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Anglo French Textiles Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1984)8ITD161(Mad.)
AppellantAnglo French Textiles Ltd.
Respondentincome-tax Officer
Excerpt:
1. this appeal by the assessee is directed against certain disallowances in computing the total income of the assessee for the assessment year 1977-78.2. the assessee is a public limited company. the first item in dispute relates to the disallowance of a sum of rs. 4,42,930 being the damages paid by the assessee under section 14b of the employees' provident funds act, 1952. the assessee was required to pay the amount by the order of the regional provident fund commissioner, dated 27-9-1976. the regional provident fund commissioner had found that under para 38 of the employees' provident funds and family pension fund scheme and para 9(1) of the family pension fund scheme, the assessee was required to deposit the contributions of the employees along with the employer's contribution and.....
Judgment:
1. This appeal by the assessee is directed against certain disallowances in computing the total income of the assessee for the assessment year 1977-78.

2. The assessee is a public limited company. The first item in dispute relates to the disallowance of a sum of Rs. 4,42,930 being the damages paid by the assessee under Section 14B of the Employees' Provident Funds Act, 1952. The assessee was required to pay the amount by the order of the Regional Provident Fund Commissioner, dated 27-9-1976. The Regional Provident Fund Commissioner had found that under para 38 of the Employees' Provident Funds and Family Pension Fund Scheme and para 9(1) of the Family Pension Fund Scheme, the assessee was required to deposit the contributions of the employees along with the employer's contribution and administrative charges to the fund within fifteen days of the close of each month. But the assessee had delayed the payment.

The assessee had pleaded that the delay was due to lock-out and strikes in the factory as well as restriction by the RBI on borrowing on security of cotton and resultant paucity of liquid funds to pay the amounts on the due dates. The assessee also pleaded that the assessee had paid the contribution in time in certain months and, therefore, there was no deliberate default. The Regional Provident Fund Commissioner, however, felt that the grounds advanced were not sufficient to waive the damages imposable under Section 14B but, since the assessee was very regular in payment and had promptly transferred past accumulations, a lenient view should be taken and restricted the damages to 6 per cent of the amount due. It was as a result of this order that the assessee had to pay a sum of Rs. 4,33,093 in respect of employees' provident fund account No. 1 and Rs. 9,838 in respect of employees' provident fund account No. 2. The assessee claimed that these payments were expenditure laid out for the purpose of the business and deductible in computing the total income. Both the ITO as well as the AAC were of the opinion that the amount paid was in the nature of penal interest and not allowable as a deduction in view of the decision of the Gujarat High Court in (he case of CIT V. Mihir Textiles Ltd. [1976] 104 ITR 167.

3. In this appeal it was contended on behalf of the assessee that the damages payable under Section 14B could not be regarded as penal interest but only as compensation for delay in the payment of the amount due and since the liability was incurred in the course of the business, the assessee was entitled to the deduction. On the other hand, the revenue relied on the decision in the cases of Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387 (All.) (FB) and of Mihir Textiles Ltd. (supra) and contended that the disallowance was justified.

4. On consideration of the rival submissions, we are of the opinion that the assessee is entitled to succeed. The latest decision of the Supreme Court which throws considerable light on this problem is that in the case of Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429.

In that case, the question was whether interest payable on arrears of cess under Section 3(3) of the U.P. Sugarcane Cess Act, 1956, was a permissible deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922 ('the 1922 Act'). The Supreme Court pointed out that the provisions of the U.P. Sugarcane Cess Act have to be examined to find out whether the interest charged under Section 3(3) thereof amounted to a penalty. It was found that under that section the interest was an automatic accretion to the cess when the payment was delayed whereas there was a separate provision for imposing penalty as well as for criminal prosecution. The interest was also recoverable along with the cess. The Supreme Court, therefore, found that the interest chargeable under that Act was in the nature of compensation paid to the Government for delaying the payment of cess and, therefore, it was not by way of penalty and, accordingly, allowed it as a permissible deduction. Taking the clue from that decision, we may examine the provisions of the Employees' Provident Funds Act. Section 6 of the Employees' Provident Funds Act provides for contributions by the employer and the employee as stipulated by the Provident Fund Schemes. It is well settled that such contributions are in the nature of a tax. It cannot be disputed that the mere failure to pay any tax is not an offence. It has been recognised that failure to pay the tax even for a long time per se does not prove fraudulent conduct. It is only fraudulent evasion which creates a right to the Government to impose a penalty. It is in this context that Section 14B enacts that any default in complying with the provisions of a scheme shall be an offence punishable with imprisonment or fine. Section 14.B further enacts that where an employer makes default in the payment of any contribution to the fund, the appropriate Government may recover from the employer such damages not exceeding 25 per cent of the amount of arrears as it may think fit to impose, Section 8 of the Employees' Provident Funds Act provides that contributions payable to the fund and the damages recovered under Section 14B may be recovered by the appropriate Government in the same manner as an arrear of land revenue. We have to consider whether these provisions in effect impose penalty for violation of law. A close reading of these provisions and in the light of the principles enunciated by the Supreme Court, leads us to the inference that Section 14B does not impose any penalty. Firstly, the section itself states that the amount recovered is damages and it is not called penalty by the section. Moreover, there is a separate provision for criminal prosecution and imposition of fine. Even though the damages which are paid at a percentage of the amount in arrears is not automatically due, the power of the appropriate Government to recover the damages is in fact a power to waive it in appropriate cases. In other words, if the assessee-employer is able to show that due to reasons beyond his control, the amount in question could not be paid on the due date, damages need not be recovered. This shows that the damages is for withholding the payment without reasonable cause and in effect for the use of the amounts belonging to the fund. We may recall the passage in 51 American Jurisprudence: The power to exact interest on delinquent taxes is an incident of the power to tax, and many jurisdictional statutes impose liability for interest on delinquent taxes in the nature of a penalty for non-payment of taxes when due. However, the imposition of liability for interest for nonpayment of taxes when due is not necessarily equivalent to a penalty thereon. This depends upon the wording and context of the statute. In many instances the Legislature in imposing liability for interest uses that term in its ordinary sense of a charge imposed for the use of money; this may be indicated by the fact that the amount of interest imposed is fixed at the legal rate of interest and chargeable on other obligations.

We gain further instruction from the recent judgment of the Supreme Court in the case of Associated Cement Co. Ltd. v. Commercial Tax Officer AIR ... Tax, interest and penalty are three different concepts. Tax becomes payable by an assessee by virtue of the charging provision in a taxing statute. Penalty ordinarily becomes payable when it is found that an assessee has wilfully violated any of the provisions of the taxing statute. Interest is ordinarily claimed from an assessee who has withheld payment of any tax payable by him and it is always calculated at the prescribed rate on the basis of the actual amount of tax withheld and the extent of delay in paying it.

It may not be wrong to say that such interest is compensatory in character and not penal.

In this context it is significant that Section 11 of the Employees' Provident Funds Act provides that in case of the employer being adjudicated insolvent, the contribution payable to the fund as well as the damages recoverable under Section14B shall have priority over other debts, thus, indicating that the amount due under Section 14B is treated only as a debt due by the employer. Since even the contribution is only a debt, the delay in discharging the debt cannot be considered to be an offence or contravention of law unless specifically made so by the statute. Therefore, the damages payable for the delay in discharging the debt can only be regarded as compensation for the use of the funds due to the provident fund and is nothing more than interest which may be commercially payable for the use of borrowed funds or funds of others especially when there is a separate section creating an offence providing the penalty therefor. In our opinion, therefore, the damages payable under Section 14B cannot be regarded as a penalty for any contravention of the law.

5. The revenue relied upon the decision in the case of Saraya Sugar Mills, (P.) Ltd. (supra) where it was held that damages payable under Section 14B of the Employees' Provident Funds Act were of the same nature and character as interest payable under the U.P. Sugarcane Purchase Tax Act, 1961. It was observed at page 397 'It stands on the same footing as interest under the Sugarcane Purchase Tax Act qua penalty'. But, then the Supreme Court had held that the interest payable under Section 3(3) of the U.P. Sugarcane Purchase Tax Act cannot be regarded as a penalty. Therefore, the reasons for which the Allahabad High Court came to the conclusion that the damages payable under Section 14B should be regarded as a penalty are no longer valid.

On behalf of the revenue, our attention was drawn to the observation of the Supreme Court in the case of Mahalakshmi Sugar Mills Co. (supra) at page 435 where it was stated that since the case of Saraya Sugar Mills (P.) Ltd. (supra) was not in appeal, the question raised therein was not being considered. Even though the Allahabad High Court decision was not specifically overruled, it is clear that the said decision must yield to the subsequent decision of the Supreme Court with regard to the principles underlining the question whether Section 14B imposes a penalty or not. The Gujarat High Court in the case of Mihir Textiles Ltd. (supra) had followed the decision of the Delhi High Court in the case of CIT v. Mahalaxmi Sugar Mills Ltd. [1972] 85 ITR 320 which has been reversed by the Supreme Court in the case cited above on appeal.

The Gujarat High Court has also relied on the case of J.S. Parkar v.V.B. Palekar [1974] 94 ITR 616 (Bom.) which has been disapproved by the Supreme Court in the case of CIT v. Piara Singh [1980] 124 ITR 40.

6. The revenue relied upon the decision of the Bombay High Court in the case of CIT v. Smt. Godavari devi Saraf [1978] 113 ITR 589 and contended that there being decisions of the High Court specifically on the question whether Section 14B is a penalty or not, we should respect the law laid down by the High Court and follow them. But, it has been explained in that decision that so long as there is no contrary decision o f another High Court, the Tribunal was bound to follow the decision of the High Court even when it strikes down a section of an Act as ultra vires. The question was whether in doing so the Tribunal was itself going into the constitutionality of a section which it could not do. It is in that context the Bombay High Court pointed out that the Tribunal was only following the precedent set down by the High Court. In the present case, we are only concerned with the interpretation of section and not the constitutionality of it.

Therefore, the question is whether the two decisions of the Allahabad High Court and the Gujarat High Court could be considered to be safe precedents to follow. In view of the subsequent decision of the Supreme Court, which has overruled the decisions followed by the Gujarat High Court and has also undermined the reasons adopted by the Allahabad High Court, it cannot be said that those decisions are clearly binding. In the circumstances, on the principles adumbrated by the Supreme Court, we cannot but hold with due deference to the decisions of the High Courts that damages recoverable under Section 14B amount only to compensatory interest for use of the funds due to the provident fund and is not in the nature of penalty for any contravention of law.

7. The second question that arises is, whether, even if it were a penalty, it is deductible or not. The leading case is that of the Supreme Court in the case of Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350. It was held in that case that an infraction of law was not a normal incident of business carried on by the assessee and the penalty paid for such infraction was held to fall on the assessee in some character other than that of a trader and cannot, therefore, be deducted as an expenditure laid out for the purpose of the business. We have the other type of case in Piara Singh (supra) where distinguishing this case, it was held by the Supreme Court that where the assessee carries on a business inherently unlawful and the income therefrom is being assessed, any penalty for infraction of the law would constitute a normal incident of that business and be deductible as an expenditure laid out for the purpose of that business. We have now before us a third type of case which is in-between the two. We cannot shut our eyes to the reality of infraction of law being necessary for carrying on lawful business also and the question will be whether penalty for such infraction falls on the trader in his capacity as a trader or not. To illustrate, supposing the assessee has a shop on a street where no parking of vehicles are allowed and the assessee is required by necessity to violate the traffic regulations and park his vehicles for the purpose of transporting his goods, loading and unloading them at his shop, can it be said that the infraction of the law was in a capacity other than a trader or that penalty for such infraction falls on him in any other capacity? To our mind such an infraction cannot but be recognised as springing directly from the carrying on of the business and incidental to it and the penalty payable would be a business loss within the meaning of the definition of a business loss given by the Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 and repeated in the case of Piara Singh (supra). Therefore, the vital question is not whether the amount claimed as a deduction is a penalty for infraction of law but whether the infraction of law was a normal incident of the business of the assessee. Looked at from this point of view, the failure to pay the provident fund dues was, as explained by the assessee before the Regional Provident Fund Commissioner, due to reasons beyond his control, namely, due to lock-outs and strikes as well as the policy of the RBI which prevented the assessee from having access to liquid funds and, hence, incidental to his business. In those circumstances, apart from the fact that non-payment of the amount due on the due date cannot be regarded as infraction of law, the postponement of such payment was really in the interest of the assessee's business, for the assessee in the absence of liquid funds could raise money only by liquidating its assets which would not obviously be commercially expedient. On the other hand, though the payment of the amount to the provident fund was delayed, the assessee had the use of the funds with which further income was earned and which is now being charged to tax. Naturally, the earning of such income being based on the funds utilised by postponing the payment to the provident fund, the damages paid for such use must of necessity be considered as an admissible deduction in computing that income. We also notice that in the case of Mahalakshmi Sugar Mills Co. (supra) the question whether the interest payable on delayed payment of cess could be considered as interest paid on borrowed capital was noted as not argued. On the facts of the present case, it appears that for that additional reason also, the damages paid under Section 14B must be considered either as business loss or expenditure or as interest paid on borrowed capital and in either case admissible as a deduction. We notice that similar claim of the assessee for deduction of damages paid under Section 14B in computing the total income for the assessment year 1970-71 has been allowed by the Tribunal by order dated 24-4-1978 in IT Appeal Nos. 1061 and 1062 of 1974-75. It has been held by the Madras High Court in the case of CIT v. S. Devaraj [1969] 73 ITR 1 that in the construction of the provisions of the Income-tax Act, 1961 ('the Act'), the Bench of the Tribunal though differently constituted should not normally take a different view from that taken earlier especially in the case of the same assessee. We, therefore, hold that as in the earlier assessment years, the assessee is entitled to the deduction for this assessment year also.

8. The second point in dispute is a similar claim for deduction of Rs. 5,025 paid as penalty to the Central excise department. The brief facts relating to this payment are that the assessee was governed by self removal procedure under the Central Excise Rules under which by way of self-assessment the assessee had to maintain a minimum amount as deposit to cover probable excise duty on the goods before removing them from the factory. It appears that due to either a mistake or negligence, the clerk of the assessee miscalculated the amount of deposit required and failed to remit the necessary additional amounts to cover further removal of goods. The result was that the assessee was liable for penalty under Rule 173(q) of the Central Excise Rules for removing excisable goods in contravention of the rules to the extent there was a shortfall in the minimum balance of Central excise amount in deposit. Here again, the authorities below have refused the deduction only on the ground that it was a levy for infraction of law and, hence, an inadmissible deduction. But, as we have discussed above, the question is not whether the amount paid was a penalty for infraction of law which in this case may not be in dispute, but, the crucial question is whether the infraction of law was a normal incident of the business of the assessee and the resulting expenditure or loss fell on the assessee in his character as a trader. The answer to this question has to be in the affirmative and in favour of the assessee because the infraction of the rule requiring the retention of a minimum balance of amount towards Central excise before removing excisable goods from the factory sprang out of and was incidental to the business. The penalty was for breach of a rule which does not contemplate any mens rea or moral culpability so as to be regarded as personal to the person committing the default. It is a statutory impost which does not take into account any extenuating circumstances and is to enforce compliance of the rule regarding maintenance of a minimum balance of excise duty rather than a punishment for any deliberate default. When an employee of the assessee is entrusted with the work of complying with the regulations, any penalty imposed, invited by negligence or mistake of that employee, must of necessity be considered as incidental to the carrying on of the business because the negligence of the employee is incidental to the business and arises in the course thereof. The businessman has to take into account the loss that may be incurred due to negligence or mistake of his agents which may not be recoverable from the employee concerned. We are, therefore, of the considered opinion that as in the case of damages paid for delay in the payment of provident fund contributions, the penalty paid under Rule 173(q) of the Central Excise Rules is also expenditure or loss occurring in the course of the business and is, therefore, an admissible deduction.

9. The third item in dispute relates to the claim of the assessee for enhanced depreciation. The assessee had purchased certain plant and machinery importing them from abroad during 1968 to 1970 on deferred payment terms. Due to exchange fluctuation, the assessee incurred extra expenditure of Rs. 19,11,128. The assessee claimed that this extra expenditure should be added to the cost as at the inception, depreciation worked out thereon and after adjusting depreciation already allowed, amounting to Rs. 3,82,227, the balance of Rs. 11,65,536 should be allowed as a deduction in computing the total income of this assessment year in the place of depreciation allowable on the revised written down value of the plant and machinery for this assessment year alone. The ITO was of the opinion that Section 43 A of the Act on which the assessee relied on did not justify such a claim.

On appeal, the Commissioner (Appeals) also was of the opinion that the assessee was entitled to the depreciation only on written down value and since the written down value was defined to mean only the actual cost less depreciation actually allowed in the earlier years, the assessee was not entitled to anything more than that in spite of the provision in Section 43A enabling the additional expenditure incurred due to exchange fluctuation to be added to the actual cost.

10. In this further appeal before us, it was submitted on behalf of the assessee that Section 43A was a special provision enabling the assessee to revise the actual cost due to exchange fluctuation and full effect should be given to that provision by granting additional depreciation that would have been available to the assessee if the actual cost had been revised at the inception. It was pointed out that what was defined under Section 43A was the actual cost and not the written down value and, therefore, the depreciation had to be computed from the actual cost and not only the written down value. Reliance was also placed on the decision in the case of Maharana Mills (P.) Ltd. v. ITO [1959] 36 ITR 350 (SC) to contend that as a consequence of the statutory definition, it was possible to grant depreciation which had not been granted earlier though the assessee was entitled to it. On the other hand, it was contended on behalf of the revenue that under Section 32 of the Act depreciation was allowable only on the written down value and since the written down value has been defined in Section 43(6) of the Act to mean only the actual cost less depreciation already allowed, there was no question of imagining any depreciation that was required to be allowed for the earlier years which could be allowed in the present assessment year.

11. On consideration of the rival submissions, we are of the opinion that the assessee may not be entitled to succeed on this point. We may first notice the relevant sections of the Act. Under Section 32, in respect of machinery and plant owned by the assessee and used for the purpose of his business, a deduction shall be allowed in respect of depreciation at such percentage on the written down value thereof as may be prescribed. Section 43(5) defines 'written down value' in the case of assets acquired before the previous year as the actual cost to the assessee less the depreciation actually allowed to him. Reading these two sections together, it would mean that if the actual cost of a machine was Rs. 100 and depreciation of 20 per cent had been given for the preceding assessment year, the assessee would be entitled in the present assessment year for depreciation on the amount of Rs. 80, namely, Rs. 100 less Rs. 20. Section 43A makes a special provision consequential to changes in rate of exchange of current year. In that section, where an assessee has acquired an asset from a country outside India and there is an increase in the liability for making payment towards the cost of the asset, the amount of such increase shall be added to the actual cost of the asset as defined in Clause (1) of Section 43. The section also provides for deducting the amount in case the liability is reduced due to exchange fluctuation. In the illustration we have given above, if the original cost was Rs. 100 and due to exchange fluctuation there is an additional liability of Rs. 10, the actual cost will now be taken at Rs. 110. The case of the revenue is that even if the actual cost is taken at Rs. 110, the written down value would be Rs. 110 minus Rs. 20 being the depreciation actually allowed and, therefore, the assessee would be entitled to depreciation for the current assessment year on the amount of Rs. 90. The same result would follow if the written down value is increased by the additional liability of Rs. 10, for in the illustration taken above, the written down value for the current year would be original cost of Rs. 100 minus depreciation actually allowed of Rs. 20, namely, Rs. 80, and adding the additional liability of Rs. 10, the written down value for the current year would be Rs. 90. But this is not the bone of contention between the parties. As we understand it, the contention of the assessee is that the Parliament could have very well stated in Section 43A that the written down value shall be revised by the amount of difference in liability due to exchange fluctuation if this was the result that was sought to be achieved instead of stating that it is the actual cost which was to be revised. Therefore, it is argued that if the actual cost were to be revised from the inception then the depreciation thereon that ought to have been allowed would also have to be recalculated and adjusted in granting the depreciation for the current assessment year. To illustrate this contention, if the actual cost of Rs. 100 is revised upwards by adding additional liability of Rs. 10 then the actual cost has to be taken at Rs. 110 and the depreciation for the preceding assessment year itself would be Rs. 22 at the rate of 20 per cent and the further depreciation for the present assessment year at the rate of 10 per cent on Rs. 88 (Rs. 110 minus Rs. 22) will be equal to Rs. 8.80. The total depreciation for both the assessment years would be Rs. 22 plus Rs. 8.80, i.e., Rs. 30.80 whereas according to the revenue, the total depreciation allowable would be Rs. 20 plus Rs. 9 (10 per cent of 90) i.e., Rs. 29 only. The assessee claims deductions of depreciation allowable for the earlier years on the revised cost and the depreciation actually allowed as a deduction.

12. We find that this contention is based on the presumption of construction of statutes that words in a statute are used precisely and a statute ought to be so construed that if can be prevented, no word shall be superfluous, void or insignificant. Section 43A states that it is the actual cost as defined in Section 43(1) which should be revised due to exchange fluctuation. No doubt, Section 32 grants depreciation on written down value which has been defined as the actual cost less depreciation actually allowed. Yet, the use of the words 'actual cost' in Section 43A instead of the 'written down value' must have some significance. The section in effect, creates a fiction because it requires actual cost to be revised due to exchange fluctuation. That actual cost has been already incurred and recorded in the books. If it is to be varied due to exchange fluctuation, that variation must of necessity be at the inception and not from a later date, namely, the date in which the exchange fluctuation occurred. There is also nothing in the section which states that the revision of the actual cost should be made only in the year of account in which the additional liability was incurred. We may have to seek the underlying principle for this variation in the value of the plant and machinery from the principles of accountancy. Depreciation has been defined in the Dictionary for Accountants, fourth edition, by Eric L. Kohler as follows: In everyday business-and-accounting usage, the term 'depreciation' is applied to be estimated cost of expired usefulness and to making or accumulating book entries based on the application of depreciation rates in recognition of the cost of the services which a limited life asset or asset group will no longer yield, regardless of whether such services have actually been yielded, or, if yielded, whether they have benefited production... Depreciation expense computations are thus based on the assumption that every fixed asset, with the exception of land, can yield a limited quantity of useful services and has a limited life. The cost of the asset, less whatever can be anticipated in the way of resale or scrap yield, is a prepaid expense that by some method must be spread over its operating life while in the hands of its present owner.

It follows that the rate of depreciation is based on an expected life of the asset which is fixed and does not depend upon the fluctuation of rate of exchange. When the value of the asset, however, had to be varied by the fluctuation in the rate of exchange, we cannot allow our imagination to boggle and refuse to rework the depreciation on the revised value from the inception, for, otherwise the result will be that the depreciation allowable would be spread over a larger period than before. Such a result would, thus, be contrary to the principles of accountancy and unjust. It is well recognised that the Act charges only the true profits of the business to tax and such true profits cannot be ascertained without taking into account the depreciation deductible in respect of the revised actual cost which is necessary if the useful life of the asset is not to be artificially extended.

Section 43A itself came into picture only to allow the assessee to have the benefit of capitalisation of additional expenditure arising from fluctuation of rate of exchange which would not otherwise be allowable as revenue expenditure. Once such expenditure is capitalised, it is a mere corollary that the depreciation thereon is to be worked out by substituting the revised value for the actual cost. If the intention of the Parliament was to the same effect as the contention of the revenue, it would have been enough if only written down value is revised in the year in which the additional liability is incurred due to exchange fluctuation. It is also significant to note that Section 43A(2) specifically provides that the revised figure of actual cost by reason of the additional liability shall not be taken into account for the purpose of deduction of development rebate under Section 33 of the Act, i.e., even though the actual cost is revised from the inception, the natural corollary that the revised value should be the amount in respect of which development rebate is available under Section 33 for the year in which the plant and machinery was installed has been specifically excluded. We find on the contrary, no such specific exclusion of extra depreciation arising out of revision of the actual cost by reason of the additional liability. This indicates clearly the intention of the Parliament that the word 'actual cost' has been used in Section 43A rather than the 'written down value' for the specific purpose of allowing the assessee to charge additional depreciation by revising the actual cost from the inception and working out the depreciation that would have been allowable on that basis. Once the Parliament states that it is the actual cost which is to be revised, it will mean that the actual cost originally taken must be substituted with the revised value as otherwise only the written down value would be revised. It is almost equivalent to stating that there is a mistake apparent from the record by reason of this amendment introduced by Section 43A with the result that actual cost originally taken in the earlier assessment year in respect of which the plant and machinery was acquired is to be rectified by substituting the revised value. As pointed out by the Supreme Court in the case of Maharana Mills (P.) Ltd. (supra), where a rectification of the actual cost is required, the ITO should not merely revise the written down value of the previous year but should also take into consideration the depreciation allowable from the inception and work out the difference between the depreciation allowable in that case, the rectification arising from a factual mistake was approved by the Supreme Court and in the present case it means only a rectification required by operation of law as for instance in the case of M.K. Venkatachalam, ITO v. Bombay Dyeing & Mfg. Co. Ltd. [1958] 34 ITR 143 (SC).

13. But, the objection of the revenue would be that under Section 32 read with Section 43(5) depreciation can be given only on actual cost less depreciation actually allowed and, therefore, the depreciation which ought to have been allowed for the earlier years by revising the actual cost could not be allowed without revising the assessment for the earlier years and, consequently, could not be allowed in the subsequent assessment year either. We find sufficient force in this objection. It is difficult to accept the claim that the resultant difference in the depreciation which ought to have been allowed for the earlier years and the depreciation actually allowed could be deducted only in the current assessment year merely because it had not been charged earlier and became a charge on the profits of the assessee only in the year in which the assessee incurred additional liability by reason of the exchange fluctuation in the absence of a statutory mechanism to give effect to it. As seen above, Section 32 grants depreciation on the written down value of the asset. Section 43(6)(b) defines 'written down value' in the case of assets acquired before the previous year as the actual cost less depreciation actually allowed. As far as this assessment year is concerned, we can accept that the actual cost has to be revised because of exchange fluctuation as required by Section 43A. But, the other component 'depreciation actually allowed' cannot be revised without rectifying the assessments of the earlier years nor is there anything specific in the Act to allow the difference between the depreciation allowable for the earlier years as a consequence of the revision of actual cost and the depreciation actually allowed in computing the depreciation for this year. Moreover, no provision has been made under Section 155 of the Act for such a rectification with reference to the assessments of the earlier years with regard to the depreciation already allowed on the original cost.

We are, therefore, of the opinion that this claim of the assessee was rightly rejected and the orders of the authorities below on this point should be confirmed.

14. In the circumstances, we set aside the orders of the authorities below on the first two issues discussed above and direct the ITO to recompute the total income.


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