Judgment

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 assessee and as such depreciation and development rebate are admissible with reference to this amount also ?"

2. 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.

3. 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 capitalized amount of the expenditure incurred on account of interest. No part of the above amount, according to the Income-tax Officer could be taken as expenditure attributable to the erection of the machinery or other assets. 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.

4. 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.

5. 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 references 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 case, the assessee was entitled under the provisions of Sections 10 (2) (vi), 10 (2) (vi-a) and 10 (2) (vi-b) 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 ?"

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-tax Act of 1957 is allowable as a deduction under Sect