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Commissioner of Income-tax, Bombay City-i Vs. Tata Mills Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 181 of 1970
Judge
Reported in[1979]118ITR496(Bom); [1979]1TAXMAN289(Bom)
ActsIncome Tax Act, 1961- Sections 32 and 33
AppellantCommissioner of Income-tax, Bombay City-i
RespondentTata Mills Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateD. Vyas, Adv.
Excerpt:
.....256 (1) of income tax act, 1961 - assessee could not have expanded its capacity by installation of additional spindles unless it acquired right to install them - such right acquired by assessee from other mill at nagpur - price paid to nagpur mill for acquisition of right would form part of cost of assets to assessee - accepted accountancy rules for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and not to put them in working conditions - acquisition of right to expand mill and to install additional spindles clearly expenditure to bring additional assets into existence - assessee entitled to get depreciation and development rebate on sum paid for acquiring right to install and operate additional spindles. - - acquisition..........made an observation in the appeal that the assessee might be entitled to add rs. 75,760 to the cost of spindles for claiming depreciation allowance in the year in which the new spindles were installed. however, when the assessee made such a claim in the assessment year 1967-68, both the ito and the aac took the view that the sum of rs. 75,760 could not form part of the cost of acquisition and installation of spindles. the claim for depreciation and development rebate was accordingly rejected in respect of the assessment year 1967-68. the tribunal had two appeals before it. one appeal related to the assessment year 1965-66 in which the assessee claimed that the sum of rs. 75,760 should be allowed as revenue expenditure. the other appeal related to the claim for depreciation and.....
Judgment:

Chandurkar J.

1. The question referred to the High Court under s. 256(1) of the I.T. Act, 1961, at the instance of the revenue is as follows :

'Whether, on the facts and circumstances of the case, the assessee is entitled to get depreciation and development rebate on the sum of Rs. 75,760 paid for acquiring the right to install and operate additional spindles ?'

2. The spindle capacity of a textile mill is restricted by the Central Government and permission of the Central Government is required for expanding the capacity. If, however, any textile mill is not able to make its use of full sanctioned capacity, it is open to another textile mill to purchase the surplus capacity of such mill.

3. In the instant case, the assessee purchased this surplus capacity from the Central Indian Spinning and Weaving Mills Co. Ltd. of Nagpur. For this purchase, the assessee paid a sum of Rs. 75,760 in 1964. The additional spindles were actually installed in the accounting year 1966, relevant for assessment year 1967-68. The payment of Rs. 75,760 made in 1964 was claimed by the assessee as revenue deduction in the assessment year 1965-66, but the ITO turned down the claim for deduction holding that this was a capital expenditure.

4. The AAC, however, made an observation in the appeal that the assessee might be entitled to add Rs. 75,760 to the cost of spindles for claiming depreciation allowance in the year in which the new spindles were installed. However, when the assessee made such a claim in the assessment year 1967-68, both the ITO and the AAC took the view that the sum of Rs. 75,760 could not form part of the cost of acquisition and installation of spindles. The claim for depreciation and development rebate was accordingly rejected in respect of the assessment year 1967-68. The Tribunal had two appeals before it. One appeal related to the assessment year 1965-66 in which the assessee claimed that the sum of Rs. 75,760 should be allowed as revenue expenditure. The other appeal related to the claim for depreciation and development rebate. The Tribunal while it dismissed the appeal in respect of the claim for revenue expenditure, allowed the appeal in respect of the claim for depreciation and development rebate, and it held that the amount of Rs. 75,760 was an integral part of the cost of installation of spindles which were installed in the accounting year 1966. By the question referred at the instance of the revenue this view of the Tribunal has been challenged.

5. Mr. Joshi appearing on behalf of the revenue has contended that the amount paid for the acquisition of rights to install additional spindles could not be treated as a part of the cost of the spindles. This argument must be negatived in view of the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT : [1975]98ITR167(SC) . For the purpose of determining the depreciation and the development rebate, which could be claimed by the assessee, it becomes necessary to determine the actual cost of the asset. The words 'actual cost' have been defined in s. 43 of the I. T. Act 1961, as meaning the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. The proviso and the Explanations are not relevant for the purpose of the present case. The latter part of the definition is also not relevant and what is to be determined is, what is the cost of the assets to the assessee, so far as the present case is concerned.

6. It is obvious that the assessee could not have expanded its capacity by installation of additional spindles unless it acquired the right to install these addition spindles. This right was acquired by the assessee from the other mill at Nagpur. Unless this right was first acquired the additional spindles could not be installed. It is obvious to us that the price paid to the Nagpur mill for the acquisition of the right would form a part of the cost of the assets to the assessee. In Challapalli Sugar's case : [1975]98ITR167(SC) , the Supreme Court pointed out that the accepted accountancy rules 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. Acquisition of a right to expand the mill and to install additional spindles was clearly expenditure to bring the additional extension into existence. in our view the question must really stand concluded by the decision of the Supreme Court in Challapalli Sugar's case : [1975]98ITR167(SC) .

7. The question referred to us must, therefore, be answered in the affirmative and favour of the assessee.

8. The assessee to get the costs of this reference from the revenue.


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