Sudhindra Mohan Guha, J. - (1.) This reference relates to the assessment year 1960-61, at the instance of the Commissioner of Income-tax (Central), Calcutta. Three questions have been referred to us by the Tribunal which are as follows : "1. Whether, on the facts arid in the circumstances of the case, the Tribunal was right in holding that the interest payment of Rs. 4,81,693 and Rs. 80,230 which were not allowable as revenue expenditure represents an element of actual cost of the assets of Sahu Chemicals and as such depreciation and development rebate are admissible with reference to the said amounts ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in including in the original cost of the plant and machinery any part of the expenses incurred for (i) staff training, (ii) insurance, and (iii) power and fuel in ascertaining the actual cost for the purpose of allowance of development rebate and depreciation allowance ? 3. Whether the Tribunal was justified in law in directing the Income-tax Officer to grant development rebate on Rs. 93,768 representing interest on deferred payment for machinery ?" The Company, M/s. New Central Jute Mills, incurred a total expenditure of Rs. 49,52,267 from the incorporation in 1954, till the commencement of production by Sahu Chemicals Factory on 31st October, 1959. It was argued before the lower authorities that the original cost of assets included not only the direct expenses relating to the cost of erection of plant and machinery but also those incurred in framing and setting up the business like printing, stationery, postage, advertising, publicity, trial running, etc. The ITO allowed the assessee to capitalise Rs. 59,00,000 and refused to grant depreciation and development rebate of Rs. 34,00,000. The AAC discussed the Calcutta High Court's decision in CIT v. Standard Vacuum Refining Co. of India Ltd. [1966] 61 ITR 799 and came to the conclusion that the expenses amounting to Rs. 22,00,000 are liable to be excluded from the cost of the assets for the purposes of depreciation and development rebate.
(2.) It was argued before the Tribunal that all these expenses related to the pre-production stages of Sahu Chemical Ltd. factory and that in view of the several authoritative opinions in standard books on accountancy, these amounts should be treated as forming part of the cost of the assets. It was contended that all those expenses really formed a part of the cost of assets as they were all incurred for the only purpose of creating and putting up the plant. There could not be and there was no other purpose in incurring the expenditure in question. The Tribunal was taken through the details of apportionable expenses as on 31st October, 1959, and then it was argued that the AAC's action in disallowing the depreciation and development rebate was substantially wrong. It was pointed out that the AAC was wrong in disallowing the claim in respect of 50 per cent. of the salary, wages, bonus, provident fund and welfare expenses. Similarly, it was pointed out that the power and fuel estimated as consumed by stock-in-hand and valued at Rs. 41,832 was also wrongly taken into account by the AAC. If the estimated consumption of power and fuel for the stock-in-hand was to be disallowed then the production up to 31st October, 1959, taken at Rs. 2,48,862 should be enhanced accordingly, with the result that there would be no case for disallowing any depreciation and development rebate of Rs. 41,832. It was specifically pointed out that all the expenses could only relate to the employees engaged in the construction or erection of the plant and there was no justification for the AAC in disallowing the depreciation and development rebate of Rs. 84,000. The departmental representative, on the other hand, highlighted the reasons of the AAC.
(3.) As regards the question of interest on deferred payment of Rs. 93,768, the AAC disposed of the matter in the following manner: "Interest on deferred payments, Rs. 93,768: Certain machinery were purchased for Sahupuri Plant from abroad on the basis of deferred payments. A portion of the agreed price was paid before the despatch of the consignments and the balance amount was to be paid over an agreed period of time with the stipulation to pay interest. On such deferred payments, an interest of Rs. 93,768 was paid. Though this amount was paid to nonresidents, tax was not deducted at source. Therefore, the claim was not allowed as a deduction." It was argued that this interest should be deducted under Section 36(1)(iii) as it was paid in respect of borrowed capital for the purpose of business. Reference was made to Section 40(a)(i) and it was contended that from the interest chargeable, if paid outside India, the tax should be deducted and after such deduction the interest should be allowed under Section 36(1)(iii). In short, it was argued that the interest paid should be capitalised and depreciation and development rebate allowed on the same.;