COMMISSIONER OF INCOME TAX Vs. BASSEIN ELECTRIC SUPPLY COMPANY LIMITED

JUDGEMENT

(1.) THIS is a reference at the instance of the CIT under S. 256(1) of the IT Act, 1961. The question referred to us by the Tribunal reads as follows :

(2.) WE are concerned in this reference with the asst. year 1965 -66, for which the accounting year is the financial year ended 31st March, 1965. In respect of the assessments made on the assessee under the Indian IT Act, 1922, the written down value of the various assets was determined in accordance with the provisions of the said Act. When the IT Act, 1961, came into operation as from the asst. year 1962 -63, the written down value of the assets was taken as per the calculations made under the old Act and depreciation allowed on the assets accordingly. This was continued to be done up to the asst. year 1964 -65. For the asst. year 1965 -66 the assessee claimed depreciation on these assets in the same way. The ITO, however, took the view that in view of the new provisions defining "actual cost" to be found under S. 43(1) of the IT Act, 1961, the written down value of the assets was required to be recalculated. In the case of the various assets the consumers of the assessee, which is a limited company engaged in the business of supply of electricity, had contributed and thereby met a part of the cost of the service lines. The ITO, therefore, redetermined the written down value of the assets; he recalculated the actual cost according to the definition in the Act of 1961 and thereafter deducted therefrom the depreciation actually allowed on the assets in all the past years. In the case of some of the assets the depreciation allowed in the past years exceeded the figure of the actual cost as recalculated by applying the provisions of the 1961 Act. This resulted in a negative figure. In the view of the ITO, such assets were not entitled to any further depreciation, but he proceeded further to take the negative figure into consideration in determining the overall written down value by adjusting this negative figure with the positive figure of the assets which were yet entitled to depreciation and allowed depreciation on the net resultant amount.

(3.) BEING aggrieved by the action of the ITO, the assessee carried the matter in appeal to the AAC. The AAC rejected the principal submission made on behalf of the assessee that the action of the ITO in applying the definition of "actual cost" to be found in the Act of 1961 was not correct. The AAC, however, observed that where the written down value of any particular asset would result in a negative figure after applying the definition of "actual cost" to be found in the Act of 1961, depreciation may cease to be allowed thereon but that the so -called negative figure was not required to be further adjusted thereafter against other assets which were yet required to be depreciated. In other words, the conclusion of the AAC was that, although the ITO had considered the statutory provision correctly, the proper result was to hold the assessee ineligible for depreciation of such assets where the figure of depreciation allowed in the past exceeded the figure of actual cost as worked out under the new definition. In the operative order, however, the AAC surprisingly dismissed the assessee's appeal totally perhaps assuming that the observations he had made in his order would be sufficient for the assessee to have recomputation done before the ITO. The assessee carried the matter in further appeal to the Tribunal. It was submitted that the written down value of the assets as arrived at on the basis of the actual cost as defined under the Act of 1922 could not be disturbed. Several difficulties and absurdities which would result if the course which found favour with the ITO and the AAC was adopted were pointed out to the Tribunal. It was also contended before the Tribunal that such retrospective operation of the provisions of the Act of 1961 was not warranted. The Tribunal considered the scheme of the Act and in its view the new definition of "actual cost" provided in the Act of 1961 could not change the definition of "actual cost" retrospectively. In its words : "In our opinion, the correct view is that in respect of an asset acquired before the previous year, not governed by the new Act, it can only be the actual cost as defined under the old Act and the actual depreciation allowed under the old Act that will give the written down value as defined under S. 43(6) of the new Act. In other cases it will be solely governed by the definition of 'actual cost' as given in S. 43(1) of the new Act. That, in our opinion, is the only way of harmoniously interpreting the action as a whole, "The Tribunal supported the view that it had taken by pointing out that the view which found favour with the ITO resulted in a negative figure of written down value in many cases, which, according to the Tribunal, resulted in an absurd situation. Accordingly, the submissions of the assessee were fully accepted. Aggrieved by this decision, the reference has been made to this Court from the said order of the Tribunal.