Per Shri S. Rajaratnam, Accountant Member - This is an appeal file by Narsimha & Sons of Secunderabad objecting to the order of Commissioner under section 263 of the Income-tax Act, 1961 (the Act) for the assessment year 1979-80.
2. The assessee is a registered firm doing business as transport contractors. During the accounting year relevant to the assessment year under consideration, the assessee purchased a second-hand crane from Bombay for Rs. 1,50,000. It also incurred an expenditure of Rs. 50,000 on transport of the same from Bombay to Secunderabad by road. It had claimed the latter amount as a deduction and was allowed by the ITO.The assessee had also claimed depreciation at 30 per cent on the crane which was also allowed. The Commissioner was of the view that the allowance of Rs. 50,000 as a revenue deduction and acceptance of the depreciation at 30 per cent were both erroneous and prejudicial to the revenue. On these two issues, he issued notice under section 263 and heard the case. It was the assessees case that since the crane was purchased during the running of the business, it could be claimed as a revenue deduction. This argument did not appeal to the Commissioner. As for the rate of depreciation, the assessees argument that it was either earth-moving machinery or some other item entitled to 30 per cent rate was not found acceptable. He, therefore, enhanced the assessees income on the basis of the these two findings, the resultant enhancement being Rs. 75,000. The assessee is in appeal before us. The learned representative for the assessee argued that the carne was necessary for unloading the wagons and was a current business asset. He argued that on the facts of the assessees case, it was clearly a revenue deduction.
Even granting that the assessee was entitled to capitalise the same, it was stated that it was open to the assessee to treat it as a revenue deduction if the circumstances warranted as in this case. It was noticed that the Commissioner had cited authorities from a publication of the Institute of Chartered Accountants of India and a author Shri J.R. Batliboi dealing specifically with freight for carriage paid for a plant for his conclusion. The learned representative relied upon the following passage from Shri J. R. Batlibois Principles and Practice of Auditing : "A practice also obtains amongst manufacturing concerns to capitalise the whole of the revenue expenditure incurred till the concern has reached a revenue earning state by distributing the same over the fixed assets on the basis of their respective costs. Such a practice is by no means commendable inasmuch as it unduly inflates the original cost of the fixed assets, and the auditor, if asked, should never favour such a procedure. If, however, those responsible for the accounts insist on their own way of adjustment, the auditor should at least see that the additional amount charged to each asset in this manner is clearly indicated on the balance sheet. Rather than permanently capitalise expenditure which is revenue in its nature, a better plan would be to treat the amount as deferred revenue expenditure and charge it off to revenue over a period of three to five years, as circumstances would admit." He pointed out that the assessee treated the expenditure as revenue expenditure in the accounts and, according to him, the above extract clearly supports the method of accounting in debiting it as revenue expenditure. He also cited authorities though not directly on the point but, according to him, on similar items like guarantee commission, etc., in relation to acquisition of capital asset as in the case of Addl. CIT v. Akkamba Textiles Ltd.  117 ITR 294 (AP). He referred to the Boards circular on commitment charges where an observation was made that in having a particular outlay as of revenue or capital nature, the large context of business necessity or commercial expediency has to be reckoned. He also relied upon a decision of Bombay Bench of this Tribunal in IT Appeal No. 819 (Hyd.) of 1981, dated 18-3-1982 wherein it was pointed out that every item of expenditure capitalisable (if we may use the word) prior to commencement of the business cannot and need not be a capital expenditure after such commencement. The Tribunal in that case was concerned with interest on borrowing for purchase of a capital asset, insurance charges of such capital asset and road tax paid thereon. As for depreciation, he filed certain literature indicating that the crane is a heavy equipment mounted on a tractor suggesting that it is ordinarily used for earth-moving purposes in construction of dams, etc., and hence, classified as an earth-moving equipment. Even otherwise, it was used as a tractor as it runs on a tractor. The learned departmental representative sought to distinguish the case cited by the learned representative for the assessee. He claimed that any expenditure in erection of a plant is part of its cots. Any other view he claimed, would work adversely against the assessee in respect of investment allowance, etc. It is the standard practice of accountants as well as revenue officers to accept such outlay as cost. He pointed out that any other view would be contrary to the established accountancy practice as well as decided case law. As for depreciation, he claimed that the assessee uses the machinery not for transport or earth moving, but for the purposes as a crane for unloading the wagons, etc. Hence, according to him, it cannot be considered to be an earth-moving machinery macinery nor could it be considered as a tractor because it runs on a tractor. He also opposed introduction of materials to identify the crane with some other entry.
3. We have carefully considered the records as well as the arguments.
As regards the cost of transport of crane, the crane itself is a capital asset. The transport cost is transporting this asset to the work site. The authoritise cited by the learned Commissioner do show that all such items are ordinarily treated in accountancy practice as part of the cost. Even the extract from Shri J. R. Batlibois Principles and Practice of Auditing relied upon would only discourage capitalisation of ordinary revenue expenditure and does not seem to have such items as encountered here as the subject-matter of observation relied upon. There may be marginal items which can justifiably be either capitalised or treated as revenue expenditure. In such a case, we can say that the assessee probably has an option to treat it either way. But, we do not think that merely by capitalising a revenue expenditure or by treating a capital expenditure as a revenue item, the assessee can bind the ITO to accept his accounting method.
What we have to consider is the general accounting practice and the law relating thereto. Though case laws were cited, they all deal with items with which we are not concerned here. Cost of transporting the asset is even a stage anterior to cost of erection and both of them, in our view, will have to be treated as a capital expenditure whether in a particular case it is favourable to the assessee or not from tax point of view. The authorities cited by the learned Commissioner amply support his conclusion. We are, therefore, to up hold his order in this regard.
4. As for the depreciation rate to be adopted on the crane, we do find that the ITO had not applied his mind. The assessee had argued his claim only with reference to the entry relating to earth-moving machinery. The entry no doubt requires that it should not only be an earth-moving machinery, but also employed in heavy construction work, such as dams, tunnels, canals, etc. Admittedly, the assessee was not using it in heavy construction work. The assessee, however, alternatively claimed it under the entry ropeway structures.... This also, as found by the Commissioner, is far-fetched. An attempts was made to have it treated as motor tractors under entry 9A of section (sic) under special rates for machinery and plant. Just because the crane is mounted on a tractor the entire crane cannot become a tractor.
Obviously, the crane and the tractor are one and the same part of the same machinery and equipment. The assessee may be probably right in pointing out that the general rate is too inadequate for such specialised item of machinery which does not have as long a life as general machinery may have. But, if a special rate has not been prescribed for such special machinery, we are helpless in the matter.
We, therefore, do not find any merit in respect of this ground as well.