1985 (5) TMI 32 - HC - Income Tax

Summary

Issues:
Capitalization of expenses towards construction of cinema building - ground rent, corporation tax, house tax.

Analysis:
The judgment pertains to the capitalization of expenses incurred by the assessee for the construction of a cinema building. The primary issues revolve around whether certain expenses, namely ground rent, corporation tax, and house tax, should be considered as part of the actual cost of the building for the purpose of allowing depreciation.

The Income-tax Officer disallowed the inclusion of certain items, such as tax paid prior to the start of the cinema, interest paid to banks, house tax, and ground rent, in the computation of the actual cost of the building. The Appellate Assistant Commissioner allowed the claim regarding interest paid to banks based on a previous judgment. Subsequently, the Tribunal allowed the capitalization of corporation tax and house tax but not ground rent, leading to two references.

The key questions referred to the court were whether ground rent could be added to the cost of the cinema for depreciation and whether corporation tax and house tax paid before the start of the cinema could be capitalized as part of the actual cost of the building. The court analyzed the precedents and principles of accountancy to determine the treatment of these expenses.

The court highlighted that taxes, such as corporation tax and house tax, are payable regardless of the construction of the building and do not form part of the actual cost. The ground rent for a leasehold plot and other corporation taxes were also deemed not directly related to the construction cost of the building. The court emphasized the lack of a nexus between these expenses and the actual cost of the cinema building.

In the absence of any accounting principle supporting the capitalization of ground rent, house tax, or corporation tax as part of the construction cost, the court ruled in favor of the Department. The court held that these expenses cannot be considered as part of the cost of the building and, therefore, should not be capitalized for depreciation purposes. The judgment was delivered in favor of the Department, denying the inclusion of these expenses in the actual cost of the cinema building for depreciation allowance.