1. The following three questions are referred to us by the Income-tax Appellate Tribunal (Bombay Bench 'D'), under s. 256(1) of the I.T. Act, 1961 :
'(1) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 27,385 incurred on the ceremony of laying the foundation for the factory forms part of the 'actual cost' of the assets to the assessee for the purposes of grant of depreciation allowance under section 32 of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the interest expenditure of Rs. 5,52,936 relating to the bank overdraft utilised for erection of the factory forms part of the 'actual cost' of the assets to the assessee for the purposes of grant of depreciation allowance under section 32 of the Income-tax Act, 1961 ?
(3) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 38,792 incurred on the inauguration ceremony of the factory is allowable as deduction in terms of sub-section (1) of section 37 of the Income-tax Act, 1961 ?'
2. In order to appreciate the points involved, the facts may be briefly stated as under :
The assessee set up a plant for the manufacture of nylon filament textile yarn and its factory was under construction from 1959 to 1962. Production stated from 1st December, 1962, and the first profits and loss account has been prepared for the period 1st December, 1962, to 31st March, 1963.
3. The usual ceremony of laying of the foundation stone of the factory took place. At that time certain guests were invited and expenses were incurred on photographs, refreshment, furniture hire, brochure printing and advertisements. The aggregate expenditure was Rs. 27,385. The amount was claimed by the assessee as includible in the cost of the building for the purposes of the grant of depreciation allowance. However, this claim was rejected by the ITO. The matter was carried further by the assessee, and both the AAC and the Income-tax Appellate Tribunal have upheld the contention of the assessee-company. Being aggrieved by the decision, the Commissioner has come to this court, and this is the point involved in question No. 1.
4. The assessee-company had taken an overdraft from the mercantile bank Ltd. during the construction period and had paid interest of Rs. 5,52,936 in respect of the amount due at the face of the over draft account from time to time. It was contended by the assessee that such interest payment should be added to the cost of the building, plant and machinery and electrical installation for the purposes of granting depreciation. This claim was rejected by the ITO but upheld by the AAC and the Income-tax Appellate Tribunal. This is the point involved in question No. 2.
5. The expenses aggregating to Rs. 38,792 had been incurred at the time of inauguration of the assessee-company's factory. The ITO held that any such expenditure could not be allowed as revenue deduction in view of the provisions of s. 37 of the I.T. Act, 1961. The AAC and the Income-tax Appellate Tribunal have subsequently, in further appeals, upheld the assessee's contention.
6. Mr. Joshi on behalf of the Commissioner has agreed with the learned counsel for the assessee that as far as question No. 2 is concerned, the same appears to be concluded against the Commissioner by a decision of the Supreme Court in Challapalli sugars Ltd. v. CIT : 98ITR167(SC) .
7. It was, however, urged by Mr. Joshi that on questions Nos. 1 and 3 the AAC as well as the Tribunal have decided in favour of the assessee on erroneous considerations.
8. As far as question No 1 is concerned, the AAC had observed that the expenses incurred on account of the foundation laying ceremonies must be added to the cost of the factory building on the footing that the foundation is a part of the construction. Our attention was drawn by the learned counsel appearing for the assessee-company to the decisions of a Division Bench of his court in CIT v. Great Eastern Shipping Co. Ltd. : 118ITR772(Bom) , where the Division Bench was considering the traveling expenses incurred by the directors and their relations for trips to foreign countries for finalising the acquisition and launching of new ships. One of the items with which the said Division Bench was dealing was expenses incurred in connection with the ceremony of launching a ship which was being acquired by the assessee-company. It was observed that the ceremony of launching is an integral part of ship-building. According to the Bench, the expenses incurred were held as not incurred for ceremonial purposes but for acquiring assets. In the course of the judgment it was observed, following an earlier decision of the Bombay High Court in CIT v. Polychem Ltd. : 98ITR574(Bom) :
'... 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.'
9. Once the above principle has been correctly understood and appreciated, it must follow that the AAC and the Income-tax Appellate Tribunal were right in holding that the expenditure of Rs. 27,385 incurred in the present case on the ceremony of laying the foundation formed part of the actual cost of the assets to the assessee and that depreciation allowance was required to be granted on such assets. In passing it may be mentioned that the depreciation on this amount claimed by the assessee-company comes to Rs. 685 only in one year.
10. As far as question No 3 is concerned, the AAC had referred to the modern compelling necessities for such expenditure. He had also observed that this expenditure has not brought into existence any enduring asset. According to the AAC-and his view appears to be correct-this is one of the formalities which any assessee has to incur after the business is set up. The amount of Rs. 38,792 incurred on the inauguration ceremony appears to be a legitimate business expenditure, and, in our opinion, both the AAC and the Income-tax Appellate Tribunal were right in allowing the same as deduction in terms of sub-s. (1) of s. 37 of the I.T. Act, 1961.
11. The questions are accordingly answered as follows :
Question No. 1 : In the affirmative and in favour of the assessee.
Question No. 2 : In the affirmative and in favour of the assessee as concluded by the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT : 98ITR167(SC) .
Question No. 3 : In the affirmative and in favour of the assessee.
12. The Commissioner will pay the costs of the reference to the assessee.