1989 (8) TMI 58 - HC - Income Tax

Actual Cost Appeal To Tribunal Computation Of Capital Depreciation Developement Rebate New Industrial Undertaking

Summary

Issues:
1. Capitalization of expenses during construction for depreciation and development rebate.
2. Interpretation of provisions and scope of relevant rule for recomputing capital under section 80J(1A).

Analysis:
1. The case involved the assessment of an assessee, a company engaged in agricultural operations, for the year 1975-76, related to the establishment of a distillery for manufacturing alcoholic liquors. The company claimed preliminary expenditure of Rs. 2,79,847 to be capitalized for depreciation and development rebate purposes. The Income-tax Officer allowed only Rs. 1,65,707 to be capitalized, applying different proportions for expenses incurred during three periods. The Appellate Assistant Commissioner directed the Income-tax Officer to capitalize most expenses except for specific amounts paid to certain entities. On further appeal, the Tribunal held that only expenses necessary to bring the plant and machinery into existence and working order could be capitalized, leading to the restoration of the Income-tax Officer's order.

2. The Tribunal also considered the claim for relief under section 80J and directed the Income-tax Officer to recompute the capital in accordance with section 80J(1A) due to a retrospective amendment introduced by the Finance Act. Citing relevant case law, the Tribunal determined that only a portion of the total expenses was eligible for capitalization as part of the actual cost of assets for depreciation and development rebate. The High Court upheld the Tribunal's decision, emphasizing that only necessary expenses for asset creation and functionality could be capitalized, and the Income-tax Officer must recompute the relief under section 80J based on the amended provision and relevant legal precedents.

3. In conclusion, the High Court answered both questions in favor of the Revenue and against the assessee, affirming the Tribunal's decision on capitalization of expenses during construction and the recomputation of capital under section 80J(1A). The judgment highlighted the importance of considering only essential expenses for capitalization and complying with the amended provisions for tax relief calculations. A copy of the judgment would be forwarded to the Income-tax Appellate Tribunal for further action.