2001 (7) TMI 61 - HC - Income Tax

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 ... Depreciation for the purpose of 'setting off' - Capitalised as being pre-commencement expenditure - incurred for the acquisition of plant and machinery and for bringing the fixed assets into working condition - Whether, the Tribunal was right in law in holding that the expenditure was not part of the actual cost of the plant? - HELD THAT:- In view of the settled legal position, it was not open to either the Commissioner of Income-tax (Appeals) or the Tribunal to ignore a part of the contents of the affidavit. We are conscious of the fact that the findings recorded by the Commissioner of Income-tax (Appeals) and the Tribunal are concurrent as regards the facts and evidence on record and but for the averments made in the affidavit which have been ignored, we would not have interfered with the said findings. It is a well settled canon of interpretation that a document has to be read as a whole: it is not permissible to accept a part and ignore the rest of the document. Out of the total expenditure incurred by the assessee-company there is one item of depreciation amount which would stand on a different footing as against the remaining items. In relation to this, the Tribunal has held that the depreciation cannot be allowed to be capitalised as it does not represent an expenditure incurred towards installation of assets whether directly or indirectly. It is further held that the depreciation being a notional allowance towards wear and tear of capital assets it is treated as a deductible item on revenue account to be set off against revenue receipts for the purpose of ascertaining the real income chargeable to tax. According to the Tribunal, it would not be open to the assessee to claim deduction in relation to the depreciation for the purpose of 'setting off' against its revenue receipt and at the same time seek capitalisation of the same by treating the said item as relatable to a period prior to the commencement. There cannot be any dispute as regards the principle laid down by the Tribunal that the assessee cannot claim benefit twice in relation to the item of depredation, once on revenue account and again by seeking capitalisation of the same. However, from the facts available on record it is not possible to state with certainty that the assessee has in fact claimed double benefit as apprehended by the Tribunal. We, therefore, hold that in the circumstances of the case the Tribunal was not justified in law in holding that the expenditure, except as regards the item of depreciation, was not part of the actual cost of the plant. In the result, the question referred to us is answered in the negative, subject to our direction in relation to item of depredation, i.e., in favour of the assessee and against the Revenue. 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.