1999 (3) TMI 29 - HC - Income Tax

High Court decision on preoperational expenses treatment & eligibility of civil works for investment allowance

The High Court dismissed the Commissioner's challenge on the treatment of preoperational expenses in the construction of a factory building due to lack of ... Reference, Investment Allowance, Plant Issues:1. Interpretation of preoperational expenses in the construction of factory building.2. Eligibility of civil works expenses on foundation and water storage tank for investment allowance.Issue 1: Interpretation of Preoperational ExpensesThe case involved a dispute regarding the treatment of preoperational expenses in the construction of a factory building for an assessee engaged in manufacturing craft paper. The Valuation Officer's report valued the factory construction cost higher than the amount shown by the assessee, leading to an addition of the difference to the assessee's income as unexplained investment. However, the Commissioner of Income-tax (Appeals) later held that the nature of projects financed by public limited companies justified the inclusion of proportionate preoperational expenses. The Tribunal also found no undisclosed investment attracting section 69 of the Income-tax Act. The Commissioner sought a reference on the legality of considering preoperational expenses, but the High Court noted that this issue was not raised before the Tribunal and did not arise from its order. Therefore, the first question proposed by the Commissioner did not hold.Issue 2: Eligibility of Civil Works Expenses for Investment AllowanceThe second issue revolved around whether civil works expenses on foundation and water storage tank amounting to Rs. 6,16,963 were eligible for investment allowance. The Tribunal considered these expenses as part of plant and machinery, crucial for the functioning of the plant as a whole. Various High Court decisions were cited to support the view that specialized structures like reinforced concrete foundations and water storage tanks could be categorized as plant. The High Court noted that the determination of whether these expenses constituted plant involved a mixed question of fact and law. As there was no direct decision from the Supreme Court or the High Court on this specific point, the High Court directed the Tribunal to refer the question of law on the eligibility of civil works expenses for investment allowance back to the court for consideration.In conclusion, the High Court addressed the issues raised by the Commissioner of Income-tax regarding preoperational expenses and civil works expenses for investment allowance. While the first issue was dismissed due to lack of consideration by the Tribunal, the second issue was deemed to require further examination, leading to a direction for reference back to the court for a legal opinion.