Law:

Section:

Section 43(1) of the income-tax act, 1961-Actual cost-Assessee-company paid Rs. 7,70,000 to common controlled concern for executing labour contract and capitalised the same for claiming higher depreciation under section 32 and development rebate under section 33 on plant-ITO detected collusive arrangement for non-commercial consideration and included Rs. 3,60,000 representing actual expenditure and profit in determining cost-Tribunal took impugned cost of Rs. 7,70,000 as actual cost of asset for claiming said allowances and not cost as determined by ITO-Whether tribunal justified-Held, on facts, no Facts The assessee-company entered into an agreement on 19-5-1961 with BG for the execution of the contract jobs (primarly a labour contract) on paying the latter Rs. 3,50,000. There were, however, supplementary agreements under which the assessee paid to BG an aggregate amount of Rs. 7,70,000 in order to cover the additional jobs said to have been undertaken by it. The assessee had capitalised a total sum of Rs. 16,46,417, including said Rs. 7,70,000, as cost of the plant and machinery installed during the accounting year ended 31-12-1962, relevant for the assessment year 1963-64 and claimed depreciation and development rebate thereon. During assessment proceedings, the ITO found (i) that the assessee-company and BG were connected concerns indirectly owned by RD; (ii) that 75 per cent of assessee's share capital was owned by BD and SA, which were, in turn, controlled by RD having beneficial interest of more than 51 per cent; (iii) that it was a labour contract as all the material for fabrication of driers and accessories was supplied by the assessee for which BG had incurred a total expenditure of Rs. 3,11,954; and (iv ) that BG had a brought forward loss of over Rs. 7,00,000 in this assessment year. The ITO, therefore, considered the said payment of Rs. 7,70,000 to be excessively inflated and collusive and was paid with the objects, inter alia, to wipe off the resultant profit of Rs. 4,58,000 accruing to BG against the carried forward loss, with no incidence of tax liability, and to enable the assessee to claim much larger depreciation, etc., on the inflated cost.…

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