Case: Saharanpur Electric Supply Co. Ltd. Etc. Etc Vs. Commissioner Of Income-Tax Etc.Etc

133 : 1976 (103) ITR 123 , 132 : 1977 AIR(SC) 552) relied upon by counsel 2. The language used in the provision 20. It was next suggested that there is an indication in the language of section 43(6) itself to show that it is available to be invoked only in respect of assets which had been acquired in earlier years. Reference is made in this context to the use of the words "as has been met" in Section 43(1) and the use of similar language in the notes on clauses of the corresponding provision in the Income Tax Bill, 1961 (42) ITR 161 (Supp)) It is argued that if the intention had been that the actual cost of assets which had been acquired earlier to the previous year should also be covered, the legislature would have used the words "as had been met". In support of this contention, Sri Dastur referred to the decision in Carson v. Carson and Stoyek ( 1964 (1) ALLER 681: 1964 (1) WLR 511). In that case Section 3 of the Matrimonial Causes Act, 1963, which came into operation on July 31, 1963, provided that "adultery which has been condoned shall not be capable of being revived". While it was quite clear that, as a result of this provision, no petition could rely on a course of conduct subsequent to July 31 as reviving previous condoned adultery, the question that arose was whether the section had retrospective effect and whether a course of conduct before that date could be relied upon as reviving previously condoned adultery. The question was answered in the negative. We do not think that the decision is of any help in the present context. The nature of the provisions with which we are concerned and the mode of its operation are totally different. The use of the words "has been met" is very appropriate and proper in the present context once we understand the mechanics of the provision. As we have already explained, it is incontrovertible that, under Section 43(1) read with Section 43(6) the officer has to determine the actual cost for all assets, new and old, and the definition in Section 43(1) only requires that, at the time of doing so, he has to examine whether the actual cost has been fully laid out by the assessee or has been met by someone else in whole or in part. The words "has been met" squarely fit into this reading of the section and it is difficult to accept the suggestion that the use of the words "has been met" lends support to an interpretation restricting the definition in Section 43(1) to assets acquired in the previous year 3. Absurdities and anomalies 21. It is contended that the Revenues interpretation will result in absurdities and anomalies. The first of these is said to be that it may lead to the computation of a negative written down value and consequent difficulties in applying various other statutory provisions. We have already negatived this contention and pointed out that the proviso to clause (c) really places a limitation on the depreciation deductible at any point of time and, hence, there can never be a negative written down value as contended. The second anomaly is said to be that the interpretation favoured by the Revenue is incompatible with the terms of Explanations 2, 4 and 6 to Section 43(6). We see no such difficulty. Explanations 2 and 4 fall in line with the suggested interpretation, once it is understood that the reference to "depreciation actually allowed" should be read subject to the limitation of clause (c) of the proviso to Section 10(2)(vi) [now Section 34(3)]. Explanation 6 offers no difficulty as the relationship as "parent" and "subsidiary" between the companies involved in the transfer for the purposes of this clause has to be determined as at the time of the transfer of the asset and will not be a wobbling or fluctuating one as suggested by counsel for the assessee. Another difficulty pointed out is that the interpretation put forward by the department might lead to difficulties in the calculation of assessable profits under Section 41(2) or the allowance under Section 32(1) (iii). Sri Ramachandran illustrate the difficulty by giving the instance of an asset purchased for, say, Rs. 10, 000 entirely with monies contributed by others. If the asset had been purchased in 1958 and was eligible for depreciation at 10 per cent., the assessee would have secured depreciation of Rs. 2, 710 in the assessment years 1959-60, 1960-61 and 1961-62. Suppose in the previous year relevant to the assessment year 1963-64, it is sold for Rs. 5, 000. Mr. Ramachandran points out that, according to the departments interpretation the actual cost of the asset will be nil and, therefore, its written down value at the end of the previous year relevant for the assessment year 1962-63 would be nil with the result that the entire sum of Rs. 5, 000 for which the asset is sold would become chargeable under Section 41(2). In other words, the assessee will have to pay tax or Rs. 5, 000 by way of balancing charge though he had been allowed depreciation only to the extent of Rs. 2, 710. Again if the asset is sold for Rs. 2, 500 in the previous year relevant for assessment year 1963-64, according to the department he will have to pay a tax on Rs. 2, 500 whereas under the old provisions he would have got an allowance under Section 32(1)(iii). But this is only a seeming anomaly. For, the sums of Rs. 5, 000 and Rs. 2, 500 would be taxed not as a balancing charge but as capital gains which is quite consistent with the departments position that, the assessee having paid nothing for the asset, its actual cost should be taken at nil, a stand in which there is no absurdity. We do not, therefore, think that any difficulty or anomaly results from the interpretation suggested

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]3. It will be seen from the main paragraph of sub-section (1) of Section 43 that it does not really define what is meant by the actual cost of an asset to the assessee; it only contains a gloss that, whatever the expression may mean, that figure has to be reduced by that portion of it, if any, as has been met directly or indirectly by any other person or authority. The question before us arises partly due to this circumstance and partly due to the earlier legislative history of these provisionsIn view of the consensus of views of the High Courts against them, they have taken considerable pains to address elaborate arguments which merit serious consideration in these appeals10. Attractive as this argument appears, there are two difficulties in accepting it. The first is the language of Section 43(6) and, even its predecessor section 10(5)(a) of the 1922 Act. Though, in substance, depreciation on an asset for any assessment year is calculated on its written down value which is normally carried forward from an earlier assessment year, the phraseology of the Act does not bear out the contention that the actual cost of the asset has to be determined only once, viz., in the previous year of its acquisitionIn the light of these decisions and the clear language of the statute, it is not possible to accept the contention that the Income tax Officer had no justification to compute first the actual cost of an asset which had been acquired before the previous year. The second difficulty in the way of accepting the argument of Dr. Pal is that, whatever its validity over the period of continuous operation of the same Act (of 1922 or 1961), it can have no application for the assessment year 1962-63. There is no provision in the 1961 Act which permits or compels the adoption or continuance of the figure of actual cost and written down value determined under the provisions of the earlier statute which has been repealed by the 1961 Act. We, therefore, reject this contention of Dr. Pal12. We are of the view that it is difficult to read any limitations into the statutory provision in section 43(6) as contended for by counsel. As already explained, the definition envisages the computation of the actual cost of each asset, for every assessment year, not only in respect of assets acquired during the previous year but also in respect of assets acquired before the previous year. This naturally has to be done with reference to the factual or legal position that may prevail during the relevant previous year and can be taken into account for the relevant assessment year. The section does not say that the computation of the actual cost of the asset has to be based only on the facts or law as they stood at the time of acquisition of the asset and as could have been taken into account for the assessment year relevant to the previous year of acquisition. It is one thing to contend, as Dr. Pal did, that once the actual cost as at the date of acquisition has been computed, that figure is final and cannot be interfered with subsequently. But that contention is not acceptable for reasons already discusses. Once it is conceded that the figure of actual cost can require modifications it is not possible to confine such modifications in the manner contended for by Sri Dastur. Where subsequent information - factual or legal reveals that the actual cost determined originally was wrong, there can be no doubt that the original figure of actual cost has to be altered, if need be, and if possible, by reopening the earlier assessment and, if that be not possible, at least for the futureWe are not concerned with that aspect here. All that is relevant is that this is a decision which permits an alteration in the figure of actual cost consequent on subsequent factual occurrences that do not relate back. It also shows that the actual cost for 1961-62 could be scaled down for the assessment year 1962-63. There are also other decisions which make it clear that the original cost of an asset may change after the year of installation or erection as a result of further liabilities arising later13. These apart, there are clearly situations in which the actual cost does get altered prospectively and not retrospectively. One such instance is where the cost of an asset increases or decreases on account of a fluctuation in the value of the currency. Suppose an asset was purchased in 1965 for $ 10, 000 (equivalent to say, Rs. 1, 00, 000) and the price or the moneys borrowed by the assessee in foreign currency for its payment, remained outstanding. The devaluation of the rupee in June 1966 would result in the increase of the price to say, Rs. 1, 20.000. It may be arguable whether this is a retrospective enhancement in the price or not. But it would be only reasonable to say that the actual cost has increased to Rs. 1, 20, 000 in June 1966 and that the assessee should be entitled to the grant of depreciation and other allowances at least thereafter, on the basis of the altered cost. This is what section 43-A provides. Another situation would be where, subsequent to the acquisition of the asset, substantial capital expenditure has been incurred thereon (not amounting to the addition of a separate asset on which depreciation, etc. could be independently allowed). Such expenditure is added, under the rules, in practice to the actual cost and allowance given thereon subsequently, vide : the third column in the table set out at p. 878 in Habib Hussain ( 1963 (48) ITR 859 (Bom)) . This is quite correct and fully accords with the departments interpretation of the provision. On the assessees interpretation, no such increased allowances can at all be granted as there is no other provision permitting the additional cost being taken into account as part of the actual cost even for years subsequent to the addition or alteration. In principle, therefore, we are unable to accept the contention that the actual cost cannot be determined year after year on the factual or legal position applicable for the relevant previous year and that the actual cost once determined cannot be altered except in the three situations outlined by counsel where the original figure itself requires a modification16. Examining the provisions with which we are concerned in the light of the principles succinctly summarised above, it will be apparent that what we are concerned with here is not at all a case of retrospective operation of the statute. It is not the case of the Revenue that the actual cost as determined in the assessment year 1962-63 should be applied to revise the computations for earlier years. All that the department says is that, though in respect of these particular assets, the assessee might have obtained depreciation for earlier assessment years on the basis of a higher figure, that will no longer be available in future and that the figure of actual cost should be taken not as was originally calculated but only at a lower figure for the assessment years 1962-63 and onwards. It is just the case of a provision, a part of the requisites for the operation of which is drawn from a time antecedent to its passingThis argument is based on the provisions of clause (c) of the proviso to Section 10(2)(vi) of the 1922 Act (corresponding to Section 34(3) of the 1961 Act) which lays down that the aggregate of all deductions in respect of depreciation made in the Act or its predecessor Act shall "in no case exceed the actual cost to the assessee of the building, machinery, plant, furniture, structure or work, as the case may be"If, on the basis of the depreciation already granted, the written down value of the asset becomes too low and the assessee is able to sell the asset for a higher price, the surplus is brought to tax. On the other hand, where the depreciation allowed is inadequate and the amount realised by the assessee on the sale, demolition or destruction of the asset is much less than the written down value, the assessee is allowed to write off the difference between the written down value and the scrap value of the asset. In other words, the Act has provided a machinery which ensures that the assessee gets by way of depreciation allowance which is correlated to reality. According to him, this right of the assessee, whether it is described as a vested right or an existing right, is affected by the provision with which we are presently concerned18. We are of the opinion that these contentions are unfounded. It is incorrect to view the position as if, when an assessee acquires an asset, he acquires a right to obtain depreciation thereon equal to the actual cost of the asset as originally determined for the purposes. The effect of clause (c) of the proviso to Section 10(2)(vi) of the 1922 Act and Section 34(3) of the 1961 Act is only this that, while allowing depreciation in respect of any asset the officer should be careful to see that the aggregate of the depreciation allowed to the assessee in respect of that asset does not exceed the actual cost of the asset. In other words, as and when the provision is applied for each and every assessment year and the depreciation on any asset is calculated, it should be ensured that the depreciation allowed does not exceed the actual cost of the asset. In other words, the actual cost referred to is not the actual cost as originally determined at the time of acquisition. Thus, in the cases before us, while examining whether a particular asset is entitled to any depreciation for the assessment year 1962-63, the officer will find that it has already secured depreciation much more than the actual cost of the asset as determined by him and will grant no further depreciation in respect thereof. It is no doubt true that in past years the asset had become eligible to amounts of depreciation the aggregate of which exceeds the actual cost as presently determined and, if that depreciation is deducted from the actual cost subsequently arrived at, a negative figure may result. But such a situation will arise even in the category of cases in which, according to counsel, the revision of actual cost is permissible. Thus, even in Karnani Industrial Bank ( 1954 (25) ITR 558 (Cal) cited by him, the assessee had obtained for earlier years depreciation far exceeding the real cost of the asset. This is an "anomaly" which arises because the assessee was erroneously granted higher depreciation than what he deserved. But, even here, there was no negative written down value in earlier years and, equally, there will be none in the year of revision as the effect of the proviso is not to produce a negative written down value but only to preclude further grant of depreciation on the asset in future. Read thus as a limitation on the maximum amount of depreciation that an assessee can claim in respect of a particular asset, there is no question of arriving at a negative written down value. We are, therefore, unable to accept the contention of counsel that the interpretation contended for by the Department operates against the well known principle that retrospective operation - assuming that the provision has a retrospective effect - should not be presumed where existing or past rights are interfered with19. Nor do we think that there is any doubt or ambiguity about the provision. It is clear and explicit, as already pointed out, that the actual cost has to be determined, in each assessment year, even of assets acquired before the commencement of the previous year relevant to the assessment year. Not only is this intention plain and clear, it does not create any injustice or hardship; on the contrary, it is only reasonable and just. It should be remembered that the object of the provision dealing with the grant of depreciation is, generally speaking, to enable him to get the capital expenditure incurred by him in acquiring the asset written off to his profits over the years though it is true that, in certain situations, the statute specifically relaxes this rigidity. In earlier years, he had been obtaining depreciation on a particular footing. But the language used lent itself to an interpretation that the could get a deduction even in respect of expenditure he did not incur. The correctness of this interpretation is not in doubt. Where a person purchases an asset, it may be correct to say that the cost of the asset does not change because a part of the cost is met by some one else. But the legislature had to decide whether an assessee should be allowed to claim an allowance of depreciation in respect of the asset on the artificial basis of the cost of the asset rather than what he has actually spent to acquire that asset and whether the wording of the original provision, as interpreted by courts, had not conferred an undue advantage or benefit on the assessee. This was not considered by the legislation. It accords with reason that the provision should be interpreted to say that, at least after the amendment, the assessee should not be allowed depreciation on the basis of the earlier figure of actual cost. It is, therefore, incorrect, in our opinion, to describe this provision as creating any undue hardship or injustice or inconvenience to an assesseeWe do not think that the decision is of any help in the present context. The nature of the provisions with which we are concerned and the mode of its operation are totally different. The use of the words "has been met" is very appropriate and proper in the present context once we understand the mechanics of the provision. As we have already explained, it is incontrovertible that, under Section 43(1) read with Section 43(6) the officer has to determine the actual cost for all assets, new and old, and the definition in Section 43(1) only requires that, at the time of doing so, he has to examine whether the actual cost has been fully laid out by the assessee or has been met by someone else in whole or in part. The words "has been met" squarely fit into this reading of the section and it is difficult to accept the suggestion that the use of the words "has been met" lends support to an interpretation restricting the definition in Section 43(1) to assets acquired in the previous yearThe second anomaly is said to be that the interpretation favoured by the Revenue is incompatible with the terms of Explanations 2, 4 and 6 to Section 43(6). We see no such difficulty. Explanations 2 and 4 fall in line with the suggested interpretation, once it is understood that the reference to "depreciation actually allowed" should be read subject to the limitation of clause (c) of the proviso to Section 10(2)(vi) [now Section 34(3)]. Explanation 6 offers no difficulty as the relationship as "parent" and "subsidiary" between the companies involved in the transfer for the purposes of this clause has to be determined as at the time of the transfer of the asset and will not be a wobbling or fluctuating one as suggested by counsel for the assessee. Another difficulty pointed out is that the interpretation put forward by the department might lead to difficulties in the calculation of assessable profits under Section 41(2) or the allowance under Section 32(1) (iii)In other words, the assessee will have to pay tax or Rs. 5, 000 by way of balancing charge though he had been allowed depreciation only to the extent of Rs. 2, 710. Again if the asset is sold for Rs. 2, 500 in the previous year relevant for assessment year 1963-64, according to the department he will have to pay a tax on Rs. 2, 500 whereas under the old provisions he would have got an allowance under Section 32(1)(iii). But this is only a seeming anomaly. For, the sums of Rs. 5, 000 and Rs. 2, 500 would be taxed not as a balancing charge but as capital gains which is quite consistent with the departments position that, the assessee having paid nothing for the asset, its actual cost should be taken at nil, a stand in which there is no absurdity. We do not, therefore, think that any difficulty or anomaly results from the interpretation suggested