1992 (10) TMI 11 - HC - Income Tax

Accounting Year Actual Cost Assessment Year Attributable To Business Expenditure Capital Employed Computation Of Capital Expenditure Incurred Expenditure On Advertisement New Industrial Undertaking Preliminary Expenses Sales Promotion Special Deduction Wealth Tax

Issues Involved:
1. Relief under section 80J of the Income-tax Act, 1961.
2. Capital computation under section 80J.
3. Deduction of publicity and promotional expenses.
4. Deduction under section 35D.
5. Capitalization of pre-production expenditure.
6. Treatment of barter transactions.
7. Guidelines under section 43A.

Detailed Analysis:

1. Relief under section 80J of the Income-tax Act, 1961:
Issue: Whether the relief under section 80J is allowable only proportionately for a period of five months.
Judgment: The Tribunal's decision to restrict the relief under section 80J to a portion of the year was incorrect. The court held that even if the industrial undertaking was operative only for part of the year, it is entitled to the relief for the whole year. This decision was based on precedents such as CIT v. Aurofood (P.) Ltd. and CIT v. Simpson and Co. Hence, the question was answered in the negative and in favor of the assessee.

2. Capital computation under section 80J:
Issue: Whether the value of assets should be taken without deducting liabilities for capital computation under section 80J.
Judgment: The Tribunal was incorrect in holding that liabilities should not be deducted. The Supreme Court in Lohia Machines Ltd. v. Union of India upheld the validity of rule 19A, which requires the deduction of borrowed amounts in computing capital. Thus, the question was answered in the negative and in favor of the Department.

Issue: Whether capital computation should be done on a daily basis.
Judgment: The Tribunal's decision to compute capital on a daily basis was incorrect. Rule 19A prescribes that capital should be computed as on the first day of the accounting year. The question was answered in the negative and in favor of the Department.

3. Deduction of publicity and promotional expenses:
Issue: Whether expenses incurred up to March 31, 1970, should be allowed as a deduction for the assessment year 1972-73.
Judgment: The Tribunal was incorrect in allowing these expenses. Deduction is permitted only for expenses incurred in the relevant accounting year. The expenses incurred before the commencement of the business cannot be allowed. The question was answered in the negative and in favor of the Department.

4. Deduction under section 35D:
Issue: Whether certain advertisement and promotional expenses should be allowed under section 35D.
Judgment: The Tribunal correctly allowed the expenses under section 35D, except for warehousing and depreciation expenses. The word "survey" in section 35D(2)(a)(iii) includes activities necessary for marketing the products. The question was answered in the affirmative and against the Department.

5. Capitalization of pre-production expenditure:
Issue: Whether pre-production expenses should be capitalized for depreciation and development rebate.
Judgment: The Tribunal was correct in directing the capitalization of pre-production expenses. Expenses necessary to bring the asset into existence and put it in working condition should be included in the actual cost. The question was answered in the affirmative and against the Department.

Issue: Whether any part of the expenditure up to the date of commencement of production, other than marketing expenses, was not part of the cost of plant, machinery, and buildings.
Judgment: The Tribunal did not hold that such expenditures were not part of the cost. The question does not arise out of the Tribunal's order.

Issue: Whether expenses incurred in trial runs and other related expenses should be capitalized.
Judgment: The Tribunal correctly held that expenses for trial runs and related activities should be included in the actual cost of the plant and machinery. The question was answered in the affirmative and against the Department.

Issue: Whether salaries, wages, rents, welfare expenses, and insurance amounts should be capitalized.
Judgment: The Tribunal's estimation and partial allowance of these expenses for capitalization were justified. The question was answered in the affirmative and against the Department.

6. Treatment of barter transactions:
Issue: Whether the value of hydrogen given to Madras Refineries Ltd. constitutes a sale.
Judgment: The Tribunal correctly held that the transaction was a barter and not a sale. The question was answered in the affirmative and against the Department.

7. Guidelines under section 43A:
Issue: Whether the guidelines given by the Tribunal for adjusting the cost of plant and machinery under section 43A were correct.
Judgment: The Tribunal's guidelines for applying section 43A were appropriate. The question was answered in the affirmative and against the Department.

Conclusion:
- Questions at the instance of the assessee: Question (i) was answered in the negative and in favor of the assessee; Question (ii) does not arise.
- Questions at the instance of the Department: Questions (i) to (iii) were answered in the negative and in favor of the Department; Questions (iv) to (x) were answered in the affirmative and against the Department.
- Parties are directed to bear their own costs.

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