Bombay H.C : Whether, on the facts and circumstances of the case, the sums of Rs. 46,178 and Rs. 10,399 are allowable as revenue expenditure for the asst. yrs. 1964-65 and 1965-66 respectively ?

Counsel Appeared

N. A. Dalvi with B.D. Damodar i/b Kanga & Co., for the Applicant : G.S. Jetly with P.S. Jetly i/b Mrs. S. Sengupta, for the Respondent

DR. B.P. SARAF, J.:

By this reference made under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following questions of law to this Court for opinion :

“(1) Whether, on the facts and circumstances of the case, the sums of Rs. 46,178 and Rs. 10,399 are allowable as revenue expenditure for the asst. yrs. 1964-65 and 1965-66 respectively ?

(2) If the answer to the question No. 1 is in the negative, whether the plea of the assessee that the said amounts should be added to the “actual cost”of the plant and depreciation should be allowed thereon, has been rightly disallowed to be raised by the Tribunal ?

(3) If the answer to question No.2 is in negative, whether the said amounts should be added to the “actual cost”of the plant and depreciation should be allowed thereon for the asst. yrs. 1964-65 and 1965-66 respectively ?

(4) Whether, the expenditure of Rs. 10,60,827 and Rs. 1,46,312 incurred by the assessee for bringing the gifted machinery from Europe to Bombay should be taken as part of the “actual cost”of the said machinery for the asst. yrs. 1964-65 and 1965-66 respectively ?

(5) Whether, on the facts and circumstances of the case, the expenditure of Rs. 9,873 on Mr. E. Candolif was allowable as revenue/business expenditure for the asst. yr. 1965-66 ?

(6) If the answer to Question No. 5 is in the negative, whether, on the facts and circumstances of the case, the said expenditure should be treated as part of the “actual cost”of the plant of the assessee and depreciation should be allowed thereon ?”

The assessment years involved in this reference are 1964-65 and 1965-66 for which the respective previous years are years ended 31st Dec., 1963 and 31st Dec., 1964.

The assessee is a company carrying on the business of manufacture and sale of pharmaceutical goods. It has a factory and office at Bombay. The equity capital of the assessee-company was Rs. 50 lakhs out of which 65% was held by Ciba Ltd., Basle, which has its office in Switzerland. The assessee had set up a research centre in Bombay at Goregaon for carrying out the research in connection with the production of pharmaceutical goods.

During the years under consideration, the assessee had set up a new plant at Bhandup for manufacturing additional pharmaceutical goods. In that connection, travelling expenses aggregating to Rs. 46,178 and Rs. 10,399 were incurred by the assessee during the accounting periods relevant to the asst. yrs. 1964-65 and 1965-66. In the accounting period relevant to the asst. yr. 1964-65, the assessee had incurred an expenditure to the tune of Rs. 9,873 on account of the visit of one Mr. E. Candolif who visited India for training the staff of the assessee for starting production at the plant at Bhandup. The assessee claimed deduction of the said amounts as revenue expenditure on the ground that it was incurred in the course of its business and the said new plant at Bhandup was merely for manufacturing additional goods in the same line of business so far carried on by the assessee. The ITO disallowed the said claims of the assessee on the ground that the expenditure in question could not be said to have been incurred wholly and exclusively for the purpose of the assessee’s existing business. The said expenditure, according to the ITO, was incurred in connection with the establishment of the manufacturing operation in respect of various products and schemes. The AAC allowed Rs. 8,323 out of the travelling expenditure of Rs. 16,623 for the asst. yr. 1964-65 included in the amount of Rs. 46,178 incurred by Mr. E. Bernet on the ground that the same was incurred wholly and exclusively for the purpose of the business of the assessee. So far as the balance claims of the assessee for the two years under consideration is concerned, the AAC agreed with the ITO and confirmed the disallowance made by him. Both the assessee and the Department preferred appeals before the Tribunal. The Tribunal affirmed the order of the ITO and the two amounts of Rs. 46,178 and Rs. 10,399 were held to be capital expenditure.

There was one more controversy in this case. It related to the computation of the actual cost of certain machinery, which was gifted to the assessee by its parent company M/s Ciba Ltd., Basle, for the purpose of depreciation. During the accounting year relevant to the asst. yr. 1964-65, Ciba Ltd., Basle, gifted to the assessee machinery of the invoice value of Rs. 21,97,983 which was purchased only a little earlier before the gift was made. The machinery, at the time of gift, was lying in New York. The assessee incurred an expenditure of Rs. 10,60,827 during the first year relevant to the asst. yr. 1964-65 and Rs. 1,46,312 during the second year relevant to the asst. yr. 1965-66 on account of freight, customs duty etc. for bringing the said machinery from New York to Bombay where it was installed. The question arose regarding the actual cost of the above machinery on which the assessee was entitled to depreciation and development rebate. According to the assessee, the actual cost would include not only the amount of Rs. 21,97,983 but also the amounts of Rs. 10,60,827 and Rs. 1,46,312 incurred by it. The latter part of the assessee’s contention was not accepted by the ITO who held that the actual cost was only Rs. 21,97,983 and, accordingly, he allowed depreciation and development rebate only on that amount. The ITO, while negating the contention of the assessee, relied on Expln. 2 to s. 43(1) of the Act and held that the invoice value was the market value, which would not include the said expenditure of Rs. 10,60,827 and Rs. 1,46,312. On appeal, the contention of the assessee was accepted by the AAC. The AAC directed that depreciation and development rebate should be allowed on the amount of Rs. 10,60,827 for the first year and depreciation on the said sum and sum of Rs. 1,46,312 for the second year. On appeal by the Revenue, the Tribunal reversed the finding of the AAC and confirmed the view taken by the ITO. Aggrieved by the order of the Tribunal, the assessee applied for reference of the questions of law arising out of the order of the Tribunal to this Court and the Tribunal, on being satisfied that the questions of law set out above did arise out of its order, has referred the same to this Court for opinion.

We have heard counsel for the parties. It is an agreed position that questions No. 1 and 5 both relate to the nature of the expenditure incurred by the assessee in the two assessment years. In other words, the issue raised in these two questions is whether the Tribunal was correct in holding that the expenditure was not revenue expenditure but expenditure of capital nature. The issue involved in question No.2 relates to the power of the Tribunal to allow the assessee to advance alternate argument that may arise consequential to an adverse finding of the Tribunal on the question actually raised by it. Questions 3 and 6 pertain to the computation of actual cost for the purpose of depreciation in the event the disputed items of expenditure are held to be capital in nature. Question No. 4, of course, raises a different issue and the answer depends on the true meaning of the expression “actual cost”as used is s. 43(1) of the Act r/w Expln. 2 thereto.

For the sake of convenience, we first take up questions No. 1 and 5 together. On a careful consideration of the facts of the case and the nature of the expenditure, we find that both the ITO and the Tribunal were justified in holding that these expenditure were not revenue in nature. Though a feeble attempt was made by counsel for the assessee to submit that these expenditures are revenue expenditures, we do not find any force in his submission. We, therefore, find no justification for interfering with the finding of the Tribunal in regard to the nature of these expenditures incurred by the assessee, which to our mind are clearly capital in nature. Accordingly both questions No. 1 and 5, are answered in the negative and in favour of the Revenue. Having held so, the next questions that fall for consideration are questions 3 and 6. But before we venture to answer the same, it is necessary to answer question No. 2 because that is like a road block in our way of answering these two questions. This question, as indicated above, pertains to the power of the Tribunal, in an appeal where the controversy is whether a particular expenditure is revenue or capital in nature, to allow the assessee to raise an alternative plea that in the event the expenditure in question is held to be capital in nature, suitable directions should be given by the Tribunal to the authorities below to include the same in the cost of the asset and to allow the assessee the benefit of development rebate and depreciation accordingly. In the instant case, the assessee made such alternative submission before the Tribunal which was turned down by the Tribunal on the ground that it amounted to taking an additional ground of appeal. We are not satisfied with the approach of the Tribunal for reasons more than one. First, the alternative submission of the assessee in the instant case did not amount to raising an additional ground of appeal. In fact, these submissions were different facets of the same controversy. In other words, this was consequential if the finding of the Tribunal was against the assessee. This submission would not arise in case the Tribunal accepts the contention of the assessee that it was a revenue expenditure. But where the Tribunal turns down the claim of the assessee for deduction of a particular amount by way of revenue expenditure and holds it to be capital expenditure, in our opinion, it is the duty of the Tribunal, even without an alternative submission, to pass necessary consequential orders, suo motu, to give such further directions in the matter as the situation may warrant. In this connection, it may be observed that the powers of the Tribunal are expressed in the widest possible terms as is evident from the use of the expression “pass such orders thereon as it thinks fit”in s. 254(1) of the Act. Thus, there is no restriction in regard to the nature of orders that the Tribunal can pass. The only restriction on the powers of the Tribunal can be inferred from the expression “thereon”which indicates that while passing orders it should confine itself to the subject-matter of the appeal and should not go beyond it. That is the only limitation on the power of the Tribunal. No other limitation is there. This view of ours gets full support from the decision of the Supreme Court in CIT vs. Mahalakshmi Textile Mills Ltd. (1967) 66 ITR 710 (SC), where dealing with the scope of the powers of the Tribunal under s. 33(4) of the Indian IT Act, 1922 [corresponding to s.
254(1) of the present Act] it was held : “………..There is nothing in the IT Act which restricts the Tribunal to the determination of questions raised before the Departmental authorities. All questions whether of law or of fact which relate to the assessment of the assessee may be raised before the Tribunal : If, for reasons recorded by the Departmental authorities in rejecting a contention raised by the assessee, grant of relief to him on another ground is justified, it would be open to the Departmental authorities and the Tribunal, and indeed they would be under a duty, to grant that relief. The right of the assessee to relief is not restricted to the plea raised by him Emphasis, italicised inprint, supplied)

In that view of the matter, we are of the clear opinion, that the Tribunal was not justified in refusing to consider the alternative submission of the assessee that, in the event the expenditure in question was held by it to be capital in nature, suitable direction should be given for allowing appropriate development rebate and depreciation as admissible under the law on such amount on the plea that it was an additional ground raised by the assessee. In our opinion, it was the duty of the Tribunal even in the absence of alternate argument of the assessee to make such a direction suo motu. We, therefore, answer the second question in the negative and in favour of the assessee.

9. We now turn to questions 3 and 6, which relate to the allowance of depreciation on the aforesaid amounts incurred by the assessee which were held to be capital expenditure. It was submitted by counsel for the Revenue that these two questions should not be answered by this Court as they have not been dealt with by the Tribunal. According to him the case should be remitted to the Tribunal to decide the controversy raised in these two questions. We have considered the contention of the Revenue. Ordinarily, that is what is done by the Courts while dealing with the reference. But that is a matter of practice<196>not a rule. It may be decided by the Court in each case in the light of the facts and circumstances thereof whether it should direct the Tribunal to examine the matter or decide it itself on the basis of the facts contained in the statement of the case. This reference relates to asst. yrs. 1964-65 and 1965-66. More than 27 years have passed. All facts necessary for deciding it are available in the statement of the case. No fresh finding of fact is necessary. In such a situation, we do not think that any fruitful purpose will be served by going through the ritual of directing the Tribunal to decide the same, instead of doing it ourselves. We are, therefore, not inclined to remand the matter to the Tribunal for fresh determination of these questions. On merits, we find that there is no serious dispute at the bar in regard to the allowability of depreciation. It appears to be the correct position that the expenditures in question having been held to be capital in nature, the assessee would be entitled to depreciation thereon at the appropriate rate as admissible under the Act and the rules. We, therefore, answer both the questions No. 3 and 6 in the affirmative, that is, in favour of the assessee and against the Revenue.

10. We are now left with question No. 4 which again raises an important and interesting question in regard ttheincludibility of the expenditure incurred by the assessee in bringing the gifted machinery from New York to Bombay where it was installed for its business in computing the “actual cost”for the purpose of depreciation and development rebate. As stated above, the machinery was gifted to the assessee by its parent company in Switzerland and the value thereof in the hands of the parent company was Rs. 21,97,983. There is no dispute also in regard to the fact that the assessee incurred an expenditure of Rs. 10,66,827 during the first year and Rs.

1,46,312 during the second year on account of freight, customs duty etc. for bringing the said machinery from New York to Bombay where it was installed. It is also an agreed position that this expenditure incurred by the assessee had neither been claimed by it as revenue expenditure nor allowed as a deduction in computation of the assessee’s income. Evidently, it was the admitted position that it is a capital expenditure. The assessee wanted this amount to be included in the cost of acquisition of Rs. 21,97,983 to determine the actual cost for the purpose of depreciation. There is no dispute that, in the event the machinery in question would have been purchased by the assessee, these amounts would have been included in the cost of acquisition to determine the actual cost for the purpose of depreciation. The controversy has arisen on account of the machinery having been received by the assessee by way of gift from its parent company. According to the Revenue, in such a case it is only the value of the machinery computed in the manner laid down in Expln. 2 to s. 43(1) of the Act which will be deemed to be the actual cost and nothing more. In other words, the Revenue has sought to draw a distinction for the purpose of computation of actual cost in two cases-one where the asset has been acquired by purchase and another where it has been acquired by gift. We have given our careful consideration to the controversy. Sec. 43 (1) defines the expression “actual cost”for the purposes of ss. 28 to 41. This section, so far it is relevant, reads as follows :

“Sec. 43(1) “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 ……….. Explanation 2.—Where an asset is acquired by the assessee by way of gift or inheritance, the “actual cost”of the asset to the assessee shall be the written down value thereof as in the case of the previous owner for the previous year in which the asset is so acquired or the market value thereof on the date of such acquisition, whichever is less ……………”

11. A plain reading of this definition makes it clear that where the asset has been acquired by an assessee in the usual course by purchase etc. the actual cost means the actual cost of the asset to the assessee. In case of acquisition of an asset by way of gift or inheritance, the cost of the asset to the assessee might be nil. To take care of this situation, Expln. 2 provides that in such cases the written down value of such asset in the hands of the previous owner or the market value thereof on the date of acquisition, whichever is less, should be taken as the actual cost of the asset to the assessee. The object of this Explanation seems to be to set at rest all controversies based on the contention that the assessee having not purchased the asset, the cost of the said asset to the assessee should be nil. That contention is not possible in view of the specific provision contained in Expln. 2. It is now made clear that in such cases, cost of the asset to the assessee would be the value of the asset in the hands of the previous owner or its market value. In the instant case, admittedly the value of the machinery in question in the hands of the previous owner was Rs. 21,97,983. There is no controversy in this regard. So far as s. 43(1) or the relevant Expln. 2 simpliciter is concerned, there cannot be any controversy. The controversy has arisen on account of further expenditure incurred by the assessee in bringing the machinery from New York to Bombay and paying customs duty etc. This expenditure incurred by the assessee in the two assessment years is admittedly capital in nature. Had the machinery in the instant case been purchased by the assessee, even according to the Revenue, this amount would have been added to the “actual cost”thereof for the purpose of depreciation. The dispute has arisen only because the machinery was acquired by the assessee by way of gift and its value had been determined by taking resort to Expln. 2 to sub-s. (1) of s. 43. In our opinion, the fact whether the value is determined under sub-s. (1) of s. 43 or under that sub-section read with the Explanation has no relevance for deciding the controversy at issue. It is well-settled that “actual cost”is not a static figure. It will vary from time to time. At the time of first acquisition, it might be a particular figure but that does not stop there. It will go on changing. As observed by Supreme Court in Saharanpur Electric Supply Co. Ltd. vs. CIT (1992) 101 CTR (SC) 452 : (1992) 194 ITR 294 (SC) : “….. 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 year. This naturally has to be done with reference to the factual or legal position that may prevail during the relevant previous year and can be taken into account for the relevant assessment year. The section does not say that the computation of the actual cost of the asset has to be based only on the facts or law as they stood at the time of acquisition of the asset and as could have been taken into account for the assessment year relevant to the previous year of acquisition. It is one thing to contend, …. 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.”

The illustration given by the Supreme Court has made the position in this respect further clear : “…….. 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……..”

The Supreme Court summed up the position as below : “In principle, therefore, we are unable to accept the contention that the actual cost cannot be determined year after year on the factual or legal position applicable for the relevant previous year and that the actual cost once determined cannot be altered except in the three situations outlined by counsel where the original figure itself requires a modification …

We find that earlier also, the Supreme Court had occasion to explain the concept of actual cost in the context of allowance of depreciation under the Indian IT Act, 1922 in Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC). It was observed : “….. “actual cost”should be interpreted in the sense which no commercial man would misunderstand”.

The Supreme Court held that for this purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. It was observed : “….. the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure….”

From these decisions of the Supreme Court and the clear language of s. 43(1) and Expln. 2 it is clear that the expression “actual cost”cannot be given a narrow meaning as is sought to be given by the Revenue in the instant case. True it is that in the instant case the cost of acquisition on the date the gift was made by the parent company to the assessee was Rs. 21,97,983. But equally true is the fact that the assessee had incurred in the two years relevant to the assessment years under consideration amounts of Rs. 10,60,827 and Rs. 1,46,312 by way of expenditure on freight, customs duty etc. for bringing the said machinery from New York to Bombay where it was installed. There is no dispute that this amount spent by the assessee is not revenue expenditure but is expenditure of capital nature. That being so, this amount would form part of the cost of the asset for the purpose of depreciation. The amount of Rs. 10,60,827, therefore, has to be added to the original cost of acquisition in the assessment for the asst. yr. 1964-65 and the sum of Rs. 1,46,312 has to be further added thereto in the next assessment year i.e. 1965-66.

In view of the foregoing discussion question No. 4 is answered in the affirmative, that is, in favour of the assessee and against the Revenue.

Under the facts and circumstances, we make no order as to costs.

[Citation : 202 ITR 1]