Law:

Section:

Section 43(1) of the Income-tax Act, 1961 - Actual cost - Assessee entered into an agreement with a foreign company for supply of machinery to it by latter - In case of delay in delivery of machinery, foreign company was to pay compensation to assessee - Foreign company could not supply machinery within stipulated time - Consequently assessee was allowed by foreign company not to pay sum of Rs. 5,72,216 out of price of machinery - Whether actual cost of machinery had to be reduced by aforesaid amount of compensation paid by foreign company to assessee - Held, on facts, no FACTS The assessee-company, engaged in the business of manufacture and sale of cement and asbestos cement products, entered into an agreement with a foreign company on 17-8-1960 for supply of machinery for manufacture of asbestos cement products. The agreement provided, inter alia, that in the case of delay in delivery, as set out under the shipment plan, the foreign company would reimburse the assessee with compensation calculated at the rate of 0.25 per cent for each week of delay. The foreign company could not supply the machinery within the stipulated time and consequently the assessee claimed compensation for the delay under the aforesaid term of the agreement. The claim for the compensation was, however, settled by an agreement dated 12-7-1963, whereby it was agreed upon between the parties that the assessee would not pay to the foreign company the amount equivalent to Rs. 5,72,216 out of the price of the machines which it was liable to pay under the first agreement. In the course of the assessment proceedings for the assessment year 1963-64, the ITO reduced the actual cost of the plant and machinery by the amount which the assessee was allowed to retain out of the price of the machinery by way of compensation, and the ITO allowed development rebate and depreciation on such reduced cost. On appeal, both the AAC and the Tribunal upheld the ITO's order. On reference: HELD Having regard to the nature of the assessee's business and on a plain reading of the terms of the agreement dated 17-8-1960, it was obvious that the provision for compensation was not made with the intention of reducing…

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