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Calcutta Electric Supply Corporation Ltd. Vs. Additional Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 81 of 1976
Judge
Reported in(1982)27CTR(Cal)263,[1982]136ITR777(Cal)
ActsIncome Tax Act, 1961 - Sections 32, 43 and 43(6); ;Income Tax Rules, 1962 - Rule 5
AppellantCalcutta Electric Supply Corporation Ltd.
RespondentAdditional Commissioner of Income-tax
Appellant AdvocateD. Pal and ;A. Roy Chowdhury, Advs.
Respondent AdvocateS. Sen, Adv.
Cases ReferredGold Coast Selection Trust Ltd. v. Humphrey
Excerpt:
- sabyasachi mukharji, j.1. in this reference under section 256(1) of the i.t. act, 1961, the following questions have been referred to this court:'1. whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the additional commissioner of income-tax legally invoked the provisions of section 263(1) of the income-tax act, 1961 ?' 2. whether, on the facts and in the circumstances of the case, and having regard to the fact that the assessee is a sterling company maintaining accounts in pound sterling, the tribunal was right in holding that the written down value of the fixed assets should be determined on the basis of the rate of exchange with reference to the date of contract or the date of delivery or the date of payment for the assessment years.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following questions have been referred to this court:

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Additional Commissioner of Income-tax legally invoked the provisions of Section 263(1) of the Income-tax Act, 1961 ?'

2. Whether, on the facts and in the circumstances of the case, and having regard to the fact that the assessee is a sterling company maintaining accounts in pound sterling, the Tribunal was right in holding that the written down value of the fixed assets should be determined on the basis of the rate of exchange with reference to the date of contract or the date of delivery or the date of payment for the assessment years 1967-68, 1968-69, 1969-70 and 1970-71 ?'

2. This reference arises out of four assessment years, viz., assessment years 1967-68, 1968-69, 1969-70 and 1970-71. In order to appreciate the questions, it would be necessary to refer to certain facts.

3. The assessee-company is engaged in the business of supply of electricity. The assessment years concern the previous year ended on 31st March of each year respectively. The assessee is a sterling company incorporated on the 15th January, 1907, with its registered office in England. Clauses 140 to 144 of the articles of association, as adopted by a special resolution passed on the 9th November, 1949, speak about the keeping of the accounts of the company. Clause 140 of the articles of association states that the director should cause to be kept such books of account as were necessary to comply with the provisions of the statute. Clause 141 of the articles of association provides that books of account were to be kept at the office or such other place within Great Britain as the directors think fit and shall always be open to the inspection of the directors. No member, other than a director, should have any right of inspection of any account or book or document of the company except as conferred by the statute or authorised by the director's or by ordinary resolution of the company. Clause 142 of the articles of association stipulated that the directors should from time to time, in accordance with the provisions of the statute, cause to be prepared and to be laid Before a general meeting of the company such profit and loss account, balance-sheet,if any, and reports as might be necessary. Clause 135 of the new articles of association adopted by a special resolution passed on the 31st October, 1969, stated that subject to the proviso to Section 147(3) of the Companies Act, 1948, the books of account should be kept in, the head office or such other place as the directors think fit and should always be kept open to inspection by the members. No member other than a director should have any right of inspection of any accounts or books or documents of the company except as conferred by the statute or authorised by the directors.

4. Therefore, admittedly, the assessee is a sterling company maintaining accounts in sterling at its registered office in England. At the annual general meeting of each year, it laid before its shareholders the profit and loss account, described as revenue account and net revenue account, and the balance sheet--all expressed in pound sterling. In the proceedings for the assessment to tax, for the assessment year under reference, the ITO, after looking into the surplus and revenue account kept in sterling and after considering the inadmissible expenses and after allowing the depreciation, development rebate and profit under Section 41(2) of the Act, converted the resultant sterling figure into a rupee figure and determined the net profit or business income in rupees. In order to appreciate the contentions and controversies raised in this case, it may not be inappropriate to refer to any one of the assessment orders as an illustration. We may refer to the assessment order for the assessment year 1967-68. Dealing with the surplus and revenue account, it indicated as follows ;

' Surplus and revenue account 28,27,271Add :Depreciation and casual rents 8,20,511

36,47,782Less :Interest on debentures 94,953 Less :Interest on 66,207 3,310

91,643 Interest on secured loans 1,98,396 Interest on unsecured loans 13,681

3,03,720

33,44,062Add :Expenses not allowable -- Legal expenses 364 Donations 171 Donations -- Calcutta 480 Professional fees regarding preference staff 5,000 Repair charges for let out property 54 Insurance 4 Occupier's shares for let out property 10 Central representation fund 113

6,196

33,50,258Less :Depreciation15,73,611 Development rebate 2,36,887 Deduction under section 32(1)(iii) 5,573

18,16,071

15,34,187Add :Profit under section 41(2) 2,283

15,36,470 Business income @ Rs. 21 Rs.3,22,65,870

5. Thereafter, the assessment order adds back certain amounts. These additions are all expressed in Indian rupees and there is no question of conversion. Thereafter, it deals with the addition of income on interest and on securities which are expressed in rupees as also the interest on debentures, income from house properties and bank interest and all those income shown under different heads are in rupees. For the relevant year, the total income as expressed in rupees was arrived at Rs. 3,59,88,509. The assessee was given the rebate on donations at Rs. 6,425 and other necessary orders were passed. In the subsequent years with which we are concerned, more or less the same pattern was followed. It is not necessary to set out the said assessment orders. We may also incidentally mention that these assessment orders were subject to rectification orders passed under Section 154 of the I.T. Act, 1961, but that is not relevant for our present purpose.

6. Thereafter, it appears that the Addl. Commissioner initiated proceedings under Section 263 of the I.T. Act, 1961, as according to him, the orders passed by the ITO for all those years were erroneous in so far as those were prejudicial to the interest of the revenue and he served the notice upon the assessee dated 4th/5th September, 1973. The Addl. Commissioner was of the opinion that it appeared from the assessment records, in consequence of devaluation of the rupee on the 6th June, 1966, the assessee revalued the sterling value of all assets as a result of which the value of the assets was reduced in terms of sterling and that the rupee equivalent to sterling was not adjusted. He also noticed that fixed assets were largely acquired by the company in sterling at the rate of 1s. 6d., equivalent to rupee one and that the ITO allowed depreciation on such fixed assets at the ratio of 1 equivalent to Rs. 21. According to him, the ITO was to compute the depreciation prevalent at the material time. Hence, the Addl. Commissioner was of the opinion that the ITO allowed excessive depreciation to the assessee. As a result of the order passed by the ITO, there had been a change in the written down values of the assets for the assessment years 1967-68 to 1970-71. He thus gave notice proposing to pass orders under Section 263 of the Act with a view to increase or modify or cancel the four assessment orders. He also proposed to enhance, modify or cancel the orders passed under Section 154 by the ITO for the assessment years 1967-68, 1968-69 and 1969-70. In response to the show-cause notice, the assessee challenged the proposal to rectify the orders under Section 263 of the Act by the Addl. Commissioner. It was contended on behalf of the assessee that there was no warrant for taking different written down values on the assets on which; depreciation was allowed and that when the assessee, being a sterling company, prepared accounts in sterling and had to determine the profit and loss, according to commercial principles, the tax on income should be determined according to the commercial principle. The depreciation being an outgoing expenditure had to be computed in terms of Section 32(1)(ii) read with Section 43(6) of the Act and it was also to be calculated on the actual cost of the assets to the assessee as provided in Section 43(6) of the Act. When the actual cost was in sterling, profit and loss were to be determined after allowing depreciation in sterling and then the net profit was to be determined in sterling and then the net profit was to be converted into Indian rupee and this has been done in the instant case, according to the assessee. By referring to the provisions of Section 145(1) of the Act, it was contended on behalf of the assessee that when the assessee's method of accounting was to keep accounts in sterling and when that was a regular method of accounting, the same should not have been disturbed. It was further contended that the assessee had not written off a part of its capital asset after devaluation and as such when there had been mere adjustment in the books of account to bring the sterling value at par with the corresponding rupee value at the new rate of exchange, there was no error in the orders of the ITO and, as a result, the Addl. Commissioner should (sic) take the view that the order of the ITO was erroneous or it was prejudicial to the interest of the revenue. It was contended that the Addl. Commissioner had no jurisdiction to proceed in the matter. The Addl. Commissioner, however, was unable to accept the contentions urged on behalf of the assessee. It may be appropriate at this stage to refer to certain portions of the order of the Addl. Commissioner. After referring to the contentions urged, the Addl. Commissioner noted, inter alia, as follows:

'2. According to me, the assessee-company has been allowed depreciation in the assessment years 1967-68 to 1970-71, far in excess of what is admissible under the law resulting in under-assessment in those years and the assessment orders are erroneous as well as prejudicial to the interest of the revenue and call for modification under Section 263 of the Income-tax Act, 1961. The assessee is a company incorporated in the U.K. It carried on business exclusively in India and not in any other country. All its fixed assets are located in India and are used in the business carried on in India. The company maintains its accounts in India in rupee but converts it into sterling at the appropriate rate of exchange for incorporation of the results of the business in the accounts maintained in the U.K. The company prepares the final accounts in the prescribed form under the Electric-city Supply Act where rupee and corresponding sterling figures are shown for every item of receipt, expenditure, assets and liabilities including share capital and reserves. The company also prepares another final account showing the revenue account and balance-sheet in sterling only for placing before its shareholders.

3. The balance-sheet of the company as on 31-3-1967 prepared in the prescribed form shows the capital of the company's gross capital expenditure and net value of all assets in terms of sterling and rupee as under:

SterlingRupees

Rs.Paid up capital 61,62,64612,94,15,566Gross capital expenditure before deduction of depreciation4,87,56,15465,66,86,313Capital expenditure in the form of work-in-progress 9,85,902 1,86,93,939Net value of all assets2,34,69,64049,28,62,438

A glance at the balance-sheets of the company or at the above figures will show that fixed assets of the company were mostly acquired out of its rupee resources in India. The company has created statutory as well as other reserves out of profits earned in India. It has also raised debentures in Calcutta as well as in London. Loans were also obtained in India from Indian banks for the purpose of business. The fixed assets of the company were largely acquired in India out of rupee funds and sometimesacquired outside India out of funds remitted from India and sometimes assets were also acquired outside India out of funds available outside. The Indian rupee which was equivalent to 1s. 6d. till 5th June, 1966, was devalued and the exchange rate became Rs. 21 equivalent to 1 with effect from 6-6-1966. The depreciable fixed assets of the company which were acquired in India till 5-6-1966 were converted into sterling for incorporation in the U.K. accounts @ 1s. 6d. to the rupee. Similarly, assets purchased outside India and brought into use in India up to 5-6-1966 were converted into rupee till 5-6-1966 for incorporation in the Indian accounts at 1s. 6d. a rupee. These conversions from one exchange to the other were according to the accepted principle of accountancy. This accepted principle is that the fixed assets must be converted at the rate which ruled at the time of their purchase or when the funds were specifically remitted to pay for them.

4. For the purpose of assessment in India the company was preparing and submitting depreciation schedules along with its return in sterling showing the sterling value of the different assets. The Income-tax Officer accepted the company's computation in sterling, year after year, and did not prepare a depreciation schedule in rupees showing the rupee cost of the assets acquired and used in India, their written down value and admissible depreciation in rupees. According to me the cost of various fixed assets should be determined in terms of rupees as these assets are located ;in India and are used for the purpose of business in India. Such rupee cost of the assets will not change with any change in the exchange rate of rupee in relation to any other foreign currency. In fact, after the devaluation of the rupee even the assessee has not disturbed the rupee cost of the assets in its accounts though the value of the assets in terms of sterling has been reduced by making necessary adjustments. In making assessments in India, the ITO should have determined the cost of all assets in terms of rupee according to the accepted commercial principle and should have allowed depreciation on the same and worked out the WDV of each asset for depreciation purposes from year to year. As this was not done, I felt that the orders of the ITO for the assessment years 1967-68 to 1970-71 were erroneous and prejudicial to the interest of the revenue. When the rupee was devalued, the sterling value of the rupee assets of the company declined substantially and the company while preparing its final accounts took a note of the same as mentioned earlier. The company reduced the original cost of the fixed assets by 1,68,690 and also made corresponding adjustments in the depreciation charged in the accounts up to 31-3-67. In other words, the value of the fixed assets in terms of rupees were shown in the B/S at their corresponding sterling value of the new rate of exchange, i.e., at their reduced value. The capital loss suffered by the companyin terms of sterling due to devaluation was written off in the sterling accounts maintained in the U.K. As no such loss was suffered by the company in terms of rupees and as its rupee assets otherwise remained intact, there was no adjustment in the rupee a/c. While preparing the depreciation schedule for income-tax purposes the company did not take the rupee value of the assets for working out the WDV but started with the sterling value of the assets as appeared in the depreciation schedule prior to the devaluation and at the end of the previous year for the assessment year 1966-67. The company did not make any adjustment in the depreciation schedule and did not disturb the WDV of any of its assets in sterling after the devaluation in spite of the fact that the said schedule was prepared in sterling and not in rupee. The ITO, without applying his mind to the problem, accepted the computation and allowed depreciation which, according to me, was much in excess of what the company was entitled to. A simple example is given below for an asset purchased for Rs. 2,00,000 on 1-6-66 for which depreciation is admissible @ 25% :

Asstt. yearWDV in Rs.Depcn. in Rs.WDV in Depcn. claimed by the Co.

Rs.Rs.1967-682,00,00050,00015,000 @1s 7d.3,7501968-691,50,00037,50011,2502,8131969-701,12,50028,1258,4372,1091970-7184,37521,094

6,3281,582

1,36,719

10,254

The above illustration is only to explain actually what has happened and to what extent it is wrong. According to me depreciation on the above asset allowable in the four assessment years is Rs. 1,36,719 and further to be allowed in future is Rs. 63,281 (total Rs. 2 lakhs). The depreciation actually claimed and allowed in three years is Rs. 2,15,334 (10,254 @ Rs. 21 =- 1) and further to be allowed in future, according' to the company is 4,746, i.e., Rs. 99,666. Thus, according to the company's claim, a sum of Rs. 3,15,000 has to be allowed as depreciation on an asset costing Rs. 2,00,000. After going through the records, I find the company has been allowed excess depreciation of about Rs. 1,13,87,500 in the assessment year 1967-68, Rs. 56,11,900 in the assessment year 1968-69, Rs. 49,02,100 in the assessment year 1969-70 and so on. According to me, the ITO should have determined the WDV of the assets in terms of rupee by converting the sterling @ 1s. 6d. in the rupee on 1-4-66 which is the beginning ofthe accounting year 1966-67, the previous year for the assessment year 1967-68. Similar remarks also apply to the assessment years 1968-69 to 1970-71. The representatives of the company were, therefore, requested by me to state their objections, if any, to the proposed recomputation of the depreciation allowance for the assessment years 1967-68 to 1970-71 on the rupee cost of the various assets.'

7. He, thereafter, referred to other arguments urged on behalf of the assessee. His attention was drawn to Section 32(1)(ii) where the provision for allowing depreciation for written down value of assets had been made. Thereafter, reference was made to Section 43(6) where the written down value had been defined. It was urged that the depreciation had to be allowed on the actual cost of the asset to the assessee as provided in Section 43(6). According to him, the assessee being a sterling company, the actual cost was the cost in terms of sterling whether the asset was acquired in rupee in India or in other currencies outside India. The contention is important because this, in our opinion, is the main controversy in this case. It was urged that in computating the taxable profit the income had to be computed in accordance with the method of accounting regularly employed by the assessee as provided in Section 145(1) of the Act. It was urged that the maintenance of accounts in sterling was a regular method of accounting and as such the same should not be disturbed. It was submitted that there was no special provision in the Act which went against the principle and the method of accounting followed by the company. According to the assessee, the company had not written off a part of its capital asset after devaluation but merely had made an adjustment in the books to bring the sterling value at par with the corresponding rupee value at the new rate of exchange of Rs. 21 = 1. On behalf of the assessee, it was pointed out that the adjustment of the balance-sheet was completely irrelevant for a computation of the profits for income-tax purposes. It was further urged that if two views were possible, one favourable to the taxpayer should be adopted. Dealing with this contention, the Addl. Commissioner observed, inter alia, as follows:

'8. I have carefully considered the arguments put forward before me by the learned senior advocate, Shri Ginwala, but I am unable to agree with him. The main issue is what is the actual cost of the assets to the assessee as contemplated in Section 43(6) of the Income-tax Act. According to Shri Ginwala, the assessee being a sterling company and the accounts being maintained in sterling in the U.K. for the purpose of an Act under which it has been registered in that country, the word 'actual cost to the assessee' is the cost in sterling on the date on which the assets were purchased. This proposition cannot be accepted for the reasons discussed hereafter. The business of the company is in India andhence in this case for the purpose of Indian income-tax the profits and gains arising in India is required to be determined in every year. The entire business receipts of the company are in Indian currency and its books of account for Indian business including the profit and loss account are being maintained in India in Indian currency. The depreciation allowance is a kind of loss suffered by the company in India as a result of the use of the assets in the Indian business. The loss is determined in terms of money by applying the prescribed percentage on the WDV of assets in accordance with rule 5 of the Income-tax Rules. Such loss has to be determined in terms of rupees on the rupee cost of the assets. The actual cost of the assets to the assessee is the cost in rupees as the assets are installed and used in India. Some of these assets might have been purchased outside India in sterling or in any other foreign currency, but the value of such assets or their cost in terms of rupees do not vary with the fluctuation in the exchange rate of rupee. The depreciation allowance cannot, therefore, vary with the decline or increase in the exchange value of the rupee. If the cost of an asset contemplated in Section 43(6) refers to the sterling cost in the case of a sterling company as suggested by the learned counsel, then such cost has to be recalculated from year to year with every fluctuation in the exchange rate of rupee for the purpose of determining the cost of WDV of an asset and for calculating the depreciation admissible in terms of rupees under the Income-tax Act. The procedure suggested by the learned senior advocate will lead us to an absurd position not contemplated by the Act.

9. This issue can be examined from a different angle also. The value of the fixed assets acquired in any particular currency can be converted into a different currency only at a fixed rate as discussed in para. 3 of the order, viz., they must be converted at the rate of exchange which ruled at the time of their purchase or when the funds were specifically remitted to pay for them. If the cost of such asset is determined in terms of rupees and in terms of sterling at a particular rate and if the depreciation schedule is prepared and WDV is worked out in terms of sterling then the depreciation admissible under Section 32 read with rule 5 worked out in sterling will have to be converted into rupees at the same rate of exchange at which the assets were originally converted from rupees to sterling, or from sterling to rupees, as the case may be, with a view to restrict the total depreciation to the cost of the asset in rupees. If this is not done and the depreciation allowance is converted from sterling to rupees at the altered rate of exchange then it will amount to upward revaluation of the cost of assets or its WDV in terms of rupees. In other words, it will result in an allowance of depreciation in terms of rupees which will be higher than what has been prescribed by rule 5 of theIncome-tax Rules, and ultimately the total depreciation in rupees will exceed the rupee cost of assets.

10. The Income-tax Act of this country contemplates determination of every allowance and every item of income in terms of Indian currency. If any authority is required in support of this statement, then a glance at the Finance Act and Section 37 of the Income-tax Act, 1961, may be cited as instances in support. There is, therefore, hardly any doubt that the words 'written down value' and 'the actual cost to the assessee' referred to in Section 43(6) of the Act contemplates cost of assets in rupees and not in sterling. Section 34(2) of the Act provides that the aggregate of all deductions in respect of depreciation shall in no case exceed the actual cost of the assets to the assessee.' Here also, the actual cost refers to the rupee cost of acquisition of the asset on the date of acquisition. This proposition will be more clear if we refer to Section 43A of the Act where special provisions have been made to meet the consequences of changes in the rate of exchange of the currency. This section is applicable to all assessees, resident and non-resident, Indian and non-Indian, rupee company and sterling company and so on. There were cases where assets were purchased in foreign countries and installed in India for the purpose of business for which full payments had not been made on the date of devaluation of rupee. Under the mercantile system of accounting, when an asset is purchased the asset account is debited and the account of the settlor of the asset is credited. Thus, the rupee value of the asset, is determined on that date by the entry made under the mercantile system of accounts. Normally, the assessee is entitled to depreciation only on such rupee value, though it may have to remit after devaluation a larger amount in terms of rupee to meet the liability incurred in the foreign country for the asset so acquired. Parliament took note of the situation and made special provisions in the Act to enable the assessee, whether an Indian or a foreigner, to claim depreciation also on the additional liability incurred in terms of rupees for discharging the foreign debt. Sub-section (2) of Section 43A, however, makes a specific provision that the concession thus provided for determining the actual cost of an asset will not apply for allowing development rebate under Section 33. Thus, it is also clear from this section that depreciation has to be computed only on the old rupee value of the assets of the assessee-company and on the WDV computed on such rupee value determined before the date of devaluation.'

8. He was unable to accept the arguments that by the order that he proposed to make, there was an attempt to insist on changing the method of accounting. According to him, the method of accounting was mercantile and the accounts had to be maintained in accordance with the provisions of lawfor the purpose of income-tax in Indian rupees. He observed, inter alia, in conclusion on this aspect as follows :

'12. In the present case the assets of this sterling company were in India and as a result of the devaluation of the rupee it suffered a capital loss in terms of sterling as the sterling value of the rupee assets declined. The company took note of this loss and made necessary adjustments in its accounts and the loss was written off against certain reserves or otherwise provisions were made for the loss. On the other hand, the company was at liberty to think that the sterling cost of the assets had not changed and due to devaluation of rupee the value of its Indian assets in terms of rupee has gone up. In that event, the value of the assets should have been revalued upward in rupees and value should have been kept undisturbed. This was not done in spite of the so-called method of accounting in stressed before me. The reason is very clear, the theory developed before me has no leg to stand. While preparing the depreciation schedule in sterling for the purpose of the Indian income-tax the assessee did not change the sterling value of the assets and as a result this resulted in an upward revision of the WDV of the assets in terms of rupees for the purpose of depreciation. This upward revaluation is an indirect result of the company's decision not to change the WDV of the assets in terms of sterling for claiming depreciation though their value in the balance-sheet was reduced.'

9. In the premises, the Addl. CIT passed the orders as proposed.

10. Thereafter, there was an appeal before the Tribunal. More or less the same contentions were repeated before the Tribunal. According to the statement of the case, the view of the Tribunal was as follows:

'9. The Tribunal considered the matter from first principles as found in the books of accountancy relating to conversion and fluctuations of rate of exchange. Then the Tribunal considered the scope according to the scheme of the provisions of the Income-tax Act having regard to the determination of total income, according to the charging sections read with sections dealing with computation of income as contained in Sections 28 to 43A and the rules thereunder. It made special reference to rule 115 of the Income-tax Rules and also the concept of profit as considered in the case of Spanish Prospecting Co. Ltd. [1911] 1 Ch 92 and in the case of E.D. Sassoon and Co. Ltd. : [1954]26ITR27(SC) and the case of CIT v. Askokbhai Chimanbhai : [1965]56ITR42(SC) . It held that it appeared that according to the principles of accountancy the order of the Income-tax Officer appeared to be erroneous. It is true as stated by Viscount Simonds in Duple Motor Bodies v. Ostime [1961] 39 TC 537. 'The practice of accountants though it were general or even universal, could not by itself determine the amount of profits and gains of a trade fortax purposes.' It has also been stated by Lord Reid in that case that normally a court attaches great weight to the view of the accountancy profession though the court must always have the last word. Similar view has been expressed in the case of Gold Coast Selection Trust Ltd. v. Humphrey [1948] 30 TC 209; [1949] 17 ITR (Supp.) 19 . It is also stated that the method of keeping accounts is often a guide but never conclusive in the matter of ascertaining the liability under the Income-tax Act. It thus held that it appeared at first blush that when the total income accrued or arose to the assessee or was deemed to accrue or arise to the assessee at the end of the year, the determination of the total income as was done by the Income-tax Officer appeared to be correct as far as the rule is concerned with conversion of income at the end of the year and that rule 115 of the Income-tax Rules does not state anything about the principle regarding conversion rate in respect of fixed assets and fixed liabilities, current assets and current liabilities and so on as could be found in accountancy principle.

10. But having regard to the decision of the Calcutta High Court in the case of Riverside (Bhatpara) Electric Supply Co. Ltd. v. CIT (I.T. Ref. No. 56 of 1971) : [1977]109ITR399(Cal) about the concept of actual cost and written down value, the Tribunal held '......we are to hold that the writtendown value of fixed assets would be redetermined on the basis of the rate with reference to the date of contract or the date of delivery or the date of payment'. It further held we are bound by the principle laid down by the Calcutta High Court in the case mentioned supra'. It further held that it is true that Kanga and Palkhivala in their Commentary on Income Tax, Sixth Edition, while dealing with Section 43A have stated at page 484 that the main benefit conferred by this section is that it permits the cost of an asset to be increased upon devaluation of the rupee even where the price has been fully paid by the assessee before devaluation out of borrowed moneys and only the loan remains outstanding. In such cases the cost of the asset may not be held to be increased on general principles, apart from this section. But in cases where the price itself (in foreign exchange) remains unpaid and a larger amount has to be found in Indian rupees to pay it, the cost of the asset should be held to have increased even on general principles, apart from this section. But this goes against the principles laid down by the Calcutta High Court in the case of Riverside (Bhatpara) Electric Supply Co. Ltd. v. CIT : [1977]109ITR399(Cal) cited above, while considering the scope of Section 43. Thus, the Tribunal expressed the opinion that the orders of the Income-tax Officer were erroneous in so far as they were prejudicial to the interests of the revenue and as such the Additional Commissioner of Income-tax rightly invoked the provisions of Section 263(1)of the Income-tax Act, 1961. A copy of the Tribunal's consolidated order is marked annexure 'E' forming part of the case.'

11. On these facts, the aforesaid two questions have been referred to this court.

12. On behalf of the assessee, it was contended that it has to be borne in mind that the assessee is a UK company. It was stressed that the articles of association of the company to which we have referred required the accounts to be kept in sterling. Learned advocate for the assessee proceeded thereafter to stress that the profits in India had to be computed, according to the Indian I.T. Act, in sterling, and it was submitted that any profit so computed was to be converted under the provisions of Rule 115 of the I.T. Rules, 1962. In aid of this submission, he referred us to Section 5 of the I.T. Act, 1961, which provided for the inclusion of the income. Subsection (2) of Section 5 enjoins that the total income of any previous year of a person who was a non-resident included all income from whatever source derived which was received or was deemed to be received in India in such year by or on behalf of such person or accrued or arose or was deemed to have accrued or arose to him in India during such year. Explanation 1 to Sub-section (2) of Section 5 stipulated that income accruing or arising outside India should not be deemed to be received in India within this section by reason only of the fact that it was taken into account in a balance-sheet prepared in India. Explanation 2 stipulated that for the removal of doubts it was declared that the income which had been included in the total income of a person on the basis that it had accrued or arisen or was deemed to have accrued or arisen to him should not again be so included on the basis that it was received or deemed to be received by him in India. Our attention was drawn to Section 28 of the Act which dealt with computation of the business profits as also to Section 29 which deals with the same provision. Section 32 provides for depreciation and reliance was placed on Section 34(2). Our attention was drawn to Section 43(1) dealing with the definition of actual cost. Section 43(6) deals with written down value. It may not be inappropriate in this connection to refer to the definition of actual cost. In Sub-section (1) of Section 43, without the Explanation, it provides as follows;

'43. (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 :

Provided that where the actual cost of an asset, being a motor car which is acquired by the assessee after the 31st day of March, 1967, but before the 1st day of March, 1975, and is used otherwise than in a business of running it on hire for tourists, exceeds twenty-five thousand rupees, the excess of the actual cost over such amount shall be ignored,and the actual cost thereof shall be taken to be twenty-five thousand rupees.'

The written down value in Sub-section (6) of Section 43 is as follows :

'43. (6) 'Written down value' means-

(a) in the case of assets acquired in the previous year, the actual cost to the assessee;

(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 this Act, or under the Indian Income-tax Act, 1922 (XI of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force :

Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of Clause (ii) of Sub-section (1) of Section 32, 'depreciation actually allowed' shall not include depreciation allowed under Sub-clauses (a), (b) and (c) of Clause (vi) of Subsection (2) of Section 10 of the Indian Income-tax Act, 1922 (XI of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said Clause (vi).

Explanation 1.--When in a case of succession in business or profession, an assessment is made on the successor under Sub-section (2) of Section 170 the written down value of any asset shall be the amount which would have been taken as its written down value if the assessment had been made directly on the person succeeded to.

Explanation 2.--When any capital asset is transferred by a holding company to its subsidiary company or by a subsidiary company to its holding company, then, if the conditions of Clause (iv), or, as the case may be, of Clause (v) of Section 47, are satisfied, the written down value of the transferred capital asset to the transferee-company shall be taken to be the same as it would have been if the transferor-company had continued to hold the capital asset for the purposes of its business.

Explanation 2A.--Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company, and the amalgamated company is an Indian company, the written down value of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its business.

Explanation 3.--Any allowance in respect of any depreciation carried forward under Sub-section (2) of Section 32 shall be deemed to be depreciation 'actually allowed'.'

13. Our attention was also drawn to Rule 115 of the I.T. Rules, 1962, which provided for depreciation and a Table is indicated in Appendix I to thesaid rule. Learned advocate for the assessee drew our attention to Rule 115 of the I.T. Rules, 1962, which reads as follows;

'115. Rate of exchange for conversion into rupees of income expressed in foreign currency.--The rate of exchange for the calculation of the value in rupees of any income shall be as follows :--

(a) in respect of income accruing or arising or deemed to accrue or arise to the assessee or received or deemed to be received by him or on his behalf before the 6th day of June, 1966-

(i) 1 sh. 6 d. = Re. 1;

(ii) U.S. $ 1 = Rs. 4.762 ;

(b) in respect of income accruing or arising or deemed to accrue or arise to the assessee or is received or deemed to be received by him or on his behalf on or after the 6th day of June, 1966-

(1) where such income accrues or arises or is deemed to accrue or arise to the assessee or is received or deemed to be received by him or on his behalf-

(i) before the 19th day of November, 1967, 1 sterling = Rs. 21.00;

(ii) after the 18th day of November, 1967, 1 sterling = Rs. 18-00 ;

(2) U. S. $ 1 = Rs. 7.50.'

14. Relying on the aforesaid basis, it was argued that what the ITO, in the instant case, had done was the only proper way of complying with the provisions of the Rules or the Act. It was, secondly, contended that in any case for allowing depreciation, the determination of the actual cost had to be done in the year in question and in this connection reliance was placed on certain observations of this court to which we shall presently refer. It was, thirdly, urged that, in any event, the method of accounting was in sterling and, therefore, the ITO was justified in computing the business income according to the sterling which, according to the assessee, was done in sterling and then converted in accordance with Rule 115 of the I.T. Rules, 1962, as we have mentioned hereinbefore. In this connection, it was stressed that a broad and reasonable view of the expression 'the method of accounting mentioned in Section 145(1) of the I.T. Act, 1961', should be taken. In so far as learned advocate for the assesses contended that the assessee is a company registered in the UK, that has to be accepted, because, that is a fact. In so far as the contention of the assessee that the articles of association of the said company required that the accounts and the balance-sheet of the said company had to be prepared in sterling, this, in our opinion, in view of the provisions of the articles and the facts of this case, has also to be accepted. But, in so far as the assessee urged that the profits in India of the assessee-company had to be computed in accordancewith the Indian I.T. Act in sterling, we are, however, unable to accept this contention. Indeed, the assessment under the Indian Act had to be made in Indian currency. A reference to some of the sections, as illustration, would make, in our opinion, the position clear. We may refer to Sections 10, 10B, 10(15), 16, 43(1), 37(2), 40A(6), 80L and 285A as illustration of the fact that the allowances in several cases had to be made in Indian rupees. Therefore, the assessment, as such, must always be made in Indian rupees according to the Indian Act.

15. Therefore, assessment as such must always be made in Indian rupees according to the Indian I.T. Act. But if a particular assessee maintained his accounts in a currency other than the Indian rupee then the figures of the said account had to be taken into consideration. For instance, as the learned advocate for the revenue has given an illustration, if a non-resident lawyer or a businessman earns some income in India then he might produce his accounts either from America or the UK to indicate the amount he has remitted from his earnings in India and on that basis the ITO, by converting the amount in Indian currency at the appropriate time, would arrive at the figure of the income which was taxable in India. Therefore, the fact that for the computation of the business income the figures had to be taken by the ITO in sterling, as would appear in the profit and loss account, did not indicate that the assessment had to be made in sterling. Therefore, the basic pillar of the argument on behalf of the assessee, in our opinion, cannot be accepted as sound. In this connection, we may incidentally refer to the observations of the Supreme Court in the case in Chainrup Sampatram v. CIT : [1953]24ITR481(SC) . There, the Supreme Court observed that it was a misconception to think that any profit 'arises out of the valuation of the closing stock' and the suits of its arising or accrual was where the valuation was made. Valuation of unsold stock at the close of an accounting period was a necessary part of the process of determining the trading results of that period and could in no sense be regarded as the 'source' of such profits Nor could the place where such valuation was made be regarded as the situs of their accrual. The source of the profits and gains of the business was indubitably the business, and the place of their accrual was where the business was carried on. As such, profits could be correctly ascertained according to the method adopted by an assessee only after bringing into the trading account his closing stock wherever it might exist, the whole of the profits must be taken to accrue or arise at the place of carrying on the business. Chief Justice Patanjali Sastri at p. 487 of the report observed as follows:

'Again, it is a misconception to think that any profit 'arises out of the valuation of the closing stock' and the situs of its arising or accrual is where the valuation is made. As already stated, valuation of unsoldstock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sensebe regarded as the 'source of such profits'. Nor can the place where suchvaluation is made be regarded as the situs of their accrual. The source ofthe profits and gains of a business is indubitably the business, and theplace of their accrual is where the business is carried on. As such, profitscan be correctly ascertained according to the method adopted by anassessee only after bringing into the trading account his closing stockwherever it may exist, the whole of the profits must be taken to accrueor arise at the place of carrying on the business. On the finding of theincome-tax: authorities that the 582 bars of silver lying at Bikaner hadnot been really sold but remained part of the unsold stock of the firm'sbusiness at the end of the accounting year, the whole of the profits ofthat year must be taken to have accrued or arisen at Calcutta where thebusiness was carried on, no part of that business having admittedly beentransacted at Bikaner. '

16. It is true in what manner the books are kept is not the system or method of accounting as understood in the background of Section 145(1) of the I.T. Act (sic). In India an assessee might keep his books in English or in Bengali or in any other Indian language. The language employed in expressing his earning is not as such the method or the manner of accounting as contemplated under Section 145(1) of the Act, though it is true that the method of expressing the accounts may broadly and loosely be considered to be a manner of maintaining the accounts. Our attention was drawn to certain observations of the Full Bench of the Lahore High Court in the case of Seth Gurmukh Singh v. CIT , where at p. 422, dealing with Section 13 of the Indian I.T. Act, 1922, the court observed that the method of accounting should be given a broad and reasonable interpretation. With great respect it is undoubtedly so, that the method of accounting in the context of Section 145(1) of the I.T. Act, 1961, which is very similar to Section 13 of the Indian I.T. Act, 1922, cannot be compared with the language in which the books of account are kept, that is to say, whether in Nagri or Bengali or English or whether the figures expressed in sterling or rupee or dollar. Learned advocate for the assessee sought to rely that if the depreciation was granted then the cost had to be computed in the year of account. He drew our attention to the observation made by this court in the case of Riverside (Bhatpara.) Electric Supply Co. Ltd. v. CIT : [1977]109ITR399(Cal) , where after the coming into operation of the I.T. Act, 1961, the question arose as to how the actual cost and written down value had to be computed. It was held by the court that the difference between Section 10(5)(a) of the Indian I.T. Act, 1922, and Section 43(1) of the I.T. Act, 1961, was that under the Act of 1922, in assessing the actual cost, only thecontribution by government or any other public or local authority had to be excluded, while under the Act of 1961, the contribution received from any person had to be excluded. Section 43 of the new Act denned certain items and clearly stipulated that unless the context otherwise required, the meaning given to the expression in Section 43 would have to be given effect to after the coming into operation of the 1961 Act. In respect of an asset acquired prior to the relevant assessment year the asset might have enjoyed depreciation under the 1922 Act. That depreciation had to be excluded in computing the actual cost. It was to safeguard the same that reference had to be made to the depreciation allowed under the Indian I.T. Act, 1922, in Clause (b) of Section 43(6) of the Act of 1961. The actual cost determined for a particular asset could be altered or redetermined for a particular assessment year. That would not amount to, according to this court, giving retrospective effect to any legislation, nor would the same effect any vested right of the assessee. Each year's assessment was self-contained and there was no question of any res judicata or estoppel by way of a previous year's assessment. The written down value and depreciation were not used as having ordinary dictionary meanings but had certain statutory meanings. This court further held that the actual cost and the written down value had to be computed in accordance with the provisions of the Act of 1961, even with reference to assets in use in the previous year for the assessment year 1962-63, but which were acquired prior thereto. Where the assessee derived income from the business of distribution of electricity and depreciation was allowed to it under the Act of 1922, on the basis that the actual cost would include contributions received from customers for installation of service lines, but after the passing of the Act of 1961, such contributions had to be excluded in computing the actual cost, on the question whether for the assessment year 1962-63, the actual cost had to be recomputed, it was held by this court that for the determination of assessments after the coming into operation of the 1961 Act, the computation of the actual cost must be in accordance with the relevant provisions of the 1961 Act. Similar view was also expressed by the Allahabad High Court in the case of CIT v. Saharanpur Electric Supply Co. Ltd. : [1977]109ITR545(All) . The Division Bench of the Bombay High Court in the case of CIT v. Bassein Electric Supply Co. Ltd. : [1979]118ITR884(Bom) , also expressed the same view. But as we have mentioned before, the controversy in those cases was different. Here, there was no question of recomputing the actual cost. In view of the coming into operation of the new Act, all the assessments with which we are concerned were done under the provisions of the I.T. Act, 1961. Having regard to the nature of the controversy involved in this case we are of the opinion that the ratio of the said decisions would not be very relevantfor our present purpose. In any event, if this ratio had any application, in our opinion, the same principle would be against the assessee as was the view of the Tribunal.

17. In the aforesaid view of the matter, we are of the opinion that the Tribunal was right in coming to the conclusion it arrived at and, therefore, both the questions are answered in the affirmative and in favour of the revenue.

18. In the facts and circumstances of the case, parties will pay and bear their own costs.

Sudhindra Mohan Guha, J.

19. I agree.


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