1983 (7) TMI 7 - HC - Income Tax

Actual Cost, Business Expenditure, Depreciation, Developement Rebate, New Industrial Undertaking, Plant, Special Deduction

Issues Involved:
1. Depreciation and development rebate on the cost of roads.
2. Development rebate on the enhanced cost of plant and machinery due to devaluation.
3. Computation of disallowable perquisites under section 40(a)(v).
4. Calculation of capital employed for purposes of section 80J.
5. Written down value for the purpose of rule 19A(2)(i).

Detailed Analysis:

1. Depreciation and Development Rebate on the Cost of Roads:
The court addressed whether roads within the factory premises should be treated as "plant" or "building" for the purpose of allowing depreciation and development rebate. The Tribunal had held that the roads should be treated as "plant." The court agreed, stating that the term "plant" includes items used for business purposes, and roads within the factory premises, essential for transporting raw materials, qualify as "plant." The court concluded that roads are integral to the factory's functioning and thus should be treated as "plant" for depreciation and development rebate purposes.

2. Development Rebate on Enhanced Cost Due to Devaluation:
The court examined whether the increased cost of machinery due to the devaluation of the Indian rupee should be considered for development rebate. The ITO had allowed this increased cost for depreciation but not for development rebate. The court held that the actual cost includes all expenditures necessary to bring the asset into existence and in working condition, including the increased cost due to devaluation. The court concluded that the increased liability due to devaluation should be included in the actual cost for both depreciation and development rebate.

3. Computation of Disallowable Perquisites under Section 40(a)(v):
The court evaluated whether perquisites related to employees whose salary is exempt from tax under section 10(6)(vii) should be excluded in computing disallowable perquisites. The Tribunal had affirmed that such perquisites should be excluded. The court agreed, stating that the salary of foreign technicians, being exempt from tax, should not be considered in calculating disallowable perquisites. The court upheld the Tribunal's view and concluded that perquisites for employees with tax-exempt salaries should be excluded from disallowable perquisites.

4. Calculation of Capital Employed for Purposes of Section 80J:
The court considered whether liabilities should be deducted from assets employed in the undertaking as provided under rule 19A and whether the average capital employed should be taken into account. The Tribunal had followed the Calcutta High Court's decision, which held that liabilities need not be deducted and the average capital employed should be considered. The court agreed, declaring rule 19A ultra vires to the extent it prescribes a different mode of calculating capital employed. The court concluded that liabilities should not be deducted, and the average capital employed should be used for section 80J purposes.

5. Written Down Value for Rule 19A(2)(i):
The court addressed whether the "written down value" in rule 19A(2)(i) should be taken as defined in section 43(6) of the I.T. Act. The Tribunal had rejected the assessee's contention that the written down value should be as per the books of account. The court agreed with the Tribunal, stating that the written down value should be calculated using the "diminishing value method" as per section 43(6), which is more scientific and accurate for ascertaining profits and gains from business. The court concluded that the written down value should be determined as per section 43(6) and not the method adopted by the assessee in its accounts.

Conclusion:
- Depreciation and Development Rebate on Roads: Treated as "plant."
- Development Rebate on Enhanced Cost Due to Devaluation: Allowed.
- Disallowable Perquisites under Section 40(a)(v): Excluded for tax-exempt salaries.
- Calculation of Capital Employed for Section 80J: Liabilities not deducted; average capital employed considered.
- Written Down Value for Rule 19A(2)(i): As per section 43(6), not the assessee's accounts.

All questions except the third question in R.C. No. 82 of 1978 were answered in favor of the assessee.

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