1. The following question of law has been referred for the opinion of this Court by the Income-tax Appellate Tribunal, Chandigarh, arising out of its order dated July 3, 1991, in respect of the assessment year 1982-83:
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee was not entitled to capitalise the expenditure of Rs. 1,86,300 incurred on electric line feeder, etc., prior to the commencement of the business?
2. The assessee-company set up a factory for manufacture of vanaspati ghee. The previous year of the assessee relevant to the assessment year 1982-83 ended on August 31, 1981. The assessee claimed the following amounts aggregating to Rs. 2,08,154 for capitalisation to the cost of plant and machinery for purpose of various allowances under the Income-tax Act, 1961 (for short, 'the Act'):
Date of expenditure Nature of expenditure Amount19-5-1978 Cost of temporary electric connection 21,8549-1-1980 Cost of power line for independent feeder 1,85,6409-1-1980 To inspection fee 660_________2,08,154
3. The Assessing Officer rejected the claim of the assessee on the basis that the electric lines did not belong to the assessee and that as revenue expenditure it was not incurred in the relevant assessment year. The view of the Assessing Officer was confirmed by the Commissioner of Income-tax (Appeals).
4. The Tribunal upheld the claim of the assessee to the extent of Rs. 21,854 towards the cost of temporary electric connection which was held to be intimately connected with and having direct nexus in the construction and setting up of plant and machinery. The Tribunal, however, rejected the claim of the assessee for two sums aggregating to Rs. 1,86,300 on a finding that the said expenditure is not part and parcel of the plant and machinery. Expenditure on the cost of power line for independent feeder was held to be revenue in nature in the light of the judgment of this Court in CIT v. Panbari Tea Co. Ltd. .
5. Learned Counsel for the assessee submits that the Tribunal wrongly observed that the expenditure in dispute was not part and parcel of the plant and machinery. The expenditure had to be treated as part and parcel of plant and machinery, which the assessee was entitled to capitalise, the expenditure being prior to the commencement of the business. Reliance has been placed on the judgment of the hon'ble Supreme Court in Challapalli Sugars Ltd. v. CIT : [1975]98ITR167(SC) and Travancore-Cochin Chemicals Ltd. v. CIT : [1977]106ITR900(SC) .
6. In Challapalli Sugars' case : [1975]98ITR167(SC) it was observed (page 175):
It would appear from the above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary.
7. We find merit in the contention raised. The expenditure incurred by the assessee on the cost of power line for independent feeder, incurred prior to the commencement of production, had to be treated as part of plant and machinery being necessary for commencement of production and had to be capitalised. The hon'ble Supreme Court in Travancore-Cochin's case : [1977]106ITR900(SC) applied the test laid down in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 192 (HL) to the effect (page 902):
When an expenditure is made...with a view of bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital'
8. This view has been followed by the hon'ble Supreme Court, inter alia, in CIT v. Bokaro Steel Ltd. : [1999]236ITR315(SC) .
9. Applying the above test to the present case we are of the view that the expenditure incurred was necessary for the commencement of the business and was of enduring nature. The same had to be treated as capital expenditure.
10. Accordingly, the question is answered in favour of the assessee and against the Revenue.