Income-tax law stipulates that depreciation has to be computed at the prescribed percentage of the written down value, which, in turn, is calculated with reference to the actual cost of the asset. In the context of computing depreciation, it is important, therefore, to understand the actual meaning of `actual cost'.

Section 43(1) of the Income-Tax Act, 1961, defines actual cost to mean ``the actual cost of the assets to the assessees, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority''.

In the absence of an exhaustive definition of the term `actual cost' in theI-T Act, this expression has to be construed in accordance with the generally accepted principles of accounting. Accordingly, the actual cost of a depreciable asset comprises its purchase price (including import duties and other non-refundable taxes or levies) and any directly attributable cost of bringing the asset to its working condition for its intended use. Trade discounts and rebates are deducted in arriving at the purchase price.

The cost of self-constructed fixed assets comprises those costs of construction that relate directly to the specific assets and costs that are attributable to the construction activity in general and can be allocated to specific assets.

The question of what constitutes the actual cost of a capital asset has also been examined in a number of cases. Some important propositions accepted in these cases are as below:

Actual cost to the assessee would be what the assessee has in fact expended or laid out for the purpose of acquiring the asset. The word `actual' lays emphasison the reality and genuineness of the cost and excludes collusive, inflated, deflated or fictitious costs.

The commission paid to a bank for a standard guarantee for the purchase of machinery from a foreign firm forms part of the actual cost of the machinery.Salaries and other expenses of technical staff engaged in installing the machinery can be claimed as part of the actual cost. Similarly, fees paid to architects for preparing layouts and expenditure on re-doing defective foundations for installation of a plant form part of the actual cost of plant and machinery.

It has also been held that expenditure on test runs of machinery, foundation stone-laying ceremony expenses, payment for know-how for erection and commissioning of plant, consideration for the right to install additional productive capacity, and expenditure on installation of machinery form part of the actual cost of machinery. Compensation for delayed delivery of machinery and rebate for defective machinery are not to be reduced from the costof machinery.

Section 36 (1) (iii) provides that the amount of interest paid on the capital borrowed for the purposes of the business or profession is a deductible expense. However, unless a business is actually commenced, no deduction can be claimed in respect of the interest on money borrowed for the period prior to such commencement.

Interest relating to the period before commencement of production on amounts borrowed for the acquisition and installation of plant and machinery, etc, forms part of the actual cost of the asset.

In this connection, the apex court has held that the accepted accountancy rule for determining 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 not 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 offixed assets created as a result of such expenditure.

It may be noted that interest in connection with the acquisition or construction of an asset can still be capitalised upon till the period such asset is first put to use (even though the commercial production otherwise may have commenced earlier). In such a case, the assessee also has the option to claim this interest as a revenue expenditure where the borrowing is made to acquire the relevant fixed asset.

Interest relating to the period after the asset is first put to use cannot now be treated as part of the actual cost, in view of Explanation 8 to Section 43 (1). Therefore, such interest can only be claimed as revenue expenditure.

Hence, the assessee should take care while claiming the depreciation on fixed assets and ensure whether the actual cost of the asset has been correctly computed so that there is no disallowance at the stage of assessment.

The Jindals are Delhi-based chartered accountants