1987 (6) TMI 105 - AT - Income Tax

Summary

Issues Involved:
1. Capitalization of administrative expenses.
2. Capitalization of interest.
3. Investment allowance and relief under section 80J.
4. Treatment of central subsidy.
5. Investment allowance on building construction equipment.
6. Depreciation on boiler plant.
7. Extra shift depreciation on weighing machines.
8. Guest house expenses.

Issue-wise Detailed Analysis:

1. Capitalization of Administrative Expenses:
The assessee contended that all administrative expenses incurred before the completion of the construction of the factory building, plant, and machinery should be capitalized. The authorities below restricted capitalization to 87%, deeming 13% unrelated to capital. The assessee relied on precedents like *Saraf Textile Industries* and *Challapali Sugars Ltd. vs. CIT*. The Tribunal concluded that general administrative and office expenses indirectly related to or incidental to the construction must be capitalized. Expenses not related to construction, such as salaries of the sales department, should not be capitalized. The Tribunal directed the ITO to allow the depreciation on these expenses.

2. Capitalization of Interest:
The assessee sought to capitalize interest of Rs. 1,68,59,106, with Rs. 21,54,558 treated as revenue expenditure. The Tribunal noted that per section 43(1) Explanation 8, effective from 1st April 1974, interest on borrowings for assets after they are put to use cannot be included in the actual cost. Consequently, the claim for capitalization of interest was disallowed, impacting the related claims for investment allowance and relief under section 80J.

3. Investment Allowance and Relief under Section 80J:
The assessee's claims for investment allowance and relief under section 80J were consequential to the decision on the capitalization of interest. Since the interest capitalization claim was disallowed, these claims also failed.

4. Treatment of Central Subsidy:
The Department treated a central subsidy of Rs. 15 lakhs as part of the cost contributed by authorities. The Tribunal held that the subsidy, given as an inducement for industrial establishment, should not be treated as a cost contribution. The ITO was directed to allow depreciation and investment allowance on the cost of assets without reducing the subsidy amount.

5. Investment Allowance on Building Construction Equipment:
The assessee claimed investment allowance on building construction equipment worth Rs. 93,031, citing *CIT vs. Mysore Iron & Steel Ltd.* The Tribunal agreed that machinery used for constructing the factory is used for business purposes. Therefore, the claim was allowed, and the ITO was directed to verify compliance with section 32A.

6. Depreciation on Boiler Plant:
The assessee claimed 15% depreciation on the boiler plant, asserting it came in contact with corrosive chemicals. The Tribunal found the claim unjustified, as the boiler is used for steam generation and does not directly contact corrosive chemicals.

7. Extra Shift Depreciation on Weighing Machines:
The assessee claimed extra shift depreciation on weighing machines attached to production machinery. The Tribunal noted that weighing machines are not entitled to extra shift allowance per the rules. Therefore, the claim was disallowed.

8. Guest House Expenses:
The assessee argued that accommodations used by employees and management should not be treated as a guest house. The Tribunal upheld the Department's view, citing section 37(5), which retrospectively classifies such accommodations as guest houses, leading to the disallowance of related expenses.

Conclusion:
The appeal was partly allowed, with specific directions provided for each issue.