In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets: Supreme Court

 

Hon’ble Supreme Court in the case of  Challapalli Sugars Ltd. Vs. CIT (1975) 98 ITR 0167 has delivered following judgment which is relied upon by various courts in subsequent rulling. It is still relevant in various judgement:

1. It would appear that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition.
2. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure.
3. The rule of accountancy should be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary. Sec. 208 of the Companies Act may be referred to which makes provision for payment of interest on share capital in certain contingencies. Clause (b) of sub-s. (1) of s. 208 of Companies Act provides that in case interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section the sum so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus 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 section even though such money constitutes share capital. The same principle, should hold good if interest is paid on money not raised by way of share capital but taken on loan for the 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.—CIT vs. Challapalli Sugars Ltd.(1970) 77 ITR 392 (AP) : TC29R.282 reversed; CIT vs. Standard Vacuum Refining Co. of India Ltd. (1966) 61 ITR 799 (Cal) : TC29R.285 affirmed; CIT vs. L. G. Balakrishnan & Brothers (P) Ltd. (1974) 95 ITR 284 (Mad) : TC29R.286 and CIT vs. J.K. Cotton Spinning & Weaving Mills Ltd. (1975) 98 ITR 153 (All) : TC29R.298 approved.
4. Interest paid on monies borrowed for acquisition of machinery and to meet expenses connected with its installation, etc., and capitalised has to be added to the cost of asset for purposes of depreciation.
5. Word “cost” is not synonymous with “price”—Other items of expenditure, such as freight or warehouse charges or insurance, must in certain cases be added to the price—Therefore interest expenditure
6. As the expression “actual cost” has not been defined, it should, be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The word “cost”, as observed on page 424 of Simon’s Taxes, 3rd Edn. Vol. B, is not synonymous with “price”. Other items of expenditure, such for instance as freight or warehouse charges or insurance, must in certain cases be added to the price. The accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing the erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. This rule of accountancy should, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary.—CIT vs. Challapali Sugars Ltd.(1970) 77 ITR 392 (AP) : TC68R.148 reversed.

 

CHALLAPALLI SUGARS LTD. vs. COMMISSIONER OF INCOME TAX

SUPREME COURT OF INDIA

H.R. Khanna & A.C. Gupta, JJ.

Civil Appeals Nos. 1353 of 1970 & 1784-1785 of 1970

31st October, 1974

(1974) 42 CCH 0416 ISCC

(1974) 1974 CTR 0309 (SC) : (1975) 98 ITR 0167

Legislation Referred to

Section 43(1)

Case pertains to

Asst. year 1959-60

Decision in favour of:

Assessee

Counsel appeared:

V.S. Desai with J. Ramamurthi & R.N. Sachthey, for the Appellant : N.A. Palkhivala with M.L. Bhakta, J.B. Dadachanji, Ravinder Narain & O.C. Mathur, for Interveners Nos. 1 & 3 & D.N. Gupta, for Intervener No. 2

KHANNA, J.

Appeal No. 1353 of 1970 on certificate is directed against the judgment of the Andhra Pradesh High Court whereby the High Court answered the following question on reference made to it under s. 66(1) of the Indian IT 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 asst. yr. 1959-60, the corresponding accounting year for which ended on 30th June, 1958. The assessee is a public limited company engaged in the manufacture and sale of sugar. The company went into production on 22nd Jan., 1958. The assessee-company had borrowed considerable sums 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 ITO 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 capitalised amount of the expenditure incurred on account of interest. No part of the above amount, according to the ITO, could be taken as expenditure attributable to the erection of the machinery or other assets. The AAC on appeal reversed the decision of the ITO on this aspect. The AAC 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 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 CIT on certificate against the judgment of the Calcutta High Court whereby the High Court answered the following question in references under s. 66(1) of the Act for asst. yrs. 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 ss. 10(2)(vi), 10(2)(via) and 10(2)(vib) read with s. 10(5) of the IT Act, 1922, 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?”

6. In Civil Appeal No. 1784 of 1970, which relates to the asst. yr. 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 WT Act of 1957 is allowable as a deduction under s. 10(1) or under s. 10(2)(xv) of the Indian IT Act, 1922?”

7. The assessee-company in these two appeals, M/s Standard Vacuum Refining Co. of India Ltd. (now known as “Hindustan Petroleum Corporation Ltd.”), was incorporated on 5th July, 1952, and commenced its business in Sept., 1954. In June, 1953, it borrowed rupees four crores on debenture at the rate of Rs. 5 1/4 per cent interest from the public. The interest was to run from June, 1953. The above amount together with rupees twelve crores financed by the company was used in setting up a refinery for which plant and machinery were imported from abroad. The refinery started work on 1st Sept., 1954, from which date depreciation began to be calculated. The assessee-company capitalised all the expenses during the period of construction, including the interest amounting to Rs. 23,53,284 which had accrued from the date of borrowing to the date of the commencement of the business on the aforesaid loan and claimed depreciation on the full amount. The ITO did not include interest on debentures in arriving at the figure of actual cost and as such rejected the claim of the assessee in this respect. The AAC agreed with the ITO. The Tribunal on further appeal held that the assessee was also entitled to depreciation on the capitalised interest of Rs. 23,53,284 paid to the debenture holders.
8. The relevant facts so far as the second question in Civil Appeal No. 1784 of 1970 is concerned were as follows:

The assessee-company filed a return showing an income of Rs. 1,52,88,497 for the asst. yr. 1959-60, the relevant accounting year for which was the calendar year 1958. In arriving at the above figure of the income, the assessee claimed a sum of Rs. 5,04,000 representing the provision for wealth-tax payable by it for the previous year relevant to the date of valuation, viz., 31st Dec., 1958. The ITO held that the provision for the payment of wealth-tax did not amount to expenditure laid out wholly and exclusively for the purposes of the business. The AAC agreed with the ITO. On second appeal the Tribunal held that the above amount could be allowed at the time when actual payment was made.

9. The High Court, as already mentioned, answered both the questions in favour of the assessee and against the Revenue.
10. This judgment would dispose of all the three civil appeals.
11. In appeal before us Mr. Palkhivala, on behalf of the assessees in the three appeals, has argued that interest for the period before the commencement of production on money borrowed for the purpose of acquiring and installing the machinery and plant should be included in the actual cost of the plant and as such capitalised for the purpose. As against that, Mr. Desai, on behalf of the Revenue, has supported the view taken by the Andhra Pradesh High Court. After hearing the learned counsel for the parties, we are of the opinion that the submission made by Mr. Palkhivala is well founded.
12. Before dealing with the contentions advanced, we may set out the relevant provisions. Sec. 10, inter alia provides for the payment of tax in respect of profits or gains of any business by an assessee. Sub-s. (2) of that section provides that such profits or gains shall be computed after making the allowances specified therein. Clause (vi) of that sub-section deals with deductions on account of depreciation and provides, inter alia, that deductions would be permissible in respect of depreciation of machinery or plant used for the purpose of business and, being the property of the assessee, of a sum equivalent to such percentage on the written down value thereof as may in any case or class of cases be prescribed. “Written down value” has been defined in sub-s. (5) of s. 10, in the case assets acquired in the previous year, the actual cost to the assessee, and in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act or any Act repealed thereby, or under executive orders issued when the Indian IT Act, 1886, was in force. The definition is subject to provisos, but we are not concerned with them. The Explanation which has been added to sub-s. (5) reads as under:

“Explanation.—For the purposes of this sub-section the expression ‘actual cost’ means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by Government or by any public or local authority, and any allowance in respect of any depreciation carried forward under clause (b) of the proviso to clause (vi) of sub-s. (2) shall be deemed to be depreciation ‘actually allowed’.”

13. It has not been disputed that so far as the question before us is concerned the legal position for determining the actual cost for the purpose of development rebate is the same as for the purpose of depreciation.
14. It would appear from the above that, while considering the question of deduction on account of depreciation and development rebate, we have to take into account the written down value. Written down value in its turn depends upon the actual cost of the assets to the assessee. The expression “actual cost” has not been defined in the Act, and the question which engages our attention is whether the interest paid before the commencement of production on the amount borrowed for the acquisition and installation of the plant and machinery can be considered to be part of the actual cost of the assets to the assessee. So far as the interest after the commencement of production in respect of capital borrowed for the purposes of business is concerned, the same can be deducted under cl. (iii) of sub-s. (2) of s. 10 of the Act.
15. In finding the answer to the question mentioned above, we have to bear in mind that it arises in the context of profits or gains of business and the permissible deductions on account of depreciation and development rebate relating to the machinery and plant of the assessee. As the expression “actual cost” has not been defined, it should, in our opinion, be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The word “cost”, as observed on page 424 of Simon’s Taxes, third edition, vol. B, is not synonymous with “price”. Other items of expenditure, such for instance as freight or warehouse charges or insurance, must in certain cases be added to the price. The matter has been dealt with in Accountancy by Pickles, 1955 edition, on page 944, under the head “Payment of Interest on Construction Capital” as under:

“In the ordinary course of affairs no dividends may be paid unless such dividends are paid out of profits: interest on debentures (being a charge) is, however, payable whether profits are earned or not. Where company raises share capital and out of the proceeds defrays the expenses of the construction of any works or buildings or provisions of plant which cannot be made profitable for a lengthened period, the company may pay interest on so much of that share capital as is paid up for the period and may charge to capital the sum paid by way of interest, provided that the restrictions imposed under s. 65 of the Companies Act, 1948, are complied with.”

It is further observed:

“The interest so paid is ‘capitalised’, that is to say, it is treated as part of the cost of construction being added thereto (similarly to legal expenses of acquiring property or brokers’ charges on purchasing investments).”

In Spicer & Peglar’s Practical Auditing, 11th edition, it is observed on pages 190-191, under the head “Interest Payable Out of Capital During Construction”:

“Interest on debentures issued for a similar purpose can be charged to capital during the period of construction (Hinds vs. Buenos Ayres Grand National Tramways Co. Ltd.)”

In Higher Book-keeping & Accounts by Cropper Morris & Fison, seventh edition, it is observed as under:

“Capital expenditure over a long period must perforce involve the question of interest as an additional cost. If the work were undertaken by an independent contractor he would, of course, take interest into account when preparing the estimates on which to base his tender. The final cost of construction work is made up of the cost of the machinery, materials, labour, supervision and establishment charges, plus interest on the capital employed which, but for its employment in that way, would be invested in good securities paying a reasonable rate of interest.”

16. Sec. 208 of the Companies Act, 1956 (1 to 1956), deals with payment of interest on share capital in certain contingencies. Sub-s. (1) of that section reads as under:

“(1) Where any shares in a company are issued for the purpose of raising money to defray the expenses of the construction of any work or building, or the provision of any plant, which cannot be made profitable for a lengthy period, the company may—

(a) pay interest on so much of that share capital as is for the time being paid up, for the period and subject to the conditions and restrictions mentioned in sub-ss. (2) to 7; and

(b) charge the sum so paid by way of interest, to capital as part of the cost of construction of the work or building or the provision of the plant.”

17. Exercise of power under sub-s. (1), is however, subject to certain restrictions which have been enumerated in the remaining sub-sections of the section, one of which requires that no such payment shall be made without the previous sanction of the Central Government. In Statement on Auditing Practices issued by the Institute of Chartered Accountants of India (1974) it is observed in paragraph 2.5 as under:

“2.5 Fixed Assets should be valued at cost and depreciation should be written off on a proper and consistent basis. Cost includes all expenditure necessary to bring the assets into existence and to put them in working condition. By way of illustration the following may be mentioned :

(i) Legal charges and stamp duties in the case of land,

(ii) Architect’s fees in the case of buildings,

(iii) Wages, salaries and installation expenses in the case of machinery, and

(iv) Interest on borrowings to the extent specified in paragraph 2.22.”

Relevant part of paragraph 2.22 reads as under:

“2.22. The question often arises as to whether interest on borrowings can be capitalised and added to the fixed assets which have been created as a result of such expenditure. The accepted view seems to be that in the case of a newly started company which is in the process of constructing and erecting its plant, the interest incurred before production commences may be capitalised. ‘Interest incurred’ means actual interest paid or payable in respect of borrowings which are used to finance capital expenditure. In no circumstances should imputed interest be capitalised, such as interest on equity or preference capital at a notional rate. Interest on capital during construction paid in accordance with the provisions of s. 208 of the Companies Act, 1956, may however, be capitalised as permitted by that section. Interest on monies which are specifically borrowed for the purchase of a fixed asset may be capitalised prior to the asset coming into production, i.e., during the erection stage. However, once production starts, no interest on borrowings for the purchase of machinery (whether for replacement or renovation of existing plant) should be capitalised…”

18. It would appear from the above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary.
19. We have already referred to s. 208 of the Companies Act which makes provision for payment of interest on share capital in certain contingencies. Clause (b) of sub-s. (1) of that section provides that in case interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sum so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus 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 section even though such money constitutes share capital. The same principle, in our opinion, should hold good if interest is paid on money not raised by way of share capital but taken on loan for the 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.
20. Mr. Desai has argued that if the interest paid on loan incurred for the purpose of acquisition and installing the machinery of a plant is to be taken into account in considering the actual cost of the plant, the result would be that the actual cost would be higher if the machinery for the plant is acquired and installed with borrowed money compared to the cost of such plant in case the money spent for the acquisition and installation of the above machinery is that which belongs to the assessee. This undoubtedly is so but it is inevitable and should not detract from the conclusion at which we have arrived. Let us take the case of an architect constructing his house. In case the architect engages another architect to prepare the plan for his house and to supervise its construction and pays remuneration to that other architect for this purpose, the amount so paid to the other architect shall have to be taken into account in arriving at the figure of actual cost of the house. In case, however, the architect constructing the house himself prepares the plan of the house and supervises its construction, he would naturally be not paying any remuneration to himself for the aforesaid work. The result would be that in the latter event the actual cost of the house would be less compared to the cost of the house in the former event even though the house in all other respects is identical. It would, therefore, follow 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 machinery is acquired and installed with the assessee’s own money or in case it is acquired and installed with borrowed money does not consequently militate against the answer which we propose to give to the question referred in the three appeals.
21. In the case of Hinds vs. Buenos Ayres Grand National Tramways Co. Ltd. (1906) 2 Ch 654 (Ch D) a tramway company, for the purpose of converting its undertaking to a system of electric traction issued conversion debenture stock. The directors passed resolutions that the interest on this stock should be treated as a part of the cost of construction, and chargeable to capital account during the construction of the works. The memorandum and articles of association of the company contained no provisions relating to this subject. It was held that there was no general rule of law which compelled companies to charge to revenue account interest on money borrowed for the purpose of constructing works, or prohibited them from charging it, during construction, to capital account. It was further held that in the absence of any provision to the contrary the company was at liberty to charge the interest in question to capital account. Dealing with the question of costs for the purpose of construction and the question whether the interest paid on money borrowed for such construction could be capitalised, Warrington, J. observed:

“Now, what is it that the company are really proposing to do? They are creating a capital asset by means of which they will hereafter earn, or they hope to earn, profits for the company. They are not simply employing contractors to find the money and do the work. They are finding the money themselves, and they find the money by borrowing it. What does each mile of line cost them under these circumstances—what is it that they expend in constructing each mile of line, taking the amount of the borrowed money expended on that line to be £10,000, that being the company’s estimate? The money is borrowed for that particular purpose—the £10,000. They have to pay interest on that £10,000 during the period that construction is taking place. In my opinion that asset which they are so constructing costs them not only the £10,000 but the £10,000 plus the amount of interest during the period of construction; and that is what they are out of pocket during the construction of that mile of line. Now, it seems to me that the company are entitled—I do not say that they are bound to do it—if they think fit to charge in their accounts as the cost of that mile of line not only £10,000, but the £10,000 and the interest on it during the period of construction.”

22. Mr. Desai has referred to the decision of the House of Lords in the case of Corporation of Birmingham vs. Barnes (H.M. Inspector of Taxes) (1935) 19 Tax Cases 195 : 3 ITR (Eng. Case) 26, 30 (HL). The appellant corporation in this case entered into an agreement with a company to lay a tramway track and establish a tramway service to the company’s works. By virtue of the work having been completed and the service established by a certain date, the corporation received from the company, in accordance with the terms of the agreement, a specified sum. The corporation also spent considerable sums of money on the renewal of their tramway tracks and received in that connection grants from the Unemployment Grants Committee. These grants were made under certain conditions to local authorities to assist them in carrying out at once approved schemes of public utility on which a substantial number of unemployed persons could be engaged. It was held that the payment by the company and the grant from the Unemployment Grants Committee should not be taken into account in ascertaining the actual cost to the corporation of the tramway track in question for the purpose of computing the allowance due to the corporation for wear and tear of such tracks. Lord Atkin observed in the above case:

“What a man pays for construction or for the purchase of the work seems to me to be the cost to him; and that whether someone has given him the money to construct or purchase for himself, or before the event has promised to give him the money after he has paid for the work, or after the event has promised or given the money which recoups him what he has spent. In the present case the Corporation paid the whole of the cost of the tramways out of their funds unless the first half of the Dunlop contribution was so applied: as to which there is no evidence, not is it material.”

23. The above observations were made in the context whether money contributed by another party can be taken into account in considering the cost of construction. No such question arises in the present case. On the contrary, what we are concerned with here is whether interest paid on money borrowed for the acquisition and installation of the machinery of plant accruing before the commencement of production can be taken into account in considering the actual cost of the plant. Such a question did not arise in the above mentioned case before the House of Lords.
24. Another case to which reference has been made on behalf of the Revenue is India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) : TC17R.649. The appellant-company in that case obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation by creating a charge on its fixed assets. In connection therewith the company spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer’s fee and claimed this amount as business expenditure. It was held that the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee’s business and was, therefore, allowable as a deduction under s. 10(2)(xv) of the Act. The act of borrowing money it was observed, was incidental to the carrying on of business and the loan obtained was not an asset or an advantage of enduring nature. This Court accordingly held that the amount of Rs. 84,633 was an allowable expenditure. This case too is of no assistance to the Revenue. The appellant-company in that case at the time it raised the loan was a running concern. Unlike the assessee in the present appeals, the loan raised by the appellant-company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in the actual cost of the plant did not arise in that case.
25. It may be mentioned that as against the view taken by the Andhra Pradesh High Court in the judgment which is the subject- matter of the appeal, three other High Courts have taken the contrary view and have held that interest paid in such circumstances can be capitalised and included in the actual cost of the machinery and plant. The decision of the Calcutta High Court in which the contrary view has been taken is the subject- matter of appeal before us. The view of the Calcutta High Court has been followed by the Madras High Court and the Allahabad High Court. The decision of the Madras High Court is in the case of CIT vs. L.G. Balakrishnan & Bros. (P) Ltd. (1974) 95 ITR 284 (Mad) : TC29R.286, while that of the Allahabad High Court is in the case of CIT vs. J.K. Cotton Spg. & Wvg. Mills Ltd. (1975) 98 ITR 153 (All) : TC29R.298. After giving the matter our consideration, we are unable to subscribe to the view taken by the Andhra Pradesh High Court. The correct view in the matter, in our opinion, has been taken by the Calcutta High Court and we affirm the same.
26. We may now advert to the second question in Civil Appeal No. 1784 on the point whether the wealth-tax payable by the assessee is allowable as a deduction. The High Court, as already mentioned, answered the second question in favour of the assessee. Subsequent to the judgment of the High Court this Court in the case of Travancore Titanium Products Ltd. vs. CIT (1966) 60 ITR 277 (SC) : TC17R.233 held that the amount of wealth-tax paid by an assessee on his net wealth under the WT Act is not a permissible deduction under s. 10(2)(xv) of the Act in his income-tax assessment. This Court in that context observed that wealth-tax is imposed on the owner of assets and not on any commercial activity. The fact that in certain special cases the quantum of the liability of a company to wealth-tax is related to the profits earned would not alter the character of the tax. It remains a tax charged upon the net wealth and it is not made a tax related to or incidental to the carrying on of business.
27. After the above decision, the matter was considered by the larger Bench consisting of five judges in the case of Indian Aluminium Co. Ltd. vs. CIT 1972 CTR (SC) 51 : (1972) 84 ITR 735 (SC) : TC18R.218. This Court held that the wealth-tax paid by the assessee which was a trading company on assets held by it for the purpose of business was deductible as a business expenditure in computing the assessee’s income from business. Sikri, C.J., speaking for four of the judges, observed that when a person has a dual capacity of a trader-cum-owner, and he pays tax in respect of property which is used for the purpose of trade, the payment must be taken to be in the capacity of a trader according to ordinary commercial principles.
28. Subsequent to the above decision in the case of Indian Aluminium Co. (supra), the IT Act, 1961, was amended first by means of an ordinance and later by means of the IT (Amendment) Act, 1972 (41 of 1972). By s. 2 of the amending Act sub-cl. (iia) was inserted and was deemed always to have been inserted in cl.(a) of s. 40 of the IT Act, 1961, as under:

“(iia) any sum paid on account of wealth-tax.”

29. An Explanation was added to the above sub-clause, but it is not necessary to reproduce the same. Sec. 40 of the IT Act, 1961, specifies the amounts which shall not be deducted in computing the income chargeable under the head “profits or gains of business or profession”. According to s. 4 of the amending Act, nothing contained in the Indian IT Act, 1922, shall be deemed to authorise, or shall be deemed ever to have authorised, any deduction in the computation of the income of any assessee chargeable under the head “profits and gains of business, profession or vocation” or “income from other sources” for the assessment year commencing on the 1st April, 1957, or any subsequent assessment year, of any sum paid on account of wealth-tax.
30. In view of the above provisions, it is plain that any sum paid on account of wealth-tax cannot be deducted in computing the income of an assessee chargeable under the head “Profits and gains of business, profession or vocation” or “Income from other sources”. There is, however, a saving clause contained in s. 5 of the amending Act and it reads as under:

“Where, before the 15th day of July, 1972 [being the date on which the Income-tax (Amendment) Ordinance, 1972, came into force], the Supreme Court has, on an appeal in respect of the assessment of an assessee for any particular assessment year, held that wealth-tax paid by the assessee is deductible in computing the total income of that year, then nothing contained in sub-cl. (iia) of cl. (a) of s. 40, or sub-s. (1A) of s. 58, of the principal Act, as amended by this Act, or, as the case may be, s. 4 of this Act, shall apply to the assessment of such assessee for that particular year.”

31. Mr. Palkhivala submits that the case of the assessee in respect of the second question in Civil Appeal No. 1784 is covered by s. 5 of the amending Act reproduced above.
32. To appreciate the above submission, we may observe that Civil Appeals Nos. 1784 and 1785 of 1970, along with Civil Appeals Nos. 1694 and 1730 of Indian Aluminium Co. and Civil Appeal No. 1831 of 1970 of Standard Vacuum Oil Co., were argued before the Constitution Bench on 1st Feb., 1972. The Court reserved judgments in Civil Appeals Nos. 1694 and 1730 of Indian Aluminium Co. and Civil Appeal No. 1831 of Standard Vacuum Oil Co. As an additional question relating to the inclusion of interest in the calculation of the actual cost arose in Civil Appeals Nos. 1784 and 1785 of 1970, the Court after hearing some arguments on that point in these appeals directed that they be heard by a Division Bench after the pronouncement of judgment in Civil Appeals Nos. 1694, 1730 and 1831. Judgments in those three appeals, i.e., two appeals of Indian Aluminium Co. and one of Standard Vacuum Oil Co., were pronounced on 29th March, 1972. The decision in the appeals in the case of Indian Aluminium Co. is reported, as already mentioned, in 1972 CTR (SC) 51 : (1972) 84 ITR 735 (SC) : TC18R.218, while that in the case of Standard Vacuum Oil Co. is reported in1972 CTR (SC) 65 : (1972) 86 ITR 1 (SC) : TC18R.219.
33. The submission made by Mr. Palkhivala is that even though no final order was pronounced in Civil Appeal No. 1784 before 15th July, 1972, the effect of the judgment in the other three Civil Appeals Nos. 1694, 1730 and 1831, which were heard along with Civil Appeal No. 1784 on the point as to whether the wealth-tax paid by the assessee was a permissible deduction was that this court held that the same was to be the decision on that point in Civil Appeal No. 1784. As against that, Mr. Desai contends that there was no finding by this Court before 15th July, 1972, in Civil Appeal No. 1784 that the wealth-tax paid by the assessee was deductible in computing the total income of the assessee.
34. There is, in our opinion, force in the submission of Mr. Palkhivala. As stated above, arguments were heard together on 1st Feb., 1972, in Civil Appeals Nos. 1784, 1694, 1730 and 1831, on the question as to whether the wealth-tax paid by the assessee was a permissible deduction under s. 10(2)(xv) of the Indian IT Act. On the conclusion of the arguments on that point, this Court found that an additional question arose in Civil Appeal No. 1784 on the point as to whether the interest payable on loan was part of the actual cost of the assets. The Constitution Bench after hearing arguments on this additional point for some time directed that Civil Appeal No. 1784 along with the connected Civil Appeal No. 1785 should be posted for hearing before a Division Bench after pronouncement of judgments in Civil Appeals Nos. 1694, 1730 and 1831. The effect of the above order which was made on 1st Feb., 1972, was that the decision in Civil Appeals Nos. 1694, 1730 and 1831 on the point as to whether the wealth-tax paid by the assessee was a permissible deduction, was also to be the decision in Civil Appeal No. 1784. After the judgments of the Constitution Bench in Civil Appeals Nos. 1694, 1730 and 1831 on 29th March, 1972, the question as to whether the wealth-tax paid by the assessee was a permissible deduction under s. 10(2)(xv) of the Act no longer remained the subject of controversy in Civil Appeal No. 1784 as the decision on that point in the three appeals was also to govern the decision in appeal No. 1784. It is no doubt true that Civil Appeal No. 1784 was not disposed of before 15th July, 1972, but that fact would not prevent the case of the assessee in that appeal being covered by s. 5 of the amending Act. What is necessary to attract that section is that this Court should have held before 15th July, 1972, on an appeal in respect of an assessment of the assessee for any particular assessment year that the wealth-tax paid by the assessee is deductible in computing the total income of that year. Once that is the effect of a decision given by this Court before 15th July, 1972, the fact that the judgment in which the above finding is recorded is given in other appeals, which are heard together along with the appeal of the assessee, and the further fact that the assessee’s appeal is not disposed of before 15th July, 1972, would not take the case of the assessee out of the purview of s. 5. We would, therefore, hold that the case of the assessee in Civil Appeal No. 1784 is covered by s. 5 of the amending Act.
35. We, however, make it clear that the benefit of s. 5 of the amending Act so far as the second question in Civil Appeal No. 1784 is concerned would be available only in respect of wealth- tax paid and not merely payable.
36. In the light of the above, we dismiss Civil Appeals Nos. 1784 and 1785 of 1970. We accept Civil Appeal No. 1353 of 1970 and discharge the answer given by the High Court. We answer the aforesaid question in the affirmative, in favour of the assessee and against the Revenue. The assessee shall be entitled to the costs of these appeals. One hearing fee in Civil Appeals Nos. 1784 and 1785 of 1970.