Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 14
PETITIONER:
CHALLAPALLI SUGAR LTD.
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME TAX, A.P. HYDERABAD
DATE OF JUDGMENT31/10/1974
BENCH:
KHANNA, HANS RAJ
BENCH:
KHANNA, HANS RAJ
GUPTA, A.C.
CITATION:
1975 AIR 97 1975 SCR (2) 538
1975 SCC (3) 572
ACT:
Indian Income-Tax Act, 1922, Section 10, secs. 10(2),
10(2)(vi), 10(5) and explanation to sec. 10(5) and Section
208(1) of Companies Act, 1956 (Act 1 ,of 1956-Payment of tax
in respect of profits or gains-Interest paid before
commencement of production on money borrowed for- acquiring
and installing the machinery and plant, if could be
capitalised and included in actual cost.
Income-tax Act, 1961, as amended by Income-Tax (Amendment )
Act 1972 (Act No. 41 of 1972) Sctions 10(2) (xv) and 40
(iia)- Wealth tax paid by assessee on net wealth, whether
deductible as business expenditure under sec. 5 of Amending
Act.
HEADNOTE:
In all the three appeals the case of the assessee is that
the interest for the .period before the commencement of
production on money borrowed for the purpose of acquiring
and installing the machinery and Plant should be included in
the actual cost of the plant and as such capitalised for the
purpose. In Civil Appeal No. 1784, the contention of the
assessee is that the wealth-tax payable by the assessee is
allowable as a deduction.
Allowing Civil Appeal No. 1353 of 1970 and dismissing Civil
Appeals Nos. 1784 and 1785 of 1970.
HELD : (i) So far as the first question is concerned the
legal position for determining the actual cost. for the
purpose of development rebate is the same as for the purpose
of depreciation. A reading of the provisions sees.
10,10(2), 10(2)(vi), 10(5) and the explanation to sec. 10(5)
will disclose that, while considering the question of
deduction on account of depreciation and development rebate
the written down value has to be taken into account.
Written down value in its turn depends on the actual cost of
the assets to the assessee. As the expression "actual cost"
has not been defined in the Act, it should be construed in
the sense which no commercial man would misunderstand. It
would appear 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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 14
of constructing 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 be
adopted for determining the actual cost of the assets in the
absence of any statutory definition or other indication to
the contrary. [543B-D, E; 545F-H]
Clause (b) of sub-section (1) of section 208 of the
Companies Act, 1956, gives 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 in contingencies mentioned in that section even though
such money constitutes share capital. The same principle,
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. [545H-546C]
It is true that for similar fixed assets there can be
different actual costs. The fact that there would be a
difference in the actual cost of the plant in case its
machinery is acquired and installed with the assessee’s own
money or in case it is acquired and installed with borrowed
money does not consequently militate against the principle
that interest paid in such circumstances can be capitalised
and included in the actual cost of machinery and plant.
[546F-G]
539
Hindus. v. Buenos Ayres Grand National Tramways Co. Limited,
[1906] 2 Cl, D. 654, Corporation of Birmin gham v. Barnes
(H. M. Inspector of Taxes), 19 Tax Cases 195, India Cements
Ltd. v. Commissioner of Income-Tax, Madras,[ 1966] 60 ITR 52
referred to.
Commissioner of Income-Tax Madras v. L. G. Balakrishnan and
Bros. (P) Lid. [1974] 95 I.T.R. 284 and Commissioner of
Income-tax v. J. K. Cotton Spinning’ & Weaving Mills.
Income-tax reference No. 234 of 1972 decided on My 13. 1974,
by Allahabad High Court, approved.
(ii) In Travancore Titanium Product Ltd. v. Commissioner of
Income-Tax, Kerala [1966] 60 ITR 277, the Supreme Court held
that the amount of Wealth Tax paid by an assessee on his net
wealth under the Wealth-Tax Act is not a permissible
deduction under sec. 10(2) (xv) of the Act in his income-tax
assessment. After this decision when the matter was
considered by a larger Bench consisting of five Judges in
the case of Indian Almunium Co. Ltd. v. Commissioner of
Income-Tax, West Bengal, Lk[ 1972) 84 ITR 735] this Court
held that the WealthTax paid by the assessee which was a
trading company on assets held by it for the purpose of
business was deductible as a business expenditure in
computing the assessee’s income from business. Subiequent
to this decision, the Income-Tax Act, 1961 was amended first
by means of an Ordinance and later by means of the Income-
Tax (Amendment) Act, 1972 (Act No. 41 of 1972). The result
of this amendment is that any sum paid on account of Wealth-
Tax cannot be deducted in computing the income of an
assessee chargeable under the head "Profits and Gains of
business, profession or Vocation" or "Income from other
sources". The serving clause contained in section 5 of the
amending Act provided
"Where, before the 15th day of July, 1972
being the date on which the Income-tax
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 14
(Amendment) Ordinance, 1972 came into force,
the Supreme Court has, on: an appeal in
respect of the assessment of an assessee for
any particular assessment year, held that
wealth-tax paid by the assessee is deductible
in computing the total income of that year,
then, nothing contained in sub-clause (iia) of
clause (a) of section 40, or sub-section (IA)
of section 58, of the principal Act, as
amended by this Act, or, as the case may be,
section 4 of this Act, shall apply to the
assessment of such assessee for that
particular year." [549F-550F]
What is necessary to attract this section is that this Court
should have held before July 15, 1972 on an appeal in
respect of an assessment of the assesse for any particular
assessment year that the wealth-tax paid by the assessee is
deductible in computing the total income of that year. Once
that is the effect of a decision given by this Court before
July 15, 1972 the fact that the judgment in which the above
finding is recorded is given in other appeals, which are
heard together along with the appeal of the assessee, and
the further fact that assessee’s appeal is not disposed of
before July 15, 1972, would not take the case of the
assessee out of the purview of section 5. The case of the
assessee in Civil Appeal No. 1784 is covered by 5 of the
Amending Act. [5510-552A]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1353 of
1970.
From the Judgment and order dated the 5th September, 1969 of
the Andhra Pradesh High Court in Case No. 64 of 1965 and
Civil Appeals Nos. 1784 & 1785 of 1970.
From the Judgment & Order dated the 18th August, 1965 of the
Calcutta High Court in I.T.R. No. 148 and 149 of 1961.
N.A. Palkhivala, S. T. Desai and T. A. Ramachandran, for the
appellant (in C.A. No. 1353 of 1970.)
V. S. Desai, J. Ramamurthi and R. N. Sachthey, for the
appellant (in C.A. 1784-85.)
V. S. Desai, J. Ramamurthi, S. P. Nayar and R. N.
Sachthey, for the respondent (in C.A. 1353 of 1970.)
540
N.. A. Palkhiwala, S. T. Desai, A. K. Varma, Ravinder
Narain, J. B. Dadachanji, 0. C. Mathur, and K. J. John,
for the Interveners Nos. 1 and 3 (in C.A. No. 1784-85/70.)
N. A. Palkhiwala, Bhakta, J. B. Dadachan, Ravinder Narain,
O. C. Mathur, for Interveners Nos. 1 and 3 (in C.A. 1784-
85/70.)
D. N. Gupta for Intervener No. 2 (in C.A. 1784-85/70.)
The Judgment of the Court was delivered by
KHANNA, J.-Appeal No. 1353 of 1970 on certificate is
directed against the judgment of Andhra Pradesh High Court
whereby the High Court answered the following question on
reference made to it under section 66(1) of the Indian
Income-tax Act, 1922 (hereinafter referred to as the Act)
against the assessee and in favour of the revenue
"Whether the interest payment of Rs.
2,38,614/represents an element on the actual
cost of the machinery, plant etc. to the
asseessee and as such depreciation and deve-
lopment rebate are admissible with
reference to this amount also ?"
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 14
The matter relates to the assessment year 1959-60, the
corresponding accounting year for which ended on June 30,
1958. The assessee is a public limited company engaged in
the manufacture and sale of sugar. The company went into
production on January 22, 1958. The assessee company had
borrowed considerable sum of money from the Industrial
Finance Corporation of India for the installation of
machinery and plant. During the relevant year and for the
period prior to the commencement of its business the
assessee paid Rs. 2,38,614 as interest. The case of the
assessee is that the payment of interest added to the cost
of machinery and plant to the assessee and as such while
calculating depreciation admissible to the assessee, the
interest paid should be treated as part of the cost of the
machinery and plant to the assessee.
The income)-tax officer rejected the above claim of the
assessee and held that the interest paid from year to year
was an admissible item of revenue expenditure and no
depreciation could be allowed on the capitalised amount of
the expenditure incurred on account of interest. No part of
the above amount, according to the incometax ,officer,
should be taken as expenditure attributable to the erection
of the machinery or other assests. The Appellate Assistant
Commissioner on appeal reversed the decision of the income-
tax officer on this aspect. The Appellate Assistant
Commissioner held that during the period of construction
when money was borrowed for the purpose of purchasing and
installing the machinery, the payment of interest was the
"cost of maintaining the borrowal", and as such could be
included as part of the capital cost. On further appeal the
Income-tax Appellate Tribunal held that the cost to the
assessee must include all expenditure which it had to incur
for acquiring and installing the asset. The interest paid
or payable during the period of acquisition and installation
could, therefore, be considered as part of the cost to the
assessee.
541
The question reproduced above was then referred to the High
Court. The High Court held that where a plant is
constructed out of borrowed money, the interest on the loan
up to the date of the commencement of the business could not
be capitalised or treated as part of the actual cost of the
plant.
Similar question arises in civil appeals Nos. 1784 and 1785
of 1970 which have been filed by the Commissioner of Income-
tax on certificate against the judgment of the Calcutta High
Court whereby the High Court answered the following question
in reference under section 66(1) of the Act for assessment
years 1955-56 and 1959-60 against the revenue and in favour
of the assessee company :
"Whether on the facts and in the circumstances
of the the assessee was entitled under the
provisions of sections 10(2)(vi), 10(2)(vi-a)
and 10(2)(vi-b) and read With section 10(5) of
the Indian Income tax Act to treat the sum of
Rs. 23,53,284 being the amount of interest
paid on monies borrowed at part of the actual
cost for the purpose of depreciation
allowances and development rebate ?"
In civil appeal No. 1784 of 1970, which relates to the
assessment year 1959-60, the following additional question
was also answered by the High Court against the revenue and
in favour of the assessee
"Whether the wealth-tax payable by the
assessee under the provisions of the Wealth-
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 14
tak Act of 1957 is allowable as a deduction
under section 10(1) or under section 10(2)(xv)
of the Indian Income-tax Act?"
The assessee company in these two appeals, M/s Standard
Vacuum Refining Co. of India Ltd. (now known as Hindustan
Petroleum Corporation Ltd.), was incorporated on July 5,
1952 and commenced its business in September 1954. In June
1953 it borrowed rupees four crores on debenture at-the.
rate of Rs. 5 1/4 per cent interest from the public. The
interest was to run from June 1953. The above amount
together with rupees twelve crores financed by the company
was used in setting up a refinery for which plant and
machinery were imported from abroad. The refinery started
work on September 1, 1954, from which date depreciation
began to be calculated. The assessee company capitalised
all the expenses during the period of construction,
including the interest amounting to Rs. 23,53,284 which had
accrued from the date of borrowing to the date, of the
commencement of the business on the aforesaid loan and
claimed depreciation on full amount. The income-tax officer
did not include interest on debentures in arriving at the
figure of actual cost and as such rejected the claim of the
assessee in this respect. The Appellate Assistant
Commissioner agreed with the Incometax officer. The
Tribunal on further appeal held that the assessee was also
entitled to depreciation on the capitalised interest of Rs.
23,53,284 paid to the debenture holders.
The relevant facts so far as the second question in civil
appeal No. 1784 of 1970 is concerned were as follows. Ile
assessee,
542
company filed a return showing an income of rs. 1,52,88,497
for the assessment year 1959-60, the relevant accounting
year for which was the calendar year 1958. In arriving at
the above figure of the income, the assessee claimed a sum
of Rs. 5,04,000 representing the provision for wealth-tax
payable by it for the previous year relevant to the date of
valuation, viz., December 31, 1958. The income-tax officer
held that the provision for the payment of wealth tax did
not amount to expenditure laid out wholly and exclusively
for the purposes of the business. ’The Appellate Assistant
Commissioner agreed with the income-tax officer. On second
appeal the Appellate Tribunal held that the above amount
could be allowed at the time when actual payment was made.
The High Court, as already mentioned, answered both the
questions in favour of the assessee and against the revenue.
This judgment would dispose of all the three civil appeals.
In appeal before us Mr. Palkhivala on behalf of the
assessees in the three appeals has argued that interest for
the period before the commencement of production on money
borrowed for the purpose of acquiring and installing the
machinery and plant should be included, in the actual cost
of the plant and as such capitalised for the, purpose. As
against that, Mr. Desai on behalf of the revenue has
supported theview taken by the Andhra Pradesh High Court.
After hearing the learned counsel for the parties, we are of
the opinion that the submission made by Mr. Palkhivala is
well-founded.
Before dealing with the contentions advanced, we may set out
therelevant provisions. Section 10 inter alia provides for
the payment of tax in respect of profits or gains of any
business by an assessee.Sub-section (2) of that section
provides that such profits or gains shall be computed after
making the allowances specified therein. Clause (vi) of that
sub-section deals with deductions on account of depreciation
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 14
and provides inter alia that deductions would be permissible
in respect of depreciation of machinery or plant used for
the purpose of business and being the property of the
assessee, of a sumequivalent to such percentage on the
written down value thereof as may in any case or class of
cases be prescribed. "Written downvalue" has been defined
in sub-section (5) of section 10 in the caseof assets
acquired in the previous year, the actual cost to the
assessee, and in the case of assets acquired in the previous
year, the actualcost to the assessee, less all
depreciation actually allowed to him under this Act or any
Act repealed thereby, orunder executive orders issued when
the Indian Income-tax Act,1886 was in force. The
definition is subject to provisos, but we are not concerned
with them. The explanation which has been added to sub-
section (5) reads as under
"Explation For the purpose of this subsection
the expression ’actual cost’ means the actual
cost of the assetsto the assessee reduced
by that portion of the cost thereof,if any, as
has been met directly or indirectly by
Governments
543
or by any public or local authority, and any
allowance in respect of any depreciation
carried forward under clause (b) of
the proviso to- clause (vi) of sub-section (2)
shall be deemed to be depreciation ’actually
allowed’."
It has not been disputed that so far as the question before
us is concerned the legal position for determining the
actual cost for the purpose of development rebate is the
same as for the purpose of depreciation.
It would appear from the above that while considering the
question of deduction on account of depreciation and
development rebate, we have to take into account the written
down value. Written down value in its turn depends upon the
actual cost of the assets to the assessee. The expression
"actual cost" has not been defined in the Act, and the
question which engages our attention is 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. So far as the interest
after the commencement of production in respect of capital
borrowed for the purposes of business is concerned, the same
can be deducted under clause (iii) of subsection (2) of
section 10 of the Act.
In finding the answer to the question mentioned above, we
have to bear in mind that it arises in the context of
profits or gains of business and the permissible deductions
on account of depreciation and development rebate relating
to the machinery and plant of the assessee. 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. For this purpose it would be
necessary to ascertain the connotation of the above,
expression in accordance with the normal rules of
accountancy prevailing in commerce and industry. The word
"cost", as observed on page 424 of Simon’s Taxes B Third
Edition, 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. The matter has been dealt with in Accountancy by
Pickles 1955 Ed.on page 944 under the head "Payment of
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 14
interest on Construction Capital"as under:
"In the ordinary course of affairs no
dividends may be paid unless such dividends
are paid out of profits : interest on
debentures (being a charge is, however,
payable whether profits are earned or not).
Where company raises share, capital and out of
the proceeds defrays the expenses of the
construction of any works or buildings or
provision of plant which cannot be made
profitable for a lengthened period the company
may pay interest on so much of that share
capital as is paid up for the period and may
charge to capital the sum paid by way of
interest, provided that the re
strictions imposed under section 65 of the
Companies, s Act, 1948 are complied with,"
4-L319Sup.Cl/75
544
It is further observed
"The interest so paid is ’capitalised’, that
is to say it is treated as part of the cost of
construction being added thereto (similarly to
legal expenses of acquiring Property or
brokers’ charges on purchasing investments)."
In Spicer & Pegler’s Practical Auditing 11th Edition it is
observed on pages 190-191 under the head "Interest Payable
Out of Capital During Construction"
"Interest on debentures issued for a similar
purpose can be charged to capital during the
period of construction (Hinds v. Buenos Ayres
Grand National Tramways Co. Ltd. (1906) 2 Ch.
654)."
In Higher Book-Keeping, & Accounts by Cropper Morris & Fison
Seventh Edition, it is-observed as under
"Capital expenditure over a long period must
perforce involve the question of interest as
an additional cost. If the work were
undertaken by an independent contractor he
would, of course take,interest into account
when preparing the estimates on which to base
his tender. The final cost cost of
construction work is’ made up of’ thecost
of 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."
Section 208 of the Companies Act, 1956 (Act 1 of 1956) deals
with payment of interest on share capital in certain
contingencies. Subsection (1) of that section reads as
under:
"(1) Where any shares in a company are issued for the
purpose of raising money to defray the expenses of the cons-
truction of any work or building. or the provision of any
plant, which cannot be made profitable for a lengthy period,
the’ company may-
(a) pay. interest so much of that share
capital as is for the time being paid up, for
the period and subject to the conditions and
restrictions mentioned in subsections (2) to
(7); and
(b) charge the sum so paid by way of
interest, to capital as part of the cost of-
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 14
construction of the work or building or the
Provision of the plant."
Exercise of power under sub-section (1) is, however subject
to certain restrictions which have been enumerated in the
remaining subsections of the section, one of which requires
that no such payment shall be made without the previous
sanction of the Central Government. , In Statement on
Auditing Practices issued by the Institute of Chartered
Accountants of India (1974) it is observed in paragraph 2. 5
as under :
"2.5 Fixed Assets should be valued at cost and
depreciation should be written off on a proper
and consistent basis.
545
Cost includes all expenditure necessary to
bring the assets into existence and to put
them in working condition. By way of
illustration the following may be mentioned
(i) Legal charges and stamp duties in the
case of land,
(ii)Architect’s fees in the case of buildings,
(iii)Wages, salaries and installation
expenses in the case of machinery, and
(iv) Interest on borrowings to the extent
specified in paragraph 2.22"
Relevant part of paragraph 2.22 reads as under
"2.22 The question often arises as to whether
interest on borrowings can be capitalised and
added to the 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. In no
circumstances, should imputed interest be
capitalised, such as interest on equity or
preference capital at a notional rate.
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 capi-
talised.............. "
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 constructing 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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 14
assets in the absence of any statutory definition or other
indication to the contrary.
We have already referred to section 208 of the Companies Act
which makes provision for payment of interest on Share
capital in ,certain contingencies. Clause (b) of sub-
section (1) of that section provides that in case interest
is paid on share capital issued for the purpose of raising
money to defray the expenses of constructing any work or
building or the provision of any plant in contingencies
546
mentioned in that section, the sum so paid by way of
interest may be charged to capital as part of ’the cost of
construction of the work or building or the provision of the
plant. The above provision thus ,gives 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. in contingencies mentioned in that section
even though such money constitutes share capital. 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.
Mr. Desai has argued that if the interest paid on loan
incurred for the purpose of acquisition and installing the
machinery of a plant is to be taken into account in
considering the actual cost of the plant, the result would
be that the actual cost would be higher if the machinery for
the plant is acquired and installed with borrowed money
compared to the cost of such plant in case the money spent
for the acquisition and installation of the above machinery
is that which belongs to the assessee. This undoubtedly is
so but it is inevitable and should not detract from the
conclusion at which we have arrived. Let us take the case
of an architect constructing his house. In case the
architect engages another architect to prepare the plan for
his house and to supervise its construction and pays
remuneration to that other architect for this purpose, the
amount so paid to the other architect shall have to be taken
into account in arriving at the figure of actual cost of the
house. In case, however, the architect constructing the
house himself prepares the plan of the house and supervises
its construction, he would naturally be not paying any
remuneration to himself for the aforesaid work The result
would be that in the latter event the actual cost of the
house would be less compared to the cost of the house in the
former event even though the house in all other respects is
identical. It would therefore, follow that for similar
fixed assets there can be different ’actual costs. The fact
that there would be a difference in the actual cost of the
plant in case its machinery is acquired and installed with
the assessee’s own money or in case it is acquired and
installed with borrowed money does not consequently militate
against the answer which we propose to give to the question
referred in the three appeals.
In the case of Hinds v. Buenos Ayres Grand National Tramways
Company, Limited(1) a trarnway company, for the purpose of
converting its undertaking to a system of electric traction,
issued conversion debenture stock. The directors passed
resolutions that the interest on this stock should be
treated as part of the cost of construction, and chargeable
to capital account during the construction of the works.
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 14
The memorandum and articles of association of the company
contained no provisions relating to this subject. It was
held that there
(1) [1906] 2 Ch. D. 654.
547
was no general rule of law which compelled companies to
charge to revenue account interest on money borrowed for the
purpose of constructing works, or prohibited them from
charging it, during construction, to capital account. It
was further he-Id that in the absence of any provision to
the contrary the company was at liberty to charge the
interest in question to capital account. Dealing with the
question of costs for the, purpose of construction and the
question whether the interest paid on money borrowed for
such construction could be capitalised, Warrington J.
observed :
"Now, what is it that the company are really
proposing to do ? They are creating a capital
asset by means of which they will hereafter
earn, or they hope to earn, profits for the
company. They are not simply employing
contractors to find the money and do the work.
They are finding the money themselves, and
they find the money by borrowing it. What
does each mile of line cost them under these
circumstanceswhat is it that they expend in
constructing each mile of line, taking the
amount of the borrowed money expended on that
line to be pond s 1 0,000, that being the
company’s estimate? The money is borrowed for
that particular purpose-the pond 10,000. They
have to pay interest on that pond 10,000
during the period that construction is taking
place. In my opinion that asset which they
are so constructing costs them not only the Es
10,000, but the Es 10,000 plus the amount of
interest during the period of construction;
and that is what they are out of pocket during
the construction of that mile of line. Now,
it seems to me that the company are entitled-I
do not say that they are bound to do it-if
they think fit to charge in their accounts as
the cost of that mile of line not only pond-s
10,000, but the Es 10,000 and the interest on
it during the period of construction."
Mr. Desai has referred to the decision of the House of Lords
in the case of Corporation of Birmingham v. Barnes (H. M.
Inspector of Taxes).(1) The appellant corporation in this
case entered into an agreement with a company to lay a
tramway track and establish a tramway service to the
company’s works. By virtue of the work having been
completed and-the service established by a certain date, the
corporation received from the company in accordance with the
terms of the agreement, a specified sum. The corporation
also spent considerable sums of money on the renewal of
their tramway tracks and received in that connection grants
from the Unemployment Grants Committee. These grants were
made under certain conditions to local authorities to assist
them ’in carrying out at once approved schemes of public
utility on which a substantial number of unemployed persons
could be engaged. It was held that the payment by the
company and the grant from the Unemployment Grants Committee
should not be, taken into account in ascertaining the actual
Costs to the corporation of the tramway track in question
for the purpose of computing the allowance due to the
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 14
corporation for
(1) 19 Tax Cases 195.
548
wear and tear of such tracks. Lord Atkin observed in the
above case :
"What a man pays for construction or for the
purchase of a work seems to me to be the cost
to him; and that whether someone has given him
the money to construct or purchase for
himself, or before the event has promised to
give him the money after he has paid for the
work, or after the event has promsed or given
the money which recoups him what he has spent.
In the present case, the Corporation paid the
whole of the cost of the tramways out of their
funds unless the first half of the Dunlop
contribution was so applied : as to which
there is no evidence, nor is it material."
The above observations were made in the context whether
money contributed by another party can be taken into account
in considering the cost of construction. No such question
arises in the present case. On the contrary, what we are
concerned with here is whether interest paid on money
borrowed for the acquisition and installation of the
machinery of a plant accruing before the commencement of
production can be, taken into account in considering the
actual cost of the plant. Such a question did not arise in
the above mentioned case before the House of Lords.
Another case to which reference has been made on behalf of
the revenue is India Cements Ltd. v. Commissioner of Income-
tax Madras.(1). The appellant company in that case obtained
a loan of Rs. 40 lakhs from the Industrial Finance
Corporation by creating a charge on its fixed assets. In
connection therewith the company spent a sum of Rs. 84,633
towards stamp duty, registration fees, lawyer’s fee and
claimed this amount as business expenditure. It was held
that the amount spent was not in the nature, of capital
expenditure and was laid out or expended wholly and
exclusively for the purpose of the assessee’s business and
was therefore allowable as a deduction under section 2(xv)
of the Act. The act of borrowing money, it was observed,
was incidental to the carrying on of business and the loan
obtained was not an asset or an advantage of enduring
nature. This Court accordingly held that the amount of Rs.
84,633 was an allowable expenditure. This case too is of no
assistance to the revenue. The appellant company in that
case at the time it raised the loan was a running concern.
Unlike the assessees in the present appeals, the loan raised
by the appellant company in the cited case was not before
the commencement of production but at a later stage. The
question of including the interest paid on loan
before the commencement of business in the actual cost of
the plant did not arise in that case.
It may be mentioned that as against the view taken by the
Andhra Pradesh High Court in the judgment which is the
subject
(1) [1966] 60 I.T.R. 52.
549
matter of the appeal, three other High Courts have taken the
contrary view and have-field that interest paid in such
circumstances can be capitalised and included in the actual
cost of the machinery and plant. The decision of the
Calcutta High Court in which the contrary view has been
taken is the subject matter of appeal before us. The view
of Calcutta High Court has been followed by the Madras High
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 14
Court and the Allahabad High Court. The decision of the
Madras High Court is in the case of Commissioner of
Income-.tax Madras v. L. G. Balakrishnan and Bros. (P)
Ltd.,(1) while that of the Allahabad High Court is in the
case of Commissioner of Income-tax v. J. K. Colton Spinning
& WVg. MilIs (2). After giving the matter our considera-
tion, we are unable to subscribe to the view taken by the
Andhra Pradesh High. Court. The correct view in the
matter, in our opinion, has been taken by the Calcutta High
Court and we affairm the same.
We may now advert to the second question in civil appeal No.
1784 on the point whether the wealth-tax payable by the
assessee is allowable as a deduction. The High Court, as
already mentioned, answered the second question in favour of
the assessee. Subsequent to the judgment of the High Court
this Court in the case of Travancore Titanium Product Ltd.
v. Commissioner of Income-tax Kerala(3) held that the amount
of wealth tax paid by an assessee on his net wealth under
the Wealth-tax Act is not a permissible deduction under
section 10(2)(xv) of the Act in his income-tax assessment.
This Court in that context observed that wealth-tax is
imposed on the owner of assets and not on any commercial
activity. The fact that in certain special cases the
quantum of the liability of a company to wealth-tax is
related to the profits earned would not alter the character
of the tax. It remains a tax charged upon the net wealth
and it is not made a tax related to or incidental to the
carrying on of business.
After the above decision, the matter was considered by a
larger Bench consisting of five Judges in the case of Indian
Aluminium Co. Ltd. v. Commissioner of income-tax West
Bengal(4). This Court held that the wealth-tax paid by- the
assessee which was a trading company on assets held by it
for the purpose of business was deductible as a business
expenditure in computing the assessee’s income from busi-
ness. Sikri, C.J. speaking for four of the Judges observed
that when a person has a dual capacity of a trader-cum
owner, and he pays tax in respect of property which is used
for the purpose of trade, the payment must be taken to be,
in the capacity of a trader according to ordinary commercial
principles.
Subsequent to the above decision in the case of Indian
Aluminium Co. (supra) the Income-tax Act, 1961 was amended
first by means of an ordinance and later by means of the
Income-tax (Amendment) Act, 1972 (Act No. 41 of 1972). By
section 2 of the amending Act such clause (iia) was inserted
and wits deemed always to have been
(1) [1974] 95 I.T.R. 284.
(2) Income-tax reference No. 234 of 1972 decided on May 13,
1974.
(4) [1972] 84 I.T.R. 735.
(3) [1966] 60 I.T.R. 277.
550
inserted in clause (a) of section 40 of the Income-tax Act
1961 as under :
"(iia) any sum paid on account of wealth-tax."
An explanation was added to the above sub-clause, but it is
not necessary to reproduce the,, same. Section 40 of the
Indian Income-tax Act, 1961 specifies the amounts which
shall not be deducted in computing the income chargeable
under the heads "Profits or gains of business or
profession". According to section 4 of the amending Act,
nothing contained in the Indian Income-tax Act, 1922 shall
be deemed to authorise, or shall be deemed ever to have
authorised, any deduction in the computation of the income
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 14
of any assessee chargeable under the head "Profits and gains
of business, profession or vocation" or "Income from other
sources" for the assessment year commencing on the 1st day
of April, 1957 or any subsequent assessment year, of any sum
paid on account of wealth-tax.
In view of the above provisions, it is plain that any sum
paid on account of wealth-tax cannot be deducted in
computing the income of an assessee chargeable under the
head "Profits and gains of business, profession or vocation"
or "Income from other sources". There is, however, a saving
clause contained in section 5 of the amending Act and it
reads as under :
"Where, before the 15th day of July, 1972
being the date on which the Income tax
(Amendment) Ordinance, 1972 came into force,
the Supreme Court has, on an appeal in respect
of the assessment of an assessee for any
particular assessment year, held that wealth-
tax paid by the assessee is deductible in
computing the total income of that year, then,
nothing contained in subclause (iia) of clause
(a) of section 40, or sub-section (IA) of
section 58, of the principal Act, as amended
by this Act, or, as the case may be, section 4
of this Act, shall apply to the assessment of
such assessee for that particular year."
Mr. Palkhivala submits that the case of the assessee in
respect of the second question in civil appeal No. 1784 is
covered by section 5 of the amending Act reproduced above.
To appreciate the above submission, we may observe that
civil appeals Nos. 1784 and 1785 of 1970 along with civil
appeals Nos. 1694 and 1730 of Indian Aluminium Co. and civil
appeal No. 1831 of 1970 of Standard Vacuum Oil Co. were
argued before the Constitution Bench on February 1, 1972.
The Court reserved judgments in civil appeals No. 1694 and
1730 of Indian Aluminium CO. and civil appeal No. 1831 of
standard Vacuum Oil Co. As an additional question relating
to the inclusion of interest in the calculation of the
actual cost arose in civil appeals Nos. 1784 and 1785 of
1970, the Court after hearing some arguments on that point
in these appeals directed that they be heard by a Division
Bench after the pronouncement of judgment in civil appeals
No. 1694, 1730 and 1831. Judgments in those three appeals,
i.e. two appeals of Indian Aluminium
551
Co. and one of Standard Vacuum Oil Co. were pronounced on
March 29, 1972. The decision in the appeals in the case of
Indian Aluminium Co. is reported, as already mentioned, in
(1972)84 ITR 735, while that in the case of Standard Vacuum
Oil Co. is reported in (1972) ’86 ITR 1.
The submission made by Mr. Palkhivala is that even though no
final order was pronounced in civil appeal No. 1784 before
July 15, 1972, the effect of the judgment in the other three
civil appeals Nos. 1694, 1730 and 1831, which were heard
along with civil appeal No. 1784 on the point as to whether
the wealth-tax paid by the assessee was a permissible
deduction, was that this Court held that the same was to be
the decision on that point in civil appeal No. 1784. As
against that, Mr. Desai contends that there was no finding
by this Court before July 15, 1972 in civil appeal No. 1784
that the wealthtax paid by the assessee was deductible in
computing the total income of the assessee.
There is, in our opinion, force in the submission of Mr.
Palkhivala. As stated above, arguments were heard together
on February 1, 1972 in civil appeals Nos. 1784, 1694, 1730
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 14
and 1831 on the question as to whether the wealth-tax paid
by the assessee was a permissible deduction under section
10(2) (xv) of the Indian Income-tax Act. On the conclusion
of the arguments on that point, this Court found that an
additional question arose in civil appeal No. 1784 on the
point as to whether the interest payable on loan was part of
the actual cost of the assets. The Constitution Bench after
hearing arguments on this additional point for some, time
directed that civil appeal No. 1784 along with the connected
civil appeal 1785 should be posted for hearing before a
Division Bench after pronouncement of judgment in civil
appeals Nos. 1694, 1730 and 1831. The effect of the above
order which was made on February 1, 1972 was that the
decision in civil appeals Nos. 1694, 1730 and 1831 on the
point as to whether the wealth-tax paid by the assessee was
a permissible deduction, was also to be the decision in
civil appeal No. 1784. After the judgments of the
Constitution Bench in civil appeals Nos. 1694, 1730 and 1831
on March 29, 1972 the question as to whether the wealth-tax
paid by the assessee was a permissible deduction under
section 10(2)(xv) of the Act no longer remained subject of
controversy in civil appeal No. 1784 as the decision on that
point in the three appeals was also to govern the decision
in appeal No. 1784. It is no doubt true that civil appeal
No. 1784 was not disposed of before July 15, 1972 but that
fact would not prevent the case of the assessee in that
appeal ’being covered by section 5 of. the amending Act.
What is necessary to attract that section is that this Court
should have held before July 15, 1972 on an appeal in
respect of an assessment of the assessee for any particular
assessment year that the wealth-tax paid by the assessee is
deductible in computing the total income of that at year.
Once that is the effect of a decision given by this Court
fore July 15, 1972 the fact that the judgment in which the
above finding is recorded is given in other appeals, which
are heard together along with the appeal of the assessee and
the further fact that assessee’s appeal is not disposed of
before July 15, 1972
552
would not take the case of the assessee out of the purview
of section 5. We would, therefore, hold that the case of the
assessee in civil appeal No. 1784 is covered by section 5 of
the amending Act.
We, however, make it clear that the benefit of section 5 of
the amending Act so far as the second question in civil
appeal No. 1784 is concerned would be available only in
respect of wealth-tax paid and not merely payable.
In the light of the above, we dismiss civil appeals No. 1784
and 1785 of 1970. We accept civil appeal No. 1353 of 1970
and discharge the answer given by the High Court. We answer
the aforesaid question in the affirmative in favour of the
assessee and against the revenue. The assessees shall be
entitled to the costs of these appeals. One hearing fee in
civil appeals No. 1-784 and 1785 of 1970.
C. As. Nos. 1784 & 1785/70 dismissed V.M.K. C.A. No. 135
3/70 allowed.
553