Income-tax---

----Depreciation---Scope of right to depreciation---Actual cost of asset-- Computation envisaged for every assessment year---Original figure of actual cost to be altered for current year on basis of subsequent factual or legal information---Change of law---New definition of "actual cost" in 1961 'Act excluding cost met by others---Not unreasonable---Not retrospective in operation---Only part of requisites drawn from antecedent period---New provision applies to assets installed prior to 1961 Act coming into force---No anomaly or absurdity---Electric supply company---Part of cost of service lines installed prior to 1961 Act coming into force recovered from consumers---To be excluded from actual cost for assessment year 1962-63 and thereafter-- Indian Income-tax Act, 1961, Ss. 32(1)(iii), 34(2), 41(2), 43(1), (6), Expl. 2, 4, 6 & 8---Income-tax Act, 1922, S.10(2)(vi), (5)(a).

The first step, statutorily prescribed, for the determination of the written down value of any asset for any year, is for the Assessing Officer to determine its actual cost. This is a mandatory step which the Officer cannot be prevented from taking merely because the actual cost of the asset had already been determined in one or more earlier years.

The definition of "written down value" in section 43(6) of the Income tax Act, 1961, envisages the computation of the actual cost of each asset, for every assessment year, not only in respect of assets acquired during the previous year but also in respect of assets acquired before the previous year. This naturally has to be done with reference to the factual or legal position that might prevail during the relevant previous year and could be taken into account for the relevant assessment year. The section does not say that the computation of the actual cost of the asset has to be based only on the facts or law as they stood at the time of acquisition of the asset and as could have been taken into account for the assessment year relevant to the previous year of acquisition Where subsequent information, factual or legal, reveals that the actual cost determined originally was wrong, there can be no doubt that the original figure of actual cost has to be altered, if need be, and, if possible, by reopening the earlier assessments and, if that be not possible, at least for the future.

It is not correct to say that, when an assessee acquires an asset, he acquires a right to obtain depreciation thereon equal to the actual cost of the asset as originally determined for tax purposes. The effect of clause (c) to the proviso to section 10(2)(vi) of the 1922 Act and section 34(2) of the 1961 Act is only that, while allowing depreciation in respect of any asset, the Officer should be careful to see that the aggregate of the depreciation allowed to the assessee in respect of that asset does not exceed the actual cost of the asset. In other words, as and when the provision is applied for each and every assessment year and the depreciation on any asset is calculated, it should be ensured that the depreciation allowed does not exceed the actual cost of the asset. In other words, the "actual cost" referred to is not the actual cost determined at the time of acquisition. The effect of the proviso is not to produce a negative written down value but only to preclude further grant of depreciation on the asset in future. Read thus as a limitation on the maximum amount of depreciation that an assessee can claim in respect of a particular asset, there is no question of arriving at a negative written down value.

There is no doubt or ambiguity about section 43(6). It is clear and explicit that the actual cost has to be determined in each assessment year, even of assets acquired before the commencement of the previous year relevant to the assessment year. It does not create any injustice or hardship; on the contrary, it is only reasonable and just. Where a person purchases an asset, it may be correct to say that the cost of the asset does not change because a part of the cost is met by someone else. But the Legislature had to decide whether an assessee should be allowed to claim an allowance of depreciation in respect of the asset on the artificial basis of the cost of the asset rather than on what he has actually spent to acquire that asset and whether the wording of the original provision, as interpreted by Courts, had not conferred an undue advantage or benefit on the assessee. This was not considered by the Legislature to be equitable and, therefore, it was altered by legislation. It accords with reason that the provision should be interpreted to say that, at least after .the amendment, the assessee should not be allowed depreciation on the basis of the earlier figure of cost.

It is incontrovertible that, under section 43(1) read with section 43(6), the Officer has to determine the actual cost for all assets, new and old, and the definition in section 43(1) only requires that, at the time of doing so, he has to examine whether the actual cost has been fully laid out by the assessee or has been met by someone else in whole or in part. The words "has been met" squarely lit into this reading of the section and the use of those words does not restrict the definition in section 43(1) to assets acquired in the previous year.

Held, accordingly, that in allowing depreciation on service lines installed by the appellants (electricity supply companies) prior to the previous year relevant to the assessment year 1962-63, that part of the expenditure incurred in connection with the installation which was recovered by the appellants from the consumers had to be deducted in computing the written down value for the assessment year 1962-63 and thereafter, and the actual cost of the assets as computed under the 1922 Act had to be recomputed under the provisions of section 43(1) of the 1961 Act.

CIT v. Saharanpur Electric Supply Co. Ltd. (1977) 109 IGTR 545, CIT v. Bombay Suburban Electricity Co. Ltd. (1983) 142 ITR 298 and Ahmedabad Electricity Co. Ltd. v. CIT (1991) 190' ITR 413, CIT v. South Madras Electric Supply Corporation Ltd. (1977) 109 ITR 426 and Riverside (Bhatpara) Electric Supply Co. Ltd. v. CIT (1977) 109 ITR 399 affirmed.

CIT v. Bassein Electric Supply Co. Ltd. (1979) 118 ITR 884 (Bom.); Rohtak and Hissar Districts Electric Supply Co. Ltd. v. CIT (1981) 128 ITR 52 (Delhi); Ambala Electric Supply Co. Ltd. v. CIT (1983) 139 ITR 925 (P&H), British Insulated Callendars' Cables Ltd. v. CIT (1983) 142 ITR 300 (Bom.); CIT v. Panvel Taluka Electrical Development Co. Ltd. (1983) Taxation 71(1) 14 (Sh.N) (Bom.); Ranchi Electric Supply Co. Ltd. v. CIT (1984) 150 ITR 95 (Patna); CIT v. Lonawalla Khandalla Electric Supply Co. Ltd. (1985) 22 Taxman 77 (Bom.); CIT v. Calcutta Electric Supply Corporation Ltd. (1987) 166 ITR 797 (Cal.) CIT v. Bassein Electric Supply Co. Ltd. (1989) 177 ITR 482 (Bom.) and CIT v. Calcutta Electric Supply Corporation Ltd. (1989) 179 ITR 580 (Cal.) impliedly approved.

Additional CIT'v. Gupta (K.S.) (1979) 119 ITR 372 (AP); Birmingham Corporation v. Barnes (1935) 3 ITR (Eng. Cas) 26 (HL); Carson v. Carson and Stoyek (1964) 1 All ER 681 (PDA); CIT v. Ambala Cantt. Electric Supply Co. Ltd. (1971) 82 1TR 217_(P&H); CIT v. Bombay Suburban Electric Supply Co. (P.) Ltd. (1977) 100 ITR 752 (Bom.); CIT v. Cochin Electric Co. Ltd. (1965) 57 ITR 82 (Ker); CIT v. Hides and Leather Products (P.) Ltd. (1975) 101 1TR 61 (Guj.); CIT v. Mithilesh Kumari (1973) 92 ITR 9 (Delhi); CIT v. Poona Electric Supply Co. Ltd. (1.946) 14 ITR 622 (Bom.); CIT v. Ranchi Electric Supply Co. Ltd. (1954) 26 ITR 89 (Patna).; CIT v. U.P. Hotel Restaurant Ltd. (1980) 123 ITR 626 (All); Govinddas v. ITO (1976) 103 ITR 123 (SC); Habib Hussein v. CIT (1963) 48 ITR 859 (Bom.); Karnani Industrial Bank Ltd. v. CIT (1954) 25 ITR 558 (Cal.); Kilkotagiri Tea and Coffee Estate Ltd. v. CIT (1978) 113 ITR 729 (Ker) Maharana Mills (P.) Ltd. v. ITO (1959) 36 ITR 350 (SC). ref

Civil Appeal No.1861 of 1977 (From the judgment and order, dated May 30, 1978 of the Calcutta High Court in ITR No.74 of 1977).

Civil Appeal No. 904 of 1980 (Patna Electric Supply Co. Ltd. v. CIT) is from the judgment and order, dated May 30, 1978, of the Calcutta High Court in ITR No.75 of 1977.

Civil Appeal No.220 of 1980 (Tinnevelly Tuticorin Electric Supply Co. Ltd. v. CIT) is from the judgment and order, dated May 30, 1978, of the Calcutta High Court in ITR No.74 of 1977.

Civil Appeal No.221 of 1980 (Patna Electric Supply Co. Ltd. v. CIT) is from the judgment and order, dated May 30, 1978, of the Calcutta High Court in ITR No.112 of 1977.

Civil Appeals Nos. 905 and 906 of 1980 (Muzaffarpur Electric Supply Co. Ltd. v. CIT) are from the judgment and order, dated February 7, 1977 of the Calcutta High Court in ITR No.96 of 1976.

Civil Appeal No.4097 of 1991 (Ahmedabad Electricity Co. Ltd. v: CIT) i3 by special leave from the judgment and order dated February 19, 1991, of the Bombay High Court in ITR No. 481 of 1976. The judgment of the High Court is reported as Ahmedabad Electricity Co. Ltd. v. CIT (1991) 190 ITR 413 (Bom.).

Civil Appeal No.197 of 1983 (Bombay Suburban Electric Supply Co. Ltd. v. CIT) is by special leave from the judgment and order, dated August 25, 1981 of the Bombay High Court in ITR No.179 of 1971. The judgment of the High Court is reported as CIT v. Bombay Suburban Electricity Co. Ltd. (1983) 142 ITR 298 (Bom.).

S.L.P. (Civil) No. 15346 of 1991 (Ahmedabad Electricity Co. Ltd. v. CIT) is against the judgment dated March 8, 1991, of the Bombay High Court in ITR No.297 of 1977.

Civil Appeals Nos. 4703 and 4704 of 1984 (Saleem-Erode Electricity Distribution Co. Ltd. v. CIT) are from the judgment and order, dated February 2, 1981, of the Calcutta High Court in ITR No.521 of 1975.

Civil Appeal No.4705 of 1984 (Patna Electric Supply Co. Ltd. v. CIT) is from the judgment and order, dated July 22, 1981 of the Calcutta High Court in ITR No. 245 of 1976.

Civil Appeal No. 4706 of 1984 Cuttack Electric Suply Co. 'Ltd. v. CIT) is from the judgment and order, dated February 2, 1981, of the Calcutta High Court in ITR No. 549 of 1975.

Civil Appeals Nos. 4707 to 4710 of 1984 (Tinnevelly Tuticorin Tea and Investment Co. Ltd. v. CIT) arc from the judgment and order, dated May 13, 1980, of the Calcutta High Court in ITR No. 449 of 1975.

Civil Appeal No. 4711 of 1984 (Patna Electric Supply Co. Ltd. v. CIT) is from the judgment and order, dated February 2, 1981, of the Calcutta High Court in ITR No. 428 of 1975.

Civil Appeals Nos. 812 to 817 of 1977 (South Madras Electric Supply Corporation Ltd. v. CIT) are from the judgment and order, dated June 22, 1976 of the Madras High Court in T.C. No.424 of 1970. The judgment of the High Court is reported as CIT v. South Madras Electric Supply Corporation Ltd. (1977) 109 ITR 426 (Mad.).

Civil Appeal No. 217 of 1977 Riverside (Bhatpara) Electric Supply Co. Ltd. v. CIT) is from the judgment and order, dated December, 12, 1974, of the Calcutta High Court in ITR No. 56 of 1971. The judgment of the High Court is reported as Riverside Bhatpara Electric Supply Co. Ltd. v. CIT (1977) 109 ITR 399 (Cal.).

Civil Appeals Nos. 23 to 25 of 1982 (Calcutta Electric Supply Corporation Ltd. v. CIT) are from the judgment and order, dated August 12, 1980 of the Calcutta High Court in ITR No. 307 of 1973.

Dr. Debi Pal, Senior Advocate D.P. Mukharji, Advocate with him for Appellants A.C. (in CA. No. 217 of 1977 and CA. Nos. 23 to 25 of 1982).

Soli J: Dastur, Senior Advocate (Percy Pardiwalla, Dushyant Dave Cyrus Mistry Raian Kaanjawalla and Ms. Manik Karanjawalla, Advocates with him) for Appellant (in CA. No. 4097 of 1991 and .Petitioner in S.L.P. (Civil) No. 15346 of 1991).

Soli J. Dastur, Senior Advocate (Mrs. Anali K. Vcrma, Advocate of J.B. Dadachanji & Co. with him) for Appellant (in CA. No. 197 of 1983).

T.A. Ramchandran, Senior Advocate (R. Ayyam Perumal, Advocate with him) for Appellant (in CA. Nos. 4703 and 4704 of 1984).

T.A. Ramachandran, Senior Advocate (Mrs. Janaki Ramachandran, Advocate with him) for Appellant (in CA. Nos. 812 to 817 of 1977).

K.P. Gupta, Advocate for Appellant (in CA. No. 1861 of 1977).

R. Ayyam Perumal, Advocate, for Appellants (in the other Appeals).

Dr. V. Gauri Shankar and S.C. Manchanda, Senior Advocates (S. Rajappa and Ms. A. Subhashini, Advocates with them) for Respondents (in all the Appeals).

JUDGMENT

RANGANATHAN, J. --- The appellants are electric supply undertakings situated in various parts of the country. All the appeals relate to the assessment year 1962-63 or later. They raise a common question regarding the computation of depreciation on service lines installed by the assessees a part of the expenditure incurred in connection with the installation of which is recovered by the assessees from consumers of electricity.

Depreciation, under the Income-tax Act, 1961, is computed as a percentage of the "written down value" of the asset in question. The Income-tax Act, 1961 came into force on April 1, 1962. Section 43(6) of the Act defines "written down value" thus:

"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."

The Act also defines the expression "actual cost" in section 43 (1). It reads thus:

"actual cost" means the actual cost of the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly, by any other person or authority:

It will be seen from the main paragraph of subsection (1) of section 43 that it does not really define what is meant by the actual cost of an asset to the assessee; it only contains a gloss that, whatever the expression may mean, that figure has to be reduced by that portion of it, if any, as has been met directly or indirectly by any other person or authority. The question before us arises partly due to this circumstance and partly due to the earlier legislative history of these provisions.

Under section 10(2)(vi) read with section 10(5) of the Indian Income tax Act, 1922, an assessee was entitled to an allowance of depreciation at a percentage of the actual cost to the assessee or the written down value of the relevant asset owned by him and used for the purposes of business. It is common ground that the service lines constitute machinery or plant on which assessees are entitled to depreciation. Also, as under the present Act, so under that Act, "written down value" was defined with reference to "actual cost". Initially, between 1922 and 1952, the expression "actual cost" was defined to mean just "the actual cost of the asset to the assessee". As already mentioned, a part of the cost of the asset in the present case, viz., service lines is met by the consumers with the result that, though the company might have incurred a particular amount as expenditure towards the installation of the service lines, "the actual cost" to it, of the service lines, could, in a loose sense, be said to be the amount of expenditure incurred by it in this behalf less the amount recovered from the consumers in respect thereof. The Income-tax Department tried to adopt this layman's approach and restrict the depreciation on the service lines on the basis of their cost less the amount recovered from consumers. The Bombay High Court in CIT v. Poona Electric Supply Co. Ltd. (1946) 14 ITR 622 and in CIT v. Bombay Suburban Electric Supply Co. (P.) Ltd. (1977) 106 ITR 752, the Kerala High Court in CIT v. Cochin Electric Co. Ltd. (1965) 57 ITR 82, the Punjab High Court in CIT v. Ambala Cantt. Electric Supply Co. Ltd. (1971) 82 ITR 217 and the Patna High Court in CIT v. Ranchi Electric Supply Co. Ltd. (1954) 26 ITR 89, disapproved this line of reasoning. Relying on the decision of the House of Lords in Birmingham Corporation v. Barnes (1935) 3 ITR (Eng. Cas) 26 (HL), they held that, in ascertaining the actual cost of an asset to the assessee, it was immaterial that someone else has recouped to the assessee, wholly or in part, towards such cost. This general principle is well-settled by these decisions and is also not in issue before us now.

The 1922 Act was amended by the Income-tax (Amendment) Act, 1953, with effect from April 1, 1952, in this respect. This amendment introduced an Explanation to the definition of "actual cost" to nullify the effect of the above decision. Though, at the stage of the Bill, the proposal was to exclude from the concept of actual cost, any moneys reimbursed to the assessee in this regard by any outside source (vide (1952) 21 ITR (St.) 40), the amendment, as finally effected, permitted only a limited exclusion. The Explanation read as follows:

"For the purposes of this subsection, the expression "actual cost" means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by Government or by any public or local authority..."

When enacting the income-tax Act, 1901, however, the Legislature revived the earlier proposal of 1953 and the present Act directs the exclusion, in the computation of the actual cost, of all amounts reimbursed to the assessee by any person whatsoever.

Now the question, which arises before us, in relation to the assessment year 1962-63, is this: The appellant companies had installed service connections during the relevant previous year. So far as these arc concerned, there is no dispute that depreciation has to be allowed on them with reference to their "actual cost" as defined in section 43(1), i.e., by excluding contributions or reimbursements from consumers. But the appellants have also to he granted depreciation on service connections installed in earlier previous years and it is only in respect of such assets that the present controversy arises. The depreciation on those assets, under section 43(6) of the 1961 Act, has to be computed with reference to their written down value, that is, their "actual cost" less all depreciation allowed in respect thereof under the 1922 Act till the assessment year 1961-fit. Since those assets had been acquired by the assessees in the previous years relevant to the assessment year 1961-62 or earlier assessment years, their actual cost had been duly ascertained for the previous year of acquisition in accordance with the provisions of section 10(5)(a) of the Indian Income-tax Act, 1922. If the assets had been acquired earlier than the previous year relevant to the assessment year 1952-53, the actual cost of the assets to the assessee would perhaps have been taken without any deductions whatever in respect of the contributions made by other persons towards the cost of the asset. In the case of such of those assets as had been acquired during the previous years relevant to the assessment years 1952-53 to 1961-62, the actual cost would have been determined in accordance with the relevant law as it stood at that time, viz., by taking their actual cost and deducting therefrom the contributions made by the Government or any public or local authority to enable the assessee to acquire the assets. The assessees' contention is that there is no justification for disturbing the written down value as so determined and that the depreciation for the assessment year 1962-63 and thereafter should be based only on the actual cost and written down value so determined earlier. They plead for the undisturbed continuance of the earlier depreciation sheets in respect of these assets. On the other hand, the Revenue contends that, though the assets have been acquired in earlier previous years, the statutory mandate of section 43(6)(b) is that their actual cost should be determined afresh for each assessment year and this, for the assessment year 1962-63 onwards, can only be in accordance with the definition contained in the 1961 Act. On this view, the Department has ignored the written down value of these assets as per the earlier record, computed the actual cost of the service lines by excluding therefrom the contributions of consumers but given credit thereafter for all depreciation allowed in respect thereof (on the basis of the higher actual cost as then determined) in all the earlier years. The question is which of these contentions is correct.

All the High Courts have upheld the stand of the Revenue. They have answered the question by holding that the actual cost of all assets for purposes of assessment year 1962-63 and onwards, whatever might have been the date of acquisition of the assets in question, has to be computed in accordance with the new formula laid down by the Income-tax Act of 1961. These decisions are: Riverside (Bhatpara) Electric Supply Co. Ltd. v. CIT (1977) 109 ITR 399 (Cal); CIT v. South Madras Electric Supply Corporation Ltd. (1977) 109 ITR 426 (Mad.); CIT v. Saharanpur Electric Supply Co. Ltd. (1977) 109 ITR 545 (All); CIT v. Bassein Electric Supply Co. Ltd. (1979) 118 ITR 884 (Bom.); Rohtak and Hissar Districts Electric Supply Co. (P.) Ltd. v. CIT (1981) 128 ITR 52 (Delhi); Ambala Electric Supply Co. Ltd. v. CIT (1983) 139 ITR 925 (Punj); CIT v. Bombay Suburban Electricity Co. Ltd. (1983) 142 ITR 298 (Bom); British Insulated Callendars' Cables Ltd. v. CIT (1983) 142 ITR 300 (Bom.); CIT v. Panvel Taluka Electrical Development Co. Ltd. (1983) Taxation 71(1)-14 (Sh.N) (Bom.); Ranchi Electric Supply Co. Ltd. v. CIT (1984) 150 ITR 95 (Patna); CIT v. Lonawalla Khandalla Electric Supply Co. Ltd. (1985) 22 Taxman 77 (Bom.); CIT v. Calcutta Electric Supply Corporation Ltd. (1987) 166 ITR 797 (Cal); CIT v. Bassein Electric Supply Co. Ltd. (1989) 177 ITR 482 (Bom.); CIT v. Calcutta Electric Supply Corporation Ltd. (1989) 179 ITR 580 (Cal); and Ahmedabad Electricity Co. Ltd. CIT (1991) 190 ITR 413 (Bom). The appellants before us contest the correctness of this unanimous view of the High Courts. Indeed, some of the decisions above referred to form the subject-matter of some of these appeals.

Dr. Debi Pal, Sri Dastur and Sri Ramachandran, who appeared for the assessees, submitted that the various High Courts have not correctly appreciated the arguments put forward before them and failed to see that the interpretation approved by them will result in absurdities and anomalies. In view of the consensus of views of the High Courts against them, they have taken considerable pains to address elaborate arguments which merit serious consideration in these appeals.

We may, at the outset, dispose of an argument raised by Dr. Pal. His point was that the figure of actual cost ascertained in respect of any asset in any of the earlier previous years cannot be altered in a subsequent year. According to him, both the 1922 Act as well as the 1961 Act envisage continuance of the figure of actual cost once arrived at in respect of any plant or machinery throughout the lifetime of such plant or machinery. He says that, for the assessment year 1962-63, the question of determination of actual cost can arise only in respect of assets acquired during the relevant previous year under clause (a) of section 43(5). So far as the assets in question are concerned, which had been acquired in earlier previous years, depreciation has to be calculated on the basis of the written down value. Since the written down value in respect of these assets had already been ascertained for the assessment year 1961-62, all that has to be done further to find out the written down value for the assessment year 1962-63, is to deduct therefrom the depreciation allowed for the assessment year 1961-62.

Attractive as this argument appears, there are two difficulties in accepting it. The first is the language of section 43(6) and, even its predecessor section 10(5)(a) of the 1922 Act. Though in substance, depreciation on an asset for any assessment year is calculated on its written down value which is normally carried forward from, an earlier assessment year, the phraseology of the Act does not bear out the contention that the actual cost of the asset has to be determined only once, viz., in the previous year of its acquisition. Section 43(6) specifically deals with two categories of assets: (i) those acquired during the relevant previous year, and (ii) those acquired earlier to that. Even in respect of the latter class of assets, the Act envisages computation of the actual cost of the asset and the deduction therefrom of all depreciation allowed in earlier years in respect of that asset. Thus, the first step, statutorily prescribed, for the determination of the written down value of any asset for any year, is for the Assessing Officer to determine its actual cost. This is a mandatory step which the officer cannot be prevented from taking merely because the actual cost of the asset has already been determined in one or more earlier years, though it may be true that, in ninety-nine (and perhaps even more) per cent of the cases, the result (barring mistakes and some special situations) will just be the equivalent of the written down value taken for the immediately preceding assessment year less the depreciation allowed for that year. This mechanics of the definition was explained by the Calcutta High Court in Karnani Industrial Bank Ltd. v. CIT (1954) 25 ITR 558, approved by this Court in Maharana Mills (P.) Ltd. v. ITO (1959) 36 ITR 350 and followed in Habib Hussain v. CIT (1963) 48 ITR 859 (Bom.) In the light of these decisions and the clear language of the statute, it is not possible to accept the contention that the Income-tax Officer had no justification to compute first the actual cost of an asset, which had been acquired before the previous year. The second difficulty in the way of accepting the argument of Dr. Pal is that, whatever its validity over the period of continuous operation of the same Act(of 1922 or 1961), it can have no application for the assessment year 1962-63. There is no provision in the 1961 Act which permits or compels the adoption or continuance of the figure of factual cost and written down value determined under the provisions of the earlier statute which has been repealed by the 1961 Act. We, therefore, reject this contention of Dr. Pal.

Perhaps realising the above difficulty, Sri Dastur put forward a slightly modified contention. He concedes that the actual cost as determined for the earlier years is not sacrosanct or untouchable and that there may be circumstances in which it may have to be modified in the light of subsequent events. According to learned counsel, however, changes in actual cost in three situations can be taken into account for purposes of the definition in section 43(1) read with subsection (6). These according to him, are:

(i) subsequent factual occurrences which call for a modification of the figure of actual cost as at the time of acquisition determined earlier;

(ii) discovery of arithmetical errors in the earlier computation of the actual cost or written down value of any asset; and

(iii) redetermination of the original actual cost necessitated by a specific retrospective statutory provision.

He points to instances of such modifications permitted by judicial decisions. In Karnani Industrial Bank Ltd.v.CIT [`1954] 25 ITR 558 (Cal), the assessee claimed to have purchased machinery for Rs.3,94,000 and obtained depreciation on that basis from the assessment year 1939-40 onwards. In proceedings for the assessment year 1946-47, the Officer discovered that the cost of the machinery was only Rs.2,80,000. and since the assessee had already obtained depreciation beyond this, refused the grant of depreciation for the assessment years 1946-47 and 1947-48. This was upheld by the Calcutta High Court. In Maharana Mills (P) Ltd. v. ITO [1959] 36 ITR 350 (SC), the Officer rectified the assessments of the assessee to re-work the written down value computed and the depreciation granted for earlier years as not being in accordance with law. The validity of these rectifications was upheld. In Habib Hussein v. CIT [1963] 48 ITR 859 (Bom), the asset in question had been acquired in the previous year relevant to the assessment year 1950-51. The assessee had acquired the asset under an agreement dated June 4, 1948. But that agreement had been revised on July 10, 1950 (after the close of the relevant previous year). The assessee claimed, nevertheless, that a sum of Rs.3,30000. payable by virtue of the subsequent agreement also formed part of the actual cost of the asset. The claim was upheld by the High Court. According to learned counsel, this was also a case where the original figure of actual cost was more precisely defined and quantified later. Counsel concedes that in cases of this type, the actual cost as determined in earlier years might need to be modified and that the Assessing Officer will be at liberty to do so. He, however, contends that the actual cost cannot be altered merely because a subsequent legislation provides for a different formula for ascertainment of the actual cost; that formula may very well apply in respect of assets acquired in and after the previous year to which the new law will be applicable but it cannot be retrospectively made applicable to assets which had been acquired much earlier and the actual cost of which had been determined in accordance with the earlier prevalent law, unless the statute specifically says so. As an example, he refers to Explanation 8 to section 43(1) which, though inserted in 1989, provides that certain expenditure of the nature specified therein "shall not be included and shall be deemed never to have been included, in the actual cost of such asset".

We are of the view that it is difficult to read any limitations into the statutory provision in section 43(6) as contended for by counsel. As already explained, the definition envisages the computation of the actual cost of each asset, for every assessment year, not only in respect of assets acquired during the previous year but also in respect of assets acquired before the previous year. This naturally has to be done with reference to the factual or legal position that may prevail during the relevant previous year and can be taken into account for the relevant assessment year. The section does not say that the computation of the actual cost of the asset has to be based only on the facts or law as they stood at the time of acquisition of the asset and as could have been taken into account for the assessment year relevant to the previous year of acquisition. It is one thing to contend, as Dr. Pal did, that once the actual cost as at the date of acquisition has been computed, that figure is final and cannot be interfered with subsequently. But that contention is not acceptable for reasons already discussed. Once it is conceded that the figure of actual cost can require modifications, it is not possible to confine such modifications in the manner contended for by Sri Dastur. Where subsequent information, factual or legal, reveals that the actual cost determined originally was wrong, there can be no doubt that the original figure of actual cost has to be altered, if need be and, if possible, by reopening the earlier assessments and, if that be not possible, at least for the future. This is illustrated by the situations in Karnani Industrial Bank Ltd. [1954] 25 ITR 558 (Cal) and Maharana Mills (P.) Ltd. [1959] 36ITR 350 (SC), and this is also the position in cases to which Explanation 8 applies. These are situations which have a retrospective impact on the original actual cost. But it is equally conceivable that the "actual cost" may undergo a change which does not relate back in fact or law and there is no reason why such change should not be given effect to in future, irrespective of what may have happened in the past. In fact, this is what happened in Habib Hussein's case [1963] 48 ITR 859 (Bom). It was not a case of the category suggested by Sri Dastur. It was a case where the figure of original cost underwent a change by reason of a subsequent agreement and the High Court directed that the sum of Rs.,3,30,000 or part thereof attributable to the acquisition of the assets "should be included in the actual cost of these assets to the assessee in the respective year or years of account at the commencement of which the liability to pay it or part thereof had accrued or would accrue". That the redetermination of actual cost permitted by the provision with which we are concerned is not restricted to cases of the limited range of retrospective change in the actual cost suggested by Sri Dastur is also illustrated by the decision in CIT v. Hides and Leather Products (P.) Ltd. [1975] 101 ITR 61 (Guj). In that case, the assessee who maintained its accounts on the mercantile system purchased a piece of machinery front a foreign firm in 1955. No amount was paid towards the price thereof on the ground that there was some defect in the machinery. The liability to the foreign supplier was shown in the books of account and balance sheet of the assessee. But, in 1960, by making appropriate entries, the assessee wrote back the amount of Rs. 30,572 being the price of the machinery, debited the amount in the account of the foreign supplier and credited the same amount in the capital reserve account. On the question whether the assessee was entitled to depreciation on the actual cost computed at Rs. 30,572 for the assessment years 1961-62 to 1965-66, the High Court held that, "in view of the fact that the foreign supplier had not recovered the amount of Rs. 30,572 and no legal steps had been taken towards its recovery for so long a time, it was not unreasonable to infer that the foreign supplier had treated the liability of the assessee to itself as having ceased and in fact and in substance there had been a cessation of this liability. The Act of 1922 applied to the assessment year 1961-62, and as the foreign supplier was neither Government nor public nor local authority, though there was cessation of liability, the assessee was entitled to have the benefit of the entire amount of Rs. 30,572 as the actual cost. Depreciation was allowable to the assessee for the assessment year 1961-62 on the basis that the cost to it of the machinery was Rs. 30,572. The Act of 1961 applied to the assessment years 1962-63 to 1904-65 and, under section 43(1) of the Act, since there was cessation of liability, the actual cost of the machinery to the assessees for these assessment years should be reduced by Rs. 30,572". Sri Dastur challenged the correctness of this decision in so far as it held that the original cost itself did not stand modified as a result of the subsequent development. We are not concerned with that aspect here. All that is relevant is that this is a decision, which permits an alteration in the figure of actual cost consequent on subsequent factual occurrences that do not relate back. It also show that the actual cost for 1961-62 could be scaled down for the assessment year 1902-63. There are also other decisions which make it clear that the original cost of an asset may change after the year of installation or erection as a result of further liabilities arising later: CIT v. U. P. Hotel-Restaurant Ltd. [1980] 123 ITR 626 (All) and Kilkotagiri Tea and Coffee Estate Ltd. v. CIT [1978] 113 ITR 729 (Ker), decided in the context of depreciation allowance and CIT v. Mithilesh Kumari [1973] 92 ITR 9 (Delhi) and Addl. CIT v. K. S. Gupta [1979] 119 ITR 372 (AP), decided in the context of the allied concept of "cost of acquisition" for purposes of capital gains.

These apart, there are clearly situations in which the actual cost does get altered prospectively and not retrospectively. One such instance is where the cost of an asset increases or decreases on account of a fluctuation m the value of the currency. Suppose an asset was purchased in 1965 for $10,000 (equivalent to say, Rs. 1,00,000) and the price or the moneys borrowed by the assessee in foreign currency for its payment, remained outstanding. The devaluation of the rupee in June, 1966, would result in the increase of the price to say, Rs. 1,20,000. It may be arguable whether this is a retrospective enhancement in the price or not. But it would be only reasonable to say that the actual cost has increased to Rs. 1,20,000 in June, 1966, and that the assessee should be entitled to the grant of depreciation and other allowances at least thereafter, on the basis of the altered cost. This is what section 43-A provides. Another situation would be where, subsequent to the acquisition of the asset, substantial capital expenditure has been incurred thereon (not amounting to the addition of a separate asset on which depreciation, etc., could be independently allowed). Such expenditure is added, under the rules, in practice to the actual cost and allowance given thereon subsequently vide the third column in the Table set nut at page 878 in Habib Hussein's case [19631 48 ITR 859 (Bom). This is quite correct and fully accords with the Department's interpretation of the provision. On the assessee's interpretation, no such increased allowances can at all be granted as there is no other provision permitting the additional cost being taken into account as part of the "actual cost" even for years subsequent to the addition or alteration. In principle, therefore, we are unable to accept the contention that the actual cost cannot be determined year after year on the factual or legal position applicable for the relevant previous year and that the actual cost once determined cannot be altered except in the three situations outlined by counsel where the original figure itself requires a modification.

Sri Dastur, however, contends that there are three formidable reasons as to why the interpretation suggested by 'the Department should not be accepted. We shall proceed to consider these objections:

1. Legislation cannot be given retrospective effect so as to affect existing rights unless it says so expressly or by necessary implication:

The rule as to the prospective application of statutes is well-settled. It is sufficient here to refer to some basic rules enunciated by prominent authors on construction of statutes. To start with, the position has been explained in Craies on Statute Law (7th Edition ) at page 389. The learned author first discusses the meaning of the word "retrospective" and points out: "a statute is to be deemed to be retrospective which takes away or impairs any vested right acquired under existing laws, or creates a new obligation, or imposes a new ditty, or attaches a new disability in respect of transactions or considerations already past". But a statute "is not properly called a retrospective statute because, a part of the requisites for its action is drawn from a time antecedent to its passing". A little later, it is explained that, while Parliament has competence to make the provisions of an Act of Parliament retrospective, "...no rule of construction is more firmly established than this--that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation otherwise than as regards a matter of procedure, unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in a language which is fairly capable of either interpretation, it ought to be construed as prospective only". Maxwell on the Interpretation of Statutes (12th Edition) contains a passage to like effect at pages 215 to 219. We may also refer to a passage from the Principles of Interpretation of Statutes by G. P. Singh (Fourth Edition) where the learned author warns against a departure from the ordinary meaning of the words used in a statute merely on grounds of hardship, injustice or absurdity. At page 81, he points Out:" considerations of hardship, injustice or absurdity as avoiding a particular construction is a rule which must be applied with great care. `The argument ab inconvenient said Lord Moulton, `is one which requires to be used with great caution'. Explaining why great caution is necessary, Lord Moulton further observed. There is a danger that it may degenerate into a mere judicial criticism of the propriety of the Acts of Legislature. We have to interpret statutes according to the language used therein, and though occasionally the respective consequences of two rival interpretations may guide us in our choice between them, it can only be where, taking the Act as a whole and viewing it in connection with existing state of the law at the time of the passing of the Act, we can satisfy ourselves that the words cannot have been used in the sense to which the argument points'. According to Brett L. J., `the inconvenience necessitating a departure from the ordinary sense of the words should not only be great but should also be what he calls an `absurd inconvenience'. Moreover, individual cases of hardship or injustice have no bearing for rejecting the natural construction; and it is only when the natural construction leads to some general hardship or injustice and some other construction is reasonably open that the natural construction may be departed from".

Examining the provisions with which we are concerned in the light of the principles succinctly summarised above, it will be apparent that what we are concerned with here is not at all a case of retrospective operation of the statute. It is not the case of the Revenue that the actual cost as determined in the assessment year 1962-63 should be applied to revise the computations for earlier years. All that the Department says is that, though in respect of these particular assets, the assessee might have obtained depreciation for earlier assessment years on the basis of a higher figure, that will no longer be available in future and that the figure of actual cost should be taken not as was originally calculated but only at a lower figure for the assessment year 1962-63 and onwards. It is just the case of a provision a part of the requisites for the operation of which is drawn from a time antecedent to its passing.

It is argued on behalf of the assessee that the provision should be considered to be retrospective because it affects the vested or existing rights of the assessee. This argument is based on the provisions of clause (c) of the proviso to section 10(2) (vi) of the 1922 Act (corresponding to section 34(3) of the 1961 Act) which lays down that the aggregate of all deductions in respect of depreciation made in the Act or its predecessor Act shall "in no case exceed the actual cost to the assessee of the building, machinery, plant, furniture, structure or work, as the case may be". Mr. Dastur's argument is that, when the asset was acquired, its actual cost had been determined in a particular manner and that, by virtue of the above provision, the assessee acquired a vested right to obtain depreciation thereon equal to the actual cost as so determined. He also points out that, under the provisions of the 1922 act as well as the 1961 Act, there are elaborate provisions to adjust the allowances of depreciation so as to accord with reality. If, on the basis of the deprecation already granted, the written down value of the asset becomes too low and the assessee is able to sell the asset for a higher price, the surplus is brought to tax. On the other hand, where the depreciation allowed is inadequate and the amount realised by the assessee on the sale, demolition or destruction of the asset is much less than the written down value, the assessee is allowed to write off the difference between the written down value and the scrap value of the asset. In other words, the Act has provided a machinery which ensures that the assessee gets by way of depreciation allowance which is correlated to reality. According to him, this right of the assessee, whether it is described as a vested right or an existing right, is affected by the provision with which we are presently concerned. To this argument, Sri Ramachandran adds the further point that, under the provisions of section 10(2)(vi) of the 1922 Act and section 33 of the 1961 Act, the amount of depreciation which cannot be adjusted against the profits of a particular year can be carried forward, treated as the depreciation for the subsequent year and set of against the profits of subsequent years. He points out that the result of accepting the Department's interpretation of section 43(6) of the Act is that the depreciation allowed to the assessee in the earlier years may be higher than the actual cost as arrived at subsequently under the provisions of the 1961 Act. In such an event, the written down value of the asset, i.e., the actual cost minus the depreciation allowed to the assessee will be a negative figure. The result of this, according to counsel, will be that the carried forward unabsorbed depreciation will be a negative figure in so far as this asset is concerned and will reduce the amount of depreciation that will be allowable to the assessee for the same year against the other assets and in subsequent years against other profits. In this way, according to counsel, the construction advocated by the Department would result in affecting rights which had been available to the assessee prior to the amendment.

We are of the opinion that these contentions are unfounded. It is incorrect to view the position as if, when an assessee acquires an asset, he acquires a right to obtain depreciation thereon equal to the actual cost of the asset as originally determined for tax purposes. The effect of clause (c) of the proviso to section 10(2)(vi) of the 1922 Act and section 34(2) of the 1961 Act is only this that, while allowing depreciation in respect of any asset, the officer should be careful to see that the aggregate of the depreciation allowed to the assessee in respect of that asset does not exceed the actual cost of the asset. In other words, as and when the provision is applied for each and every assessment year and the depreciation on any asset is calculated, it should be ensured that the depreciation allowed does not exceed the actual cost of the asset. In other words, the "actual cost" referred to is not the actual cost as originally determined at the time of acquisition. Thus, in the cases before us, while examining whether a particular asset is entitled to any depreciation for the assessment year 1962-63, the officer will find that it has already secured depreciation much more than the actual cost of the asset as determined by him and will grant no further depreciation in respect thereof. It is no doubt true that, in past years, the asset had become eligible to amounts of depreciation the aggregate of which exceeds the actual cost as presently determined and, if that depreciation is deducted from the actual cost subsequently arrived at, a negative figure may result. But, such a situation will arise even in the category of cases in which, according to counsel, the revision of actual cost is permissible. Thus, even in Karnani Industrial Bank's case (1954)25 IRT 558 (Cal) cited by him, the assessee had obtained for earlier years depreciation far exceeding the real cost of the asset. This is an "anomaly" which arises because the assessee was erroneously granted higher depreciation than what he deserved. But, even here, there was no negative written down value in earlier years and, equally, there will be none in the year of revision as the effect of the proviso is not to produce a negative written down value but only to preclude further grant of depreciation on the asset in future. Read thus as a limitation on the maximum amount of depreciation that an assessee can claim in respect of a particular asset, there is no question of arriving at a negative written down value. We are, therefore, unable to accept the contention of counsel that the interpretation contended for by the Department operates against the well known principle that retrospective operation--assuming that the provision has retrospective effect--should not be presumed where existing or past rights are interfered with.

Nor do we think that there is any doubt or ambiguity about the provision. It is clear and explicit, as already pointed out, that the actual cost has to be determined, in each assessment year, even of assets acquired before the commencement of the previous year relevant to the assessment year. Not only is this intention plain and clear, it does not create any injustice or hardship; on the contrary, it is only reasonable and just. It should be remembered that the object of the provision dealing with the grant of depreciation is, generally speaking, to enable him to get the capital expenditure incurred by him in acquiring the asset written off to his profits over the years though it is true that, in certain situations, the statute specifically relaxes this rigidity. In earlier years, he had been obtaining depreciation on a particular footing. But the language used lent itself to an interpretation that he could get a deduction even in respect of expenditure he did not incur. The correctness of this interpretation is not in doubt. Where a person purchases an asset, it may be correct to say that the cost of the asset does not change because a part of the cost is met by someone else. But the Legislature had to decide whether an assessee should be allowed to claim an allowance of depreciation in respect of the asset on the artificial basis of the cost of the asset rather than what he has actually spent to acquire that asset and whether the wording of the original provision, as interpreted by Courts, had not conferred an undue advantage or benefit on the assessee. This was not considered by the Legislature to be equitable and, therefore, it was altered by legislation. It accords with reason that the provision should be interpreted to say that, at least after the amendment, the assessee should not be allowed depreciation on the basis of the earlier figure of actual cost. It is, therefore, incorrect, in our opinion, to describe this provision as creating any undue hardship or injustice or inconvenience to an assessee. It is in this context that the passages cited earlier from Brett L.J. and Lord Moulton become relevant. They appear to be particularly apt to the context of the present provisions. For the above reasons, we are unable to accept the contention addressed on behalf of the assessee or to draw any support therefor from the observations in Govinddas v. ITO [1976] 103 ITR 123 (SC) at p.132 relied upon by counsel.

2. The language used in the provision:

It was next suggested that there is an indication in the language of section 43(6) itself to show that it is available to be invoked only in respect of assets which had been acquired in earlier years. Reference is made in this context to the use of the words "as has been met" in section 43(1) and the use of similar language in the Notes on Clauses of the corresponding provision in the Income-tax Bill, J961 (see [1961] 42 ITR (Supp.) at page 161). It is argued that, if the intention had been that the actual cost of assets which had been acquired earlier to the previous year-should also be covered, the Legislature would have used the words "as had been met". In support of this contention, Sri Dastur referred to the decision in Carson v. Carson and Stoyek [1964] 1 All ER 681 (PDA). In that case, section 3 of the Matrimonial Causes Act, 1963, which came into operation on July 31, 1963, provided that "adultery which has been condoned shall not be capable of being revived". While it was quite clear that, as a result of this provision, no petition could rely on a course of conduct subsequent to July, 31 as reviving previously condoned adultery, the question that arose was whether the section had retrospective effect and whether a course of conduct before that date could be relied upon as reviving previously condoned adultery. The question was answered in the negative. We do not think that the decision is of any help in the present context. The nature of the provisions with which we are concerned and the mode of its operation are totally different. The use of the words "had been met" is very appropriate and proper in the present context once we understand the mechanics of the provision. As we have already explained, it is incontrovertible that, under section 43(1) read with section 43(6), the officer has to determine the actual cost for all assets, new and old, and' the definition in section 43(1) only requires that, at the time of doing so, he has to examine whether the actual cost has been fully paid out by the assessee or has been met by someone else in whole or in part. The words "has been met" squarely lit into this reading of the section and it is difficult to accept the suggestion that the use of the words "has been met" lends support to an interpretation restricting the definition in section 43(1) to assets acquired in the previous year.

3. Absurdities and anomalies:

It is contended that the Revenue's interpretation will result in absurdities and anomalies. The first of these is said to be that it may lead to the computation of a negative written down value and consequent difficulties in applying various other statutory provisions. We have already negatived this contention and pointed out that the proviso to clause (c) really places a limitation on the depreciation deductible at any point of time and, hence, there can never be a negative written down value as contended. The second anomaly is said to be that the interpretation favored by the Revenue is incompatible with the terms of Explanations 2, 4 and 6 to section 43(6). We see no such difficulty. Explanations 2 and 4 fall in line with the suggested interpretation, once it is understood that the reference to "depreciation actually allowed" should be read subject to the limitation of clause (c) of the proviso to section 10(2)(vi) [now section 34(3)]. Explanation 6 offers no difficulty as the relationship of "parent" and "subsidiary" between the companies involved in the transfer, for the purposes of this clause, has to be determined as at the time of the transfer of the asset and will not be a wobbling or fluctuating one as suggested by counsel for the assessee. Another difficulty pointed out is that the interpretation put forward by the Department might lead, to difficulties in the calculation of assessable profits under section 41(2) or the allowance under section 32(1)(iii). Sri Ramachandran illustrated the difficulty by giving the instance of an asset purchased for, say, Rs.10,000 entirely with monies contributed by others. If the asset had been purchased in 1958 and was eligible for depreciation at 10 per cent, the assessee would have secured depreciation of Rs.2,710 in the assessment years 1959-60, 1960-61 and 1961-62. Suppose, in the previous year relevant to the assessment year 1963-64, it is sold for Rs.5,000. Mr. Ramachandran points out that, according to the Department's interpretation the actual cost of the asset would be nil and, therefore, its written down value at the end of the previous year relevant for the assessment year 1962-63 would be nil with the result that the entire sum of Rs. 5,000 for which the asset is sold would become chargeable under section 41(2). In other words, the assessee will have to pay tax on Rs. 5,000 by way of balancing charge though he had been allowed depreciation only to the extent of Rs. 2,710. Again, if the asset is sold for Rs. 2,500 in the previous year relevant to the assessment year 1963-64, according to the Department, he will have to pay tax on Rs. 2,500 whereas, under the old provisions, he would have got an allowance under section 32(1)(iii). But this is only a seeming anomaly for, the sums of Rs. 5,000 and Rs. 2,500 would be taxed not as a balancing charge but as capital gains which is quite consistent with the department's position that the assesses having paid nothing for the asset, its actual cost should be taken at nil, a stand in which there is no absurdity. We do not, therefore, think that any difficulty car anomaly results from the interpretation suggested.

For the reasons discussed above, we agree with the view taken by the several High Courts and dismiss these appeals.

M.B.A./1610/TAppeals dismissed.