Pre-commencement expenditure may be capitalised as actual cost if needed to bring plant into working condition.

Pre-commencement expenditure incurred while a factory and machinery were still under construction may form part of the actual cost of plant and machinery if it is necessary to bring the assets into existence and into working condition. Expenditure not directly referable to a specific item of plant can still be capitalised on a practical, business-like view where it represents part of the cost that would have been paid under a turn-key or independent-contractor arrangement. On the facts noted, foreign tour expenses of the managing director and technical adviser, and auditor's fees other than annual audit fees, satisfied that test and were includible in actual cost for depreciation.

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Issues: Whether expenditure incurred before commencement of commercial production on foreign tours of the managing director and technical adviser and on auditor's fees, other than annual audit fees, could be included in the actual cost of plant and machinery for depreciation purposes.

Analysis: The expenditure was incurred while the factory and machinery were still under construction and installation. The accepted accountancy rule is that the cost of fixed assets includes all expenditure necessary to bring the assets into existence and to put them in working condition. Expenditure not directly referable to a specific item of plant may still form part of actual cost if, on a practical and business-like view, it is part of the price that would have been paid had the installation been undertaken on a turn-key or independent-contractor basis. On the facts found, the expenditure on the managing director's and technical adviser's tours, and the auditor's fees other than annual audit, satisfied that test.

Conclusion: The expenditure was rightly included in the actual cost of the assets and depreciation was allowable accordingly, in favour of the assessee.

Ratio Decidendi: Pre-commencement expenditure necessary to bring plant and machinery into existence and into working condition may be capitalised as part of their actual cost even if it cannot be directly correlated to a particular asset.

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