CHALLAPALLI SUGAR LTD. versus THE COMMISSIONER OF INCOME TAX, A.P. HYDERABAD

Citation: [1975] 2 S.C.R. 538 · Decided: 31-10-1974 · Supreme Court of India · Bench: HANS RAJ KHANNA · Disposal: Disposed off

Judgment (excerpt)

538 
CHALLAPALLI SUGAR LTD. 
v. 
THE COMMISSIONER OF INCOME TAX, A.P. HYDERABAD 
October 31, 1974 
[H. R. KHANNA AND A. C. GUPTA, JJ.] 
.11ldia11 I11come·Tax Ac:t, 1922, Section 10, secs, 10(2), 10(2)(vl), 10(5) a11d 
.exp/a11atlon te1 sec. 10(5) a11d Sectio11 208(1) of Compa11ies Act, 1956 (A'.ct 1 
.of 1956)-Payment of tax i11 respect of profits or gains-Interest paid li,efore 
commencement of produ,~tion on mo11ey borrowed for acquiri11g and lns1'1//i11g 
the machiner.y and plant, if coul<I be capitalised and i11c/uded 111 actual cost. 
l11c01nc-rax Act, 1961, as amended by Income-Tax (Amendment) Act, 1972 
(Act No. 41 of 1972) Sctions 10(2) (xv) and 40 (1ia)-Wealth•tax pai'd by 
.assessee on net wealth, whether deductible as business expendilui~ under sec. S 
uf Amending Act. 
lo all the three appeals the case of the assessee is that the interest for the 
period before the com.men;ement of· production on money borrowed for the ·pur. 
pose of acquJ ring a.nd installing the machinery and plant should be included in the 
:actual cost of the plant and Ill! such capita.lised for the purpose. In Civil Al'J)ea1 
No. 1784, the contention of the assessee is that the wealth-tax payable by the 
.nssessee is allowable aR n deduction. 
.Allowing Civil Appeal No. 1353. of 1970 and dismhsing Civil Appeals Nos. 
1784 and 1785 of 1970. 
B 
c 
D 
HELD : (i) So far .as the first question is concero~d the legal position for 
-determining lhe actual cost .. for the purpose of development rebate is the same 
.as for the purpose of depreciation. A reading of the provisions secs. 10,10(2), 
10{2)(vi), 10(5) and the explanation to sec. 10(5) will disclose that, while: coo· 
sideriog the question of deduction on account of depreciation and development 
rebate the wiitten down value has to be taken into account. Written down value 
E 
in its tum depends on the actual cost of the assets to the assessee. As the. expres· 
sioo "actual cost" .has not been defined in the Act, it should be construed in the 
sense which ':no cpmmercial man would misunderstand. It would appear that the 
.ae<:epted accountani.:y rule for determining the cost of fixed assets is to iD.clude 
all expenditure necessary to bring such assets into existence and to put them in 
working condition. lo case money is borrowed by a newly started company which 
is in the process of constructing and erecting its plant. the interest i'ocurred before 
the. commencement of production on such borrowed money can be capitalise:d and 
F 
added to the cost of (he fixed assets which have been created as a result of suoh 
expenditure. The above rule of accountancy should be adopted for deternlioing 
the actual c0st of the a:l'Sets in the absen:e of any staMory definition or other 
'indication to' the contrary. [543B-D, E; 545F·HJ 
Clause (b) of sub-s1~ction (1) of sec:t.ioo 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 
G 
·section even though such money constitutes share capital. The same principle, 
should hold .sood if interest: is paid on money not raised by way of share 'capital 
but taken on ·loan for tlie 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. 
[54SH-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 
H 
machinery is acquired and installed with ihe assessee's own money or in case it is 
·acquired and installed with borrowed money does not consequently militate 
against the princiole that interest oaid in such circumstances can be ~pitalised 
-and induded in the actual cost of machinery and plant. [546F·0] 
A 
B 
c 
0 
E 
F 
G 
H 
CHALLAPALLI SUGAR LTD, v, C.I.T. (Khanna, J,) 
539 
[{111ds, v, .Buenos Ayres Grant/ National Tramways Co. Limided, [1906] 2 Cl., 
D. 654, Corporation of Blrmln;ham v. Barne8 (H. M. Inspector of Taxes), 1!> 
Tax Cases t95, India Cements Ltd, v. Comm/ss/011er of Income.tax; Madras, 
(1966] 60 !TR 52 referred 10. 
Commissioner of lncome·Tax Madras v. L, G. Balakrishnan and Bros. (I') 
Ltd, [1974] 95 I.T.R .. 284 and 

Excerpt shown. Read the full judgment & AI analysis in Lexace.