1. The assessee is a private limited company carrying on business in the manufacture and sale of yarn. In the assessment proceedings relating to the assessment year 1966-67, corresponding to the year ending March 31, 1966, they claimed to capitalise their pre-production, overhead and other expenditure to the extent of Rs. 2,46,830 and claimed depreciation and development rebate on such capitalised amount. This was on the basis that they were necessary expenditure incurred by the assessee in the purchase, supervision and erection of the machinery and construction of the building. The Income-tax Officer rejected this claim on the ground that in the absence of a definition the words 'actual cost' will have to be understood and given its ordinary meaning and, if so understood, it would include only direct expenditure incurred for the purchase and erection of the machinery or the cost of construction of the building and it would not include any indirect expenditure. On appeal by the assessee, the Appellate Assistant Commissioner, following the decision of the Calcutta High Court in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. : 61ITR799(Cal) , held that the cost of construction or purchase or erection of the machinery will have to be understood as in commercial parlance and that all pre-production expenditure incurred whether directly or indirectly in connection with the purchase, supervision or erection of the plant and machinery and the construction of the building would have to be capitalised. Though the Appellate Assistant Commissioner was satisfied that most of the items of expenditure claimed by the assessee had to be capitalised on this principle, since some of the items would have to be excluded, he directed the Income-tax Officer to look into the various items and exclude such of those items which would have been incurred even if no machinery had been erected. The Tribunal confirmed this order of the Appellate Assistant Commissioner. At the instance of the revenue, the following question has been referred :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the indirect expenses to the extent of Rs. 2,46,830 incurred before commencement of manufacture should be added to the cost of assets for granting depreciation allowance and in so far as it was allocated to the cost of machinery development rebate also ?'
2. Reference was asked for mainly on the ground that the decision in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. : 61ITR799(Cal) had been taken in appeal to the Supreme Court and that that view also requires re-consideration. Subsequently, this court, following the said decision, held in Commissioner of Income-tax v. L.G. Balakrishnan & Bros. (P.) Ltd. : 95ITR284(Mad) , that any expenditure incurred in connection with the inspection, selection and supervision would also have to be capitalised along with the cost and other erection expenditure. Subsequently, the Supreme Court also, in the decision reported in Challapalli Sugars Ltd. v. Commissioner of Income-tax : 98ITR167(SC) , approved the ratio of the decision of the Calcutta High Court in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. : 61ITR799(Cal) and this court in Commissioner of Income-tax v. L. G. Balakrishnan & Bros. (P.) Ltd. : 95ITR284(Mad) . The Supreme Court held that--See : 98ITR167(SC) :
'......the accepted accountancy rule for determining the cost of fixedassets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of accountancy should......be adopted for determining theactual cost of the assets in the absence of any statutory definition or other indication to the contrary.'
3. Therefore, the pre-production expenses incurred in connection with bringing the actual assets into existence and to put them in working condition have also to be included in the actual cost of the asset. The learned counsel for the assessee had given before us a copy of the statement which was filed before the Tribunal showing the break-up figures of the pre-production expenses sought to be capitalised. As we have already pointed out, the Appellate Assistant Commissioner, while disposing of the appeal, directed the Income-tax Officer to look into the various items and exclude such of those items which would have been incurred even if no machinery had been erected. We think that the Appellate Assistant Commissioner meant by this statement only to say that only those items which were not relatable for bringing the asset into existence and to put them into working condition alone will have to be excluded and all the other items will have to be included. That direction still stands and the Tribunal had not modified the same. We accordingly answer the reference technically in the affirmative but subject to the direction of the Appellate Assistant Commissioner regarding the actual figures to be included. The assessees will be entitled to their costs. Counsel's fee Rs. 250.