D.K. Kapur, J.
1. The question referred to us in the case of the assessed is as follow :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 23,069 being expenditure on milk used to test the assessed-company's plant and machinery before the plant and machinery was ready to commence commercial production is to be regarded as part of the cost of the said plant and machinery for the purpose of computing the allowance for depreciation and development rebate admissible to the assessed-company ?'
2. Although the question is as unusual one, we find that in reality the answer to the question is already covered by the judgment of the Supreme Court in Challapalli Sugars Ltd. v. CIT : 98ITR167(SC) .
3. The facts of the case are that Food Specialities Ltd., the assessed in this case, was engaged in the business of condensed milk sold under the trade mark 'Milkmaid'. A new plant was set up for this purposes. After the factory had been erected, but before it was ready for commercial production, certain trial runs were made regarding the working of the installed machinery. For the purposes, milk worth Rs. 41,411 was purchased. The waste product was Rs. 18.342 and the difference was capitalised-it amounted to Rs. 23,069. This amount disallowed by the ITO and the AAC, but the Tribunal allowed the same. The reasoning of the Tribunal was that the machinery cannot be said to be installed unless its working condition is ensured beyond doubt. For the purposes of ensuring this, the installed machinery had to be worked and experimentation had to be made. If the machinery was defective or not giving expected results, it could be repaired or replaced before the actual commercial production was stated. Some examples are given by the Tribunal in its order.
4. The real question in this case is whether the sum represented the cost of acquiring a capital asset. No doubt, the cost involved - (a) the purchases of the machinery, (b) the cost of installing the same, (c) the payment of wages for labour, etc., and so on. All most all costs made or property incurred for the purposes of setting up the factory are allowed, such as electricity, transport, and so on. It would follow that the purchases of milks for experimental purposes to test out the factory would also be a capital expense unless it could be said that the expenses was not a proper expenses involved in the installation proceedings.
5. Keeping in view the fact that the setting up of the factory would be incomplete unless some sort of the trial or test runs were made, it seems that the Tribunal was not wrong in holding that hit expense was also a capital expenses. There is a time fixed by the I.T. Act when it can be said that a business has been set up. As stated by the Supreme Court in the aforementioned decision, the rules of accountancy have to be applied in a reasonable manner keeping in view the ordinary practice of the business community in such matters. Viewed from this angle, the expenses involved in purchasing the milk and determined whether the factory is in a proper working condition and making adjustment, and so on, does not seem to be anything more than step in the setting up and finalisation of the factory which is the capital asset of the company. After the tests have been carried out, it can be said that the factory has been set up and is ready for commercial production. We would, accordingly, hold that the question referred to us has to be answered in the affirmative, in favor of the assessed and against the department. But we would leave the parties to bear their own costs.