Madras H.C : Whether the Tribunal was right in law in holding in the appeal filed by the Department where this question came to be considered for the first time that the original cost/written down value of the machinery, should be reduced by the sum of Rs. 2,72,975 and that the depreciation and investment allowance should be a recomputed on that basis?

High Court Of Madras

Rashi Leathers (P) Ltd. vs. CIT

Sections 43(1), 254(1)

Asst. Year 1978-79

R. Jayasimha Babu & N.V. Balasubramanian, JJ.

TC No. 887 of 1987

18th June, 1998

Counsel Appeared

P.P.S. Janarthana Raja, for the Applicant : C.V. Rajan, for the Respondent

JUDGMENT

N.V. Balasubramanian, J. :

The assessee is a private limited company. The assessment year with which we are concerned is 1978-79. The assessee is its accounts relating to the previous year for the said assessment year accepted a sum of Rs. 2,72,975 as a grant received from foreign buyers. The said sum was allegedly gifted to the assessee by the foreign buyers and the intention to that effect was conveyed by a letter of the foreign buyers dt. 5th Oct., 1976 enclosing a cheque for a sum of $ 30,000. The foreign company is one Mcconomy & Co. Ltd. and it is a London based company. In that letter, it was stated that the amount was meant as a contribution to the assessee for the purchase of a double width shaving machine, which according to them, would improve the production of the assessee. The case of the assessee was that the same was granted as a loan free of interest and the amount was credited to the account of the assessee in Bank of Baroda on 13th Oct., 1976 and on 5th Jan., 1978 the foreign company informed the assessee its desire to treat the amount as a total grant to the assessee for the purchase of the machinery and the assessee need not repay the amount. The assessee claimed before the ITO that the amount received was a capital receipt. The ITO did not accept the contention of the assessee and held that the receipt was revenue in nature and taxable as part of its income.

The assessee challenged the order of the ITO before the CIT(A). The CIT(A) held that the amount given as a grant was a capital receipt. The Revenue had challenged the order of the CIT(A) before the Tribunal. The Tribunal upheld the views of the CIT(A) that the grant by the foreign company to the assessee should be treated as a capital receipt. The order of the Tribunal holding that the amount of grant is a capital receipt has become final, as the Revenue has not challenged that part of the order of the Tribunal. However, before the Tribunal, the Department also raised another ground that even if the grant is held to be a capital receipt, it would go to reduce the actual cost of the machinery purchased by the assessee. The Tribunal accepted the alternative case put forward by the Revenue and held that the cost for the purchase of the machinery was provided by the foreign company and, therefore, the actual cost of the machine should be the purchase cost of the assessee as reduced by the amount of grant of Rs. 2,72,975 and the assessment required modification in that regard. The assessee has challenged that part of the order of the Tribunal holding that the amount of grant should be reduced from its purchase cost and the Tribunal has stated a case and referred the following questions of law for our consideration :

1. Whether the Tribunal was right in law in holding in the appeal filed by the Department where this question came to be considered for the first time that the original cost/written down value of the machinery, should be reduced by the sum of Rs. 2,72,975 and that the depreciation and investment allowance should be a recomputed on that basis?

2. Whether, on the facts and in the circumstances of the case and on a proper interpretation of the provisions of s. 43(1) the Tribunal was right in law in holding that the sum of Rs. 2,72,975 was deductible from the actual cost of the asset for the purpose of depreciation and investment allowance?

Mr. Janarthana Raja, learned counsel for the assessee submitted that it was a case of gift of machinery by the foreign buyers to the assessee and, therefore, under the Expln. 2 to s. 43(1) of the IT Act, 1961 (for short, ‘the Act’), the actual cost of the machinery will be its written down value as in the case of the previous owner for the previous year or the market value of the machinery, whichever is the less and the view of the Tribunal that the amount of gift would go to reduce the amount of actual cost is not justifiable. However, learned counsel for the Revenue supported that findings of the Tribunal.

We have carefully considered the submissions of the learned counsel for the assessee. The definition of ‘actual cost’ is found in s. 43(1) of the Act which reads as under: ” “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.”

In the instant case, the assessee had purchased the machinery and it is not a case of one of the foreign buyer purchasing the machinery and gifting the same to the assessee and in such circumstances, the actual cost to the assessee would be the purchase cost as reduced by the portion of the contribution made by third parties. Admittedly, in the instant case, originally the amount was given by the foreign buyers as interest-free loan for the purchase of the machinery. Subsequently, it was converted as a gift by the foreign buyers to the assessee and the subsequent conversion as gift from loan has material bearing to determine the actual cost of the machinery. Since the amount was contributed by the foreign buyers for the purchase of the machinery, the amount given as grant by the foreign buyers would go to reduce the actual cost incurred by the assessee for the purchase of the machinery. Under sub-s. (1) of s. 43 of the Act, the actual cost is determined by deducting from the purchase cost the contribution made by any third party for the purchase of the machinery, and since the entire amount of the purchase cost was met by the foreign buyers, the actual cost to the assessee should be determined after deducting the contribution by way of gift made by the foreign buyers.

Learned counsel for the assessee also referred to a decision of the Kerala High Court in the case of CIT vs. Cochin Co. (P) Ltd. (1990) 81 CTR (Ker) 115 : (1990) 184 ITR 230 (Ker) : TC 29R.419, wherein the assessee therein had purchased certain items of machinery and when the assessee was not able to repay the same in full, the debt was written off and in that factual situation. The Kerala High Court held that the cost of machinery could not be reduced by the amount remitted by the financier for the purpose of depreciation. The decision of the Kerala High Court on which reliance was placed by the learned counsel for the assessee has no application on the facts of the case. In the instant case, the assessee had purchased the machinery out of the grant given by the foreign buyers.

Learned counsel for the assessee also relied upon the Expln. 2 to s. 43(1) of the Act and submitted that in this case, the asset was acquired by way of gift by foreign buyers and, therefore, the actual cost to the assessee should be the written down value of the previous owner or the market value on the date of purchase whichever is less. We are unable to accept the submission of the learned counsel for the assessee. It is not the case where the foreign party acquired the machinery and then gifted the same to the assessee. It is a case where the assessee purchased the machinery and the contribution had been provided by the foreign buyers. Sec. 43(1) and Expln. 2 to that section deal with two different concepts. Sub-s. (1) of s. 43 deals with a case of an assessee purchasing a machinery and a portion of the actual cost of the machinery is met by a third party. On the other hand, Expln. 2 to s. 43(1) deals with a case where the asset was purchased by a third party and later on gifted to the assessee. In our view, the case of the assessee does not fall within the Expln. 2 to s. 43(1) of the Act as the machinery was purchased by the assessee itself and it falls within the purview of sub-s. (1) of s. 43 of the Act and the actual cost has to be determined in the manner provided in s. 43(1) of the Act. The Tribunal held that the grant given by the foreign buyers should be reduced from the actual cost met by the assessee to determine the cost of the asset to the assessee for the purchase of the machinery. We find no infirmity in the finding of the Tribunal in holding that the cost should be reduced by the portion of the grant made by the foreign buyers. Of the two questions referred to us, one question relates to the jurisdiction of the Tribunal to entertain and decide the question whether the contribution should be deducted from the actual cost of the machinery. Though the question was raised for the first time before the Tribunal, it is settled that the entire assessment is before the Tribunal at the time of hearing the appeal. The Revenue has challenged the order of the CIT(A) raising a specific ground that the contribution made by the foreign buyers should go to reduce the actual cost incurred by the assessee. The assessee was put on notice on the ground raised by the Revenue and the order of the Tribunal also indicates that the question was argued before the Tribunal. The Tribunal has the jurisdiction to entertain the new ground raised before it and the Tribunal has exercised its jurisdiction properly, in a matter which arose out of the order of assessment. We are of the opinion that the jurisdiction exercised by the Tribunal is correct. Further, the issue that arose before the IT authorities was whether the grant would be a capital or revenue receipt, and a decision on the question whether it was a capital receipt or not would have a direct impact on the question of determination of depreciation allowable as the grant of depreciation would depend upon the actual cost of the machinery, and therefore, the Tribunal has the jurisdiction and rightly exercised its discretion to entertain the ground as to the mode of calculation of actual cost of the machinery. Therefore, the Tribunal was justified in entertaining the ground raised by the Revenue to regulate the grant of depreciation on the machinery.

Accordingly, we answer both the questions of law referred to us in the affirmative and against the assessee and in favour of the Revenue. The Revenue will be entitled to costs of a sum of Rs. 750.

[Citation : 240 ITR 702]

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