I borrowed to buy and install my plant and paid interest before production started — can I add that interest to the cost of the plant and claim depreciation on it?
Yes. The Supreme Court held that interest paid on money borrowed to acquire and install plant and machinery, for the period before production commences, forms part of the actual cost of the asset. 'Actual cost' is not defined in the Act, so it must be read in the sense no commercial man would misunderstand — that is, by the accepted accountancy rule, which brings in all expenditure necessary to bring the asset into existence and put it in working condition. Depreciation and development rebate are therefore admissible on the capitalised interest.
Decided by the Supreme Court (Supreme Court of India — Hans Raj Khanna and A.C. Gupta JJ (judgment by Khanna J)) on 1974-10-31, reported as 1975 AIR 97; 1975 SCR (2) 538; (1975) 3 SCC 572; 98 ITR 167; 1975 SCC (Tax) 65; 1975 Tax LR 40. It bears on section 43(1), section 32, section 36(1)(iii) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the foundation of pre-operative interest capitalisation in Indian tax law, and it is the reason the Act now carries a proviso to section 36(1)(iii) and Explanation 8 to section 43(1). The Court's method matters as much as its result: where the Act leaves a commercial expression undefined, ordinary accountancy usage supplies the meaning. It is still the authority cited whenever the boundary between capitalising and expensing borrowing cost is argued, and it is the counterpart to India Cements — interest after production commences is revenue under section 36(1)(iii); interest before it belongs in the cost of the asset. The judgment also decides a wealth-tax deduction point under section 5 of the Income-tax (Amendment) Act 1972.
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Three appeals were heard together. In Civil Appeal 1353 of 1970 the assessee, a public limited sugar company, had borrowed heavily from the Industrial Finance Corporation of India to install its machinery and plant. It went into production on 22 January 1958 and, for the period before business commenced, paid Rs 2,38,614 as interest. For assessment year 1959-60 it claimed that this interest formed part of the actual cost of the machinery and plant for depreciation and development rebate. The Income-tax Officer rejected the claim, treating the interest as revenue expenditure of each year. The Appellate Assistant Commissioner and the Tribunal accepted the assessee's case, but the Andhra Pradesh High Court held that interest on a loan up to the date of commencement of business could not be capitalised. Civil Appeals 1784 and 1785 of 1970 were the Revenue's appeals from the Calcutta High Court on the same question for Standard Vacuum Refining Co. of India, which had capitalised Rs 23,53,284 of debenture interest accrued before its refinery started work, and in Appeal 1784 also on whether wealth-tax was deductible.
Civil Appeal 1353 of 1970 was allowed. The answer given by the Andhra Pradesh High Court was discharged and the referred question answered in the affirmative, in favour of the assessee: the interest payment represented an element of the actual cost of the machinery and plant, and depreciation and development rebate were admissible with reference to it. The Revenue's appeals 1784 and 1785 of 1970 were dismissed. The legal position for determining actual cost is the same for development rebate as for depreciation. On the wealth-tax question in Appeal 1784, the Court held the assessee was covered by the saving in section 5 of the Income-tax (Amendment) Act 1972: what that section requires is that the Supreme Court should have held before 15 July 1972 that wealth-tax paid was deductible, and the effect of the order of 1 February 1972 was that the Constitution Bench decision in the connected Indian Aluminium and Standard Vacuum Oil appeals governed this appeal too, even though it was not itself disposed of before that date. The benefit was confined to wealth-tax paid, not merely payable. The assessees got their costs.
Depreciation and development rebate are computed on written down value, and written down value depends on the actual cost of the asset to the assessee. The 1922 Act nowhere defined 'actual cost'. Since the question arises in the context of profits and gains of business, the expression must be construed in the sense no commercial man would misunderstand, which means ascertaining its meaning by the normal rules of accountancy prevailing in commerce and industry. The Court went to the accountancy texts and to the Institute of Chartered Accountants of India's Statement on Auditing Practices, which state that the cost of a fixed asset includes all expenditure necessary to bring it into existence and put it in working condition, and that for a newly started company constructing and erecting its plant, interest incurred before production commences may be capitalised — actual interest on borrowings used to finance capital expenditure, never imputed interest on equity. That rule of accountancy should be adopted for determining actual cost in the absence of any statutory definition or indication to the contrary. Section 208(1)(b) of the Companies Act 1956 gives statutory recognition to capitalising interest paid on share capital raised to defray construction expenses; the same principle must hold, with stronger reason, where the interest is paid on borrowed money rather than share capital. The Revenue's objection that identical plant would then carry different costs depending on whether own or borrowed money was used was answered by the architect illustration: for similar fixed assets there can be different actual costs, and that consequence does not detract from the principle. Interest after production commences remains deductible as revenue expenditure.
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.
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that interest paid on money borrowed to acquire and install plant and machinery, for the period before production commences, forms part of the actual cost of the asset. 'Actual cost' is not defined in the Act, so it must be read in the sense no commercial man would misunderstand — that is, by the accepted accountancy rule, which brings in all expenditure necessary to bring the asset into existence and put it in working condition. Depreciation and development rebate are therefore admissible on the capitalised interest. This was decided by the Supreme Court (Supreme Court of India — Hans Raj Khanna and A.C. Gupta JJ (judgment by Khanna J)) and bears on section 43(1), section 32, section 36(1)(iii) of the Income Tax Act 1961. It is reported as 1975 AIR 97; 1975 SCR (2) 538; (1975) 3 SCC 572; 98 ITR 167; 1975 SCC (Tax) 65; 1975 Tax LR 40. This is the foundation of pre-operative interest capitalisation in Indian tax law, and it is the reason the Act now carries a proviso to section 36(1)(iii) and Explanation 8 to section 43(1). The Court's method matters as much as its result: where the Act leaves a commercial expression undefined, ordinary accountancy usage supplies the meaning. It is still the authority cited whenever the boundary between capitalising and expensing borrowing cost is argued, and it is the counterpart to India Cements — interest after production commences is revenue under section 36(1)(iii); interest before it belongs in the cost of the asset. The judgment also decides a wealth-tax deduction point under section 5 of the Income-tax (Amendment) Act 1972. If it applies to you, the first step is this: Fix the date production commenced and split the interest at that date — before it goes into cost of the asset, after it is a section 36(1)(iii) deduction.
Three appeals were heard together. In Civil Appeal 1353 of 1970 the assessee, a public limited sugar company, had borrowed heavily from the Industrial Finance Corporation of India to install its machinery and plant. It went into production on 22 January 1958 and, for the period before business commenced, paid Rs 2,38,614 as interest. For assessment year 1959-60 it claimed that this interest formed part of the actual cost of the machinery and plant for depreciation and development rebate. The Income-tax Officer rejected the claim, treating the interest as revenue expenditure of each year. The Appellate Assistant Commissioner and the Tribunal accepted the assessee's case, but the Andhra Pradesh High Court held that interest on a loan up to the date of commencement of business could not be capitalised. Civil Appeals 1784 and 1785 of 1970 were the Revenue's appeals from the Calcutta High Court on the same question for Standard Vacuum Refining Co. of India, which had capitalised Rs 23,53,284 of debenture interest accrued before its refinery started work, and in Appeal 1784 also on whether wealth-tax was deductible. The matter was decided on 1974-10-31 by the Supreme Court (Supreme Court of India — Hans Raj Khanna and A.C. Gupta JJ (judgment by Khanna J)). On those facts the Supreme Court held as follows. Civil Appeal 1353 of 1970 was allowed. The answer given by the Andhra Pradesh High Court was discharged and the referred question answered in the affirmative, in favour of the assessee: the interest payment represented an element of the actual cost of the machinery and plant, and depreciation and development rebate were admissible with reference to it. The Revenue's appeals 1784 and 1785 of 1970 were dismissed. The legal position for determining actual cost is the same for development rebate as for depreciation. On the wealth-tax question in Appeal 1784, the Court held the assessee was covered by the saving in section 5 of the Income-tax (Amendment) Act 1972: what that section requires is that the Supreme Court should have held before 15 July 1972 that wealth-tax paid was deductible, and the effect of the order of 1 February 1972 was that the Constitution Bench decision in the connected Indian Aluminium and Standard Vacuum Oil appeals governed this appeal too, even though it was not itself disposed of before that date. The benefit was confined to wealth-tax paid, not merely payable. The assessees got their costs.
Depreciation and development rebate are computed on written down value, and written down value depends on the actual cost of the asset to the assessee. The 1922 Act nowhere defined 'actual cost'. Since the question arises in the context of profits and gains of business, the expression must be construed in the sense no commercial man would misunderstand, which means ascertaining its meaning by the normal rules of accountancy prevailing in commerce and industry. The Court went to the accountancy texts and to the Institute of Chartered Accountants of India's Statement on Auditing Practices, which state that the cost of a fixed asset includes all expenditure necessary to bring it into existence and put it in working condition, and that for a newly started company constructing and erecting its plant, interest incurred before production commences may be capitalised — actual interest on borrowings used to finance capital expenditure, never imputed interest on equity. That rule of accountancy should be adopted for determining actual cost in the absence of any statutory definition or indication to the contrary. Section 208(1)(b) of the Companies Act 1956 gives statutory recognition to capitalising interest paid on share capital raised to defray construction expenses; the same principle must hold, with stronger reason, where the interest is paid on borrowed money rather than share capital. The Revenue's objection that identical plant would then carry different costs depending on whether own or borrowed money was used was answered by the architect illustration: for similar fixed assets there can be different actual costs, and that consequence does not detract from the principle. Interest after production commences remains deductible as revenue expenditure. In the words reproduced by the source cited on this page: "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."
It was decided by the Supreme Court on 1974-10-31 and is reported as 1975 AIR 97; 1975 SCR (2) 538; (1975) 3 SCC 572; 98 ITR 167; 1975 SCC (Tax) 65; 1975 Tax LR 40. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 43(1), section 32, section 36(1)(iii), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Civil Appeal 1353 of 1970 was allowed. The answer given by the Andhra Pradesh High Court was discharged and the referred question answered in the affirmative, in favour of the assessee: the interest payment represented an element of the actual cost of the machinery and plant, and depreciation and development rebate were admissible with reference to it. The Revenue's appeals 1784 and 1785 of 1970 were dismissed. The legal position for determining actual cost is the same for development rebate as for depreciation. On the wealth-tax question in Appeal 1784, the Court held the assessee was covered by the saving in section 5 of the Income-tax (Amendment) Act 1972: what that section requires is that the Supreme Court should have held before 15 July 1972 that wealth-tax paid was deductible, and the effect of the order of 1 February 1972 was that the Constitution Bench decision in the connected Indian Aluminium and Standard Vacuum Oil appeals governed this appeal too, even though it was not itself disposed of before that date. The benefit was confined to wealth-tax paid, not merely payable. The assessees got their costs. It arises in Deductions & Disallowances matters, on section 43(1), section 32, section 36(1)(iii) of the Income Tax Act 1961, and was decided by Supreme Court of India — Hans Raj Khanna and A.C. Gupta JJ (judgment by Khanna J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Trace the borrowing to the specific asset: the Court capitalised interest on money actually borrowed to acquire and install plant, not notional or imputed interest on own funds. Keep the accounting records that show the capitalisation, and the auditors' treatment; the Court relied on ordinary accountancy usage to fill the statutory gap. Check the present statutory text before relying on this alone — the proviso to section 36(1)(iii) and Explanation 8 to section 43(1) now govern, and the case supports rather than displaces them.
Superseded by amendment. The principle stands and the case remains constantly cited (the source page records over 400 citing decisions), but the field is now occupied by statute: the proviso to section 36(1)(iii) and Explanation 8 to section 43(1) of the 1961 Act govern pre-operative and post-acquisition interest directly. The judgment itself was decided on the 1922 Act. No later decision doubting the reasoning was checked. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line gives the year as 1975 (the reporting year); the judgment is dated 31 October 1974 and decided_on follows the judgment. The judgment is under the Indian Income-tax Act 1922 — sections 10(2)(vi), 10(2)(iii) and the Explanation to section 10(5) — and the 1961 Act sections listed are the modern equivalents, not the provisions construed. The wealth-tax holding turns on section 5 of the Income-tax (Amendment) Act 1972, which is spent. Whether later authority has qualified the accountancy-usage approach was not checked. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Civil Appeal 1353 of 1970 was allowed. The answer given by the Andhra Pradesh High Court was discharged and the referred question answered in the affirmative, in favour of the assessee: the interest payment represented an element of the actual cost of the machinery and plant, and depreciation and development rebate were admissible with reference to it. The Revenue's appeals 1784 and 1785 of 1970 were dismissed. The legal position for determining actual cost is the same for development rebate as for depreciation. On the wealth-tax question in Appeal 1784, the Court held the assessee was covered by the saving in section 5 of the Income-tax (Amendment) Act 1972: what that section requires is that the Supreme Court should have held before 15 July 1972 that wealth-tax paid was deductible, and the effect of the order of 1 February 1972 was that the Constitution Bench decision in the connected Indian Aluminium and Standard Vacuum Oil appeals governed this appeal too, even though it was not itself disposed of before that date. The benefit was confined to wealth-tax paid, not merely payable. The assessees got their costs.
TaxSphere, “Challapalli Sugars Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/challapalli-sugars-ltd-v-cit/ (validity last checked 2026-08-29)
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