Decided on January 11,1982



V.P. Sharma, Accountant Member - (1.) THIS is an appeal by the revenue pertaining to the assessment year 1976-77 for which the previous year ended on 30-6-1975. The only controversy which has been raised is with regard to the allowance as revenue expenditure of an amount of Rs. 7,69,110 by the learned Commissioner (Appeals).
(2.) The relevant facts are briefly as follows : The assessee is a limited company manufacturing fused aluminium oxide abrasive grains with foreign collaboration of a Czechoslovakian concern. This undertaking of the assessee-company is absolutely a new undertaking. Plant and machinery of the undertaking was under installation until 31-12-1974. There had been trial run of the machinery in June 1974 but actual production commenced a few months later. In fact production of white aluminium grains commenced with effect from 1-1-1975 and that of brown A grains with effect from 1-4-1975. Over and above the actual cost of plant and machinery an expenditure of Rs. 16.49 lakhs had been incurred which was directly related to the installation of the plant and machinery and the same was capitalised and included in the initial cost of the plant. Further the assessee-company claimed capital expenditure of Rs. 5,25,781 as deferred revenue expenditure in terms of Section 35D out of which the ITO accepted the claim to the extent of Rs. 4,80,942 and allowed deduction for one-tenth thereof. There was further expenditure of Rs. 7,69,110 with which we are concerned in the present appeal. The circumstances under which this expenditure was incurred are as follows : The assessee-company's factory was located in the industrial area at Porbandar of the Gujarat Industrial Development Corporation ("GIDC" for short). There was no arrangement for supply of power in that area. Since the undertaking of the assessee was power intensive, at the assessee's request, it was arranged that Gujarat Electricity Board (GEB) would establish a sub-station at Porbandar laying down power line from Ramavav to Porbandar and the expenditure incurred thereon which was Rs. 19.80 lakhs was to be shared equally by GIDC and GEB, i.e., Rs. 9.90 lakhs each. Out of Rs. 9.90 lakhs to be borne by GIDC, the assessee accepted liability for payment of two-third, i.e., Rs. 6.60 lakhs. In addition the assessee-company paid directly to GEB Rs. 1.09 lakhs for laying power line to connect the assessee's factory with the sub-station at Porbandar. Thus expenditure of Rs. 7,69,110 was incurred. The power line and the sub-station remained the assets of the GEB. In the assessment for the year 1975-76 (year ending 30-6-1974) the assessee had claimed as business expenditure the said amount vide letters dated 9-8-1977 and 19-8-1977 but the ITO rejected the claim of the assessee for two reasons. Firstly, the ITO contended that the expenditure in question having been incurred prior to commencement of production, it could not be allowed as revenue expenditure. Secondly, the ITO came to the conclusion that the expenditure in question was capital expenditure, since by incurring the same the assessee had secured enduring benefit an for that conclusion he derived support from the Supreme Court decision in Travancore Cochin Chemicals Ltd. v. CIT [1977] 106 ITR 900. Reliance was also placed on the Calcutta High Court decision in the case of Ganesh Sugar Mills Ltd. v. CIT [1969] 73 ITR 395.
(3.) IN appeal the learned AAC upheld the action of the ITO. The learned AAC took notice of the directors' report dated 26-12-1974 for the year ending 30-6-1976 which stated that production was now being started. The learned AAC found that trial run had taken place in June 1974 but production commenced a few months later. The expenditure in question was, thus, found to have been incurred prior to the commencement of production. The learned AAC further held that the ITO had rightly treated the said expenditure as capital expenditure. Disallowance made was sustained. This decision of the AAC was accepted by the assessee-company. ';

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