Venkataramaiah, J.:— The assessee in all these cases is M/s. Kirloskar Electric Company Ltd., Bangalore. The assessment years are 1968-69, 1969-70, 1970-71 and 1971-72. I.T.R.C No. 65 of 1975 relates to the assessment year 1968-69 and the other cases relate to the succeeding assessment years. The Income-tax Appellate Tribunal, Bangalore Bench, has referred, under s. 256(1) of the I.T Act, two questions in I.T.R.C No. 65/76 and one question in each of the other three cases which is common to all the four years.
2. Sri G. Sarangan, learned counsel for the assessee, states that the second question referred to us in respect of the assessment year 1968-69 need not be answered.
3. It follows that only one common question arises for consideration before us in respect of all the four assessment years and that reads as follows:
“Whether, on the facts and in the circumstances of the case, difference in the rupee value of machinery due to devaluation of the rupee was part of the actual cost of plant and machinery for purposes of allowance of depreciation, and development rebate?”
4. The assessee is a limited company. Under a collaboration-agreement entered into between the assessee and M/s. Brush Electric Co. Ltd., the latter had subscribed to 1,33,300 shares of the assessee-company, the subscription being in sterling currency. The total amount so subscribed in terms of sterling was £135,434-17-8. The said amount was deposited on May 10, 1966, in the assessee's account with the Bank of India Ltd., London Branch. On June 6, 1966, the Indian rupee was devalued. During the accounting years relative to the assessment years 1968-69, 1969-70, 1970-71 and 1971-72 the assessee-purchased some machinery in England and paid out of the amount standing to its credit in Bank of India Ltd. as aforementioned and the value of the machinery was shown in the books of account of the assessee by converting the sterling paid in England to the sellers of the machinery into rupees at the rate prevailing after devaluation. The machinary purchased by the assessee were brought to India and were installed in the factory of the assessee. During the assessment years, the assessee claimed depreciation allowance and development rebate on the basis of the cost of the machinery shown in its books of account in terms of rupees.
5. The ITO allowed depreciation allowance and development rebate on the basis of the value of the pound sterling as it was obtaining prior to the devaluation after negativing the contention of the assessee that in order to arrive at the actual cost of the machinery the value of the pound on the date of purchase should be taken into consideration. The reason given by him in support of his order was that the assessee had not incurred any extra expenditure after the deposit was made to its credit on 10-5-1966 and the subsequent devaluation would not have any effect on the actual cost of the machinery in question to the assessee. The assessee preferred appeals before the AAC of Income-tax. The AAC allowed the appeals holding that:
“The ITO erred in correlating the value of foreign exchange received towards the share capital of the company to the import of machinery subsequent to devaluation. Depreciation and development rebate is to be granted on the rupee value of plant and machinery and is not to be based on the cost of foreign currency to the appellant prior to devaluation. If the appellant did not have the foreign exchange abroad, it would have had to pay so much more by way of Indian rupees and likewise the foreign currency became so much more valuable when devaluation took place. Had the foreign currency not been unutilised for the purchase of machinery, the repatriation of such foreign currency would have in terms of Indian rupees meant much more than otherwise. The import of plant and machinery having taken place after devaluation, the ITO was not justified in denying the enhanced value of plant and machinery for purposes of depreciation and development rebate.”
6. The department filed appeals before the Tribunal against the orders of the AAC. The Tribunal reversed the finding of the AAC on the above question observing that:
“The assessee had acquired foreign exchange (and kept it with the Bank of India Ltd.) at Rs. 13.267 per pound sterling. It was at this rate that credit to the share capital account of the Brush Electric Co. Ltd. and to the share premium account was made. Therefore, there can be no doubt that the assessee had acquired this foreign exchange in pound sterling at pre-devaluation rate. It did not pay anything extra for the sterling when it spent a part of it for purchase of machinery. The difference representing the difference in the pre and post-devaluation rates of the rupee vis-a-vis sterling which the assessee had credited to the capital reserve account is merely a notional figure which has been arrived at on the assumption that the assessee would have had to pay a higher amount if it had acquired pound sterling at the time of purchase of the machinery. In other words, the figure credited to the capital reserve account is clearly a notional figure by increasing the value of the imported machinery in terms of rupees calculated at post-devaluation rates. The assessee did not expend this amount of Rs. 6,03,280 or part thereof since it did not pay this amount to any person, either to the Bank of India Ltd., London, or to the suppliers of the machinery. It is thus purely a notional figure.”
7. When it was brought to the notice of the Tribunal that even the customs department had levied duties on the machinery on the basis of their amended value computed in terms of post-devaluation rates the Tribunal rejected that contention saying that it was not. relevant.
8. At the instance of the assessee, the question extracted above is referred to this court in respect of each of the assessment years in question.
9. At the outset, it should be observed that the approach of the Tribunal to the question before it was wholly erroneous. The Tribunal while observing that any change that had taken place in the value of the British currency owned by the assessee, out of which it paid the price of the machinery in question was merely notional, disregarded the ordinary commercial principles which should govern the determination of questions arising under ss. 32 and 33 of the I.T Act. If the assessee had transmitted the British currency which it had in its account in the Bank of India Ltd. to India, after devaluation, it would have in terms of rupees got more rupees than what it would have got had such transfer taken place prior to devaluation. If the assessee wanted to buy after devaluation the machinery in question without the aid of the amount standing to its credit in England, it had to remit from India rupees at the post-devaluation rates. In these circumstances, it cannot be said that so far as the assessee was concerned the effect of devaluation was merely notional. By virtue of the devaluation in terms of rupees the amount in deposit in England appreciated and there is nothing wrong in the assessee claiming the benefit of it. If the reason given by the Tribunal is adopted then it would lead to incongruous results. The actual cost of the machinery to an Indian purchaser who had British currency prior to devaluation would be different from the actual cost to another Indian purchaser who purchased the machinery at the same time and who had not acquired British currency prior to devaluation. While determining the actual cost to the assessee of the machinery or plant except in cases where the cost has been met directly or indirectly by any other person or authority it would not be correct to go into the question as to how the assessee got the currency for paying the price of the machinery and plant and at what rate he got it. There may be a case, where an assessee has acquired some money by way of gift which he can utilise as he likes and out of that money he buys some machinery. Can such an assessee be denied the depreciation allowance and development rebate on the ground that he had not paid anything from out of his pocket? The answer has to be in the negative. The Tribunal was wrong in going into the question of the cost of the currency with which the machinery and plant were purchased. It should have only taken into consideration the current value of the British pound used by the assessee in terms of rupees on the date of purchase which was subsequent to the date of devaluation as it was not and could not have been the case of the department that the enhanced value of the British pound in terms of Indian rupees was a grant made by any person or authority to buy the machinery. In the circumstances, it cannot be said that any part of the cost of the machinery in terms of Indian rupees has been met directly or indirectly by any other person or authority as stated in s. 43(1) of the I.T Act, 1961. The advantage derived by the assessee on account of devaluation has no connection with the purchase of the machinery. They are two separate and independent economic events. Such advantage cannot, therefore, have any effect on the actual cost to the assessee of machinery which in the circumstances should include the rupee value of the British pounds paid as the price of the machinery at post-devaluation rates.
10. We, therefore, answer the first question in I.T.R.C No. 65/75 and the question referred to us in each of the other cases in the affirmative and in favour of the assessee. We decline to answer the second question in I.T.R.C No. 65/75 as desired by the learned counsel for the assessee. No costs.