Law:

Section:

JUDGMENT A.C. Sen, J.-This is a reference under section 66(1) of the Indian Income-tax Act, 1922. The following question has been referred to us for our decision: "Whether, on the facts and in the circumstances of the case, the assessee was entitled under the provisions of sections 10(2)(vi), 10(2)(via) and 10(2)(vib) 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, as part of the actual cost for the purposes of depreciation allowances and development rebate ?" Facts relevant to the question referred are as follows : The assessee-company was incorporated on 5th July, 1952, and commenced its business from September, 1954. In June, 1953, it borrowed rupees four crores on debentures at the rate of 5¼ per cent. interest from the public, the interest to run from June, 1953. This sum together with rupees twelve crores financed by the company were used in setting up the refinery for which plant and machinery were imported from abroad. The refinery started work on the 1st September, 1954, from which date depreciation began to be calculated. The assessee-company had capitalised all the expenses incurred during the period of construction including the interest of Rs. 23,53,284, which had accrued from the date of borrowing to the date of the commencement of the business on the aforesaid debenture loan and claimed that depreciation must be allowed on the full amount. The only point for consideration is whether the aforesaid sum of Rs. 23,53,284, paid as interest from the date of borrowing to the date of the commencement of business on the aforesaid debentures, that is to say, during the period of the setting up of the refinery can be said to form part of the actual cost of the refinery. The argument on behalf of the revenue is that, as the said sum was paid to the debentureholders for procuring the loan, it cannot enter into the cost of construction. In other words, according to the revenue, actual cost of the capital asset, namely, the refinery, includes the cost for procuring materials and services for setting up the capital asset, but not the cost of procuring the funds with…

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