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Commissioner of Income-tax Vs. L.G. Balakrishnan and Bros. (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 40 of 1968 (Reference No. 11 of 1968)
Judge
Reported in[1974]95ITR284(Mad)
ActsIncome Tax Act, 1961 - Sections 43(1) and 43(6)
AppellantCommissioner of Income-tax
RespondentL.G. Balakrishnan and Bros. (P.) Ltd.
Appellant AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Respondent AdvocateS. Swaminathan and ;K. Ramagopal, Advs.
Cases ReferredAct. In Duple Motor Bodies v. Ostime
Excerpt:
direct taxation - depreciation - sections 43 (1) and 43 (6) of income tax act, 1961 - whether tribunal correct in holding that sum representing interest on moneys utilised in purchase of machinery entitled to depreciation and development rebate - depreciation and development rebate can be allowed only on actual cost of assets to assessee - assessee's peculiar position at time of purchase of machinery should be taken into account while granting allowance for depreciation and development rebate - where person cannot acquire machinery with his own funds but can do so by borrowing his actual cost of machinery includes cost price, incidental charges and extra expenditure incur in respect of borrowing - held, tribunal right in allowing assessee's claim for depreciation and development.....ramanujam, j. 1. the assessee is a private limited company. it started a factory for the manufacture of various types of chains in collaboration with a west german firm. on 1st august, 1960, the company had entered into an agreement with its foreign collaborators for providing the technical know-how. the said agreement provided that the technical know-how will be linked with a free consulting period of 3 years from the date of the agreement, that a lump sum payment of rs. 17,143 has to be made to the foreign collaborators as an indemnity for the elaboration of the scheme, for transmitting arrangement, of their experience and all their assistance for the duration of the free consulting period. the said sum of rs. 17,143 was paid on october 18, 1960, and this sum was transferred to the.....
Judgment:

Ramanujam, J.

1. The assessee is a private limited company. It started a factory for the manufacture of various types of chains in collaboration with a West German firm. On 1st August, 1960, the company had entered into an agreement with its foreign collaborators for providing the technical know-how. The said agreement provided that the technical know-how will be linked with a free consulting period of 3 years from the date of the agreement, that a lump sum payment of Rs. 17,143 has to be made to the foreign collaborators as an indemnity for the elaboration of the scheme, for transmitting arrangement, of their experience and all their assistance for the duration of the free consulting period. The said sum of Rs. 17,143 was paid on October 18, 1960, and this sum was transferred to the plant and machinery account on March 31, 1962.

2. The three directors of the company and an engineer went abroad on various dates and incurred the following expenses:

NameDateExpenses incurred

L. G. Balakrishnan31-5-1960Rs. 10,763L. G. Varadarajulufrom 6-7-1960 to 13-2-196215,767L. G. NityanandanJune 61 to October 616,018(The above amounts were debited to the personal accounts of the respective parties and transferred to plant and machinery account on 31-3-1962). P. Ramachandran (Engineer) Oct. 61 to March 629,655Other payments509

Rs. 42,712

3. The company had expended up to March 31, 1962, a sum of Rs. 6,91,794 for setting up of the factory. Out of this sum, a sum of Rs. 1,92,890 was incurred to import raw materials, chemicals, etc., and the balance of Rs. 4,98,905 was utilised for purchase of machinery. In the year ending on March 31, 1963, the company has paid interest at 6 per cent. on the said sum of Rs. 4,98,905 said to have been borrowed, and this came to Rs. 33,000.

4. In the assessment year 1963-64 corresponding to the previous year ending on March 31, 1963, the assessee claimed depreciation and development rebate on the cost of the plant and machinery which included the following sums :

Rs.Foreign tour expenses42,712Interest33,000Payment to foreign collaborators17,143

5. The Income-tax Officer rejected the claim for depreciation and development rebate on the aforesaid three amounts on the ground that the aboveexpenditure did not result in the creation of any tangible asset.

6. The assessee appealed to the Appellate Assistant Commissioner. He held that the payment of Rs. 17,143 to the foreign collaborators was a sort of indemnity and that it was not merely for the technical know-how but for the other purposes mentioned in the collaboration agreement, that the foreign tour expenses did not add to the value of the machineries and that, therefore, the company's claim for depreciation and development rebate on these two sums could not be sustained. In respect of the claim for depreciation and development rebate on the interest amount of Rs. 33,000 he found that borrowed money had been utilised for the purchase of the machinery, that the interest paid represented part of the cost of acquisition of tangible assets and, therefore, the assessee was entitled to capitalise and claim depreciation and development rebate on the said sum of Rs. 33,000.

7. Both the department and the assessee went before the Appellate Tribunal on appeal. In the department's appeal which was directed against the allowance of depreciation and development rebate on Rs. 33,000 being the interest paid, the Tribunal agreed with the decision of the Appellate Assistant Commissioner relying on the decision of the Calcutta High Court in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd., [1966] 61 I.T.R. 799 (Cal.) In the company's appeal which was directed against the disallowance of the depreciation and development rebate on the foreign tour expenses of Rs. 42,712 and on the payment of Rs. 17,143 made to the foreign collaborators, the Tribunal held that the expenses incurred for the foreign travel should be considered as part of the actual cost of the machinery and depreciation and development rebate has, therefore, to be allowed thereon, but that in respect of the sum of Rs. 17,143 representing payment to foreign collaborators the decision of the Appellate Assistant Commissioner was right.

8. Both the department and the assessee sought references to this court and the following three questions have been referred, the first two at the instance of the department and the third at the instance of the company :

'(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 33,000 representing interest on moneys utilised in purchase of machinery could be considered as forming part of the actual cost of the machinery and entitled to depreciation and development rebate ?

(2) Whether, on the facts and in the circumstances of the case, the expenses Rs. 42,712 incurred on foreign trips could be considered as part of the actual cost of machinery.

(3) Whether, on the facts and in the circumstances of the case, the expenses of Rs. 17,143 representing the payment to foreign collaborators was part of the actual cost of machinery entitled to depreciation and development rebate '

9. The finding of the Tribunal in relation to the first question is that the machinery has been purchased by the company with borrowed capital and that the sum of Rs. 33,000 represented the interest paid on those borrowings during the previous year. The question is whether such interest can be included in the cost of the machinery so that depreciation and development rebate could be claimed thereon. Both the Appellate Assistant Commissioner and the Tribunal have upheld the claim of the company in this regard following the decision of the Calcutta High Court in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd.

10. Section 32 providing for depreciation and Section 33 providing for development rebate make reference to the ' actual cost of the machinery or plant ' and its ' written down value ' Section 43(1) has defined ' actual cost ' as ' actual cost of the assets to the assessee ' reduced by that portion of the cost thereon, if any, as has been made directly or indirectly by any other person or authority. Section 43(6) defines ' written down value ' as meaning 'in the case of assets acquired in the previous year', the actual cost to the assessee, and in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciations actually allowed to him under the Income-tax Act. The above statutory provisions clearly indicate, according to the revenue, that the depreciation and development rebate can be allowed only on the actual cost of the assets to the assessee or its written down value and that the interest paid on the capital borrowed by the company and utilised for the purchase of the machinery cannot, in any sense, be termed as cost of the machinery. It is said that Whether the machinery has been purchased with one's own money or borrowed capital, the cost of the assets will have to be the same, that there is no direct connection between the borrowing and the cost of the machinery and that the act of borrowing is independent of the contract of purchase of the machinery. It is also pointed out that the company has paid interest in its capacity as a borrower under a money-lending transaction and the liability to pay interest has not been incurred in its capacity as purchaser of the machinery, that the company's liability as a borrower should be distinguished from its ownership of the machinery, that the interest paid on capital borrowed cannot, in its very nature, add to the value of the machinery, that the payment of interest is to discharge its liability as a borrower, that such a liability is alien to the concept of cost and, therefore, interest paid to discharge its liability as a borrower cannot be a component of the cost of the machinery. It is contended that liabilities being amounts owed by the company, they are not capable of being assessed as assets even though the liabilities have been incurred in connection with the acquisition of the machinery.

11. The reasoning given by the Appellate Assistant Commissioner for upholding the claim of the assessee in this regard is that the money borrowed has been utilised for the purchase of the machinery and, therefore, the interest paid thereon should be capitalised. The Tribunal agreed with this view. The question is whether the interest paid on the amount borrowed for the purchase of the machinery could be capitalised and added to the cost of such machinery, and whether depreciation and development rebate could be claimed on such capitalised value.

12. In Habib Hussein v. Commissioner of Income-tax, : [1963]48ITR859(Bom) the Bombay High Court held that the expression ' actual cost to the assessee ' as used in Section 10(5) of the Indian Income-tax Act, 1922, will take in whatever the assessee had in fact expended or laid out for the purpose of acquiring the depreciable assets and that, therefore, the expenditure incurred by the assessee in that case in getting prepared suitable plans and designs for the construction of the cinema theatre, for securing various priorities and permits for scarce materials including cement, steel, piping and petrol for transport, for securing import licence for various goods for the purpose of the cinema theatre and for securing foreign exchange facilities to enable the assessee to import from abroad goods required for the purpose of the said cinema theatre was liable to be included in the cost of the depreciable assets of the assessee and, therefore, such portion of the remuneration as was attributable to the said services should be included in the cost of the depreciable assets. A somewhat similar question came up for consideration before the Calcutta High Court in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. In that case the assessee-company borrowed monies on debentures oil first June, 1953, and utilised the same along with other monies financed by it for setting up a refinery. It started functioning from September 1, 1954. All expenses incurred during the period of construction including the amount of interest which had accrued on the aforesaid debentures from the date of the borrowing to the date of the commencement of the business were capitalised and depreciation on the full amount was claimed. The Tribunal upheld the claim and on a reference to the High Court by the revenue it was held that the interest paid on the debentures issued formed part of the actual cost incurred by the assessee in acquiring the capital and such interest must be taken into consideration for the purpose of depreciation and development rebate. The reasoning of the court in that case is this :

'Depreciation and development rebate are allowed on the written down value of the capital asset. Section 10(5)(a) says that written down value means in the case of assets acquired in the previous year, the actual cost to the assessee. Therefore, depreciation and development rebate are allowed in the case of assets acquired in the previous year on the actual cost to the assessee of the capital asset. Capital asset may be acquired by the assessee either out of his own savings or with borrowed capital. When capital asset is acquired with borrowed capital the assessee is ordinarily required to pay interest on such amount borrowed while the capital asset is being acquired, that is to say, until it is fit for the commencement of business... Whatever expenses are essential to the erection of the capital asset are certainly included in the actual cost to the assessee. Is the payment of interest essential to the acquisition of a capital asset When a capital asset is acquired by an assessee with his own money he is not required to pay any interest; so it may be argued that payment of interest is not essential to the acquisition of a capital asset but this argument does not bear scrutiny. Employment of an erection engineer may be necessary in one case and may not be necessary in another. From this it cannot be said that in an appropriate case the employment of an erection engineer is not essential to the erection of a factory. Similarly, where an assessee cannot acquire a plant except with the aid of a loan, the loan is essential to him for the acquisition of the plant, and payment of interest being essential to the procurement of loan, payment of interest too must be regarded as essential to the acquisition of the plant .... On a general principle there is scarcely any distinction between payment made to a supervisor who supervises the erection of a plant and the payment made by way of interest on the amount borrowed for the acquisition of the capital asset. If payment to a supervisor is an element in the actual cost incurred by the assessee in having the plant, there is no reason why payment of interest should not be an element in such cost.'

13. The above decision, has been followed by a later decision of the same High Court in Commissioner of Income-tax v. Fort Gloster Industries Ltd., : [1971]79ITR48(Cal) In that case the assessee placed an order with a British concern for the purchase of machinery worth Rs. 48 lakhs. The British supplier required a guarantee to be given. The Allahabad Bank Ltd. agreed to be the guarantor for the sum of Rs. 48 lakhs and received a consideration of Rs. 36,000 as guarantee commission from the assessee. The question arose whether the said sum of Rs. 36,000 could be treated as part of the ' actual cost to the assessee ' of the new machinery acquired by it for the purpose of allowance of development rebate under Section 10(2)(vib) of the Indian Income-tax Act of 1922. The court had expressed the view that the ' actual cost to the assessee ' included all costs essential for the acquisition of the capital asset and, therefore, the guarantee commission paid by the assessee is an expenditure laid out for the purpose of acquiring depreciable assets and it should be treated as part of the assessee's 'actual cost' of the machinery. In Commissioner of Income-tax v. Lothian Jute Mills Co. Ltd., : [1967]66ITR630(Cal) the court construed the expression ' actual cost to the assessee ' as indicating the legislative intention to treat the sum of money or money's worth which it cost the assessee to acquire the asset and that ' actual cost ' meant the real cost, that is the cost which the assessee incurred in fact to acquire the asset.

14. The learned counsel for the revenue, however, contends that the above decisions have overlooked the fact that the amount borrowed cannot be treated as an asset or advantage for the enduring benefit of the assessee's business and, therefore, the interest paid on the amount borrowed cannot be treated as cost of the capital asset. He refers to the decision in India Cements Ltd. v. Commissioner of Income-tax, : [1966]60ITR52(SC) . In that case the assessee had obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation by creating a charge on its fixed assets. In connection therewith it spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed the said amount as a business expenditure. The revenue contended that the said expenditure is of a capital nature and, therefore, could not be allowed as a deduction under Section 10(2)(xv) of the Income-tax Act, 1922. Rejecting that contention the Supreme Court held that the act of borrowing money was incidental to the carrying on of the business and the loan obtained was not an asset or advantage of enduring nature as the expenditure was made for securing the use of money for a certain period. The Supreme Court observed that a loan is a liability and has to he repaid and that, therefore, it is erroneous to consider a liability as an asset or an advantage of an enduring nature. According to the revenue if the interest paid on the money borrowed for the business cannot be treated as a capital expenditure, it cannot for the same reason be treated as cost of the machinery which is a capital asset. Mr. Balasubrahmanyan for the revenue also relied on the decision of the Supreme Court in Sitalpur Sugar Works Ltd. v. Commissioner of Income-tax, [1963] 49 I.T.R.160 in support of his contention that depreciation and development rebate cannot be allowed on the interest paid because no tangible asset was acquired nor any improvement was made to the machinery to increase its value by incurring the expenditure. In that case the assessee-company had a sugar factory at Sitalpur. As good quality of sugarcane was not available in sufficient quantities in that place, it shifted its factory to Guraul and in the process of dismantling the building and machinery and transporting and erecting them at Guraul incurred an expenditure of Rs. 3 lakhs and odd and claimed that amount as deduction under Section 10(2)(xv) of the Income-tax Act, 1922. It also claimed, in the alternative, that depreciation should be allowed on that amount under Section 10(2)(vi) if it were capital expenditure. The Supreme Court took the view that the expenditure having been incurred for the purpose of carrying on the concern with a greater advantage for the trade than it had, it should be taken as a capital expenditure but that no depreciation could be claimed because no tangible asset was acquired by the expenditure and no improvement was made in any capital asset in the sense that there was an increase in the value thereof. The revenue also points out that the decision in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. proceeds on an erroneous assumption that the cost of installation will go to add to the 'actual cost' of the machinery, while in fact Section 10(2)(vi) does not treat the cost of erection or installation of the machinery as the cost of the machinery. Rules 5 and 5A of the Income-tax Rules, 1962, are also referred to as showing that for purposes of depreciation and development rebate the cost of erection or installation of the machinery is not expected to be taken into account. It is further argued that from the mere fact that interest has been paid on the amount borrowed for the purchase of the machinery it cannot be said to have gone even indirectly for the purchase of the machinery, that if any indirect connection between the amount spent and the purchase of the machinery is taken to be relevant for the purpose of depreciation and development rebate, it will allow free flow of discretion on the part of the assessing authority in the matter of grant of allowance and this will lead to inequity and that, therefore, the court had always to take the actual cost of the machinery as the 'actual amount' expended for acquiring the same. The learned counsel, however, concedes that the actual cost has to necessarily include the insurance, and freight, if any, which have got a direct relation to the purchase of the machinery.

15. Mr. Swaminathan, learned counsel for the company, however, urges that in the matter of ascertaining the ' actual cost to the assessee ' for the purpose of depreciation and development rebate one must make the distinction between the period before the factory begins to work and later, that the normal commercial and accountancy practice is to capitalise all the expenditure incurred in connection with the acquisition of the machinery and its erection and treat it as the cost of the machinery, that such a commercial and accountancy practice has been accepted all the world over, and that such capitalisation cannot be overlooked by the income-tax authorities. It is also stated that the provisions of the Income-tax Act and the Rules contemplated the inclusion of erection or installation charges as part of the cost of the plant. He refers to Part I to Appendix I to the Income-tax Rules, 1922 and submits that the depreciation is allowed at a certain percentage on the 'written down value' of the asset either as factory-wise, plant-wise or item-wise and that if the depreciation is allowed at a certain percentage of the cost of the factory it would necessarily include the erection and installation charges.

16. Mr. Swaminathan refers to the following passages from Simon's Taxes B., third edition, at pages 423 and 424 dealing with 'cost price':

' Cost price : The process of ascertaining cost is primarily a matter of identification. In some cases physical identification is possible. This is the position where articles are sold in the same condition as that in which they are bought, where each article is identifiable and distinguishable from the rest and where records can be kept showing the actual cost of each article bought (e.g.. a dealer in motor cars). Even in such straightforward cases it is necessary to remember that 'cost' is not synonymous with 'price' but that other items of expenditure, such for instance as freight or warehouse charges or insurance, must in certain cases be added to the price.

Market value: The purpose of valuing stock at market price instead of cost is to provide for an anticipated loss on sale. The loss expected must be such as will arise on a sale in the ordinary course of business. The question as to what goods in stock are worth on a given day involves the contemplation of some market; it would not be right to value goods at a figure which could be got by having a break-up sale, or a forced sale. The contemplation of a market involves two possibilities; the market in which the goods were bought and that in which they will be sold. The first may be described as the replacement price of the stock; the second is their realisable value.'

17. The above passages indicate that there is always difference between the cost price of the goods and its market price. Cost price is synonymous with the price, freight and insurance and represents the amount spent by the assessee for acquiring the asset while the market value represents the price it will fetch if sold in the market. Challoner and Greenwood on ' Income-tax Law and Practice (Commonwealth)', second edition, in paragraph 362 at page 261, while dealing with the meaning of 'cost price ' point out that the cost price does not mean invoice price or purchase price which is the price as between the vendor and purchaser apart from charges for freight, delivery, duty, etc., and that it means cost to the taxpayer including charges in getting it into its existing condition and bringing it to its place. Dealing with the meaning of ' cost of unit of property ' for purpose of calculating depreciation, the learned authors point out, at page 448, in paragraph 586, that the cost of a unit is not limited to its purchase price but includes such items as customs duty, expenditure incurred in transporting the unit to the place where it is to be installed and during the operation and also the cost of its installation excluding, however, any structural alterations to the building which the installation may have necessitated. It is, however, found that the above passages are with reference to the provisions of the Australian Income-tax Assessment Act which are somewhat different.

18. Apart from saying that the courts have always interpreted the meaning of ' cost to the assessee ' as including any expenditure incurred by him in connection with the acquisition of the asset, Mr. Swaminathan also says that the commercial and accountancy practice is always to capitalise the expenditure incurred in connection with the acquisition of the machinery so that the depreciation and development rebate could be claimed thereon. It is stated that if expenditure were in fact incurred in connection with the purchase of the machinery long before the factory commences to work, the amounts so incurred cannot either be claimed as a revenue expenditure or as a depreciation allowance after the machinery is put to work and that it is for this reason such expenditures are allowed to be capitalised. He refers to certain authorities on auditing to establish such a commercial and accountancy practice. In Dicksee's Auditing, 17th edition, at page 159, it is stated :

' A common practice is to value processed stock at prime cost plus an addition for works or factory overhead expenses, but excluding administration, selling and distribution expenses. '

19. But the above passage refers to the cost of the processed stock to the sellor and not the cost of the assets to the purchaser with which we are concerned. Reference is also made to the following passage under the head ' Interest on borrowings ' in the ' Members Handbook Series, The Institute of Chartered Accountants of India, No. 202 ' as establishing the accountancy practice :

' The question often arises as to whether interest on borrowings can be capitalised and added to the cost of fixed assets which have been created as a result of such expenditure. The accepted view seems to be that in the case of a newly started company which is in the process of constructing and erecting its plant, the interest incurred before production commences may be capitalised, 'Interest incurred' means actual interest paid or payable in respect of borrowings which are used to finance capital expenditure. , . . Interest on capital during construction paid in accordance with the provisions of Section 208 of the Companies Act, 1956, may, however, be capitalised as permitted by that section. Interest on monies which are specifically borrowed for the purchase of a fixed asset may be capitalised prior to the asset coming into production, i.e, during the erection stage. However, once production starts, no interest on borrowings for the purchase of machinery (whether for replacement or renovation of existing plant) should be capitalised. For an existing business, the only interest which may be capitalised is interest paid for financing a completely new unit or a substantial expansion undertaken by the company. Even here only the interest on monies specifically borrowed for the new expansion may be capitalised and that only for the period before production starts. '

21. Section 208 of the Indian Companies Act, 1956, contemplates payment of interest on share capital in certain contingencies and permits the interest payments to be treated as capital as representing the cost of construction of the work or building or the provision of the plant, as the case may be. It is said that this section has, in a way, given recognition to the commercial and accountancy practice of capitalising the interest payments towards the cost of construction of works or of installation of the plant.

22. The learned counsel for the revenue, however, points out that thecommercial or accountancy practice is entirely irrelevant for the purpose ofconsidering the question whether interest payment in this case is part ofthe actual cost of machinery, and that such a question has to be decidedwith reference to the relevant provisions of the Income-tax Act and notwith reference to the so-called commercial and accountancy practice ofcapitalising the interest payments as part of the cost of the capital asset.He refers to the following authorities in support of his contention thatcommercial and accountancy practice has altogether to, be ignored. InCommissioners of Inland Revenue v. Alexander Von Glehn & Co. Ltd., [1920] 12 T.C. 232.Warrington L.J. said :

'Now the first thing I desire to say about it is that in my opinion the question of whether this deduction is to be allowed is one that must be determined by the rules regulating the assessment of income-tax and not by rules regulating what may be allowed in the preparation either for a company or for an individual or for a firm, of the balance-sheet or the profit and loss account. '

23. In Broken Hill Theatres Pvt. Ltd. v. Federal Commissioner of Taxation, 85 C.L.R. 42 , Dixon C.J. said:

' The way in which the company actually dealt in its accounts with the expenditure in question does not appear from the statement of agreed facts or from the evidence. And we do not think that anything could turn on it. We have to interpret a particular section (Section 51) of the Income Tax Assessment Act, 1936-1948, and it would be nothing to the point to say that the company could properly, or did in fact, debit the expenditure in question to its profit and loss account for the income year in question. '

24. In John Fairfax & Sons Pvt. Ltd. v. Federal Commissioner of Taxation, 101 C.L.R. 30, Menzies J. said that the way in which a taxpayer deals with a debit in its accounts cannot of course determine its character for the purpose of interpretation of the statute. In Gold Coast Selection Trust Ltd. v. Humphrey (H.M. Inspector of Taxes), [1948] 30 T.C. 209; 1949 17 I.T.R. (Suppl.) Somervell L.J. states that the method of keeping accounts is often a guide but is never conclusive in the matter of ascertaining the liability under the Income-tax Act. In Duple Motor Bodies v. Ostime, [1961] 1 W.L.R. 739, ; 39 T.C. 537 , Viscount Simonds states :

'The practice of accountants, though it were general or even universal could not by itself determine the amount of profits and gains of a trade for tax purposes. . . . Normally a court attaches great weight to the view of the accountancy profession though the court must always have the last word (per Lord Reid).'

25. In this case the assessee has, in fact, capitalised the interest payments made before the factory started functioning and this is in accordance with the normal commercial and accountancy practice. We are not, however, inclined to base our decision on the said commercial or accountancy practice. We are of the view that as the statute has specifically used the expression 'actual cost to the assessee' the interest payments made on the amounts borrowed for the purpose of acquiring the machinery can be taken to be an expenditure incurred by the assessee in acquiring the machinery and that will go to add to his actual cost of the machinery. We are inclined to agree with the decision of the Calcutta High Court in Commissioner of Income-tax v Standard Vacuum Refining Co, of India Ltd., already referred to, though we may not entirely agree with the reasoning given in that case. The decision in Commissioner of Income-tax v. Challapalli Sugars Ltd., : [1970]77ITR392(AP) , which also deals with interest payments made on the capital borrowed for the acquisition of machinery of course takes a different view. In that case it was held that the words 'actual cost' in Section 10(2)(vi) of the Indian Income-tax Act, 1922, mean the sum of money which a person expends or lays out for acquiring the machinery and that it will not include the payment made towards interest on borrowed capital used for the acquisition of the machinery. But we are of the view that the said decision overlooks the significance of the words ' actual cost to the assessee '. If the statute has merely used the word 'actual cost' then it is possible to say that the interest payments in question cannot come in within the expression. The intention of the legislature in using the expression 'actual cost to the assessee' appears to be to take into account the assessee's peculiar position at the time of the purchase of the machinery while granting allowance for depreciation and development rebate. Take for instance a person having enough finance to purchase the machinery. For him the actual cost of the machinery is what he pays out as the price of the machinery plus charges for freight, insurance, transport, etc. But where a person cannot acquire the machinery with his own funds but can do so only by borrowing, his actual cost of the machinery will normally include not only the cost price of the machinery plus incidental charges but also the extra expenditure which he has to incur in respect of the borrowing. Therefore, the cost of the machinery in the case of the latter will definitely be different. We have to, therefore, hold that the interest paid on the amounts borrowed for the purchase of the machinery has rightly been capitalised as part of the cost of the machinery and the Tribunal was right in allowing the assessee's claim for depreciation and development rebate. The first question is, therefore, answered in the affirmative and against the revenue.

26. The second question referred relates to the expenses incurred on foreign trips by the three directors and the engineers. It is claimed by the company that the said expenditure should be considered as part of the actual cost of machinery and depreciation and development rebate allowed thereon. This claim has been accepted by the Tribunal though it was rejected by the Appellate Assistant Commissioner. The Tribunal has taken the view that the foreign tours have been undertaken by the three directors and the engineer on various dates in connection with the acquisition of the plant and machinery, that some preliminary talks and visits to various factories abroad are necessary for the purchase of the machinery for the factory of the nature contemplated by the company for the first time in India, and that there can be no doubt that such expenditure is of a capital nature. The Tribunal purported to follow the decision in Habib Hussein's case, and Ambica Mills' case, : [1964]54ITR167(Guj) The learned counsel for the revenue contends that the finding of the Tribunal that foreign tours have been undertaken by the directors and the engineer in connection with the purchase of the machinery is based on no evidence and that in fact the materials in the case disclose that the foreign tours were undertaken only for the purpose of getting the collaboration agreement from the West German firm. Sri L.G. Balakrishnan, one of the directors, made a trip to West Germany on May 31, 1960, and had expended Rs. 10,763. The above trip was long before the collaboration agreement which was entered into at Munich on 1st August, 1960, and, therefore, it should be taken that the trip was undertaken only for the purpose of choosing the foreign collaborator. Likewise the travel expenses of Sri L.G. Varadarajulu, another director, for his foreign trip on July 6, 1960, were incurred long before the date of collaboration agreement and, therefore, it should be taken to be only in connection with the collaboration agreement, and not for the purchase of the machinery. The subsequent two foreign trips by the said L.G. Varadarajulu were on March 31, 1961, and February 13, 1962. These trips were long after the collaboration agreement and are claimed to be specifically undertaken for the purpose of purchasing the machinery. On behalf of the revenue it is stated that under clause 4 of the collaborator's agreement, the scheme regarding the selection and purchase of the machinery will have to be processed by the collaborators and M/s. Matra Works, Frankfurt, have been entrusted with the supply of machinery required for the scheme, that the presence of the director in West Germany is not necessary for the purchase of the machinery and that, therefore, the expenses incurred by the director should be taken to be merely for supervision and not for purchase of the machinery. But, having regard to the fact that even if the collaborators have to give a scheme comprising all machineries required for the factory and their nominees, M/s. Matra Works, Frankfurt, have to supply the same, still the presence of the director cannot be said to be unnecessary. Even if the choice of the machinery has been left to the collaborators, inspection and supervision of the machinery before their despatch by the supplier at Frankfurt cannot be said to be unnecessary. If the two trips undertaken by this director on March 31, 1961, and February 13, 1962, were in connection with the acquisition of the plant and machinery then the assessee's claim has to be sustained.

27. Another director, L. G. Nityanandam, has undertaken tours to West Germany on various dates between June, 1961, to October, 1961. These tours were also subsequent to the collaboration agreement and it is claimed that these tours have been undertaken in connection with the purchase of the various items of machinery at various stages. In addition an engineer has been sent to the factory of the collaborators in Munich for learning the technique of erection of the machinery as provided in Clause 5 of the collaboration agreement and these expenses have been claimed as part of the cost of the machinery. Admittedly, these expenses have not created any tangible asset and the engineers have acquired experience in handling the machinery. The expenses incurred for learning that technique and for getting that experience will not enhance the value of the machinery purchased. We are, therefore, of the view that the Tribunal is not justified in taking the entire tour expenses as part of the cost of the machinery and that only such of those expenses which are directly relatable to the selection, inspection and supervision of the machinery that can be taken to add to the cost of the machinery. But we find that the Tribunal has not considered in detail each item of the tour expenses separately to find out whether the expenditure was incurred in connection with the selection, inspection and supervision of the machinery purchased. Therefore, we have to answer question No. 2, technically in favour of the revenue, the result being that the Tribunal has to consider afresh this item of foreign tour expenses in the light of what has been stated above.

28. As regards the third question which relates to the payment of Rs. 17,143 to the foreign collaborators as per the terms of the collaboration agreement dated August 1, 1960, it is seen that the said payment was ' for the elaboration of the scheme for the transmitting arrangement of their experiences and all their assistance for the duration of the free consulting period' We agree with the Tribunal that the payment made for getting the technical know-how for erection of the factory for the production of the chains therein could not be considered as part of the actual cost of the plant and machinery. It is true that a scheme comprising of all the machineries required for the manufacture of chains will have to be elaborated and submitted by the collaborators to the assessee, and Clause 4 of the agreement also provides that the manufacturer at Frankfurt is entrusted with the supply of such machinery required. But the payment of Rs. 17,143 cannot be treated as a commission or brokerage paid in connection with the purchase of the machinery. The scheme for the purchase of the machinery suggested by the collaborators is part of the technical know-how which the collaborators are bound to supply to the assessee under the terms of the agreement. We have to, therefore, hold that the said payment does not relate to the actual acquisition of the machinery by the assessee from the manufacturer at Frankfurt. We, therefore, agree with the Tribunal that the said sum cannot be taken to be a part of the cost of the machinery and that the assessee is not entitled to depreciation and development rebate thereon. The third question is, therefore, answered in the negative and against the assessee. As the revenue has succeeded on two questions it will have its costs from the assessee. Counsel's fee Rs. 250.


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