1981 (6) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Legality of invoking Section 263(1) of the Income-tax Act, 1961 by the Additional Commissioner of Income-tax.
2. Determination of the written down value of fixed assets for a sterling company maintaining accounts in pound sterling.

Detailed Analysis:

Issue 1: Legality of Invoking Section 263(1) of the Income-tax Act, 1961

The Tribunal held that the Additional Commissioner of Income-tax legally invoked the provisions of Section 263(1) of the Income-tax Act, 1961. The Additional Commissioner initiated proceedings under Section 263 because the orders passed by the Income-tax Officer (ITO) were erroneous and prejudicial to the interest of the revenue. The ITO had allowed excessive depreciation to the assessee by converting the sterling value of assets into rupees using an incorrect exchange rate, resulting in an under-assessment of income for the years 1967-68 to 1970-71.

The Additional Commissioner observed that the ITO should have computed the depreciation based on the rupee cost of the assets, as the assets were located and used in India. The depreciation allowance should be determined in terms of rupees, and the cost of the assets should not change with fluctuations in the exchange rate. The Tribunal upheld this view, stating that the orders of the ITO were indeed erroneous and prejudicial to the interests of the revenue, thus justifying the invocation of Section 263(1).

Issue 2: Determination of the Written Down Value of Fixed Assets

The Tribunal considered the method of determining the written down value (WDV) of fixed assets for a sterling company maintaining accounts in pound sterling. The assessee argued that the WDV should be determined based on the sterling value of the assets and then converted into rupees using the exchange rate at the end of the year, as per Rule 115 of the Income-tax Rules, 1962. The assessee maintained that this method was consistent with the commercial principles and the regular method of accounting followed by the company.

However, the Additional Commissioner and the Tribunal disagreed with this approach. They held that the actual cost of the assets should be determined in terms of rupees, as the assets were used in India. The depreciation should be computed on the rupee cost of the assets, and the WDV should be calculated accordingly. The Tribunal referred to the decision of the Calcutta High Court in Riverside (Bhatpara) Electric Supply Co. Ltd. v. CIT, which supported the view that the actual cost and WDV should be determined based on the rupee value of the assets at the time of their acquisition.

The Tribunal also noted that the Income-tax Act required the determination of allowances and income in terms of Indian currency. Sections such as 10, 10B, 43(1), and 43(6) of the Act, along with Rule 115, supported the view that the assessment should be made in Indian rupees. The Tribunal concluded that the method of accounting in sterling did not affect the requirement to compute depreciation and WDV in rupees for the purpose of Indian income tax.

Conclusion:

The Tribunal affirmed the legality of invoking Section 263(1) by the Additional Commissioner and upheld the determination of the WDV of fixed assets in rupees, rejecting the assessee's method of accounting in sterling. Both questions referred to the court were answered in the affirmative and in favor of the revenue.