1980 (9) TMI 75 - HC - Income Tax

Pre-Business Expenses & Leasing Income: Impact on Asset Cost & Taxable Profits

Additional Commissioner Of Income-Tax, Delhi-II Versus Rajindra Flour And Allied Industries Pvt. Limited

The expenses incurred before the commencement of business were considered part of the actual cost of fixed assets, allowing depreciation and development ... Depreciation Issues Involved:1. Whether the expenses incurred under the heads salaries, managing director's remuneration, interest, and electrical energy charges before the commencement of the business represent an element of the actual cost of machinery, plant, and buildings of the assessee and as such depreciation and development rebate are admissible with reference to these amounts.2. Whether the income from the lease of plant, machinery, and building should be computed under the head 'Profits and gains of business' or 'Other sources'.Detailed Analysis:Issue 1: Expenses Before Commencement of BusinessThe primary question was whether expenses incurred on salaries, managing director's remuneration, interest, and electrical energy charges before the commencement of the business should be considered part of the actual cost of machinery, plant, and buildings, thereby allowing depreciation and development rebate.The Tribunal concluded that the expenditure on salaries, wages, electrical energy, and interest were related to the acquisition, construction, or installation of the factory building and machinery, and thus formed part of the actual cost of the fixed assets of the assessee. This was in line with the Supreme Court judgment in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC), which accepted the accountancy rule that the cost of setting up a fixed asset includes expenses necessary to make it fit for use. Therefore, the Tribunal's apportionment of these expenses between building and machinery was deemed appropriate.The High Court found that the Tribunal's procedure was in accordance with normal business practice and common sense, and thus answered the first question in favor of the assessee, affirming that these expenses should be included in the actual cost for depreciation and development rebate purposes.Issue 2: Computation of Income from LeaseThe second issue was whether the income from leasing the plant, machinery, and building should be computed under the head 'Profits and gains of business' or 'Other sources'.The Tribunal interpreted the Supreme Court's decision in New Savan Sugar and Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 and concluded that the lease was a temporary measure to exploit the commercial assets until the company could start manufacturing itself. The Tribunal noted that the company had taken significant steps to start the business but faced unforeseen circumstances, such as the death of the managing director and changes in licensing requirements, which necessitated leasing the factory temporarily. The lease was thus seen as a continuation of the business activity rather than an abandonment.The High Court agreed with the Tribunal, noting that the factory, plant, and machinery remained commercial assets. The lease was a temporary measure to tide over difficulties, and the intention was always to exploit the assets commercially. The High Court distinguished this case from New Savan Sugar and Gur Refining Co. Ltd., where the intention was to abandon the business.The High Court also referred to other cases, such as CIT v. Vikram Cotton Mills Ltd. [1977] 106 ITR 829 (All), where leasing out business assets during financial difficulties was still considered a business activity. The High Court emphasized that the intention and circumstances indicated that the leasing was a business activity.Additionally, the High Court noted that the company's memorandum of association included leasing as a business activity, further supporting that the lease income should be computed under 'Profits and gains of business.'Thus, the High Court answered the second question in favor of the assessee, holding that the income from the lease should be computed under the head 'Profits and gains of business.'Conclusion:Both issues were resolved in favor of the assessee. The expenses incurred before the commencement of business were deemed part of the actual cost of fixed assets, allowing depreciation and development rebate. The income from leasing the plant, machinery, and building was to be computed under 'Profits and gains of business,' recognizing the temporary lease as a continuation of business activities.