Law:

Section:

Section 43(1) of the Income-tax Act, 1961 - Actual cost - Assessee company, engaged in business of condensed milk, incurred expenditure on purchase of milk to test plant and machinery before the same was ready to commence commercial production-Whether said expenditure could be regarded as part of "actual cost" for purpose of computing allowance for depreciation and development rebate-Held, yes Facts The assessee-company was engaged in the business of condensed milk. After the factory had been erected, but before it was ready for commercial production, certain trial runs were made regarding the working of the newly in-stalled machinery. For this purpose, milk worth Rs. 41,411 was purchased. The waste product was Rs. 18,342. The difference, which amounted to Rs. 23,069, was capitalised by the assessee-company and the same was in-cluded in the actual cost of the plant and machinery. The ITO did not entertain assessee's claim. The AAC, on appeal, upheld the ITO's order but the Tribunal, on second appeal, upheld the assessee's claim holding that the machinery could not be said to be installed unless its working conditions were ensured beyond doubt and for this purpose, the installed machinery had to be worked and experimenta-tion had to be made. On reference: Held The cost of acquiring a capital asset involves (a) the purchase of the machinery, (b) the cost of installing the same, (c) the payment of wages for labour, etc., and almost all the costs which are made or properly incurred for the purpose of setting up the factory such as electricity, transport and so on. Accordingly, the purchase of milk for experimental purposes to test out the factory would also be a capital expenses unless it could be said that the expense was not a proper expense involved in the installation proceedings. The setting of a factory cannot be said to be complete unless some sort of trial or test runs are made and the rules of account-ancy have to be applied in a reasonable manner keeping in view the ordinary practice of the business community in such matters. Viewed from this angle, the expenses involved in pur-chasing the milk and determining whether the factory was in a proper working…

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