TaxTMI 
TaxTMI 
1992 (1) TMI 2
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....e 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depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force."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....
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....g 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 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 compu....
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....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 correct. All the High Courts have upheld the stand of the Revenue. They have 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. CIT....
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....e 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 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 acquisition. Section 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 respect of the latter class of asset....
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....bsequent 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 Rs. 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 machinery was only Rs. 2,80,000 and since the assessee had already obtained depreciation beyond this, refused the grant of depreciation for the assessment years 1946-47 and 1947-48. This was upheld by the Calcutta High Court. In Maharana Mills (P.) Ltd. v. ITO [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....
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....ed 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 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 possible, at least for the future. This is illustrated by the situations in Karnani Industrial Bank Ltd. [1954] 25 ITR 558 (Cal) and Maharana Mills P. Ltd. [1959] 36 ITR 350 (SC), and this is also the position in cases to which Explanation 8 applies. These are situations which have a retrospective impact....
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.... 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 an 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 assessment 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....
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....he 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 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 obligation, or imposes a new duty, or attaches a new disability in respect of transactions or considerations already past". But a statute "is not pro....
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....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, though in respect of these 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 time antecedent to its passing. It is argued on behalf of the assessee that the provision should be considered to be retrospective because it ....
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....r 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 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) of the proviso to section 10(2)(vi) of the 1922 Act and section 34(2) 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 agg....
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....t 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 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 cl....
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....e 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. As we have already explained, it is incontrovertible that, under section 43(1) read with section 43(6), the officer has to determine the actual cost for all assets, new and old, and the definition in section 43(1) only requires that, at the time of doing so, he has to examine whether the actual cost has been fully paid 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 restricting the definition in section 43(1) to assets acquired in the previous year....