High Court allows pre-production expenses for depreciation, declines post-commencement salary capitalization.

The High Court ruled in favor of the assessee regarding the entitlement to depreciation on expenditure incurred prior to the factory's commencement. The expenses were deemed necessary for putting the plant into production, making them eligible for depreciation. However, the High Court declined to address the capitalization of salary and perquisites paid to foreign technicians after the business began, as the question was referred by the Commissioner without an application. The Commissioner was instructed to cover the reference costs for the assessee.

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Issues Involved:
1. Entitlement to depreciation on expenditure incurred prior to the commencement of the factory.
2. Justification of capitalizing salary and perquisites paid to foreign technicians after the commencement of the business.

Summary:

Issue 1: Entitlement to Depreciation on Expenditure Incurred Prior to the Commencement of the Factory

The Tribunal referred the question of whether the assessee was entitled to depreciation on Rs. 3,67,083 out of Rs. 4,80,873, being expenditure incurred prior to the commencement of the factory at Anand. The ITO had disallowed this amount as capital expenses, stating that they did not bring into existence any tangible or depreciable assets. The Tribunal and AAC upheld this view, considering these expenses as preliminary and not eligible for depreciation.

However, the High Court referred to the Supreme Court's decision in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, which held that all expenditure necessary to bring assets into existence and put them in working condition should be included in the actual cost of the assets. The High Court concluded that the expenses of Rs. 3,67,083 were necessary for putting the plant into production and should be treated as part of the actual cost of the plant and machinery. Therefore, the assessee was entitled to depreciation on this expenditure.

Issue 2: Justification of Capitalizing Salary and Perquisites Paid to Foreign Technicians After the Commencement of the Business

The Tribunal also referred the question of whether the salary and perquisites paid to foreign technicians after the commencement of the business, amounting to Rs. 72,537, should be capitalized and added to the cost of the machinery, entitling it to depreciation and development rebate. The High Court noted that the application u/s 256(1) of the I.T. Act, 1961, was by the assessee, and there was no application by the revenue for referring this particular question.

Citing the Supreme Court's decision in CIT v. V. Damodaran [1980] 121 ITR 572, the High Court held that it was not competent for the Tribunal to refer the question at the instance of the Commissioner, as the non-applicant cannot base their claim on a reference application filed by the other party. Consequently, the High Court declined to answer this question.

Conclusion:

The High Court answered question No. 1 in favor of the assessee, stating that the expenditure of Rs. 3,67,083 should be treated as part of the actual cost of the plant and machinery, thus entitling the assessee to depreciation. The High Court declined to answer question No. 2, as it was referred at the instance of the Commissioner, who was not the applicant before the Tribunal. The Commissioner was ordered to pay the costs of the reference to the assessee.

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