Commissioner of Income Tax vs Anil Steel Industries Ltd.

M.B. Sharma, J.—On an application u/s 256(1) of the income tax Act, 1961 (''the Act''), the Tribunal under its order dated 22-2-1989, has refused to refer the following question of law to this Court for its opinion: Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that all the pre-operative expenses as claimed by the assessee related directly to erection of building and installation of plant and machinery and as such no part of it can be disallowed from being capitalised for purposes of depreciation and investment allowance ?

The revenue has filed the application u/s 256(2) praying that the Tribunal be asked to draw a statement and refer the aforesaid question of law for its opinion to this Court.

For the assessment year 1975-76 in its return the assessee-company claimed pre-operative expenses for capitalisation towards building, plant and machinery and the ITO, the assessing authority allowed a part of the expenses out of the total claim of the assessee and part of the claim was disallowed for capitalisation holding that they were not directly relatable to erection of building and installation of plant and machinery. The assessee filed an appeal before the Commissioner (Appeals) who examined each and every item of expenditure and considered that the said expenses do not pertain to the erection of building and installation of plant and machinery and, therefore, has disallowed the percentage which was considered by him looking to examination of the said list. A perusal of the appellate order will show that so far as percentage of expenditure disallowed for capitalisation towards erection of building and installation of plant and machinery is concerned, the Commissioner (Appeals) considered it reasonable to disallow capitalisation on the following scale--

Nature of expenses

Percentage of dis-

Allowances

Service charges, employees'' welfare, rent and taxes, audit fees, payment to auditors in other capacity internal audit fees.

100% of the claim

Misc. expenses.

75% of the claim

Technical know-how, printing and stationery, motor car expenses and conveyance expenses, travelling expenses, directors'' travelling expenses, directors'' meeting fees.

50% of the claim

Power, salary, wages & bonus, allowances, ESI, PF, etc., rent, electricity charges, postage telegram, telephone and telex.

25% of the claim

Store material consumed, insurance, interest & commission charges, guarantee commission, RC charges, repairs and maintenance, architect fees.

Nil

The assessee filed an appeal before the Tribunal and the Tribunal under its order dated 19-8-1988 allowed the claim of the assessee for capitalisation in full. As said earlier an application u/s 256(1) was filed and it was dismissed by the Tribunal.

The contention of Mr. Singhal, the learned counsel for the revenue in this application u/s 256(2) is that part of the expenses was not directly relatable to the erection of the building and installation of the plant and machinery. So far as services charges and other expenses are concerned, they are not relatable to the construction of building and installation of plant and machinery at all. Mr. Ranka, the learned counsel for the assessee contended that as to what expenses are relatable to the erection of building and installation of plant and machinery is a pure question of fact and no question of law arises for opinion of this Court and this Court should not direct the Tribunal to make a statement of the case and refer the aforesaid question of law sought to be referred to this Court. A look at the aforesaid extracted order of the Commissioner (Appeals) so far as percentage of expenses disallowed for capitalisation is concerned, will show that item No. 1 is in respect of service charges, employees'' welfare, rent and taxes, audit fee, payment to auditors in other capacity internal audit fees, and they were disallowed to the extent of 100 per cent. Item No. 2 is in respect of miscellaneous expenses and the claim was disallowed to the extent of 75 per cent. Item No. 3 is in respect of technical know-how, printing and stationery, motor car expenses and conveyance expenses, travelling expenses, directors'' travelling expenses and directors'' meeting fee and they have been disallowed to the extent of 50 per cent. Item No. 4 is in respect of power, salary wages and bonus, allowances, ESI, PF, etc., rent, electricity charges, postage, telegram and telex and they were disallowed to the extent of 25 per cent and item No. 5 is in respect of store material consumed, insurance interest and commission charges, guarantee commission, RC charges, repairs and maintenance and architect fees and they were allowed in full. The question is whether these expenses incurred were directly relatable to the erection of building and installation of plant and machinery and were necessary to be incurred to bring the assets in existence. In the first place it involves ascertainment of facts and in second place the application of correct principle of law on facts so found. Such a question is a mixed question of fact and law. Again, the question is whether expenses and if so, to what extent, do or do not pertain to the erection of building or installation of plant and machinery and directly relate to it in the first instance, may be a question of fact, but the inference from such facts found is a question of law. The Supreme Court in the case of Commissioner of Income Tax, Bombay City I Vs. Greaves Cotton and Co. Ltd., has taken a view that whether a certain expenditure was laid out or expended wholly or exclusively for the purpose of the assessee''s business is a question which involves in the first place the ascertainment of facts by the Tribunal and in the second place the application of the correct principle of law to the facts so found. The question, therefore, is a mixed question of facts and law. Again, in the case of Oriental Investment Co. Ltd. Vs. Commissioner of Income Tax, Bombay, the Apex Court said that inference from facts would be a question of fact or a question of law according as the point for determination is one of pure fact or a mixed question of law and fact. A finding of fact without evidence to support it or based on relevant and irrelevant matters is not unassailable. The Supreme Court in the case of Challapalli Sugar Ltd. Vs. The Commissioner of Income Tax, A.P., Hyderabad, , laid down the principles for determination of cost of fixed assets and said that the expression ''actual cost'' has not been defined, and it should be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. Therefore, though for determining the capitalised value of the building, plant and machinery, the cost will include also the interest on the money borrowed by a newly started company, but each and every item will have to be seen whether it was the expenditure necessary to bring the assets into existence. A look at the impugned order of the Tribunal will show that the revenue authorities had disallowed the expenses to the tune of Rs. 12,01,368 and the Tribunal referred to the pleas of the assessee that most of the expenses are related to either construction of the building or erection of the machinery, insurance relating to the building construction and plant and machinery during the period of erection, interest paid on loans taken for building and plant and machinery, etc., it will, therefore, be clear that the plea of the assessee himself was that most of the expenses were incurred as aforesaid. The Tribunal also referred to the order of the Commissioner (Appeals) wherein the Commissioner (Appeals) said--

There are certain items of expenditure which cannot be considered to have contributed in setting up of an asset or building it into working condition. Again, there are sometimes which cannot considered allowable to entirely.

Again at page 4 of its order, the Tribunal said that--

There is no doubt that there are certain expenses which would be incurred irrespective of whether there is any construction activity or not, which are the normal meeting fees of directors, and routing filing fees and certain administrative expenses.

It will, therefore, be clear that the Tribunal in its order has not dealt with each and every item of the expenditure which it was required to deal with and then to arrive at a finding of fact whether and if so, which extent the expenditure was necessary to bring the assets into existence and to put them in working condition. As said earlier, it was the duty of the Tribunal first to determine by reference of each item of the expenditure that it was necessary to be incurred to bring the assets in existence and then to apply proper law as enacted by the Supreme Court in the case of Challapalli Sugar Ltd. (supra).

We are of the opinion that the following questions arise out of the order of the Tribunal for determination of this Court: 1. Whether the finding of the Tribunal that whole of the expenses claimed by the assessee-company towards the pre-operative expenses are capitalisation towards the building, plant and machinery, amounting to Rs. 12,01,368, is perverse and based on no material ?

Whether the Tribunal in the absence of finding as aforesaid was right in holding that pre-operative expenses amounting to Rs. 12,01,368 as claimed by the assessee related directly to the erection of building and installation of plant and machinery and no part of it can be disallowed ?

Consequently, we direct the Tribunal to make a statement of the case and refer the aforesaid two questions of law for opinion of this Court.