TMI Blog1980 (7) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioned and put into service from October 9, 1963. The assessee company incurred various expenses before the commencement of production. The expenses which were incurred, amounting to Rs. 4,80,873, had been capitalised and the assessee claimed depreciation thereon. These items of expenditure were debited to factory buildings and various plants and machinery but the ITO noted that they included an aggregate amount of Rs. 1, 13,790 representing payment of salary, pocket money, etc., to the foreign technicians employed in the erection work. In his order the ITO discussed the position and concluded that except for Rs. 1, 18,790 the rest of the expenses, that is, the sum of Rs. 3,67,083, were of the nature described in ss. 30 to 36 and would be allowable either under those sections or under s. 37 as revenue expenditure but for the fact that the expenses were incurred prior to the commencement of business at Anand factory. As these initial expenses were incurred prior to the commencement of business, they were disallowed as capital expenses but as none of them brought into existence any tangible or depreciable assets or added to the value of depreciable assets, he did not allow any d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of the business, namely, Rs. 72,537, should be capitalised and added to the cost of the machinery entitling it to the claim of depreciation and development rebate ? Now, it must be pointed out that the application under s. 256(1) of the I.T. Act, 1961, was by the assessee. There was no application by the revenue asking that a particular question regarding Rs. 72,537 should be referred to the High Court for its opinion. Under these circumstances, the question arises whether the Tribunal was right in referring the question which it directed to be referred at the instance of the revenue. In this connection, it may be pointed out that there has been a recent decision of the Supreme Court in CIT v. V. Damodaran [1980] 121 ITR 572. There the Supreme Court has pointed out (headnote): " In every case, it is only the party applying for a reference who is entitled to specify the question of law which should be referred. Nowhere in the I.T. Act, 1961, is there a right given to the non-applicant to ask for a reference of questions of law on the application made by the applicant. Where the order of the Tribunal under s. 254 has decided the appeal partly against one party and partly ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as question No. 2 is concerned, we decline to answer question No. 2 which has been referred to us in the instant case at the instance of the Commissioner. As regards question No. 1, that is, the question referred to us at the instance of the assessee, the ITO's order points out how the aggregate amount of Rs. 4,80,873 was claimed by the assessee, that being the amount in respect of which depreciation should be allowed. In para. 16(b) of his order the IT has pointed out that the construction and installation of machineries and plants imported from West Germany in the factory at Anand was completed and the production was commenced from October 9, 1963. Erection and installation of machineries was done by the German technicians, majority of whom were directly delegated by " Image " of West Germany, which supplied the said machineries to the assessee-company. In all, there were eight German technicians for each of whom there was a separate service agreement, copies of which had been furnished to the IT. The details of payments made to and expenditure incurred for these technicians during the year relevant to the assessment year 1964-65 show that the total expenditure came to Rs. 1, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted production, the amount would have been allowed either under ss. 30 to 36 or under s. 37 of the I.T. Act, and this position was not disputed before the Tribunal when the matter reached the Tribunal. As pointed out earlier, the AAC merely confirmed the order of the IT and the Tribunal, while dealing with this part of the claim of the assessee, merely states: " In our view, therefore, these are expenses of revenue nature but having been incurred prior to the starting of the factory these are expenses of preliminary nature which cannot be capitalised in such a way as to allow depreciation. Hence, we do not see any substance in this ground." The question as to what is to happen to expenses incurred by an assessee up to the stage of commencement of regular production has been dealt with by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The question before the Supreme Court was as to how the interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery should be treated, namely, whether they should be treated as part of the actual cost of acquisition of the capital asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a working condition is part of the actual cost of the assets to the assessee and it is in the light of that actual cost thus arrived at that the question of depreciation has to be considered by the I.T. authorities. In Arvind Wills Ltd. v. CIT[1978] 112 ITR 64, a Division Bench of this High Court consisting of J. B. Mehta J. and one of us (P. D. Desai J.) considered the question in terms of the decision in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) and pointed out that the expression " actual cost " in the context of the statutory provisions of ss. 33(1) and 43A of the I.T. Act, 1961, must be understood in the sense in which no commercial man would misunderstand. The word " cost " is not synonymous with " price ". Besides the price of machinery and plant, cost takes in other items of expenditure such as freight or warehouse charges or insurance charges, legal expenses incurred in acquiring a property or brokers' charges on purchasing investments, before the commencement of the production, on the capital contributed or borrowed to acquire such assets. In other words, in determining the actual cost of fixed assets, all expenses necessary to bring such assets into exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f running the factory but simply because the production had not commenced, the Income-tax Appellate Tribunal and the lower authorities in the I.T. Dept. did not allow these expenses to be added to the cost of construction. It must be borne in mind that all expenses necessary for putting the plant into production stage are part of the cost of construction. That is the accountancy principle which has been recognised by the Supreme Court in Challapalli Sugars' case [1975] 98 ITR 167. If that is so, in the case before us since the total items of expenditure aggregating to Rs. 3,67,083 have not been disputed and the only reason why the amount of Rs. 3,67,083 was not added to the cost of construction was that the items were such as would have been deductible under ss. 30 to 36 or under s. 37 of the l.T. Act, 1961, but for the fact that the expenses were incurred prior to the commencement of the factory going into production, indicates that all these expenses were necessary for putting the new plant of the assessee-company into production and these expenses having been incurred prior to the date of actual production went to swell the actual cost of assets to the assessee-company. As has b ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
