Income Tax Appellate Tribunal - Delhi
Oil & Natural Gas Commission vs Additional Commissioner Of Income Tax on 24 August, 1998
Equivalent citations: [1999]69ITD69(DELHI)
ORDER
B.M. Kothari, A.M.
1. This appeal by the assessee is directed against the order dt. 23rd December, 1997 of the CIT(A), Dehradun for asst. yr. 1994-95.
Ground Nos. 1 to 1.3 raised in the appeal are reproduced hereunder :
1. Depreciation allowable.
1.1. That the learned CIT(A), Dehra Dun, has erred in law and on the facts and circumstances of the case in disallowing the appellant's claim of depreciation amounting to Rs. 12,50,48,50,000 in respect of assets to which it was eligible under s. 32 of the IT Act, 1961.
1.2. That the learned CIT(A), Dehra Dun, ought to have held that under s. 43(6)(c) of the IT Act, 1961, the written down value should have been computed by the AO after taking into account the aggregate of the written down value of all assets falling within a block of assets at the beginning of the previous year i.e., 1st April, 1993, and adjusting it by increasing the actual cost of the assets acquired during the year and reducing it by the moneys payable in respect of any assets which were sold, discarded, demolished or destroyed during the previous year.
1.3. That the learned CIT(A), Dehra Dun has wrongly construed the expressions 11 moneys payable" and "sold" as referred to in the Explanation below s. 41(4) of the IT Act, 1961."
1.1. The appellant Oil and Natural Gas Commission (hereinafter referred to as 'ONGC') was a fully owned Government of India undertaking established under the Oil & Natural Gas Commission Act, 1959, with the main objectives of exploration, exploitation and extraction of mineral oils. Pursuant to the decision of the Government of India to convert ONGC into a public limited company under the Companies Act, 1956, Oil & Natural Gas Corporation Limited (thereafter referred to as the "Corporation)" was incorporated on 23rd June, 1993. The Oil & Natural Gas Commission (Transfer of Undertaking and Repeal) Act, 1993, was passed on 4th September, 1993, which was deemed to have come into force on the 2nd day of July, 1993. Sec. 3 of the said Act, provides that "on such date as the Central Government may, by notification in the Official Gazette, appoint, the undertaking of the Commission shall stand transferred to, and vest in, the Corporation. A Notification No. O-11021/2/93-ONG/D. III dt. 28th January, 1994, was issued in exercise of the powers conferred by s. 3 of the said Act notifying that the Central, Government hereby appoints the first day of February, 1994, as the date on which the undertaking of the Commission shall be transferred to and vest in the Corporation.
1.2. The appellant Commission filed its return of income for asst. yr. 1994-95 declaring total loss of Rs. 3,04,34,30,344 after setting off of c/f loss claimed to be available from the asst. yr. 1993-94 covering the period from 1st April, 1993, to 31st January, 1994. The Corporation fixed a separate return of income for asst. yr. 1994-95 covering the period from 1st February, 1994, to 31st March, 1994.
1.3. The AO disallowed the appellant's entire claim of depreciation amounting to Rs. 12,50,48,50,000 in view of the facts and elaborate reasons given in para 1 at pp. 2 to 4 of the assessment order, which is reproduced hereunder :
"1. Depreciation. - For the reason of transfer of Undertaking and vesting of it in the new company namely Oil & Natural Gas Corp. Ltd. from 1st February, 1994, two returns of income for the financial year 1993-94 have been filed. Income for the first 10 months has been declared in the hands of O.N.G. Commission and for the remaining 2 months i.e. 1st February, 1994 to 31st March, 1994 in the hands of Oil & Natural Gas Corp. Ltd. On an analogy that O.N.G. Commission and O.N.G. Corpn. Ltd., are two separate legal entities, full depreciation has been claimed in the hands of O.N.G. Commission for its functioning of 10 months during the previous year and half of the admissible depreciation has been claimed in the hands of the Corp. Ltd. for its functioning of less than 180 day under the second proviso to s. 32(1). Vide order-sheet entry dt. 22nd August, 1996, assessee was asked to explain as to why claim of depreciation be not disallowed in view of the provisions as contained under s. 43(6)(c) and Expln. (2) below s. 41(4) r/w Expl. (4) below s. 43(6) of the IT Act, 1961. In compliance with the above query, Shri V. J. Mehmi, vide letter dt. 16th September, 1996, attempted to justify the claim for depreciation in the wake of legal opinion rendered by M/s Arthur Andersen & Associates as also by Shri Y. V. Chandrachud, former Chief Justice of India, as under :
'Oil & Natural Gas Commission has claimed depreciation for the period 1st April, 1993 to 31st January, 1994 during which it was functionally and fully operated. Its extinction was caused on the appointed day under Oil & Natural Gas Commission (Transfer of Undertaking and Repeal) Act, 1993, that is on 1st February, 1994. ONGC did not, by any interpretation of the law, sell its undertaking to Oil & Natural Gas Corp. Ltd. Oil & Natural Gas Commission had no power to do so, since it was denuded of all its powers and obligations by Oil & Natural Gas Commission (Transfer of Undertaking and Repeal) Act, 1993, which brought about its extinction. The vesting of the assets of the Oil & Natural Gas Commission in the Oil & Natural Gas Corp. Ltd. took place on 1st February, 1994, on which date Oil & Natural Gas Commission was not in existence. An entity which had no existence in the eye of law on 1st February, 1994, could not transfer its assets and liabilities to another entity on that date.' Apparently the authorised representative of the assessee is denying the existence of an event which in reality has already happened. Moreover, it will be incorrect to presuppose a void between extinction of the old entry and the transfer to and vesting in the other. At the same time, transfer could well be effected by an operation of law, "the word 'transfer' thus is wide enough to comprehend both a transfer by act of parties or by operation of law". CIT vs. F.X. Periera & Sons (Travancore) (P) Ltd. (1990) 184 ITR 461 (Ker). Further the title of the Act i.e. "The Oil & Natural Gas Commission (Transfer of Undertaking and Repeal) Act, 1993" itself makes it abundantly clear that the passing of earlier entity into the new one was a "transfer". In the preamble as also at many other places, the word "transfer" has been mentioned equivocally. Thus the legislature enacting ONGC Act was fully conscious of the fact that the change over was a transfer. It is because of this that by way of specific provision as contained in art. 6(3), the transfer and vesting of the Undertaking has been excluded from the ambit of capital gains. Thus the makers of law knew for certain that unless a specific provision was made, the transfer would be hit by the provisions of capital gains of the Act.
Expln. 2 below s. 41(4) of the IT Act reads as under :
'"sold" includes a transfer by way of exchange or a compulsory acquisition under any law, for the time being in force but does not include a transfer, in a scheme of amalgamation, of any assets by the amalgamating company to the amalgamated company, where the amalgamated company is an Indian company.' And Expln. 4 below s. 43(6)(c) speaks that for the purpose of s. 43(6)(c), the meaning of 'sold' will be the same as given in Explanation below sub-s. (4) of s. 41. As is evident from the provisions of said Explanation reproduced above, the meaning of 'sold' embarasses all kinds of transfer and inclusive the only exception made in the above referred meaning of 'sold' is that of amalgamation of the companies. Clearly as stated above, the transfer and vesting of the ONGC is fully covered within the definition of 'sold'. Accordingly, by applying the provisions of s. 43(6)(c), there will be Nil depreciation for the reason that the entire assets stood transferred during the previous year being the financial year 1993-94 as per the meaning of previous year given in s. 3 of the IT Act, 1961, with the result that the WDV on which depreciation ought to be calculated for the asst. yr. 1994-95 in the hands of the ONGC had become Nil. Steps for calculating depreciation are clearly given in s. 43(6)(c) which defines WDV as the opening cost or opening WDV plus additions during the year minus deductions by way of sold/discard, etc. In this case as the entire assets have been transferred during the year, as per its meaning as given above, WDV becomes Nil. So depreciation also becomes Nil. For the above reasons, I decline to allow any depreciation to the ONGC for the asst. yr. 1994-95.' 1.4. The CIT(A) has discussed this point in para 2 to 2.10 at pp. 1 to 10 of his order. In para 2 to 2.4 the brief facts and findings of the AO have been discussed. In para 2.5, the gist of main submissions submitted vide written submissions dt. 7th August, 1997 have been mentioned. The CIT(A) forwarded the written submissions of the assessee to the AO. The AO submitted his comments thereon on 10th October, 1997 through letter dt. 26th September, 1997, the contents whereof have been reproduced in para 2.6. Further submissions made on behalf of the assessee have been briefly incorporated in para 2.7 and 2.8. The oral submissions of the AO have been recorded in para 2.9. The CIT(A) has recorded his findings in para 2. 10, which is reproduced below :
"2.10 the written submissions of the appellant and the oral arguments of the learned counsel for the appellant have been considered along with the comments and arguments of the AO. I find considerable force in the argument of the AO that the word "sold" was wide enough to cover a transfer by act of parties or by operation of law as held in the case of CIT vs. F.X. Periera & Sons (Travancore) (P) Ltd. (1990) 184 ITR 461 (Ker) cited by the AO in his assessment order. The financial statement of the ONG corporation Ltd. for the period ending 31st March, 1994, a copy of which has been furnished by the learned representative for the appellant on 12th November, 1997, states that the issue and subscribed capital of the ONG Corp. Ltd. represented 342853716 equity shares of Rs. 10 each issued as fully paid-up to the President of India without the payment being received in cash in terms of ONG Commission (Transfer of Undertaking and Repeal) Act, 1993. This amount of Rs. 3,42,85,37,160 may not represent the 'price or money payable' in relation to any specific asset, because the assets were transferred at book value by operation of law, it definitely brings in an element of "consideration for sale" as the Govt. of India were in this way compensated for the capital invested by them in the ONG Commission prior to its transfer to ONG Corporation Ltd. Furthermore the appellant Commission ceased to exist from 1st February, 1994, simultaneously with the transfer of the Undertaking and there remained no asset for calculation of W.D.V. or for calculation of depreciation at the close of the previous year relevant for asst. yr. 1994-95. Sec. 32 of the IT Act r/w s. 43(6)(c) presupposes existence of a block of assets owned by the assessee at the close of the previous year for calculation of depreciation. In the absence of that block of assets, there would be no question of allowing any depreciation. The fact that the legislature while enacting the law for the transfer of the Undertaking of the appellant Commission considered it necessary to make a specific provision in the Act itself to save the transfer of the Undertaking from capital gains tax under the IT Act lends further support to the argument of the AO that the transfer of the Undertaking was a deemed sale. I, therefore, do not find any merit in appellant's contention and the order of the AO disallowing appellant's claim for depreciation is being upheld."
1.5(i). Shri S. E. Dastur, the learned senior advocate briefly explained the facts and the relevant provisions of the Oil and Natural Gas Commission (Transfer of Undertaking & Repeal) Act, 1993, as a result of which the entire Undertaking of the ONGC statutorily stood transferred to, and vested in, the "Corporation" from the appointed date, namely, the 1st day of February, 1994.
1.5(ii). The learned lawyer contended that the appellant is clearly entitled to grant of depreciation at the full rate prescribed in the IT Rules, 1962, as the assets have been owned and used by the assessee for more than 180 days in the year under consideration. The assessee fulfils all the conditions of ss. 32 and 34 of the IT Act, 1961 (For short, the 'Act'). He pointed out that s. 34(2)(ii) which expressly disallowed depreciation to an assessee for the year in which the assets were "sold, discarded, demolished or destroyed" has been deleted w.e.f. asst. yr. 1988-89.
1.5(iii). The learned counsel contended that the AO has erred in disallowing depreciation by applying the provisions of s. 43(6)(c) of the Act. He submitted that an interpretation based on the plain language of the said provision clearly indicates the fallacy of the view taken by the AO. Sec. 43(6)(c) of the Act requires that the "written down value" defined in s. 43(6) shall be reduced "by the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year ......... Expln. 4 to s. 43(6) provides that for the purposes of s. 43(6), the expression "moneys payable" and "sold" shall have the same meanings as in the Explanation below sub-s. (4) of s. 41 of the Act.
1.5(iv). The learned senior advocate then, drew our attention towards the definition of the expression "moneys payable" and "sold" given in the Explanation below s. 41(4) of the Act. The definition of expression "sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation. The natural and ordinary meaning of word "sold" has been extended to include a transfer by way of exchange or a compulsory acquisition under any law. Therefore, the question which requires consideration is whether such statutory transfer and vesting of the undertaking of the Commission in favour of the Corporation can be treated as a sale as understood in law or it can be treated as a transfer by way of exchange or a transfer by way of compulsory acquisition under any law.
1.5(v). The learned counsel submitted that it cannot be said that the ONGC has sold its assets or the undertaking to the Corporation. The words "sold" has not been defined in the IT Act. Therefore, the meaning of the expression "sold" will have to be examined as is generally understood in the commercial world. The definition of "sale" and "price" given in the provisions of Transfer of Property Act and Sale of Goods Act clearly indicate that a transaction is called "sale" where for money consideration, property in goods is transferred under a contract of sale. The learned counsel argued that in order to constitute "sale" the following factors should co-exist : (i) there should be a contract between the parties for transfer of property from one person to another; (ii) such a transfer (sale) should be for a price; and (iii) price as defined in the Sale of Goods Act has to be in monetary consideration. The learned counsel invited our attention towards the following judgments to support this contention :
1.5(vi). CIT vs. Motors & General Stores (P) Ltd. (1967) 66 ITR 692 (SC).
The relevant extracts from the said judgment are reproduced below :
"Sale is a transfer of property in goods or of the ownership in immovable property for a money consideration. But in exchange there is a reciprocal transfer of interest in immovable property, a corresponding transfer of interest in movable property being denoted by the word "barter". The difference between a sale and an exchange is this, that in the former the price is paid in money, whilst in the latter it is paid in good by way of barter. The presence of money consideration is an essential element in a transaction of sale. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale."
1.5 (vii). New India Sugar Mills Ltd. vs. CST AIR 1963 SC 1207 Para 47 of the said judgment at p. 1222 relied upon by the learned counsel is reproduced below :
"(47) Under s. 29 of the Transport Act, 1947 (10 and 11 Gen. 6C. 49) the company's railway wagons were vested on 1st January, 1948 in the British Transport Commission. These wagons were already under requisition to the Ministry of Transport under the powers contained in Regulation 53 of the Defence (General) Regulations, 1989. Later the company received compensation., This amount was higher than the written down value. A balancing charge of 29,021 was made under s. 17 of the IT Act, 1945 (8 and 9 Gen. 6 C. 32) in an, assessment under cl. 1 of Schedule D to the IT Act, 1918. The company appealed against the balancing charge and succeeded. Sec. 17(1) of the IT Act, 1945 (which in its purport resembled s. 10(2)(vii) of the Indian IT Act, 1922) ordained that a balancing charge or allowance should be made if certain events occurred, one such event being "(a) the machinery or plant is sold, whether still in use or not". The question was whether there was such a 'sale' justifying a balancing charge. It was contended for the Revenue that the word "sale" had a wider meaning than a contract and a conveyance of a property and that in its legal meaning it did not involve a contract at all but just the transfer of the property in or ownership of something from A to B for a money price, whether voluntary or affected by operation of law or compulsory. Passages were cited from Benjamin on Sale (2nd Edn. p. 1), Halsbury's Laws of England (2nd Edn. Vol. xxi p. 5). Blackstone's Commentaries [19th Edn. (1836) Vol. II p. 446], and Chalmer's Sale of Goods (11th Edn. p. 161), to show that a bargain only shows a mutual asset but it is the transfer of property which is the actual sale. Analogy of Lands Clauses Consolidation Act 1845, Stamp Act and other Acts was invoked and later Finance Acts were also called in aid where such compulsory transactions were described as sale or purchase. The House of Lords by a majority of 4 to 1 overruled these contentions. It was held that the vesting of the wagons in the Transport Commission by operation of s. 29 of the Transport Act and the payment of compensation in the shape of transport stock did not constitute are and the analogy of compulsory acquisition of land did not apply, since the procedure there was entirely different. The word 'sale' in s. 17 of the IT Act, 1945, it was held, imported a consensual relation and the meaning of the section being plain, it was not possible to go to later Acts to construe the section. I shall quote a few passages from the speeches to show how this conclusion was reached so as to be able to show how the same reasoning was used in connection with the building contracts."
1.5 (viii). Calcutta Electric Supply Corporation Ltd. vs. CIT (1951) 19 ITR 406 (Cal) The relevant extract from the said judgment is reproduced hereunder :
"Held, that the transaction by which the Government acquired the plant could not be regarded as a sale within the meaning of s. 10(2)(vii) and, therefore, sum, of Rs. 3,27,840 was not taxable as profit under s. 10(2)(vii). The ordinary meaning of the word "sale" is a transaction entered into voluntarily between two persons known as the buyer and the seller by which the buyer acquires property of the, seller for an agreed consideration known as a price."
1.5(ix). The learned counsel agreed that in the present case, there is no contractual relationship, there is no consideration for the transfer and the condition of payment of any price in monetary terms is missing. Hence, the transfer and vesting of the Undertaking of the Commission in favour of the "Corporation" by virtue of the Oil & Natural Gas Commission (Transfer of Undertaking and Repeal) Act, 1993 can be regarded as "sale", or "sold" as contemplated in s. 13(6)(c) of the Act.
1.5(x). The learned senior advocate further argued that the transfer of assets from the Commission to the Corporation by an act of Parliament does not result in any exchange of assets. He invited our attention to the judgment of Hon'ble Supreme Court. in the case of CIT vs. Motors & General Stores (P) Ltd. (supra). At p. 696 the Hon'ble apex Court has observed as under :
"Sec. 118 of the Transfer of Property Act defines "exchange" as follows :
"Where two persons mutually transfer the ownership of one thing for the ownership of another, neither thing or both things being money only, the transaction is called an "exchange". A transfer of property in completion of an exchange can be made only in manner provided for the transfer of such property by sale."
Sec. 119 provides :
"If any party to an exchange or any person claiming through or under such party is by reason of any defect in the title of the other party deprived of the thing or any part of the thing received by him in exchange, then unless a contrary intention appears from the terms of the exchange, such other party is liable to him or any person claiming through or under him for loss caused thereby, or at the option of the person so deprived, for the return of the thing transferred, if still in the possession of such other party or his legal representative or a transferee from him without consideration.
The definition of "exchange" in s. 118 of the Transfer of Property" Act is not limited to immovable property but it extends also to barter of goods. It is clear therefore that both under the Sale of Goods Act and the Transfer of Property Act, sale is a transfer of property in the goods or of the ownership in immovable property for money consideration. But in exchange there is a reciprocal transfer of interest in the immovable property, the corresponding transfer of interest in the movable property being denoted by the word "barter", "the difference between a sale and exchange is this, that in the former the price is paid in money, whilst in the latter it is paid in goods by way of barter."
1.5(xi). The learned counsel invited our attention towards s. 54 and s. 118 of the Transfer of Property Act to support his contention that in order to constitute a transfer by way of exchange, there has to be two contracting parties, who should mutually agree for the "reciprocal transfers". In the present case, the ONGC has ceased to exist from the appointed date of 1st February, 1994 when the entire undertaking (including all assets and liabilities) of the Commission stood transferred to, and vested in, the Corporation. The Corporation has not transferred anything in favour of the Commission. The shares issued in favour of the Central government in terms of the provisions of the Oil & Natural Gas Commission (Transfer of Undertaking and Repeal) Act, 1993 [hereinafter referred to as ONGC (T.U.R.) Act] cannot be treated as any asset transferred in favour of the Commission by way of exchange. Nothing could be transferred in favour of the Commission as it had ceased to exist. Furthermore, the issue of shares cannot be treated as transfer of ownership but issues of new shares by the company created new asset.
1.5 (xii). Shri Dastur, drew our attention towards the judgment in the case of In. re, V.G.H. Holdings Ltd. (an English decision) (1942) All ER Annotated 224. At p. 226; the Hon'ble Court of Appeal has observed that between the issue of a share to a subscriber and the purchase of a share from an existing shareholder is the difference between the creation and the transfer of a chose-in-action. The two legal transactions of the creation of a chose-in-action and the purchase of a chose-in-action are quite different in conception and in result. The learned counsel further pointed out that the aforesaid English decision has been cited with approval by the Hon'ble Supreme Court in the case of Shri Gopal Jalan & Co. vs. Calcutta Stock Exchange AIR 1964 SC 250. The Hon'ble apex Court in para 7 of the said judgment has observed that "a share is a chose-in-action. A chose-in-action implies the existence of some person entitled to the rights which are rights in action as distinct from rights in possession, and, until the share is issued, no such person exist. Putting it in a nutshell, the difference between the issue of a share to a subscriber and the purchase of a share from an existing shareholder is the difference between the creation and the transfer of a chose-in-action". The learned counsel submitted that the allotment of shares by the ONGC Corporation Ltd. in favour of the President of India cannot be treated as transfer of shares nor those shares have been purchased. Hence, the said statutory transfer and vesting cannot be treated as "exchange". He further submitted that the transfer by way of exchange has to be registered as a "sale". In the present case transfer and vesting of assets has taken place as a result of an Act of Parliament without there being any need or registration under the provisions of Registration Act and as required under the provisions of T.P. Act.
1.5(xiii). The learned counsel also invited out attention to the judgment of Hon'ble Full Bench of Madras High Court in the case of Secretary, Board of Revenue vs. Madura Mills Co. Ltd. AIR 1937 Mad. 259. The relevant head-note is reproduced hereunder :
"A share is property in the hands of a "shareholder, only when the company is for the first time issuing shares, there is no transfer to the allottee of any property already possessed by the company as the company cannot be regarded as owner of its shares.
Where two companies M and H orally agreed to allot some of their shares, fully paid-up, to such other otherwise than in cash, as per certain agreement between them and the substance of the agreement was embodied in resolutions recorded in the books of both the companies and a statement embodying the particulars of the above agreement was filed in the form presented before the Registrar under s. 104, Companies Act, along with an agreement bearing a twelve anna stamp :
Held : the contract of which the particulars were recorded in the prescribed form filed with the Registrar did not amount to a "conveyance" within the meaning of s. 2(10), Stamp Act and was a mere "agreement"."
1.5 (xiv). The learned counsel further relied upon the decision in the case of Oudh Sugar Mills Ltd. vs. ITO (1990) 34 ITD 76 (Bom). The relevant extracts are reproduced below :
"If the scheme of assessment involves the transfer of a company's undertaking to another company usually the transfer is brought about by allotment of shares to the shareholders of the transferor company in satisfaction of the assets transferred. This is a perfectly legitimate arrangement and the scheme of arrangement cannot be considered fraudulent or illegal merely because it is so arranged as to avoid capital gains or any other tax liability as to a person is lawfully entitled to do anything or so conduct his affairs as to avoid or reduce tax liability. Now, the expression 'sold' for the purpose of s. 41(2) is to be given the same meaning as is contained in Explanation to sub-s. (4) of s. 41. Clause (2) of this Explanation provides that the expression 'sold' includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer in a scheme of amalgamation of any asset by the amalgamating company to the amalgamated company. Now, in the present case, there was no exchange inasmuch as the parties to the transaction were not two persons who had mutually exchanged the ownership of one thing for the ownership of another. This, as explained by the CIT(A), was, tripartite agreement where the shareholders of the assessee constituted the third party along with the assessee and A. Further the scheme of arrangement under which the assets had been made over had been formed consequent to a company's petition made to the High Court and it had been approved by the High Court as a scheme of arrangement under s. 391, r/w s. 394, of the Companies Act. The scheme itself was described as a scheme of arrangement between the assessee, A and their respective shareholders. Since this scheme had been finalised under s. 391, r/w s. 394, of the Companies Act, 1956, it was in the nature of a scheme of amalgamation, whatever had been done in this scheme was legitimately done. Any transfer in a scheme which is akin to the scheme of amalgamation, cannot come within the meaning of the term 'sold' as per cl. (2) of Explanation to sub-s. (4) of s. 41. Therefore, there was neither a sale nor an exchange in the present transaction. Again, the expression 'moneys payable' has been explained in cl. (1) of Explanation to sub-s. (4) of s. 41 as insurance, salvage or compensation moneys or where building, machinery, plant or furniture is sold, the price for which it is sold. In the, present case, no such price had been paid for the assets transferred. There was only an arrangement for issue of shares to the shareholders which was again a legitimate arrangement sanctioned by the provisions of s. 394 of the Companies Act, further in terms of clauses of the scheme, A agreed to allot in manner provided, preference shares. In the present case, the allotment of shares was probably made in terms of cl. (ii) of s. 394(1) of the Companies Act and the receipt of shares on allotment by the shareholders of the assessee could not take the form of the expression 'money payable'. Firstly, the difference between assets and liabilities was paid in the form of allotment of shares and, secondly, such allotment was made to the shareholders of the assessee and not to the company as such. In this process, the assessee could not be said to have 'received any consideration or price for the plant and machinery transferred and, in that case, what was received by the shareholders could not be said to be a consideration in the form of moneys payable being the price of the assets transferred, since it was not paid to or received by the assessee. Therefore, there was no sale or exchange between the assessee and A, there was no consideration paid by the latter to the former and therefore, the amount representing the difference between the assets and liabilities could not be brought to tax as deemed profits under s. 41(2). "
1.5(xv). On the strength of aforesaid submissions and judgments, the learned lawyer vehemently argued that the transfer and vesting of the Undertakings of the Commission in favour of the Corporation by virtue of ONGC (T.U.R.) Act cannot be treated as transfer by way of "exchange" also.
1.5(xvi). The learned senior advocate submitted that it is also not a case of any compulsory acquisition under any law. He submitted that neither the expression "sale" nor "exchange" nor "compulsory acquisition under any law" apply to the present case or vesting of the Undertaking of the Commission in favour of the Corporation.
1.5(xvii). Shri Dastur contended that assuming for a moment that such statutory transfer and vesting is a "sale" or "exchange" still the provisions of s. 43(6)(c) will not apply, as the said provision requires that the written down value at the beginning of the previous year should be reduced by the money payable in respect of any asset falling within that block sold or discarded or demolished or destroyed during the previous year. It necessarily implies that price (money) is payable for identifiable assets. In the present case, price payable has not been determined, in relation to any identifiable assets. It cannot be said that any money was payable by way of price by the Corporation to the Commission towards the cost of building, plant, machinery and furniture, etc. There is no stipulation in the ONGC (T.U.R.) Act providing for payment of money in consideration of purchase of any such assets.
1.5(xviii). The learned counsel relied upon the following judgements to support the aforesaid contention :
(a) CIT vs. Electric Control Ghar Mfg. Co. (1997) 227 ITR 278 (SC) The relevant extract from head-note is reproduced hereunder "The assessee was a partnership concern consisting 13 partners. On 31st March, 1966, it entered into an agreement whereby it transferred the entire assets of the business together with the liabilities as a going concern to a limited company, for a consideration of Rs. 8 lakhs. The erstwhile partners of the assessee-firm were allotted shares in the company of the same value in their profit-sharing proportion. The ITO held that the depreciation allowed to the assessee-firm amounting to Rs. 3,32,863 in respect of the assets transferred by the firm to the said company, was chargeable to tax under the provisions of s. 41(2) of the IT Act, 1961. He also brought to tax capital gains of Rs. 8 lakhs, being the purchase consideration received by the assessee and after excluding the sum of Rs. 7,95,000 in the computation of the total income of the assessee under the head "capital gains".
Held, (i) that there was nothing to indicate the price attributable to the assets like machinery, plant or building out of the consideration amount of Rs. 8 lakhs. Merely because a sum of Rs. 3,32,863 had been allowed as depreciation to the assessee-firm, it could not be said that was the excess amount between the price and the written down value. The provisions of s. 41(2) were not applicable. "
(b) CIT vs. F. X. Periera & Sons (Travancore) (P) Ltd. (supra) The relevant extracts from Headnote (ii) is reproduced hereunder :
"(ii) That the intention of the parties to the sale deed was to have the business sold as a going concern. A capital asset had thus been transferred by the sale deed dt. 14th April, 1971. There was, therefore, no sale of the building, plant, machinery and furniture separately. Only if the assets which were enjoying depreciation were sold separately, that the provisions of s. 41(2) would be attracted. Therefore, the Tribunal was right in holding that the industrial undertaking as a whole had been taken over by the Government and the profit derived by the assessee could not be assessed under s. 41(2) of the Act. "
1.5(xix). The learned counsel submitted that in the instant case, no price or money is payable for transfer and vesting of assets. He once again drew our attention to ss. 3 and 4 of the ONGC (T.U.R.) Act providing that the undertaking of the Commission shall stand transferred to, and vest in, the Corporation from the appointed day and the entire control of the Commission shall, be virtue of that Act, stand vested in the Corporation, the learned counsel further submitted that issue of shares of 342 crores in favour of the President of India cannot to treated as consideration for transfer of assets having WDV of more than 4,000 crores.
1.5(xx). The learned counsel also referred to the Circular issued by the CBDT No. 63 dt. 16th August, 1971 published in (1971) 82 ITR (St) 1. The relevant extract is reproduced hereunder :
"Subject :- Nationalisation of commercial banks - Income-tax assessments and payment of tax liability.
7. Liability to balancing charge under s. 41(2) of the IT Act. - There will be no liability to tax on the existing bank in respect of the "balancing charge" under s. 41(2) of the IT Act."
1.5(xxi). The learned counsel submitted that the AO and the CIT(A) have wrongly placed reliance on s. 6(3) of the ONGC (T.U.R.) Act. Sec. 6(3) of the said Act provides that the transfer and vesting of the undertaking or any part thereof in terms of s. 3 shall not be construed as a transfer within the meaning of IT Act, 1961 for the purpose of capital gains. The insertion of such a specific provision in relation to exemption from capital gains tax cannot lead to the conclusion that it will come within the ambit of expression "sold" used in s. 43(6)(c) of the Act.
1.5(xxii). Shri Dastur, the learned senior advocate further contended that the authorities below have erred in holding that the previous year of ONGC continued upto 31st March, 1994 and not only upto 31st January, 1994, as claimed by the assessee. Referring to s. 3 of IT Act, 1961, the learned counsel argued that a "previous year" as defined in s. 3 relate to the person whose income is assessable. If a person who does not survive, the previous year cannot be extended beyond the date of his death. In the present case, the ONGC ceased to exist after the close of 31st March, 1994. The accounts have been made up by the Commission from 1st April, 1993 to 31st January, 1994. The previous year, therefore, ended on 31st January, 1994. The findings given by AO and CIT(A) that the previous year continued upto 31st March, 1994 is invalid and unjustified.
1.5(xxiii). The learned counsel also referred to the judgment in the case of A. M. Ponnurangam Mudaliar vs. CIT & Anr. (1997) 228 ITR 454 (Mad). At p. 456, the Hon'ble Court has inter alia observed as under :
"Held, (i) that the term "transferred" is not used in s. 34(2)(ii) of the Act and it has used only the words "sold, discarded, demolished, destroyed". It has not even used the expression "or otherwise transferred" "or disposed" as for example, found in certain other provisions of the Act. Further, the definition in s. 2(47) of the term "transfer" is only in relation to a "capital asset" as defined under s. 2(14) the term "transfer" is in relation to computation of "capital gains" coming under Chapter IV-E of the Act.
(ii) The though the term "owned by the assessee" is used in s. 32(1). it could not mean that the assessee should have remained the owner of the asset in question for the entire previous year in question. The assessee, in the instant case was the owner of the buses during the previous year, that is from 1st April, 1979, to 30th June, 1979, though not for 365 days of a year. Since the business itself was closed on 30th June, 1979, the assessee had been fully using the asset for the business during the entire accounting year of the three months ending with 30th June, 1979.
(iii) That the object of the legislature in granting depreciation allowance under s. 32 of the Act is to give due allowance to the assessee for wear and tear suffered by the asset used by him in his business so that the net income (total income) is duly arrived at. Further, the enactment read with the IT Rules, as it existed at the relevant point of time, goes to the extent of granting such allowance even when the asset in question is used for the purpose of the business at any time "during the previous year" In other words at the relevant point of time, even of the asset has been used for a single day, in the business of the assessee, depreciation allowance in full was given under s. 32(1) of the Act. Therefore,, it could not be said that the assessee could not be granted the said depreciation allowance if he was not the owner for the entire period of the previous year or if he was not the owner on the last day of the previous year in question. There is no such stipulation in the Act.
(iv) That; therefore, the CIT was not justified in refusing depreciation allowance claimed by the assessee either on the ground that the assessee was not the owner of the buses for the full previous year in relation to the assessment year in question or on the ground that s. 34(2)(ii) would apply to the case of the assessee."
1.5(xxiv). The learned counsel submitted that the fourth proviso has been inserted in s. 32 by the Finance (No. 2) Act, 1996 w.e.f. 1st April, 1997, which now provides that the aggregate deduction, in respect of depreciation on building, machinery, plant or furniture allowable to the predecessor and the successor in the case of succession, referred to in s. 170 or in case of amalgamation, shall not exceed in any previous year, the deduction calculated at the prescribed rates, as if the succession or the amalgamation had not taken place, and such deduction shall be apportioned between the predecessor and the successor, in the ratio of the number of days for which the assets were used by them. The aforesaid amendment made w.e.f. 1st April, 1997 cannot be applied with retrospective effect. The very fact that such an amendment has been made w.e.f. 1st April, 1997 further supports the claim of the assessee for grant of depreciation at full prescribed rates.
1.5(xxv). Shri Dastur, the learned senior advocate thus strongly urged that disallowance of appellant's claim of depreciation amounting to Rs. 12,50,48,50,000 confirmed by the CIT(A) should be deleted and the AO may be directed to allow the same.
1.6. Shri S. C. Grover, the learned CIT (hereinafter referred to as the senior Departmental Representative) represented the case on behalf of the Department.
1.6(i). The learned senior Departmental Representative stated that in case of Government companies, it is often said that such litigation between the two wings of the Central Government is a wasteful exercise, as payment of taxes merely goes from one pocket of the Government to the other pocket of the same Government. As a result, the relevant facts and provisions are interpreted in a very liberal manner, which is legally unwarranted and unjustified.
1.6(ii). The learned senior Departmental Representative submitted that the Commission ceased to exist on 31st January, 1994. It worked for only 10 months, and have claimed full depreciation for asst. yr. 1994-95. The Corporation worked for only 2 months from 1st February, 1994 to 31st March, 1994 and has claimed depreciation at 50% of the normal rates. Thus depreciation for the same asst. yr. 1994-95 has been claimed at 150 per cent, which is neither legal nor fair nor justified. He contended that various banks were nationalised in July, 1969. The assets of the former banks were transferred and vested in favour of the nationalised banks from the appointed date in similar manner and in pursuance of an Act of Parliament. The RBI vide letter No. Nat. 323/C.469(F)-71 dt. 25th February, 1971 addressed to the Custodian, Punjab National Bank, Parliament Street, New Delhi (copy placed on records) advised the bank to file the annual return of income of the bank for the whole accounting year 1969. The learned senior Departmental Representative submitted that depreciation aggregating to more than 100 per cent of the prescribed rate cannot be claimed in one assessment year by the assessee-Commission and it successor Corporation.
1.6(iii). The learned senior Departmental Representative further relied upon the fourth proviso to s. 32 added by the Finance (No. 2) Act, 1996 w.e.f. 1st April, 1997. He contended that the said proviso is clarificatory and is fair, reasonable and equitable. Without prejudice to the disallowance of entire amount of depreciation made by the AO and confirmed by the CIT(A), he submitted that the AO should be directed to work out the amount of depreciation allowance, it any, in accordance with the fourth proviso to s. 32 inserted w.e.f. 1st April, 1997.
1.6(iv). The learned Departmental Representative strongly relied upon the detailed reasons mentioned in the assessment order and in the order of the CIT(A) and urged that the order of CIT(A) confirming the disallowance of entire depreciation should be sustained.
1.6(v). Shri Shantnu Dhamija, the learned Departmental Representative who assisted the learned senior Departmental Representative Shri S. C. Grover also addressed arguments on behalf of the Department in relation to ground No. 1.
1.6(vi). Shri Dhamija submitted that Explanation to s. 41(4) starts with the words "For the purposes of sub-s. (3)". the meaning of : money payable "and 11 sold" defined in the said Explanation will apply, Therefore, the definition of these expressions given in the Explanation to s. 41(4) applies only in relation to s. 41(3) dealing with expenditure of a capital nature on scientific research and has nothing to do with the claim of depreciation governed by s. 32, 34 and 43(6)(c).
1.6(vii). Shri Dhamija, learned Departmental Representative further contended that definition of "Transfer in relation to a capital asset" given in s. 2(47) is not confined only to the determination of capital gains. It extends to all cases of transfer of capital assets, whether it relates to determination of capital gains or it pertains to transfer or sale of assets for the purposes of depreciation or determination of WDV under s. 43(6)(c) of the Act. In the present case, there is an extinguishment of rights in the assets owned by the Commission upon its transfer and vesting in favour of the Corporation by virtue of ONGC (T.U.R.) Act. The WDV of the block will be Nil as the block of assets ceased to exist on such transfer by operation of law.
1.6(viii). Shri Dhamija further argued that the expression "moneys payable" in respect of any asset falling within the block does not apply, to all the situations mentioned in s. 43(6)(c)(i)(B). No money is payable in case of discarding, demolition or destroying of assets. But in such situations also the WDV will be reduced due to cessation of ownership over assets. Shri Dhamija thus strongly supported the order of the CIT(A).
1.6(ix). In the rejoinder, Shri Dastur, the learned senior advocate contended that s. 43(6)(c)(i)(B) does not provide that the assessee should be the owner of the asset at the end of the previous year for claiming depreciation. He placed reliance on the decision of Hon'ble Madras High Court 228 ITR 454 (supra). He further contended that s. 2(47) defines the word "transfer", while s. 43(6)(c)(i)(B) does not use the word "transfer". Transfer is surely a much wider expression. It includes gifts, exchange, sale, etc. The learned lawyer submitted that s. 2(47) relates to capital gains. This will be apparent from the Memorandum explaining the relevant provisions of the Bill published in 42 ITR (St) 1 at p. 153. He further contended that s. 32 does not use the term "capital assets". It provides for grant of depreciation on building, plant, machinery and furniture only. He also invited our attention towards the Commentary on Income-tax Law by Palkhiwala, 8th Edition at p. 100 to support the aforesaid view. The learned counsel further pointed out that the expression used in ss. 33 and 34 was "sold or otherwise transferred". Such is not the expression is s. 43(6)(c)(i)(B). He also invited our attention towards judgment in 228 ITR 454 (Mad) (supra) at p. 460. He submitted that the letter of RBI to PNB relied upon by the senior Departmental Representative does not give any details of the relevant facts of the query raise by PNB to RBI. The clarification given by the RBI to PNB cannot override the clear provisions of law contained in s. 43(6)(c)(i)(B). Depreciation at 100 per cent of the prescribed rate of depreciation claimed by the Commission and Depreciation claimed 50 per cent of the prescribed rate by the Corporation is perfectly valid and justified. The subsequent amendment by way of insertion of fourth proviso to s. 32 w.e.f. 1st April, 1997 cannot be applied in relation to asst. yr. 1994-95. The meaning and scope has been explained by the Circular issued by CBDT published in (1996) 220 ITR (St) 223, which supports the aforesaid contention. The learned counsel also invited our attention to the Board's Circular published in 82 ITR (St) 1. He strongly urged that depreciation, as claimed by the assessee should be allowed.
1.7. We have considered the submissions made by the learned representatives of the parties and have carefully gone through all the documents and decisions to which our attention was drawn during the course of hearing.
1.7(1). It may be imperative to reproduce the relevant provisions of the Act.
"(a) Sec. 32(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall subject to the provisions of s. 34, be allowed :
(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed.
The following fourth proviso shall be inserted in sub-s. (1) by the Finance (No. 2) Act, 1996, w.e.f. 1st April, 1997 :
Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture allowable to the predecessor and the successor in the case of succession, referred to in s. 170 or the amalgamating company and the amalgamated company in the case of amalgamation, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, as the case may be, in the ratio of the number of days for which the assets were used by them.
Explanation 2. - For the purposes of this clause "written down value of the block of assets" shall have the same meaning as in cl. (c) of sub-s. (6) of s. 43."
(b) The various conditions prescribed in s. 34(1) and 34(2) relating to grant of depreciation were omitted by the Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986 w.e.f. 1st April, 1988.
(c) Sec. 43(6) says "written down value" means -
"(c) in the case of any block of assets, -
(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within the block of assets at the beginning of the previous year and adjusted, -
(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; and (B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and
(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets' in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).
Explanation 4. - For the purposes of this clause, the expressions "moneys payable" and "sold" shall have the same meanings as in the Explanation below sub-s. (4) of s. 41.
(d) Explanation to s. 41(4) - For the purposes of sub-s. (3), -
(1) "moneys payable" in respect of any building, machinery, plant or furniture includes -
(a) any insurance, salvage or compensation moneys payable in respect thereof;
(b) where the building, machinery, plant or furniture is sold, the price for which it is sold.
(2) "sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company."
1.7(ii). The CIT(A) has held that the expression "sold" used in s. 43(6)(c) is wide enough to cover such a transfer by operation of law. The issue of 34,29,53,716 equity shares of Rs. 10 each as fully paid-up shares of the value of Rs. 3,42,85,37,160 in favour of the President of India represents "consideration for sale". The ONGC ceased to exist on 1st February, 1994, simultaneously with the transfer of the undertaking and there remained no asset for calculation of WDV or for calculation of depreciation at the close of the previous year relevant for asst. yr. 1994-95. Sec. 32 of the Act r/w s. 43(6)(c) presupposes existence of a block of asset owned by the assessee at the close of the previous year for calculation of depreciation. The CIT(A) has confirmed the disallowance of entire amount of depreciation.
1.7(iii). Let us examine the correctness or otherwise of the findings so given by the AO and confirmed by the CIT(A). The undertaking of the Commission along with all its assets and liabilities stand transferred to, and vest in the Corporation with effect from the appointed date of 1st day of February, 1994, by virtue of the Oil and Natural Gas Commission (Transfer of Undertaking and Repeal) Act, 1993. The said Act also provides that on the appointed day (viz. 1st February, 1994), the Oil and Natural Gas Commission Act, 1959 shall stand repealed. The ONGC thus ceased to exist simultaneously when its undertaking stood transferred to, and vest in favour of the Corporation.
1.7(iv). The main point which required our consideration is whether such statutory transfer and vesting of the undertaking of the Commission (including its depreciable assets) in consequence of an Act of Parliament can be brought within the ambit of s. 43(6)(c)(ii) r/w cl. (i)(B) thereof. The said provision provides that the "written down value" of any block of assets in respect of any previous year relating to asst. yr. 1989-90 or any assessment year shall be the WDV of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further reduced by the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year. The Departmental authorities have expressed the view that it is covered by the expression "sold" used in s. 43(6)(c) read with the wide and inclusive definition of words "sold" give in the Explanation to s. 41(4) of the Act.
1.7(v). The definition of "sold" given in the Explanation below sub-s. (4) of s. 41 will cover within its ambit the following :
(a) "Sale" as understood in the commercial world or as understood under the provisions of the Transfer of property Act and Sale of Goods Act.
(b) transfer by way of exchange.
(c) a compulsory acquisition under any law.
The Hon'ble apex Court in the case of M/s New India Sugar Mills Ltd. vs. CST (supra) observed that under s. 4 of the Sale of Goods Act, a transaction is called sale only where for money consideration property in goods is transferred under a contract of be. A contract of sale between the parties is, therefore, a prerequisite to a sale. There should be a payment by way of monetary consideration. The statutory transfer and vesting of assets of the commission in favour of the Corporation as a result of an Act of Parliament cannot be treated as a transaction of sale. It cannot be validly contended that the assets of the Commission have been "sold" to the Corporation. This view is fully supported by the various judgments cited by the learned counsel appearing on behalf of the assessee.
The statutory transfer and vesting of the undertaking including the entire assets and liabilities cannot also be regarded as "transfer by way of Exchange". "exchange" necessarily implies reciprocal transfers. The ONGC has ceased to exist simultaneously with the transfer of its, undertaking in favour of the Corporation. The Corporation has not transferred anything in favour of the Commission. Moreover, there is no mutual agreement for transfer of the ownership of one thing for the ownership of another. It cannot, therefore, be, treated as any transfer by way of exchange also.
It is not the case of the Revenue that it comes within the third category of "a compulsory acquisition under any law".
In view of the aforesaid facts and the various judgments referred to hereinbefore, we are of the view that the transfer and vesting of assets of ONGC in favour of the Corporation does not come within the scope of "sale" or exchange" or "compulsory acquisition" and hence it does not come within the expression "Sold" used in s. 43(6)(c).
1.7(vi). We also agree with the submissions made by the learned senior advocate-Shri Dastur, that even it it is assumed to be a sale, there is no "money payable" in respect of any assets falling within the respective block of assets, transferred during the previous year.
1.7(vii). There is no stipulation or provision in the ONGC (T.U.R.) Act providing for payment of moneys (purchase price) in respect of the asset transferred in favour of the Corporation. The Corporation has not paid any money as price in monetary terms to the Commission, as the Commission had simultaneously ceased to exist. The issue of shares to the President of India cannot be treated as payment of purchase price for transfer and vesting of any particular or identifiable assets. Thus, the other pre-codition for invoking s. 43(6)(c) does not stand fulfilled on the facts of the present case.
1.7(viii). The contention of the learned senior Departmental Representative and the Departmental Representative that definition of "transfer" in relation to a capital asset given in s. 2(47) is applicable on the facts of the present case is devoid of any merit. The expression used in s. 43(6)(c) is not "transfer" but the section specifically incorporates the words "sold or discarded or demolished or destroyed". The legislature in its wisdom has used different expressions in various provisions of the Act. In s. 45 the words used are "Any profits or gains from the transfer of a capital asset" have been used. The definition given in s. 2(47) applies only in relation to determination of capital gains. The legislature has used the words "sold or otherwise transferred" in s. 32A(5), s. 32AB(8); S. 33, etc. The expression "otherwise transferred" used in these sections has not been used in s. 43(6)(c). It is, therefore, clear that all kinds of "transfers" are not envisaged in relation to interpretation of s. 43(6)(c) of the Act.
1.7(ix). The learned senior Departmental Representative did not point out any specific provision in IT Act requiring that in order to get depreciation the assessee should be the owner of the assets for the entire period of the previous year or he should be the owner on the last day of the previous year. There is no such stipulation in the IT Act. The judgment in the case of A. M. Ponnurangam Mudaliar (supra) fully supports the assessee's contention.
1.7(x). The submission made by the learned senior Departmental Representative that the fourth proviso to s. 32 inserted by the Finance (No. 2) Act, 1996 w.e.f. 1st April, 1997, is clarificatory in nature is just, fair and equitable. He urged that the said proviso shall be applied in the case of the appellant. Such a contention, though fair and equitable, cannot be validly applied with retrospective effect in relation to a prior year, when the legislature has specifically made it applicable from asst. yr. 1997-98. It may be relevant here to reproduce the memo, explaining the scope and meaning of the existing provision prior to insertion of the fourth proviso and the object of introducing the said proviso as published in 220 ITR (St) at p. 274 :
(b) Depreciation in case of succession and amalgamation The existing provisions provide for depreciation allowance on assets acquired by an assessee during the previous year and which are put to use for the purposes of business or profession for a period of less than one hundred and eighty days in a previous year. It is provided that the depreciation allowance in such cases will be restricted to fifty per cent of the amount calculated at the prescribed rates. In the cases of succession in business and amalgamation of companies, the predecessor in business and the successor or amalgamating company and amalgamated company, as the case may be, are entitled to depreciation allowance on the same assets, which in aggregate exceeds the depreciation allowance admissible for the previous year at the prescribed rates. It is proposed to restrict the aggregate deduction for this allowance in a year to the deduction computed at the prescribed rates and apportion the allowance in the ratio of the number of days for which the assets were used by them."
In view of the aforesaid clear position of law, we are unable to accept the contention of the learned senior Departmental Representative that the aggregate deduction in respect of depreciation allowable to the ONGC and the Corporation should not exceed the deduction calculated at the prescribed rate and it should be apportioned between them in the ratio of number of days/months for which the assets were used by them.
1.7(xi). The AO and the CIT(A) have also erred in arriving at the conclusion that the previous year of the assessee should be. treated as having ended on 31st March, 1994, as per s. 3 of the Act and the WDV of the assets falling in all the block of assets will be Nil as at the end of the previous, year, the asset had been transferred to the Corporation w.e.f. 1st February, 1994. The ONGC ceased to exist simultaneously when the undertaking of the Commission stood transferred to, and vested in favour of the Corporation by virtue of the ONGC (T.U.R.) Act with effect from the appointed date of 1st February, 1994. Thus, both these events had simultaneously taken place at the beginning of the day on 1st February, 1994. The ONGC had, therefore, rightly closed its accounts on 31st January, 1994. The previous year in relation to an assessee cannot be extended beyond the date of its existence. On the last date of the relevant previous year of ONGC i.e., on 31st January, 1994, the WDV of the assets falling in the respective block of asset has to be computed as per s. 43(6)(c) of the Act. The opening WDV can be reduced only by the moneys payable in respect of any asset sold or discarded or demolished or destroyed in the previous year. We have already discussed in details that such statutory transfer and vesting of assets in consequence of the Act of Parliament cannot be brought within the ambit of expression "sold" used in s. 43(6)(c)(i)(B). Hence, WDV cannot be treated as Nil.
1.7(xii). Depreciation allowance is granted because the building, plant and machinery, furniture, etc. depreciate through wear, tear and obsolesce. The provisions of s. 32 of the Act r/w r. 5 of IT Rules provide that depreciation shall be allowed at the prescribed rate if the asset has been used at any time during the year. Till asst. yr. 1992-93, even if the asset was used for a single day in the relevant previous year, full depreciation at the prescribed rate was allowable. From asst. yr. 1992-93 a proviso has been inserted providing that where any asset falling within a block is put to use for less than 180 days, in that previous year, the deduction shall be restricted to 50 per cent of the depreciation calculated at the prescribed rate. Such depreciation is thus allowed at full prescribed rate or at 50 per cent thereof regardless of the intensity of the user of assets. Such allowance is granted not only for wear and tear of assets on account of its user but also in view of rapid obsolence due to change in modern technology, etc. It may also be relevant here to refer to s. 6(1), (2) and (3) of ONGC (T.U.R.) Act. Sec. 6(1) of the said Act provides that where any relief, exemption has been granted to the Commission such as benefit by way of set off or carry forward of unabsorbed depreciation or investment allowance, etc. has been extended or is available to the Commission under IT Act, 1961, the same benefit shall continue to have effect in relation to the Corporation. The provisions of the said Act thus seek to protect the right of the undertaking to avail the benefit of all such deductions regardless of the succession of the undertaking of the Commission by the Corporation.
1.7(xiii). After giving our deep and thoughtful consideration to the entire relevant facts, the provisions of law and the various judgments referred to hereinbefore, we hold that the appellant ONGC is entitled to grant of depreciation as claimed by them. The AO and the CIT(A) have erroneously invoked the provisions of s. 43(6)(c) of the Act. The AO is accordingly directed to allow the same.
2. Grounds No. 2 to 2.2 and 3 to 3.2 raised in the grounds of appeal are reproduced hereunder "2. Adjustment in respect of foreign exchange fluctuations in respect of capital assets.
2.1 That the learned CIT(A), Dehra Dun, has erred in law and on the facts and circumstances of the case in disregarding the provisions of s. 43A of the IT Act, 1961, and in not allowing the appellant to adjust the actual cost as provided in this section to the extent of Rs. 36,23,14,733 on accrual basis.
2.2 That the learned CIT(A), Dehra Dun, has given no cogent reasons for disregarding the provisions of s. 43A which are clearly applicable in the light of several decisions of the Supreme Court and High Courts.
3. Foreign exchange fluctuations in respect of revenue expenses 3.1 That the learned CIT(A), Dehra Dun, has erred in law and on the facts and circumstances of the case in not allowing as business expenditure, the quantum of fluctuations in foreign exchange on accrual basis amounting to Rs. 1,15,56,31,950, which has been incurred by the appellant and which is deductible under s. 28 and s. 37(1) of the IT Act, 1961.
3.2 That the learned CIT(A), Dehra Dun, ought to have allowed the expenditure incurred by the appellant in light of the decision of the Tribunal, Delhi Bench and several decisions of the High Courts and the accounting standards laid down by the Institute of Chartered Accountants of India as well as the Account's Standard notified by the Central Government under s. 145(2) of the IT Act, 1961."
2.1. The AO has discussed the facts relating to aforesaid grounds in para 3 on pp. 4 and 5 of the assessment order, which are reproduced below :
"3. Foreign Exchange Loss As in the past, the assessee has allegedly incurred huge expenditure on account of foreign exchange fluctuation towards foreign exchange liability owned by it. This is an old disputed matter. As per the line of action adopted by the AO in the past as also for the reason that s. 37(1) speaks only of expenditure and not of valuation of any expenditure as has been done by ONGC, the claim of the notional liability which remains unascertained, open to increase or decrease depending on future parity rate of Indian currency vis-a-vis foreign currency win be disallowed. However, the claim of the assessee will be allowed to the extent the liability has been discharged during the year of accounting meaning thereby that the foreign exchange fluctuation will be allowed only on cash basis and not on accrual basis as claimed by the assessee. The same principle will be followed both in respect of revenue as well as capital components. It was be noted here that the learned CIT(A) has, in a detailed orders for the asst. yrs. 1991-92, 1992-93 and 1993-94, upheld the action of the AO as regards revenue component of the foreign exchange liability. Further his decision in regard to liability of depreciation by taking the enhanced value of assets represented by foreign exchange on accrual basis has not been accepted by the Department and a second appeal to this effect has already been filed before the Tribunal for the asst. yr. 1991-92. Moreover, the opinion of the Law Ministry unambiguouly is in favour of the action of the AO. Accordingly, for this year also, the liability on account of foreign exchange fluctuation both on revenue and capital components are allowed on payment basis as under :
A. Capital component Rs.
WDV of capital component of exchange loss
c/f from asst. yr. 1993-94 : 6,62,03,79,371
Add : Additions during the year 68,81,51,930
----------------
7,30,85,31,301
----------------
Depreciation @ 25% 1,82,71,32,825
However, for the reason that WDV of the assets is held to be Nil as discussed above, while deciding the point of depreciation, there be no further allowance even in respect of foreign exchange fluctuation relating to capital components on the same analogy that the WDV of the assets will be Nil, and thus enhanced foreign exchange liability on capital component is nothing but enhanced cost of the assets which, as discussed above, has already been held to be Nil.
B. Revenue components :
As per working given by ONGC : Rs. 1,39,48,03,857"
2.2 The CIT(A) has briefly stated the facts and decision of the AO in paras 3.1 and and 3.2 of the order. In paras 3.3 to 3.5, the gifts of written submissions dt. 7th August, 1997, and the oral submissions submitted on behalf of the assessee have been briefly stated. The CIT(A) invited comments of the AO on the written submissions of the assessee. The comments of the AO submitted vide letter dt. 26th September, 1997, have been reproduced in para 3.6 of the order. The CIT(A) has given his findings in paras 3.7 to 3.9 on pp. 11 to 13 of the order passed by him, which are reproduced hereunder :
"3.7 The submissions made by the appellant and the submissions made by the AO have been considered. I find no merit in appellant's claim that the loss being claimed in the P&L arc was based on liability that actually accrued in the asst. yr. 1994-95. There is no evidence on record to indicate that any business transaction in respect of this long-term liability took place in the accounting period relevant for asst. yr. 1994-95 or any liability was incurred for any particular sum during this accounting period. Since under mercantile system of accounting only those transactions are taken into account which specifically relate to that particular accounting year creating a definite liability whether discharge during the year or carried forward to the next year, there is no scope for non-specific, imaginary liabilities that may or may not become legal liabilities relatable to that particular accounting year. Even on accrual basis under the mercantile system of accounting a liability has first to become a legal and binding liability in a particular year so as to qualify to be treated as a deduction from the income of that particular year. Admittedly the liabilities on which the appellant is claiming foreign exchange fluctuation losses are long term liabilities generated in earlier years and remaining undischarged during the accounting period relevant for asst. yr. 1994-95. There is nothing on record to indicate that the appellant has in anyway committed itself in this year to repay the foreign long-term liabilities on the rates of foreign currency as recorded on the last date of this accounting period relevant for asst. yr. 1994-95. The enhancement of its long-term liability on notional basis as made by the appellant cannot be treated as a liability that has already accrued and is hence not allowable. The AO has on the other hand followed the correct system of accounting by allowing deduction to the appellant in respect of liabilities discharged during the year which arose on account of fluctuation in foreign exchange rate. In fact by following this method the AO has allowed a deduction of Rs. 1,39,48,03,857 which is much higher than the loss of Rs. 1,15,55,31,950 claimed by the appellant in its P&L a/c on revenue component of the foreign exchange fluctuation loss which was worked out on notional basis by the appellant.
3.8 This view finds support in several judgments quoted by the appellant where it has been clearly stated that allowability would be deemed to have accrued if the business liability had arisen in the accounting year or if a liability to a particular sum had been incurred during the accounting year. The nature of the claim made by the appellant does not fall in this category and therefore, it cannot be said that the liability as claimed by the appellant has accrued during the accounting year relevant for asst. yr. 1994-95. Admittedly the appellant has merely rewritten its books on the last date of the accounting year under the guidelines of accounting standard AS 11 of the ICAI. There is no evidence to indicate that these guidelines of ICAI conform to the law as stated in s. 37(1) and s. 43A of the IT Act. With the free float of Indian currency against foreign currency resulting in day-to-day fluctuation, the loss claimed on account of foreign exchange fluctuation must accrue within the accounting year as a result of a business transaction in that accounting year or on incurring of a liability to a particular sum during the same accounting year. There is no evidence on record to indicate that such a liability accrued during the year or was incurred during the year relevant for asst. yr. 1994-95.
3.9. The case law cited by the appellant does not apply directly to the facts of the present appeal because in the cases cited, relief was allowed either because the business transaction itself had taken place in that year or the repayment had been made in that year or there had been a currency devaluation giving rise to an additional ascertained liability during that year. Since the AO has already allowed deduction for foreign exchange fluctuation loss in respect of liabilities incurred and discharged during the year both for revenue account component and capital account component the action of the AO rejecting the claim of the appellant which was only notional in nature and did not relate to any liability of the year concerned was quite justified. The contention of the appellant is, therefore, rejected."
2.3. Shri Dastur, the learned senior advocate contended that similar points have been decided by the CIT(A) in favour of the assessee in asst. yr. 1987-88. The decision of the CIT(A) for asst. yr. 1987-88 has been accepted by the Department. He invited our attention towards the copy of self-contained note sent by the CBDT to Central Secretariat, President House, New Delhi for approval of Committee of Secretaries. The aforesaid note inter alia, contain the following :
"...... The view of the CIT(A) that exchange rate fluctuation loss arising out of loans taken to discharge liability of revenue nature seems consistent with the legal position as the liability having been incurred for the purposes of the business, any additional liability arising out of exchange rate fluctuations should be incidental to the running of business and allowable in the computation of business income. The view of CIT(A) about such loss incurred in respect of loan taken of capital nature is also justified and can be accepted. The only question is regarding the year of admissibility. One view can be-as taken by the AO-that the loss, if at all allowable, can be allowed in the year of actual repayment. The contrary view possible to be argued is one taken by the assessee that in a mercantile system of accounting the loss arises from year to year. There is no direct judicial pronouncement on the subject. Considering the issue from a practical point of view, however, it will be a simpler solution to accept the CIT(A) decision as the other view will involve disturbance in recorded position over a number of years. There is no likely to be any significant revenue implication as the possibility of exchange rate fluctuation moving in reverse directions is not quite bright. If at all any such contingency arises the AO can always resort to the provisions of s. 41(1) to recoup the loss arising out of deduction in earlier years on notional basis. Moreover, the assessee being liable to tax at a flat rate of taxation, the year of admissibility of loss loses significance particularly for a regularly profit-earning enterprise. "
2.3(i). The learned counsel further pointed out that whenever income accrued on account of fluctuations in the foreign exchange rate, the appellant has shown income on accrual basis in similar manner. He invited our attention towards the "Computation of total income" for asst. yr. 1997-98 in which "Exchange loss/gain for separate treatment - Rs. 3,856,118,042 has been added in the profit as per P&L a/c and Rs. 2,933,785,875 has been deducted on account of "Exchange loss/gain on revenue account". The details of Rs. 2,933,758,875 given in a separate schedule has also been submitted. Such a contention and the details relating to asst. yr. 1997-98 were not submitted before the AO or the CIT(A).
2.3(ii). The learned counsel placed reliance on the following judgments. The relevant extracts are reproduced below :
(a) Rajasthan Petro Synthetics Ltd. vs. Dy. CIT (1997) 60 ITD 682 (Del) "During the asst. yr. 1991-92, the assessee claimed depreciation on the additional cost involved in importing plant and machinery on account of fluctuations in the rate of exchange during the year resulting in the increased liability to the financial institutions from whom loans were taken in foreign currency for purchasing the said plant and machinery. The AO disallowed the claim in its entirety but the CIT(A) allowed it.
On Revenue's appeal Held Depreciation under s. 43A was allowable only on increased liability, which consisted of increased liability on dates of actual payment of instalments as well as the increased liability on the closing balances of loans as on 31st March, 1991, which was the last date of the previous year. Hence, there was nothing wrong in the order of the CIT(A) whereby he had directed the AO to allow the claim of the assessee.
(b) Telemecanique & Controls (India) Ltd. vs. Dy. CIT : (1998) 60 ITJ (Del) 434 (1997) 60 ITD 483 (Del).
"The system of accounting followed by an assessee is a crucial factor for allowability of expenditure and losses as also for the taxation of receipts. In the instant case, there was no doubt that the assessee's burden had increased in respect of the liability to pay the cost of the goods which it had imported admittedly on revenue account. As it followed the mercantile system of accounting it was entitled to claim the consequential loss in the year in which the devaluation took place. Sec. 43A speaks of an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset. The section refers to capital expenditure, but it nowhere envisages payment as a condition for effecting an increase or decrease in the cost of an asset for specified purposes. The words 'increase or reduction in the liability' are to be understood in the context of the method of accounting followed by an assessee. This line of reasoning would equally apply to the assessee's claim under s. 28. Therefore, the claim made by the assessee was to be allowed with directions to the AO that (i) in the year of remittance in case the assessee derived any benefit and the ultimate liability was reduced then the same would be brought to tax under s. 41(1), and (ii) in case any part of the raw material purchased still remained with the assessee then a suitable adjustment would have to be made in the valuation of closing stock to be carried over to the subsequent period.
(c) Bestobell (India) Ltd. vs. CIT (1979) 117 ITR 789 (Cal).
"Held, (i) that the contention of the Revenue that notionally the expenditure if any, incurred by or any loss accruing to the assessee by reason of the devaluation did not arise in the year of assessment cannot be accepted. The assessee maintained its accounts on mercantile basis. On devaluation of the Indian currency, the liability of the assessee immediately increased to the extent the rupee was devalued and the assessee became liable to pay and/or spend an extra amount in rupees in order to pay its dues. The liability of the assessee arose during the assessment year and cannot be said to be a contingent liability or an anticipated future loss. However, the extra expenditure, deemed or otherwise, or the loss, was inextricably connected with the assessee's indebtedness and did not arise de hors the indebtedness. Therefore, the extra amount which the assessee had to provide for as a result of devaluation cannot be considered as extra expenditure to be incurred for meeting the debt like postal expenses or bank charges or as extra expenditure resulting in a business loss of a revenue nature.
(ii) If there had been a devaluation in favour of the rupee as a result of which the assessee had to pay less to its creditors, the surplus arising would have been of capital nature and could not have been assessed in the hands of the assessee as a business profit. Conversely, as a result of the exchange rate going against the assessee, the loss which the assessee incurred cannot be held to be a revenue loss.
(iii) In the instant case it was not the contention of the assessee that it has incurred the extra expenditure in order to secure the loan. The loan had already been obtained. It was of the point of repayment that the assessee had to provide an extra amount in rupees by reason of the devaluation. Hence, it is not expenditure incurred for securing the use of money for a certain-period which could be treated as revenue expenditure.
Therefore, the Tribunal was right in holding that the amount of Rs. 2,83,614 was not deductible in computing the assessee's profits and gains of business."
(d) CIT vs. Arvind Mills Ltd. (1992) 193 ITR 255 (SC) "Sec. 43A was specially introduced in the IT Act, 1961, to provide for the treatment of the situation created by the devaluation of the rupee. It specifically enacts that the amount of increase or decrease in the liability due to exchange rate fluctuation should be adjusted against the actual cost or the capital expenditure or the cost of acquisition only in relation to the five provisions of the Act referred to in the section. Where the terms of sub-s. (1) are fulfilled in any case, it is mandatory to take the actual cost, capital expenditure or cost of acquisition at the higher or lower figure for the purposes of the provisions mentioned therein irrespective of whatever might have been the position independent of the section. The non obstante clause with which the section begins, indeed, makes it clear that, if the position had been different otherwise, it cannot prevail after the introduction of this section. Equally, even if the position would have been the same otherwise, there would be no justification to ignore or disregard the enacted provision on the ground that a specific statutory provision was not at all necessary. Once the provision is there and its terms apply, it would be applied. There is nothing in the language of sub-s. (1) of s. 48A which makes it inapplicable to a case where the change in the magnitude of the liability consequent on a change in the rate of exchange occurs during the very previous year in which the asset has been acquired.
Sec. 43A provides also for a case in which the assessee has completely paid for the plant or machinery in foreign currency prior to the date of devaluation but the variation of exchange rate affects the liability of the assessee (as expressed in Indian currency) for repayment of the whole or part of the monies borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purposes of acquiring the asset."
(e) CIT vs. Vitre Engg. Co. (1984) 150 ITR 183 (Bom) "The assessee carried on work in India as consulting engineers. It was a branch of a company in America. However, it was required to be considered a company under the Indian IT Act, 1922. Some of the employees of the assessee were American nationals who were paid salaries partly in dollars and partly in rupees. The dollar part of the salary was paid by the head office. The head office also charged the assessee for certain overhead expenses as also for the supply of designs, drawings, etc. A running account was maintained between the head office and the company and the assessee had obtained the permission of the Reserve Bank for maintenance of such account. In June, 1966, the rupee was devalued and to give effect to the changed exchange rate, the assessee credited the head office with a sum of over Rs. 7.5 lakhs and claimed it as business loss. The ITO disallowed the claim. Held, that there was a clear finding by the Tribunal that the assessee kept its accounts on the mercantile system. It was, therefore, required to provide a higher amount in terms of rupees for its liability for reimbursement. This provision was required to be made and considered in the assessment year in question, that is, for the previous year ending on 31st December, 1966. The assessee was entitled to the deduction of the full amount of Rs. 7,81,323 as a business loss during the assessment year in question."
(f) Oil India Co. Ltd. vs. CIT (1982) 137 ITR 156 (Cal) "The assessee had taken loans in sterling in England. The Tribunal found that the borrowings had been made for meeting the assessee's revenue expenditure and directly related to its business. It maintained its accounts on the mercantile system. On the question whether the repayment of Rs. 40,60,500 and the liability to pay an extra amount of Rs. 52,17,340 in the accounting year relevant to asst. yr. 1967-68 due to devaluation of the Indian rupee in June, 1966, was deductible as business expenditure, it being undisputed that the additional liability was in the nature of revenue : Held, that for the purpose of carrying on the business, the assessee borrowed the money and thereby became temporarily the owner of the fund and if the assessee had to incur an additional liability because of it, that would be a loss in connection with or arising out of the business. The amounts of Rs. 52,17,340 and Rs. 40,60,560 were, therefore, deductible. Bestobell (India) Ltd. vs. CIT (1979) 117 ITR 789 (Cal) applied in part. 11
(g) New India Industries Ltd. vs. CIT (1993) 203 ITR 933 (Guj) "Held, that when the assessee purchased assets at a price, its liability to pay the same arose simultaneously. Merely because the said liability was to be discharged in instalments it could not be said that the liability did not exist or accrue till the instalments became due and payable. It was that liability which had increased on account of fluctuation in the rate of exchange. The case of the assessee fell squarely within the sweep of s. 43A and it was thus entitled to claim the benefit of that section during the asst. yr. 1973-74."
The learned counsel strongly urged that ground Nos. 2 and 3 should be allowed.
2.4. The learned senior Departmental Representative strongly supported the order of the CIT(A) and relied upon the reasons mentioned in the assessment order. He contended that all the concerned loans are long-term loans. Repayment of some of the loans is not required to be made in the few initial years. Therefore, there is no justification for providing for the amount of different due to, fluctuations in the foreign exchange rate pertaining instalments of repayments payable in future years. He gave an illustration. Suppose the assessee borrowed a long-term loan of 100 million dollars in foreign currency in the year 1985. No repayment is to be made during first 4 years. The said loan is payable in next 10 years thereafter. In 1986, there were fluctuations in the foreign exchange rate. Is it legally possible to say that the entire liability due to such fluctuations had accrued in the year 1986 in respect of entire loan repayable within 14 years. No instalment is payable in 1986. How any liability can be said to have accrued in the year 1986. The learned senior Departmental Representative submitted that liability accrued only when repayment instalment becomes due and payable. The AO has already allowed deduction of higher amount on cash basis. He contended that we are presently living in the regime of floating and constantly fluctuating exchange rate. The rate is fluctuating every hourly. He submitted that the various judgments relied upon by the learned counsel relate to old period. The scenario relating to foreign trade has now changed. There is an need of caution before applying the ratio of judgments pertaining the old period in the context of present facts.
2.4(i). The learned Senior Departmental Representative placed reliance on the following judgments. The relevant extracts are reproduced below :
(a) CIT vs. Indian Overseas Bank (1985) 151 ITR 446 (Mad) "The assessee-bank dealing in foreign currencies on behalf of its customers, had certain foreign exchange contracts entered into by it which were not settled on the close of the accounting period ended on 31st December, 1967, relevant for the asst. yr. 1968-69. As the contracts were in different foreign currencies, the loss or profit arising on the outstanding contracts was estimated, based on the rate of exchange as on the closing date. In view of the devaluation of the Sterling in November, 1967, the loss arising on amount of outstanding foreign exchange contracts based on the rupee-sterling exchange rate as on 31st December, 1967, amounted to Rs. 9,20,125. The assessee-bank made provision for this amount in its accounts for the said accounting period on the ground that this amount had to be provided for, before ascertaining the profit and, accordingly, claimed deduction of the said amount from the profits earned by it. The ITO was of the view that as the amount claimed was purely an anticipated or unascertained loss and not an actual loss, the same could not be allowed as a deduction. Held that it cannot be disputed that as against the profits earned in the accounting year only the actual loss incurred can be deducted and not any probable or possible loss. As there was no settlement of the outstanding contracts in the accounting year in question, the amount claimed could only be considered to be a notional or anticipated loss and such notional or anticipated loss could not be allowed as a deduction. The Tribunal was, therefore, in error and the amount claimed could not be allowed as a deduction."
(b) CIT vs. Ashok Iron & Steel Rolling Mills (1993) 199 ITR 815 (All) "In the mercantile system, deduction can be made only in the year in which the liability to pay accrues. And it accrues only when the liability crystallises or becomes ascertained.
Held, that it was only when the Assistant Labour Commissioner passed the order on 31st December, 1973, determining the dispute as to the categories in which the various employees fitted and should be classified that the liability to pay salary and wages accrued. The assessee, therefore, rightly deducted the amount of Rs. 18,813 in the year in question which was the year in which the liability to pay materialised and was actually paid.
"2.4(ii). The learned Senior Departmental Representative further submitted that liability accrues only when it is legally enforceable and becomes due for payment. The assessee itself was claiming foreign exchange rate difference in the past, only when such liability was discharged.
2.4(iii). The learned. Senior Departmental Representative pointed out that the assessee is not dealer of Foreign Exchange. He also drew our attention to last para of the decision (1998) 60 TTJ (Del) 434 : (1997) 60 ITD 483 (Del) (supra) to show that relief granted by the Tribunal was not absolute or unconditional. The Tribunal directed the AO to first verify the relevant facts, and then decide the matter accordingly. The learned Senior Departmental Representative strongly urged that the order of the CIT(A) should be confirmed in relation to these grounds also.
2.5. We have carefully considered the submissions made by the learned representatives.
2.5(i). We would first like to deal with the "Adjustment in respect of foreign exchange fluctuations in respect of capital assets claimed at Rs. 36,23,14,733 on accrual basis". The provisions of s. 43A contains a special, provision consequential to changes in rate of exchange of currency. The section starts with the non obstante clause that notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purpose of business and in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset, the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or as the case may be, deducted from the "actual cost" as defined in s. 43(1) and in relation to the amount of capital expenditure referred to in other sections enumerated in s. 43A. This section enabling capitalisation of the loss due to fluctuations in foreign exchange rate overrides all other provisions of the Act.
2.5(ii). The Hon'ble apex Court in the case of Arvind Mills Ltd. (supra) has held that s. 43A was specifically introduced in the IT Act, 1961 to provide for the treatment of the situation created by the devaluation of the rupee. Where the terms of s. 43(1) are fulfilled in any case, it is mandatory to take the actual cost of assets or the cost of acquisition at the higher or lower figure for the purposes of the provisions referred to in s. 43A. The non obstante clause with which the section begins, indeed makes it clear that, if the position had been different otherwise, it cannot pravail after introduction of this section. In the case of New India Industries Ltd. (supra) the Hon'ble Gujarat High Court, following the judgment of Hon'ble Supreme Court in the case of Arvind Mills Ltd. (supra) have held that merely because the said liability was to be discharged in instalments, it could not be said that the liability did not exist or accrue till the instalments became due and payable. The case of the assessee falls squarely within the sweep of s. 43A in relation to the increase of liability on account of fluctuations in the rate of exchange on accrual basis. The Tribunal, Delhi, in the case of Rajasthan Petro Synthetics Ltd. vs. Dy. CIT (supra) by following the judgment of Hon'ble Supreme Court in case of Arvind Mills Ltd. (supra) and other judgments of the High Courts referred to in the said decision, has held that depreciation under s. 43A was allowable on the increased liability, which consisted of increased liability on dates of actual payment of instalments as well as the increased liability on the closing balances of loans outstanding as on the last date of the previous year.
In view of the clear provisions of s. 43A and the judgments referred to hereinbefore, we are of the opinion that the assessee is entitled to adjust the 11 actual cost" of assets by the amount of foreign exchange fluctuations in respect of the capital assets on accrual basis, as claimed by them.
2.6. We will now deal with the assessee's claim for grant of deduction of Rs. 1,15,56,31,950 representing the additional liability on account of foreign exchange fluctuations in respect of revenue expenses on accrual basis.
2.6(i). The AO has allowed a deduction of Rs. 1,39,48,03,857 on account of fluctuation in the exchange rate in respect of liabilities discharged by the appellant in the previous year under consideration. The AO has thus allowed deduction of a higher amount of loss due to fluctuation of the foreign exchange rate at Rs. 1,39,48,03,857 on payment basis as against the claim of Rs. 1,15,56,31,950 made by the assessee on accrual basis. The learned counsel relied upon the decision of Tribunal, Delhi in (1998) 60 TTJ (Del) 434 : (1997) 60 ITD 483 (Del) (supra). In that case, the Tribunal had inter alia, directed the AO to ascertain whether any part of the raw material purchased still remained with the assessee and if so, he should make suitable adjustment in the valuation of closing stock. The facts of that case have not been fully incorporated in the said reported decision. Hence, it cannot be said whether the facts of the present case are similar or different. In the present case, the CIT(A) has mentioned in para 3.7 of his order that "Admittedly the liabilities on which the appellant is claiming foreign exchange fluctuation losses are long-term liabilities generated in earlier years and remaining undischarged during the accounting period relevant for asst. yr. 1994-95. The CIT(A) in para 3.8 of his order has further observed that the loss claimed on account of foreign exchange fluctuation must accrue within the accounting year as a result of a business transaction in that accounting year. There is no evidence on record to indicate that such a liability accrued during the year in relation to any business transaction of the year under consideration.
2.6(ii). The,, additional liability arising due to fluctuations in foreign exchange rate relating, to revenue item e.g., relating to import of raw material may form part of the purchase price of the raw material. But the main question will be as to which is the appropriate year for claiming such deduction. In a case where the increase in liability occurs in a subsequent accounting year, a question may conceivably arise as to whether the assessee is entitled to reopen its accounts for the earlier year when the raw material was imported, consumed and was represented by the corresponding credit by way of sale or closing stock. According to the mercantile system of accounting, the additional cost of raw material should ordinarily form part of the purchase price of raw material of the year in which such raw material was imported, consumed and represented by corresponding sales or closing stock. That may require reopening of the accounts of earlier year and then to make necessary adjustments in respect of increased liability in that very year. Sec. 43A of IT Act, 1961 was enacted to forestall such a claim in relation. to loss on account of fluctuations in foreign exchange rate in respect of capital assets. It seeks to ensure that the enhanced liability is added to the actual cost of the asset only in the subsequent previous year in which such liability accrued. Such a view is fortified by the observations made by the Hon'ble Supreme Court in the case of CIT vs. Arvind Mills Ltd. (supra). In the absence of a provision similar to s. 43A in respect of loss due to fluctuations in foreign exchange rate relating to repayment of loan taken in foreign exchange for purchase of revenue items such as raw material, consumable tools, etc., such loss cannot be allowed in a year other than the year in which the raw material, etc. was purchased or in the year when the liability for repayment is actually discharged.
2.6(iii). The onus lies on the assessee to prove his claim for grant of deduction in respect of any claim, business expenditure or deduction in a particular year. In the present case, the assessee did not furnish necessary documents to prove its claim for deduction of Rs. 1,15,56,31,950 on accrual basis. When the relevant loan in respect of which the loss due to foreign exchange fluctuations on accrual basis is being claimed, were raised, when the items of revenue nature were imported; when corresponding sales or closing stock were shown; what are the terms of respective contracts. Neither such details nor corresponding documents were submitted before the Departmental authorities nor these were submitted before us. The appellant has thus failed to prove how such loss due to fluctuations in foreign exchange rate on accrual basis is allowable in the year under consideration.
2.6(iv). A perusal of the balance sheet as on 31st January, 1994 (p. 94 of Paper Book) shows that the assessee has shown a sum of Rs. 13,18,65,26,761 as "deferred revenue expenditure-exchange loss" in the assets side of the balance sheet. It is not known whether the claim of such loss of Rs. 1,15,56,31,950 claimed on accrual basis relating to repayment instalment payable in future years is a part of such deferred revenue expenditure. The P&L a/c shows that a sum of Rs. 5,10,96,27,090 was debited as an expenditure in the P&L a/c under the head "Adjustment of exchange difference" whether the claim of Rs. 1,15,56,31,950 in question is a part of this amount is also not known. No details in this regard have been shown to us. If the assessee has shown such amount in the assets side of the balance sheet as part of deferred revenue expenditure, how deduction thereof is allowable as a revenue expenditure.
2.6(v). It is an admitted and undisputed fact that the AO has allowed deduction of Rs. 1,39,48,03,857 in respect of loss due to fluctuations in the foreign exchange rate relating to liabilities discharged by the appellant in the previous year under consideration. The said deduction has been allowed on actual payment basis, then how the appellant can make a further claim on the basis of mercantile system of accounting in respect of Rs. 1,15,56,31,950 on accrual basis, being the liability which is to be discharged in future. On a careful consideration of the entire relevant facts and material existing on records, we are of the view that the assessee has failed to discharge the burden of proving the allowability of the said sum of Rs. 1. 15,56,31,950 on accrual basis in the year under consideration. In view of the aforesaid facts and discussions and in view of the elaborate reasons by the AO in the assessment order and the reasons given in the order of the CIT(A), we do not find any justification for interfering with the view taken by the CIT(A) in relation to this ground. The order of the CIT(A) in relation to the confirmation of disallowance of Rs. 1,15,56,31,950 is upheld.
3. Ground No. 4 reproduced below :
"4. Expenditure on round bidding :
That the learned CIT(A), Dehra Dun, has erred in law and on the facts and circumstances of the case in upholding the assessment order of the AO wherein he disallowed 10 per cent of the round bidding expenses of Rs. 65,62,980, despite the fact that the entire expenditure was incurred on the publication of tender documents, advertisement thereof, photocopying, stationery and printing in connection with invitation of bids for development and production from discovered oil/gas fields."
3.1. The AO has observed as under in Para 4 of assessment order :
"4. Round bid expenditure An expenditure of Rs. 65,62,983 has been debited as relating to round bid, the details of which have not been furnished. However, it has been claimed that these expenses are relating to preparation of tenders, etc. It is, however, seen that a portion of these expenses have been disallowed in the past and were confirmed in appeal. Accordingly, 10 per cent of such expenses are disallowed which works out to Rs. 6,56,298."
3.2. The CIT(A) after considering the oral and written submissions made on behalf of the assessee and by the AO confirmed the said disallowance.
3.3. It was explained on behalf of the assessee before the Departmental authorities as well as before us that the Commission incurred the entire expenditure of Rs. 65,62,983 on publication of tender documents advertisements, photo-copying, stationery and printing, etc. in connection with invitation of bids from foreign bidders for development and production from discovered fields. These expenses were booked under the account head "Round bid expenditure". The AO made an ad hoc disallowance @ 10 per cent of such expenses on the basis of past history. The appeals for the earlier years are stated to be still pending. This appeal being a stay granted appeal has been fixed out of turn. The disallowance of 10 per cent was made on the basis of the presumption that expenses incurred under this head of account might consist of some amount spent for entertainment of foreign bidders. The learned counsel also pointed out that a separate head of account of entertainment expenses has been maintained. The AO has not pointed out any instance of expenditure of disallowable nature debited in the said account. The expenses are supported by regular books of accounts and other records maintained by the Commission. The accounts have duly been audited by the statutory auditors. We have gone through the auditor's report dt. 7th September, 1994 (p. 134 and 136 of paper book). The auditors in that report have also certified that the company has an adequate internal audit system commensurate with the size and nature of its business. The AO has added back a sum of Rs. 59,42,294 in respect of entertainment expenses for separate consideration and has allowed deduction on account of entertainment expenses to the tune of Rs. 29,76,147 as claimed by the appellant, while computing the taxable income. On a careful consideration of the relevant facts, we are of the considered opinion that there is no justification for making any such ad hoc disallowance @ 10 per cent out of "Round bid expenditure". The AO is accordingly directed to delete the disallowance of Rs. 6,56,298.
4. Ground No. 5 raised by the appellant reads as under :-
"Gift received under United Nations Development Programme That the learned CIT(A), Dehra Dun, has erred in law and on the facts and circumstances of the case in upholding the assessment order of the AO wherein he has treated an amount of Rs. 2,29,40,751 as taxable business income of the appellant despite the fact that this amount represents the value of assets received as gift which has been certified by the auditors of the appellant and which is apparent from the audited annual accounts placed on the records of the AO.
4.1. The AO has given the following findings in para 6 of the assessment order :
"Equipments Received as Gift Rs. 2,29,40,751 An amount of Rs. 2,29,40,751 has been carried to the P&L Appropriation Account on account or equipments received as gift. Obviously, this has not been credited to the P&L a/c. When called upon to explain, the representative of the assessee have submitted that as the receipt is of capital equipments, the same is not taxable. It may be noted here that neither any details of such receipts have been furnished nor have any papers evidencing gift have been shown. It remains conclusive that the aforesaid amount is a non-refundable receipt which bears the character of an income and hence is included in the total income of the assessee. "
4.2. The CIT(A) confirmed the aforesaid addition by observing as under in para 6.4. of his order :
"6.4. The written, submissions of the appellant and the AO and the oral arguments have been considered. Since there is no evidence of gift and as the equipment was received in the course of appellant's business activity with the joint partner and since all expenses on this activity must have been taken as revenue expenditure by the appellant, the appropriation of equipment left behind by foreign parties will also be revenue receipt, particularly when there is no evidence to the contrary. In the absence of any material on record it is not clear whether the equipment was received as a gift on by way of a settlement of account between joint partners on the completion of the project. I, therefore, find no force in appellant's argument and the addition is being confirmed.
"4.3. The learned senior advocate invited our attention towards an application dt. 23rd July, 1998, submitted on behalf of the assessee for entertaining additional evidence under r. 29 of the ITAT Rules in support of ground Nos. 5 and 6. The additional evidence sought to be adduced in support of ground No. 5 are the following documents :
"(a) Copy of transfer of title of non-expendable supplies and equipments from the United Nations Development Programme to the Government of India along with its Annexure giving therein the details of the supplies and equipments.
(b) Letter dt. 31st January, 1997, of United Nations Department or Development Support and Management Services, New York, USA."
It has been further stated in the said application that :
"The above documents could not be filed before the authorities below because they could not be located earlier in view of the fact that the offices of the appellant are situated at different and distant places such as Mumbai, Ahmedabad, Ankleshwar, Mehsana, Sibsagar, Jorhat, Rajamundry, etc. and further its records are also voluminous, but are very relevant to decide the issue. To do justice in the matter as a final fact-finding Court, it will be necessary for the Hon'ble Tribunal to examine the documents now being produced by the appellant which also go to the root of the matter."
4.3(1). The learned senior. Departmental Representative did not raise any objection to the entertainment of aforesaid additional evidence.
4.3(ii). After considering the submissions made by the learned representatives, and after considering the admissibility of such evidence in the light of provisions contained in r. 29 of ITAT Rules, we are inclined to admit the said additional evidence.
4.3(iii). The learned Senior Advocate (sic) gifts of equipments received by the appellant are capital receipts not liable to tax. He placed reliance on the decision in the case of Rasi Exports (P) Ltd. vs. ITO (1981) 12 TTJ (Mad) 239. The Madras Bench of the Tribunal held as under in para 5 of its order :
"5. As rightly pointed out on behalf of the assessee, there is nothing in the record to show that the supply of the machine free of cost by the foreign buyer was pursuant to an agreement either tacit or written. If for example, there has been some under-invoicing of goods and to make up for the under-invoicing some machines, were supplied then the value of the machine so supplied could certainly be regarded as income because the value of the machine in such case takes the character of sale proceeds. That is not the case here of the Revenue at all. An assessee may receive machines without paying any value for it. The receipt of the machine may be in the course of the business. Still the value of the machine received could not be regarded as trading receipts or income of the assessee. All that can arise in such a case is what should be the value of those assets for allowing depreciation. Otherwise, the value of such machines could not be regarded as income unless the circumstances assumed above had been proved to be in existence. The CIT(A) is, in our opinion, not correct in saying that because the gifts are repeating they would constitute business receipts. Since it is possibly to envisage for a businessman to receive machinery without paying any price for it and yet the value of that machinery would not constitute his taxable income, the view taken by the CIT(A) cannot be said to be the correct view in law. We are, therefore, of the opinion that the view taken by the Tribunal in the earlier year is still the correct view and we prefer to follow it. So long as there is clear and well-recognised distinction between capital receipts and revenue receipts, the capital receipts cannot be converted into revenue receipts or vice versa merely because of the circumstances of repetition. In each case, the character of the receipt has to be judged from the surrounding circumstances. The machine received by purchase or the machine received free of cost would make no difference insofar as its character is concerned. In both the cases, it is an acquisition of a capital asset. In this case, it is an acquisition of a capital asset. In the case of the former, there was some capital outlay; in the case of the later there was no capital outlay. For the lack of capital outlay, the capital asset cannot become a revenue item unless it is shown that capital asset was received as part of the consideration on revenue account which again takes us to the starting point, namely, that there ought to be in the course of these export transactions some sort of under-invoicing or understanding by which the assessee has received the machine to make up for the balance of the sale proceed. We have repeated this point only to emphasise that unless this factor in proved we find no possibility of treating the value of the machine received to be on revenue account. We, therefore, hold that the view taken by the CIT(A) is not correct and we reverse it."
4.3(iv). The learned senior Departmental Representative relied upon the reasons mentioned in the assessment order and in the order of the CIT(A).
4.3(v). We have carefully considered the rival submissions made by the learned representatives and have perused the orders of the Departmental authorities, the statement of facts annexed with the appeal and the documents submitted along with the application for entertaining additional evidence.
4.3(vi). The statement of facts submitted along with the appeal contain the following facts :
"9. Inclusion of equipment received as gift in taxable income :
The Commission, being a highly capital intensive entity, was engaging non-resident contractors for obtaining various services and also participated in various common research programmes. The equipments used by the contractors/other participants of common research programmes were gifted by them to the Commission on completion of the tenure of the contract for continuation of the programme undertaken previously either by both the Commission and the contractor or the contractor individually. Therefore, such type of receipts are "capital receipts" and are out of the purview of "Income" under the IT Act, 1961. The AO has rejected our contention, treated the same as "Income" and included it in the taxable income for the year. The details of the equipments received as gifts during the previous year, being research equipment given by United Nations Development Programme to our Production Research Centre - IOGPT at Mumbai, are as under : (a) fittings for hooking up of equipment, Waglok tube fittings, valves & tubings, (b) Millipore Filter Assembly with filter, pre-filter 200 units. (c) Gas Chromatograph. (d) S. S. Pressure Regulators. (e) Acid Reaction Test Apparatus. All these equipments are exclusively for research purposes, for maintenance and enhancement of production.
4.3(vii). Annexure A annexed with the application dt. 23rd July, 1998 for entertaining additional evidence is the copy of Transfer of Til (sic) non-expendable supplies and equipment from the United Development Programme to the Government of India dated (sic) confirming supplies and equipments representing assistance of the United Nations Development Programme to the Government of India in connection with the Petroleum Engineering Project aggregating to US 89,25,585.15. Annexure A/1 and A/2 gives the details of various equipments with full particulars inter alia giving dates of shipping and date of receipt of various equipments under the said Development Programme of the United Nations. The various dates of receipt of equipments given in Annexes A-1 and A-2 show that various equipments were received between 1st December, 1988, to 1st January, 1991, and, therefore, the equipments were shipped on 1st June, 1994, which were received on various dates in the months of August, and September, 1994. No equipments were received under the United Nations Development Programme during the relevant period from 1st April, 1993, to 31st January, 1994, relating to the previous year of the Commission under consideration. It is beyond comprehension as to how these documents produced by way of additional evidence support the receipt of any equipments by way of gifts in the period under consideration.
4.3(viii). The aforesaid facts and discussions clearly reveal that the appellant has not submitted the relevant documents, details and material in relation to the points raised to ground No. 5 in the absence of which it cannot be decided as to whether the principles laid down in the case of Rasi Exports (P) Ltd. (supra) can be applied on the facts of the present case. In the interest of justice and fairness, we consider it is just and proper to set aside the orders of the CIT(A) and that of the AO in relation to this ground and restore the matter back to the AO so that relevant facts may be correctly ascertained and the question relating to its taxability or otherwise may be examined afresh in accordance with the provisions of law and the decisions as may be cited on behalf of the assessee before the AO. The AO may also examine the relevance of the additional evidence referred to above in relation to the assessee's claim. The assessee is being granted one more opportunity to produce necessary details and evidence in support of its claim. The aforesaid point will be decided afresh by the AO after providing reasonable opportunity to the assessee.
5. Ground No. 6 raised by the appellant is reproduced hereunder :
"6. Contributions to Panvel Municipality, Maharashtra State Electricity Board and Gujarat Electricity Board That the learned CIT(A) Dehra Dun, has erred in law and on the facts and circumstances of the case in confirming the additions made by the AO in respect of contribution made by the appellant to Panvel Municipality, Maharashtra State Electricity Board and Gujarat Electricity Board which were for obtaining additional electric lines, electric sub-stations and laying of roads which were necessary for the business of the appellant but which assets were owned by the aforesaid authorities."
5.1. The AO has disallowed a sum of Rs. 1,62,29,398 being expenditure on capital assets vide para 3 on pp. 5 and 6 of the assessment order. Para No. 3 has been wrongly mentioned in assessment order, which in fact should be para No. 4, as the preceding para dealing with "Foreign exchange loss" has also been marked as para No. 3. The IInd para marked as para No. 3 relating to this point is reproduced hereunder :
"3. Expenditure on capital assets : Rs. 1,62,29,398 :
After scrutinising details filed by the assessee, it has been noticed that an amount of Rs. 1,62,29,398 has been debited to the P&L a/c on account of expenditure which is not represented by assets. During the discussion, it has been clarified by the representative of the assessee that the above expenditure is in relation to those capital assets which are not owned by the assessee but expenditure has been wholly and necessarily in connection with conduct of assessee's business. Nonetheless expenditure being capital in nature, same is not permissible as deduction and is, accordingly, disallowed. Assessee is also dis-entitled to depreciation in respect of above capital expenditure for the reason that it is devoid of ownership."
5.2. The CIT(A) vide para 7.4 of his order has confirmed the said addition by observing as under :
"7.4 The written submissions of the appellant and of the AO and the arguments of. the learned counsel for the appellant and the AO have been considered. Since the expenditure was claimed by the appellant, the onus was on the appellant to prove that the expenditure was incurred for the business activity of the appellant and that the expenditure was necessary for earning income and that the expenditure did not have any other character. As argued by the AO the appellant had not furnished any document to support its contention that the expenditure was a business expenditure and hence the claim of the appellant cannot be accepted. The addition is, therefore, being confirmed."' 5.3. Shri Dastur, the learned senior advocate invited our attention towards the application dt. 23rd July, 1993, for entertaining additional evidence in support of ground No. 6. The additional evidence sought to be adduced in relation to aforesaid ground are the following documents :
(i) letter dt. 26th September, 1986, from Maharashtra State Electricity Board along with receipt dt. 19th November, 1986, for Rs. 3,65,00,000.
(ii) letter dt. 24th September, 1987, from Maharashtra State Electricity Board along with receipt dt. 15th February, 1988, for Rs. 1,50,00,000.
Similar reason for entertaining the aforesaid additional evidence have been given, as were given for entertaining additional evidence in support of ground No. 5, which have been reproduced hereinabove. The learned Senior Departmental Representative did not raise any objection to the entertainment of aforesaid additional evidence. In view of reasons given while entertaining additional evidence in support of ground No. 5, we entertain the additional evidence submitted in relation to ground No. 6 also.
5.4. The learned counsel invited our attention towards the facts stated in the statement of facts annexed with the appeal and also relied upon the following decisions, the relevant extracts of which are reproduced hereunder :
(a) CIT vs. Associated Cement Companies Ltd. (1988) 172 ITR 257 (SC) "Held, affirming the decision of the High Court, (i) that since the installations and accessories were the assets of the municipality and not of the respondent, the expenditure did not result in bringing into existence any capital asset for the company;
(ii) that the advantage secured by the respondent by incurring the expenditure was absolution or immunity from liability to pay municipal rates or taxes for a period of 15 years; if these liabilities had to be paid, the payments would be been on revenue account; and, therefore, the advantage secured was in the field of revenue and not capital;
(iii) that, therefore, the expenditure was deductible under s. 10(2)(xv) of the Indian IT Act, 1922, in computing the respondent's business profits."
(b) Lakshmiji Sugar Mills Co. Ltd. vs. CIT (1972) 82 ITR 376 (SC) "The assessee, a private company carrying on the business of manufacture and sale of sugar, paid to the Cane Development Council certain amounts by way of contribution for the construction and development of roads between the various sugarcane-producing centres and the sugar factories of the assessee. This expenditure was incurred under a statutory obligation for the development of roads which were originally the property of the Government and remained soon after the improvement had been done. There was no finding that the roads were to be altogether newly made or that the assessee would get an enduring benefit from those roads : Held, that the expenditure was not of a capital nature and had to be allowed as an admissible deduction in computing the profits of the assessee's business. The expenditure was incurred for the purpose of facilitating the running of its motor vehicles and other means employed for transportation of sugarcane to its factories and was, therefore, incurred for running the business or working it with a view to producing profits without the assessee gaining any advantage of an enduring benefit to itself."
5.5. The learned senior Departmental Representative relied upon the reasons mentioned the assessment order and the order of the CIT(A).
5.6. We have carefully considered the submissions made by the learned representative of the parties and have perused the orders of the Departmental authorities and all other documents and judgments to which our attention was drawn during the course of hearing. .
5.7. The Appellant has mentioned the following facts in para 11 of the statement of facts annexed with the appeal :
11. Disallowance of expenditure on items not owned by appellant and other expenses This expenditure is mainly on construction of roads and on transmission lines. All this expenditure is incurred by the appellant to keep its business functioning smoothly. If such expenditure is not incurred by ONGC then operations will be hampered resulting in decline in revenue. The expenditure which has resulted in the capital assets e.g. roads, transmission lines, etc. is not owned by the appellant but is owned by the Panvel Municipality, Maharashtra State Electricity Board and Gujarat Electricity Board. The details of the expenses are given below :
Particulars Amount
Rs.
(a) Maharashtra State Electricity Board
Line at Uran 73,00,000
(b) Maharashtra State Electricity Board
Line at Panvel 32,04,144
(c) Electric sub-Station in Ankleshwar,
Gujarat 55,12,685
(d) Construction/improvement of road at
Panvel 2,12,569
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Total 1,62,29,398
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5.8. The additional evidence submitted on behalf of the assessee are copies of letters dt. 26th September, 1988, and 24th September, 1987, of the Maharashtra State Electricity Board addressed to the assessee. Letter dt. 26th September, 1996, relates to the requirement of extending special 220 KV lines from proposed sub stations of the Board to the premises of the assessee at Uran Complex. The Electricity Board had required the appellant to pay a sum of Rs. 3,65 crores for providing various facilities to meet the bulk load requirement of 60MW requiring extending of special 220 KV lines. The demand of Rs. 3.65 crores was paid on 17th November, 1986, vide Cheque No. 85493 dt. 17th November, 1986. Letter dt. 24th September, 1987, of Maharashtra State Electricity Board relates to power supply at residential complex of ONGC and Panvel. The Board required ONGC to pay Rs. 155 lakhs to M.S.E.B. vide aforesaid letter. The amount of Rs. 1,50,00,000 was paid by cheque No. 466035 dt. 12th February, 1988. The AO had no opportunity to examine the relevance of the aforesaid documents in,, relation to the aggregate expenditure of Rs. 1,62,29,398 claimed as deduction in the year under consideration. The additional evidence produced on behalf of the assessee relate to the payments made in November, 1986, and February, 1988. How those documents relate to the expenditure of Rs. 1,62,29,398 claimed in the year under consideration covering the period from 1st April, 1993, to 31st January, 1994 could not be examined by the AO as the relevant details and documents were not submitted before the AO or the CIT(A).
In view of the aforesaid facts, we consider it just and proper to set aside the order of the CIT(A) and the order of the AO in relation to this point also and restore the matter back to the AO for deciding the issued afresh after ascertaining the relevant facts by examining the relevant documents and evidence, as may be submitted on behalf of the assessee before him. The onus is on the assessee to support its claim for grant of deduction in respect of any expenditure or deduction. The AO will, however, keep in mind the principles of law laid down by the Hon'ble apex Court in the aforesaid judgments relied upon by the learned counsel while deciding the said point afresh. The AO will conduct necessary probe and investigation and ascertain the true and correct facts, and then decide the issue afresh in accordance with the provisions of law and after giving proper opportunity to the assessee.
6. In the result, the appeal is treated as partly allowed for statistical purposes.