Kerala Premo Pipe Factory Ltd. vs Commissioner of Income Tax

Gopalan Nambiyar, C.J.—These two references arise out of the assessments on the same assessee, M/s. Kerala Premo Pipe Factory Ltd., Quilon, for the years 1969-70 and 1970-71. The questions of law sent up for our opinion are:

Whether, on the facts and circumstances of the case, the Tribunal was right in holding that in respect of an asset received by the assessee by way of gift the actual cost has to be arrived at under s. 43(1) itself and not under Expln. 2 to sec. 43(1)?

Whether there was material for the Tribunal to hold that the Expln. 2 to s. 43 will not be applicable to the assessee''s case unless the two alternative figures mentioned in the said Explanation are available?

Whether the Tribunal was justified in holding that depreciation cannot be allowed on Rs. 18,928?

The assessee is a limited company, the shares of which are owned by the Government of Kerala, engaged in the manufacture of certain type of pipes. It received a fork lift as a gift from the United States of America. Though the article was received from United States of America, the assessee had to pay customs duty for bringing, it into the frontiers of this country. The freight, insurance and customs duty paid by it came to Rs. 26,498. For the purpose of levy of duty, the article was valued by the authorities at Rs. 18,928. The assessee claimed depreciation on the total of these two figures, Rs. 45,426. The ITO held that they were not entitled to depreciation on the amount representing the value of the gift. He restricted the depreciation claimable to the expenses actually incurred by the assessee by way of customs duty, insurance, freight, etc., and allowed depreciation thereon. The orders of assessment for the two years with which we are concerned, do not either deal with or discuss the point involved in the allowance of this depreciation. The point was however discussed by the Tribunal in the assessment relating to the previous year 1967-68. A copy of the Tribunal''s order for that year has also been annexed as part of the record. On appeal the AAC held that the assessee is entitled to deduction. There were appeals to the Tribunal both by the assessee on certain matters which are not germane to this reference and also by the department. The Tribunal allowed the department''s appeal. At the instance of the assessee, the questions of law have been referred under s. 256(2) of the Act.

The points involved are subtle and tricky. The deduction is claimed under s. 32(1)(ii) read with Expln. 2 to s. 43(1). These sections may well be extracted:

Depreciation. -(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed-....

(ii) in the case of buildings, machinery, plant or furniture, other than ships covered by clause (i), such percentage on the written down value thereof as may in any case or class of cases be prescribed:

Provided that where the actual cost of any machinery or plant does not exceed seven hundred and fifty rupees, the actual cost thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessee for the purposes of his business or profession:

Provided further that no deduction shall be allowed under this clause or clause (iii) in respect of any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February, 1975, and is used otherwise than in a business of running it on hire for tourists;....

Explanation 2 to s. 43(1) reads:

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 the less.

A combined reading of these sections shows that in the case of machinery, the deduction claimable is such percentage of the written down value as may be prescribed. The written down value is defined in s. 43(6) as follows:

''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:..."

(Rest of the section omitted as unnecessary).

Counsel for the revenue would place his stand fairly and squarely on Expln. 2 to s. 43(1) and contend that the depreciation allowable is only the lesser of the two amounts, viz., written down value and market value. Where, therefore, according to him, one of the amounts is not ascertain-able, no depreciation can be claimed or allowed. Such, according to the counsel for the revenue, is the position disclosed in this case, as the previous owner, being a foreigner, is not an assessee, and the article in question would not have actual cost or value in his hands. Therefore, according to the revenue, the depreciation or deduction would not be allowable at all. The assessee countered this argument by contending that this mode of construction of the section would reduce it to a mockery and deprive the assessee of the concession granted by a taxing statute, and should be avoided, if possible, by trying to give a reasonable content or meaning to the two contingencies specified in Expln. 2 to s. 43(1), such that, the case visualised by counsel for the revenue of one value alone being available will not stultify the benefit granted. He relied on the decision in CIT v. Solomon & Sons [1933] 1 ITR 324 (Rang), where, speaking with reference to s. 10(2)(vi) of the 1922 Act, the Rangoon High Court observed that the expression "the original cost thereof to the assessee" only meant that the owner should not receive an allowance or depreciation based on a capital value of the property higher than, or different from, the value of the property to the assessee at the time when he originally acquired it. It was pointed out that it was not intended that no allowance should be made when the asset had no actual cost in the assessee''s hands. Where the assessee acquired the property otherwise than by purchase, for example, by bequest, the original cost to the assessee in s. 10(2)(vi) of the Act means, and is,-it was said-the real value of the property at the time when the assessee acquired it, less the expenses necessary for completing title. It was also laid down that the original cost to the assessee referred to the "assessee" defined in s. 2(2) of the Act, i.e., the person by whom tax is payable. The principle of this decision was followed by the Madras High Court in Francis Vallabarayar Vs. Commissioner Of Income Tax Madras, . Speaking again with respect to s. 10(2)(vi) of the Indian I.T. Act, 1922, it was ruled that an assessee is entitled under s. 10 of the Indian I.T. Act, before cl. (c) was inserted in s. 10(5) in 1953, to depreciation allowance in respect of machinery or plant which is acquired by inheritance. "Actual cost to the assessee" would be the real value of the property at the time when he acquired it by inheritance. The principle of the decision of the Rangoon High Court in Solomon & Sons case [1933] 1 ITR 324 was followed. These two cases evolved a principle as to how the "actual cost" to the assessee had to be worked out in a case where the assessee derived the property by inheritance or by bequest. Counsel for the assessee brought to our notice the decision of the Supreme Court in Kalooram Govindram Vs. Commissioner of Incometax, Madhya Pradesh, Nagpur, , which seems to refer to the above two decisions with approval. He contended that, by analogy, the same principle should apply where the assessee derived title by gift.

Counsel for the revenue submitted that the two decisions relied on by the assessee, viz., CIT v. Solomon & Sons [1933] 1 ITR 324 (Rang) and Francis Vallabarayar Vs. Commissioner Of Income Tax Madras, , were concerned with the provisions of the 1922 Act prior to its amendment in 1953, and that the position is different after the said amendment, and, particularly so, under the provisions of the 1961 Act. He referred to the Full Bench decision of this court in Commissioner of Income Tax Vs. E.C. Jacob, . We do not wish to discuss these aspects further and pronounce one way or the other, as the Tribunal has not approached the consideration of the question from the point of view of the proper perspective and of the decisions which have application. It appears to us that it is very necessary that the Tribunal will examine the matter afresh in the light of the principles and the decisions that we have referred to and determine the issue afresh.

We decline to answer the questions of law and leave the Tribunal to deal with the matter afresh in accordance with law, and in the light of our judgment. The references are disposed of accordingly. No costs.