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PETITIONER:

SAHARANPUR ELECTRIC SUPPLY CO. LTD. ETC. ETC.

Vs.

RESPONDENT:

COMMISSIONER OF INCOME-TAX ETC.ETC.

DATE OF JUDGMENT15/01/1992

BENCH:

RANGNATHAN, S.

BENCH:

RANGNATHAN, S.

OJHA, N.D. (J)

CITATION:

1992 SCR (1) 117 1992 SCC (2) 736

JT 1992 (1) 287 1992 SCALE (1)16

ACT:

Income Tax Act, 1961 : Section 43-Depreciation on

service lines for Assessment Year 1962-63-Computation of-

Written down value-Determination of.

Interpreation of Statutes-Retrospective interpretation

of a statute-When arises.

HEADNOTE:

Under the Indian Income-tax Act, 1922, while computing

the income from business, an assessee was entitled to an

allowance of depreciation at a percentage of the actual cost

to the assessee or the written down value of the relevant

asset owned by him, and used for the purposes of business.

This Act was replaced by the Income-tax Act, 1961. Under

both the Acts, `written down value' was defined with

reference to `actual cost'. Initially between 1922 and 1952,

the expression `actual cost' was defined to mean just the

actual cost of the asset to the assessee. However,consequent

on the decision of some of the High Courts that in

ascertaining the actual cost of an asset to the assessee, it

was immaterial that someone else had recouped the assessee,

wholly, or in part, towards such cost, the 1922 Act was

amended by the Income-tax Amendment Act of 1953, with effect

from 1.4.1952, nullifying the effect of the aforesaid

decision, and permitting only a limited exclusion. The

Income-tax Act, 1961, however, directed the exclusion in the

computation of the actual cost, of all amounts reimbursed to

the assessee by any person whatsoever.

The appellants in the appeals before this Court were

all electric supply undertakings in various parts of the

country. They had installed service connections during the

relevant previous year to the assessment year 1962-63. A

part of the expenditure incurred in connection with the

installation of these lines was recovered by the companies

from consumers of electricity. They claimed that the

depreciation to be allowed for the assessment year 1962-63

and thereafter on the service connections installed in the

previous years should be based only on the actual cost and

written down value determined earlier, and there was no

justification in disturbing the same. However, the Revenue

was of the view that

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though the assets had been acquired in earlier previous

years, the statutory mandate of Section 43(b) was that the

actual cost should be determined afresh for each assessment

year and this, for assessment year 1962-63 onwards, could

only be in accordance with the definition contained in the

1961 Act. Accordingly, it ignored the written down value of

the assets as per the earlier record, computed the actual

cost of the service lines by excluding therefrom the

contributions of consumers, but gave 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.

On appeal by the assesses, the concerned High Courts

upheld the view of the Revenue and held that the actual cost

of all assets for purposes of assessment year 1962-63 and

onwards, whatever might have been the date of acquisition of

the assets, had to be computed in accordance with the new

formula laid down by the Income-tax Act, 1961.

In the appeals before this Court, on behalf of the

assessee companies it was contended that the interpretation

of the Revenue approved by various High Court, would result

in absurdities and anomalies, that the figure of the actual

cost ascertained in respect of any asset in any of the

earlier previous years could not be altered in a subsequent

year, that both the 1922 Act as well as the 1961 Act

envisaged a continuance of the figure of actual cost once

arrived at in respect of any plant or machinery, throughout

the life-time of such plant or machinery, that for the

assessment year 1962-63, the question of determination of

actual cost could arise only in respect of assets acquired

during the relevant previous year under clause (a) of

s.43(5), and so far as the assets which had been acquired in

earlier previous year were concerned, depreciation had to be

calculated on the basis of the written down value, and since

the written down value in respect of these assets had

already been ascertained for the assessment year 1961-62,

all that had to be done further, to find out the written

down value for the assessment year 1962-63, was to deduct

therefrom the depreciation allowed for the assessment year

1961-62. It was further contended that though the actual

cost as determined for the earlier years was not sacrosanct

or untouchable and there may be circumstances in which it

may have to be modified in the light of subsequent events,

and changes in actual cost could be taken into account for

purposes of the definition in s.43 (1) read with sub. sec.

(6), in certain situations, the actual cost could not be

altered merely because a subsequent legislation provided for

a different formula for ascertainment of actual cost, and

that formula could not be retrospect-

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tively made applicable to assets which had been acquired

much earlier and the actual cost of which had already been

determined in accordance with the earlier prevalent law,

that the legislation could not be given retrospective effect

so as to affect existing rights, unless the legislation

stated so expressly or by necessary implication, that there

was an indication in the language of Section 43(6) itself

to show that it was available to be invoked only in respect

of assets which had been acquired in earlier years, and that

if the intention had been that the actual cost of assets

which had been acquired earlier to the previous year should

also be covered, the legislature would have used the words

"as had been met" that the Revenue's interpretation may lead

to the computation of a negative written down value and

consequent difficulties in applying various other statutory

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provisions, and that it was also incompatible with the terms

of Explanations 2, 4 and 6 to Section 43(6), and would also

lead to difficulties in the calculation of assessable

profits under Section 41(2) or the allowance under Section

32(i)(iii).

Dismissing the appeals, this Court,

HELD : 1.1 Though, in substance, depreciation on an

asset for any assessment year is calculated on its written

down value which is normally carried forward from an earlier

assessment year, the phraseology of the Income Tax Act, 1961

does not bear out that the actual cost of the asset has to

be determined only once, viz., in the previous year of its

acquisition. S.43(6) of the Income-tax Act, 1961

specifically deals with two categories of assets: (i) those

acquired during the relevant previous year and (ii) those

acquired earlier to that. Even in respect of the latter

class of assets, the Act envisages a computation of the

actual cost of the asset and the deduction therefrom of all

depreciation allowed in earlier years in respect of that

asset. Thus, the first step, statutorily prescribed, for the

determination of the written down value of any asset for any

year, is for the Assessing Officer to determine its actual

cost. This is a mandatory step which the Officer cannot be

prevented from taking merely because the actual cost of the

asset has already been determined in one or more earlier

years, though it may be true that in ninety nine (and

perhaps even more) percent of the cases, the result (barring

mistakes and some special situations) will just be the

equivalent of the written down value taken for the

immediately preceding assessment year less the depreciation

allowed for that year. [129B-E]

1.2 In the light of the clear language of the statute,

it is not possible to accept that in the instant case, the

Income Tax Officer had no justification to compute first the

actual cost of an asset which had been

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acquired before the previous year. Besides, whatever its

validity over the period of continuous operation of the same

Act (of 1922 or 1961) it can have no application for the

assessment year 1962-63. There is no provision in the 1961

Act which permits or compels the adoption or continuance of

the figure of Actual cost and written down value determined

under the provisions of the earlier statute which has been

repealed by the 1961 Act. Therefore, it cannot be accepted

that the figure of actual cost ascertained in respect of any

asset in any of the earlier previous years could not be

altered in a subsequent year. [p129F-G, 128F-G]

Maharana Mills v. I.T.O., [1959] 36 I.T.R. 350; Habib

Hussein v. C.I.T., [1963] 48 I.T.R. 859 (Bom.), relied on.

Karnani Industrial Bank v. C.I.T., [1954] 25 I.T.R.

550, referred to.

2.1 The definition of the expression "actual cost" in

S.43(1) envisages the computation of the actual cost 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 during 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. Once it is conceded that the figure of actual

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cost can require modifications it is not possible to confine

such modifications to only three situations viz., (a)

subsequent factual occurrences, which called for a

modification of the figure of actual cost as at the time of

acquisition determined earlier; (b) discovery of

arithmetical errors in the earlier computation of the actual

cost or written down value of any asset; and (c)

redetermination of the original actual cost necessitated by

a specifically retrospective statutory provision. [131B-D,

130B-C]

2.3 Where subsequent information - factual or legal

reveals that the actual cost determined originally was

wrong, there can be no doubt that the original figure of

actual cost has to be altered, if need be, and, if possible,

by reopening the earlier assessments and, if that be not be

possible, at least for the future. [131E]

Maharana Mills v. I.T.O., [1959] 36 I.T.R. 350,

referred to.

2.4 There are clearly situation in which the actual

cost does get

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altered prospectively and not retrospectively. One such

instance is where the cost of an asset increases or

decreases on account of a fluctuation in the value of the

currency. Another situation would be where, subsequent to

the acquisition of the asset, substantial capital

expenditure has been incurred thereon (not amounting to the

addition of a separate asset on which depreciation etc.

could be independently allowed). Such expenditure is added,

under the rules, in practice to the actual cost and

allowance given thereon subsequently. Therefore, it cannot

be accepted 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 aforesaid three

situations, where the original figure itself requires a

modification . [133A, C-E]

Habib Hussain v. C.I.T. [1963] 48 I.T.R. 859 (Bom.)

referred to.

3.1 The rule as to the prospective application of

statutes is wellsettled. A retrospective operation is not

to be given to a statute as to impair an existing right or

obligation otherwise than as regards a matter of procedure,

unless that effect cannot be avoided without doing violence

to the language of the enactment. If the enactment is

expressed in language which is fairly capable of either

interpretation, it ought to be construed as prospective

only. [133G, 134B-C]

Craies on Statute Law (7th Edition) page 389; Maxwell

on Interpretation of Statutes (12th Ed.) pp. 215-219;

Principles of Interpretation of Statutes by G.P. Singh

(Fourth Ed.) p. 81, referred to.

3.2 The instant case 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, though in respect of these particular assets the

assess might have obtained depreciation for earlier

assessment years on the basis of a higher figure, that will

no longer be available in future and that the figure of

actual cost should be taken not as was originally calculated

but only at a lower figure for the assessment years 1962-63

and onwards. It is just the case of a provision, a part of

the requisites for the operation of which is drawn from a

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time antecedent to its passing.[134G, 135A-B]

3.3. The interpretation of the Revenue does not operate

against the well-known principle that retrospective

operation-assuming that the provision has a retrospective

effect-should not be presumed where existing or part rights

are interfered with. [137A]

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4.1 There is no doubt or ambiguity about the provision.

It is clear and explicit, 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. The object of the

provision dealing with the grant of depreciation is,

generally speaking, to enable an assessee to get the capital

expenditure incurred by him in acquring the asset written

off to his profits over the years though it is true that, in

certain situations, the statute specifically relaxes this

rigidity. In earlier years, he had been obtaining

depreciation on a particular footing. But the language used

lent itself to an interpretation that he could get a

deduction even in respect of expenditure he did not incur.

There is no doubt about the correctness of this

interpretation. [137B-C]

4.2. Where a person purchases an asset, it may be

correct to say that the cost of the asset does not change

because a part of the cost is met by some one else. But the

legislature had to decide whether an assessee should be

allowed to claim an allowance of depreciation in respect of

the asset on the artificial basis of the cost of the asset

rather than what he has actually spent to acquire that asset

and whether the wording of the original provision as

interpreted by courts, had not conferred an undue advantage

or benefit on the assessee. This was not considered by the

legislature to be equitable and, therefore, it was altered

by legislation. It accords with reason that the provision

should be interpreted to say that, at least after the

amendment, the assessee should not be allowed depreciation

on the basis of the earlier figure of actual cost. It is,

therefore, incorrect to describe this provision as creating

any undue hardship or injustice or inconvenience to an

assessee. [137D-F]

Govind Das v. I.T.O. [1976] 103 I.T.R. 123 at p.132,

distinguished.

5.1 When an assessee acquires an asset, he does not

acquire a right to obtain depreciation thereon equal to the

actual cost of the asset a s originally determined for tax

purposes. The effect of clause (c) of proviso to Section

10(2) (vi) of the 1922 Act and Section 34(3) of the 1961 Act

is that, while allowing depreciation in respect of any

asset, the officer should be careful to see that the

aggregate of the depreciation allowed to the assessee in

respect of that asset does not exceed the actual cost of the

asset. In other words, as and when the provision is applied

for each and every assessment year and the depreciation on

any asset is calculated, it should be ensured that the

depreciation allowed does not exceed the actual cost of the

asset. The `actual cost' referred to is not the actual cost

as originally determined at the time of the acquisition.

[136B-D]

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5.2 Thus, in the instant cases, while examining whether

a particular asset is entitled to any depreciation for the

assessment year 1962-63, the officer will find that it has

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already secured depreciation much more than the actual cost

of the asset as determined by him and will grant no further

depreciation in respect thereof. It is no doubt true that in

past years the asset had become eligible to amounts of

depreciation the aggregate of which exceeds the actual cost

as presently determined and, if that depreciation is

deducted from the actual cost subsequently arrived at, a

negative figure may result. But such a situation will arise

even in the category of cases in which the revision of

actual cost is permissible [136E]

5.3. In the instant case, there was no negative written

down value in earlier years and, equally, there will be none

in the year of revision as the effect of the proviso is not

to produce a negative written down value but only to

preclude further grant of depreciation on the asset in

future. Read thus 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. [136G]

5.4 The use of the words "has been met" is very

appropriate and proper in the present context once the

mechanics of the provision are understood. It is

incontrovertible that, under S. 43(1) read with S. 43(6) the

officer has to determine the actual cost for all assets, new

and old, and the definition in S. 43(1) only requires that,

at the time of doing so, he has to examine whether the

actual cost has been fully laid out by the assessee or has

been met by some one else in whole or in part. The words

"has been met" squarely fit into this reading of the

section and the use of the words "has been met" does not

restrict the definition in S. 43(1) to assets acquired in

the previous year. [138D-E]

Carson v. Carson and Stoyek, [1964]1 All England Law

Reports 681, referred to.

5.5 The proviso to clause (c) really places a

limitation on the depreciation deductible at any point of

time and hence, there can never be a negative written down

value. Explanations 2 and 4 to Section 43(6) fall in line

with the interpretation favoured by the Revenue once it is

understood that the reference to "depreciation actually

allowed" should be read subject to the limitation of clause

(c) of proviso to S. 10(2) (vi). Explanation 6 offers no

difficulty as the relationship as "parent" and "subsidiary"

between the companies involved in the transfer for the

purposes of this clause has to be determined as at the time

of the transfer

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of the asset and will not be a wobbling or fluctuating one.

[138G-H, 139A]

5.6 There is no difficulty or anomaly resulting from

the Revenue's interpretation in the Calculation of

assessable profits under Section 41(2) or the allowances

under Section 32(1)(iii). [139B, E]

Birmingham Corporation v. Barnes [1935] 3 I.T.R. Supp.

26 (HL), referred to.

Riverside (Bhatpara) Electric Supply Co. Ltd v. C.I.T.,

[1977] 109 I.T.R. 399 (Cal.); CIT v. South Madras Electric

Supply Corporation Ltd., [1977] 109 I.T.R. 426 (Mad.); CIT

v. Saharanpur Electric Supply Co. Ltd., [1977] 109 I.T.R.

545 (All); CIT v. Bassein Electric Supply Co. Ltd., [1979]

118 I.T.R. 884 (Bom); Rohtak & Hissar Districts Electric

Supply Co. (P) Ltd., v. CIT, [1980] 128 I.T.R. 52 (Del.);

Ambala Electric Supply Co. Ltd., v. CIT. [1983] 139 I.T.R.

925 (Punj); CIT v. Bombay Suburban Electricity Co. Ltd., v.

CIT, [1983] I.T.R. 298 (Bom.);British insulated Callendars

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Cables,v. CIT[1983] 142 .I.T.R. 300(Bom); CIT v. Panvel

Taluka Electrical Development Co. Ltd., [1983] Taxation

71(1_-14 (Bom.); Ranchi Electric Supply Co. Ltd., v. CIT

[1984] 150 I.T.R. 95 (Pat.); CIT v. Lonawalla Khandalla

Electric Supply Co. Ltd., [1985] 22 Taxman 77 (Bom.); CIT v.

Calcutta Electric Supply Corporation Ltd., [1987] 166 I.T.R.

797 (Cal); CIT v. Bassein Electric Supply Co. Ltd., [1989]

177 I.T.R. 482 (ker.); CIT v. Calcutta Electric Supply

Corporation Ltd., [1989] 179 I.T.R. 580 (Cal) and Ahmedabad

Electricity Co. Ltd. v. CIT [1991] 190 I.T.R. 413 (Bom.),

approved.

JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1861 of

1977 Etc. Etc.

From the Order dated 27.8.1976 of the Allahabad High

Court in I.T.R. No. 271 of 1973.

Dr Debi Prasad Pal, S.D. Dastur, T.A. Ramachandran, D.P

Mukherjee, Ms. Priya Hingorani, C.N. Mistry, Mrs. A.K.

Verma, D.N. Misra, V. Dholakia, R. Ayyam Peruman, P.D.

Pardiwala, Dushyant Dave, R.N. Karanjawala, Ms. Manik

Karanjawala, Ms. V.S. Rekha, Sajai Singh, Ms. Janaki

Ramachandran, Kailash Pd. Gupta and H.K. Dutt for the

Appellants.

Dr. V. Gauri Shankar, S.C. Manchanda, Ms. A.

Subhashini and S. Rajappa for the Respondents.

The Judgment of the Court was delivered by

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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 assesses, a

part of the expenditure incurred in connection with the

installation of which is recovered by the assesses from

consumers of electricity.

Depreciation, under the Income-Tax Act, is computed as

a percentage of the "written down value" of the asset in

question. The Income-tax Act, 1961 came into force on

1.4.1962. S. 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 of 1886), was in force."

The Act also defines the expression `actual cost' in

Section 43(1). It reads thus :

"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 :

It will be seen from the main paragraph of sub-section

(1) of Section 43 that it does not really define what is

meant by the actual cost of an asset to the assessee; it

only contains a gloss that, whatever the expression may

mean, that figure has to be reduced by that portion of it,

if any as has been met directly or indirectly by any other

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person or authority. The question before us arises partly

due to this circumstance and partly due to the earlier

legislative history of these provisions.

Under Section 10(2)(vi) read with Section 10(5) of the

Indian Income-tax Act, 1922, an assessee was entitled to an

allowance of depreciation at a percentage of the actual cost

to the assessee or the written down value of the relevant

asset owned by him and used for the purposes of business.

It is common ground that the service lines constitute

machinery or plant on which

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the assesses are entitled to depreciation. Also, as under

the present Act, so under that Act, `written down value' was

defined with reference to `actual cost'. Initially, between

1922 and 1952, the expression `actual cost' was defined to

mean just `the actual cost of the asset to the assessee'.

As already mentioned, a part of the cost of the assets in

the present case viz. service lines is met by the consumers

with the result that, though the company might have incurred

a particular amount as expenditure towards the installation

of the service lines, `the actual cost' to it, of the

service lines, could, in a loose sense, be said to be the

amount of expenditure incurred by it in this behalf less the

amount recovered from the consumers in respect thereof. The

Income-tax Department tried to adopt this layman's approach

and restrict the depreciation on the service lines on the

basis of their cost less the amount recovered from

consumers. The Bombay High Court in C.I.T v. Poona Electric

Supply Company Ltd., [1946] 14 ITR 622, and in C.I.T.V.

Bombay Suburban Electric Supply Co. (p) Ltd.[1977] 106 ITR

752 the Kerala High Court in C.I.T. v. Cochin Electric Co.

Ltd. [1965] 57 ITR 82, the Punjab High Court in C.I.T. v.

Ambala Cantt. Electric Supply Co. Ltd., [1971] 82 ITR 217

and the Patna High Court in C.I.T. v. Ranchi Electric Supply

Co. Ltd. [1954] 26 ITR 89 disapproved of this line of

reasoning. Relying on the decision of the House of Lords in

Birmingham Corporation v. Barnes, [1935] 3 I.T.R. Supp.

26(HL), they held that, in ascertaining the actual cost of

an asset to the assessee, it was immaterial that someone

else has recouped 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 w.e.f. 1.4.1952 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 vide [1952] 21

ITR (SC) 40, the amendment, as finally effected, permitted

only a limited exclusion. The Explanation read as follows :

"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 Government or by any

public or local authority........

When enacting the Income-tax Act, 1961, however, the

legislature revived the earlier proposal of 1953 and the

present Act directs the exclusion, in the computation of the

actual cost, of all amounts reimbursed to the assessee by

any person whatsoever.

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Now the question which arises before us, in relation to

the assessment year 1962-63, is this. This appellant

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companies had installed service connections during the

relevant previous year. So far as these are concerned,

there is no dispute that depreciation has to be allowed on

them with reference to their `actual cost' as defined in S.

43(1) i.e. by excluding contributions or reimbursements from

consumers. But the appellants have also to be granted

depreciation on service connections installed in earlier

previous years and it is only in respect of such assets that

the present controversy arises. the depreciation on those

assets, under Section 43(6) of the 1961 Act, has to be

computed with reference to their written down value, that

is, their `actual cost' less all depreciation allowed in

respect thereof under the 1922 Act till the assessment year

1961-62. Since those assets had been acquired by the

assessment years, their actual cost had been duly

ascertained for the previous year of acquisition in

accordance with the provisions of Section 10(5)(a) of the

Indian Income-tax Act, 1922. If the assets had been

acquired earlier than the previous year relevant to the

assessment year 1952-53, the actual cost of the assets to

the assessee would perhaps have been taken without any

deductions whatever in respect of the contributions made by

other persons towards the cost of the asset. In the case of

such of those assets as had been acquired during the

previous years relevant to the assessment years 1952-53 to

1961-62, the actual cost would have been determined in

accordance with the relevant law as it stood at that time

viz. by taking their actual cost and deducting therefrom

contributions made by the Government or any public or local

authority to enable the assessee to acquire the assets. The

assesses' 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 assessment

year 1962-63 onwards, can only be in accordance with the

definition contained in the 1963 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 there from the

contribution 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 if these contentions

is correct.

All the High Courts have upheld the stand of the

Revenue. They have

128

answered the question by holding that the actual cost of all

assets for purposes of assessment year 1962-63 and onwards,

whatever might have been the date of acquisition of the

assets in question, has to be computed in accordance with

the new formula laid down by the Income-tax Act of 1961.

These decisions are : Riverside (Bhatpara) Electric Supply

Co. Ltd. v. C.I.T. (1977] 109 I.T.R. 399 (Cal); C.I.T. v.

South Madras Electric Supply Corporation Ltd., [1977] 109

I.T.R. 426 (Mad); C.I.T. v. Saharanpur Electric Supply Co.

Ltd., [1977] 109 I.T.R. 545 (All); C.I.T. v. Bassein

Electric Supply Co. Ltd., [1979] 118 I.T.R. 884 (Bom);

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Rohtak & Hissar Districts Electric Supply Co. (P) Ltd., v.

C.I.T., [1980] 128 I.T.R. 52 (Del); Ambala Electric Supply

Co. Ltd. v. C.I.T., (1983) 139 I.T.R. 925 (Punj); C.I.T. v.

Bombay Suburban Electricity Co. Ltd ., [1983] 142 I.T.R. 298

(Bom); British Insulated Callendars, Cables Ltd., v. C.I.T.,

(1983) 142 I.T.R. 300 (Bom.); C.I.T. v. Panvel Taluka

Electrical Development Co. Ltd., [1983] Taxation 71(1)-14

(Bom.);' Ranch Electric Supply Co. Ltd. v. C.I.T., [1984]

150 I.T.R. 95 (Pat.); C.I.T. v. Lonawalla Khandalla Electric

Supply Co.Ltd.,(1985) 22 Taxman 77 (Bom.); C.I.T v. Calcutta

Electric Supply Corporation Ltd., [1987] 166 I.T.R. 797

(Cal); C.I.T. v. Bassein Electric Supply Co. Ltd., (1989)

177 I.T.R. 482 (Ker.); C.I.T. v. Calcutta Electric Supply

Corporation Ltd. [1989] 179 I.T.R. 580 (Cal); and Ahmedabad

Electricity Co. Ltd. v. C.I.T., [1991] 190 I.T.R. 413

(Bom.). The appellants before us contest the correctness of

this unanimous view of the High Courts. Indeed some of the

decisions above referred to form the subject matter of some

of these appeals.

Dr. Debi Pal, Sri Dastur and Sri Ramachandran, who

appeared for the assessees, submitted that the various High

Courts have not correctly appreciated the arguments put

forward before them and failed to see that the

interpretation approved by them will result in absurdities

and anomalies. In view of the consensus of views of the

High Courts against them, they have taken considerable pains

to address elaborate arguments which merit serious

consideration in these appeals.

We may, at the outset, dispose of an argument raised by

Dr. Pal. His point was that the figure of actual cost

ascertained in respect of any asset in any of the earlier

previous years cannot be altered in a subsequent year.

According to him, both the 1922 Act as well as the 1961 Act

envisage a continuance of the figure of actual cost once

arrived at in respect of any plant or machinery throughout

the life-time of such plant or machinery. He says that, for

the assessment year 1962-63, the question of determination

of actual cost can arise only in respect of assets acquired

during the relevant previous year under clause (a) of S.

43(5). So far 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

129

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

S.43(6) and, even, its predecessor s. 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 is normally carried forward from an earlier assessment

year, the phraseology of the Act does not bear out the

contention that the actual cost of the asset has to be

determined only once viz. in the previous year of its acqui-

sition. S. 43(6) specifically deals with two categories of

assets : (i) those acquired during the relevant previous

year and (ii) those acquired earlier to that. Even in re-

spect of the latter class of assets, the Act envisages a

computation of the actual cost of the asset and the deduc-

tion therefrom of all depreciation allowed in earlier years

in respect of the asset. Thus the first step, statutorily

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prescribed, for the determination of the written down value

of any asset for any year, is for the Assessing Officer to

determine its actual cost. This is a mandatory step which

the Officer cannot be prevented from taking merely because

the actual cost of the asset has already been determined in

one or more earlier years, though it may be true that in

ninety nine (and perhaps even more) percent of the cases,

the result (barring mistakes and some special situations)

will just be the equivalent of the written down value take

for the immediately preceding assessment year less the

depreciation allowed for that year. This mechanics of the

definition was explained by the Calcutta High Court in

Karnani Industrial Bank v. C.I.T. [1954]25 I.T.R. 558,

approved by this Court in Maharana Mills v. I.T.O. [1959]36

I.T.R. 350 and followed in Habib Hussein v. C.I.T. [1963]48

I.T.R. 859 (Bom.). In the light of these decisions and the

clear language of the statute, it is not possible to accept

the contention that the Income Tax Officer had no justifica-

tion to compute first the actual cost of an asset which had

been acquired before the previous year. The second difficul-

ty in the way accepting the argument of Dr. Pal is that,

whatever its validity over the period of continuous opera-

tion of the same Act (of 1922 or 1961), it can have no

application for the assessment year 1962-63. There is no

provision in the 1961 Act which permits or compels the

adoption or continuance of the figure of actual cost and

written down value determined under the provisions of the

earlier statue which has been repealed by the 1961 Act. We,

therefore, reject this contention of Dr. Pal.

Perhaps realizing the above difficulty, Sri Dastur put

forward a slightly modified contention. He concedes that the

actual cost as determined for the earlier years is not

sacrosanct or untouchable and that there may be circum

130

stances 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 S.43(1) read with

sub-sec. (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 a specifically retrospective

statutory provision.

He points to instances of such modifications permitted

by judicial decisions. In Karnani Industrial Bank Ltd. v.

C.I.T. [1954]25 ITR 558 (Cal.) the assessee claimed to have

purchased a machinery for Rs. 3,94,000 and obtained

depreciation on that basis from assessment year 1939-40

onwards. In proceedings for assessment year 1946-47, the

Officer discovered that the cost of the machinery was only

Rs. 2,80,000 and, since assessee had already obtained

depreciation beyond this, refused the grant of depreciation

for assessment years 1946-47 and 1947-48. This was upheld by

the Calcutta High Court. In Maharana Mills (P) Ltd. v.

I.T.O. [1959]36 ITR 350(SC) the Officer rectified the

assessments of the assessee to re-work the written down

value computed and the depreciation granted for earlier

years as not being in accordance with law. The validity of

these rectifications was upheld. In Habib Hussein v. C.I.T.,

[1963]48 ITR 859 (Bom) the asset in question had been

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acquired in the previous year relevant to the assessment

year 1950-51. The assessee had acquired the asset under an

agreement dated 4.6.48. But that agreement had been revised

on 10.7.50 (after the close of the relevant previous year).

The assessee claimed, nevertheless, that a sum of Rs.

3,30,000 payable by virtue of the subsequent agreement, also

formed part of the actual cost of the asset. This claim was

upheld by the High Court. According to learned counsel, this

was also a case where the original figure of actual cost was

more precisely defined and quantified later. Counsel con-

cedes that, in cases of this type the actual cost as deter-

mined in earlier years might need to be modified and that

the assessing officer will be at liberty to do so. He,

however, contends that the actual cost cannot be altered

merely because a subsequent legislation provides for a

different formula for ascertainment of actual cost; that

formula may very well apply in respect of assets acquired in

and after the previous year to which the new law will be ap-

plicable but it cannot be retrospectively made applicable to

assets which

131

had been acquired much earlier and the actual cost of which

had been determined in accordance with the earlier prevalent

law, unless the statute specifically says so. As an example,

he refers to Explanation 8 to S. 43(1) which, though

inserted in 1989, provides that certain expenditure, of the

nature specified therein, "shall not be included, and shall

be deemed never to have been included in the actual cost of

such asset."

We are of the view that it is difficult to read any

limitations into the statutory provision in S. 43(6) as

contended for by counsel. As already explained, the

definition envisages the computation of the actual cost 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 computa-

tion 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 acquisi-

tion. 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 con-

tended for by Sir. Dastur. Where subsequent information-

factual or legal reveals that the actual cost determined

originally was wrong, there can be no doubt that the origi-

nal figure of actual cost has to be altered, if need be,

and, if possible, by reopening the earlier assessments and,

if that be not be possible, at least for the future. This is

illustrated by the situations in Karnani and Maharana Mills

and this is also the position in cases to which Explanation

8 applies. These are situations which have a retrospective

impact on the original actual cost. But it is equally con-

ceivable that the `actual cost' may undergo a change which

does not relate back in fact or law and there is no reason

why such change should not be given effect to in future,

irrespective of what may have happened in the past. In fact

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this is what happened in Habib Hussein's case. It was not a

case of the category suggested by Sri Dastur. It was a case

where the figure of original cost underwent a change by

reason of a subsequent agreement and the High Court directed

that the sum of Rs. 3,30,000 or part thereof attributable to

the acquisition of the assets "should be included in the

actual cost of these assets to the assessee in the respec-

tive year or years of account at the commencement of which

the liability to pay it or part thereof had accrued or would

accrue". That the redetermination of actual cost permitted

132

by the provision with which we are concerned is not

restricted to cases of the limited range of retrospective

change in the actual cost suggested by Sri Dastur is also

illustrated by the decision in C.I.T. v. Hides & leather

Products P. Ltd., [1975]101 I.T.R. 61 (Guj.). In that case,

"the assessee who maintained its accounts on the mercantile

system purchased a piece of machinery from a foreign firm in

1955. No amount was paid towards the price thereof on the

ground that there was some defect in the machinery the

liability to the foreign supplier was shown in the books of

account and balance-sheet of the assessee. But in 1960, by

making appropriate entries the assessee wrote back the

amount of Rs. 30,572 being the price of machinery, debited

the amount in the account of the foreign supplier and

credited the same amount in the capital reserve account. On

the question whether the assessee was entitled to

depreciation on the actual cost computed at Rs. 30,572 for

the assessment years 1961-62 to 1965-66". The High Court

held that "in view of the fact that the foreign supplier had

not recovered the amount of Rs. 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 Rs. 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 Rs. 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 Rs. 30,572".

Sri Dastur challenged the correctness of this decision in so

far as it held that the original cost itself did not stand

modified as a result of the subsequent development. We are

not concerned with that aspect here. All that is relevant is

that this is a decision which permits as alteration in the

figure of actual cost consequent on subsequent factual

occurrences that do not relate back. It also shows that the

actual cost for 1961-62 could be scaled down for the assess-

ment year 1962-63. There are also other decisions which

make it clear that the original cost of an asset may change

after the year of installation or erection as a result of

further liabilities arising later : C.I.T. v. U.P. Hotel-

Restaurant Ltd. [1980]123 I.T.R. 626 (All.) and Kilkotagiri

Tea and Coffee Estate Ltd. v. C.I.T., (1978) 113 I.T.R. 729

(Ker.) decided in the context of depreciation allowance and

C.I.T., v. Mithlesh Kumari, [1973]92 I.T.R. 9 (Del.) and

C.I.T. v. Gupta, [1979] 119 I.T.R. 372 (A.P.) decided in the

context of the allied "cost of acquisition" for purposes of

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capital gains.

133

These apart, there are clearly situations in which the

actual cost does get altered prospectively and not

retrospectively. One such instance is where the cost of an

asset increases or decreases on account of a fluctuation in

the value of the currency. Suppose an asset was purchased in

1965 for $10,000 (equivalent to say, Rs. 1,00,000) and the

price or the moneys borrowed by the assessee in foreign

currency for its payment, remained outstanding. The evalua-

tion of the rupee in June 1966 would result in the increase

of the price to say, Rs. 1,20,000. It may be arguable wheth-

er this is a retrospective enhancement in the price or not.

But it would be only reasonable to say that the actual cost

has increased to Rs. 1,20,000 in June 1966 and that the

assessee should be entitled to the grant of depreciation and

other allowances at least thereafter, on the basis of the

altered cost. This is what S. 43A provides. Another situa-

tion would be where, subsequent to the acquisition of the

asset, substantial capital expenditure has been incurred

thereon (not amounting to the addition of a separate asset

on which depreciation etc. could be independently allowed).

Such expenditure is added, under the rules, in practice to

the actual cost and allowance given thereon subsequently,

vide : the third column in the table set out at p. 878 in

Habib Hussein [1963]48 I.T.R. 859(Bom.). This is quite cor-

rect 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 alternation. 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 previ-

ous year and that the actual cost once determined cannot be

altered except in the three situations outlined by counsel

where the original figure itself required a modification.

Sri Dastur, however, contends that there are three

formidable reasons 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

basic rules enunciated by prominent authors on construction

of statutes. To start with, the position has been explained

in Craies on Statute Law (7th Edition) at page 389. The

learned author first discusses the meaning of the word

`retrospective' and points out : "a statute is to be deemed

to be retrospective which takes away or impairs any vested

right acquired under existing laws, or creates a new obliga-

tion, or imposes a

134

new duty, or attaches a new disability in respect to

transactions or considerations already past". But a statute

"is not properly called a retrospective statute because a

part of the requisites for its action is drawn from a time

antecedent to its passing". A little later, it is explained

that while Parliament has competence to make the provisions

of an Act of Parliament retrospective. "........no rules of

construction is more firmly established than this - that a

retrospective operation is not to be given to a statue so as

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to impair an existing right or obligation otherwise than as

regards a matter of procedure, unless that effect cannot be

avoided without doing violence to the language of the

enactment. If the enactment is expressed in language which

is fairly capable of either interpretation, it ought to be

construed as prospective only". Maxwell on Interpretation of

statutes (12th Ed.) contains passage to like effect at page

215 to 219. We may also refer to a passage from "Principles

of Interpretation of Statutes" by G.P. Singh (Fourth Ed.)

where the learned author warns against a departure from the

ordinary meaning of the words used in a statute merely on

grounds of hardship, injustice or absurdity. At page 81, he

points out : "........ considerations of hardship, injustice

or absurdity as avoiding a particular construction is a rule

which must be applied with great care. `The argument abin-

convenienti' said Lord Moulton, `is one which requires to be

used with great caution'. Explaining why great caution is

necessary, Lord Moulton further observed : `There is a

danger that it may degenerate into a mere judicial criticism

of the propriety of the Act of legislature. We have to

interpret statutes according to the language used therein,

and though occasionally the respective consequences of two

rival interpretations may guide us in our choice in between

them, it can only be where, taking the Act as a whole and

viewing it in connection with the existing state of the law

at the time of the passing of the Act, we can satisfy our-

selves 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 indi-

vidual 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 lights 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 year. All that the

department says is that, though in respect of these

135

particular assets, the assessee might have obtained

depreciation for earlier assessment years on the basis of a

higher figure, that will no longer be available in future

and that the figure of actual cost should be taken not as

was originally calculated but only at a lower figure for the

assessment years 1962-63 and onwards. It is just the case of

a provision, a part of the requisites for the operation of

which is drawn from a time antecedent to its passing.

It is argued on behalf of the assessee that the provi-

sion should be considered to be retrospective because it

affects the vested or existing rights of the assessee. This

argument is based on the provisions of clause (c) of the

proviso to Section 10(2) (vi) of the 1922 Act (corresponding

to section 34(3) of the 1961 Act) which lays down that the

aggregate of all deductions in respect of depreciation made

in the Act or its predecessor Acts shall "in no case exceed

the actual cost to the assessee of the building, machinery,

plant, furniture, structure or work, as the case may be".

Mr. Dastur's argument is that, when the asset was acquired,

its actual cost had been determined in a particular manner

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and that, by virtue of the above provision, the assessee

acquired a vested right to obtain depreciation thereon equal

to the actual cost as so determined. He also points out

that, under the provisions of 1922 Act as well as 1961 Act,

there are elaborate provisions to adjust the allowances of

depreciation so as to accord with reality. If, on the basis

of the depreciation already granted the written down value

of the asset becomes too low and the assessee is able to

sell the asset for a higher price, the surplus is brought to

tax. On the other hand, where the depreciation allowed is

inadequate and the amount realised by the assessee on the

sale, demolition or destruction of the asset is much less

than the written down value, the assesee is allowed to write

off the difference between the written down value and the

scrap value of the asset. In other words, the Act has pro-

vided a machinery which ensures that the assessee gets by

way of depreciation allowance is correlated to reality.

According to him, this right of the assessee, whether it is

described as a vested right or an existing right, is affect-

ed by the provision with which we are presently concerned.

To this argument, 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 deprecia-

tion 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 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 a negative figure. The result of this,

according

136

to counsel, will be that the carried forward unabsorbed

depreciation will be a negative figure in so far as this

asset in 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 department would result in

affecting rights which had been available to the assessee

prior to the amendment.

We are of the opinion that these contentions are

unfounded. It is incorrect to view the position as if, when

an assessee acquires an asset, he acquires a right to obtain

depreciation thereon equal to the actual cost of the asset

as originally determined for tax purposes. The effect of

clause (c) to the proviso to Section 10(2) (vi) of the 1922

Act and Section 34(3) of the 1961 Act is only this that,

while allowing depreciation in respect of any asset the

officer should be careful to see that the aggregate of the

depreciation allowed to the assessee in respect of that

asset does not exceed the actual cost of the asset. In other

words, as and when the provision is applied for each and

every assessment year and the depreciation on any asset is

calculated, it should be ensured that the depreciation

allowed does not exceed the actual cost of the asset. In

other words, the "actual cost" referred to is not the actual

cost as originally determined at the time of acquisition.

Thus, in the cases before us, while examining whether a

particular asset is entitled to any depreciation for the

assessment year 1962-63, the officer will find that it has

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already secured depreciation much more than the actual cost

of the asset as determined by him and will grant no further

depreciation in respect thereof. It is no doubt true that in

past years the asset had become eligible to amounts of

depreciation the aggregate of which exceeds the actual cost

as presently determined and, if that depreciation is

deducted from the actual cost subsequently arrived at, a

negative figure may result. But such a situation will arise

even in the category of the cases in which, according to

counsel, the revision of actual cost is permissible. Thus,

even in Karnani Industrial Bank (supra) cited by him, the

assessee had obtained for earlier years depreciation for

exceeding the real cost of the asset. This is an "anomaly"

which arises because the assessee was erroneously granted

higher depreciation than he deserved. But, even here, there

was no negative written down value in earlier years and,

equally, there will be none in the year of revision as the

effect of the proviso is not to produce a negative written

down value but only to preclude further grant 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 depart-

ment operates against the well

137

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

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 off to his profits over the years though it is

true that, in certain situations, the statute specifically

relaxes this rigidity. In earlier years, he had been

obtaining depreciation on a particular footing. But the

language used lent itself to an interpretation that he could

get a deduction even in respect of expenditure he did not

incur. The correctness of this interpretation is not in

doubt. Where a person purchases an asset, it may be correct

to say that the cost of the asset does not change because a

part of the cost is met by some one else. But the

legislature had to decide whether an assessee should be

allowed to claim an allowance of depreciation in respect of

the asset on the artificial basis of the cost of the asset

rather than what he has actually spent to acquire that asset

and whether the wording of the original provision, as

interpreted by courts, had not conferred an undue advantage

or benefit on the assessee. This was not considered by the

legislature to be equitable and, therefore, it was altered

by legislation. It accords with reason that the provision

should be interpreted to say that, at least after the

amendment, the assessee should not be allowed depreciation

on the basis of the earlier figure of actual cost. It is,

therefore, incorrect, in our opinion, to describe this

provision as creating any undue hardship or injustice or

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inconvenience to an assessee. It is in this context that the

passages cited earlier from Brett L.J and Lord Moulton

become relevant. They appear to be particularly apt to the

context of the present provisions. For the above reasons, we

are unable to accept the contention addressed on behalf of

the assessee or to draw any support therefor from the obser-

vations in Govind Das v. I.T.O., [1976]103 I.T.R. 123 at p.

132; relied upon by counsel.

2. The language used in the provision :

It was next suggested that there is an indication in

the language of Section 43(6) itself to show that it is

available to be invoked only in respect of assets which had

been acquired in earlier years. Reference is made in this

context to the use of the words "as has been met" in Section

43(1) and the

138

use of similar language in the notes on clauses of the

corresponding provision in the Income-tax Bill, 1961 (see

1961 Act 42 ITR supp. at page 161). It is argued that if the

intention had been that the actual cost of assets which had

been 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 England Law Reports 681. In that case, S. 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 previous 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 the

decision is of 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.

As we have already explained, it is incontrovertible that,

under S. 43(1) read with S. 43(6) the officer has to

determine the actual cost for all assets, new and old, and

the definition in S. 43(1) only requires that, at the time

of doing so, he has to examine whether the actual cost has

been fully laid out by the assessee or has been met by some

one else in whole or in part. The words "has been met"

squarely fit into this reading of the section and it is

difficult to accept the suggestion that the use of the words

"has been met" lends support to an interpretation restrict-

ing the definition in S. 43(1) to assets acquired in the

previous year.

3. Absurdities and anomalies :

It is contended that the Revenue's interpretation will

result in absurdities and anomalies. The first of these is

said to be that it may lead to the computation of a

negative written down value and consequent difficulties in

applying various other statutory provisions. We have already

negatived the contention and pointed out that the proviso to

clause (c) really places a limitation on the depreciation

deductible at any point of time and, hence, there can never

be a negative written down value as contended. The second

anomaly is said to be that the interpretation favoured by

the Revenue is incompatible with the terms of Explanations

2, 4 and 6 to S. 43(6). We see no such difficulty.

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Explanations 2 and 4 fall in line with the suggested

interpretation, once it is understood that the reference to

"depreciation actually allowed" should be read subject to

the limitation of clause (c) of proviso to S. 10(2)(vi) [now

section 34(3)]. Explanation 6 offers no difficulty

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as the relationship as "parent" and "subsidiary" between the

companies involved in the transfer for the purposes of this

clause has to be determined as at the time of the transfer

of the asset and will not be a wobbling or fluctuating one

as suggested by counsel for the assessee. Another difficulty

pointed out is that the interpretation put forward by the

Department might lead to difficulties in the calculation of

assessable profits under section 41(2) or the allowance

under section 32(1)(iii). Sri Ramachandran illustrated the

difficulty by giving the instance of an asset purchased for,

say, Rs. 10,000 entirely with monies contributed by others.

If the asset had been purchased in 1958 and was eligible for

depreciation at 10 per cent, the assessee would have secured

depreciation of Rs. 2710 in the assessment years 1959-60,

1960-61 and 1961-62. Suppose in the previous year relevant

assessment year 1963-64, it is sold for Rs. 5000. Mr.

Ramachandran points out that, according to the Department's

interpretation the actual cost of the asset will 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 Rs. 5000 for which

the asset is sold will become chargeable under section

41(2). In other words, the assessee will have to pay tax on

Rs. 5,000 by way of balancing charge though he had been

allowed depreciation only to the extent of Rs. 2710. Again

if the asset is sold for Rs. 2,500 in the previous year

relevant for assessment year 1963-64, according to the

Department he will have to pay a tax on Rs. 2,500 whereas

under the old provisions he would have got an allowance

under section 32(1)(iii). But this is only a seeming anoma-

ly. For, the sums of Rs. 5,000 and Rs. 2,500 will be taxed

not as balancing charge but as capital gains which is quite

consistent with the department's position that, the assessee

having paid nothing for the asset, its actual cost should be

taken at nil, a stand in which there is no absurdity. We do

not, therefore, think that any difficulty or anomaly results

from the interpretation suggested.

For the reasons discussed above, we agree with the view

taken by the several High Courts and dismiss these appeals.

N.P.V. Appeal dismissed.

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