COMMISSIONER OF INCOME TAX Vs. SIMCO METERS LIMITED

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal, Madras Bench, has referred the following question for the opinion of this court under section 256(1) of the Income-tax Act, 1961 :

(2.) THE assessee is a company engaged in the manufacture of meters. It commenced production in or about October, 1963. THE pervious year adopted for assessments is the year ended 31st March. During the previous years relevant to the assessment years 1962-63, 1963-64 and 1964-65, the assessee incurred expenses to the extent of Rs. 5,70,624 consisting mainly of interest and bank charges, advertisements, audit fees, filing fees, managing agency remuneration, sitting fees, rent and lighting, cost of technical know-how, etc. THE company capitalised this expenditure and added it to the cost of assets in its accounts. For the purpose of assessments, it claimed depreciation on such capitalised expenditure and also development rebate in respect of such expenditure allocated to plant and machinery for the assessment years 1964-65, 1965-66 and 1966-67. THE Income-tax Officer allowed the assessee's claim only to the extent of Rs. 1,33,565 paid towards cost of the technical know-how to the foreign collaborators and negatived its claim in respect of the remaining part of the expenditure on the ground that they were not directly incurred for the erection or construction of plant and machinery or buildings, holding that though the actual cost was not defined in the Act, in normal parlance, it could only mean the sum actually spent for the acquisition of the assets and not the indirect expenses and that, therefore, depreciation and development rebate were not admissible on the sum so capitalised.

(3.) IN this particular case, the Appellate Assistant Commissioner has found as a fact, as regards technical staff training expenses, that the agreement between the assessee and Messrs. Denis Ferranti Meters Ltd., the collaborators for the production of meters, showed that the asessee's staff members had to be deputed for training both in the erection and the working of the machinery and also in the production intricacies. Similarly, with regard to the payment of Rs. 1,33,565 as technical know-how fees to the foreign company, the Appellate Assistant Commissioner pointed out that the agreement between the assessee and the foreign company shows that the payment related not merely to the installation of the machinery but also the supply of drawings, designs and plans and disclosure of technical and secret process for production, etc. Thus, these two payments partake the character of partly the necessary training for the erection of the machinery and acquisition of the technical know-how and partly the necessary training for running the machinery after erection and also the secret processes for production. Therefore, the Appellate Assistant Commissioner was right in apportioning 50 per cent. of these two amounts by way of additions to the actual cost of the assets disallowing the other 50 per cent.