COMMISSIONER OF Income Tax vs COCHIN CO. (P.) LTD.

The judgment of the court was delivered by

K. S. PARIPOORNAN J. - At the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following question of law for the decision of this court

"Whether, on the facts and in the circumstances of the case, the remission by Atlanta Corporation would reduce the cost of the machinery to the assessee for the purpose of the Income Tax Act ?"

The respondent-company is an assessee to Income Tax, we are concerned with the assessment year 1975-76 for which the previous year ended on December 31, 1975. In 1968, the assessee purchased certain items of machinery at a cost of 37,486 American dollars. Atlanta Corporation, New York, was the financer, out of the amount so due, the assessee had paid a sum of 3,592 American dollars in October, 1968. The balance of 33,894 dollars was outstanding till the year ended December 31, 1973. In between 1968 and 1973. The assessee had sustained substantial loss in business, it could not repay the debt it owed to Atlanta Corporation. The debt so owed to the Corporation comprised of other amounts remaining to be paid to the said Corporation by the assessee, wherein was included the balance of the amount due, which was borrowed for the purpose of the machinery as early as 1968, the assessee and the Atlanta Corporation had business connection for a long number of years. This resulted in the gesture shown by Atlanta Corporation to write off the entire amount due from the assessee. However, the assessee was granted depreciation on the cost of the items of machinery taking the cost at the original purchase value of 37,486 American dollars. The Income Tax Officer took the view that the machinery, etc., purchased in 1968 for 37,486 dollars, were actually sold to the assessee by Atlanta Corporation. On this basis, for the instant assessment year 1976-76, the Income Tax Officer worked out the written down value from the original cost. The sum of Rs. 2,56,757 representing the cost of the machinery purchased in 1968. He also worked out the depreciation actually allowed to the assessee. In the appeal, the Commissioner of Income Tax (Appeals) held that in the absence of any provision for varying the written down value in the year subsequent to the year in which the machinery was installed, the Income Tax Officer was incompetent to reduce the written down value as was done in the �assessment, the matter went up to the Appellate Tribunal at the instance of the Revenue. The Appellate Tribunal did not fully concur with the Commissioner of Income Tax (Appeals). However, the Appellate Tribunal held that there is no ground for reducing the cost of the machinery to the assessee by the amount of the liability of the assessee which was remitted by Atlanta Corporation. The Tribunal found that the liability was remitted during the year ended December 31, 1973 was not merely the liability of the assessee towards the purchase of these machinery but also other liabilities, the appellate Tribunal, after review of the fact and circumstances, came to the conclusion that the cost of the machinery to be paid by the assessee was not met by Atlanta Corporation. All that the Atlanta Corporation did was to act as Financier to provide funds. In these circumstances, the Appellate Tribunal came to the conclusion that the remission of the liability that was outstanding to Atlanta Corporation in an entirely different event. Which cannot be equated in the terms to the position that Atlanta Corporation has met part to the cost of the machinery to the assessee, the liability of the assessee to the Atlanta Corporation arose from many transaction inclusive of the purchase of the machinery in 1968. In the circumstances, it was held that in view of the fact that Atlanta Corporation has not met a part of the cost of the a machinery to the assessee, there was no ground for reducing the cost of the machinery to the assessee. Which was remitted or waived by Atlanta Corporation. It is thereafter, at the instance of the revenue, that the question of law, stated hereinabove, has been referred for the decision of this court.

We heard counsel. The short question that arises for consideration is whether, on the facts of this case, section 43(1) of the Income Tax Act is attracted. The said section provided that "actual cost" means the actual cost of the assets to the assessee. Reduced by that portion of the cost therefore, if any, as has been met directly or indirectly by any other person or authority. Counsel for the revenue stressed the fact that when Atlanta Corporation wrote off the amount due from the assessee, which included at least a portion of the liability of the assessee, towards the purchase of the machinery in 1968, it should be consider that Atlanta Corporation met either directly to indirectly the cost of such machinery and so the Income Tax Officer was justified in his view that in working out the written down value for the assessment year, he should reduce from the original cost the sum of Rs. 2,56,757 and also the depreciation actually allowed to the assessee in the past. We are unable to accept the submission. The Appellate Tribunal has categorically found that Atlanta Corporation is only a financier and when Atlanta Corporation wrote off the liability of the assessee, it cannot be said in retrospect that the cost of the assessee of any part of the machinery purchased in 1967, was met by the Atlanta Corporation. The Appellate Tribunal held that the remission of the liability by �Atlanta Corporation long after the liability was incurred cannot be relied on to hold that Atlanta Corporation met directly or indirectly, part of the cost of the machinery of the assessee purchased as early as 1968, as per section 43(1) of the Act, if the cost of the asset is met directly or indirectly. At the time of purchase of the machinery, by any other person or authority, to that extent, the actual cost of the asset to the assessee will stand reduced. But it is far cry to state that though at the time of purchase of the machinery, no person met the cost either directly or indirectly, if, long thereafter a debt incurred in that connection is written off, it could be equated to a position that the financier met part of the cost of the asset to the assessee. We are unable to accept the plea that the remission of the liability by Atlanta Corporation can, in any way, be said to be one, where the corporation met directly or indirectly the cost of the asset to the assessee. In this view of the matter, we are of the view that remission by Atlanta Corporation could not be reduced from the cost of the machinery of the assessee for the purpose of Income Tax.

We answer the question referred to us in the negative, against the Revenue and in favour of the assessee.

A copy of this judgment under the seal of this court and the signature of the Registar will be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.