Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that only a part of the expenses during construction, namely, 1,65,707 out of Rs. 2,79,847, was eligible for capitalisation and formed part of the actual cost of the assets eligible for depreciation, development rebate, etc., and that the full amount as allowed by the AAC was not available for capitalisation ?

Counsel Appeared

M. Pathrose Mathari, for the Assessee : P.K.R. Menon, for the Revenue

K.A. NAYAR, J.:

At the instance of the assessee, the Tribunal, Cochin Bench, has referred the following questions of law as directed by this Court and arising out of the order of the Tribunal dt. 18th March, 1981 in ITA No. 544 (Coch) of 1978-79:

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that only a part of the expenses during construction, namely, 1,65,707 out of Rs. 2,79,847, was eligible for capitalisation and formed part of the actual cost of the assets eligible for depreciation, development rebate, etc., and that the full amount as allowed by the AAC was not available for capitalisation ?

(2) Whether, on the facts and in the circumstances of the case, and on a true interpretation of the provisions and the scope of the relevant rule and the retrospective amendment made to s. 80J by the Finance (No. 2) Act, 1980, the Tribunal was right in restoring the assessment to the ITO for recomputing the capital in accordance with the provisions of s. 80J(lA) ?”

2. The matter arises out of the income-tax assessment of the assessee for the year 1975-76 for which the previous year ended on 30th Sept., 1974. The assessee is a company engaged in agricultural operations. The company started a new business of manufacturing alcoholic liquors from cashew, apple and other fruits. For this purpose, the company established a distillery. The first purchase of raw materials for the distillery was made on 23rd April, 1974, and the first distillation was done on 21st May, 1974. The company claimed that it had engaged in the business of promoting this object from 1st July, 1971, onwards and from that date up to 23rd April, 1974, the company incurred an expenditure of Rs. 2,79,847 and claimed it as preliminary expenditure to be capitalised for the purpose of claiming depreciation, development rebate, etc. The ITO allowed only an amount of Rs. 1,65,707 to be capitalised. In arriving at that figure, the ITO considered the entire expenditure incurred during the three periods, that is, up to 30th June, 1972, 30th Sept., 1973, and 23rd April, 1974. In the first period, out of the claim made by way of travelling expenses, car running expenses and salary to special Officers amounting to Rs. 46,945, the ITO allowed one-sixth of the amount. In the second period, the ITO excluded bank charges, postage, printing and stationery and medical charges and also 50% of the salary to special Officers, travelling expenditure and car- running expenditure. In the third period, he excluded one-fourth of the salary to special Officers, travelling expenditure and car-running expenditure and amount paid to Technic Chemia. He also excluded in full the expenditure on printing and stationery, postage and bank charges.

On appeal by the assessee, the AAC considered that, except for the amount of Rs. 10,000 paid to CFTRI and Rs. 20,000 to I.S. Rao, Technic Chemia, all other expenses were incurred on the site or directly for the project and, therefore, he directed the ITO to capitalise them as part of the actual cost and allow development rebate and depreciation, etc., on it.

The Department went up in further appeal. The Tribunal held that it was only such expenses as are necessary to bring the plant and machinery into existence and to put them in working order that can be considered to be proper for being capitalised. The Tribunal, therefore, restored the order of the ITO.

In the assessment, the ITO computed the relief under s. 80J of the IT Act after excluding the liabilities from the aggregate value of the assets. In the appeal before the Tribunal, the Department contended that the observations of the AAC relating to the relief under s. 80J of the Act were ambiguous. The Tribunal considered that the whole question had to be gone into by the ITO in view of the retrospective amendment introduced in s. 80J by way of a new sub-s. (lA) by the Finance (No. 2) Act of 1980. It is thereafter that the aforesaid two questions of law were formulated and referred for the opinion of this Court. We heard counsel.

It is not all expenditure which have been incurred before the commencement of production that are allowed to be capitalised. Only such expenses as are necessary to bring the plant and machinery into existence and to put them in working order that can be considered to be proper for being capitalised. The ITO analysed the expenditure. He applied various proportions for the three periods for the purpose of determining what portion of the expenditure can be allowed to be capitalised. He has excluded the salary up to two months before the first period, namely, June 30, 1972, from consideration. In this period, the expenditure incurred, namely, the salary to the special Officers, travelling and car expenditure, the Tribunal found, was for the purpose of locating the sites where the distillery could be set up. Even if this amount is to be capitalised, it could only be capitalised with the land which would not be entitled to any depreciation. Therefore, the Tribunal rightly found that the expenditure incurred after the location of the site alone should be taken into account for the purpose of capital cost of the plant and during this period, namely, the period ended 30th June, 1972, after considering each item, the ITO allowed a sum of Rs. 7,824 to be capitalised. For the period ended 30th Sept., 1973, the ITO allowed capitalisation of an amount of Rs. 65,346 which included Rs. 28,440 as interest. The rest has been capitalised at 50% thereof. The Tribunal found that only that portion of the expenditure that can be considered as expenditure necessary to bring the assets into existence and to put them in working condition that are allowed to be capitalised. Similarly, for the rest of the period ended on 23rd April, 1974, the ITO capitalised onefourth of the expenditure on salary to special Officers, car expenses, travelling expenses and the payment to Technic Chemia as the correct allocation. These are purely questions of fact and, therefore, no question of law arises.

In Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC) : TC29R.273, the Supreme Court held that in determining the cost of fixed assets, all expenditure necessary to bring such assets into existence and to put them in working condition has to be included. In CIT vs. J.K. Cotton Spinning and Weaving Mills Ltd. (1975) 98 ITR 153 (All) : TC29R.298, interest paid to the State Government on the loan taken for setting up the factory, expenses like wages, salaries, insurance premia, etc., were allowed to be capitalised. Where a plant is constructed out of borrowed money, interest paid up to the date of commission of the plant was also allowed to be capitalised and treated as part of the actual cost. The actual cost of a particular asset is a question of fact. On a consideration of the entire facts, the Tribunal came to the conclusion that only an amount of Rs. 1,65,707 out of Rs. 2,79,847 was eligible for capitalisation and formed part of the actual cost of the assets eligible for depreciation, development rebate, etc. We cannot say that this finding is erroneous or otherwise infirm.

Regarding the claim of relief under s. 80J, the Tribunal had only directed the ITO to recompute the capital in accordance with the provisions of s. 80J (lA) of the Act which he has to do in the light of the decisian reported in Lohia Machines Ltd. vs. Union of lndia (1985) 44 CTR (SC) 328 : (1985) 152 ITR 308 (SC) : TC25R.910. The ITO will work out the relief in the light of the aforesaid decision and the amended provision.

Therefore, we answer both the questions in the affirmative, that is, in favour of the Revenue and against the assessee.

[Citation :181 ITR 396]