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Commissioner of Income-tax, Gujarat Vs. Hides and Leather Products Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 14 of 1971
Judge
Reported in[1975]101ITR61(Guj)
ActsIncome Tax Act, 1922 - Sections 10(2), 10(3) and 10(5); Income Tax Act, 1961 - Sections 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 43, 43(1), 43(6) and 147(1)
AppellantCommissioner of Income-tax, Gujarat
RespondentHides and Leather Products Pvt. Ltd.
Appellant Advocate J.M. Thakore, Adv.
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredIn Guzdar Kajora Coal Mines Ltd. v. Commissioner of Income
Excerpt:
direct taxation - deduction - sections 10 (2), 10 (3) and 10 (5) of income tax act, 1922 and sections 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 43, 43 (1), 43 (6) and 147 (1) of income tax act, 1961 - income tax reference regarding deductibility of depreciation - only contributions from government or public or local authority can be deducted while ascertaining actual cost. - - 11. these decisions clearly show that, so far as the income-tax officer is concerned, he has to determine the written down value for each assessment year for himself and he can determine for himself what the actual cost to the assessee had been in the first instance and not merely depend upon the determination of that question in any of the previous assessment years. it is difficult for us to.....divan, c.j. 1. in this case at the instance of the revenue the following question has been referred to us for our opinion by the appellate tribunal : 'whether, on the facts and in the circumstances of the case, depreciation was rightly allowed to the assessee on the basis that the cost to it of the machinery purchases was rs. 30,572 ?' 2. the facts giving rise to this reference are as follows : the relevant assessment years are assessment years 1961-62 to 1965-66. the assessee is a private limited company. during the calendar year 1955, that is, the previous year relevant for the assessment year 1956-57, the assessee purchased from the industrial trading and financial company ltd., zurich, switzerland, a mechanical picker press for 27,820 swiss francs equivalent to rs. 30,572 as shown in.....
Judgment:

Divan, C.J.

1. In this case at the instance of the revenue the following question has been referred to us for our opinion by the Appellate Tribunal :

'Whether, on the facts and in the circumstances of the case, depreciation was rightly allowed to the assessee on the basis that the cost to it of the machinery purchases was Rs. 30,572 ?'

2. The facts giving rise to this reference are as follows : The relevant assessment years are assessment years 1961-62 to 1965-66. The assessee is a private limited company. During the calendar year 1955, that is, the previous year relevant for the assessment year 1956-57, the assessee purchased from the Industrial Trading and Financial Company Ltd., Zurich, Switzerland, a mechanical Picker press for 27,820 Swiss Francs equivalent to Rs. 30,572 as shown in the supplier's bill dated April 28, 1955. The machinery was actually received by the assessee on June 15, 1955. According to the bill the payment was to be made against sight draft within 180 days. On this machinery, the assessee paid customs duty and clearing charges, etc., amounting to Rs. 2,359 and railway fright, expenses for foundation for installing the machinery and other expenses at the factory aggregating to Rs. 598. The total cost debited in regard to this item of machinery during calendar year 1955 amounted to Rs. 33, 529. During assessment year 1956-57 on the footing that the total cost to the assessee was Rs. 33,529, the assessee was allowed development rebate. During assessment years relevant to calendar years 1955 to 1959, the assessee was allowed depreciation aggregating to Rs. 18,406 in respect of this piece of machinery. The assessee maintains its accounts on the mercantile system and the Swiss supplier's account had been duly credited with the amount of Rs. 30,572 that being the price which the Swiss supplier was entitled to receive in respect of this press. In the course of assessment proceedings for assessment year 1961-62, the Income-tax Officer noticed an item of Rs. 30,572 under the head 'Capital reserve not available for divided' Being capital profit on liabilities written back. Thereupon, the Income-tax Officer made inquiries and the assessee informed the officer that when the machinery was purchased in 1955, the payment was to be made within 180 days on sight draft. But there was a dispute between the assessee and the suppliers about some defect in the machinery and the assessee-company had not paid the cost price of the machinery to the Swiss supplier but the amount had not been handed over nor had the Swiss supplier taken any steps or legal action against the assessee for recovering the purchase price. In 1960 the assessee transferred the liability of Rs. 30,572 to the purchase of a capital asset and the amount was not paid by the assessee-company. The Income-tax Officer called upon the assessee to produce all concerned correspondence in regard to the purchase of this machinery and the payment of the purchase price thereof. The assessee did not produce any correspondence before the Income-tax Officer on the ground that no correspondence was available with it because it was destroyed.

3. On the receipt of this information, the Income-tax Officer came to the conclusion that the assessee had been under-assessed for assessment years 1956-57 to 1960-61 inasmuch as the assessee had been allowed development rebate and depreciation which were no due to it because the cost of the asset on which the development rebate and depreciation were claimed and allowed to the assessee in these assessment year was 'Nil'. He therefore, initiated proceedings for reassessment under section 147(1)(a) and added back to the income as originally assessed the development rebate and depreciation allowed in the original assessments. The Income-tax Officer took the view that the cost meant what would have been laid out or suffered or lost to obtain anything. He noted in the assessee to obtain the machinery and he, therefore, held that the cost of the machinery to the assessee was 'Nil'. In view of these conclusion so far as assessment years 1956-57 to 1960-61 were concerned, appropriate orders were passed by the Income-tax Officer. Against the orders of the Income-tax Officer in reassessment proceedings appeals were preferred by the assessee but these appeals were dismissed by the Appellate Tribunal, it was held by the Tribunal that the proceedings under section 147(1)(a) were uncalled for. On the merits the Tribunal held that though the assessee had transferred the liability due from the assessee even though according to the law of limitation the suppliers' remedy to enforce payment might have been barred by time. The revenue did not take the matter further against the orders of the Appellate Tribunal in reassessment proceeding and there the matter apparently rested.

4. As regards assessment years 1961-62 to 1965-66, the Income-tax Officer did not allow the assessee depreciation on the machinery and this action of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner. Thereafter, the assessee had carried the matter in further appeals to the Appellate Tribunal and while disposing of the appeals for the assessment years 1961-62 to 1965-66, the Tribunal held that the actual or original cost to the assessee in respect thereof in favour of the foreign supplier. The Tribunal further held that the fact that in calendar year 1960, the liability was transferred to the capital reserve account did not detract from the position that the assessee did actually incur a liability in respect thereof. The Tribunal held that there had been no cessation or remission of the liability and the original cost to the assessee of the machinery was held to be cost as indicated in the books of account in the calendar year 1955. The Tribunal, therefore, held that the assessee was entitled to depreciation with reference to the cost of machinery as determined above and in view of these conclusion the Tribunal held in favour of the assessee and against the revenue. Thereafter, at the instance of the revenue, the question here in above set out has been referred to us.

5. In order to appreciate the correct legal position we will first refer to the provision of the law as it prevailed under the Indian Income-tax Act, 1922, prior to its repeal and replacement by the Income-tax Act, 1961. Under the scheme of the Act of 1922, under section 10 under head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. Under sub-section (2) of section 10 such profits or gains were to be computed after making allowance as set out in various clauses of sub-(2). Clause (vi) of section 10, sub-section (2), provided for depreciation; in respect of such buildings, machinery, plant or furniture being the property of the assessee, depreciation was to be allowed in a sum equivalent to such percentage on the original cost thereof to the assessee as may in any case with 'any other case'. Under section 10, sub-section (5), 'written down value' meant in the case of assets acquired in the previous year, the actual cost to the actual cost to the assessee less all depreciation actually allowed to him under the Act, or any Act repealed thereby, or under executive orders issued when the Indian Income-tax Act, 1886, was in force. Under clause (c) of section 10(5) in the case of assets acquired by the assessee by way of gift or inheritance, the 'written down value' as in the case of the previous owner or the market value thereof whichever was less was to be considered the 'written down value'. Under the Explanation to section 10(25) as it stood after the amendment by the Indian Income-tax (Amendment) Act, 1953 (25 of 1953), which came into force with effect from April 1, 1952, for the purposes of sub-section (5) of section 10, the expression 'actual cost' meant the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as had been met directly or indirectly by Government or by any public or local authority, and any allowance in respect of any depreciation carried forward under clause (b) of the proviso to clause (vi) of sub-section (2) shall be deemed to be depreciation 'actually allowed.'

6. At this stage we may point out that under section 10, sub-section (2A), which was inserted by Finance Act, 1955, with effect from April 1, 1955, for the purpose of computing profits or gains under section 10, an allowance or deduction had been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently during any previous year, the assessee had received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or had obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accrued to him was to be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year.

7. Prior to the insertion of the Explanation to sub-section (5) of section 10 by the Indian Income-tax (Amendment) Act, 1953 (25 of 1953), there had been a series of decision regarding the meaning of the word 'actual cost to the assessee' occurring in the provision of section 10. We may at this stage briefly refer to some of those decisions. In Commissioner of Income-tax v. Poona Electric Supply Co. Ltd. decided on March 27, 1945, the meaning of the words 'the actual cost to the assessee' was laid done in the light of certain observations of Lord Atkin in the decision of the House of Lords in Corporation of Birmingham v. Barnes In Commissioner of Income-tax v. Poona Electric Supply Co. Ltd., a Division Bench of the Bombay High Court consisting of Kania and Chagla JJ., as they then were, the facts were as follows :

The assessee, an electric supply company, undertook to supply electricity to the Government in certain areas on condition that it was allowed to charge Government the cost of materials and labour charges plus fifteen per cent. for supervision for the complete work. The assessee received in the accounting year contributions were non-refundable and were made towards, and represented only a part of the capital cost of constructing the new supply lines, which works were regarded by the assessee as unremunerative and would not have been undertaken without the contributions in question. On these facts, the Division Beach held that the contributions amounting to Rs. 36,310 were not trading receipt but were capita receipts and as such were not assessable to tax in the hands of the assessee. Secondly, it was held that the contributions formed part of 'the actual cost to the assessee' within the meaning of section 10(5) of the Indian Income-tax Act, 1922. Following the observation of Lord Atkin in the case above referred to, the Division Branch held that in determining the question what is the actual cost of a machinery or plant to the assessee it is an irrelevant consideration whether the assessee has spent the whole amount or only a part of it. What the taxing authorities have to consider is what the actual cost of the article is independently of who has contributed towards that particular amount. At page 627 Chagla J., delivering the judgment of the Division Bench, has observed :

'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 Lords 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 Corporation of Birmingham v. Barnes. 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 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.'

'This decision of the Bombay High Court was followed by the Patna High Court in Commissioner of Income-tax v. Ranchi Electric Supply Co. Ltd. by the Kerala High Court in Commissioner of Income-tax v. Cochin Electric Co. Ltd., by the Punjab and Haryana High Court in Commissioner of Income-tax v. Ambala Cantonment Electric Supply Co. Ltd., and the Madras High Court in Francis Vallabarayar v. Commissioner of Income-tax following the House of Lord's decision on Corporation of Birmingham v. Barnes also came to the same conclusions as the Bombay High Court. It may be pointed out that after this series of decisions and particularly after the decision of the Bombay High Court, the Government seems to have considered the legal position and the Explanation to section 10(5) was added so that when contributions were made by Government or by any public or local authority towards the actual cost of the assessee's to the assessee, those contributions were not to be taken into account for the purpose of finding out what the actual cost to the assessee was.'

8. After the enactment of the Income-tax Act, 1961, which came into force with effect from April 1, 1962, the position was changed by inserting the definition clause in section 43(1). In section 28 to 41 and in section 43, and it may be pointed out that this group of section deals with income and also with questions of depreciation allowance, 'actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost there-of if any, as has been met directly or indirectly by any other person or authority. Hence, after April 1, 1962, by virtue of the definition in section 43(1), the actual cost to the assessee which is necessary to be ascertained for the purpose of computing the written done value, any contribution to the cost which has gone to meet directly or indirectly the actual cost to the assessee has to be taken into account and the actual cost has to be reduced by such contribution even if they have proceeded from any other person or authority. Thus the law has been significantly changed after the coming into force of the Income-tax Act, 1961, and even if the cost has been met directly or indirectly by any other person or authority as distinguished from Government or local or public authority under the Act, of 1922, such direct or indirect contribution from any other person or authority must be taken out from the actual cost in order to ascertain what the actual cost to the assessee is. Under section 43, sub-section (6) of the Act, of 1961, 'written down value' means, (a) in the case of assets acquired in th previous year, the actual cost to the assessee; and (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 the Act of 1961, or under the Indian Income-tax Act, 1922, or any Act repealed by the Act of 1922, or under any executive orders issued when the Indian Income-tax Act, 1886, was in force. Therefore, in order to ascertain what the written done value of a particular asset is, the actual cost has to be ascertained in the light of the provision of the Act of 1961 as defined in section 43, sub-section (1) but all depreciations which have been actually allowed in the past have to be deducted from the actual cost as thus ascertained, whether such actual depreciations have been granted in the past under the Act of 1961 or under the Act of 1922. The result, therefore, is that reading section 43(6) in the only manner in which it can be read and in view of the fact that the legislature has specially made a distinction between actual cost not at the time when the assets were acquired before the coming into force of the Act of 1961 but actual cost to the assessee as defined by section 43(1) and as specifically referred to there-in, as depreciation allowed under the Act of 1922 have to be deducted from such actual cost, it is not possible for us to accept the contention urged by Mr. Kaji on behalf of the assessee that the actual cost to the assessee in the instant case should be as at the time of acquisition of the asset, namely, the particular piece of machinery costing Rs. 30,572 in 1955 and not the actual cost to the assessee as defined in section 43(1) of the Act of 1961.

9. The question that we have now to consider is whether in the light of any binding decisions either of the Bombay High Court or of the Supreme Court, the words 'actual cost to the assessee' have been interpreted in any manner other than the line of decision delivered by the different High Courts in India following the observations of Lord Atkin in Corporation of Birmingham v. Barnes. In Habib Hussein v. Commissioner of Income-tax, a Division Bench of the Bombay High Court has considered the meaning of the words 'actual cost to the assessee'. At page 875 of the report Tambe J. as he then was, delivering the judgment of the Division Bench of the Bombay High Court, has observed :

'In our opinion, therefore, the meaning of the expression 'actual cost to the assessee' as used in sub-section (5) of section 10 of the Act would be what the assessee has, in fact, expended or laid out for the purpose of acquiring the depreciable assets.'

10. It was also observed by the Division Bench at page 878 that the written down value has to be determined in each year in the light of the definitions in clauses (a) and (b) of sub-section (5) of section 10, and in the light of the decisions in Karnani Industrial Bank Ltd. v. Commissioner of Income-tax. The Bombay High Court held that the written down value determined in a year does not operate as res judicata nor is it conclusive in determining the written down value of the subsequent years. This decision in Karnani Industrial Bank Ltd. v. Commissioner of Income-tax was approved by the Supreme Court in Maharana Mills (Private) Ltd. v. Income-tax Officer, Porbandar pointed out that neither the principle of res judicata nor estoppel not the terms of section 10(2)(vi) of the Act of 1922 prevented the Income-tax Officer from determining for himself what the actual cost of the machinery had been and that depreciation had to be calculated for every year and it was open to the Income-tax Officer not merely to perform 'a mathematical operation on the basis of the written down value of the previous year, but one of determining the written down value himself'. According to the Bombay High Court decision in Habib Hussein v. Commissioner of Income-tax the limit to which the Income-tax Officer can go back does not stop at the written down value of the previous year but extends up to the figure of the original cost, and the method enjoined by section 10(5)(b) is not that the Income-tax Officer should merely scale down the written down value of the previous year but that he should take into consideration the actual cost, determining it for himself, and if necessary, take also into consideration the allowances granted in the past and then make his own computation as to the written down value for the assessment year with which he is concerned.

11. These decisions clearly show that, so far as the Income-tax Officer is concerned, he has to determine the written down value for each assessment year for himself and he can determine for himself what the actual cost to the assessee had been in the first instance and not merely depend upon the determination of that question in any of the previous assessment years. In Jogta Coal Co. v. Commissioner of Income-tax, Kapur J., delivering the judgment of the Supreme Court, has pointed out :

'The words which require to be considered are 'on the original cost thereof to the assessee'. It has been held by the Privy Council in Commissioner of Income-tax v. Buckingham and Carnatic Co. Ltd., that the word 'assessee' in section 10(2)(vi) refers to the person who owns the property in question and who is being assessed and not the predecessor and depreciation allowance is to be based on the original cost of such property to such person (i.e., assessee) and, therefore, the cost to be considered for the purpose of calculating the depreciation allowance is the original cost to the purchaser who is being assessed and not the written down value to his predecessor. We do not think that there is any doubt on the wording of the section or on the interpretation that has been put upon those words that the cost to be calculated for the purpose of depreciation allowance is the cost to the assessee and not to the person who makes the sale......'

12. In Kalooram Govindram v. Commissioner of Income-tax the question again camp for consideration before the Supreme Court regarding the 'actual cost to the assessee'. In that case G and B were members of a Hindu undivided family. In 1942, in a suit for partition wherein G and B were declared entitled to 10/16th and 6/16the shares in the properties, each item of property which could not be divided by metes and bounds was put up for sale by competitive bidding between them. One of the items was a sugar factory which was knocked down in favour of G for a sum of Rs. 34 lakhs. After all the items of the properties were thus allotted to one or other of them final adjustment was made by cash payment. Thereafter, G's smaller family continued to run the factory. For the assessment year 1950-51, the question arose whether the appellant was entitled to depreciation on the factory under section 10(2)(vi) of the Indian Income-tax Act, 1922, on the amount of Rs. 34 lakhs, depreciation not having been allowed for any earlier period. The Appellate Tribunal held that, as regards the 10/16th share, the cost to the appellant was the original cost to the larger family, and as regards the 6/16th share the original cost was 6/16th of the purchase price of Rs. 34 lakhs, viz., Rs. 12,75,000. On a reference at the instance of the appellant, the High Court held that depreciation ought to be computed on the basis of the original cost to the large family and not on the basis of the valuation on which the appellant took over the assets. On appeal to the Supreme Court, it was held by the majority of the learned judges who heard the matter the depreciation allowance ought to be computed on the basis of the valuation at which G took over the assets and Subba Rao and Sikri JJ., as they then were, held :

'Barring the cases of fraud, collusion and inflation and deflation of values for ulterior purposes, the cost of an asset to a divided member must necessarily be its cost to him at the time of partition, whether mentioned in the partition deed or ascertained aliunde...... if the valuation of the property for purpose of partition was not notional but was real and that was the basis for allocating properties to different members the cost of a property allotted to a member cannot be that at which it was purchased by the Joint family in the remote past, but would be the value given to it for the purpose of allotment or at which it was auctioned for the purpose of partition.'

13. This case of Kalooram Govindram v. Commissioner of Income-tax is an illustration of the application by the Supreme Court of the principle that the cost to the assessee is the actual cost to the assessee before the income-tax authorities as actually worked out or as actually paid by him but not any other price or valuation.

14. In Guzdar Kajora Coal Mines Ltd. v. Commissioner of Income-tax the Supreme Court held that the original cost to the assessee of a particular asset is a question of fact which has to be determined on the evidence of material placed before or available to the income-tax authorities. Any document or formal deed mentioning the consideration or the cost paid for the purchase of an asset by the assessee would be a piece of evidence and, prima facie, the statements or figures given therein would show how much the cost of the asset to the assessee is. But, if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the assessee and there has been inflation or deflation of value for ulterior purposes, it is open to the income-tax authorities to refuse to accept the price mentioned or allocation given in the deed or alleged by the assessee and to ascertain what the actual cost was or to determine the allocation between depreciable and non-depreciable assets. In that particular case the question before the Supreme Court was regarding the power of the Income-tax Officer to go beyond the covens and fix a valuation of the assets on his own. The Supreme Court held that there was no error or infirmity that would justify interference with the decision of the High Court that the Income-tax Officer had such power to go beyond the conveyance and fix the valuation on his own. This decision is again an illustration of the application of the principle that it is open to the income-tax authorities to go behind the document and to fix a valuation on their own as of the date of acquisition by the assessee concerned so that the actual cost to the assessee can be ascertained for taxation purposes.

15. It is true, as Mr. Kaji has urged, that in the instant case the system of account keeping of the assessee is on mercantile basis and hence when a credit entry is shown in the books of account in favour of the Swiss suppliers, from that date onwards the assessee-company accepted its liability to the Swiss suppliers and acknowledged their liability to pay. Because of the mercantile system of account keeping, it was not necessary for the assessee actually to pay the amount to the Swiss suppliers in order to claim the amount of Rs. 30,572 as the actual cost of the machinery to this assessee. Therefore, because of the mercantile system of account keeping we can proceed on the footing that from 1955 to 1960, the assessee-company by mentioning year after year the liability to the suppliers was acknowledging its liability to the suppliers and the amount of Rs. 30,572 was being shown as the actual cost. It is true, as Mr. Kaji has contended, that in terms there has been no remission of the price and there is no evidence that there was any remission by the Swiss suppliers. The question, therefore, is whether there is nay cessation of the liability to the Swiss suppliers in the events that have happened. The Tribunal has held that there was neither remission nor cessation of the liability of the assessee to the Swiss suppliers. The question, therefore, we have to consider is, whether the High Court at the present stage can enter into the question whether there was any cessation of liability and, secondly, if it can so enter, whether the conclusion of the Tribunal regarding there being no cessation of liability was correct or not. The conclusion drawn or the inference drawn from a bundle of facts is partly a question of law and partly a question of fact and, therefore, this conclusion of the Tribunal of there being no cessation of liability at least is partly a question of law an, therefore, it is open to the High Court to consider whether the inference drawn by the Tribunal from the bundle of facts before it was correct or not. The bundle of facts is that in 1955 the piece of machinery was purchased by the assessee from the Swiss suppliers. Thereafter, no amount was paid towards the price thereof on the ground that there was some defect in this piece of machinery. The liability to the Swiss Suppliers was being shown in the balance-sheet and in the books of account of the assessee-company but in 1960 by making appropriate entries in the books of account, the assessee-company wrote back the amount Rs. 30,572 and debited the amount Rs. 30,572 in the account of the Swiss suppliers and credited the same amount in the capital reserve as capital profit on liabilities written back transferred to the account as capital reserve. The Tribunal has observed that when called upon by the Income-tax Officer to produce the correspondence between the assessee-company and the Swiss suppliers, the assessee did not produce any correspondence on the ground that such correspondence was not available because it was destroyed. It is difficult for us to understand that a limited liability company like the assessee would not take care to preserve its correspondence on this issue where the question of payment of Rs. 30,572 to the Swiss suppliers was still outstanding. But, be that as it may, the question is whether non-action on the part of the swiss suppliers and their omission to take any legal steps against the assessee-company for the recovery of the amount of Rs. 30,572 for a period of nearly five years would lead to the inference that there was a cessation of liability with the effect from the date when the entry was made. The entry was made, as pointed out above, in the year 1960, that being the previous year for assessment year 1961-62, and, thereafter, the amount of Rs. 30,572 has been shown under the head 'Capital reserve not available for dividend', being capital profit of liabilities written back. Mr. Kaji may be right when he contends that at least according to the books of account of the assessee-company the liability has not ceased but what we have to ascertain is not merely entries in the books of according to the books of account of the assessee-company the liability has not ceased but what we have to ascertain is not merely entries in the books of account but actual cessation of liability. In our opinion, looking to the fact that for a period of 5 years and even till today no action has been taken by the Swiss supplier to recover the amount of Rs. 30,572 from the assessee-company and no legal steps have been taken, it is not unreasonable to infer that the Swiss supplier at least has treated this liability of the assessee-company towards itself to have come to an end and to have ceased and, under these circumstances, in substance and in fact there has been a cessation of this liability of the assessee to the Swiss suppliers.

16. In view of this cessation of liability, we have to ascertain the position for the different assessment years. As pointed out above, under the Act of 1922, which was applicable to assessment year 1961-62. It was only if there was any contribution from Government or public or local authority, that those contribution could be deducted while ascertaining the actual cost. The Swiss suppliers were neither Government nor any public or local authority and, therefore, for the assessment year 1961-62, even though there was cessation of liability, the assessee-company was entitled to have the benefit of the entire amount of Rs. 30,572 as the actual cost to the assessee for that particular assessment year and to have the written down value for assessment year 1961-62 worked out on the footing that for that particular year the cost to the assessee of this particular piece of machinery was Rs. 30,572.

17. As regards assessment years 1962-63 to 1965-66 we have to proceed, as pointed out above, under the provision of section 43, sub-section (1), of the Act of 1961. Under the definition as set out in section 43, sub- section (1), as pointed out above, even if the cost has been met directly meeting of the cost has to be deducted in order to ascertain the actual cost to the assessee. Since we have come to the conclusion that there was cessation of liability particularly in the light of the omission of the Swiss supplier to takes any legal action against the assessee, the actual cost to the assessee must be reduced for assessment years 1962-63 to 1964-65. The actual cost would be reduced by Rs. 30,572. That is the only conclusion one can come to in the light of section 43, sub-section (1), of the Act of 1961.

18. The question before us is not a question of limitation, that is of the liability being time barred or not, The question is of cessation of liability and hence the decisions cited at the Bar on behalf of the assessee dealing with the question of this liability not being time barred have not been discussed in the course of this judgment.

19. We, therefore, answer the question referred to us as follows. For the assessment year 1961-62, the depreciation was rightly allowed to the assessee on the basis that the cost to it of the machinery in question was Rs. 30,572. For assessment years 1962-63 to 1964-65, the depreciation was wrongly allowed to the assessee on the basis that the cost to it of the machinery in question was Rs. 30,572. As observed above, while calculating the actual cost to the assessee should be reduced by the amount of Rs. 30,572 for these four assessment years. The question will, therefore, be answered accordingly. In view of the fact that the assessee has partially succeeded and the revenue has partially succeeded, there will be no order as to costs.


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