1. This is a reference under s. 256(1) of the I. T. Act, 1961 (referred t hereinafter as 'the said Act')
2. The facts giving rise to this reference are as follows :
The assessee is a private limited company carrying on business in the manufacture and sale of readymade garments. The relevant assessment year is 1968-69, the relevant financial year being the financial year ending 31st March, 1968. In order to obtain exchange for the import of certain machinery, namely, power driven industrial sewing and cutting machines of the value of @6,882-8-2, equivalent to Rs. 91,765, the assessee executed a bond in favour of the President of India, represented by the Joint Chief Controller of Imports and Exports, for a sum of Rs. 1,50,000. The relevant clause of the said bond provided that if the importer, that is, the assessee, shall within 12 months from or such further time as might be granted by the said Joint Chief Controller, export readymade garments of the value equal to Rs. 1,50,000. The relevant clause of the said bond provided that if the importers, that is, the assessee, shall within 12 months from or such further time as might be granted by the said Joint Chief Controller, export readymade garments of the value equal to Rs. 1,50,000 to foreign countries excluding Nepal, Tibet, Sikkim, Butan and former Portuguese possessions in India and produce the necessary evidence before the Joint Chief Controller to show that an export of readymade garments to the aforesaid extent had been made, supported by the type of evidence set out in the said bond, within the period referred to in the said bond, the bond would be void and of no effect. But if this was not done, the bond would remain in full force and effective. There was a clause in the said bond which provided that the bond had been entered into by the Central Govt. for the performance of an act in which the public were interested. The assessee could not export readymade garments to the extent of Rs. 1,50,000 within the period provided under the said bond. The time given under the bond was up to 11th September, 1965, but by that time only garments worth Rs. 32,000 could be exported by the assessee. At the request of the assessee, an extension was given up to 11th September, 1966, but by that time the assessee was able to export garments worth only Rs. 79,385. As a result of the failure of the assessee to export readymade garments of the value of Rs. 1,50,000, the bond was forfeited and the National and Grindlays Bank Ltd., which was the guarantor in respect of the said bond, was called upon by the Government to pay the amount of the bond, which the said bank paid. The assessee had to make good the amount to be said bank. There is a finding of fact that the assessee has proved that the assessee was not in a position to fulfill the terms and conditions of the said bond because of circumstances beyond the control of the assessee. The bond was forfeited and the said amount was paid by the National and Grindlays Bank Ltd. to the Central Govt. on 8th September, 1967. In the course of the assessment proceedings for the said assessment year, namely, 1968-69, the assessee claimed a sum of Rs. 1,50,000 as a deduction in the computation of its income. This deduction was not granted by the ITO on the ground that the forfeiture was a penalty for committing an act opposed to public policy. An appeal preferred by the assessee to the AAC against the order of the ITO was dismissed. The assessee then preferred an appeal to the Income-tax Appellate Tribunal. Before the Tribunal the assessee urged an additional ground, namely, 'in the event it is considered that the aforesaid loss of Rs. 1,50,000 is of a capital nature, the appellant prays that appropriate directions be given for recomputation of depreciation allowance in respect of the said machinery by including the amount of Rs. 1,50,000 in the 'written down value'. ' The Tribunal held that the payment of the amount of this bond was a payment of a capital nature and that it should be considered as a part of the cost of the machinery and the assessee should be allowed depreciation on the enhanced cost so worked out.
3. From the aforesaid decision of the Tribunal, the following question has been referred to us at the instance of the Commissioner, which we shall propose to number as question No. 1 :
' (1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,50,000 forfeited by the Government was includible in the 'actual cost' of the machines and the assessee entitled to depreciation on such machines inclusive of the aforesaid sum?'
4. Although the assessee had not made any reference application, at the instance of the assessee, the following two questions have been referred to us, which we propose to number as question Nos. 2 and 3. The said questions run thus :
' (2) Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,50,000 was allowable as expenditure incurred wholly and exclusively for the purpose of business?
(3) Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,50,000 was allowable as a business loss?'
5. As far as questions Nos. 2 and 3, referred to us at the instance of the assessee, are concerned, we may point our that it is the undisputed position that the assessee was not entitled to raise those questions at all in view of the decision of the Supreme Court in CIT v. V. Damodaran : 121ITR572(SC) , as the assessee had not made any application for reference.
6. The only question which we are called upon to consider is whether the payment of Rs. 1,50,000 can be said to be a payment of a capital nature and that the amount be added to the actual cost of the aforesaid machinery for the purpose of calculation of depreciation allowance. Section 32 of the said Act deals with the question of depreciation and provides for the depreciation being granted on the written down value of the machinery. Relevant portion of sub-s. (1) of s. 43 of the said Act provides that :
''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...'
Sub-s. (6) of s. 43 deals with written down value and, inter alia, provides that in the case of assets acquired in the previous year, the actual cost to the assessee shall be the written down value thereof.
What we have to consider, therefore, is whether the payment of Rs. 1,50,000, which has to be made by he assessee on account of forfeiture by the Government, could be included in the actual cost of the aforesaid machinery. The submission of Mr. Joshi, learned counsel for the Commissioner, is that the payment of this amount was made long after the machinery was acquired and installed by the assessee and its connection with the acquisition of the machinery is too remote, so that it could not be considered as a part of the actual cost of the machinery. On the other hand, the submission of Mr. Shetty, learned counsel for the assessee, is that it was for the purpose of acquiring this machinery that the bond was executed and hence all payments under the bond should be included in the cost of the machinery.
7. In Challapalli Sugars Ltd. v. CIT : 98ITR167(SC) , the Supreme Court held that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in a working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. It may be mentioned that the said case arose under the Indian I. T. Act, 1922, but it is common ground that the principle laid down therein would be applicable to the case before us which arises under the said Act. Now, it appears to us that, in the present case, the bond was undoubtedly executed to enable the assessee to import machinery which is clearly a capital asset. Expenditure incurred for the purpose of execution of that bond could be reasonably regarded as included in the actual cost of the machinery, but once the nod was executed and the machinery already installed and started functioning, obligations under the bond would become obligations of the business and any expenses incurred in order to carry out those obligations could not be included in the actual cost of the machinery. In the present case the bond was forfeited a long time after the machinery was installed and started operating. Hence the amount of the bond which had to be paid out cannot be regarded as included in the cost of the machinery. This becomes clear if we ask ourselves a question; Supposing the assessee had carried out the export of readymade garments of Rs. 1,50,000 within the time stipulated under the bond and in doing so made a profit or loss, could that profit or loss be deducted from or added to the actual cost of machinery? In our view, the answer would be plainly in the negative. Once the bond was executed, the obligations under the bond would become normal obligations in the business and any profit or loss made in the carrying out of the nod would be business gain or business loss. This conclusion is supported by the decision of a Division Bench of this court in Income-tax Reference No. 98 of 1973 CIT v. Chemicals and Fibres of India Ltd. rendered on 7th April, 1982 : 142ITR413(Bom) .
8. Mr. Shetty referred us to the decision of this court in CIT v. Great Estern Shipping Company Ltd. : 118ITR772(Bom) . We may point out that in this case the Bombay High Court has followed the aforesaid decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT : 98ITR167(SC) . The question which arose before the Bombay High Court in the aforesaid case relied upon by the assessee was altogether of a different type. Hence, it was of no assistance to him. In our view, the Tribunal has not taken this point into account at all and hence has come to an erroneous conclusion.
9. In the result, question No. 1 is answered in the negative and against the assessee. In view of all the facts and circumstances of the case, however, there will be no order as to costs.