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Issues:
1. Deduction under section 43(1) for compensation received by the assessee. 2. Whether the amount received should be considered as reimbursement of cost. 3. Alternative contention for reducing the capital cost based on the received amount. Analysis: Issue 1: The appeal involved the deduction under section 43(1) of the Income-tax Act, 1961, for compensation received by the assessee. The assessee claimed depreciation on machinery for the assessment year 1978-79. The dispute arose when the Income Tax Officer (ITO) deducted Rs. 16,000 from the capital cost under section 43(1), considering it as a contribution by the Bombay company towards the cost of machinery. The Commissioner (Appeals) disagreed, stating that the amount was compensation for contract cancellation, leading to increased machinery costs, interest expenses, and loss of profit due to delayed production. The revenue challenged this decision. Issue 2: The crux of the matter was whether the received amount should be treated as reimbursement of cost. The revenue contended that the Rs. 16,000 should be excluded under section 43(1) as reimbursement. However, the assessee argued that the amount did not represent reimbursement but compensation for losses incurred. The Tribunal examined precedents and commercial principles to determine the actual cost of the asset to the assessee, emphasizing the need to reduce any portion of the cost met by another party. The Tribunal concluded that the amount received did not go towards the cost of the asset acquired subsequently, thus rejecting the revenue's contention. Issue 3: An alternative contention raised by the revenue was to reduce the capital cost based on the received amount. Referring to the Supreme Court decision in Challapalli Sugars Ltd. v. CIT, the Tribunal highlighted the accountancy rule of including all necessary expenditure to bring assets into existence. Calculations were made to determine the proportionate amount of the received sum attributable to the additional cost of machinery. The Tribunal found that only a portion of the received amount related to reimbursement of expenditure incurred prior to business setup, leading to a reduction in the capital cost for depreciation calculation purposes. Consequently, the revenue partially succeeded in its appeal, and the ITO was directed to recompute the actual cost for further proceedings. In conclusion, the appeal was allowed in part, with the Tribunal providing detailed reasoning for its decision on each issue raised by the parties involved in the case.
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