DIVAN,C.J. - (1.)IN this case at the instance of the revenue the following question has been referred to us for our opinion by the Appellate Tribunal :
'Whether, on the facts and in the circumstances of the case, depreciation was rightly allowed to the assessee on the basis that the cost to it of the machinery purchases was Rs. 30,572 ?'

(2.)THE facts giving rise to this reference are as follows : The relevant assessment years are assessment years 1961 -62 to 1965 -66. The assessee is a private limited company. During the calendar year 1955, that is, the previous year relevant for the assessment year 1956 -57, the assessee purchased from the Industrial Trading and Financial Company Ltd., Zurich, Switzerland, a mechanical Picker press for 27,820 Swiss Francs equivalent to Rs. 30,572 as shown in the supplier's bill dated April 28, 1955. The machinery was actually received by the assessee on June 15, 1955. According to the bill the payment was to be made against sight draft within 180 days. On this machinery, the assessee paid customs duty and clearing charges, etc., amounting to Rs. 2,359 and railway fright, expenses for foundation for installing the machinery and other expenses at the factory aggregating to Rs. 598. The total cost debited in regard to this item of machinery during calendar year 1955 amounted to Rs. 33, 529. During assessment year 1956 -57 on the footing that the total cost to the assessee was Rs. 33,529, the assessee was allowed development rebate. During assessment years relevant to calendar years 1955 to 1959, the assessee was allowed depreciation aggregating to Rs. 18,406 in respect of this piece of machinery. The assessee maintains its accounts on the mercantile system and the Swiss supplier's account had been duly credited with the amount of Rs. 30,572 that being the price which the Swiss supplier was entitled to receive in respect of this press. In the course of assessment proceedings for assessment year 1961 -62, the Income -tax Officer noticed an item of Rs. 30,572 under the head 'Capital reserve not available for divided' Being capital profit on liabilities written back. Thereupon, the Income -tax Officer made inquiries and the assessee informed the officer that when the machinery was purchased in 1955, the payment was to be made within 180 days on sight draft. But there was a dispute between the assessee and the suppliers about some defect in the machinery and the assessee -company had not paid the cost price of the machinery to the Swiss supplier but the amount had not been handed over nor had the Swiss supplier taken any steps or legal action against the assessee for recovering the purchase price. In 1960 the assessee transferred the liability of Rs. 30,572 to the purchase of a capital asset and the amount was not paid by the assessee -company. The Income -tax Officer called upon the assessee to produce all concerned correspondence in regard to the purchase of this machinery and the payment of the purchase price thereof. The assessee did not produce any correspondence before the Income -tax Officer on the ground that no correspondence was available with it because it was destroyed.
On the receipt of this information, the Income -tax Officer came to the conclusion that the assessee had been under -assessed for assessment years 1956 -57 to 1960 -61 inasmuch as the assessee had been allowed development rebate and depreciation which were no due to it because the cost of the asset on which the development rebate and depreciation were claimed and allowed to the assessee in these assessment year was 'Nil'. He therefore, initiated proceedings for reassessment under section 147(1)(a) and added back to the income as originally assessed the development rebate and depreciation allowed in the original assessments. The Income -tax Officer took the view that the cost meant what would have been laid out or suffered or lost to obtain anything. He noted in the assessee to obtain the machinery and he, therefore, held that the cost of the machinery to the assessee was 'Nil'. In view of these conclusion so far as assessment years 1956 -57 to 1960 -61 were concerned, appropriate orders were passed by the Income -tax Officer. Against the orders of the Income -tax Officer in reassessment proceedings appeals were preferred by the assessee but these appeals were dismissed by the Appellate Tribunal, it was held by the Tribunal that the proceedings under section 147(1)(a) were uncalled for. On the merits the Tribunal held that though the assessee had transferred the liability due from the assessee even though according to the law of limitation the suppliers' remedy to enforce payment might have been barred by time. The revenue did not take the matter further against the orders of the Appellate Tribunal in reassessment proceeding and there the matter apparently rested.

(3.)AS regards assessment years 1961 -62 to 1965 -66, the Income -tax Officer did not allow the assessee depreciation on the machinery and this action of the Income -tax Officer was confirmed by the Appellate Assistant Commissioner. Thereafter, the assessee had carried the matter in further appeals to the Appellate Tribunal and while disposing of the appeals for the assessment years 1961 -62 to 1965 -66, the Tribunal held that the actual or original cost to the assessee in respect thereof in favour of the foreign supplier. The Tribunal further held that the fact that in calendar year 1960, the liability was transferred to the capital reserve account did not detract from the position that the assessee did actually incur a liability in respect thereof. The Tribunal held that there had been no cessation or remission of the liability and the original cost to the assessee of the machinery was held to be cost as indicated in the books of account in the calendar year 1955. The Tribunal, therefore, held that the assessee was entitled to depreciation with reference to the cost of machinery as determined above and in view of these conclusion the Tribunal held in favour of the assessee and against the revenue. Thereafter, at the instance of the revenue, the question here in above set out has been referred to us.
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