Tribunal erred in excluding most pre-commencement costs from plant and machinery actual cost; depreciation not capitalisable

The HC held that, except for the depreciation item, the Tribunal was not justified in treating pre-commencement expenditures as outside the actual cost of plant and machinery. The court found it improper to ignore parts of the assessee's affidavit and concluded the Tribunal erred in law; the question was answered against the Revenue and in favour of the assessee. However, depreciation-being a notional wear-and-tear allowance-cannot be capitalised if it has been or could be claimed on revenue account.

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Issues involved: The judgment addresses the question of whether certain expenditure should be considered as part of the actual cost of a plant for income tax purposes.

Details of the Judgment:

1. Background and Initial Disallowance:
The case involved an assessee-company engaged in manufacturing glass lined equipment. The Income-tax Officer disallowed a portion of the expenditure incurred by the company, stating that not all expenses were related to acquiring plant and machinery. The Commissioner of Income-tax (Appeals) allowed capitalization of some amount but rejected a balance sum, which was confirmed by the Income-tax Appellate Tribunal without independent findings.

2. Assessee's Challenge and Legal Arguments:
The applicant-assessee challenged the Tribunal's order, arguing that the Tribunal did not consider relevant evidence, including an affidavit filed by the company director. Reference was made to legal principles regarding the interpretation of "actual cost" and the need to capitalize all expenditure related to construction and erection of a plant.

3. Affidavit and Disputed Expenditure:
The Tribunal's decision was criticized for not fully considering the affidavit filed by the company director, which clearly stated that all remaining expenditure was incurred for setting up the plant. The Tribunal's failure to address this part of the affidavit was highlighted as a legal error.

4. Depreciation Issue and Tribunal's Decision:
The Tribunal ruled that depreciation cannot be capitalized as it represents wear and tear of assets and is deducted from revenue receipts. However, it was noted that there was uncertainty regarding whether the assessee had actually claimed double benefit for depreciation.

5. Court's Decision and Direction:
The High Court held that, except for depreciation, the Tribunal was not justified in excluding the expenditure from the actual cost of the plant. The Court directed the Tribunal to reevaluate the depreciation issue based on the factual position. The question was answered in favor of the assessee, with no order as to costs.

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