Commissioner of Income Tax vs Sabari Mills Private Ltd.

Ramaswami, J.—The assessee is a private limited company carrying on business in the manufacture and sale of yarn. In the assessment

proceedings relating to the assessment year 1966-67, corresponding to the year ending March 31, 1966, they claimed to capitalise their pre-

production, overhead and other expenditure to the extent of Rs. 2,46,830 and claimed depreciation and development rebate on such capitalised

amount. This was on the basis that they were necessary expenditure incurred by the assessee in the purchase, supervision and erection of the

machinery and construction of the building. The Income Tax Officer rejected this claim on the ground that in the absence of a definition the words

actual cost"" will have to be understood and given its ordinary meaning and, if so understood, it would include only direct expenditure incurred for

the purchase and erection of the machinery or the cost of construction of the building and it would not include any indirect expenditure. On appeal

by the assessee, the Appellate Assistant Commissioner, following the decision of the Calcutta High Court in Commissioner of Income Tax

(Central) Vs. Standard Vacuum Refining Co. of India Ltd., , held that the cost of construction or purchase or erection of the machinery will have to

be understood as in commercial parlance and that all pre-production expenditure incurred whether directly or indirectly in connection with the

purchase, supervision or erection of the plant and machinery and the construction of the building would have to be capitalised. Though the

Appellate Assistant Commissioner was satisfied that most of the items of expenditure claimed by the assessee had to be capitalised on this

principle, since some of the items would have to be excluded, he directed the Income Tax Officer to look into the various items and exclude such

of those items which would have been incurred even if no machinery had been erected. The Tribunal confirmed this order of the Appellate

Assistant Commissioner. At the instance of the revenue, the following question has been referred :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the indirect expenses to the

extent of Rs. 2,46,830 incurred before commencement of manufacture should be added to the cost of assets for granting depreciation allowance

and in so far as it was allocated to the cost of machinery development rebate also ?

Reference was asked for mainly on the ground that the decision in Commissioner of Income Tax (Central) Vs. Standard Vacuum Refining Co.

of India Ltd., had been taken in appeal to the Supreme Court and that that view also requires re-consideration. Subsequently, this court, following

the said decision, held in Commissioner of Income Tax Vs. L.G. Balakrishnan and Bros. (P.) Ltd., , that any expenditure incurred in connection

with the inspection, selection and supervision would also have to be capitalised along with the cost and other erection expenditure. Subsequently,

the Supreme Court also, in the decision reported in Challapalli Sugar Ltd. Vs. The Commissioner of Income Tax, A.P., Hyderabad, , approved

the ratio of the decision of the Calcutta High Court in Commissioner of Income Tax (Central) Vs. Standard Vacuum Refining Co. of India Ltd.,

and this court in Commissioner of Income Tax Vs. L.G. Balakrishnan and Bros. (P.) Ltd., . The Supreme Court held that--See Challapalli Sugar

Ltd. Vs. The Commissioner of Income Tax, A.P., Hyderabad, :

......the accepted accountancy rule for determining the 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 which have been created as a result of such expenditure. The above rule of accountancy should......be adopted for determining the

actual cost of the assets in the absence of any statutory definition or other indication to the contrary.

Therefore, the pre-production expenses incurred in connection with bringing the actual assets into existence and to put them in working

condition have also to be included in the actual cost of the asset. The learned counsel for the assessee had given before us a copy of the statement

which was filed before the Tribunal showing the break-up figures of the pre-production expenses sought to be capitalised. As we have already

pointed out, the Appellate Assistant Commissioner, while disposing of the appeal, directed the Income Tax Officer to look into the various items

and exclude such of those items which would have been incurred even if no machinery had been erected. We think that the Appellate Assistant

Commissioner meant by this statement only to say that only those items which were not relatable for bringing the asset into existence and to put

them into working condition alone will have to be excluded and all the other items will have to be included. That direction still stands and the

Tribunal had not modified the same. We accordingly answer the reference technically in the affirmative but subject to the direction of the Appellate

Assistant Commissioner regarding the actual figures to be included. The assessees will be entitled to their costs. Counsel''s fee Rs. 250.