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TMI Blog1973 (12) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... 28, 1955. The machiney 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 freight, 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 that the liabilities in the balance-she ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onclusions 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 Assistant Commissioner but in further appeals by the assessee to 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 to the capital reserve account, there was no cessation of 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 proceedings and there the matter apparently rested. 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 mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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(5) 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 ". At this stage we may point out that under section 10, sub-section (2A), which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 observations of Lord Atkin in the case above referred to the Division Bench 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 Lord 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections 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 thereof, 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 down 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 contributions 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vering 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. " 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, and the Supreme Court in Mahayana Mills (Private) Ltd. v. Income-tax Officer, Porbandar, pointed out that neither the principle of res judicata nor estoppel nor the terms of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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... " In Kalooram Govindram v. Commissioner of Income-tax the question again came up for consideration before the Supreme Court regarding the it 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 6/16th 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 Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 conveyance 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. It is true, as Mr. Kaji has urged, that in the instan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 take 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. 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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