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Petitioner: SAHARANPUR ELECTRIC SUPPLY CO. LTD VS Respondent: COMMISSIONER OF INCOME-TAX
Court Name: Supreme Court of India Judge(s): S. Ranganathan, N. D. Ojha Title: SAHARANPUR ELECTRIC SUPPLY CO. LTD vs COMMISSIONER OF INCOME-TAX Case No.:Civil Appeal No, 1861 of 1977 with Civil Appeals Nos. 212, 213, 220, 221, 904 to
906 and 2440 of 1980, Nos. 217 and 812 to 817 of 1977, Nos. 23 to 25 of 1982, 197 of 1983, Nos. 4703 to 4711 of 1984, and No, 4097 of 1991 and S.L.P. (Civil) No, 15346 of 1991 Date of Judgment:1992-01-15 Reported As: 1992 PTD 1205 Result: Appeal dismissed. Judgment ' RANGANATHAN, J. --- The appellants arc electric supply undertakings situated in various parts of the country. All the appeals relate to the assessment year 1962-63 or later. They raise a common question regarding the computation of depreciation on service lines installed by the assessees a part of the expenditure incurred in connection with the installation of which is recovered by the assessees from consumers of electricity. Depreciation, under the Income-tax Act, 1961, is computed as a percentage of the "written down value" of the asset in question. The Income-tax Act, 1961, came into force on April 1, 1%2. Section 43(6) of the Act defines "written down value" thus: "'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 repeated by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886),was in force." ' The Act also defines the expression "actual cost" in section 43 (1). It reads thus: "actual cost" means the actual cost of 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:
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' It will be seen from the main paragraph of subsection (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 provisions. ' Under section 10(2)(vi) read with section 10(5) of the Indian Income-tax Act, 1922, an assessee was entitled to an allowance of depreciation at a percentage of the actual cost to the assessee or the written down value of the relevant asset owned by him and used for the purposes of business. It is common ground that the service lines constitute machinery or plant on which assessees are entitled to depreciation. Also, as under the present Act, so under that Act, "written down value" was defined with reference to "actual cost". Initially, between 1922 and 1952, the expression "actual cost" was defined to mean just "the actual cost of the asset to the assessee". As already mentioned, a part of the cost of the asset in the present case, viz., service lines is met by the consumers -with the result that, though the company might have incurred a particular amount as expenditure towards the installation of the service lines, "the actual cost" to it, of the service lines, could, in a loose sense, be said to be the amount of expenditure incurred by it in this behalf less the amount recovered from the consumers in respect thereof. The Income-tax Department tried to adopt this layman's approach and restrict the _depreciation on the service lines on the basis of their cost less the amount recovered from consumers. The Bombay High Court in CIT v. Poona Electric Supply Co. Ltd. (1946) 14 ITR 622 and in CIT v. Bombay Suburban Electric Supply Co. (P.) Ltd. (1977) 106 ITR 752, the Kerala High Court in CIT v. Cochin Electric Co. Ltd. (1965) 57 ITR 82, the Punjab High Court in CIT v. Ambala Cantt. Electric Supply Co. Ltd. (1971) 82 ITR 217 and the Patna High Court in CIT v. Ranchi Electric Supply Co. Ltd. (1954) 26 ITR 89, disapproved this line of reasoning. Relying on the decision of the House of Lords in Birmingham Corporation v. Barnes (1935) 3 ITR (Eng. Cas) 26 (HL), they held that, in ascertaining the actual cost of an asset to the assessee, it was immaterial that someone else has recouped to the assessee, wholly or in part, towards such cost. This general principle is well-settled by these decisions and is also not in issue before us now. ' The 1922 Act was amended by the Income-tax (Amendment) Act, 1953, with effect from April 1, 1952, in this respect. This amendment introduced an Explanation to the definition of "actual cost" to nullify the effect of the above decision. Though, at the stage of the Bill, the proposal was to exclude from the concept of actual cost, any moneys reimbursed to the assessee in this regard by any outside source (vide (1952) 21 ITR (St.) 40), the amendment, as finally effected, permitted only a limited exclusion. The Explanation read as follows: "For the purposes of this subsection, 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..." ' When enacting the Income-tax Act, 1961, however, the Legislature revived the earlier proposal of 1953 and the present Act directs the exclusion, in the computation of the actual cost, of all amounts reimbursed to the assessee by any person whatsoever. ' Now the question which arises before us, in relation to the assessment year 1962-63, is this: The appellant companies had installed service connections during the relevant previous year. So far as these are concerned, there is no dispute that depreciation has to be allowed on them with reference to their "actual cost" as defined in section 43(1), i,e,, by excluding contributions or reimbursements from consumers. But the appellants have also to he granted depreciation on service connections installed in earlier previous years and it is only in respect of such assets that the present controversy arises. The depreciation on those assets, under section 43(6) of the 1961 Act, has to be computed with reference to their written down value, that is, their "actual cost" less all depreciation allowed in respect thereof under the 1922 Act till the assessment year 1961-62. Since
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those assets had been acquired by the assessees in the previous years relevant to the assessment year 1961-62 or earlier assessm ent years, their actual cost had been duly ascertained for the - previous year of acquisition in accordance with the provisions of section 10(5)(a) of the Indian Income-tax Act, 1922. If the assets had been acquired earlier than the previous year relevant to the assessm ent year 1952-53, the actual cost of the assets to the assessee would perhaps have been taken without any deductions whatever in respect of the contributions made by other persons towards the cost of the asset. In the case of such of those assets as had been acquired during the previous years relevant to the assessment years 1952-53 to 1961-62, the actual cost would have been determined in accordance with the relevant law as it stood at that time, viz., by taking their actual cost and deducting therefrom the contributions made by the Government or any public or local authority to enable the assessee to acquire the assets. The assessees' contention is that there is no justification for disturbing the written down value as so determined and that the depreciation for the assessm ent year 1962-63 and thereafter should be based only on the actual cost and written down value so determined earlier. They plead for the undisturbed continuance of the earlier depreciation sheets in respect of these assets. On the other hand, the Revenue contends that, though the assets have been acquired in earlier previous years, the statutory mandate of section 43(6)(b) is that their actual cost should be determined afresh for each assessment year and this, for the assessm ent year 1962-63 onwards, can only be in accordance with the definition contained in the 1961 Act. On this view, the Department has ignored the written down value of these assets as per the earlier record, computed the actual cost of the service lines by excluding therefrom the contributions of consumers but given credit thereafter for all depreciation allowed in respect thereof (on the basis of the higher actual cost as then determined) in all the earlier years. The question is which of these contentions is correct. ' All the High Courts have upheld the stand of the Revenue. They have answered the question by holding that the actual cost of all assets for purposes of assessment year 1962-63 and onwards, whatever might have been the date of acquisition of the assets in question, has to be computed in accordance with the new formula laid down by the Income-tax Act of 1961. These decisions are: Riverside (Bhatpara) Electric Supply Co. Ltd. v. CIT (1977) 109 ITR 399 (Cal); CIT v. South Madras Electric Supply Corporation Ltd. (1977) 109 ITR 426 (Mad.); CIT v. Saharanpur Electric Supply Co. Ltd. (1977) 109 ITR 545 (All); CIT v. Bassein Electric Supply Co. Ltd. (1979) 118 ITR 884 (Born.); Rohtak and Hissar Districts Electric Supply Co. (P.) Ltd. v. CIT (1981) 128 ITR 52 (Delhi); Ambala Electric Supply Co. Ltd. v. CIT (1983) 139 ITR 925 (Punj); CIT v. Bombay Suburban Electricity Co. Ltd. (1983) 142 ITR 298 (Bom); British Insulated Callendars' Cables Ltd. v. CIT (1983) 142 ITR 300 (Born.); CIT v. Panvel Taluka Electrical Development Co. Ltd. (1983) Taxation 71(1)-14 (Sh.N) (Born.); Ranchi Electric Supply Co. Ltd. v. CIT (1984) 150 ITR 95 (Patna); CIT v. Lonawalla Khandalla Electric Supply Co. Ltd. (1985) 22 Taxman 77 (Born.); CIT v. Calcutta Electric Supply Corporation Ltd. (1987) 166 ITR 797 (Cal); CIT v. Bassein Electric Supply Co. Ltd. (1989) 177 ITR 482 (Bom.); CIT v. Calcutta Electric Supply Corporation Ltd. (1989) 179 ITR 580 (Cal); and Ahmedabad Electricity Co. Ltd. CIT (1991) 190 ITR 413 (Born). The appellants before us contest the correctness of this unanimous view of the High Courts. Indeed, some of the decisions above referred to form the subject-matter of some of these appeals. ' Dr. Debi Pal, Sri Dastur and Sri Ramachandran, who appeared for the assessees, submitted that the various High Courts have not correctly appreciated the arguments put forward before them aad failed to see that the interpretation approved by them will result in absurdities and anomalies. In 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 appeals. ' We may, at the outset, dispose of an argument raised by Dr. Pal. His point was that the figure of actual cost ascertained in respect of any asset in any of the earlier previous years cannot be altered in a subsequent year. According to him, both the 1922 Act as well as the 1961 Act envisage
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continuance of the figure of actual cost once arrived at in respect of any plant or machinery throughout the lifetime of such plant or machinery. He says that, for the assessment year 1962-63, the question of determination of actual cost can arise only in respect of assets acquired during the relevant previous year under clause (a) of section 43(5). So far as the assets in question are concerned, which had been acquired in earlier previous years, depreciation has to be calculated on the basis of the written down value. Since the written down value in respect of these assets had already been ascertained for the assessment year 1961-62, all that has to be done further to find out the written down value for .The assessment year 1962-63, is to deduct therefrom the depreciation allowed for the assessm ent year 1961-62. 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 acquisition. Section 43(6) specifically deals with two categories of assets: (i) those acquired during the relevant previous year, and (ii) those acquired earlier to that. Even in respect of the latter class of assets, the Act envisages computation of the actual cost of the asset and the deduction therefrom of all depreciation allowed in earlier years in respect of that asset. Thus, the first step, statutorily prescribed, for the determination of the written down value of any asset for any year, is for the Assessing Officer to determine its actual cost. This is a mandatory step which the officer cannot be prevented from taking merely because the actual cost of the asset has already been determined in one or more earlier years, though it may be true that, in ninety-nine (and perhaps even more) per cent of the cases, the result (barring mistakes and some special situations) will just be the equivalent of the written down value taken for the immediately preceding assessm ent year less the depreciation allowed for that year. This mechanics of the definition was explained by the Calcuttit High Court in Karnani Industrial Bank Ltd. v. CIT (1954) 25 ITR 558, approved by this Court in Maharana Mills (P.) Ltd. v. ITO (1959) 36 ITR 350 and followed in Habib Hussain v. CIT (1963) 48 ITR 859 (Bom.) In 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 assessme nt year 1962-63. There is no provision in the 1961 Act which permits or compels the adoption or continuance of the figure of factual 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. Pal. ' Perhaps realising the above difficulty, Sri Dastur put forward a slightly modified contention. He concedes that the actual cost as determined for the earlier years is not sacrosanct or untouchable and that there may be circumstances in which it may have to be modified in the light of subsequent events. According to learned counsel, however, changes in actual cost in three situations can be taken into account for purposes of the definition in section 43(1) read with subsection (6). These according to him, are: (i) subsequent factual occurrences which call for a modification of the figure of actual cost as at the time of acquisition determined earlier; (ii) discovery of arithmetical errors in the earlier computation of the actual cost or written down value of any asset; and (iii) redetermination of the original actual cost necessitated by a specific retrospective statutory provision.
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' He points to instances of such modifications permitted by judicial decisions. In Karnani Industrial Bank Ltd.v.CIT [1954] 25 ITR 558 (Cal), the assessee claimed to have purchased machinery for Rs,3,94,000 and obtained depreciation on that basis from the assessment year 1939-40 onwards. In proceedings for the assessm ent year 1946-47, the Officer discovered that the cost of the machinery was only Rs,2,80,000. And since the assessee had already obtained depreciation beyond this, refused the grant of depreciation for the assessment years 1946-47 and 1947-48. This was upheld by the Calcutta High Court. In Maharana Mills (P) Ltd.v.ITO [1959] 36 ITR 350 (SC), the Officer rectified the assessm ents of the assessee to re-work the written down value computed and the depreciation granted for earlier years as not being in accordance with law. The validity of these rectifications was upheld. In Habib Hussein v. CIT [1963] 48 ITR 859 (Bom), the asset in question had been acquired in the previous year relevant to the assessment year .1950-51. The assessee had acquired the asset under an agreement dated June 4, 1948. But that agreement had been revised on July 10, 1950 (after the close' of the relevant previous year). The assessee claimed, nevertheless, that a sum of Rs,3,30,000. Payable by virtue of the subsequent agreement also formed part of the actual cost of the asset. The claim was upheld by the High Court. According to learned counsel, this was also a case where the original figure of actual cost was more precisely defined and quantified later. Counsel concedes that in cases of this type, the actual cost as determined in earlier years might need to be modified and that the Assessing Officer will be at liberty to do so. He, however, contends that the actual cost cannot be altered merely because a subsequent legislation provides for a different formula for ascertainment of the actual cost; that formula may very well apply in respect of assets acquired in and after the previous year to which the new law will be applicable but it cannot be retrospectively made applicable to assets which had been acquired much earlier and the actual cost of which had been determined in accordance with the earlier prevalent law, unless the statute specifically says so. As an example, he refers to Explanation 8 to section 43(1) which, though inserted in 1989, provides that certain expenditure of the nature specified therein "shall not be included and shall be deemed never to have been included, in the actual cost of such asset". 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 assessm ent 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 discussed. 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 assessments and, if that be not possible, at least for the future. This is illustrated by the situations in Karnani Industrial Bank Ltd. [1954] 25 ITR 558 (Cal) and Maharana Mills (P.) Ltd. [1959] 36 ITR 350 (SC), and this is also the position in cases to which Explanation 8 applies. These are situations which have a retrospective impact on the original actual cost. But it is equally conceivable that the "actual cost" may undergo a change which does not relate back in fact or law and there is no reason why such change should
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not be given effect to in future, irrespective of what may have happened in the past. In fact, this is what happened in Habib Hussein's case [1963] 48 ITR 859 (Bom). It was not a case of the category suggested by Sri Dastur. It was a case where the figure of original cost underwent a change by reason of a subsequent agreement and the High Court directed that the sum of Rs, 3,30,000 or part thereof attributable to the acquisition of the assets "should be included in the actual cost of these assets to the assessee in the respective year or years of account at the commencement of which the liability to pay it or ' part thereof had accrued or would accrue". That the redetermination of actual cost permitted by the provision with which we are concerned is not restricted to cases of the limited range of retrospective change in the actual cost suggested by Sri Dastur is also illustrated by the decision in CIT v. Hides and Leather Products (P.) Ltd. [1975] 101 ITR 61 (Guj). In that case, the assessee who maintained its accounts on the mercantile system purchased a piece of machinery from a foreign firm in 1955. No amount was paid towards the price thereof on the ground that there was some defect in the machinery. The liability to the foreign supplier was shown in the books of account and balance-sheet of the assessee. But, in 1960, by making appropriate entries, the assessee wrote back the amount of Rs, 30,572 being the price of the machinery, debited the amount in the account of the foreign supplier and credited the same amount in the capital reserve account. On the question whether the assessee was entitled to depreciation on the actual cost computed at Rs, 30,572 for the assessm ent years 1961-62 to 1965-66, the High Court held that, "in view of the fact that the foreign supplier had not recovered the amount of Rs, 30,572 and no legal steps had been taken towards its recovery for so long a time, it was not unreasonable to infer that the foreign supplier had treated the liability of the assessee to itself as having ceased and in fact and in substance there had been a cessation, of this liability. The Act of 1922 applied to the assessment year 1961-62, and as the foreign supplier was neither Government nor public nor local authority, though there was cessation of liability, the assessee was entitled to have the benefit of the entire amount of Rs, 30,572 as the actual cost. Depreciation was allowable to the assessee for the assessm ent year 1961-62 on the basis that the cost to it of the machinery was Rs, 30,572. The Act of 1961 applied to the assessm ent years 1962-63 to 1964-65 and, under section 43(1) of the Act, sake there was cessation of liability, the actual cost of the machinery to the assessees for these assessm ent years should be reduced by Rs, 30,572". Sri Dastur challenged the correctness of this decision in so far as it held that the original cost itself did not stand modified as a result of the subsequent development. We 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 show that the actual cost for 1961-62 could be scaled down for the assessm ent 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 later: CIT v. U. P. Hotel-Restaurant Ltd. [1980] 123 ITR 626 (All) and Kilkotagiri Tea and Coffee Estate Ltd. v. CIT [1978] 113 ITR 729 (Ker), decided in the context of depreciation allowance and CIT v. Mithilesh Kumari [1973] 92 ITR 9 (Delhi) and Addl. CIT v. K. S. Gupta [1979] 119 ITR 372 (AP), decided in the context of the allied concept of "cost of acquisition" for purposes of capital gains. ' 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
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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…
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