Actual cost for depreciation includes only pre-production items directly tied to bringing plant and machinery into working condition.

Pre-production expenditure is includible in the actual cost of plant and machinery for depreciation and development rebate only to the extent it is directly referable to bringing the assets into existence and into working condition. Staff training, insurance, power and fuel were allowed only where they were shown to relate to construction or erection; the balance remained general pre-production expenditure and was excluded. Interest paid on deferred payment for machinery before commencement of production was treated as part of actual cost and allowed for depreciation and development rebate, consistent with the principle in Challapalli Sugars.

---

---

Issues: (i) Whether pre-production expenditure incurred for setting up the plant and machinery, including the disputed items of staff training, insurance, power and fuel, formed part of the actual cost of the assets for depreciation and development rebate purposes; (ii) Whether interest paid on deferred payment for machinery, incurred before commencement of production, was includible in the actual cost of the machinery for depreciation and development rebate.

Issue (i): Whether pre-production expenditure incurred for setting up the plant and machinery, including the disputed items of staff training, insurance, power and fuel, formed part of the actual cost of the assets for depreciation and development rebate purposes.

Analysis: The Tribunal applied the settled principle that only expenditure directly referable to bringing the assets into existence and into working condition can be treated as part of actual cost for these allowances. General establishment or running-trial expenses may be capitalised in a broader accounting sense, but do not automatically qualify for depreciation and development rebate. On the facts, a limited portion of the disputed items was accepted as relatable to construction or erection of the plant, while the balance was treated as general expenditure not forming part of the depreciable cost.

Conclusion: The issue was decided in favour of the assessee to the extent of the items found directly connected with construction or erection, and against the assessee for the remaining general pre-production expenditure.

Issue (ii): Whether interest paid on deferred payment for machinery, incurred before commencement of production, was includible in the actual cost of the machinery for depreciation and development rebate.

Analysis: The governing principle applied was that interest incurred before production on borrowings or deferred payments used for acquiring and installing plant and machinery forms part of the actual cost of the assets. The reference to the Supreme Court decision in Challapalli Sugars controlled the issue, and the Tribunal's direction to allow depreciation and development rebate on such interest was upheld.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The reference was answered by holding that the allowable pre-production expenditure and pre-commencement interest on deferred machinery payments formed part of the actual cost to the extent recognised by law for depreciation and development rebate.

Ratio Decidendi: For depreciation and development rebate, pre-production expenditure and interest incurred before commencement of production are includible in actual cost only when they are directly referable to acquiring, installing, or bringing the plant and machinery into existence and working condition.

---