TMI Blog1967 (8) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a cinema theatre. Under the terms of the lease the company was to erect upon the land within six months from the date of the approval of the building plans by competent authorities, to be submitted within two months from July 11, 1952, a substantial cinema building. Immediately thereafter, the company commenced the construction of the cinema theatre and the construction was completed in June, 1956, and the first exhibition of the films took place on June 15, 1956. For the assessment year 1957-58, the company voluntarily filed a return showing a loss and therein it had claimed Rs. 40,000 as the rent paid for the previous year. The Income-tax Officer ignored the said return as it was filed after the expiry of the period prescribed under section 22(2A) of the Indian Income-tax Act, 1922. For the next assessment year, viz., 1958-59, the previous year being July 1, 1956, to June 30, 1957, with which alone the reference is concerned, the books of accounts of the company showed that a total payment of Rs. 1,80,780 was debited to the profit and loss account towards the rent. The Income-tax Officer, by his order dated October 20, 1960, allowed a sum of Rs. 40,000 out of this debit as a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an expenditure i.e., expenditure prior to the commencement of production, is not a revenue expenditure. Capitalisation in this context is only taken to be a broad term as converse of revenue. The correct description of the expenditure would be preliminary expenditure or initial expenditure. In our opinion, this expenditure, viz., the expenditure incurred for the payment of rent, did not create any asset. It did not enhance the value of the building in any way. We are, therefore, of the opinion that the contention, viz., that this expenditure enhanced the value of the building and, therefore, is entitled to depreciation, must fail." Recently, the Supreme Court in Commissioner of Income-tax v. Alps Theatre had occasion to consider the question : "Whether the cost of land is entitled to depreciation under the Schedule to the Income-tax Act along with the cost of the building standing thereon ?" The Supreme Court, on considering the provisions of the Indian Income-tax Act in this behalf, came to the conclusion that the word "building" occurring in section 10(2)(vi) of the said Act, does not include land. Faced with this decision of the Supreme Court, Shri N. D. Karkhanis, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Karkhanis placed strong reliance on a decision of the Calcutta High Court in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. In that case, the Standard Vacuum Refining Company of India Limited was incorporated on July 5, 1952, and commenced its business from September, 1954. In June, 1953, it borrowed four crores of rupees on debentures at the rate of 5 1/4% interest from the public, the interest to run from June, 1953. This sum together with twelve crores of rupees financed by the company was used in setting up the refinery for which plant and machinery were imported from abroad. The refinery started work from September 1, 1954, from which date depreciation began to be calculated. The company capitalised all the expenses incurred during the period of construction including the interest of Rs. 23,53,284 which had accrued from the date of borrowing to the commencement of the business on the aforesaid debenture loans and claimed that depreciation must be allowed on the full amount. The only point that came up for consideration before the Calcutta High Court was whether the aforesaid amount of Rs. 23,53,284 paid as interest from the date of borrowing to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the scope of the relevant statutory provisions. In our view, so long as the relevant provisions of the Indian Income-tax Act make a distinction between the land on which a building is constructed and the building itself, and allows for depreciation only on the building, any item of expenditure incurred by an assessee, directly referable to the land and not referable to the building, as distinct from the land, cannot constitute a part of the cost of the construction of the building for the purpose of allowance of depreciation. It may be possible to capitalise expenses incurred for the acquisition or construction of a depreciable capital asset like a building or for erection, etc., of plant or machinery and add those to the cost of the asset for depreciation. Those expenses would be directly related to and necessary for bringing the depreciable asset into being. But that is not the case here. The Calcutta High Court, in the decision referred to, was considering the expenses incurred in relation to the sole depreciable asset, viz., refinery. In this case, whether the company acquired another asset or not in the form of the site by paying the rent, still the payment of rent was an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily. One of the items of property of the family was a sugar factory which was put up for sale by competitive bidding between the members of the family and the same was knocked down in favour of the assessee in the case for a sum of Rs. 34 lakhs. After partition was effected in respect of all the properties, the assessee continued to run the factory. The question that came up before the Supreme Court was whether the assessee was entitled to claim depreciation, under section 10(2)(vi) of the Act, on the amount of Rs. 34 lakhs for which value the factory was knocked down in his favour or on the original cost of the factory to the undivided family. The Supreme Court held that, if the valuation of the property for the purpose of partition was not notional, but was real and that was the basis for allocating properties for different members, the cost of a property allotted to a member cannot be that at which it was purchased by the joint family in the remote past, but would be the value given to it for the purpose of allotment or at which it was auctioned for the purpose of the partition. The Supreme Court observed : "In substance we do not see any difference in the matter of ascertaini ..... 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