COMMISSIONER OF INCOME TAX Vs. TENSILE STEEL LIMITED

JUDGEMENT

(1.) AS all these three references relate to the identical question as to whether the payment of interest should be considered as a part of the cost of plant and machinery and, therefore, in the nature of capital expenditure, we intend to dispose of these three references by this common judgment. In order to appreciate the rival contentions urged on behalf of the parties, it would be necessary to notice some facts which have given rise to these references.

(2.) THE assessee -company is engaged in the business of manufacturing high tensile wires for prestressed concrete construction or any other product or products. The assessee -company entered into a contract on March 25, 1961, with Kobe Steel Works Limited, Shinko Wire Company Limited and C. Itoh and Company Limited, all of Japan, for the purposes of establishing and erecting a plant for high tensile steel wires required for prestressed concrete construction. For that purpose, a basic agreement was effected between the aforesaid parties for providing financial collaboration, supply of plant and machinery and furnishing technical know -how. Under that basic agreement, it was, inter alia, agreed that C. Itoh and Company Ltd., and Kobe Steel Works Limited would supply required machinery and equipment as well as technical know -how. Under that basic agreement, it was, inter alia, agreed that C. Itoh and Company Ltd., and Kobe Steel Works Limited would supply required machinery and equipment as well as technical know -how concerning their installation and operation for which a separate sales contract was to be executed between the parties. Pursuant to this understanding arrived at under the basic agreement, a sales contract was executed on the same day, i.e., March 25, 1961, between the assessee -company, C. Itoh and Company Ltd., and Kope Steel Works Limited. According to article 4 of the sales contract the aforesaid two Japanese companies agreed to supply the machinery and plant and equipment for a consideration of Stg. Pounds 2,76,960 CIF Bombay or for Stg. Pounds 2,592,840 for Kobe. It was specifically agreed that should there be any change in the official rate of IMF any time till the final instalment was paid, the difference caused by this change should be adjusted at the time of payment of each instalment. By article 5 of the said contract, it was agreed that 40% of the total value of the important plant should be invested in equity of the assessee -company by the aforesaid two Japanese companies, and the amount equivalent to 40% of the total contracted value of the plant, which was to be utilised towards the payments of plant as due against shipping documents. The balance of 60% of the contracted value of the plant was to be paid as under :

(3.) BY article 6 of the said contract the assessee -company was under an obligation to obtain and deliver to C. Itoh and Company Limited at the time when the sales contract came into effect the letter of guarantee issued by any first class bank or institution in India acceptable to the said firm guaranteeing to pay the outstanding principal and interest defined in article 5 of the said sales contract if the assessee -company could not fulfil the payment of principal and interest amount. By article 18, it was agreed that the said sales contract would come into effect upon approval thereof by the Government of India granting the assessee -company the import licence for plant and also by the Government of Japan after the representatives of the aforesaid three foreign firms signed the said contract.