K. Shivashankar Bhat, J.:— The following three questions are referred in these two references under the provisions of the Income-tax Act:

“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in allowing investment allowance on the enhanced cost of assets due to fluctuations in foreign currency rates and accordingly directing the Income-tax Officer to recompute the investment allowance and grant the deductions?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in allowing depreciation and investment allowance claimed by the assessee on the capitalised amount of Rs. 13,79,406 paid/payable in instalments in respect of capital assets under the deferred payment scheme?

(3) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that excess available surplus carried over from the earlier year under the provisions of the Payment of Bonus Act cannot be treated as an outgoing and hence is not eligible for deduction ?”

2. The first question is covered by the decision of this court in Commissioner Of Income-Tax v. Motor Industries Co. Ltd., [1988] 173 ITR 374. Following the said decision, the first question is answered in the affirmative and against the Revenue. Similarly, the third question is covered by the decision of this court in Mysore Lamp Works Ltd. v. Commissioner Of Income-Tax., [1990] 185 ITR 96. Following the said decision, the third question is answered in the affirmative and against the assessee.

3. The second question has raised certain interesting aspects of the provisions of sections 32 and 32A of the Act.

4. The relevant facts are gathered from the order of the Appellate Tribunal:

This pertains to the year 1989-90. The assessee claimed depreciation and investment allowance on Rs. 13,79,406. This was the amount representing the cost subject to the written down value of certain machinery purchased by the assessee under the deferred payment scheme of IDBI. The Tribunal stated the facts thus:

“To illustrate one transaction, the assessee had placed an order on June 22, 1977, with Jyothi Industries, for the purchase of machinery. The pro forma invoice gives the particulars of that machine inclusive of sales tax of Rs. 31,860 and the balance due after adjusting the advance paid by the assessee of Rs. 28,000.

It also gives a schedule of instalments for payment of that amount as ten instalments totalling Rs. 42,048. It provides for discount charge at 11.75% per annum on bills maturing within 36 months and 10.50% per annum on bills maturing after 36 months and states that these instalments are to be paid by bills of exchange payable to the State Bank of Mysore or IDBI. Accordingly, on December 13, 1977, the assessee gave ten usance bills for an aggregate amount of Rs. 42,048 and took delivery of the machine on December 10, 1977. Each of these bills was drawn in favour of Jyothi Industries for value received and payable after the stipulated period. However, only a sum of Rs. 31,860 was capitalised in the balance-sheet of the assessee and the balance was treated as an outstanding liability. The aggregate of such liabilities in respect of such transactions came to Rs. 13,79,406. On these facts, the claim of the assessee is that these amounts which represented discounting charges formed part of the price of the machinery purchased and should go to enhance the actual cost at the inception so that the assessee would be entitled to depreciation and investment allowance thereon.”

5. The contention of the Revenue has been that these amounts are attributable to the interest payable for the facility of paying the price in instalments and this liability should be treated as incurred during the running of business subsequent to the installation of machinery; therefore, they could not go into the capitalisation value of the machinery, while considering the depreciation as well as investment allownce under sections 32 and 32A of the Act. The Appellate Tribunal had not accepted this contention. It has been found that the assessee has given the bills of exchange in favour of the seller for the gross amount payable in instalments. The seller discounted those bills to get the principal immediately. Therefore, the Appellate Tribunal has concluded that the assessee was liable to the seller for the full amount represented by the gross figure arrived at by the totality of those cheques or bills of exchange. It was the consideration payable for the machinery purchased and there was no term fixing the interest payable on any amount. In other words, the finding of the Appellate Tribunal proceeds on the assumption that there was absolutely no bargain for the payment of interest. The finding of the Appellate Tribunal was that, it was the price that was negotiated and that the total amount payable in instalments constituted the actual cost of the machinery. Consequently, the decision in Commissioner Of Income-Tax, Gujarat v. Tensile Steel Ltd., [1976] 104 ITR 581 (Guj) was relied on and the claim of the assessee allowed.

6. Learned counsel for the Revenue repeated some of the contentions as were urged before the Appellate Tribunal. To appreciate the respective contentions, it is necessary to note the provisions of sections 32 and 32A. Both under section 32 as well as section 32A, the amount which shall be considered either for depreciation or for investment allowance is the actual cost of the machinery owned by the assessee. In the instant case, there is no dispute that the machinery was used for the business of the assessee, but the contention seems to be that the ownership was postponed as in the case of a hire purchase agreement. This contention has been negatived rightly by the Appellate Tribunal, because the title vested in the purchaser (assessee) immediately. It is clear from the statement of facts referred to above that the assessee obtained delivery of machinery, for which purpose negotiable instruments were passed on to the seller in full consideration of the sale transaction. The title vested with the assessee immediately on taking delivery of the machinery. In a case falling under the scheme covered by the IDBI scheme, the question of postponing the vesting of title does not arise, because for the seller, the IDBI gives the facility of encashing the negotiable instruments on discount. But as between the purchaser and the seller, the transaction is completed on delivery and handing over of the negotiable instruments in question.

7. There can be no doubt that the totality of the figure of the entire negotiable instruments represents the consideration and the amount actually received by the seller on discounting the negotiable instrument represents the concessional value at the most. In a commercial transaction, there is a distinction between the interest payable on the belated payments and the concession shown in the matter of lump sum payment towards consideration. The concept of “actual cost” was earlier the subject-matter of the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT, [1975] 98 ITR 167, this was prior to the definition now found in section 43 of the Act. At page 175, the Supreme Court pointed out that the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets as per accountancy rules.

8. According to the Supreme Court, 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 construction 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 created as a result of such expenditure.

9. The actual cost is defined under section 43(1) which defines “actual cost” as 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 any other person or authority; since the definition of the actual cost repeats the same words again, one has to look at the normal concept of the “actual cost” as has been done in Challapalli Sugars' case, [1975] 98 ITR 167 CSC).

10. However, learned counsel for the Revenue referred to Explanation 8 to section 43(1), according to which, where any amount is paid or is pay able as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is put to use shall not be included in computing the actual cost. This Explanation is relied on to contend that the difference between the gross sum and the discounted sum represents the future interest and shall not be taken into account for computing the actual cost. This Explanation has to be read again. The definition of “interest” under section 2(28A) was referred to to point out that the above difference is the amount representing the interest as envisaged by the said definition.

11. But, it is to be noted that this difference is not the amount payable by the assessee in respect of the debt incurred by the assessee. This amount was given up by the seller at the time of encashing the negotiable instrument given to the seller by the assessee. The assessee has parted with the entire amount by handing over the negotiable instruments. The difference arose only because the seller chose to encash the negotiable instruments, because of the facility made available by the IDBI. It cannot be said that every kind of concession results in the payment of interest. Nowhere the contract envisages the payment of interest and it was not the case of the Revenue also that there was any term for the payment of interest specifically.

12. The ratio of the decision of the Gujarat High Court in Commissioner Of Income-Tax, Gujarat v. Tensile Steel Ltd., [1976] 104 ITR 581 would be applicable to the facts of the instant case, even though Explanation 8 to section 43(1) was retrospectively added in the year 1986, with effect from April 1, 1974. The amount in question cannot be held to be interest at all, either because of any term in the contract or by necessary implication having regard to the contract in question.

13. Consequently, the second question referred to us is answered in the affirmative and against the Revenue.