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1981 Supreme(Cal) 195
High Court Of Calcutta
SABYASACHI MUKHERJI, SUDHINDRA MOHAN GUHA
COMMISSIONER OF INCOME-TAX - Appellant
Versus
NEW CENTRAL JUTE MILLS - Respondent
Income-Tax Reference 414 Of 1975
Decided On : 06/10/1981
B.K.NAHA, B.L.PAL, Debi Pal, H.Murarka
Interest payment and certain expenses incurred prior to the commencement of production can be included in the actual cost of assets for the purpose of depreciation and development rebate if they are incurred for the acquisition of assets and bringing them into existence.
Headnote:
INCOME TAX - Depreciation and development rebate - Whether interest payment and certain expenses incurred prior to the commencement of production can be included in the actual cost of assets for the purpose of depreciation and development rebate - Held, yes.
Fact of the Case:
The assessee, a company, incurred certain expenses prior to the commencement of production. These expenses included interest on deferred payment for machinery, staff training expenses, insurance, and power and fuel. The assessee claimed depreciation and development rebate on these expenses. The ITO disallowed the claim, but the Tribunal allowed it. The revenue department referred the following questions to the High Court: 1. Whether the interest payment and expenses not allowable as revenue expenditure represent an element of actual cost of the assets and are eligible for depreciation and development rebate? 2. Whether the expenses incurred for staff training, insurance, and power and fuel can be included in the original cost of the plant and machinery for the purpose of depreciation and development rebate? 3. Whether development rebate can be granted on interest on deferred payment for machinery.
Finding of the Court:
The High Court held that the interest payment and expenses incurred prior to the commencement of production were incurred for the acquisition of assets, i.e., plant and machinery, and bringing them into existence. Therefore, they formed part of the actual cost of the assets and were eligible for depreciation and development rebate. The High Court also held that the Tribunal was justified in allowing depreciation and development rebate on the expenses incurred for staff training, insurance, and power and fuel.
Issues: 1. Whether the interest payment and expenses not allowable as revenue expenditure represent an element of actual cost of the assets and are eligible for depreciation and development rebate? 2. Whether the expenses incurred for staff training, insurance, and power and fuel can be included in the original cost of the plant and machinery for the purpose of depreciation and development rebate? 3. Whether development rebate can be granted on interest on deferred payment for machinery.
Ratio Decidendi: The High Court relied on the following principles in reaching its decision: - The interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery formed part of the "actual cost" of the assets of the assessee within the meaning of the expression in Section 10 (5) of the Indian I. T. Act, 1922, and the assessee would be entitled to depreciation allowance and development rebate with reference to such interest also. - Every item of capital expenditure is not by itself eligible for depreciation and development rebate though it is to be otherwise capitalised.
Final Decision: The High Court answered all the questions in the affirmative and in favor of the assessee.
( 1 ) THIS reference relates to the assessment year 1960-61, at the instance of the Commissioner of Income-tax (Central), Calcutta. Three questions have been referred to us by the Tribunal which are as follows :"1. Whether, on the facts arid in the circumstances of the case, the Tribunal was right in holding that the interest payment of Rs. 4,81,693 and Rs. 80,230 which were not allowable as revenue expenditure represents an element of actual cost of the assets of Sahu Chemicals and as such depreciation and development rebate are admissible with reference to the said amounts ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in including in the original cost of the plant and machinery any part of the expenses incurred for (i) staff training, (ii) insurance, and (iii) power and fuel in ascertaining the actual cost for the purpose of allowance of development rebate and depreciation allowance ? 3. Whether the Tribunal was justified in law in directing the Income-tax Officer to grant development rebate on Rs. 93,768 representing interest on deferred payment for machinery ?"the Company, M/s. New Central Jute Mills, incurred a total expenditure of Rs. 49,52,267 from the incorporation in 1954, till the commencement of production by Sahu Chemicals Factory on 31st October, 1959. It was argued before the lower authorities that the original cost of assets included not only the direct expenses relating to the cost of erection of plant and machinery but also those incurred in framing and setting up the business like printing, stationery, postage, advertising, publicity, trial running, etc. The ITO allowed the assessee to capitalise Rs. 59,00,000 and refused to grant depreciation and development rebate of Rs. 34,00,000. The AAC discussed the Calcutta High Court's decision in CIT v. Standard Vacuum Refining Co. of India Ltd. [1966] 61 ITR 799 and came to the conclusion that the expenses amounting to Rs. 22,00,000 are liable to be excluded from the cost of the assets for the purposes of depreciation and development rebate.
( 2 ) IT was argued before the Tribunal that all these expenses related to the pre-production stages of Sahu Chemical Ltd. factory and that in view of the several authoritative opinions in standard books on accountancy, these amounts should be treated as forming part of the cost of the assets. It was contended that all those expenses really formed a part of the cost of assets as they were all incurred for the only purpose of creating and putting up the plant. There could not be and there was no other purpose in incurring the expenditure in question. The Tribunal was taken through the details of apportionable expenses as on 31st October, 1959, and then it was argued that the AAC's action in disallowing the depreciation and development rebate was substantially wrong. It was pointed out that the AAC was wrong in disallowing the claim in respect of 50 per cent. of the salary, wages, bonus, provident fund and welfare expenses. Similarly, it was pointed out that the power and fuel estimated as consumed by stock-in-hand and valued at Rs. 41,832 was also wrongly taken into account by the AAC. If the estimated consumption of power and fuel for the stock-in-hand was to be disallowed then the production up to 31st October, 1959, taken at Rs. 2,48,862 should be enhanced accordingly, with the result that there would be no case for disallowing any depreciation and development rebate of Rs. 41,832. It was specifically pointed out that all the expenses could only relate to the employees engaged in the construction or erection of the plant and there was no justification for the AAC in disallowing the depreciation and development rebate of Rs. 84,000. The departmental representative, on the other hand, highlighted the reasons of the AAC.
( 3 ) AS regards the question of interest on deferred payment of Rs. 93,768, the AAC disposed of the matter in the following manner
