Gujarat High Court
Commissioner Of Income-Tax vs Peas Industrial Engineers Pvt. Ltd. on 31 March, 1993
Equivalent citations: [1994]205ITR447(GUJ)
JUDGMENT G.T. Nanavati, J.
1. The facts necessary for answering this reference are that the assessee entered into an agreement on June 3, 1969, with Meetler's Sons Ltd. of Switzerland to make their know-how available for manufacturing certain products in India. For obtaining this know-how and the drawings, the assessee, in all, paid Rs. 1,08,000 to the foreign company. The assessee had incurred travelling expenses amounting to Rs. 17,219 in connection with the acquisition of this technical know-how and the drawings. All these expenses were incurred between 1963 and 1966. The assessee started manufacturing activity some time in the year 1968-69. Till the year relevant to the assessment year 1971-72, the assessee had shown these expenses as miscellaneous expenses in its balance-sheet, but during the year 1970-71, which is relevant to the assessment year 1971-72, the said amounts were taken to the machinery account and were thus capitalised. It then claimed depreciation on the basis of the increased cost of the said assets.
2. The Income-tax Officer rejected that claim on the ground that the assessee could have capitalised those expenses when the same were incurred and it could not have done so in 1970-71 after the manufacturing activity had already started in the year 1968-69. This view was confirmed by the Appellate Assistant Commissioner.
3. The assessee preferred a second appeal to the Tribunal. Following the decision of this court in CIT v. Elecon Engineering Co. Ltd. [1974] 96 ITR 672, the Tribunal held that the assessee was entitled to capitalise the expenditure in the manner in which it did and that depreciation was allowable on this asset. The Tribunal also held that the travelling expenditure incurred by the assessee had to be taken into consideration for determining the actual cost of the asset and, therefore, for the purposes of considering the claim of depreciation, this travelling expenditure was also required to be taken into consideration. The Tribunal, therefore, allowed the appeal of the assessee on this point. The Revenue then moved the Tribunal to refer the following two question to this court :
"(1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to depreciation on the expenditure of Rs. 1,08,000 incurred on technical know-how in the form of drawings and designs ?
(2) Whether, on the facts and in the circumstances of the case, the travelling expenditure of Rs. 17,219 had to be taken into consideration as far as the actual cost of the asset is concerned and the assessee is entitled to depreciation thereon ?"
4. As stated earlier, the Tribunal had, following the decision of this court, held that the assessee is entitled to depreciation on the expenditure of Rs. 1,08,000 incurred on technical know-how in the form of drawings and designs. The view taken by this court was confirmed by the Supreme Court in CIT v. Elecon Engineering Co. Ltd. [1987] 166 ITR 66. Therefore, following the decision of the Supreme Court in Elecon Engineering Co. Ltd.' case [1987] 166 ITR 66, question No. 1 will have to be answered in the affirmative, i.e., against the Revenue and in favour of the assessee.
5. As regards the includibility of the travelling expenditure, the Tribunal has relied upon the decision of the Bombay High Court in CIT v. Polychem Ltd. [1975] 98 ITR 574. In that case, the Bombay high Court has held that the expression "actual cost" used in section 10(2)(vi) and 10(5) (now section 32 and 33) would include all expenditure incurred directly or indirectly on the machinery and that it would not be correct to treat the words "actual cost" to mean the cost paid to the vendors of the machinery alone. It further held that the travelling expenses incurred by the technical personnel in connection with the inspection and placing of orders for plant and machinery and the expenses incurred for the visits for doing the design and preliminary engineering work for the installation of the plant can be regarded as directly and intimately connected with installation of the machinery and would fall within the meaning of "actual cost" incurred for acquiring a depreciable asset. What can be included in the actual cost is also made clear by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, by observing 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. It cannot be disputed that the amount which was paid by the assessee for the purpose of acquiring technical know-how and drawings and the travelling expenses incurred by it were also for the purpose of bringing such assets into existence. The Tribunal was, therefore, right in holding that the travelling expenditure was required to be taken into consideration for determining the actual cost of the asset and that the assessee was entitled to depreciation thereof.
6. For the reasons stated above, both the questions are answered in the affirmative, i.e., against the revenue and in favour of the assessee. No order as to costs.