1. This is a reference at the instance of the Commissioner from the decision of the Income-tax Appellate Tribunal in Income-tax Appeal No. 12991 of 1965-65. The reference is under s. 66(1) of the Indian I.T. Act, 1922.
2. The assessee-company is a public limited company owning a number of ships. In this reference, we are concerned with the assessment year 1960-61. Whilst scrutinising the assessment of the assessee for this year, the ITO noticed that the travelling expenses claimed by the company included various expenses of directors and their relations for trips to foreign countries which were in connection with acquisition and launching of new ships. In his order, the ITO observed that necessary details were not available for the expenses in the aggregate amount of Rs. 56,000. These expenses were as follows :
(a) Expenses incurred by Mrs. V.J. Sheth (wife Rs.of the director) in U.K. and Continent in connectionwith acquisition of new ships (November 4, 1958,to December 10, 1958). 1,069(b) Expenses of Mr. Sudhir Mulji, brother ofShri Vasant J. Sheth, director, to attend the launchingof Jag Jiwan 217(c) Expenses of Mr. T.M. Sanghavi, incurredon his tour to U.K. in connection with the deliveryof the ships Jag Mata, Jag Doot and Jag Devi (April26, 1958, to August 22, 1958). 11,654(d) Expenses of Mr. T.M. Sanghavi, and cost ofair ticket to U.K. Continent for fixation offinal price of M.V. Jag Jiwan. 11,475(e) Expenses incurred by Mr. D.H.C. Storey forhis visit to U.K., and Hamburg (November 21,1958, to April 7, 1959) supervising construction ofM.V. Jag Jiwan 13,201(f) Expenses of Dr. & Mrs. Corlette and Mrs.and Mr. Mc' Eachaer in connection with the launchingof M.V. Jag Jiwan 2,185(g) Expenses of Mr. Vasant J. Sheth in connectionwith the launching of Jag Jiwan and expensesof Mr. J.J. Mulji in connection with taking deliveryof Jag Mata and Jag Doot 16,703 Accordingly, the ITO disallowed these travelling expenses, holding that they were not of a revenue nature. Further, in his opinion, these could not be added to the cost of the assets for the purpose of depreciation in view of the fact that they had not gone to increase the value of the assets acquired and that the expenses had been substantially incurred for 'ceremonial purpose'. It may be mentioned that another sum of Rs. 1,800 was incurred by the assessee company under the head 'Legal charges' and this expense was in connection with the recovery of the repairs cost of their vessel Jag Santi. In respect of this ship, which was purchased by the assessee-company, certain dispute had arisen regarding the repairs cost which was to be recovered from the previous owners. The ITO considered that these expenses could not be allowed as a revenue expenditure and were incidental to the acquiring of the ship.
3. The assessee carried the matter in appeal to the AAC. The AAC went through each item of expenditure claimed. In respect of three of them, viz., expenses incurred by Mrs. V. J. Sheth, in the amount of Rs. 1,069 (item (a)), expenses incurred by Sudhir Mulji, brother of Shri V. J. Sheth, in the amount of Rs. 217 (item (b)), and the expenses of Dr. and Mrs. Corlette and Mr. and Mrs. Mc'Eachaer in the amount of Rs. 2,185 (item (f)), he held that the ITO had rightly disallowed the same. However, as regards the balance of the expenses amounting to Rs. 53,038, the AAC held, agreeing with the ITO, that they were capital in nature, but he directed the ITO to allow appropriate depreciation. In support of this direction, the AAC has dealt with each of the items of expenses. As far as item (c) earlier noted was concerned, viz., expenses of Mr. T. M. Sanghavi, incurred on his tour to the U. K. for taking delivery of the ships, Jag Mata, Jag Doot and Jag Devi, the AAC held that the expenditure incurred in this connection should be divided equally and added to the cost of the ships. As far as item (d) was concerned, the AAC found that these expenses pertained to Mr. Sanghavi's visit to the U. K. and Continent for fixation of final price M. V. Jag Jiwan. It was ascertained that Mr. Sanghavi was deputed to contact the ship-builders before the final price of the ship was fixed. In the view of the AAC, the expenditure was necessarily incurred in the course of acquiring an asset for the company and, therefore, the expenditure was required to be added back to the cost of the ship for the purpose of working out allowable depreciation. As far as item (e) was concerned, it was ascertained by the AAC that Mr. Storey had to visit U. K. and Hamburg for a scrutiny of the drawings and for supervising the construction of the ship, M. V. Jag Jiwan. In the view of the AAC, this was a necessary expenditure incurred for the purpose of acquiring as asset and, hence, the same was required to be added back to the capital cost.
4. There remains for consideration only item (g), viz., expenses of Rs. 16,703, incurred by Mr. V. J. Sheth and Mr. J. J. Mulji in connection with the launching of Jag Jiwan and taking delivery of Jag Mata and Jag Doot, respectively. Mr. Sheth, who happened to be one of the directors of the assessee-company, had undertaken the foreign tour in connection with the launching of the ship M. V. Jag Jiwan. According to the AAC, the process of launching a ship was necessary before the same could actually be acquired by the company and the expenses, therefore, should be considered as capital in nature. The AAC further directed that the same should be added to the capital cost of the ship for the purpose of depreciation. A similar view was expressed regarding the expenses incurred by Shri. Mulji, who also happened to be a director of the assessee-company. There remains then for consideration the claim of Rs. 1,800 under the head 'Legal charges'. The AAC agreed with the ITO that these expenses were capital in nature but he directed that these were also required to be added to the cost of the ship for the purpose of working out the depreciation.
5. Aggrieved by the view taken by the AAC, the department took the matter in appeal to the Tribunal. According to the department, the expenses were incurred after the ships were ready and in a fit condition for use; therefore, these expenses could not be said to have produced an asset. In this view, the department submitted that the expenditure was not such as could be considered as adding to the cost of the asset. A special grievance was made as regards the expenses incurred by directors, Sheth and Mulji, which were regarded as ceremonial in nature. The Tribunal did not find much force in the department's contention and held that what the AAC had done was in order. According to the Tribunal, the very purpose of the expenses was to acquire the ships before the same were put to use by the company. This expenditure in its view was rightly held to be capital expenditure liable to be added to the cost of the ships acquired. It also upheld the decision of the AAC pertaining to the legal charges of Rs. 1,800.
6. A similar question had been considered by a Division Bench of this court, to which I was a party, in CIT v. Polychem Ltd. : 98ITR574(Bom) , and we had based our decision on the earlier Bombay decision in Habib Hussein v. CIT : 48ITR859(Bom) and the decision of the Andhra Pradesh High Court in CIT v. Challapalli Sugars Ltd. : 77ITR392(AP) . From the latter decision of the Andhra Pradesh High Court an appeal was preferred to the Supreme Court and the decision of the Supreme Court is reported in Challapalli Sugar Ltd. v. CIT : 98ITR167(SC) .
7.In Polychem Ltd.'s case : 98ITR574(Bom) , the view has been expressed that all expenditure incurred directly or indirectly or intimately on the capital assets acquired by the assessee-company would be required to be included in the term 'actual cost' of the asset. It was further observed that it would not be correct to treat the word 'actual cost' to mean the cost paid to the vendors for the asset alone. It was held that the term 'actual cost' was required to be liberally construed.
8. Bearing the principles laid down in the said decision in mind, it would appear that the principles have been correctly understood and applied by the AAC and the Tribunal. There may be a slight debate as to the expenses incurred by the two directors, viz., Sheth and Mulji, at the time of launching the two ships. But bearing in mind the actual cost of the ships to the company, the nature and character of the ceremony of launching, which is an integral part of ship-building, it cannot be said that the view taken by the AAC and later on confirmed by the Tribunal is one which requires correction. Broadly speaking, each item of expenditure which arises in the reference has been properly scrutinised by the nAAC and the Tribunal and the correct decision taken with regard to each item. The matter is one which does not require further elaboration. We are in full agreement with the conclusions of the Tribunal, and, in this view of the matter, the question referred to us is answered in the affirmative and in favour of the assessee.
9. The Commissioner will pay to the assessee the costs of this reference.