Law:

Section:

section 43(1) read with section 32 of the income-tax act, 1961-actual cost-depreciation- whether expenses incurred by the directors and their relatives or a shipping company in connection with supervision of construction, fixation of price, delivery of ships were capital expenditure and depreciation was allowable-held that the expenses were capital in nature forming part of the actual cost of the assets and, therefore, entitled to depreciation Facts The assessee was a shipping company. For the assessment year 1960-61, the ITO disallowed the expenses incurred by the directors and their relatives for attending the launching of ships, fixation of price, supervision of construction, and taking delivery of ships and the legal expenses for recovery of repair charges on the ground that those were not revenue expenses but were incurred for ceremonial purposes and that those were not to be added to the capital cost of the assets for granting depreciation since they did not increase the value of the assets. The AAC examined each of the items and held that the expenses incurred in connection with launching of ships were not allowable and that although the other expenses were capital in nature, depreciation was allowable on such expenses as those were necessarily incurred in the course of acquiring assets and were to be added back to the cost of the ships. The Revenue contended before the Tribunal that the expenses were incurred after the ships were ready and were in a fit condition for use and that the same did not increase the value of the assets entitling to be added to the actual cost for depreciation. The Tribunal, however, upheld the AAC's order. On reference: Held The purpose of those expenses incurred by the assessee other than in connection with the launching of the ships to acquire the ships before the same were put to use and as such, they were capital in nature. All expenditure incurred directly or indirectly on the capital assets acquired by the assessee should be included in the term 'actual cost' of the asset. Depreciation was, therefore, allowable on those expenses. Case review CIT v. Polychem Ltd. [1975] 98 ITR 574 (Bom.) followed. Cases referred to CIT v.…

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