Commissioner Of Income-Tax, Bombay City-I v. Bombay Suburban Electric Supply Co. Pvt. Ltd.

Tulzapurkar, J.:— In this reference made under section 66(1) of the Indian Income-tax Act, 1922, the following question has been referred to us for our decision at the instance of the Commissioner of Income-tax, Bombay City I, Bombay:

“Whether, on a proper interpretation of section 10(5) and section 10(2)(vib) of the Indian Income-tax Act, 1922, the contributions received from the Government or public or local authorities can be deducted in arriving at the actual cost of the machinery for purposes of allowance of development rebate under section 10(2)(vib)?”

2. The few facts giving rise to this question may be stated: The question relates to the assessment year 1961-62, the corresponding previous year being the year ended on March 31, 1961. The assessee, Bombay Suburban Electric Supply Co. Pvt. Ltd., is a company which generates and distributes electricity. During the relevant previous year the assessee-company installed machinery of the total value of Rs. 53,44,232. It claimed development rebate amounting to Rs. 13,36,060 on the said machinery under section 10(2)(vib) of the Act. Admittedly, for installing this machinery the assessee had received contributions of Rs. 1,36,436 from the Government or public or local authorities. In determining the actual cost on the basis of which the development rebate was claimed, the assessee did not deduct these contributions amounting to Rs. 1,36,436 from the total value of Rs. 53,44,232. Incidentally, it may be stated that for the purpose of depreciation the claim was made on the net cost after deducting contributions received from the Government or public or local authorities. The Income-tax Officer took the view that definition of the expression “actual cost” occurring in the Explanation to section 10(5) clearly provided for a deduction on this account. He, accordingly, deducted the contributions received from the Government or public or local authorities and allowed development rebate on the balance. The amount actually allowed came to Rs. 13,35,025. The matter was carried in appeal by the assessee-company to the Appellate Assistant Commissioner, who confirmed the Income-tax Officer's order. He rejected the assessee's contention that the Income-tax Officer was not correct in taking the view that the Explanation under section 10(5) would also cover the item of development rebate under section 10(2)(vib). The matter was carried in second appeal by the assessee-company to the Appellate Tribunal and the assessee-company raised the self-same contention, namely, that the Explanation to section 10(5) has no application to the provisions of section 10(2)(vib). The Tribunal accepted the contention and held that the Explanation to section 10(5) had been introduced only for the purpose of defining the words “actual cost” occurring in section 10(5) which opens with the words “For the purposes of this sub-section” and that it could not be given a larger operation than what had been conceived for it by the legislature. It, therefore, held that when the Explanation did not have application, the matter was governed by the decision of this court in the case of Commissioner of Income-tax v. Poona Electric Supply Co. Ltd., [1946] 14 ITR 622 (Bom) and it, therefore, allowed development rebate on the entire value of the machinery without deducting therefrom the contributions received by the assessee-company from the Government or public or local authorities. As stated above, at the instance of the Commissioner of Income-tax, the question indicated above has been referred to us for our decision.

3. In order to appreciate the contention that was urged on behalf of the revenue by Mr. Joshi before us it would be necessary to refer to the material provisions of section 10. Under the main provision, which is to be found in section 10(1), it has been provided that the tax shall be payable by an assessee under the head “profits and gains of……” in respect of the profits or gains of any business…… carried on by him. Under sub-section (2) it has been provided that such profits or gains shall be computed after making certain allowances which have been specified thereunder. Two of such allowances are depreciation allowance under sub-section (2)(vi) and development rebate under sub-section (2)(vib). The material provision with which we are concerned in the instant case is the latter and it runs as follows:

“in respect of a new machinery or plant installed after the 31st day of March, 1954, which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of acquisition of the …… installation of the machinery or plant, equivalent to,—

(ii) in the case of machinery or plant installed before the 1st day of April, 1961, twenty-five per cent and in the case of machinery or plant installed after the 31st day of March, 1961, twenty per cent of the actual cost of the machinery or plant to the assessee……”

4. It was relying upon the aforesaid material provisions which are to be found in section 10(2)(vib) that the assessee-company had claimed development rebate on the total value of the new machinery that was installed in the relevant previous year, the total value being Rs. 53,44,232, as according to the assessee-company that was the actual cost of the machinery or plant to the assessee.

5. We may then set out the material Explanation to section 10(5) on which reliance has been placed by Mr. Joshi on behalf of the revenue. It may be stated that sub-section (5) of section 10 is nothing but an interpretation clause which sets out the definitions of certain expressions like “paid”, “plant” and “written down value”. After setting out definitions of these three expressions, the Explanation runs thus:

“Explanation.— For the purposes of this sub-section, the expression ‘actual cost’ means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by Government or by any public or local authority, and any allowance in respect of any depreciation carried forward under clause (b) of the proviso to clause (vi) of sub-section (2) shall be deemed to be depreciation ‘actually allowed’.”

6. The contention of Mr. Joshi has been that since the expression “actual cost” has been explained in this Explanation in a particular manner, namely, that it would mean the actual cost of the assets to the assessee reduced by that portion of the cost thereof as has been met directly by Government or by any public or local authority, the said expression as occurring in section 10(2)(vib) should be construed accordingly and the actual cost on which development rebate that could be allowed to the assessee would be the total value of the new machinery installed by the assessee minus the contributions which the assessee received from the Government, public or local authority. In other words, according to Mr. Joshi, the development rebate had been rightly allowed by the Income-tax Officer and later by the Appellate Assistant Commissioner after deducting from the value of the total cost the amount of contribution which the assessee-company received from the Government or public or local authority. It is not possible to accept this contention of Mr. Joshi for more than one reason. In the first place, the Explanation opens with the words “For the purposes of this sub-section” and, therefore, the definition of “actual cost” as given in this Explanation will have to be considered only while considering the expression “paid”, “plant” and “written down value” which have been defined in sub-section (5) of section 10 for the purposes of sub-section (2) of section 10. The expression “written down value” in so far as is material for our purpose has been used in sub-section (2) of section 10 only in connection with depreciation allowance which has been mentioned in section 10(2)(vi) and not in section 10(2)(vib). In other words, therefore, the Explanation cannot be given any larger operation than what the legislature intended it should have. If the Explanation is, therefore, not applicable to a case where the allowance that is required to be considered is one of development rebate, the provisions of section 10(2)(vib) will only govern and the expression “actual cost of machinery or plant to the assessee” will have to be interpreted without invoking the Explanation in question. If that be so, there is nothing in section 10(2)(vib) to indicate that the actual cost of machinery or plant, etc., to the assessee-should be the one which has come out of the coffers of the assessee alone and should not include the contributions received from Government or public or local authority.

7. It was not disputed before us by Mr. Joshi that in the case of Commissioner of Income-tax v. Poona Electric Supply Co. Ltd., [1946] 14 ITR 622 (Bom) this court has taken the view that the actual cost is to be determined irrespective of the source from which the cost has been met. In other words, notwithstanding the receipt of certain contributions from Government or public or local authorities the “actual cost” will have to be the amount spent on the assets in respect of which the development rebate is claimed. In other words, the expression “actual cost” means nothing more than the actual cost actually ascertained, i.e, the amount paid for the assets.

8. Mr. Joshi then contended that the expression “actual cost…… to the assessee” occurring in section 10(2)(vib) should normally mean the cost which the assessee had spent from his own coffers and it cannot be said that if part of the cost is met by the assessee by receiving contributions from Government or public or local authority, that part of the cost would be any cost to the assessee. It is not possible to accept this contention for the reason that if once the Explanation to section 10(5) is out of the way as has been decided by this court in Commissioner of Income-tax v. Poona Electric Supply Co. Ltd., [1946] 14 ITR 622 (Bom) the actual amount paid for the assets irrespective of the source from which the cost is met would be the actual cost to the assessee. If regard be had to the Explanation to section 10(5), on which strong reliance was placed by Mr. Joshi, this aspect will become very clear. Even while explaining the expression “actual cost” under the Explanation the legislature has clearly stated that the expression “actual cost” means the actual cost of the assets to the assessee reduced by that portion of the cost thereof as has been met directly or indirectly by Government or by any public or local authority; in other words, the legislature was required to make a specific provision to exclude the contribution received from Government or public or local authority in order to give a particular meaning to the expression “actual cost of the assets to the assessee”. Therefore, ordinarily, the expression “actual cost of the assets” must mean the actual amount paid for the assets irrespective of the source from which the cost or part thereof has been met. Reference may also be made to an English decision in the case of Birmingham Corporation v. Barnes, [1935] 3 ITR (Eng Cas) 26, where in considering the words “to the person” occurring in a similar provision in the U.K Act, Lord Atkin, speaking for a unanimous House of Lords, observed as follows:

“But it is said that the words ‘to the person’ in the phrase ‘actual cost to the person’ plainly indicate that the section is intending to confine the relief to an aggregate equal to the sum of money which the person has defrayed out of his own resources, the cost of the burden which has ultimately fallen upon him. I confess I do not think that this is the natural meaning of the words. What a man pays for construction or for the purchase of the work seems to me to be the cost to him; and that whether some one has given him the money to construct or purchase for himself, or before the event has promised to give him the money after he has paid for the work, or after the event has promised or given the money which recoups him what he has spent.”

9. Similar expression occurring in section 10(2)(vib) will have, therefore, to be construed as being referable to the cost which the assessee has paid for acquiring the machinery or plant irrespective of the source from which the said cost or part thereof has been met.

10. Mr. Joshi next relied upon the material provision of the new Income-tax Act, 1961, and he invited our attention to section 43 of the 1961 Act where the expression “actual cost” has been given the meaning as the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. His contention was having regard to such a provision which is to be found in the new Act, the provisions which are to be found in the old Act should also be construed in a similar manner. It is not possible to accept this contention of Mr. Joshi for the simple reason that section 43 which contains the definitions of several expressions including the expression “actual cost” gives those definitions for the purposes of sections 28 to 41 and section 33 is one of the sections included in these sections which deals with development rebate. The position under the new Act is, therefore, entirely different; since we are concerned with the provisions of the old act in the instant case, reliance on the new provisions could not be of assistance to Mr. Joshi.

11. The question referred to us is, therefore, answered in the negative and in favour of the assessee.

12. Department will pay the costs of the reference to the assessee.