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Commissioner of Income-tax, Central Vs. Rohtas Industries Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 537 of 1973
Judge
Reported in[1981]130ITR292(Cal)
ActsIncome Tax Act, 1961 - Section 43(1)
AppellantCommissioner of Income-tax, Central
RespondentRohtas Industries Ltd.
Appellant AdvocateB.K. Bagchi and ;A.N. Bhattacharya, Advs.
Respondent AdvocateM. Seal, Adv.
Cases ReferredShanti Prasad Jain v. Directorate of Enforcement
Excerpt:
- .....it appears that no actual cost on account of machinery was met by the german firm. but if any cost of machinery was actually met, then different considerations might apply. but in this case what was paid was compensation for low output for the defective machinery supplied by the german firm and for this purpose the suppliers deposited certain money to a german bank for being utilised by the assessee-firm. there was no settlement or reduction of the cost of machinery already supplied to the assessee for which money had been paid. furthermore, the amount which the assessee had received on account of low output had been treated as revenue receipt and had been taxed as such. in these circumstances, on the construction of the section, we are of the opinion that in view of the ratio of.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference, under Section 256(1) of the LT. Act, 1961, the following question has been referred to this court :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of rebate recoverable from the foreign suppliers should not be deducted in determining the actual cost of the machinery within the meaning of Section 43(1) of the Income-tax Act, 1961?'

2. It is necessary to appreciate this question to refer to certain facts. It appears that in the regular assessment, the ITO had allowed depreciation amounting to Rs. 64,57,633. This reference relates to the assessment for the assessment year 1962-63 for which the previous year ended on 31st March, 1962. Under Section 154 of the I.T. Act, 1961, the ITO had rectified the assessment order and reduced the depreciation to Rs. 62,02,200. Thus, he withdrew the depreciation allowable to the extent of Rs. 2,55,433. The details are in the order of the Appellate Tribunal. We are not concerned with all the items. We are only concerned with one item, viz., the rebate recoverable from the foreign supplier, which amounted to Rs. 41,309. The AAC had allowed this item in favour of the assessee. There were appeals both by the revenue as well as the assessee. We are not concerned with the other items. So far as the revenue's appeal about Rs. 41,309 is concerned, it was submitted before the Tribunal that the AAC was not justified in allowing the depreciation on that item. The Tribunal was, however, unable to agree with the submission. In the earlier years, the Tribunal had considered the same point and had held against the revenue and the Tribunal therein had observed, inter alia, as follows ;

'Ground No. 17 relates to the rejection of claim for depreciation, extra shift allowance and development rebate, and ground No. 18 concerns the disallowance of depreciation and development rebate on paper Units Nos. 2, 4, 5 and 6 on the ground of rebate from the foreign suppliers. The learned counsel for the assessee-company has placed facts before us in this regard. So far as the rebate is concerned, the Tribunal held in its order in I.T.As. Nos. 3281, 3282 and 3283 of 1966-67 for the assessment years 1955-56, 1956-57 and 1957-58, respectively, decided on 19th December, 1968, that the amount of rebate received by the assessee-company was a revenue receipt for loss of production or loss of profit and that the actual cost of the machinery as adopted in the original assessment did not call for any modification. That order of the Tribunal pertained to the order of the Income-tax Officer modifying and reducing the depreciation on account of rebate received by the assessee-company in respect of paper machinery No. 2. The facts in regard to the other paper units are the same and, therefore, we hold that the rebate received by the assessee-company should be treated as revenue receipt and depreciation on the written down value based on the full cost of the actual cost of the units should be allowed. It, has been stated before us on behalf of the assessee-company, that the Income-tax Officer has treated the amount of rebate as a revenue receipt and has fixed this year and has also disallowed depreciation. In view of the Tribunal's earlier order, there was no justification for reducing the depreciation and development rebate on account of the rebate received by the assessee-company.'

3. The Tribunal noted that it was held by the Tribunal that there was no justification in reducing the depreciation and development rebate on account of rebate received by the assessee. Therefore, the Tribunal upheld the order of the AAC and the appeal preferred by the revenue was dismissed.

4. Upon these, the question as indicated above has been referred to this court.

5. Now, for the previous years 1955-56, 1956-57 and 1957-58, this point had come up for consideration by this court in the case of CIT v. Rohtas Industries Ltd. : [1978]112ITR798(Cal) , where Mr. Justice Sen, delivering the judgment of this court, had recorded that by letter dated July 7, 1958, the German firm had recorded that by way of settlement of the assessee's claim it had agreed to pay an amount of DM 205,000 to a German bank to be held by it for being utilised in future for purchase of other machinery by the assessee. Now, upon those facts, this court came to the conclusion that the dispute between the parties was in respect of a low output because of the defective machinery and it was finally settled by payment of an agreed amount long after the purchase. In those circumstances, the assessee did not at any stage prefer any claim for diminution of price. Therefore, the Tribunal, this court held, was right in holding that the sum of Rs. 2,44,922 was payment for a low output and as such a revenue receipt and not a rebate on the actual price of the machinery originally supplied by the German firm to the assessee. In this connection, reference was made by the Division Bench to the observations of the Supreme Court in the case of Shanti Prasad Jain v. Directorate of Enforcement : [1963]2SCR297 , where it was found that the payment actually made was a payment by way of compensation. Now, upon those facts, even in spite of coming into operation of the I.T. Act, 1961, by which the question involved in the assessment year must be guided, in our opinion, the Tribunal came to the right conclusion. We might incidentally refer to the language used in the Explanation to Section 10(5) of the Indian I.T. Act, 1922, which read as follows :

'Explanation.--For the purposes of this sub-section, 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 the 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. It was held in the previous decision referred to herein : [1978]112ITR798(Cal) that as the German firms were not a government or public or local authority, the Explanation had no application. But Section 43(1) of the I.T. Act, 1961, provides as follows :

'(1) '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 :......'

7. On this change of language, on behalf of the revenue, it was contended that it was no longer necessary for the cost to be reduced and the cost need not necessarily have to be met by a government or public or local authority, but it would be sufficient if any portion of the cost was met directly or indirectly by any other person or authority. It was urged that the German firm was either a person or authority and indirectly meeting the cost, would attract the mischief of the section. In the facts found by the Tribunal, it appears that no actual cost on account of machinery was met by the German firm. But if any cost of machinery was actually met, then different considerations might apply. But in this case what was paid was compensation for low output for the defective machinery supplied by the German firm and for this purpose the suppliers deposited certain money to a German bank for being utilised by the assessee-firm. There was no settlement or reduction of the cost of machinery already supplied to the assessee for which money had been paid. Furthermore, the amount which the assessee had received on account of low output had been treated as revenue receipt and had been taxed as such. In these circumstances, on the construction of the section, we are of the opinion that in view of the ratio of the decision of this court referred to hereinbefore, the assessee is bound to succeed.

8. Our attention, however, was drawn to the Bench decision of the Gujarat High Court in the case of CIT v. Hides & Leather Products P. Ltd. : [1975]101ITR61(Guj) . There, deciding the question under Sections 43(1) of the I.T. Act, 1961, the Division Bench had to deal with the following facts (p. 72):

'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 of Rs. 30,572 and debited the amount of 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 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 leastaccording to the books of account of the assessee-company the liability hasnot ceased but what we have to ascertain is not merely entries in thebooks of account but actual cessation of liability. In our opinion, lookingto the fact that for a period of 5 years and even till today no action hasbeen taken by the Swiss supplier to recover the amount of Rs. 30,572 fromthe 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 tohave ceased and, under these circumstances, in substance and in factthere has been a cessation of this liability of the assessee to the Swisssuppliers.'

9. In these circumstances, the Division Bench held that there was a cessation of liability. But in this case, there is no question of cessation of liability. In the Gujarat High Court's/case no payment was made towards the defective machinery, and the liability of the foreign supplier was shown in the books of account and the balance-sheet of the assessee and, sub-sequently, the liability was treated to have ceased. In those circumstances, it might possibly be true that there has been a meeting of the cost indirectly, though we do not intend to express our final view in the matter. The point of meeting the liability and the cost of the cessation is not before us. In the premises, the question must be answered in the affirmative and in favour of the assessee.

10. Each party will pay and bear its own costs.

Sudhindra Mohan Guha, J.

I agree.


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