1987 (4) TMI 61 - HC - Income Tax

Summary

Issues:
1. Capitalization of shares issued to foreign company for depreciation.
2. Capitalization of rent payment for accommodation of engineers.
3. Eligibility of relief under section 80J without restriction.
4. Treatment of borrowed capital for computation of relief under section 80J.

Analysis:
1. The first issue pertains to the capitalization of shares issued to a foreign company for depreciation. The Income-tax Officer disallowed the depreciation claim on the shares, stating that shares cannot be considered depreciable capital assets. However, the Appellate Assistant Commissioner and the Tribunal disagreed, upholding the assessee's contention. The court referred to a Supreme Court decision in Scientific Engineering House P. Ltd. v. CIT, where it was established that expenditure on acquiring technical know-how can result in a depreciable asset falling under the definition of "plant." In this case, the shares were issued in consideration of technical expertise provided by the foreign collaborators, which directly contributed to erecting the plant. Therefore, the court ruled in favor of the assessee, allowing depreciation on the capitalization of shares.

2. The second issue involves the capitalization of rent payment for accommodation of engineers supervising the construction of buildings and plant erection. The court considered the indispensability of the foreign experts' services in the plant's construction, leading to the conclusion that expenses incurred for rent should be capitalized and added to the fixed assets' cost. Citing various precedents, including Challapalli Sugars Ltd. v. CIT and Ambica Mills Ltd. v. CIT, the court ruled in favor of the assessee, allowing depreciation on the rent payment.

3. The third issue addresses the eligibility of relief under section 80J without restriction based on the period of working by the assessee-company. Referring to a previous decision in CIT v. English Indian Clays Ltd., the court ruled in favor of the assessee, allowing the relief without proportionate restriction.

4. The final issue concerns the treatment of borrowed capital for computing relief under section 80J. Citing the Supreme Court decision in Lohia Machines Ltd. v. Union of India, the court ruled in favor of the Revenue, stating that borrowed capital should not be excluded from the capital computation for the purpose of allowing relief under section 80J. The court directed the parties to bear their respective costs in the tax referred cases and ordered the judgment to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.