COMMISSIONER OF INCOME TAX Vs. RANCHI ELECTRIC SUPPLY COMPANY LIMITED

JUDGEMENT

(1.) IN this case the assessee is a public limited company. The assessment year is 1947 -48 and the accounting year is from 1st Jan., 1946, to 31st of Dec., 1946. During this accounting year the assessee incurred an expenditure of Rs. 8,582 for installing new electric connections to consumers. The assessee received in its turn a total sum of Rs. 8,520 from the respective consumers for having taken the new electric connections. In the course of assessment proceeding the assessee claimed that the expenditure of Rs. 8,582 was expenditure on capital account and that depreciation should be allowed on this amount. The assessee also made a claim that the receipt of Rs. 8,520 from the consumers was of capital nature and ought not to have been taken into account for the assessment of tax. The ITO rejected both the contentions raised by the assessee. The ITO held in the first place that the receipt from the consumers for service connection was of revenue nature and was liable to be taxed. The ITO further held that the expenditure of Rs. 8,582 was also revenue in nature. The ITO rejected the claim of depreciation on this amount but deducted that amount from the gross income liable to be taxed. An appeal was taken by the assessee to the AAC and the only question argued before him was whether the expenditure of Rs. 8,582 was of capital nature and whether the assessee was entitled to be granted depreciation on this amount. The appeal was dismissed by the AAC. The matter was again taken in appeal to the Tribunal and the only question again argued was whether the expenditure of Rs. 8,582 was of capital nature and whether the assessee should be granted depreciation allowance. The appeal was allowed by the Tribunal on the finding that the amount of Rs. 8,582 was expenditure of capital account and the assessee was entitled to depreciation on the whole of his amount under S. 10 (2) (vi) of the IT Act. The Tribunal took the view that depreciation is to be allowed to the assessee on the whole amount of Rs. 8,582 without deduction the amount of Rs. 8,520 as contribution made by the consumers for installing service connection. In support of their view the Tribunal referred to the decision of the Bombay High Court in CIT vs. Poona Electric Supply Co. Ltd. (1946) 14 ITR 622.

(2.) IN these circumstances the Tribunal has submitted the following questions of the law for the opinion of the High Court : (1) Whether, in the circumstances of the case, the Tribunal was right in holding that receipts from service connections are capital receipts ? and (2) Whether, in the circumstances of the case, depreciation is allowable on the amount of cost incurred on service connection ?

(3.) AS regards the second question Mr. R. J. Bahadur on behalf of the IT Department made the submission that the amount of Rs. 8,582 must be treated as revenue receipt (sic) and the assessee was not entitled to any depreciation under S. 10 (2) (vi) of the Act. Mr. Bahadur did not dispute the correctness of the decision of the Bombay High Court in CIT vs. Poona Electric Supply Co. Ltd. (supra) but the argument of the learned counsel was that the present case was distinguishable and cannot be governed by the decision of the Bombay High Court. In our opinion the argument of Mr. Bahadur cannot be accepted as correct. The question depends in the first place upon the interpretation of S. 10(2) (vi) of the Act which states that the assessee is entitled to an allowance "in respect of depreciation of such building, machinery, plant or furniture being the property of the assessee, a sum equivalent (where the assets are ships other than ships ordinarily plying on inland waters) to such percentage on the original cost thereof to the assessee as may in any Cal or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed........" In this connection S. 10(5) (a) is also important. Sec. 10(5) (a) states : "In Sub -S. (2), 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section; 'plant' includes vehicles, books, scientific apparatus and surgical equipment purchased for the purpose of the business, profession or vocation; and 'written down value' means (a) in the case of assets acquired in the previous year, the actual cost to the assessee......" The question to be determined involves the correct interpretation of the phrase "actual cost to the assessee" which occurs in S. 10(5) (a) of the Act. It was pointed out by Mr. Bahadur that the assessee has recouped the cost of installing the service connection from the consumers to the extent of Rs. 8,520 and this amount should not therefore be treated as actual cost incurred by the assessee within the meaning of S. 10 (5) (a) of the Act. I do not think that the submission is right. In considering what is the actual cost to the assessee for the service connection the question as to the source from which the money came is wholly immaterial. The only point to be determined is what is the actual cost of installation of service connection and not what is the proportion of the cost which is contributed by the assessee or which is contributed by the consumers to whom service connection is given. That is the true meaning of the expression "actual cost to the assessee" which occurs in S. 10 (5) (a). The conception of deportation which is allowed under S. 10 (2) (vi) involves the conception of replacement of the particular machinery or of the particular service connection and examined from this standpoint also it is clear that the phrase "actual cost to the assessee" which occurs in S. 10 (5) (a) of the Act must be interpreted to mean the actual cost incurred in installing service connection irrespective of any consideration as to the amount actually contributed by the assessee or the amount actually recouped ultimately from the consumers. This view is in accordance with the decision of the Bombay High Court in CIT vs. Poona Electric Supply Co. Ltd. (supra). The same principle has been laid down by the House of Lords in an English case, Corporation of Birmingham vs. Barnes (1935) 19 Tax Cases 195. In that case the Corporation of Birmingham had entered into an agreement with a company to lay a tramway track and establish a tramway service to the company's works and, by virtue of the work having been completed and the service established by a certain date, received from the company, in accordance with the terms of the agreement, a specified sum. The Corporation had also expended a considerable amount on the renewal, etc., of their tramway tracks, in respect of which they received grants from the Unemployment Grants Committee. These grants were made by the Ministry of Labour under certain conditions to local authorities to assist them in carrying out at once approved schemes of work of public utility on which a substantial number of unemployed persons could be engaged. The question was raised whether the payment by the company and the grant from the Unemployment Grants Committee should be taken into account in ascertaining, under r. 6(6) of Cases I and II of Schedule D, the "actual cost" to the Corporation of the tramway tracks in question for the purposes of computing depreciation allowance. Rule 6(6) of cases I and II of Schedule D of the English Act is in the following terms : - "No deduction for wear and tear, or repayment on account of any such deduction, shall be allowed for any year if the deduction, when added to the deductions allowed on the account for any previous years to the person by whom the trade is carried on, will make the aggregate amount of the deductions exceed the actual cost any expenditure in the nature of capital expenditure on the machinery or plant by way of renewal, improvement, or re - instatement." It was held by Lord Atkin that the question should be answered in the negative and that the payment by the company and the grant from the Unemployment Grant Committee should not be taken into account in ascertaining the "actual cost" to the Corporation of the tramway tracks under Rule 6(6) of Cases I and II of Schedule D. At page 216, Lord Atkin states : -"But it is said that the words 'to the person' in the phrase 'actual cost to the person' plainly indicated that the section is intending to confine the relief to an aggregate equal to the sum of money which the person has defrayed out of his own resources, the cost of the burden which has ultimately fallen upon him. My Lords, I confess I do not think that this is the natural meaning of the words. What a man pays for construction or for the purchase of a work seems to me to be the cost to him; and that whether someone has given him to money to construct or purchase for himself, of before the event has promised to give him the money after he has paid for the work, or after the event has promised or given the money which recoups him what he has spent. In the present case the Corporation paid the whole of the cost of the tramways out of their funds unless the first half of the Dunlop contribution was so applied : as to which there is no evidence; nor is it material. I myself should not have thought the answer of counsel for the appellants to the question put by Lord Justice Romer would have been what he suggests. On the hypothesis that the Dunlop Company had recouped the Corporation the whole of the cost of the first tramway, I should have thought the answer to 'what did it cost you ?' or 'what did it actually cost you ?' would have been 'it actually cost us 54,732 but none of the burden of that cost will fall on the Corporation, for the Dunlop Company have paid us the full amount'. I think the same result is arrived at by saying 'actual cost to the person' is the same thing as the amount expended by the person."