1. The following question has been referred by the Tribunal:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the expenses of Rs. 11,13,084 incurred prior to the commencement of production in the assessee's sugar factory, which started functioning in the previous year relevant to the assessment year under appeal, namely, 1966-67, should be treated as part of the cost of plant and machinery for granting depreciation and development rebate for 1966-67 assessment ?'
2. The assessee is a company which was originally engaged only in trading operations. It extended its activities by setting up a sugar factory and the first crushing operation took place on 10th March, 1965. Prior to the commencement of production, the assessee incurred certain expenditure which was included under the following heads :
Rs.Vehicles maintenance70,722Travelling expenses21,413Electricity charges16,310Interest on loans3,34,278Registration and stamp duty on mortgage loan1,78,788Salaries and wages3,32,225Insurance3,180Printing & stationery, telephones, repairs, etc.,37,892Miscellaneous expenses1,28,492Depreciation 66,263
3. This sum was allocated by the assessee towards the cost of buildings, plant and machinery and electric installations in the proportion of the direct costs of those assets.
4. In the above analysis, it will be found that a sum of Rs. 66,263 has been claimed as depreciation liable to be added to the capital costs. Out of the said sum of Rs. 66,263, a sum of Rs. 53,229 was claimed as depreciation relatable to the machinery and plant. The Income-tax Officer rejected the claim of the assessee, observing that the assessee had separately capitalised direct expenses such as erection charges, labour charges, etc., incurred forsetting up of the sugar factory, and that a sum of Rs. 8,94,268, referable to the machinery, was of a revenue nature and could not be included in the cost of the capital assets. He disallowed the entire claim. The assessee appealed to the Appellate Assistant Commissioner and relied, before him, on a decision of the Calcutta High Court in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. : 61ITR799(Cal) . The Appellate Assistant Commissioner directed allowance of the following amounts, viz.:
Rs.Interest on loans3,34,278Registration and stamp duty1,78,788Salaries and wages3,32,225
5. He rejected the contention of the assessee with reference to the rest of the amounts. In other words, the amounts allowed by him were to be treated as part of the actual cost of the plant and machinery, etc.
6. Both the assessee as well as the department appealed to the Tribunal. The department wanted that none of the items should be taken into consideration in determining the actual cost for the purpose of depreciation and development rebate, while the assessee wanted that all the above items of expenditure claimed should be considered as part of such actual cost.
7. The Tribunal held that most of the expenditure was incurred for the purpose of acquisition of the assets, for example, the loans were raised for the purpose of acquiring the assets, the stamp duty and registration charges were paid in connection with the raising of the finance, the salaries and wages were paid for the establishment which was run while acquiring the assets, the vehicles were maintained for setting up the machinery, etc.
8. In respect of the 'miscellaneous expenses' of Rs. 1,28,492, the Tribunal was of the view that the said expenditure was referable to the acquisition of assets, except to the extent of Rs. 216 which represented loss in the sale of furniture.
9. At the instance of the revenue the question, as mentioned above, has been referred to this court.
10. The question as to whether the expenditure incurred prior to the commencement of the production could be capitalised for the purpose of arriving at the actual cost of the plant, machinery, etc., has been considered by the Supreme Court in Challapalli Sugars Ltd. v. Commissioner of Income-tax : 98ITR167(SC) . That case related to interest paid before the commencement of the production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery. The Supreme Court held that the interest paid formed part of the actual cost of the assessee within the meaning of Section 10(5) of the Indian Income-tax Act of 1922 and that the assessee would be entitled to depreciation allowance and development rebate with respect to such interest also. Onthe basis of this decision, there can be no dispute about the allowance of Rs. 3,34,278 in the present case.
11. Similarly, registration and stamp duty on the mortgage loan, viz., Rs. 1,78,788, and insurance of Rs. 3,180 would have to be capitalised as they also relate to the new assets. With reference to the miscellaneous expenditure of Rs. 1,28,492 also the Tribunal has gone over the nature of the expenditure and except for a sum of Rs. 216, the rest of the expenditure referred to the acquisition expenses. Therefore, this leaves for consideration only the rest of the items.
12. With reference to these items, the question that arises is as to what should be done. In Commissioner of Income-tax v. L.G. Balakrishnan & Sons (P.) Ltd. : 95ITR284(Mad) this court had occasion to consider a similar question as to whether the expenditure incurred was liable to be included in the actual cost of the machinery and plant, etc. As regards the expenses which were directly incurred with reference to the assets themselves, the amount was directed to be allowed as deduction. With reference to the other expenditure, this court went into the question individually as to whether they formed part of the expenses for the acquisition or the setting up of the machinery, plant, etc. This decision has been noticed by the Supreme Court in Challapalli Sugars Ltd. v. Commissioner of Income-tax : 98ITR167(SC) .
13. In view of the fact that each item of expenditure will have to be examined for the purpose of considering whether it is liable to be taken as forming part of the actual cost, it is necessary for us to restore the matter to the file of the Tribunal which would go into the includibility of the following amounts, viz.:
Rs.Travelling expenses21,413Electricity charges16,310Salaries and wages3,32,225Printing & stationery, telephone, repairs, etc.37,892
14. Depreciation, which was included in the figures, is not the subject-matterof dispute, and, therefore, does not require consideration. If the Tribunalhad given a finding with reference to the above item also, then it would nothave been necessary for us to restore the matter for the decision, of theTribunal. In the absence of a specific finding, we find it necessary torestore the appeal itself on this point for the decision of the Tribunal overagain. It will go into each item and see whether the whole or part of it represented expenditure attributable to the new assets and consider it accordingly.In the result, the question referred to us is answered accordingly. Therewill be no order as to costs.