1. Two questions have been raised in this reference:
Whether on the facts found by the Tribunal the contributions amounting to Rs. 36,310 received by the assessee company from Government during the accounting period are trading receipts and are, as such, assessable to tax in the hands of the company?
The contention of the company is that these receipts are not trading receipts but capital receipts being contribution towards capital expenditure-made by the consumers which in this case happen to be Government. The position is this: On 5-12-1940, the Chief Engineer, Southern Command, wrote to the company requesting the company to let him know the estimate of the cost for giving service in the areas mentioned in that letter. On 10th December the company replied that the price of the materials would vary from time to time and therefore it was not possible for them to give a firm quotation but they were prepared to charge Government the cost of materials and labour charges plus fifteen per cent. for supervision for the complete work. In pursuance of this correspondence the company undertook the work of supplying electricity to the areas to which it had not supplied it before and for that purpose it had to construct new supply lines and in respect of those lines Government paid a sum which is in question, viz., Rs. 36,310. Mr. Setalvad contends that this is a part of the company's remuneration and therefore chargeable as the profit and income of the company. It is clear that the company would not have constructed these new lines and given the supply of electricity to Government unless they received Government contribution towards capital expenditure to be incurred by the company in laying down these new lines. This contribution is not in the nature of recurring income or receipt. It is not as if the company is charging Government anything more for supplying electricity to them, but what the company tells Government is, 'We are not in a position, and we do not propose, to incur capital expenditure to supply electricity to you unless you contribute towards the same.' When Government agreed to make this contribution, the company agreed to incur capital expenditure to supply electricity to Government, In our opinion, therefore, the first question raised must be answered in the negative. They are not trading receipts: they are capital receipts.
2. The other question raised is:
If the contributions are in the nature of capital receipts, do they form part of 'the actual cost to the assessee' within the meaning of Section 10(5), Income-tax Act?
Now, under Section 10(2) one of the permissible deductions is in respect of depreciation of a certain percentage of the written down value as may in any class of cases be prescribed. 'Written down value' is defined in Section 10(5)(b) as in the case of assets acquired before the previous year the actual cost to the assessee. The question that arises is, what is the actual cost to the assessee? Does the expression 'actual cost' mean only what the assessee is out of pocket by, or does the expression mean only the costs, the whole costs, and nothing but the costs, to use the words of Lord Atkin in the judgment to which I shall presently refer. The House of Lords were considering the rule in the English Income-tax statute which deals with the question of depreciation. The decision is reported in (1933) 19 Tax. cas. 195 The scheme of depreciation under the English Act is slightly different from the scheme under our Act. The English Act considers what the wear and tear of a particular machinery or building is in the course of the year. The Commissioner determines the wear and tear and permits depreciation, but the subsequent rule provides that in no event the aggregate of the depreciation to be allowed by the Commissioner should exceed the actual cost to the assessee of the machinery or the particular article being depreciated, and in construing the 'actual cost to the assessee' the House of Lords came to the conclusion that what was to be considered was what the actual cost of making the article or machinery was independently of who had contributed towards that particular amount. It was entirely an irrelevant consideration whether the assessee had spent the whole amount or only a part of it. What the taxing authorities were concerned with was what the actual cost of the article was Therefore in our opinion it is not permissible to exclude from what constituted the actual cost to the assessee the sum of Rs. 36,310. Therefore, the answer to the second question will be in the affirmative. The Commissioner to pay the costs of the reference.