a long period. It followed as a necessary corollary, therefore, that if interest was a part and parcel of the price, it must also be treated similarly. The arrangement to which the parties had entered into had to be viewed from the angle of commercial trading and expediency and it was required to be viewed as a whole. The argument on behalf of the revenue that out of the interest nothing was acquired and that it was only with a view to get deferred payment terms that the said liability was incurred, was rejected in the light of the above findings. The further submission of the revenue that interest paid after the production commenced could not be allowed to be capitalised was rejected on the ground that in Challapalli's case : 98ITR167(SC) , the principle was a approved that interest incurred before the commencement of production on borrowed money could be capitalized and added to the cost of the fixed assets which had been created as a result of such borrowings. Interest 'incurred' meant actual interest paid or payable in respect of borrowings which are used to finance capital expenditure. Since the assessee-company was maintaining its accounts according to mercantile system of accounting, even if the disbursements of interest might have taken place in future, the obligation to pay interest must be treated as having been incurred immediately when, according to the agreement, machinery and plant were supplied and transferred to the assessee-company. The assessee had in fact debited to the plant and machinery account the price of plant and machinery and interest in the calendar year 1962. The fact that disbursement of the liability was spread over a period of years was held to be of no effect. Having regard to the nature of the transaction and the circumstances of the case it was held that both the amounts of interest were required to be treated as capital expenditure on which depreciation was admissible.
30. This decision goes a long way and covers considerable ground which we are required to travel herein. This court took the view in that case that additional liability of payment of interest arising on account of devaluation nearly three years after the production commenced could still be allowed to be capitalised in view of the fact that the assessee, who was maintaining its books of account according to mercantile system, had incurred the liability immediately upon the supply of plant and machinery though the amount might be disbursed later. In the present case, the additional liability arose in the year of acquisition itself under similar circumstances and the present case, therefore, stands even on a stronger footing.
31. The revenue, when faced with this position, contended that the enactment of section 43A by Finance (No. 2) Act, 1967, after the devaluation was itself sufficient evidence to show that increased liability arising on account of devaluation was not covered within the meaning of 'actual cost' and that any such liability could not be taken into account for computing the actual cost of such asset to the assessee except under the said section. The Tribunal also appears to have taken a similar view. In our opinion, this argument also cannot assist the revenue in the facts and circumstances of the case.
32. Now, it is true that section 43A, sub-section (1), deals with the case of increase or reduction in the liability of an assessee, as expressed in Indian currency, for making payment towards the whole or part of the cost of an asset acquired from abroad, or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring such asset, on account of or in consequence of change in the rate of exchange at any time after the acquisition of such asset, and provides that the amount by which the liability is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined in section 43(1) and that the amount arrived at accordingly shall be taken to be the actual cost of the asset to the assessee. This provision, if it is not closely examined, might appear to provide for all cases of increase or decrease in the cost of an asset on account of change in the rate of exchange. However, a closer scrutiny will show that it applies only to such cases in which such increase or decrease arises for the first time, in consequence of a change in the rate of exchange at any time after the acquisition of the asset. Therefore, cases like the present where the increased liability is in fact incurred prior to acquisition of the asset and it, therefore, becomes part of the cost of acquisition in its ordinary signification, are not within the ambit of the said section. The said section may be attracted in cases such as, for example, when an assessee maintains his accounts on cash receipt basis and the increased liability in respect of repayment of instalments of purchase price of loan accrues or arises for the first time after the acquisition and installation of the asset. The section takes care of such cases and to give relief in such case it give an artificial meaning to the expression 'actual cost of the asset'. In our opinion, therefore, the argument based on the enactment of section 43A cannot help the revenue.
33. The last contention on behalf of the revenue-and this was also the view of the Tribunal-was that section 43A was a special provision enacted to meet with all the situations arising out of variation in the rate of foreign exchange as a result of devaluation and that it must prevail over or supersede section 33, which is a general provision, having regard to sub-section (2) of section 43A which provides that the provisions of sub-section (1) shall not be taken into account in computing the actual cost of an asset for the purpose of the deduction on account of development rebate under section 33. In view of what we have already observed with regard to the scope and ambit of sub-section (1) of section 43A and its effect on the interpretation of the words 'actual cost' in section 33, this argument has no force. The special provision does not cover cases such as the present where the increased liability was incurred prior to acquisition. It embraces other cases not falling within the general provision where such increased liability is incurred or arises for the first time after acquisition. In those other case, the benefit of development rebate may not be available, though we wish to express no final opinion on the question. It is inconceivable that when the legislature was inclined to grant relief in some cases, which it thought was not available under the general provisions, it would in the process withdraw the very relief available in some other cases, on the plain terms of section 33.
34. Much was made, however, of the opening words to be found in sub-section (1) of section 43A and it was urged that the non-obstante clause has the effect of overriding the preceding provisions of the Act dealing with the same situation and that once that rule of interpretation was borne in mind, and sub-section (1) was read with sub-section (2), the conclusion was apparent that in cases contemplated by sub-section (1), relief of development rebate would not be available to the assessee. We are unable to accept the submission in its entirety. The effect of a non-obstante clause has to be judged in the light of well settled principles of interpretation. In Aswini Kumar Ghose v. Arabinda Bose : 4SCR1 , the following observations were made in connection with the non-obstante clause at page 376 :
'It should first be ascertained what the enacting part of the section provides on a fair construction of the words used according to their natural and ordinary meaning, and the non-obstante clause is to be understood as operating to set aside as no longer valid anything contained in relevant existing laws which is inconsistent with the new enactment.' (Underlining supplied).
35. This is the approach to be adopted in the construction of the non-obstante clause in section 43A(1) and in judging its effect on all other relevant provisions of the Act which preceded the same. We have already adverted to the provisions of the enacting portion of sub-section (1) of section 43A. They do not cover cases where such increased liability is incurred before acquisition and it becomes part of the cost of the asset within the ordinary meaning of the said expression. Development rebate and depreciation allowance will be available thereon de hors section 43A(1) in such cases. The provisions of sections 32 and 33, which proceed upon the concept of 'actual cost' in the sense in which we have explained above, being thus independent of and not inconsistent with the enacting part of sub-section (1) of section 43A, the question of sub-section (1) of section 43A operating of set aside as no longer valid anything contained in sections 32 and 33 on the same subject-matter does not arise.
36. In view of the foregoing discussion, we come to the conclusion that the increased liability of the assessee with regard to repayment of the loan and payment of interest, commitment charges, etc., on account of devaluation, in so far as it was relatable to the machinery acquired in the year of account, should have taken into consideration in working out the actual cost of the machinery to the assessee for the purpose of the grant of development rebate. The contrary view of the Tribunal was not correct.
37. In the result, we answer the questions referred to us as under :
Question No. 1. - In the negative, i.e., in favour of the assessee and against the revenue.
Question No. 2. - Not pressed.
38. The Commissioner will pay the costs of this reference to the assessee.