1976 (4) TMI 13 - HC - Income Tax

High Court allows capitalization of expenses for tax benefits, directs Tribunal assessment on other expenses.

The High Court of Madras ruled in favor of the assessee, allowing the capitalization of expenses such as interest on borrowed capital and technical ... Actual Cost, Plant And Machinery Issues:Interpretation of 'actual cost of the assets' for depreciation and development rebate.Analysis:The High Court of Madras was presented with a question regarding the interpretation of the 'actual cost of the assets' for the purpose of claiming depreciation and development rebate under the Income-tax Act, 1961. The case involved an assessee company engaged in the manufacture of meters, which capitalized various expenses, including interest and banking charges, managing agency remuneration, sitting fees, etc., and claimed depreciation and development rebate on these expenses for the assessment years 1964-65, 1965-66, and 1966-67.The Income-tax Officer initially disallowed most of the claimed expenses, stating that they were not directly related to the construction of plant and machinery or buildings. The Appellate Assistant Commissioner partially allowed the claim, specifically permitting the capitalization of interest payments and technical staff training expenses. The Income-tax Appellate Tribunal upheld this decision, leading to the reference of the question to the High Court.The High Court, following the Supreme Court's decision in Challapalli Sugars Ltd. v. Commissioner of Income-tax, held that all expenses necessary to bring assets into existence and put them in working condition can be capitalized. Therefore, the interest paid on borrowed capital, training expenses, and fees paid to foreign collaborators for technical know-how were deemed eligible for capitalization. However, for other expenses like managing agency remuneration, rent and lighting, law charges, directors' sitting fees, and depreciation on furniture, the court directed the Tribunal to determine if they were essential for bringing assets into existence or putting them in working condition before allowing their capitalization.In conclusion, the High Court ruled in favor of the assessee on the principle that expenses vital for creating and operating assets can be capitalized for claiming depreciation and development rebate. The Tribunal was instructed to assess the remaining expenses to determine their eligibility for capitalization based on their relevance to asset creation or operation. The assessee was awarded costs for substantially succeeding in the case.