1. The two questions referred to us by the Income-tax Appellate Tribunal at the instance of the Commissioner are as follows :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was entitled to development rebate and depreciation on the amount of Rs. 36,669 being part of the average expenses allocated to the distillery plant ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the relief under section 80J of the Income-tax Act, 1961, read with rule 19A of the Income-tax Rules, 1962, should be worked out by aggregating the values of all the assets as on the first day of the computation period irrespective of the fact whether those assets were used during the accounting period or not ?'
2. As far as question No. (2) is concerned, counsel for the Department has very fairly stated that the answer to be given to the said question is concluded, as far as this court is concerned, by its previous decision in CIT v. Alcock Ashdown & Co. Ltd. : 119ITR164(Bom) . This is a decision to which I was a party. We have been invited to answer the said question, that is, question No. (2), in accordance with the aforesaid decision in Alcock Ashdown's case without further statement facts or law. Accordingly, question No. (2) is answered in the negative and in favour of the assessee. The Tribunal has not erred at all.
3. It would appear to us that the answer to question No. (1) is also now concluded in principle by a Supreme Court's decision, but a few facts may be set down to explain how this would be so.
4. The first question relates to an inclusion of amount of Rs. 36,669 as part of the cost of the plant and machinery on which the assessee claims that depreciation and development rebate should be allowed. The assessee is a limited company. The previous year was the financial year ending March 31, 1968. The company was established for the manufacturing polystyrene products at Vizagapatnam.
5. In manufacturing these products, three stages are involved :
(a) Manufacture of alcohol,
(b) Manufacture of styrene by using alcohol, and
(c) Manufacture of polystyrene by using styrene.
6. Three different units of plant and machinery were thus required to be installed and during the year under consideration, the assessee company was able to install the alcohol manufacturing plant and start production. The third plant for manufacturing polystyrene went into production only on January 1, 1969, and for the purpose of the of the said plant, the company was using imported styrene. The second plant had not commenced manufacture even on the date on which the appeal was heard by the Tribunal.
7. The total cost of the distillery plant came to Rs. 84 lakhs, whereas the cost of all the plants together was about Rs. 3.63 crores. The assessee company during the period of construction of the building and installation of plant had incurred certain common expenses in connection with such construction and erection. A list of such expenses totalling to Rs. 24,70,060 was filed before the Tribunal. These expenses were being carried forward in the balance-sheet as work-in-progress. Out of these expense, Rs. 56,210 were allocated to building, plant and machinery of the distillery plant and claimed as part of its cost. The amount was made up of several items like salaries, expenses of guest-house maintained for erection staff, travelling expenses incurred in setting up the plant, vehicle expenses incurred in setting up the plant and general expenses also pertaining to the setting up of the plant.
8. Initially, the Income-tax Officer allowed a sum of Rs. 19,541 out of this amount. This was the amount paid by way of salary. According to the Income-tax Officer, this amount could be properly regarded as forming part of the cost of the plant on which depreciation and development rebate was allowable. He disallowed the balance of Rs. 36,669 holding that the same could not be capitalised as cost of the plant inasmuch as these expenses were not related directly to the setting up of the plant. In appeal, the Appellate Assistant Commissioner accepted the assessee's claim and, in further appeal, the Tribunal upheld the Appellate Assistant Commissioner's decision.
9. It is found from a perusal of the judgment that the Revenue has relied on the judgment of the Andhra Pradesh High Court in CIT v. Challapalli Sugars Ltd. : 77ITR392(AP) . The assessee company, in the said case, namely, Challapalli Sugars Ltd., had carried the matter to the Supreme Court and the decision of the Supreme Court is to be found in Challapalli Sugars Ltd. v. CIT : 98ITR167(SC) . Allowing the claim of the assessee, the Supreme Court has observed in the said decision that 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. (See page 175 of the report.) According to the Supreme Court, the above rule of accountancy is required to be adopted for tax purposes in order to determine the actual cost of the assets in the absence of any statutory definition or other indication to the contrary in the Income-tax Act. If the principles enunciated in the above decision by the Supreme Court are applied to the facts of the case before us, question No. (1) will also be required to be answered in favour of the assessee. It would have to be held that both the Appellate Assistant Commissioner and the Tribunal were entirely right in allowing the full amount claimed by the assessee and that the Income-tax Officer was in error in disallowing the sum of Rs. 36,669 from being claimed as part of the actual cost of the distillery plant. In the result, question No. (1) is answered in the affirmative and in favour of the assessee.
10. Parties, however, will bear their own costs of the reference.