(a) Income‑tax‑‑‑

‑‑‑Appea ,to Appellate Tribunal‑‑‑Powers of Tribunal‑‑‑Power to consider a new ground of appeal raised for first time before Tribunal‑‑‑Question whether grant received from foreign company was a revenue receipt or a capital receipt‑‑‑Question raised for first time before Tribunal that if it were a capital receipt it could not be taken into account for purposes of calculating depreciation and investment allowance‑‑‑Decision on question whether disputed amount was a capital receipt had direct impact on question of calculation of depreciation and investment allowance Tribunal was justified in allowing additional ground‑‑‑Indian Income Tax Act, 1961, S.254.

The assessee claimed that it had been granted a loan free of interest by a foreign company and subsequently the foreign company expressed its desire to treat the amount as a total grant to the assessee‑for the purchase of the machinery and the assessee need not repay the amount. The assesses claimed before the Income‑tax Officer that, the amount received was a capital receipt. The Income‑tax Officer did not accept the contention of the assessee. The Commissioner of Income‑tax (Appeals) held that the amount given as a grant was a capital receipt. This was upheld by the Tribunal in an appeal filed by the Department. However, before the Tribunal, the Department also raised another ground that even if the grant were held to be a capital. receipt, it would go to reduce the actual cost of the machinery purchased by the assessee. The Tribunal accepted the alternative case put forward by the Revenue and held that the cost for the purchase of the machinery, was provided by the foreign company and, therefore, the actual cost of the machine should be the purchase cost of the assessee as reduced by the amount of grant of Rs.2,72,975 and the assessment required modification in that regard. On a reference it was contended on behalf of the assessee that the Tribunal was not justified in admitting the additional ground:

Held, (i) that the Tribunal has jurisdiction to entertain a new ground raised before it. The issue that arose before the income‑tax authorities was whether the grant would be a capital or revenue receipt, and a decision on the question whether it was a capital receipt or not, would have a direct impact on the question of determination of depreciation allowable, as the grant of depreciation would depend upon the actual cost of the machinery and, therefore, the Tribunal had the jurisdiction and rightly exercised its discretion to entertain the ground as to the mode of calculation of actual cost of the machinery. Therefore, the Tribunal was justified in entertaining the ground raised by the Revenue to regulate the grant of depreciation on the machinery.

(b) Income‑tax‑‑‑

‑‑‑‑Depreciation‑‑‑Investment allowance‑‑‑Actual cost‑‑‑Effect of S.43(1)‑‑ Reduction of actual cost by portion met directly or indirectly by any other person or authority‑‑‑Amount given 'originally by a foreign company as an interest free loan converted subsequently to a grant‑‑‑Gram had to be reduced from actual cost of machinery for purposes of calculating depreciation and investment allowance‑‑‑Indian Income Tax Act, 1961, Ss.32, 32A & 43.

Admittedly, in the instant case, originally the amount was given by the foreign buyers as interest‑free loan for the purchase of the machinery. Subsequently it was converted into a gift by the foreign buyers to the assessee. It was not a case where the foreign party acquired the machinery and then gifted the same to the assessee. It was a case where the assessee purchased the machinery and the contribution had been provided by the foreign buyers. Section 43(1) and Explanation 2 to that section deals with two different concepts. Clause (1) of section 43 deals with a case of an assessee purchasing a machinery and a portion of the actual cost of the machinery is met by a third party. On the other hand, Explanation 2 to section 43(1) deals with a case where the asset was purchased by a third party and later on gifted to the assessee. The case of the assessee did not fall within Explanation 2 to section 43(1) of the Act as the machinery was purchased by the assessee itself and it fell within the purview of cruse (1) of section 43 of the Act and the actual cost had to be determined in the manner provided in section 43(1). The cost should be reduced by the portion of the grant made by the foreign buyers.

CIT v. Cochin Co. (P.) Ltd. (1990) 184 ITR 230 (Ker.) ref.

P.P.S. Janarathana Raja for the Assessee.

C.V. Rajan for the Commissioner.

JUDGMENT

N.V. BALASUBRAMANIAN, J.‑‑‑The assessee is a private limited company. The assessment year with which we are concerned is 1978‑79. The assessee in its accounts relating to the previous year for the said assessment year accepted a sum of 88.2,72,975 as a grant received from foreign buyers. The said sum was allegedly gifted to the assessee by the foreign buyers and the intention to that effect was conveyed by a letter of the foreign buyers, dated October 5, 1976, enclosing a cheque for a sum of Rs.30,000. The foreign company is one Meconomy & Company Limited and it is a London based company. In that letter, it was stated that the amount was meant as a contribution to the assessee for the purchase of a double width shaving machine, which according to them, would improve the production of the assessee. The case of the assessee was that the same was granted as a loan free of interest and the amount was credited to the account of the assessee in Bank of Baroda on October 13, 1976, and on January 5, 1978, the foreign company informed the assessee of its desire to treat the amount as a total grant to the assessee for the purchase of the machinery and the assessee need not re‑pay the amount. The assessee claimed before the Income‑tax Officer that the amount received was a capital receipt. The Income‑tax Officer did not accept the contention of the assessee and held that the receipt was revenue in nature, and taxable as part of its income.

The assessee challenged the order of the Income‑tax officer before the Commissioner of Income‑tax (Appeals). The Commissioner (Appeals) held that the amount given as a grant was a capital receipt. The Revenue had challenged the order of the Commissioner of Income‑tax (Appeals) before the Income‑tax Appellate Tribunal. The Tribunal upheld the views of the Commissioner (Appeals) that the grant by the foreign company to the assessee should be treated as a capital receipt. The order of the Appellate Tribunal, holding that the amount of grant is a capital receipt has become final as the Revenue has not challenged that part of the order of the Appellate Tribunal.

However, before the Appellate Tribunal, the Department also raised another ground that even if the grant is held to be a capital receipt, it would go to reduce the actual cost of the machinery purchased by the assessee. The Appellate Tribunal accepted the 'alternative case put forward by the Revenue and held that the cost for the purchase of the machinery was provided by the foreign company and, therefore, the actual cost of the machine should be the purchase cost of the assessee as reduced by the amount of grant of Rs.2,72,975 and the assessment required modification in that regard. The assessee has challenged that part of the order of the Appellate Tribunal holding that .tae amount of grant should be reduced from its purchase cost and the Appellate Tribunal has stated a case and referred the following questions of law for our consideration:

"(1) Whether the Tribunal was right in law in holding in the appeal filed by the Department where this question carne to be considered for the first time that the original cost/written down value of the machinery, should be reduced by the sum of Rs.2.72,975 and that the depreciation and investment allowance should be recomputed on that basis?

(2) Whether, on the facts and in the circumstances of the case and on a proper interpretation of the provisions of section 43(1) of the Tribunal was right in. law in holding that the sum of Rs.2,72,975 was deductible from the actual cost of the asset for the purpose of depreciation and investment allowance?"

Mr. Janarthana Raja, learned counsel for the assessee, submitted that it was a case of gift of machinery by the foreign buyers to the assessee and, therefore, under Explanation 2 to section 43(1) of the Income Tax Act, 1961, (for short, "the Act"), the actual cost of the machinery will be its written down value as in the case of the previous owner for the previous year or the market value of the machinery, whichever is the less and the view of the Appellate Tribunal that the amount of gift would go to reduce the amount of actual cost is not justifiable. However, learned counsel for the Revenue, supported the findings of the Appellate Tribunal.

We have carefully considered the submissions of learned counsel for the assessee. The definition of actual cost is found in section 43(1) of the Act which reads as under:

'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 any other person or authority?"

In the instant case, the assessee had purchased the machinery and this is not a case of the foreign buyer purchasing the machinery and gifting the same to the assessee and, in such circumstances, the actual cost to the assessee would be the purchase cost as reduced by the portion of the contribution made by third parties. Admittedly, in the instant case, originally the amount was given by the foreign buyers as interest free loan for the purchase of the machinery. Subsequently, it was converted as a gift by the foreign buyers to the assessee and the subsequent conversion as gift from loan has a material bearing to determine the actual cost of the machinery. Since the amount was contributed by the foreign buyers for the purchase of the machinery, the amount given as grant by the foreign buyers would go to reduce the actual cost incurred by the assessee for the purchase of the machinery. Under clause (1) of section 43 of the Act, the actual cost is determined by deducting from the purchase cost the contribution made by any third party for the purchase of the machinery and since the entire amount of the purchase cost was met by the foreign buyers, the actual cost to the assessee should be determined after deducting the contribution by way of gift made by the foreign buyers.

Learned counsel for the assessee also referred to a decision of the Kerala High Court in the case of CIT v. Cochin Co. (P.) Ltd. (1990) 184 ITR 230 wherein the assessee therein had purchased certain items of machinery and when the assessee was not able to re‑‑pay the same in full, the debt was written off and in that factual situation, the Kerala High Court held that the cost of machinery could not be reduced by the amount remitted by the financier for the purpose of depreciation. The decision of the Kerala High Court on which reliance was placed by learned counsel for the assessee has no application on the facts of the case. In the instant case, the assessee had purchased the machinery out of the grant given by the foreign buyers.

Learned counsel for the assessee also relied upon Explanation 2 to section 43(1) of the Act and submitted that in this case, the asset was acquired by way of gift by foreign buyers and, therefore, the actual cost to the assessee should be the written down value of the previous owner or the market value on the date of purchase whichever is less. We are unable to accept the submission of learned counsel for the assessee. It is not a case where the foreign party acquired the machinery and then gifted the same to the assessee. It is a case where the assessee purchased the machinery and the contribution had been provided by the foreign buyers. Section 43(1) and Explanation 2 to that section deals with two different concepts. Clause (1) of section 43 deals with a case of an assessee purchasing a machinery and a portion of the actual cost of the machinery is met by a third party. On the other hand, Explanation 2 to section 43(1) deals with a case where the asset was purchased by a third party and later on gifted to the assessee. In our view, the case of the assessee does not fall within Explanation 2 to section 43(l) of the Act as the machinery was purchased by the assessee itself and it falls within the purview of clause (1) of section 43 of the Act and the actual cost has to be determined in the manner provided in section 43(1) of the Act. The Tribunal held that the grant given by the foreign buyers should be reduced from the actual cost met by the assessee to determine the cost of the assets to the assessee for‑ 'the' purchase, of the machinery. We find no infirmity in the finding of the Appellate Tribunal in holding that the cost should be reduced by the portion of the grant made by the foreign buyers.

Of the two questions referred to us one question relates to the jurisdiction of the Appellate Tribunal to entertain and decide the question whether the contribution should be deducted from the actual cost of the machinery. Though that question was raised for the first time before the Appellate Tribunal it is settled that the entire assessment is before the Appellate Tribunal at the time of hearing the appeal. The Revenue has challenged the order of the Commissioner (Appeals) and raised a specific ground that the contribution made by the foreign buyers should go to reduce the actual cost incurred by the assessee. The assessee was put on notice of the ground raised by the Revenue and the order of the Appellate Tribunal also indicates that the question was argued before the Tribunal. The Tribunal has the jurisdiction to entertain the new ground raised before it and the Appellate Tribunal has exercised its jurisdiction properly in a matter which arose out of the, order of assessment. We are of the opinion that the jurisdiction exercised by the Tribunal is correct.

Further, the issue that arose before the Income‑tax Authorities was whether the grant would be a capital or revenue receipt, and decision on the question whether it has a capital receipt or not would have direct impact on the question of determination of depreciation allowance as the grant of depreciation in turn would depend upon the actual cost of the machinery, and, therefore, the Tribunal has the jurisdiction and rightly exercised as discretion to entertain the ground as to the mode of calculation of actual cost of the machinery. Therefore, the Tribunal was justified in entertaining the ground raised by the Revenue regulate the grant of depreciation on the machinery.

Accordingly, we answer both the questions of law referred to us in the affirmative and against the assessee and in favour of the Revenue. The Revenue will be entitled to costs of a sum of Rs.750.

M.B.A./366/FC

Reference answered.