Commissioner Of Income-Tax, Bombay City I v. Polychem Ltd.

S.K Desai, J.:— The assessee in this reference is M/s. Polychem Ltd., Bombay. The business of the assessee-company is the manufacture of polystyrene. We are concerned with the assessment years 1958-59 and 1959-60, the relevant previous years being the years ended on 31st March, 1958, and 31st March, 1959.

2. For the purposes of its business the assessee-company had procured necessary machinery abroad and after importing various items had them erected. In this reference we are not concerned with the cost of the machinery and the erection charges paid by the assessee-company to Messrs. Dodsal Private Ltd. and other companies which helped in the erection. Apart from these sums the assessee-company claimed a further amount of Rs. 3,97,561. According to the assessee-company, this amount was required to be treated as forming part of the actual cost of the plant and machinery so as to qualify for allowance of depreciation and development rebate allowable under section 10(2) of the Indian Income-tax Act, 1922. This claim was not accepted by the Income-tax Officer, whose disallowance was confirmed in appeal by the Appellate Assistant Commissioner. Being aggrieved by the said order, the assessee-company preferred an appeal to the Income-tax Appellate Tribunal.

3. Before the Tribunal the contention of the assessee was that the amount, in whole or in part, at any rate, should be treated as expenses for erecting plant and machinery so as to be subsequently taken into account for the purpose of depreciation and development rebate. The Income-tax Appellate Tribunal went into the components of the expenses claimed and held that the expenses directly incurred in connection with the erection of the machinery were liable to be considered in this connection. It required the assessee to set out in a statement filed before it various details in respect of the amount claimed and this statement has been annexed to the statement of the case as annexure “C”. After hearing the parties and satisfying itself about the allowability of a portion of the expenses claimed, the Tribunal allowed the aggregate sum of Rs. 2,73,597.14, the break-up being as follows:

Rs. Salaries to engineers & technicians, etc. 69,354.27 Travelling expenses 3,031.09 Postage and telegrams 3,426.50 Insurance premium 1,039.81 Printing & stationery ex. allocated 2,238.97 Technical fees 1,20,062.50 Technical training expenses 36,405.19 Motor expenses 1,632.81 Expenses between 1-1-1957 to 30-4-1957 36,406.00 Total 2,73,59714

4. It may be mentioned that out of this amount the allowance of Rs. 69,354.27, being the salaries paid to engineers and technicians, and technical fees of Rs. 1,20,062.50 are, in this reference, not disputed as allowable by the Commissioner, and the Commissioner has disputed only the balance amount of Rs. 84,180.37.

5. As regards this amount, the following question was framed by the Tribunal as directed by the High Court in its order under section 66(2) of the Act:

“Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to include Rs. 84,181 (Rs. 2,73,597 minus salaries to engineers Rs. 69,354 and technical fees Rs. 1,20,062.50) in arriving at the original cost of machinery and plant for purposes of computing depreciation and development rebate admissible to it?”

6. The short question involved in this reference is whether these amounts allowed by the Tribunal can be said to be amounts laid out by the assessee for acquiring and installing its assets? We are concerned in this reference with the provisions of section 10(2)(vi) read with section 10(5) of the Indian Income-tax Act, 1922, but it is not necessary to set out these provisions.

7. The meaning of “actual cost” for purposes of the aforesaid provisions came to be considered by a Division Bench of this court in Habib Hussein v. Commissioner Of Income-Tax, Bombay City I. [1963] 48 ITR 859 Bom.. In the opinion of the Division Bench, the meaning of the expression “actual cost” to the assessee as used in subsection (5) of section 10 of the Act would be what the assessee had, in fact, expended or laid out for the purpose of acquiring the depreciable assets. The Division Bench thereafter went on to consider the claim of the assessee in the light of the view it had taken on the expression.

8. The expression came to be considered by a Division Bench of the Andhra Pradesh High Court in Commissioner of Income-tax v. Challapalli Sugars Ltd. [1970] 77 ITR 392 AP.. The relevant observations are to be found at pages 395 and 396 of the report. The following observations may be set out:

“The phrase ‘actual cost’, therefore, plainly indicates that the section is intended to confine the relief to an aggregate equal to the sum of money which the person has expended out of his own resources, called cost, of which the burden has ultimately fallen upon him. In other words, what a person expends on machinery seems to us to be the actual cost to him of acquiring and installing that machinery. The term, therefore, guides one to the conclusion that all expenditure on the machinery by the assessee will be the actual cost to the assessee. The actual cost, therefore, to the assessee is what he in fact expends or lays out for acquiring and installing the asset, in this case the machinery.

It is true that such an expenditure would vary from assets to assets and would depend upon its nature and availability. For example, in a case of cost of a cinema theatre, the said term would include the payment made to a third party for assistance in preparing plants for the construction and for securing permits, priorities, import licences and foreign exchange for the materials. It will include a profit paid by him to a contractor if one has been employed. In other kinds of assets, other sorts of expenditure might be included. No hard and fast rule can be laid down as to what items of expenditure will be included in that term. Nor is it advisable to make any attempt in that direction as there are bound to be innumerable and varying assets which are acquired. Each case depends and has to be decided upon the facts and circumstances of that case. It can, however, be broadly stated that in acquiring an asset of machinery, not only the invoice cost are to be included but the cost which the assessee incurs in transporting the machinery and erecting it for the purpose of his business will also have to be included in the said term. The services of the technicians or engineers necessary for designing and erecting the machinery including its supervisory cost will also have to be included in the said term.

Thus all expenditure incurred directly or intimately on the machinery can be said to be included in that term. It would not be correct to treat the words ‘actual cost’ to mean the cost paid to the vendors of the machinery alone. The term being what it is, has to be, in our view, liberally construed,”

9. On these principles Mr. Joshi has submitted that the amount of Rs. 84,181 out of the amount of Rs. 2,73,597 allowed by the Income-tax Tribunal represents the expenses which cannot be said to be incurred by the assessee-company directly or intimately on the machinery installed.

10. I now propose to briefly deal with these items one by one. The first item is the amount of Rs. 3,031.09 claimed by the assessee-company as travelling expenses of its plant engineers and works manager in connection with their trips to Calcutta and were incurred, as the note at page 24 of the paper book (part of annexure “C”) shows, in connection with inspection and placing orders for plant and machinery. It may be stated that the amount of Rs. 35,519-9-6 claimed by the assessee-company as travelling expenses for its directors' trip abroad was disallowed. In my opinion such expenses incurred, as the note suggests, by the technical personnel for the purpose mentioned in the note must be regarded as directly and intimately connected with the installation of the machinery and, therefore, would be within the amount of the actual cost incurred by the assessee-company for acquiring depreciable assets.

11. The next item is the sum of Rs. 3,426.50 claimed in respect of postage and telegrams. Here again, at page 24 of the paper book, I find a note made (part of annexure “C”) which is to the effect that this amount reprents the expenditure incurred by the company for sending foreign telegrams and letters to Messrs. Dow Chemical Co. Ltd. of U.S.A, who were the suppliers of the plant and machinery. In my view this expenditure is directly concerned with the machinery acquired and installed and was properly allowed by the Income-tax Tribunal.

12. The next item is a sum of Rs. 1,039.81 allowed by the Tribunal as insurance premium. Particulars of such premium paid by the assessee-company are to be found at page 25 of the paper book (part of annexure “C”). Apart from Rs. 15-5-0 paid as insurance premium for furniture and fixtures at works and the sum of Rs. 5 paid as insurance premium for cash in transit, the remaining items pertain to the insurance premia paid for tools, plant and machinery and erection insurance. I am inclined to take the view that insurance premium which should be allowed as part of the actual cost incurred by the asseesee-company should be the figure allowed by the Tribunal reduced by these amounts of Rs. 15-5-0 and Rs. 5 (i.e, Rs. 20.30).

13. The next item allowed by the Tribunal is the sum of Rs. 2,238.97 for printing and stationery expenses. The details of these expenses are to be found at page 38 of the paper book. On going through these details it appears to me that almost all of these printing and stationery expenses have no connection with the acquisition and installation of the machinery; and, therefore, this is one item which could not be allowed to the assessee. In respect of this item, therefore, I am of the view that the contention of the revenue must be accepted in toto.

14. The next item which the revenue has called in question is the amount of Rs. 36,40519 allowed by the Tribunal as technical training expenses.

15. It appears from annexure “C” at pages 26 and 27 of the paper book that these were expenses incurred for the visits of the chemical engineers of the company and its works manager, who were deputed, as the note indicates, to Michigan in U.S.A for doing the designing and preliminary engineering work for the installation of the polystyrene plant. It is important to note in this connection that debit entries are made between 27th February, 1956, and 5th October, 1956, i.e, much prior to the completion of the erection work, which, as the note shows, was completed by the end of April, 1957. It is not possible to agree with the contention of the revenue that these expenses were not incurred directly or intimately in connection with the acquisition and erection of the machinery.

16. The next item for consideration is the amount of Rs. 1,632.81 allowed as expenses for motor cars. The details of these expenses are to be found at page 28 of the paper book (part of annexure “C”). The note suggests, though it could have been more happily worded, that this amount is in respect of two cars which were used by the works manager and the erection engineers for the erection of plant and machinery at Goregaon. The expenses are in connection with the purchase of petrol, payment of repair bills, wheel-tax and insurance for the said two cars., and these in my opinion ought to be allowed.

17. Finally, the Tribunal has allowed the sum of Rs. 36,406 as expenses between 1st January, 1957, and 30th April, 1957. The details of these expenses incurred during this period are to be found at page 29 of the paper book (part of annexure “C”), and the further break-up at pages 31 to 34 of the paper book. Out of the aggregate amount of Rs. 78,897.60 claimed by the assessee, according to the Tribunal, the allowable expenses which would be part of the actual cost incurred by the assessee for erection and installation of the machinery would be Rs. 36,406. How this figure has been worked out has not been stated by the Tribunal in its order. But it may be mentioned that an amount of Rs. 46,675-12-6 has been shown by the assessee-company as salaries paid to its technical staff, viz., the works manager, engineers and others during these four months period. Even this figure is more than the amount allowed by the Tribunal under this head. I see no reason not to accept the Tribunal's finding that this amount of Rs. 36,406 out of the aggregate amount of Rs. 78,897-60 claimed by the assessee ought to be properly allowed to the assessee as part of the actual cost incurred by the assessee-company in acquiring and installing the depreciable assets.

18. The same conclusions will hold good for both the assessment years in question, as it is the admitted position that the facts arcs identical for both these years.

Vimadalal, J.:— I agree and have nothing more to add.

By the Court:

The question referred to in para. 7 of the statement of the case is answered in the affirmative, but the figure is reduced from Rs. 84,181 to Rs. 81,922-73.

20. The answer to the question referred to us in para. 8 of the statement of the case will be in the same terms.

21. The Commissioner must pay to the assessee the costs of the reference.