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Issues involved: Interpretation of capital expenditure for depreciation and development rebate.
Summary: The case involved a limited company concerned with the assessment year 1961-62, which had not yet started cement production but incurred expenses related to the construction of a cement plant. The dispute revolved around whether certain expenses, such as factory lighting and test and trial runs for the cement plant, should be considered as capital expenditure for depreciation and development rebate. The Income Tax Officer (ITO) disallowed a portion of the electricity expenses, considering them as capital expenditure. The Appellate Assistant Commissioner (AAC) disallowed a larger amount, while the Tribunal allowed 50% of factory lighting and the full amount of test and trial expenses to be treated as capital expenditure related to the cement plant under construction. The High Court referred to the Supreme Court's decision in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, which emphasized including all necessary expenditures to bring assets into existence and working condition as part of the actual cost of assets. Applying this principle, the High Court held that the expenses on factory lighting and test and trial runs, totaling Rs. 20,000, should be considered as capital expenditure for depreciation and development rebate. Therefore, the Tribunal's decision to treat the mentioned expenses as capital expenditure was upheld, and the question was answered in the affirmative against the revenue. No costs were awarded due to the unsettled legal position prior to the Supreme Court's decision.
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