assessee, private limited company, is in appeal for asst. yr. 1982-83 urging single contention. issue raised is that CIT (A) was not justified in holding that penalty paid to customs authorities amounting to Rs. 20,000 could not be treated as actual cost of machinery and as such depreciation and investment allowance was not admissible on same. facts relating to amount of Rs. 20,000 are mentioned in para 5.1 of assessment order. Shri N.K. Sud, in brief, submitted that certain machinery was imported for which letter of credit had been taken in name of M/s Bawa Leather Industries initially but later on due to further developments assessee-company was floated and machinery was actually purchased and imported by it. It was further pointed out that customs authorities allowed machinery to be imported by assessee-company but for infringement of t h e rules about letter of credit being in different name, penalty of Rs. 20,000 was imposed. Shri Sud submitted that this was not case of any infraction of law but violation of rule, which could be regularised on payment of penalty. He submitted that position in case of regularisation of infringement was that infringement gets wiped out and there is no offence committed in eye of law. He relied upon observations of Delhi High Court at p. 636 of ITR in case of CIT vs. Loke Nath & Co. (1984) 40 CTR (Del) 297: (1984) 147 ITR 625 (Del). Next he pointed out that assessee s case is different from cases decided about infraction of law where penalty is paid and is claimed as revenue expenditure. He stated that in this case assessee s claim is to capitalise amount of penalty as part of "Actual Cost" of machinery imported as per definition in s. 43(1) of IT Act, 1961. He submitted that s. 43(1) of Act defines actual cost to mean actual cost of assets to assessee reduced to limited extent as stated in that section. He went on to say that for these purposes reduction provided in section was not material and material words are actual cost of assets to assessee. According to him, this was wider definition, which will take in its scope any expenditure incurred for acquiring machinery. It was further submitted that in event of non-payment of penalty machinery could not be obtained from Customs Authorities and used as asset in assessee s business. He cited in support observations at p. 1571 in Volume 2 of Commentary of Chaturvedi & Pithisaria on Income-tax, 3rd Edn., CIT vs. Pannalal Narottamdas & Co. (1968) 67 ITR 667 (Bom), CIT vs. Polychem Ltd. (1975) 98 ITR 574 (Bom) and Supreme Court authority in case of Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309: (1975) 98 ITR 167 (SC). On behalf of Revenue, reliance was placed on arguments mentioned by ITO in assessment order. In brief, it was submitted that expenditure of Rs. 20,000 did not create or bring into existence tangible asset not did it make any improvement in capital assets so as to increase its value. On consideration of rival submissions, we find force in claim of assessee that amount of Rs. 20,000 should be capitalised as part of actual cost of machinery imported. argument urged on behalf of Revenue clearly begs question. expenditure claimed is in relation to asset and by itself it cannot produce any further tangible asset. case is clearly to be decided on interpretation of words actual cost used in s. 43(1) of Act. Supreme Court has considered import of those words in case of Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309: (1975) 98 ITR 167 (SC), and has held that expression actual cost should be understood in accordance with normal rules of accountancy prevailing in commerce and industry. On that basis, Supreme Court laid down that cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. Applying that test laid down by highest Court, amount of penalty of Rs. 20,000 is clearly to obtain possession of assets i.e. machinery imported. In event of assessee not paying amount it could not get hold of machinery imported. Consequently, in our opinion, amount has to be capitalised being part of actual cost of machinery imported and concerned allowances admissible in law are to be allowed on basis of such increased cost. We direct ITO to allow assessee s claim for depreciation and investment allowance with reference to aforementioned increased cost of machinery. appeal of assessee is allowed. *** SARUP TANNERIES v. INSPECTING ASSISTANT COMMISSIONER (ASSESSMENT)