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Judges
  • A.R Dave
  • D.A Mehta, JJ.
Acts
  • provisions of Section 256(2) of the Income-tax Act, 1961 (hereinafter referred
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Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • A.R Dave
  • D.A Mehta, JJ.
Acts
  • provisions of Section 256(2) of the Income-tax Act, 1961 (hereinafter referred
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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

The Income-tax Appellate Tribunal, Ahmedabad Bench B, referred a question under Section 256(2) of the Income-tax Act, 1961, asking whether the Tribunal was right in law in holding that expenditure of Rs. 1,69,218 was not part of the actual cost of the plant. The assessment year was 1974-75 and the accounting period ended June 30, 1973. The assessee-company, incorporated for manufacturing glass-lined equipment, carried out only fabrication of the factory during the relevant previous year and capitalised expenditure totalling Rs. 10,25,050. This sum included expenditure from the preceding accounting year; for the year under consideration a sum of Rs. 9,89,924 was claimed as pre-commencement expenditure to be capitalised. The Income-tax Officer disallowed Rs. 3,45,563 on the ground that not all expenses were incurred for acquisition of plant and machinery or for bringing fixed assets into working condition.

The assessee appealed to the Commissioner of Income-tax (Appeals). During the appeal the assessee filed an affidavit by a director (Shri Natvarlal Chunilal Choksi) and withdrew claims for six items totalling Rs. 38,349. The Commissioner (Appeals) allowed capitalisation of Rs. 1,39,995 and rejected the claim for Rs. 1,69,218. The Tribunal concurred with the Commissioner (Appeals) without recording independent findings. The assessee challenged the Tribunal's order before this court.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 1,69,218 was not part of the actual cost of the plant?
  2. Whether the item of depreciation (Rs. 53,957) can be capitalised where it is not established on the record that the assessee has already claimed a corresponding deduction on revenue account (i.e., whether double benefit has been taken)?

Arguments of the Parties

Appellant's Arguments

  • The Tribunal failed to apply its mind to the facts, specifically overlooking (or not considering) the affidavit of the director and the written submissions filed before the Commissioner (Appeals).
  • Relying on Challapali Sugars Ltd. v. CIT [1975] 98 ITR 167, the expression "actual cost" must be construed in a commercial sense consistent with normal rules of accountancy; therefore all expenditure incurred for construction and erection of the plant at the pre-commencement stage should be capitalised and added to the cost of the resulting fixed assets.
  • Support from decisions of various High Courts (CIT v. Polychem Ltd. [1975] 98 ITR 574 (Bom), CIT v. J. M. A. Industries Ltd. [1981] 129 ITR 373 (Delhi), and CIT v. Standard Polygraph Machines Pvt. Ltd. [2000] 243 ITR 788 (Mad)) was invoked to argue that the appropriate test is what a turnkey contractor would bill; if such billed expenditure is capitalisable, the departmental expenditure incurred by the assessee should not be treated less favourably.
  • Relying on Mehta Parikh & Co. v. CIT [1956] 30 ITR 181 (and the Allahabad High Court application in L. Sohan Lal Gupta v. CIT [1958] 33 ITR 786), it was contended that once an affidavit is filed and its contents are not disproved by cross-examination, Revenue authorities cannot disregard its averments. The affidavit here specifically admitted six items totaling Rs. 38,349 to be excluded, and affirmed that all remaining expenditure was incurred for establishing the plant; that unchallenged portion ought to have been accepted.

Revenue's Arguments

  • The Income-tax Officer had already allowed more than 65% of the total expenditure; only about 35% was rejected because certain items (general expenses, miscellaneous expenses, administrative staff salary, etc.) were not incurred for bringing assets into existence or into working condition. The Commissioner (Appeals) further granted deductions after applying his mind, narrowing the dispute to roughly 10% of the total expenditure.
  • The Commissioner (Appeals) made disallowances based on an estimate supported by evidence; although some estimate element exists, the figure disallowed was fair and reasonable. The assessee itself described some amounts as disallowable on the basis of estimate in its affidavit.
  • No substantial legal issue is involved; the findings by Commissioner (Appeals) and the Tribunal were factual and based on evidence, and this court should not disturb those concurrent findings of fact.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court (as stated in the opinion)
Challapali Sugars Ltd. v. CIT [1975] 98 ITR 167 That the expression "actual cost" must be construed commercially in line with normal rules of accountancy; implies pre-commencement expenditure for construction/erection should be capitalised. Cited by the assessee to support the contention that all expenditure incurred for construction and erection at the pre-commencement stage should be capitalised; the Court considered this submission in the context of the appeal (the Court's ultimate decision was consistent with the assessee on the main dispute, subject to directions on depreciation).
CIT v. Polychem Ltd. [1975] 98 ITR 574 (Bombay High Court) Used to support the proposition that the appropriate test is what expenditure a turnkey contractor would incur for setting up the plant (and hence capitalise). Relied upon by the assessee as authority for the "turnkey-contractor" test; the opinion records this reliance as part of the assessee's submissions.
CIT v. J. M. A. Industries Ltd. [1981] 129 ITR 373 (Delhi High Court) Same general proposition as above — supporting the "turnkey-contractor" approach to capitalisation of pre-commencement expenditure. Cited by the assessee to support the argument that departmental expenditure equivalent to turnkey billing should be capitalisable; recorded in the opinion as part of submissions.
CIT v. Standard Polygraph Machines Pvt. Ltd. [2000] 243 ITR 788 (Madras High Court) Also cited for the proposition regarding capitalisation and the turnkey/commercial approach to "actual cost." Cited by the assessee and recorded in the opinion as part of the authorities relied upon; the opinion notes these submissions but bases its reasoning primarily on other points (notably the affidavit authorities).
Mehta Parikh & Co. v. Commissioner Of Income Tax, Bombay [1956] 30 ITR 181 That where an affidavit is filed and the deponent is not cross-examined, Revenue cannot disregard the affidavit's averments; the affidavit stands unless disproved. The Court relied on this principle to conclude that the Commissioner (Appeals) and the Tribunal misdirected themselves by accepting only part of the affidavit and ignoring the unchallenged, categorical averment that the remaining expenditure related to setting up the plant.
L. Sohan Lal Gupta v. CIT [1958] 33 ITR 786 (Allahabad High Court) Application of the Mehta Parikh principle in a situation where the assessee filed the affidavit. Referred to by the assessee to reinforce the position that an unchallenged affidavit by the assessee should not be disregarded; noted in the opinion as supportive authority.

Court's Reasoning and Analysis

The court examined the orders of the Commissioner of Income-tax (Appeals) and the Tribunal and found both to contain concurrent factual findings based on evidence. However, on closer reading the court identified a legal misdirection in how the Commissioner (Appeals) treated the affidavit filed by the director of the assessee-company.

Key analytical steps taken by the court:

  1. Identification of the affidavit: The director's affidavit withdrew six items totalling Rs. 38,349 and expressly averred that "all the remaining expenditure is incurred or made for establishment set up and maintained for setting up of the plant at Umreth." The court emphasised that this portion of the affidavit was categorical and remained unaddressed in the appellate orders.
  2. Application of Mehta Parikh principle: The court relied on the Supreme Court ruling in Mehta Parikh that, where an affidavit is filed and the deponent is not cross-examined, Revenue authorities cannot lightly discard its averments. The court noted that no cross-examination occurred and therefore it was not open to the Revenue to challenge the affidavit's uncontroverted part.
  3. Improper partial acceptance: The Commissioner (Appeals) had selectively relied on the part of the affidavit that favoured Revenue (the assessee's admission of Rs. 38,349) while ignoring the rest where the assessee affirmatively stated that the remaining expenditure related to setting up the plant. The court held that it is impermissible to accept part of a document and ignore the remainder; a document must be read as a whole.
  4. Effect on the Tribunal's conclusion: Because the Tribunal's order was silent on the affidavit and merely concurred with the Commissioner (Appeals) without independent findings, the Tribunal was held to have not applied its mind properly to this material on record. Consequently, the Tribunal's legal conclusion that Rs. 1,69,218 was not part of the actual cost of the plant (except for the depreciation item) was not justified.
  5. Separate treatment of depreciation item: The court accepted the legal principle (as articulated by the Tribunal) that depreciation is a notional allowance for wear and tear treated as a revenue deduction, and that an assessee cannot claim a double benefit by both deducting depreciation on revenue account and capitalising the same amount. However, the court observed factual uncertainty on the record whether the assessee had in fact claimed the depreciation amount on revenue account. Because parties' counsel could not state whether double benefit had been taken, the court directed the Tribunal to re-examine and adjust its decision after ascertaining the factual position regarding depreciation.

In summary, the court's analytical focus was on the legal effect of the unchallenged affidavit and on ensuring that the authorities read the affidavit as a whole; that failure led to the reversal on the principal dispute, while leaving a factual question open regarding depreciation for further determination.

Holding and Implications

Holding: The court answered the question referred by the Tribunal in the negative — it held that, in the circumstances of the case, the Tribunal was not justified in law in holding that the expenditure (except the item of depreciation) was not part of the actual cost of the plant.

Implications:

  • Direct effect: The decision is in favour of the assessee and against the Revenue as regards the disputed expenditure (other than the depreciation item). The court directed that the Tribunal must re-examine the depreciation item after ascertaining whether the assessee has claimed a corresponding deduction on revenue account; if the depreciation has not been claimed on revenue account, the assessee may be permitted to capitalise it.
  • Procedure and evidence: The ruling underscores that an unchallenged affidavit filed by the assessee cannot be ignored and that a document must be read as a whole; selective acceptance of parts of an affidavit by appellate authorities amounted to a legal error in this case.
  • Precedential scope: The opinion resolves the particular reference in favour of the assessee and contains directions for further factual determination on depreciation. The opinion does not purport to lay down a new, broad precedent beyond applying established principles (notably Mehta Parikh) to the facts; its immediate consequence is the reversal of the Tribunal's conclusion on the stated amount, subject to the depreciation inquiry. The court made no order as to costs.

Outcome as stated in the opinion: Question answered in the negative, subject to direction regarding the item of depreciation; in favour of the assessee and against the Revenue; no order as to costs.

Show full summary ...

    Glass Lines Equipments Co. Ltd. v. Commissioner Of Income-Tax

    1. The Income-tax Appellate Tribunal, Ahmedabad Bench B, has referred the following question for the opinion of this court in compliance with the direction issued under the provisions of Section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act")-

    "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 1,69,218 was not part of the actual cost of the plant ?"

    The assessment year involved is 1974-75 and the accounting period is the year ended June 30,1973. The assessee-company was incorporated to conduct the business of manufacturing glass lined equipment. During the previous year under consideration, the company carried out only fabrication of the factory and it capitalised expenditure to the tune of Rs. 10,25,050. It appears that this sum also included the amount of expenditure which was incurred in the preceding year, viz., the year ended June 30,1972, and, therefore, for the year under consideration a sum of Rs. 9,89,924 was sought to be capitalised as being pre-commencement expenditure. The Income-tax Officer, disallowed the sum of Rs. 3,45,563 holding that all the expenses cannot be said to have been incurred for the acquisition of plant and machinery and for bringing the fixed assets into working condition.

    The assessee being aggrieved carried the matter in appeal before the Commissioner of Income-tax (Appeals). During the course of hearing, the assessee-company filed an affidavit of one Shri Natvarlal Chunilal Choksi, who was a director of the company, and as per the said affidavit the assessee withdrew its claim in relation to six items totalling to Rs. 38,349. The Commissioner of Income-tax (Appeals) for the reasons stated in the appellate order dated February 15,1982, allowed the claim of capitalisation as' regards the sum of Rs. 1,39,995 while rejecting the claim in respect of the balance sum of Rs. 1,69,218. The Income-tax Appellate Tribunal concurred with the reasons stated by the Commissioner (Appeals) and confirmed the appellate order without recording any independent finding.

    Mr. Manish J. Shah, the learned advocate appearing on behalf of the appli-cant-assessee, challenged the impugned order of the Tribunal on the ground that the Tribunal had not applied its mind to the facts of the case with special reference to the affidavit of the director and the written submissions which were filed before the Commissioner of Income-tax (Appeals). It was submitted that the decision of the Supreme Court in the case of Challapali Sugars Ltd. v. CIT [1975] 98 ITR 167, had specified that the expression "actual cost" had to be construed in the sense which no commercial man would misunderstand and for this purpose the normal rules of accountancy prevailing in commerce and industry had to be borne in mind. It was submitted that all expenditure which was incurred for construction and erection of a plant, viz., at the pre-commencement stage, had to be capitalised and added to the cost of the fixed assets which would come into existence as a result of such expenditure. It was submitted that the Tribunal had failed to take into consideration the aforesaid salutary principles and hence the order of the Tribunal should not be permitted to hold the field. In support of the aforesaid submission, the following decisions of various High Courts were relied upon :

    (1) CIT v. Polychem ltd. [1975] 98 ITR 574 (Bom);

    (2) CIT v. J. M. A. Industries Ltd. [1981] 129 ITR 373 (Delhi); and (3) CIT v. Standard Polygraph Machines Pvt. Ltd. [2000] 243 ITR 788 (Mad).

    Referring to the ratio of the aforesaid decisions it was contended that the test to be applied would be in case a contract was given for setting up the plant on turn-key project basis, what would be the expenditure such a contractor would incur, and if the entire expenditure as billed by the contractor was available for the purpose of capitalisation, the assessee who undertakes such setting up on its own on departmental basis should not be denied the same benefit.

    The order of the Tribunal was assailed from another angle while referring to and relying upon the decision of the apex court in the case of Mehta Parikh & Co. v. Commissioner Of Income Tax, Bombay. [1956] 30 ITR 181. It was contended that as held by the Supreme Court once an affidavit has been filed and the contents of the affidavit have not been disproved by cross-examining the deponent, it would not be open to the Revenue authorities to disregard the averments made in the affidavit. It was further submitted that the Supreme Court was called upon to deaf with a situation where an affidavit was filed by the third party but the ratio of the decision had been applied by the Allahabad High Court in the case of L. Sohan Lal Gupta v.' CIT (1958] 33 ITR 786, in a case where the assessee himself had filed an affidavit. Elaborating on this contention our attention was drawn to the affidavit appearing at page 49 of the paper book and it was pointed out that the assessee had on its own described six items of expenditure totalling Rs. 38,349 which according to the assessee are not relevant to the setting up of the plant, that this part of the affidavit had been accepted by the Commissioner of Income-tax (Appeals), and the balance portion of the affidavit had been ignored. Our attention was drawn to para. 5 of the affidavit which reads as under :

    "(5) That all the remaining expenditure is incurred or made for establishment set up and maintained for setting up of the plant at Umreth."

    It was submitted that this part of the affidavit having remained uncontro-verted, it was not open to the Commissioner of Income-tax (Appeals) or the Tribunal to take any different view as regards the balance amount of expenditure.

    Mr. Akil Qureshi, the learned advocate appearing on behalf of the Revenue, submitted that out of the total expenditure of about Rs. 10 lakhs the Income-tax Officer himself had allowed more than 65 per cent, of the expenditure and only 35 per cent, of the claim was rejected in view of the fact that certain items of expenditure like general expenses, miscellaneous expenses, administrative staff salary, etc., could not be said to have been incurred for the purpose of bringing the assets in existence and putting them in a working condition. That in spite of this position the Commissioner of Income-tax (Appeals) had after application of mind granted further deduction and the dispute narrowed down to hardly 10 per cent, of the total expenditure incurred. It was, therefore, urged that no interference was called for and the Tribunal had correctly concurred with the finding and reasoning of the Commissioner of Income-tax (Appeals). It was further submitted that the assessee had in its affidavit stated that the amount which was agreed to be disallowed was on the basis of an estimate, and, therefore, the orders of the authorities below were more than fair and reasonable when some portion of the expenditure was disallowed on an estimated basis. Referring to the order of the Commissioner of Income-tax (Appeals), it was pointed out that the estimate made by the appellate authority for the purpose of disallowance was based on evidence even though there was an element of guess work in such estimate as is bound to be, but that should not detract from the position that, the sum ultimately disallowed was just and proper. According to Mr. Qureshi no legal issue was involved and the findings recorded by the Commissioner of Income-tax (Appeals) which have been confirmed by the Tribunal were based on facts and evidence on record and it was not open to this court to take any other view of the matter on the basis of these findings.

    It is true, as contended on behalf of the Revenue, that the findings recorded by the Commissioner of Income-tax (Appeals) and the Tribunal are based on facts and evidence on record, but on a close reading; of the order of the first appellate authority we find that he has misdirected himself in law while taking into consideration the affidavit filed by the director of the company. The Commissioner of Income-tax (Appeals) for the purpose of upholding partial disallowance has relied upon one portion of the affidavit, viz., where the assessee-company has through its director offered Rs. 38,349 for disallowance. As regards the balance portion the affidavit is categorical in terms and as can be seen from the extract reproduced hereinbefore, the assessee-company has made a positive averment to the effect that all other items of expenditure are allowable, i.e., all other items of expenditure are relatable to setting up the plant and bringing fixed assets into existence and putting them into working condition. In none of the appellate orders, viz., those of the Commissioner of Income-tax (Appeals) and the Tribunal, we find any discussion in relation to this part of the affidavit. In fact, the order of the Tribunal is absolutely silent as regards the affidavit and there is no indication whatsoever in the order as to whether the Tribunal was even aware about the existence of the affidavit which was on record.

    As laid down by the Supreme Court in the case of Mehta Parikh & Co. v. Commissioner Of Income Tax, Bombay. [1956] 30 ITR 181, none of the authorities considered it necessary to cross-examine the deponent with reference to the statement made in the affidavit, and, hence, under these circumstances it was not open to the Revenue to challenge the correctness of the statement made by the deponent in the affidavit. In other words, consequently, the assessee was entitled to assume that the authorities were satisfied with the affidavit as sufficient proof on this point. In the present case, we find that the Commissioner of Income-tax (Appeals) while dealing with the affidavit has conveniently chosen to accept only one part of the statement which was in favour of the Revenue and against the assessee while ignoring the rest of the portion wherein specific averments were made in relation to the balance items of expenditure.

    In view of the settled legal position, it was not open to either the Commissioner of Income-tax (Appeals) or the Tribunal to ignore a part of the contents of the affidavit. We are conscious of the fact that the findings recorded by the Commissioner of Income-tax (Appeals) and the Tribunal are concurrent as regards the facts and evidence on record and but for the averments made in the affidavit which have been ignored, we would not have interfered with the said findings. It is a well settled canon of interpretation that a document has to be read as a whole: it is not permissible to accept a part and ignore the rest of the document.

    Out of the total expenditure incurred by the assessee-company there is one item of depreciation amounting to Rs. 53,957 which would stand on a different footing as against the remaining items. In relation to this, the Tribunal has held that the depreciation cannot be allowed to be capitalised as it does not represent an expenditure incurred towards installation of assets whether directly or indirectly. It is further held that the depreciation being a notional allowance towards wear and tear of capital assets it is treated as a deductible item on revenue account to be set off against revenue receipts for the purpose of ascertaining the real income chargeable to tax. According to the Tribunal, it would not be open to the assessee to claim deduction in relation to the depreciation for the purpose of "setting off against its revenue receipt and at the same time seek capitalisation of the same by treating the said item as relatable to a period prior to the commencement.

    There cannot be any dispute as regards the principle laid down by the Tribunal that the assessee cannot claim benefit twice in relation to the item of depreciation, once on revenue account and again by seeking capitalisation of the same. However, from the facts available on record it is not possible to state with certainty that the assessee has in fact claimed double benefit as apprehended by the Tribunal. In fact, learned counsel appearing for both the sides are not in a position to inform or state as to whether in fact the assessee had claimed deduction against its revenue receipt on the one hand and again capitalised the said item for the purpose of claiming depreciation and development rebate. In view of these circumstances, in so far as the item as regards depreciation is concerned, we direct the Tribunal to adjust its decision after ascertaining the factual position. In the event of the assessee having not claimed the amount of depreciation relatable to the assets of the office on revenue account the assessee may be permitted to capitalise the same.

    We, therefore, hold that in the circumstances of the case the Tribunal was not justified in law in holding that the expenditure, except as regards the item of depreciation, was not part of the actual cost of the plant. In the result, the question referred to us is answered in the negative, subject to our direction in relation to item of depreciation, i.e., in favour of the assessee and against the Revenue, with no order as to costs.

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    Glass Lines Equipments Co. Ltd. v. Commissioner Of Income-Tax
    (Jul 12, 2001)