Pre-production expenditure capitalisation: costs before factory setup were treated as part of capital cost, allowing depreciation and development rebate.

Pre-production expenditure incurred before a factory is set up, including trial expenses, interest and legal charges, forms part of the capital cost when it is integrally connected with bringing the asset into existence and making it ready for use. Applying the binding Supreme Court view, the contrary contention that such expenditure should be treated as revenue was rejected. The capitalised amount was therefore eligible for depreciation and development rebate under the Income-tax Act, 1961, and the question was answered in favour of the assessee.

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Issues: Whether expenditure incurred in connection with the construction of the factory and erection of plant prior to the setting up of the factory, including trial expenses, interest and legal charges, was liable to be capitalised so as to qualify for depreciation and development rebate.

Analysis: The assessment year fell within the regime of the Income-tax Act, 1961. The dispute turned on the treatment of pre-production expenditure incurred before the factory had been set up. In view of the binding Supreme Court ruling that such expenditure is to be capitalised, the contrary view pressed by the Revenue could not be accepted. The amount directed to be capitalised by the appellate authority was therefore properly treated as part of the capital cost of the undertaking.

Conclusion: The expenditure was rightly capitalised and depreciation and development rebate were allowable thereon; the question was answered in favour of the assessee.

Ratio Decidendi: Expenditure incurred prior to the setting up of a factory, when integrally connected with bringing the asset into existence and making it ready for use, forms part of the capital cost and is eligible for depreciation and development rebate.

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