In this appeal by assessee, there are several grounds. first of issue is regarding not allowing to capitalise portion of administrative expenses incurred prior to completion of construction of factory building, plant and machinery, etc. plea of assessee was that till construction activity is completed, entire expenses is incurred in carrying out business of construction of factory building and installation of plant and machinery, etc There can be no restriction in capitalisation of these amounts as if had been done by authorities below stating that 87 per cent is relatable to capital and 13 per cent is not relatable to capital. Reliance was also placed on Jaipur Bench in case of Saraf Textile Industries decided on 20 March, 1986 wherein it had been held that all pre-operative expenses are to be capitalised only. Reliance was placed on Challapali Sugars Ltd. vs. CIT 1974 CTR (SC) 309: (1975) 98 ITR 167 (SC), CIT vs. Polychem Ltd. (1975) 98 ITR 574 (Bom) Shree Vallabh Glass Works Ltd. vs. CIT (1981) 127 ITR 37 (Guj), Ballarpur Paper and Shaw Board Mills Ltd. vs. CIT (1979) 10 CTR (Bom) 227: (1979) 118 ITR 613 (Bom), Addl. CIT vs. Rajendra Flour and Allied Industries P. Ltd. (1981) 128 ITR 402 (Del) CIT vs. Hindustan Polymers Ltd. (1985) 45 CTR (Bom) 165: (1985) 156 ITR 860 (Bom). next issue assessee pleaded is in respect of non-allowing capitalisation of interest to tune of Rs.. 1,68,59,106. plea of assessee was that out of this, Rs. 21,54,558 has been wrongly treated as Revenue expenditure. assessee accepted fact that said amount of interest though related to plant and machinery is for period subsequent to commencement of production and but for amendment contained in s. 43(1) regarding cost of assets, said amount is to be treated as part of capital cost only. Reliance was placed on CIT vs. Tinsile Steel Ltd. (1976) 104 ITR 581 (Guj), Ballarpur Paper and Shaw Board Mills Ltd. vs. CIT (1979) 10 CTR (Bom) 227 (1979) 118 ITR 613 (Bom), CIT vs. J.K. Cotton Spinning and Weaving Mills Ltd. (1975) 98 ITR 153 (All), Banamali Tea Estate vs. State of Assam & Ors. (1985) 48 CTR (Gau) 303: (1986) 160 ITR 426 (Gau), CIT vs. Borosil Glass Works Ltd. (1986) 161 ITR 286 (Bom), Bethireddy Rama Koreshna Reddy vs. ITO (1986) 57 CTR (Trib) 26 (Hyd). next plea of assessee was that ground related to investment allowance and relief under s. 80J are consequential to claim of interest being decided. ground nos. 3 and 4 are related to receipt of central subsidy of Rs. 15 lakhs which Department has treated as part of cost contributed by authorities, which is factually wrong and matter has been set at rest by Special (1985) 15 TTJ (Mad) 88 (SB): (1983) 3 ITD 714 (Mad) (SB). Ground No. 5 is related to claim of investment allowance on building construction equipment of Rs. 93,031. Relying on CIT vs. Mysore Iron & Steel Ltd. (1978) 115 ITR 219 (Kar) plea of assessee was that till construction activity is completed only business is that of construction and, therefore, assessee was entitled to investment allowance on said machinery used for construction activity. next issue is in respect of claim under s. 80J which it was fairly conceded before us that Supreme Court in case of Lohia Machines Ltd. & Anr. vs. Union of India & Ors. (1985) 44 CTR (SC) 328: (1985) 152 ITR 308 (SC) and decided issue against as. next issue is in respect of claim depreciation on boiler plant at 15 per cent on ground that it comes in contact with corrosive chemicals. next ground is in respect of claim of extra shift depreciation on weighing machines, which are attached to machineries. Plea was that since they are attached to machineries used in production, they themselves become part of machine on which extra-shift allowance are being granted and, accordingly, claim of assessee was justified. next ground is in respect of expenses on guest house. Placing reliance on Saraswati Industrial Syndicate Ltd. vs. CIT (1981) 24 CTR (P&H) 246: (1982) 136 ITR 361 (P&H) and CIT vs. Parshva Properties Ltd. (1986) 53 CTR (Cal) 151 plea was that accommodations situated about 10 kms. form factory and used mainly by employees and management and, therefore, cannot be treated as guest house. plea of Department, on other hand was that what has not been allowed to be capitalised out of expenses, like salary, travelling, etc. are for reason that they have no relation whatsoever, with construction activity or installation of machinery as such. These are in nature of general expenses which have to be incurred by company whether or not there are construction activities. It was further pleaded that Delhi High Court in case of CIT vs. J.M. Industries Ltd. (1981) 129 ITR 373 (Del) was of view that only expenses which could be said to have any relevance to construction could be capitalised. On issue of interest in view of amendment to s. 43(1), which was effective from 1st April, 1974, claim of assessee is not at all tenable. On issue of subsidy plea of assessee was that since it was given as percentage of cost of investment or assets, it should be treated as contribution of cost by authorities. As far as investment allowance on building equipment is concerned, plea was that investment allowance is to be granted only on assets which are used in business of assessee. On issue of depreciation at 15 per cent on boiler, it was pleaded that boiler is used for generation of steam which steam is pumped into plant where chemicals are used for dyeing purposes. Therefore, there is no question of chemicals being used in plant and, thus, they cannot be said to be coming in close contact with corrosive chemicals. On extra-shift, of weighing machines, he submitted that rule is very clear that no extra-shift is permissible on weighing machines. On guest house expenses, he submitted that s. 37(5) has clearly mentioned that use of any premises even for staff is guest house and, accordingly, expenses have to be disallowed. On redirect counsel for assessee submitted that Delhi High Court decision relied on by Department in fact, supports case of assessee. We have given very careful considerations to arguments of parties. In case relied on by Department, issue involved was determination of actual cost, capitalisation of expenses incurred before commencement of production. expenses were in nature of travelling expenses of Director, technical adviser, auditors remuneration, etc. Delhi High Court was of view that amount to be capitalised has to be looked from point of view of any other person being allowed to carry on construction activity for assessee. Delhi High Court further observed that "it has not been case of Department at any stage that any portion of amount presently in question did not constitute expenditure in relation to business." In present case before us also, it is accepted fact by Department that these are expenses of business. objection of Department is that amounts which assessee is claiming to be capitalised are in nature of routine administrative expenses and that expenses were incurred on exploration of markets, procurement of working capital, etc. further objection was that accounts being had no relation whatsoever, with acquisition or cost or to say increase in cost of depreciable assets, therefore, cannot be added on to cost. expenses of nature of filing of return with Company Law Board also had nothing to do with cost of capital assets. Basically expenses of nature of formation of company, expenses in connection with issue of shares, debentures, prospectus, etc. are shown in balance sheet separately under head Misc. Expenditure. Therefore, to this extent, objection of Department that some of expenses are incurred on above is not proper. As regards expenses which are incurred regarding project as such, like project report, feasibility studies, financial studies, land surveys, location, raw material, acquisition, etc. covered in projects are of nature as defined under s. 35D of IT Act, which expenses are allowable to assessee over period of 10 years from year from which company commences production in particular proportion. Therefore, even these expenses cannot be capitalised and expenses as claimed does not indicate that these are in respect of above. These are also not in nature of financial expenses. These are in nature of indirectly related and incidental to construction. To say that no accounts need to be maintained during period of constructions is folly. general administrative and office expenditure which is indirectly related to or incidental to construction have to be necessarily capitalised. Even maintenance of vehicles as well as depreciation thereon have to be capitalised. expenses incurred are not in nature of and for purposes of work, which would be undertaken after project commences commercial production. usual nature of such expenses are recruitment and training of sales staff, as well as general office staff. It may also include training with foreign collaboration. expenses which are not at all related to construction activity would be salaries of sales Department, publicity Department, and it is not claim of Department that there had been expenses incurred in respect of any publicity to popularise product, which is yet to be manufactured. expenses of nature claimed by assessee are not also on general meeting or secretarial fees which have no relation whatsoever, with construction activity as they may have to incurred whether or not construction has taken place. Therefore, we are of view that restricting expenses on some percentage purely on conjecture is not at all justified. As observed above, expenses which could be identified of nature given above only cannot be capitalised and these expenses are usually in view of general policy of accounting followed by accountants as proposed by Institute of Chartered Accountants of India are not at all capitalised. details of expenses claimed to be indirectly related to construction do not indicate in any way of nature as surmised by Department and, therefore, amount as claimed by assessee need only to be capitalised and that ITO is directed to allow depreciation on these as well as claim by assessee. On claim of capitalisation of interest in view of clarification that is contained in s. 43(1) Expln. 8 which is effective from 1st April, 1974, according to which, any amount payable as interest on borrowal for assets after assets has been put to use shall not be included in actual cost of assessee. Accordingly, amount so claimed cannot be allowed to be capitalised and, therefore, claim of assessee fails and with this claim of investment allowance as well as relief under s. 80J also falls down. On issue of central subsidy it has been repeatedly pointed out that this is as per policy of Government to provide such subsidies as inducement for establishment of industries under industrialisation policy. quantum has to be preferred by assessee on basis of cost incurred quantum has to be preferred by assessee on basis of cost incurred by it on fixed assets, which is used as measure to arrive at. quantum of subsidy to be provided to assessee. Therefore, it would be wrong to treat amount of subsidy or cost contribution. We, therefore, direct ITO to allow depreciation and investment allowance on cost of assets as incurred without reducing therefrom amount of central subsidy. On issue of claim of investment allowance on machinery used in construction work Karnataka High Court in case of CIT vs. Mysore Iron & Steel Ltd. (1978) 115 ITR 219 (Kar) had held that it is allowable on ground that assessee itself carried on construction of its factory and that machinery. observation was "when assessee itself constructed building for expansion of its factory, it did so for purposes of its business. When any machinery was used for such construction, then machinery was used purposes of its business". Department could not bring in any contrary authority to this ruling. Since it is not disputed that machinery was bought by assessee and used for building construction activity which is business till construction activity is completed, claim of assessee appears to be fully justified. Placing reliance on Karnataka High Court decision, we allow this claim of assessee and direct ITO to allow claim after verification of fact of compliance of s. 32A. next issue of 80J in now decided by their Lordships of Supreme Court in case of Lohia Machines Ltd. and Anr. vs. Union of India & Ors. (1985) 44 CTR (SC) 328: (1985) 152 ITR 308 (SC) defining meaning of capital employed which has been followed by CIT(A) and, therefore, we see no merits in ground of assessee . On issue of claim of depreciation at 15 percent on boiler plant, claim of assessee is not at all justified as boiler does not come into contact with corrosive chemicals. On question of claim of extra-shift depreciation on weighing machine, claim would be justified if machines are attached to machineries in production and claim of assessee before us is that these weighing machines are attached to machineries in production. When weighting machine is used just as weighing machine and not connected to machineries used in production no extra-shift allowance is available. However, rules under extra-shift allowance in item No. 10 have specifically provided that weighing machines are not entitled to extra-shift allowance. Therefore, claim is not justified. On issue of guest house expenses in view of provisions that is contained in s. 37, which has retrospective effect whereby accommodation meant for providing lodging and boarding for employees as well as management is to be treated as guest house, we have to only uphold orders of authorities below. appeal is partly allowed. *** MODERN SYNTEX (INDIA) LTD. v. INCOME TAX OFFICER