Citation Codes

Equivalent Citations

citation codes

Case Number

Tax Case No. 887 of 1987 (Reference No. 590 of 1987)

Judges

R. Jayasimha Babu
N.V Balasubramanian, JJ.

Acts

section 43(1) of the Income-tax Act, 1961 (for short, the Act),
provisions of section 43(1)

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Smart Summary

Structured Summary of the Opinion (N.V. Balasubramanian, J.)

Factual and Procedural Background

The assessee is a private limited company for assessment year 1978-79. During the relevant previous year the assessee accepted Rs. 2,72,975 as a grant (initially provided as an interest-free loan) from foreign buyers, identified as Meconomy and Company Limited (London). A letter dated 5 October 1976 (which enclosed a cheque for Rs. 30,000) described the amount as a contribution towards the purchase of a double-width shaving machine. The amount was credited to the assessee's bank account on 13 October 1976. On 5 January 1978 the foreign company informed the assessee that it would treat the amount as a total grant so the assessee need not repay it.

The assessee claimed before the Income-tax Officer (ITO) that the amount was a capital receipt; the ITO held it to be revenue in nature and taxable. The assessee appealed to the Commissioner of Income-tax (Appeals), who held the amount to be a capital receipt. The Revenue appealed to the Income-tax Appellate Tribunal (ITAT). The ITAT upheld the Commissioner (Appeals)'s finding that the grant was a capital receipt (this part of the ITAT order became final as the Revenue did not challenge it).

Separately, the Department (Revenue) argued before the ITAT that if the sum was a capital receipt, it should nevertheless reduce the actual cost of the machinery — thereby reducing depreciation and investment allowance. The ITAT accepted this alternative submission and directed modification of the assessment to reduce the purchase cost by Rs. 2,72,975 for computation of depreciation and investment allowance. The assessee challenged this latter part, and the ITAT referred two questions of law to the High Court.

Legal Issues Presented

Whether the Tribunal was right in law in holding in the appeal filed by the Department that the original cost/written down value of the machinery should be reduced by Rs. 2,72,975 and that depreciation and investment allowance should be recomputed on that basis.
Whether, on the facts and on a proper interpretation of the provisions of section 43(1) of the Income-tax Act, 1961, the Tribunal was right in law in holding that the sum of Rs. 2,72,975 was deductible from the actual cost of the asset for the purpose of depreciation and investment allowance.

Arguments of the Parties

Assessee's Arguments (as advanced before the Court)

The assessee's counsel submitted that the transaction was effectively a gift of machinery by the foreign buyers to the assessee and therefore Explanation 2 to section 43(1) applied. Under that Explanation the actual cost to the assessee would be the written down value of the asset in the hands of the previous owner or the market value on the date of purchase, whichever is less — implying that the grant amount would not reduce the assessee's actual cost for depreciation purposes.
The assessee relied on a Kerala High Court decision (Commissioner Of Income-Tax v. Cochin Co. (P) Ltd., [1990] 184 ITR 230) where, on its facts, a financier's remission of debt did not lead to a reduction in the cost of machinery for depreciation purposes; the assessee argued that this precedent supported its position.

Revenue's Arguments (as advanced before the Court)

The learned counsel for the Revenue supported the ITAT's view that the contribution by the foreign buyers should reduce the actual cost of the machinery under section 43(1) because the contribution had directly met the purchase cost.
The Revenue contended (and had raised before the ITAT) that even if the amount constituted a capital receipt, it was nonetheless a contribution that met part of the purchase cost and so must be deducted in computing the actual cost for depreciation and investment allowance.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner Of Income-Tax v. Cochin Co. (P) Ltd., [1990] 184 ITR 230 (Kerala High Court)	Held on its facts that where a financier's debt was written off/remitted, the cost of machinery could not be reduced by the amount remitted for depreciation purposes.	The Court found this decision inapplicable on the facts: here the machinery was purchased by the assessee out of a contribution from the foreign buyers, whereas the Kerala High Court case involved a different factual matrix (debt remission by a financier). The Court therefore did not apply that precedent to alter its interpretation of section 43(1) in the present case.

Court's Reasoning and Analysis

The Court's reasoning proceeded by close textual and factual analysis of section 43(1) of the Income-tax Act, 1961 and the factual sequence in which the monies were provided and classified.

Statutory interpretation: The Court quoted the definition of "actual cost" in section 43(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."
The Court treated this definition as the primary statutory guide for determining whether a third-party contribution reduces the actual cost to the assessee.
Factual application: The Court emphasized the factual distinction that the assessee itself purchased the machinery and that the foreign buyers had provided the funds as an interest-free loan which was subsequently converted into a grant. Because the contribution met the purchase cost (directly or indirectly), it fell squarely within the scenario described by clause (1) of section 43: a portion of the cost met by a third party.
Distinguishing Explanation 2 to section 43(1): The Court explained that clause (1) and Explanation 2 cover different factual situations. Explanation 2 addresses an asset acquired by a third party and later gifted to the assessee (the previous owner scenario). Clause (1) addresses a case where the assessee purchases an asset but a third party meets a portion of the cost. Since here the assessee purchased the machinery (albeit financed by the foreign buyers), Explanation 2 was not applicable.
Treatment of the foreign buyers' contribution: Given the statutory language and the facts, the Court concluded that the contribution by the foreign buyers must be treated as a portion of the cost met by a third party and therefore must be deducted from the purchase cost to determine the "actual cost" for depriciation and investment allowance.
On the Kerala High Court decision relied upon by the assessee, the Court held that the facts were materially different (debt remission versus third-party contribution towards purchase) and so that decision did not control the present case.
Jurisdictional point: The Court addressed whether the ITAT could entertain, for the first time before it, the Revenue's ground that the contribution should reduce actual cost. The Court observed that the entire assessment is before the Tribunal on appeal, the assessee had been put on notice of the Revenue's ground, and the question was argued before the Tribunal. Given that the question of whether the receipt was capital or revenue directly affected depreciation, the Tribunal was held to have properly and validly exercised its jurisdiction to entertain and decide the matter.

Holding and Implications

Holding: The Court answered both referred questions of law in the affirmative and ruled against the assessee and in favour of the Revenue.

Direct implications (as expressed in the opinion):

The sum of Rs. 2,72,975, being a contribution by the foreign buyers that met the purchase cost of the machinery, must be deducted from the purchase cost to determine the actual cost of the asset to the assessee for the purpose of computing depreciation and investment allowance.
The ITAT was correct to entertain the Revenue's ground and to direct recomputation of depreciation and investment allowance after reducing the actual cost by the amount of the grant.
The Revenue is entitled to costs of Rs. 750.

Broader implications: The opinion did not purport to establish a new general principle beyond its statutory interpretation of section 43(1) applied to the facts. The decision's effect is to confirm that where an assessee purchases an asset and a third party meets part of that purchase cost (even if the payment was initially a loan later converted to a gift), the contribution reduces the actual cost for depreciation purposes under section 43(1). The Court expressly distinguished cases in which the asset itself was purchased by a third party and later gifted (which are governed by Explanation 2).

Outcome in brief: The assessee's challenge on the point of deduction from actual cost failed; the ITAT's direction to reduce the machinery cost by Rs. 2,72,975 for depreciation/investment allowance computations was upheld, and the Revenue was awarded costs of Rs. 750.

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Ravi Leathers (P.) Ltd. v. Commissioner Of Income-Tax

N.V Balasubramanian, J.:— The assessee is a private limited company. The assessment year with which we are concerned is 1978-79. The assessee in its accounts relating to the previous year for the said assessment year accepted a sum of Rs. 2,72,975 as a grant received from foreign buyers. The said sum was allegedly gifted to the assessee by the foreign buyers and the intention to that effect was conveyed by a letter of the foreign buyers dated October 5, 1976, enclosing a cheque for a sum of Rs. 30,000. The foreign company is one Meconomy and Company Limited and it is a London based company. In that letter, it was stated that the amount was meant as a contribution to the assessee for the purchase of a double width shaving machine, which according to them, would improve the production of the assessee. The case of the assessee was that the same was granted as a loan free of interest and the amount was credited to the account of the assessee in Bank of Baroda on October 13, 1976, and on January 5, 1978, the foreign company informed the assessee of its desire to treat the amount as a total grant to the assessee for the purchase of the machinery and the assessee need not repay the amount. The assessee claimed before the Income-tax Officer that the amount received was a capital receipt. The Income-tax Officer did not accept the contention of the assessee and held that the receipt was revenue in nature, and taxable as part of its income.

2. The assessee challenged the order of the Income-tax Officer before the Commissioner of Income-tax (Appeals). The Commissioner (Appeals) held that the amount given as a grant was a capital receipt. The Revenue had challenged the order of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal. The Tribunal upheld the views of the Commissioner (Appeals) that the grant by the foreign company to the assessee should be treated as a capital receipt. The order of the Appellate Tribunal, holding that the amount of grant is a capital receipt has become final, as the Revenue has not challenged that part of the order of the Appellate Tribunal.

3. However, before the Appellate Tribunal, the Department also raised another ground that even if the grant is held to be a capital receipt, it would go to reduce the actual cost of the machinery purchased by the assessee. The Appellate Tribunal accepted the alternative case put forward by the Revenue and held that the cost for the purchase of the machinery was provided by the foreign company and, therefore, the actual cost of the machine should be the purchase cost of the assessee as reduced by the amount of grant of Rs. 2,72,975 and the assessment required modification in that regard. The assessee has challenged that part of the order of the Appellate Tribunal holding that the amount of grant should be reduced from its purchase cost and the Appellate Tribunal has stated a case and referred the following questions of law for our consideration:

“1. Whether the Tribunal was right in law in holding in the appeal filed by the Department where this question came to be considered for the first time that the original cost/written down value of the machinery, should be reduced by the sum of Rs. 2,72,975 and that the depreciation and investment allowance should be recomputed on that basis?

2. Whether, on the facts and in the circumstances of the case and on a proper interpretation of the provisions of section 43(1) the Tribunal was right in law in holding that the sum of Rs. 2,72,975 was deductible from the actual cost of the asset for the purpose of depreciation and investment allowance?”

4. Mr. Janarthana Raja, learned counsel for the assessee, submitted that it was a case of gift of machinery by the foreign buyers to the assessee and, therefore, under Explanation 2 to section 43(1) of the Income-tax Act, 1961 (for short, “the Act”), the actual cost of the machinery will be its written down value as in the case of the previous owner for the previous year or the market value of the machinery, whichever is the less and the view of the Appellate Tribunal that the amount of gift would go to reduce the amount of actual cost is not justifiable. However, learned counsel for the Revenue, supported the findings of the Appellate Tribunal. We have carefully considered the submissions of learned counsel for the assessee. The definition of actual cost is found in section 43(1) of the Act which reads as under:

“‘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.”

5. In the instant case, the assessee had purchased the machinery and this is not a case of the foreign buyer purchasing the machinery and gifting the same to the assessee and, in such circumstances, the actual cost to the assessee would be the purchase cost as reduced by the portion of the contribution made by third parties. Admittedly, in the instant case, originally the amount was given by the foreign buyers as interest-free loan for the purchase of the machinery. Subsequently, it was converted as a gift by the foreign buyers to the assessee and the subsequent conversion as gift from loan has a material bearing to determine the actual cost of the machinery. Since the amount was contributed by the foreign buyers for the purchase of the machinery, the amount given as grant by the foreign buyers would go to reduce the actual cost incurred by the assessee for the purchase of the machinery. Under clause (1) of section. 43 of the Act, the actual cost is determined by deducting from the purchase cost the contribution made by any third party for the purchase of the machinery and since the entire amount of the purchase cost was met by the foreign buyers, the actual cost to the assessee should be determined after deducting the contribution by way of gift made by the foreign buyers.

6. Learned counsel for the assessee also referred to a decision of the Kerala High Court in the case of Commissioner Of Income-Tax v. Cochin Co. (P) Ltd., [1990] 184 ITR 230 wherein the assessee therein had purchased certain items of machinery and when the assessee was not able to repay the same in full, the debt was written off and in that factual situation, the Kerala High Court held that the cost of machinery could not be reduced by the amount remitted by the financier for the purpose of depreciation, The decision of the Kerala High Court on which reliance was placed by learned counsel for the assessee has no application on the facts of the case. In the instant case, the assessee had purchased the machinery out of the grant given by the foreign buyers.

7. Learned counsel for the assessee also relied upon Explanation 2 to section 43(1) of the Act and submitted that in this case, the asset was acquired by way of gift by foreign buyers and, therefore, the actual cost to the assessee should be the written down value of the previous owner or the market value on the date of purchase whichever is less. We are unable to accept the submission of learned counsel for the assessee. It is not a case where the foreign party acquired the machinery and then gifted the same to the assessee. It is a case where the assessee purchased the machinery and the contribution had been provided by the foreign buyers. Section 43(1) and Explanation 2 to that section deal with two different concepts. Clause (1) of section 43 deals with a case of an assessee purchasing a machinery and a portion of the actual cost of the machinery is met by a third party. On the other hand, Explanation 2 to section 43(1) deals with a case where the asset was purchased by a third party and later on gifted to the assessee. In our view, the case of the assessee does not fall within Explanation 2 to section 43(1) of the Act as the machinery was purchased by the assessee itself and it falls within the purview of clause (1) of section 43 of the Act and the actual cost has to be determined in the manner provided in section 43(1) of the Act. The Tribunal held that the grant given by the foreign buyers should be reduced from the actual cost met by the assessee to determine the cost of the asset to the assessee for the purchase of the machinery. We find no infirmity in the finding of the Appellate Tribunal in holding that the cost should be reduced by the portion of the grant made by the foreign buyers.

8. Of the two questions referred to us, one question relates to the jurisdiction of the Appellate Tribunal to entertain and decide the question whether the contribution should be deducted from the actual cost of the machinery. Though that question was raised for the first time before the Appellate Tribunal, it is settled that the entire assessment is before the Appellate Tribunal at the time of hearing the appeal. The Revenue has challenged the order of the Commissioner (Appeals) and raised a specific ground that the contribution made by the foreign buyers should go to reduce the actual cost incurred by the assessee. The assessee was put on notice of the ground raised by the Revenue and the order of the Appellate Tribunal also indicates that the question was argued before the Tribunal. The Tribunal has the jurisdiction to entertain the new ground raised before it and the Appellate Tribunal has exercised its jurisdiction properly in a matter which arose out of the order of assessment. We are of the opinion that the jurisdiction exercised by the Tribunal is correct. Further, the issue that arose before the income-tax authorities was whether the grant would be a capital or revenue receipt, and a decision on the question whether it has a capital receipt or not would have direct impact on the question of determination of depreciation allowance as the grant of depreciation in turn would depend upon the actual cost of the machinery, and, therefore, the Tribunal has the jurisdiction and rightly exercised its discretion to entertain the ground as to the mode of calculation of actual cost of the machinery. Therefore, the Tribunal was justified in entertaining the ground raised by the Revenue to regulate the grant of depreciation on the machinery.

9. Accordingly, we answer both the questions of law referred to us in the affirmative and against the assessee and in favour of the Revenue. The Revenue will be entitled to costs of a sum of Rs. 750.

Ravi Leathers (P.) Ltd. v. Commissioner Of Income-Tax

Structured Summary of the Opinion (N.V. Balasubramanian, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments (as advanced before the Court)

Revenue's Arguments (as advanced before the Court)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Ravi Leathers (P.) Ltd. v. Commissioner Of Income-Tax

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