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Commissioner of Income-tax Vs. Fort Gloster Industries Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 73 of 1966
Judge
Reported in[1971]79ITR48(Cal)
ActsIncome Tax Act, 1922 - Section 10(2)
AppellantCommissioner of Income-tax
RespondentFort Gloster Industries Ltd.
Appellant AdvocateD.K. Sen and ;C. Banerjee, Advs.
Respondent AdvocateD. Pal and ;N. Khaitan, Advs.
Cases ReferredHabib Hussein v. Commissioner of Income
Excerpt:
- .....the tribunal was right in holding that the sum of rs. 36,000 should 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 income-tax act, 1922 '4. now, the relevant provisions of section 10 areas follows:'10. (1) the tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. (2) such profits or gains shall be computed after making the following allowables, namely : . . . . (vib) in respect of machinery or plant being new, which has been installed after the 31st day of march, 1954, and which is wholly used for the purposes of.....
Judgment:

Sankar Prasad Mitra, J.

1. In this reference under Section 66(1) of the Indian Income-tax Act, 1922, the first question referred to this court is as follows:

' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of wealth-tax paid by the assessee in the relevant previous years was allowable as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922 '

2. This question has to be answered in the negative in view of the Supreme Court judgment in Travancore Titanium Products Ltd. v. Commissioner of Income-tax, : [1966]60ITR277(SC) .

3. The next question runs thus :

' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 36,000 should 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 Income-tax Act, 1922 '

4. Now, the relevant provisions of Section 10 areas follows:

'10. (1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him.

(2) Such profits or gains shall be computed after making the following allowables, namely : . . . .

(vib) in respect of machinery or plant being new, which has been installed after the 31st day of March, 1954, and which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of installation equivalent to twenty-five per cent. of the actual cost of such machinery or plant to the assessee:....'

5. In the instant reference, for the assessment year 1960-61, the' assessee claimed development rebate on the sum of Rs. 36,000 which the assessee had paid to the Allahabad Bank Ltd. The assessee had 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 and the assessee approached the Allahabad Bank Ltd. to secure the guarantee. The bank agreed to be the guarantor for the sum of Rs. 48 lakhs for a consideration of Rs. 36,000 to be paid to the bank as guarantee commission. The question is whether this sum of Rs. 36,000 should 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 in terms of Section 10(2)(vib) of the Indian Income-tax Act, 1922. The Tribunal has held in favour of the assessee.

6. Mr. D.K. Sen, learned counsel for the department, drew our attention to the judgment of this court in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd., [1966] 61 I.T.R. 799 (Cal.) In this case, the assessee borrowed monies on debentures in June, 1953, interest to run from that date, and utilized the amount along with other monies financed by it for setting up a refinery which started work on September 1, 1954. All expenses incurred during the period of construction including a sum of Rs. 23,53,284 being the interest which had accrued on the said debentures from the date of the borrowing to the date of commencement of the business were capitalised and depreciation on the full amount was claimed. This court has held that the interest paid on the debentures issued, formed part of the actual cost incurred by the assessee in acquiring the capital asset under Section 10(2)(vi), 10(2)(via), 10(2)(vib) read with Section 10(5) and such interest must be taken into consideration for the purpose of depreciation and development rebate.

7. Counsel for the department submits that there is a difference between interest paid on debentures and commission paid on account of a guarantee. His point is that in the case of interest the money that is borrowed or raised on loan is actually utilised for the purchase of plant or machinery and, as such, any interest paid on the amount borrowed or taken on loan may be included in 'actual cost' but that principle cannot apply to a commission-paid on a guarantee.

8. The expression 'actual cost' used in the Income-tax Act has been construed not only in this judgment in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. but also in other judgments of this court and the Bombay High Court.

9. In Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. at page 803 it is stated that 'actual cost' to the assessee includes all costs essential to the acquisition of a capital asset. The Bombay High Court in Habib Hussein v. Commissioner of Income-tax, [1963] 48 I.T.R. 859 (Bom.) at page 875, has said:

' The dictionary meaning of the word 'cost' is ' what is laid out or suffered to obtain anything' .... In our opinion, therefore, the meaning of the expression ' actual cost to the assessee ' as used in Sub-section (5) of Section 10 of the Act would be what the assessee has, in fact, expended or laid out for the purpose of acquiring the depreciable assets.'

10. The Calcutta High Court in Commissioner of Income-tax v. Lothian Jute Mills Co. Ltd., [1967] 66 I.T.R. 630 (Cal.) at page 636, has stated :

' It would therefore appear that in using the expression ' actual cost to the assessee' the legislature wanted to indicate the sum of money or money's worth which it cost the assessee to acquire the asset. In special cases, however, the legislature indicated that the ' actual cost to the assessee' might be determined at some other figure. The word ' actual' means, according to the Oxford Dictionary, ' existing in act or fact, really acted or acting, carried out, real as opposed to potential, possible, virtual, theoretical, ideal, etc.' Again it may mean ' in action or existence at the time, present, current'....' actual cost' means ' real cost' -- the cost which the assessee incurred in act or fact. This can only mean the cost at which the assessee acquired the asset, namely, the original cost. '

11. The Calcutta High Court has relied, inter alia, on Habib Hussein's case of the Bombay High Court.

12. It seems, therefore, that costs which were essentially necessary for a particular assessee to incur for acquiring a plant or machinery or a capital asset would be included in his ' actual cost '. Applying this principle to the facts in the present reference we find that the British concern was insisting on a guarantee; the assessee approached the Allahabad Bank Ltd. for furnishing the guarantee; the bank agreed to the assessee's proposal on a consideration of Rs. 36,000 which the assessee had paid, and the guarantee was provided by the bank On these facts, it would be reasonable to conclude that the expense of Rs. 36,000 which the assessee had incurred for payment of commission to the bank was essential for acquisition of the machinery the assessee had ordered for and this sum should be treated as part of the assessee's 'actual cost'.

13. In these premises, our answer to the second question quoted above is in the affirmative and in favour of the assessee.

14. Each party will bear and pay its own costs.

Sabyasachi Mukharji, J.

15. I agree.


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