2006 (9) TMI 101 - HC - Income Tax

Expenses incurred on the cost of power line incurred prior to commencement of production had to be treated as part of plant and machinery being necessary for commencement of production and had to be capitalized Assessee s appeal allowed.

Summary

Issues:
Whether the assessee was entitled to capitalize the expenditure incurred on electric line feeder etc. prior to commencement of business.

Analysis:
The assessee company set up a factory for manufacturing Vanaspati Ghee and claimed amounts for capitalization to the cost of plant and machinery for various allowances under the Income-tax Act, 1961. The Assessing Officer rejected the claim, stating that the electric lines did not belong to the assessee and were not incurred in the relevant assessment year. The Commissioner of Income-tax (Appeals) upheld this decision.

The Tribunal partially upheld the claim, allowing Rs.21,854 for the cost of temporary electric connection but rejected Rs.1,86,300 for the power line for an independent feeder. The Tribunal considered the expenditure as revenue in nature based on a previous court judgment.

The counsel for the assessee argued that the expenditure should be treated as part of the plant and machinery and capitalized, citing judgments from the Supreme Court. The court referred to Challapalli Sugar Ltd. and Travencore-Cochin Chemical Ltd. cases, emphasizing the need to include all necessary expenditure to bring assets into existence and put them in working condition.

The court agreed with the assessee's contention, stating that the expenditure on the power line for an independent feeder, necessary for the commencement of production, should be treated as part of plant and machinery and capitalized. The court applied the test from Atherton v. British Insulated and Helsby Cables Ltd., emphasizing that expenditure for enduring benefits should be treated as capital.

Citing precedents like CIT v. Bokaro Steel Ltd., the court concluded that the expenditure in question was necessary for commencing the business and of an enduring nature, thus qualifying as capital expenditure. Consequently, the court ruled in favor of the assessee and against the revenue department.