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1976 (1) TMI 12 - HC - Income Tax

Issues:
- Treatment of expenses incurred prior to the commencement of production in the assessee's sugar factory as part of the cost of plant and machinery for granting depreciation and development rebate for the assessment year.

Analysis:
The case involved a company that extended its operations by setting up a sugar factory. The company incurred various expenses before the start of production, including vehicles maintenance, travelling expenses, salaries, wages, interest on loans, and more, totaling Rs. 11,89,563. The company allocated this sum towards the cost of buildings, plant, machinery, and electric installations based on direct costs. The Income-tax Officer disallowed the claim of Rs. 66,263 as depreciation, stating that certain expenses were of a revenue nature and could not be included in the cost of capital assets. The Appellate Assistant Commissioner allowed specific amounts like interest on loans, registration and stamp duty, and salaries and wages to be treated as part of the actual cost of plant and machinery.

Both the assessee and the department appealed to the Tribunal, with the department arguing that none of the items should be considered in determining the actual cost, while the assessee contended that all the expenses should be part of the actual cost. The Tribunal found that most expenses were incurred for acquiring assets and allowed them to be capitalized. However, for miscellaneous expenses of Rs. 1,28,492, except for Rs. 216 representing a loss, the Tribunal considered the rest as acquisition-related expenses.

The High Court referred to a Supreme Court decision regarding interest paid before production, which was considered part of the actual cost. Following this precedent, the court allowed specific expenses like interest on loans, registration and stamp duty, and insurance to be capitalized. However, for remaining items like travelling expenses, electricity charges, salaries and wages, and printing & stationery, the court decided to restore the matter to the Tribunal for a detailed examination of whether these expenses were attributable to the new assets.

In conclusion, the High Court answered the question by directing a re-examination of certain expenses by the Tribunal to determine their includibility in the actual cost of plant and machinery. The court emphasized the need for a thorough analysis of each item to decide their treatment, indicating that the matter required further review for a comprehensive decision.

 

 

 

 

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