1981 (3) TMI 38 - HC - Income Tax

Summary

Issues involved: Interpretation of whether the expenditure on milk used for testing plant and machinery before commercial production is part of the cost for depreciation and development rebate.

In this case, the assessee, engaged in the business of condensed milk, incurred an expenditure on milk for testing the plant and machinery before commencing commercial production. The Tribunal allowed this amount, considering it as a capital expense necessary for ensuring the working condition of the machinery. The question arose whether this expense should be considered part of the cost of the plant and machinery for depreciation and development rebate. The court referred to the Supreme Court judgment in Challalpalli Sugars Ltd. v. CIT [1975] 98 ITR 167, which guided the decision-making process.

The court analyzed the facts where the expenditure on milk was incurred for trial runs to ensure the machinery's proper functioning before commercial production. The Tribunal's reasoning was that testing was essential to identify any defects in the machinery before actual production started. The court considered whether this expense constituted the cost of acquiring a capital asset, which included various costs like machinery purchase, installation, labor wages, and other related expenses. It was noted that most costs incurred in setting up the factory were allowed as capital expenses, indicating that the milk purchase for testing purposes could also be considered a capital expense if it was a proper part of the installation process.

The court further deliberated on the necessity of trial runs in the setting up of a factory, emphasizing that such testing was crucial to ensure the machinery's proper functioning. Applying the principles of accountancy in a reasonable manner and considering common business practices, the court concluded that the expense on purchasing milk for testing and finalizing the factory's working condition was indeed a step in setting up the capital asset. Therefore, the court held in favor of the assessee, stating that the expense should be considered part of the cost for depreciation and development rebate. The parties were left to bear their own costs in this matter.