Interest paid on money borrowed for the acquisition of a capital asset forms part of the actual cost of the asset for the purpose of depreciation and development rebate.

( 1 ) 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) (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?"

( 2 ) FACTS relevant to the question referred are as follows.

( 3 ) 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 51/4% 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.

( 4 ) 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.

( 5 ) 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 debenture-holders 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 which the said materials and services are procured.

( 6 ) LET us examine the validity of the above argument. Depreciation and development rebate are allowed on the written down value of the capital asset. Section 10 (5) (a) says that written down value means in the case of assets acquired in the previous year, the actual cost to the assessee. Therefore, depreciation and development rebate are allowed in the case of assets acquired in the previous year on the actual cost to the assessee of the capital asset. Capital asset may be acquired by the assessee either out of his own savings or with borrowed capital. When capital asset is acquired with borrowed capital the assessee is ordinarily required to pay interest on such amount borrowed while the capital asset is being acquired, that is to say, until it is fit for the commencement of business. Expenses are incurred by the assessee in buying the other materials including machinery for the construction of the capital asset, in paying wages of labourers engaged for the work of construction and in paying remuneration to erection engineer, architects, designers etc. It is not disputed that such expenses do form part of the actual cost to the assessee in acquiring the capital asset. If a machine is imported from abroad, amounts paid on account of freight and for transporting it from the harbour to the factory site certainly form part of the actual cost to the assessee in acquiring the capital asset. In the case of a machine, invoice price alone is not the actual cost; certain other expenses incurred in installing the machine also enter into the actual cost. Whatever expenses are essential to the erection of the capital asset are certainly included in the actual cost to the assessee. Is the payment of interest es