Tax Case No. 424 of 1970 (Reference No. 130 of 1970)

Decided on June 22, 1976

The Judgment of the Court was delivered by

Ismail, J.:— The Income-tax Appellate Tribunal, Madras Bench, under section 256(1) of the Income-tax Act; 1961, has referred the following question of law for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the income-tax authorities were not justified in deducting a sum referable to the contribution made by the private consumers in determining the actual cost of the house service connections which were given prior to April 1, 1961, for the purpose of allowing depreciation on the written down value for the assessment years 1962–63 to 1967-68?”

2. The assessee is a company carrying on business in the distribution of electricity. In the return filed for the assessment year 1962–63, the assessee showed a sum of Rs. 7,07,990 as written down value of the capital expenditure incurred for laying house service connections prior to the previous year, relevant to the assessment year 1962–63, and claimed depreciation thereon at ten per cent. The Income-tax Officer found that this sum of Rs. 7,07,990 included a sum of Rs. 3,39,537 being the portion of the cost of house service connections met by the consumers. The cost of Rs. 3,39,537 met by the consumers was not deducted from the actual cost for allowing depreciation for the assessment years earlier to 1962–63, since such deduction was permitted under the Indian Income-tax Act, 1922, only if it is contributed by the Government or by any public or local authority. For the assessment year 1962–63 and for the subsequent years, the Income-tax Officer computed the written down value of the house service connections after deducting the cost of Rs. 3,39,537 met by the consumers and allowed depreciation only on the balance of Rs. 3,68,453 in view of the change in the law brough about by section 43(1) of the Income-tax Act, 1961. The assessee preferred an appeal to the Appellate Assistant Commissioner, who confirmed the conclusion of the Income-tax Officer. On further appeal preferred by the assessee, the Income-tax Appellate Tribunal reversed the conclusion of the Income-tax Officer and the Appellate Assistant Commissioner, and held that the provision contained in section 43(1) of the Income-tax Act, 1961, will apply only to assets acquired subsequent to April 1, 1961, and that consequently the consumers' contribution should not be deducted from the total cost for arriving at the actual cost. It is the correctness of this conclusion that is being challenged in the form of the question referred to above. Admittedly, the assets in this case came into existence prior to the coming into force of the Income-tax Act, 1961, on April 1, 1962. The Explanation to section 10(5) of the Indian Income-tax Act, 1922, stated;

“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’.”

3. However, section 43(1) of the Income-tax Act, 1961, made a departure in this behalf. That section, so far as it is relevant for the purpose of this case, states:

“In sections 28 to 41 and in this section, unless the context otherwise requires—

(1) ‘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 any other person or authority.”

4. The difference in the sections is clear and obvious. While the Explanation to section 10(5) of the Indian Income-tax Act, 1922, authorised the deduction of contributions made by any public or local authority, section 43(1) of the Income-tax Act, 1961, authorises the deduction of any contribution made by any person or authority. Consequently, the contributions made by consumers could not have been deducted under the Explanation to section 10(5) of the 1922 Act, but the same shall be deducted under section 43(1) of the 1961 Act.

5. Section 32 of the Income-tax Act, 1961, deals with “depreciation” and section 43 deals with the definitions of certain terms relevant to income from profits and gains of business or profession and in that context defines the expression “actual cost” in sub-section (1) and similarly it defines the term “written down value” in sub-section (6). So far as it is relevant, section 43(6) states:

“‘written down value’ means—

(a) in the case of assets acquired in the previous year, the actual cost to the assessee;

(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force:…………..”

6. Though it is only section 43(6)(b) that it is immediately relevant for the purpose of this case, because of the use of the expression “actual cost” occurring in that provision, we are thrown back on the definition of that expression occurring in section 43(1).

7. The contention of the assessee before the Tribunal, which found favour with that Tribunal, was that the definition of “actual cost” occurring in section 43(1) of the Income-tax Act, 1961, should be applied only to assets coming into existence subsequent to April 1, 1961, and that in respect of assets which came into existence prior to April 1, 1961, the definition of the term “actual cost” occurring in the Explanation to section 10(5) of the Indian Income-tax Act, 1922, alone should be applied. The significance of April 1, 1961, is that though the Income-tax Act, 1961, came into force on April 1, 1962, and governed the assessment year 1962–63, the previous year for that assessment year would ordinarily commence on April 1, 1961, and that was the reason why such a contention was put forward before the Tribunal. The Tribunal accepted this contention by giving two reasons in support of its conclusion. One is that section 43 of the Income-tax Act, 1961, itself opens by saying:

“In sections 28 to 41 and in this section, unless the context otherwise requires—”

8. Therefore, according to the Tribunal, the context of section 43(1) requires that the expression “actual cost” occurring in section 43(6)(b) should be understood as defined in the Explanation to section 10(5) of the Indian Income-tax Act, 1922, since the assets came into existence when that Act was in force. The second reason given by the Tribunal is Explanation (4) to section 43(1). That Explanation is as follows:

“Where assets which had once belonged to the assessee and had been used by him for the purposes of his business or profession and thereafter ceased to be his property by reason of transfer or otherwise, are re-acquired by him, the actual cost to the assessee shall be the actual cost to him when he first acquired the assets less the depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922, diminished by any loss deducted, or, as the case may be, increased by any profit assessed, under the provisions of clause (iii) of subsection (1), or clause (ii) of sub-section (1A) of section 32 or sub-section (2) or sub-section (2A) of section 41 of this Act or under the corresponding provisions of the Indian Income-tax Act, 1922, or the actual price for which the asset is re-acquired by him, whichever is the less.”

9. It is conceded before us that there is no decision of any court of this country on the point arising in this case. Consequently, we have to consider this question purely as one of construction of the relevant statutory provisions. We are of the opinion that the two reasons given by the Income-tax Appellate Tribunal for coming to the conclusion that the definition of the term “actual cost” contained in section 43(1) of the Income-tax Act, 1961, will apply only to the assets which came into existence on or after April 1, 1961, are neither valid nor relevant.

10. In the first place, the expressions occurring in the beginning of section 43, “Unless the context otherwise requires—”, do not lead to the inference that in section 43(6)(b), the expression “actual cost” should be understood only as defined in the Explanation to section 10(5) of the Indian Income-tax Act, 1922. As a matter of fact, the very language of section 43(6)(b) will show that that provision applies both to assets which came into existence prior to April 1, 1961, and the assets which came into existence after April 1, 1961. The very reference to “depreciation actually allowed under the Indian Income-tax Act, 1922” in section 43(6)(b) will indicate that the said provision applies to assets which came into existence before April 1, 1961, also.

11. Secondly, once the Indian Income-tax Act, 1922, has been repealed by the Income-tax Act, 1961, there being no provision in the 1961 Act keeping alive the definition of the term “actual cost” occurring in the Explanation to section 10(5) of the 1922 Act for further application, there is no question of the definition contained in the old provision being applied for the purpose of arriving at the written down value as contemplated by section 43(6)(b) of the 1961 Act. We may make it clear in this context that it was not disputed before us by the counsel for the assessee that the written down value can be determined afresh in each year and what was determined in one year need not necessarily be taken to be the written down value in the next succeeding year.

12. Therefore, we are of the opinion that there is nothing in the context of sections 28 to 41 or section 43 of the Income-tax Act, 1961, to compel the court to conclude that the definition of the term “actual cost” occurring in section 43(1) should be applied only to assets which came into existence on or after April 1, 1961.

13. The context will be the other way. A person like the assessee in the present case was getting the benefit of depreciation allowance in respect of a portion of his assets brought into existence out of the contributions made by the consumers, to which they would not be normally entitled. As a matter of fact, such a benefit was enjoyed only by an assessee like the one in the present case who happened to be engaged in the business of distribution of electricity. No other business had the benefit of receiving contribution from its customers towards the cost of its assets. Thus, the depreciation allowance in question given to a person like the assessee in the present case on the basis of the definition of “actual cost” contained in the Explanation to section 10(5) of the Indian Income-tax Act, 1922, was an anomaly and it was that anomaly which was sought to be removed by the altered provision made in section 43(1) of the Income-tax Act, 1961.

14. The second reason given by the Tribunal also, in our opinion, is totally irrelevant. As the Tribunal itself points out in the course of its order, the purpose of Explanation 4 to section 43(1) of the 1961 Act is obviously to see that an assessee is not permitted to claim a higher depreciation allowance by resorting to the ruse of transferring an asset and subsequently re-acquiring it at a higher price, The Tribunal proceeds to state:

“The effect of this Explanation (Explanation 4 to section 43(1)) is that where an assessee transfers an asset which was acquired by him when the 1922 Act was in force and later re-acquires it, the actual cost in respect of that asset ‘shall be the actual cost to him when he first acquired the asset less the depreciation actually allowed’ etc………. Now, there can be no dispute that in such a case the actual cost when the assessee first acquired the asset would be the actual cost as defined in the 1922 Act. This Explanation in our opinion clearly indicates the intention of the legislature regarding the treatment to be given to assets acquired prior to the 1961 Act. Again there is no reason why an assessee who acquired an asset under the 1922 Act, but did not resort to a ruse which would bring him within the terms of the said Explanation, should be discriminated against by the application of the definition of the expression ‘actual cost’ as contained in the 1961 Act.”

15. We are not expressing any opinion as to whether the Tribunal was right or not in its interpretation of Explanation 4 to section 43(1) in so far as it stated that in respect of assets acquired prior to April 1, 1961, the actual cost of such assets for the purpose of that Explanation should be determined only with reference to the definition of that expression in the Indian Income-tax Act, 1922. All that we are pointing out is whether that interpretation is correct or not. Explanation 4 to section 43(1) itself does not give any indication to the conclusion that the definition of the term ‘actual cost’ occurring in section 43(1) should be applied only to assets coming into existence on or after April 1, 1961. What is clear is that even this Explanation 4 applies to assets which came into existence prior to April 1, 1961, as well as to assets which came into existence subsequently. But, from the Explanation alone, no inference can be drawn that the legislature intended to apply the definition of the term “actual cost” occurring in section 43(1) only to assets coming into existence on or after April 1, 1961. In these circumstances, both the reasons given by the Tribunal in support of its conclusion in this behalf are not really relevant and, therefore, there is no escape from the conclusion flowing from the actual language used in section 43(6)(b) read with section 43(1) that the “actual cost” for the purpose of arriving at the written down value within the scope of section 43(6)(b) for the assessment years 1962–63 onwards will have to be only as defined in section 43(1) of the Income-tax Act, 1961.

16. For these reasons, we answer the question in the negative and against the assessee. Having regard to the fact that there is no authority covering the point in issue, we are not making any order as to costs.