TMI Blog1981 (1) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to which depreciation was to be allowed for the assessment years 1961-62, 1963-64, 1964-65 and 1965-66 ? " The reference, which is a consolidated one for the four assessment years referred to above, arises out of the assessments of M/s. J. M. A. Industries Ltd., Delhi. The assessee is a limited company doing business in the manufacture of auto parts. Its accounting year was the calendar year. The company started commercial production some time in November, 1960. Till October 31, 1960, the factory was in the process of construction and the machinery and plant were in the process of installation. The company incurred an expenditure of Rs. 93,717 before the business of the company commenced in the commercial sense. These expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the opinion of the Tribunal, the allocation of 1/3rd of the expenses to the assessee-company cannot be called unreasonable having regard to the job he did on their account. Secondly, the Tribunal found that there was nothing wrong in the assessee-company allocating its expenditure between two classes of assets (the machinery plant and the building) in the same proportion as the direct cost incurred in connection with these assets. In the opinion of the Tribunal, the basis adopted by the company was quite a scientific one and in accordance with the canons of accountancy and commercial practice. The Tribunal then proceeded to deal with the question whether on principle the expenditure incurred by the company on the foreign tour of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat expenditure, which is not directly related to the assets is treated as a part of the cost of the assets for purpose of accountancy while determining the value of the assets and while determining the profits earned from the use of the assets. It is on that basis that the expenditure incurred by the assessee for the travelling of the managing director and the technical adviser and for services of the auditors has to be treated as a part of the cost of the assets." In coming to the above conclusion, the Tribunal relied on the principle enunciated in the decision of the Bombay High Court in Habib Hussain v. CIT [1963] 48 ITR 859 and of the Calcutta High Court in CIT v. Standard Vacuum Refining Co. of India Ltd. [1966] 61 ITR 799. It may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er interest paid by an assessee before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery would form part of the actual cost of the assets to the assessee within the meaning of the expression in s. 10(5) of Indian I.T. Act, 1922, so as to entitle him to depreciation allowances and development rebate with reference to such interest also. The Supreme Court answered the question in the affirmative. After referring to the established principles of accountancy as well as the provisions of the Companies Act in this regard, the Supreme Court observed as follows (p. 175): " It would appear from the above that the accepted accountancy rule for determining the cost of fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork were undertaken by an independent contractor he would, of course, take interest into account when preparing the estimates on which to base his tender ", and that the final cost of the construction work is made up of the cost of the machinery, materials, labour, supervision and establishment charges, plus interest on the capital employed which, but for its employment in that way, would be invested in good securities paying a reasonable rate of interest ". On the above principle the expenditure which will go into the cost of the assets will be not only the expenditure that is directly and specifically referable to those assets (such as interest paid on borrowed capital for the purpose of acquisition , or expenditure that is incurred on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise than for annual audit, can be regarded as expenditure which the assessee would have had to pay as part of the price of the assets in case he had handed over the installation job to an independent contractor. This finding of the Tribunal is a finding of fact and there is no challenge to this finding on behalf of the applicant. Shri Madan Lokur, learned counsel for the department, contended that the apportionment of the expenditure between the three companies had been done on an ad hoc basis. He also suggested that some at least of the expenditure incurred by the managing director on tours had been for his own personal purposes. But these are aspects of the matter which do not arise for consideration before us. It has not been the case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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