SHREE VALLABH GLASS WORKS LTD. Vs. COMMISSIONER OF INCOME

JUDGEMENT

(1.) In this case the Tribunal has referred two questions to us, one at the instance of the assessee and the other at the instance of the revenue. The facts leading to this reference are as follows :

(2.) The assessee is a public limited company and follows the mercantile system of accounting. The assessment year under consideration is 1964-65, the relevant previous accounting year being the financial year 1963-64. The assessee manufactures safety glasses, wired glasses and figured glasses. The assessee started construction of its factory at Anand in Kaira District in the accounting year 1961-62 and imported machinery from West Germany for the erection of this factory. The erection and installation of machineries were mainly entrusted to German technicians who had been directly delegated by the West German suppliers of the machinery. The plant was commissioned and put into service from October 9, 1963. The assessee company incurred various expenses before the commencement of production. The expenses which were incurred, amounting to Rs. 4,80,873, had been capitalised and the assessee claimed depreciation thereon. These items of expenditure were debited to factory buildings and various plants and machinery but the ITO noted that they included an aggregate amount of Rs. 1,13,790 representing payment of salary, pocket money, etc., to the foreign technicians employed in the erection work. In his order the ITO discussed the position and concluded that except for Rs. 1,18,790 the rest of the expenses, that is, the sum of Rs. 3,67,083, were of the nature described in sections 30 to 36 and would be allowable either under those sections or under section 37 as revenue expenditure but for the fact that the expenses were incurred prior to the commencement of business at Anand factory. As these initial expenses were incurred prior to the commencement of business, they were disallowed as capital expenses but as none of them brought into existence any tangible or depreciable assets or added to the value of depreciable assets, he did not allow any depreciation in respect of Rs. 3,67,083, that being the difference between the aggregate amount of Rs. 4,80,873 which was claimed by the assessee as available for depreciation and the aggregate of Rs. 1,13,790 which was the amount allowed by the ITO. On appeal by the assessee, the AAC agreed with the view of the ITO and dismissed the assessee's appeal as regards this item. The assessee went in further appeal to the Tribunal. The Tribunal found that the exact nature of the work done by the foreign technicians had not been explained and the ITO's statement that the majority of the expenses were in the nature of expenses described in sections 30 to 36 or were deductible under section 37 but for the fact that the expenses were incurred prior to the commencement of the factory, had not been disputed. The Tribunal also dismissed the assessee's appeal regarding this item of Rs. 3,67,083.

(3.) An item of Rs. 72,537 has also been the subject-matter of appeal before the Tribunal. This amount of Rs. 72,537 represented the salary and perquisites of foreign technicians incurred after the commencement of production. This item was disallowed by the ITO. The assessee had capitalised a substantial portion but claimed Rs. 72,537 being the salary, pocket money, rent, etc., incurred for these German technicians as revenue expenditure. The ITO did not allow the claim. The AAC also, for reasons discussed by him, confirmed the order of the ITO and the Tribunal held that the amount was entitled to be capitalised and was available for depreciation and development rebate if the other conditions were fulfilled. In the original order which the Tribunal passed, the Tribunal had not allowed depreciation regarding this item but subsequently by a rectification order it directed as above and thereafter two questions have been referred to us, one at the instance of the assessee, namely: