1982 (6) TMI 13 - HC - Income Tax

Summary

Issues:
1. Whether the forfeited amount of Rs. 1,50,000 should be included in the actual cost of machinery for depreciation calculation.
2. Whether the forfeited amount of Rs. 1,50,000 was allowable as a business expenditure.
3. Whether the forfeited amount of Rs. 1,50,000 was allowable as a business loss.

Analysis:

Issue 1:
The primary issue was whether the forfeited amount of Rs. 1,50,000 should be considered part of the actual cost of machinery for depreciation calculation. The Tribunal held that the payment of the forfeited bond amount was of a capital nature and should be added to the cost of machinery for depreciation purposes. However, the High Court disagreed. The Court analyzed the relevant provisions of the Income Tax Act, specifically Section 32 dealing with depreciation. The Court considered the connection between the bond payment and the acquisition of machinery. It was argued that since the bond was executed to import machinery, all payments under the bond should be included in the machinery's cost. The Court, however, held that once the machinery was installed and functioning, obligations under the bond became part of normal business operations, and expenses incurred thereafter could not be added to the machinery's cost for depreciation purposes. The Court relied on precedents and concluded that the bond forfeiture amount was not part of the machinery's actual cost for depreciation calculation.

Issue 2 & 3:
Regarding the second and third issues raised by the assessee, the Court noted that the assessee was not entitled to raise these questions as no reference application was made. The Court referred to a Supreme Court decision to support this position. The Court emphasized that the only question to be considered was the nature of the bond payment in relation to the machinery's cost for depreciation. The Court further discussed the principles laid down in previous cases, emphasizing that expenses necessary to bring fixed assets into existence could be included in the asset's cost. However, in this case, since the bond was forfeited long after the machinery was operational, the payment could not be considered part of the machinery's cost. The Court distinguished a previous decision cited by the assessee, emphasizing that the circumstances were different. Ultimately, the Court answered the first question in the negative, against the assessee.

In conclusion, the High Court held that the forfeited amount of Rs. 1,50,000 could not be included in the actual cost of machinery for depreciation calculation. The Court considered the timing of the bond forfeiture in relation to the machinery's acquisition and operation, determining that the payment was not part of the machinery's cost. The Court provided a detailed analysis of relevant legal provisions and precedents to support its decision.