Sudhindra Mohan Guha, J.
1. This reference relates to the assessment year 1960-61, at the instance of the Commissioner of Income-tax (Central), Calcutta. Three questions have been referred to us by the Tribunal which are as follows :
'1. Whether, on the facts arid in the circumstances of the case, the Tribunal was right in holding that the interest payment of Rs. 4,81,693 and Rs. 80,230 which were not allowable as revenue expenditure represents an element of actual cost of the assets of Sahu Chemicals and as such depreciation and development rebate are admissible with reference to the said amounts ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in including in the original cost of the plant and machinery any part of the expenses incurred for (i) staff training, (ii) insurance, and (iii) power and fuel in ascertaining the actual cost for the purpose of allowance of development rebate and depreciation allowance ?
3. Whether the Tribunal was justified in law in directing the Income-tax Officer to grant development rebate on Rs. 93,768 representing interest on deferred payment for machinery ?'
The Company, M/s. New Central Jute Mills, incurred a total expenditure of Rs. 49,52,267 from the incorporation in 1954, till the commencement of production by Sahu Chemicals Factory on 31st October, 1959. It was argued before the lower authorities that the original cost of assets included not only the direct expenses relating to the cost of erection of plant and machinery but also those incurred in framing and setting up the business like printing, stationery, postage, advertising, publicity, trial running, etc. The ITO allowed the assessee to capitalise Rs. 59,00,000 and refused to grant depreciation and development rebate of Rs. 34,00,000. The AAC discussed the Calcutta High Court's decision in CIT v. Standard Vacuum Refining Co. of India Ltd. : 61ITR799(Cal) and came to the conclusion that the expenses amounting to Rs. 22,00,000 are liable to be excluded from the cost of the assets for the purposes of depreciation and development rebate.
2. It was argued before the Tribunal that all these expenses related to the pre-production stages of Sahu Chemical Ltd. factory and that in view of the several authoritative opinions in standard books on accountancy, these amounts should be treated as forming part of the cost of the assets. It was contended that all those expenses really formed a part of the cost of assets as they were all incurred for the only purpose of creating and putting up the plant. There could not be and there was no other purpose in incurring the expenditure in question. The Tribunal was takenthrough the details of apportionable expenses as on 31st October, 1959, and then it was argued that the AAC's action in disallowing the depreciation and development rebate was substantially wrong. It was pointed out that the AAC was wrong in disallowing the claim in respect of 50 per cent. of the salary, wages, bonus, provident fund and welfare expenses. Similarly, it was pointed out that the power and fuel estimated as consumed by stock-in-hand and valued at Rs. 41,832 was also wrongly taken into account by the AAC. If the estimated consumption of power and fuel for the stock-in-hand was to be disallowed then the production up to 31st October, 1959, taken at Rs. 2,48,862 should be enhanced accordingly, with the result that there would be no case for disallowing any depreciation and development rebate of Rs. 41,832. It was specifically pointed out that all the expenses could only relate to the employees engaged in the construction or erection of the plant and there was no justification for the AAC in disallowing the depreciation and development rebate of Rs. 84,000. The departmental representative, on the other hand, highlighted the reasons of the AAC.
3. As regards the question of interest on deferred payment of Rs. 93,768, the AAC disposed of the matter in the following manner:
'Interest on deferred payments, Rs. 93,768: Certain machinery were purchased for Sahupuri Plant from abroad on the basis of deferred payments. A portion of the agreed price was paid before the despatch of the consignments and the balance amount was to be paid over an agreed period of time with the stipulation to pay interest. On such deferred payments, an interest of Rs. 93,768 was paid. Though this amount was paid to nonresidents, tax was not deducted at source. Therefore, the claim was not allowed as a deduction.'
It was argued that this interest should be deducted under Section 36(1)(iii) as it was paid in respect of borrowed capital for the purpose of business. Reference was made to Section 40(a)(i) and it was contended that from the interest chargeable, if paid outside India, the tax should be deducted and after such deduction the interest should be allowed under Section 36(1)(iii). In short, it was argued that the interest paid should be capitalised and depreciation and development rebate allowed on the same.
4. After hearing both the parties, the Tribunal decided as follows :
'We have carefully considered the pith and substance of the decisions in CIT v. Fort Gloster Industries Ltd. : 79ITR48(Cal) and CIT v. Standard Vacuum Refinning Co. of India : 61ITR799(Cal) . In our opinion, it is not necessary for us to consider the decision of the Andhra Pradesh High Court in CIT v. Challapalli Sugars Ltd. : 77ITR392(AP) as it has expressed an opinion contrary to that of the Calcutta High Court in CIT v. Standard Vacuum Refining Co. : 61ITR799(Cal) , which is bindingon us. We shall now go by the decisions of the Calcutta High Court in CIT v. Fort Gloster Industries Ltd. : 79ITR48(Cal) , CIT v. Standard Vacuum Refinning Co. : 61ITR799(Cal) and also consider the ratio of the Bombay High Court decision in Habib Hussein v. CIT : 48ITR859(Bom) as it has been followed by the Calcutta High Court in the above decisions. In the Bombay High Court decision in the case of Habib Hussein v. CIT : 48ITR859(Bom) , it was held that the expenditure incurred in getting prepared suitable plans and designs for the construction of a minuet theatre, for securing various priorities and permits for scarce materials, for securing import licences for various goods for the purpose of the cinema theatre, and for securing foreign exchange facilities for the purpose of importing goods for constructing the theatre, were all to be included in the cost of the assets for the purposes of depreciation and development rebate. It was specifically held in that case that the expenditure incurred by way of commission paid for getting the required finances, expenditure incurred in getting the permission from the Bombay Municipality for constructing an additional sixth floor, etc., did not form part of the 'actual cost' of the assets. Similarly, expenses incurred for pushing, up vigorously the building works and visiting the said building works during the course of construction and for entering into negotiations with the Bombay Municipality for widening the Hospital Road were also held to be liable to be excluded from the cost of depreciable assets. This decision has been followed by the Calcutta High Court in CIT v. Fort Gloster Industries Ltd. : 79ITR48(Cal) and in the Standard Vacuum case : 61ITR799(Cal) . We would, therefore, go by the principles laid down in these decisions and also consider the principles of accountancy dealt with in the standard books on accountancy relied upon by on the assessee's counsel.'
Reference was also made by the assessee's counsel to the comments at pages 100-102 of Advanced Accounting by Batliboi, 29th Edn. The Tribunal also took into consideration the extracts from the book on 'Advanced Accounting' by Carter and Pickles. According to the Tribunal, these comments relate to the principles for capitalising the expenses and not necessarily for capitalising the expenses for the purpose of depreciation and development rebate. Every item of capital expenditure, according to the Tribunal, is not by itself eligible for depreciation and development rebate though it is to be otherwise capitalised. The Tribunal, however, allowed, on estimate for the purposes of depreciation and development rebate, the capitalisation of the following items from out of those mentioned by the AAC:
'(i) Staff training expenses--50% of Rs. 54,246. (ii) Insurance--50% of Rs. 54,252 as applicable to the machinery and plant used in the construction or erection of the plant.'
The Tribunal also directed the grant of depreciation and development rebate of Rs. 41,832 in view of the error pointed out by the assessee's counsel as having crept into the order of the AAC. Thus, the amount of Rs. 21,34,090 on which the AAC disallowed the development rebate and depreciation would be reduced by Rs. 41,832 and 50% of Rs. 54,245 and of Rs. 54,252.
5. The other expenses mentioned in para. 22 of the AAC's order were of a general nature and did not add to the cost of plant and machinery for the purpose of development rebate and depreciation. They related to the cost of running trials and establishment expenses which were to be capitalised but which did not form part of the cost of the assets for the purpose of depreciation and development rebate. The last question related to the disallowance by the AAC of the claim for development rebate at Rs. 93,768 representing deferred payment for the machineries. The claim of the assessee was that the interest on deferred payment for the machineries accrued prior to the commencement of the production and should be treated as forming part of the cost of the machineries. In view of the decision of the Calcutta High Court in CIT v. Fort Gloster Industries Ltd. : 79ITR48(Cal) and CIT v. Standard Vacuum Refining Co, of India Ltd. : 61ITR799(Cal) , the Tribunal directed the ITO to grant depreciation and development rebates in accordance with law provided the necessary conditions had been satisfied by the assessee. In the above facts and circumstances, only three questions as stated earlier have been referred to this court.
6. Mr. B.L. Pal, learned advocate for the revenue, is candid enough to concede that the last question, i.e., question No. 3, is covered by the decision of the Supreme Court; in the case of Challapalli Sugars Ltd. v. CIT : 98ITR167(SC) and the decision of the Tribunal is right on the point. As he does not press this question and in view of the decision of the Supreme Court, we answer question No. 3 in the affirmative and in favour of the assessee.
7. As regards the other two questions, the only argument of Mr. Pal is that there is no finding of the Tribunal whether the alleged costs were made for acquisition of assets, i.e., plants and machineries for bringing them into existence.
8. Mr. Murarka, learned advocate for the assessee, points out that this very question came up before this court for decision in the case of CIT v. New Central Jute Mills Ltd., that is, the present assessee, reported in : 118ITR1005(Cal) of the report, it is observed by their Lordships as follows :
'It appears to us that, in the instant case, the purpose of the assessee in obtaining the loan was to defray the cost of the said chemical plant which was in the process of erection. Under the agreement, the amountreceived on the said loan had to be utilised for the said plant and in fact the money was spent on machinery for the plant. Till the amount was utilised for the stipulated purpose, the assessee had agreed to keep the same in deposit with the Central Bank of India. It was not a term of the agreement that the amount had to be kept in a deposit account which would earn interest in the interim period.
According to law as settled by the Supreme Court in Challapalli Sugars Ltd. : 98ITR167(SC) , the interest paid to the Government of Uttar Pradesh had to be capitalised and added to the cost of the said plant which was being set up. That being so, the same amount could not be treated differently in the accounts of the assessee and converted into a loss by deducting therefrom the interest paid to the Government of Uttar Pradesh.'
Thus, it was already found by this court in the aforesaid case that the costs in question were incurred for acquisition of assets, that is, plant and machinery, and bringing them into existence. Moreover, from the order of the Tribunal, it would not appear that this aspect of the question was never agitated before the Tribunal. It was found by the Supreme Court in the case of Challapalli Sugars Ltd. : 98ITR167(SC) , that interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery formed part of the 'actual cost' of the assets of the assessee within the meaning of the expression in Section 10(5) of the Indian I.T. Act, 1922, and the assessee would be entitled to depreciation allowance and development rebate with reference to such interest also. In this view of the matter, the Tribunal was amply justified in allowing the depreciation and development rebate claimed by the assessee.
9. In the above premises, we also answer questions Nos. 1 and 2 in the affirmative and in favour of the assessee.
Each party will pay and bear its own costs.
Sabyasachi Mukharji, J.
10. I agree.