Actual cost for depreciation depends on whether liability has ceased and whether the amount was truly borne by the assessee.
Depreciation on machinery turned on the meaning of "actual cost" under two tax regimes. For assessment year 1961-62, the 1922 Act treated actual cost as the assessee's own cost, subject only to the limited statutory adjustment then available, so the machinery cost remained Rs. 30,572. For assessment years 1962-63 to 1965-66, section 43(1) of the 1961 Act required actual cost to be reduced by any amount not in substance borne by the assessee; the cessation of liability to the foreign supplier and the write-back of that liability meant the amount could no longer be treated as part of actual cost for depreciation and written-down value.
Issues: (i) Whether, for assessment year 1961-62, depreciation was to be computed on the basis that the actual cost of the machinery to the assessee was Rs. 30,572. (ii) Whether, for assessment years 1962-63 to 1965-66, the assessee was entitled to depreciation on the same basis after the liability to the foreign supplier had ceased and the definition of actual cost under the Income-tax Act, 1961 applied.
Issue (i): Whether, for assessment year 1961-62, depreciation was to be computed on the basis that the actual cost of the machinery to the assessee was Rs. 30,572.
Analysis: Under the Income-tax Act, 1922, actual cost for depreciation purposes was confined to the cost to the assessee, subject to the statutory adjustment then available only where the cost was met directly or indirectly by Government or by a public or local authority. The machinery was acquired in 1955, the price was credited to the foreign supplier, and the supplier was neither Government nor a public or local authority. On that footing, the later write-back of the liability did not alter the position for the assessment year governed by the 1922 Act.
Conclusion: The depreciation for assessment year 1961-62 was rightly allowed on the basis that the cost to the assessee was Rs. 30,572, and this issue is decided in favour of the assessee.
Issue (ii): Whether, for assessment years 1962-63 to 1965-66, the assessee was entitled to depreciation on the same basis after the liability to the foreign supplier had ceased and the definition of actual cost under the Income-tax Act, 1961 applied.
Analysis: Under section 43(1) of the Income-tax Act, 1961, actual cost means the actual cost to the assessee reduced by any portion met directly or indirectly by any other person or authority. The Court treated the supplier's inaction over several years and the accounting write-back as showing cessation of liability in substance and in fact. Once the 1961 Act applied, the amount no longer represented cost borne by the assessee for those years and had to be excluded in computing actual cost and written down value.
Conclusion: The depreciation for assessment years 1962-63 to 1965-66 was wrongly allowed on the basis that the cost to the assessee was Rs. 30,572, and this issue is decided in favour of the revenue.
Final Conclusion: The reference was answered partly for the assessee and partly for the revenue, with the allowance of depreciation sustained for assessment year 1961-62 and disallowed on the claimed basis for the later assessment years.
Ratio Decidendi: For the 1922 Act, actual cost for depreciation is determined under the then applicable statutory framework, but under the 1961 Act actual cost must be reduced by any amount effectively not borne by the assessee, including a liability that has ceased in substance.