ISMAIL J. - The Income-tax Appellate Tribunal, Madras Bench, has referred the following question for the opinion of this court under section 256(1) of the Income-tax Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the indirect expense like interest and banking charges, managing agency remuneration, sitting fees, etc, should be considered as part of the actual cost of the assets for entitlement of depreciation and development rebate ?'
The assessee is a company engaged in the manufacture of meters. It commenced production in or about October, 1963. The pervious year adopted for assessments is the year ended 31st March. During the previous years relevant to the assessment years 1962-63, 1963-64 and 1964-65, the assessee incurred expenses to the extent of Rs. 5,70,624 consisting mainly of interest and bank charges, advertisements, audit fees, filing fees, managing agency remuneration, sitting fees, rent and lighting, cost of technical know-how, etc. The company capitalised this expenditure and added it to the cost of assets in its accounts. For the purpose of assessments, it claimed depreciation on such capitalised expenditure and also development rebate in respect of such expenditure allocated to plant and machinery for the assessment years 1964-65, 1965-66 and 1966-67. The Income-tax Officer allowed the assessee's claim only to the extent of Rs. 1,33,565 paid towards cost of the technical know-how to the foreign collaborators and negatived its claim in respect of the remaining part of the expenditure on the ground that they were not directly incurred for the erection or construction of plant and machinery or buildings, holding that though the actual cost was not defined in the Act, in normal parlance, it could only mean the sum actually spent for the acquisition of the assets and not the indirect expenses and that, therefore, depreciation and development rebate were not admissible on the sum so capitalised.
The assessee preferred appeals against all the three assessments. The Appellate Assistant Commissioner in those three appeals held that the assessee's claim has to be fully allowed in respect of the interest paid on borrowed amounts, but with regard to the other amounts claimed by the assessee, only 50 per cent, could be allowed. In doing so, he also disallowed the claim based on audit fees, advertisement expenses and filing fees. The result of the order of the Appellate Assistant Commissioner was that an amount of Rs. 3,07,054 representing interest payments was allowed to be capitalised towards cost of machinery. Out of the balance of Rs. 2,54,402 50 per cent. alone was allocated to the actual cost of machinery, working it out to Rs. 1,27,221. The total of these amount came to Rs. 4,34,225. Since the Income-tax Officer had already allowed Rs. 1,33,565 being the payment made for the technical know-how to the foreign collaborators, the balance of Rs. 3,00,690 was directed to be allocated to the items of depreciable assets commissioned in each year on the basis as set out in the assessment order.
Against the order of the Appellate Assistant Commissioner, appeals were preferred in respect of all the three years both by the assessee as well as the department. The Income-tax Appellate Tribunal affirmed the order of the Appellate Assistant Commissioner. It is, thereafter, at the instance of the department, the Income-tax Appellate Tribunal, Madras Bench, has referred the question as mentioned above for the opinion of this court.
We shall now give the various amounts claimed by the assessee to form part of the cost of its assets for the different years in question.
Managing agency remuneration
Rent and lighting
Directors' sitting fees
Interest and banking charges
Technical staff training expenses
Depreciation on furniture
Less : Interest receipts
The above figures do not include the sum of Rs. 1,33,565 paid to the foreign collaborators towards technical know-how. Consequently, the question for consideration before us is, out of these items, what are the items which can be capitalised as forming part of the cost of the assets of the company. We are leaving out the audit fees, advertisement charges and filing fees because the claim of the assessee in respect of these items was negatived by the Appellate Assistant Commissioner which was confirmed by the Income-tax Appellate Tribunal and the assessee itself had not come up to this court in respect of those items. Consequently, we are left with the three major heads, namely, interest and banking charges, technical staff training expenses and payment to foreign collaborators for the technical know-how and the other items finding a place in the extract given above.
As far as the interest part is concerned, there is a direct decision of the Supreme Court on this point in Challapalli Sugars Ltd. v. Commissioner of Income-tax : 98ITR167(SC) . In this decision, the Supreme Court approved the view of the Calcutta High Court in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. : 61ITR799(Cal) , which view was followed by this court in Commissioner of Income-tax v. L. G. Balakrishnan & Bros. (P.) Ltd. : 95ITR284(Mad) and a similar view was taken by the Allahabad High Court in Commissioner of Income-tax v. J. K. Cotton Spinning & Weaving Mills Ltd. : 98ITR153(All) . In doing so, the Supreme Court, after referring to the various principles as to the ascertainment of the actual cost of asserts as laid down in certain text books dealing with accountancy as well as certain decisions pointed out - See : 98ITR167(SC) :
'It would appear from the above that the accepted accountancy rule 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. 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, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary.'
There being no definition of the term 'actual cost of the assets' in the Income-tax Act or the Rules made thereunder, following the above decision of the Supreme Court, it must be held that the Appellate Assistant Commissioner as well as the Income-tax Appellate Tribunal were right in allowing the claim of the assessee to the extent of Rs. 3,07,054 being the interest paid on borrowed capital for the purpose of bringing into existence the assets. The same principle will apply to the amount spent by way of training of staff as well as payment to the foreign collaborators for the technical know-how because in the extract of the judgment of the Supreme Court given above, the expenditure necessary to bring such assets into existence and to put them in working condition is referred to.
In this particular case, the Appellate Assistant Commissioner has found as a fact, as regards technical staff training expenses, that the agreement between the assessee and Messrs. Denis Ferranti Meters Ltd., the collaborators for the production of meters, showed that the asessee's staff members had to be deputed for training both in the erection and the working of the machinery and also in the production intricacies. Similarly, with regard to the payment of Rs. 1,33,565 as technical know-how fees to the foreign company, the Appellate Assistant Commissioner pointed out that the agreement between the assessee and the foreign company shows that the payment related not merely to the installation of the machinery but also the supply of drawings, designs and plans and disclosure of technical and secret process for production, etc. Thus, these two payments partake the character of partly the necessary training for the erection of the machinery and acquisition of the technical know-how and partly the necessary training for running the machinery after erection and also the secret processes for production. Therefore, the Appellate Assistant Commissioner was right in apportioning 50 per cent. of these two amounts by way of additions to the actual cost of the assets disallowing the other 50 per cent.
That leaves out the several other items referred to by us already, namely, (1) managing agency remuneration; (2) rent and lighting; (3) law charges; (4) directors' sitting fees; and (5) depreciation on furniture. There is no express finding either by the Appellate Assistant Commissioner or by the Appellate Tribunal that these amounts also were relatable to the acquisition of the assets or the erection of the machinery. In the absence of any such finding, the Appellate Assistant Commissioner and the Appellate Tribunal were not justified in allowing the claim of the assessee to capitalise the expenditure under those heads even to the extent of 50 per cent.
Consequently, while affirming the conclusion of the Appellate Assistant Commissioner as well as the Appellate Tribunal with respect to the interest payment of Rs. 3,07,054 and technical staff training expenses of Rs. 50,638 for the year 1962-63 and Rs. 27,607 for the year 1963-64 and the payment of Rs. 1,33,565 to the foreign collaborators as technical know-how fees, we direct the Appellate Tribunal to record a specific finding in respect of the other items enumerated above as to whether they are referable or relatable to the erection of the machinery or bringing into existence of any of the assets of the company. Under these circumstances, while answering the question referred to us (we may incidentally point out that the expression 'indirect expenses' occurring in the question may not be appropriate since they are the actual expenses incurred) against the revenue on principle, namely, that all expenses incurred for bringing the assets into existence and putting them in working condition can be capitalised for the claim of depreciation and development rebate, we direct the Income-tax Appellate Tribunal to deal with the items enumerated already for the purpose of finding out whether they were expenses necessary for bringing into existence any of the assets of the company or putting them in working condition, and if the finding of the Tribunal is that they or part thereof were necessary for bringing into existence of the assets or putting them in working condition, the assessee would be entitled to capitalise them also and claim depreciation and development rebate thereon. Since the assessee has substantially succeeded, it will be entitled to its costs. Counsel's fee Rs. 250.