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TMI Blog1992 (1) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment of the court was delivered by RANGANATHAN J. -The appellants are all electric supply undertakings situated in various parts of the country. All the appeals relate to the assessment year 1962-63 or later. They raise a common question regarding the computation of depreciation on service lines installed by the assessees, a part of the expenditure incurred in connection with the installation of which is recovered by the assessees from consumers of electricity. Depreciation, under the Income-tax Act, 1961, is computed as a percentage of the "written down value" of the asset in question. The Income tax Act, 1961, came into force on April 1, 1962. Section 43(6) of the Act defines "written down value" thus : "'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depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ochin Electric Co. Ltd. [1965] 57 ITR 82, the Punjab High Court in CIT v. Ambala Cantt. Electric Supply Co. Ltd. [1971] 82 ITR 217 and the Patna High Court in CIT v. Ranchi Electric Supply Co. Ltd. [1954] 26 ITR 89, disapproved this line of reasoning. Relying on the decision of the House of Lords in Birmingham Corporation v. Barnes [1935] 3 ITR (Eng. Cas) 26 (HL), they held that, in ascertaining the actual cost of an asset to the assessee, it was immaterial that someone else has recouped to the assessee, wholly or in part, towards such cost. This general principle is well settled by these decisions and is also not in issue before us now. The 1922 Act was amended by the Income-tax (Amendment) Act, 1953, with effect from April 1, 1952, in this respect. This amendment introduced an Explanation to the definition of "actual cost" to nullify the effect of the above decision. Though, at the stage of the Bill, the proposal was to exclude from the concept of actual cost, any moneys reimbursed to the assessee in this regard by any outside source, the amendment, as finally effected, permitted only a limited exclusion. The Explanation read as follows : "For the purposes of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble the assessee to acquire the assets. The assessees' contention is that there is no justification for disturbing the written down value as so determined and that the depreciation for the assessment year 1962-63 and thereafter should be based only on the actual cost and written down value so determined earlier. They plead for the undisturbed continuance of the earlier depreciation sheets in respect of these assets. On the other hand, the Revenue contends that, though the assets have been acquired in earlier previous years, the statutory mandate of section 43(6)(b) is that their actual cost should be determined afresh for each assessment year and this, for the assessment year 1962-63 onwards, can only be in accordance with the definition contained in the 1961 Act. On this view, the Department has ignored the written down value of these assets as per the earlier record, computed the actual cost of the service lines by excluding therefrom the contributions of consumers but given credit thereafter for all depreciation allowed in respect thereof (on the basis of the higher actual cost as then determined) in all the earlier years. The question is which of these contentions is correc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. According to him, both the 1922 Act as well as the 1961 Act envisage continuance of the figure of actual cost once arrived at in respect of any plant or machinery throughout the lifetime of such plant or machinery. He says that, for the assessment year 1962-63, the question of determination of actual cost cart arise only in respect of assets acquired during the relevant previous year under clause (a) of section 43(5). So far as the assets in question are concerned, which had been acquired in earlier previous years, depreciation has to be calculated on the basis of the written down value. Since the written down value in respect of these assets had already been ascertained for the assessment year 1961-62, all that has to be done further to find out the written down value for the assessment year 1962-63, is to deduct therefrom the depreciation allowed for the assessment year 1961-62. Attractive as this argument appears, there are two difficulties in accepting it. The first is the language of section 43(6) and, even its predecessor section 10(5)(a) of the 1922 Act. Though, in substance, depreciation on an asset for any assessment year is calculated on its written down value which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention. He concedes that the actual cost as determined for the earlier years is not sacrosanct or untouchable and that there may be circumstances in which it may have to be modified in the light of subsequent events. According to learned counsel, however, changes in actual cost in three situations can be taken into account for purposes of the definition in section 43(1) read with sub-section (6). These according to him, are : (i) subsequent factual occurrences which call for a modification of the figure of actual cost as at the time of acquisition determined earlier ; (ii) discovery of arithmetical errors in the earlier computation of the actual cost or written down value of any asset ; and (iii) redetermination of the original actual cost necessitated by specific retrospective statutory provision. He points to instances of such modifications permitted by judicial decisions. In Karnani Industrial Bank Ltd. v. CIT [1954] 25 ITR 558 (Cal), the assessee claimed to have purchased machinery for ₹ 3,94,000 and obtained depreciation on that basis from the assessment year 1939-40 onwards. In proceedings for the assessment year 1946-47, the Officer discovered that the cost of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of each asset, for every assessment year, not only in respect of assets acquired during the previous year but also in respect of assets acquired before the previous year. This naturally has to be done with reference to the factual or legal position that may prevail during the relevant previous year and can be taken into account for the relevant assessment year. The section does not say that the computation of the actual cost of the asset has to be based only on the facts or law as they stood at the time of acquisition of the asset and as could have been taken into account for the assessment year relevant to the previous year of acquisition. It is one thing to contend, as Dr. Pal did, that once the actual cost as at the date of acquisition has been computed, that figure is final and cannot be interfered with subsequently. But that contention is not acceptable for reasons already discussed. Once it is conceded that the figure of actual cost can require modifications, it is not possible to confine such modifications in the manner contended for by Sri Dastur. Where subsequent information, factual or legal, reveals that the actual cost determined originally was wrong, there can be n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 to 1965-66, the High Court held that, "in view of the fact that the foreign supplier had not recovered the amount of ₹ 30,572 and no legal steps had been taken towards its recovery for so long a time, it was not unreasonable to infer that the foreign supplier had treated the liability of the assessee to itself as having ceased and in fact and in substance there had been a cessation of this liability. The Act of 1922 applied to the assessment year 1961-62, and as the foreign supplier was neither Government nor public nor local authority, though there was cessation of liability, the assessee was entitled to have the benefit of the entire amount of ₹ 30,572 as the actual cost. Depreciation was allowable to the assessee for the assessment year 1961-62 on the basis that the cost to it of the machinery was ₹ 30,572. The Act of 1961 applied to the assessment years 1962-63 to 1964-65 and, under section 43(1) of the Act, since there was cessation of liability, the actual cost of the machinery to the assessees for these assessment years should be reduced by ₹ 30,572". Sri Dastur challenged the correctness of this decision in so far as it held that the orig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Bom). This is quite correct and fully accords with the Department's interpretation of the provision. On the assessee's interpretation, no such increased allowances can at all be granted as there is no other provision permitting the additional cost being taken into account as part of the "actual cost" even for years subsequent to the addition or alteration. In principle, therefore, we are unable to accept the contention that the actual cost cannot be determined year after year on the factual or legal position applicable for the relevant previous year and that the actual cost once determined cannot be altered except in the three situations outlined by counsel where the original figure itself requires a modification. Sri Dastur, however, contends that there are three formidable reasons as to why the interpretation suggested by the Department should not be accepted. We shall proceed to consider these objections : 1. Legislation cannot be given retrospective effect so as to affect existing rights unless it says so expressly or by necessary implication : The rule as to the prospective application of statutes is well-settled. It is sufficient here to refer to some ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t can only be where, taking the Act as a whole and viewing it in connection with existing state of the law at the time of the passing of the Act, we can satisfy ourselves that the words cannot have been used in the sense to which the argument points'. According to Brett L. J., 'the inconvenience necessitating a departure from the ordinary sense of the words should not only be great but should also be what he calls an 'absurd inconvenience'. Moreover, individual cases of hardship or injustice have no bearing for rejecting the natural construction ; and it is only when the natural construction leads to some general hardship or injustice and some other construction is reasonably open that the natural construction may be departed from." Examining the provisions with which we are concerned in the light of the principles succinctly summarised above, it will be apparent that what we are concerned with here is not at all a case of retrospective operation of the statute. It is not the case of the Revenue that the actual cost as determined in the assessment year 1962-63 should be applied to revise the computations for earlier years. All that the Department says is that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gument, Sri Ramachandran adds the further point that, under the provisions of section 10(2)(vi) of the 1922 Act and section 33 of the 1961 Act, the amount of depreciation which cannot be adjusted against the profits of a particular year can be carried forward, treated as the depreciation for the subsequent year and set off against the profits of subsequent years. He points out that the result of accepting the Department's interpretation of section 43(6) of the Act is that the depreciation allowed to the assessee in the earlier years may be higher than the actual cost as arrived at subsequently under the provisions of the 1961 Act. In such an event, the written down value of the asset, i.e., the actual cost minus the depreciation allowed to the assessee will be negative figure. The result of this, according to counsel, will be that the carried forward unabsorbed depreciation will be a negative figure in so far as this asset is concerned and will reduce the amount of depreciation that will be allowable to the assessee for the same year against the other assets and in subsequent years against other profits. In this way, according to counsel, the construction advocated by the Depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of depreciation on the asset in future. Read thus as a limitation on the maximum amount of depreciation that an assessee can claim in respect of a particular asset, there is no question of arriving at a negative written down value. We are, therefore, unable to accept the contention of counsel that the interpretation contended for by the Department operates against the well-known principle that retrospective operation-assuming that the provision has a retrospective effect should not be presumed where existing or past rights are interfered with. Nor do we think that there is any doubt or ambiguity about the provision. It is clear and explicit, as already pointed out, that the actual cost has to be determined, in each assessment year, even of assets acquired before the commencement of the previous year relevant to the assessment year. Not only is this intention plain and clear, it does not create any injustice or hardship ; on the contrary, it is only reasonable and just. It should be remembered that the object of the provision dealing with the grant of depreciation is, generally speaking, to enable him to get the capital expenditure incurred by him in acquiring the asset written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een acquired earlier to the previous year should also be covered, the Legislature would have used the words "as had been met". In support of this contention, Sri Dastur referred to the decision in Carson v. Carson and Stoyek [1964] 1 All ER 681 (PDA). In that case, section 3 of the Matrimonial Causes Act, 1963, which came into operation on July 31, 1963, provided that "adultery which has been condoned shall not be capable of being revived". While it was quite clear that, as a result of this provision, no petition could rely on a course of conduct subsequent to July 31 as reviving previously condoned adultery, the question that arose was whether the section had retrospective effect and whether a course of conduct before that date could be relied upon as reviving previously condoned adultery. The question was answered in the negative. We do not think that the decision is of any help in the present context. The nature of the provisions with which we are concerned and the mode of its operation are totally different. The use of the words "has been met" is very appropriate and proper in the present context once we understand the mechanics of the provision. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... others if the asset had been purchased in 15 an was eligible for depreciation at 10 per cent., the assessee would have secured depreciation of ₹ 2,710 in the assessment years 1959-60, 1960-61 and 1961-62. Suppose, in the previous year relevant to the assessment year 1963-64, it is sold for ₹ 5,000. Mr. Ramachandran points out that, according to the Department's interpretation the actual cost of the asset would be nil and, therefore, its written down value at the end of the previous year relevant for the assessment year 1962-63 would be nil with the result that the entire sum of ₹ 5,000 for which the asset is sold would become chargeable under section 41(2). In other words, the assessee will have to pay tax on ₹ 5,000 by way of balancing charge though he had been allowed depreciation only to the extent of ₹ 2,710. Again, if the asset is sold for ₹ 2,500 in the previous year relevant to the assessment year 1963-64, according to the Department, he will have to pay tax on ₹ 2,500 whereas, under the old provisions, he would have got an allowance under section 32(1)(iii). But this is only a seeming anomaly for, the sums of ₹ 5,000 and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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