Commissioner of Income Tax vs Coromandel Fertilisers Ltd.

At the instance of the Commissioner, Hyderabad, the following questions of law are referred u/s 256(1) of the income tax Act, 1961 (''the Act'') :

Whether, on the facts and in the circumstances of the case, the depreciation and development rebate are allowable on the cost of roads and if so whether by treating them as plant or building ?

Whether, on the facts and in the circumstances of the case, development rebate is allowable on the enhanced cost of plant and machinery due to the devaluation?

Whether in computing the disallowable perquisites u/s 40(a) (v), the perquisites relating to employees whose salary is exempt from tax u/s 10(6) (vii) of the income tax Act, 1961, should be excluded ?

Whether in working out the capital employed for purposes of section 80J, liabilities need not be deducted from the assets employed in the undertaking as provided under rule 19A and also whether the average capital employed by the assessee-company should be taken into account for the purpose of rule 19A and not the capital as on the first day of the accounting periods?

These questions arise out of the consolidated order of the Tribunal dated 30-7-1976 in IT Appeal Nos. 395 and 68 (Hyd.) of 1975-76 and IT Appeal Nos. 445 and 446 (Hyd.) of 1975-76 and from the subject-matter of RC No. 144 of 1977. IT Appeal No. 68 (Hyd.) of 1975-76 relates to the assessment year 1968-69. IT Appeal No. 395 (Hyd.) of 1975-76 relates to the assessment year 1969-70. IT Appeal No. 445 (Hyd.) of 1975-76 relates to the assessment year 1969-70 and IT Appeal No. 446 (Hyd.) of 1975-76 relates to the assessment year 1970-71.

In IT Appeal No. 396 (Hyd.) of 1975-76 relating to the assessment year 1970-71, the following two questions are referred at the instance of the revenue :

Whether, on the facts and in the circumstances of the case, the depreciation and development rebate are allowable on the cost of roads and if so whether by treating them as plant or building?

Whether in working out the capital employed for the purpose of section 80J, liabilities need not be deducted from the assets employed in the undertaking as provided under rule 19A and also whether the average capital employed by the assessee should be taken into account for the purpose of rule 19A and not as on the first day of the account period?

In respect of the assessment, at the instance of the assessee, the following question is referred :

Whether, on the facts and in the circumstances of the case, the written down value in rule 19A(2) (i) should be taken as ''written down value'' as defined in section 43(6) of the income tax Act, 1961?

These three questions form the subject-matter of RC No. 82 of 1978. Question No. 1 in RC No. 82 of 1978 and Question No. 1 in RC No. 144 of 1977 are identical and Question No. 2 in RC No. 82 of 1978 is the same as Question No. 4 of RC No. 144 of 1977.

Coromandel Fertilisers Ltd. is a company registered under the Companies Act, 1956, having its registered office at 126, Sarojini Devi Road, Secunderabad. It was incorporated on 16-10-1961. The main object of the company is the manufacture of fertilisers at its factory to be erected at Visakhapatnam. It is common ground that it is a newly established industrial undertaking entitled to the benefit u/s 80J of the Act. The previous year for the assessee up to the assessment year 1969-70 was the year ending with 30th September. It was changed to calendar year ending with 31-12-1969. Thus, for the assessment year 1969- 70 the year of the petitioner is the year ending with 30th September and for the assessment year 1970-71 the previous year is from 1-10-1968 to 31-12-1969 and, thereafter, the calendar year is the previous year.

Even by the relevant assessment year, the company had not completed setting up its manufacturing facility at Visakhapatnam and hence did not go into production. The company, however, purchased and sold fertilisers during the year. No other activity except erection of the factory at Visakhapatnam was going on. The company in its return claimed depreciation on the amount of Rs. 5,61,55,708 which includes the expenditure incurred on laying roads laid within the factory area as ''plant'' or in the alternative as ''building''. The assessee also claimed development rebate on the expenditure incurred for laying roads within the factory.

It also claimed Rs. 6,35,400 paid to EID Parry as consideration for the purchase of technical know-how pertaining to acquisition of knowledge and experience in the field of agronomy and agricultural practices. The ITO disallowed the claim for depreciation on roads. He held that they can neither be treated as ''plant'' nor as ''building''. The AAC rejected the claim of the assesse to treat the roads as ''plant'' and allowed depreciation treating them as ''buildings''. The assessee carried the matter in appeal to the Appellate Tribunal and claimed that ''roads'' constitute ''plant''. The Tribunal by its order dated 2-8-1976, disposing of IT Appeal Nos. 445, 446 and 395 and 68 (Hyd.) of 1975-76 relating to the assessment years 1968-69, 1969-70 and 1970-71, held that the roads owned by the assessee-company should be treated as ''plant'' and depreciation should be allowed under the provisions of the Act on that basis. This forms the subject-matter of Question No. 1 both in RC No. 144 of 1977 and RC No. 82 of 1978.

In respect of buildings, machinery, plant or furniture owned by the assessee and used for the purpose of business or profession, deductions towards depreciation as mentioned in section 32 of the Act are allowed subject to the provisions of section 34 of the Act. The depreciation that is allowable on buildings, machinery, plant or furniture shall be such percentage of the written down value thereof as may in any case or class of cases be prescribed. The depreciation allowable u/s 32 in respect of ''buildings'' is less than the depreciation admissible in case of ''plant''. For the purpose of sections 28 to 41 of the Act, which deal with the profits and gains of business or profession, certain special definitions of the expressions are given in section 43 of the Act. Section 43(3) defines ''plant'' as under:

''plant'' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of business or profession;

This definition is an inclusive definition and is not exhaustive. What may not in ordinary parlance be treated or understood as ''plant'' for the purpose of sections 28 to 41 and more precisely for the purpose of calculating the depreciation allowable u/s 32, are included under this definition : so much so ships, vehicles, books, scientific apparatus and surgical equipment are specifically included in the definition of ''plant'' provided they are used for the purposes of business or profession. What is important is that these different items which are included in the definition of ''plant'' must in fact be used for the purposes of business or profession. But what exactly the term ''plant'' connotes has to be determined on a consideration of all the facts and circumstances of the particular business and nature of the item which is claimed as ''plant'' attracting depreciation allowable u/s 32 read with the rules framed thereunder. In this case, the assessee-company claims that ''roads'' laid within the premises of the assessee''s fertiliser project at Visakhapatnam, i.e., Coromandel Fertilisers Ltd., constitute ''plant'' and depreciation should be allowed on that basis and not as ''buildings''. The project of the assessee-company is a Rs. 50-crore project and the roads with which we are concerned are laid within the factory premises extending over several acres and has cost the assessee Rs. 57 lakhs. It is common ground that this fertiliser manufacturing company, inter alia, imports by sea phosphates, sulphur and naphtha and transports them in dumpers to the factory site. The approximate quantity of raw material transported in any assessment year is about 10 lakhs metric tons. For moving such large quantities and heavy loads for the berthing facilities at Visakhapatnam port and transporting the same to the factory premises, the assessee had to necessarily lay good roads within the factory premises. Without taking provision for excellent roads within the factory premises, the huge quantity of raw material required cannot be moved up to the point where it is actually utilised for converting them into fertilisers. It is impossible for the assessee to carry on its business of manufacturing fertilisers at the factory established for this purpose. These roads, it is claimed, are as much a part of the factory which converts these phosphates, sulphur and naphtha into fertilisers as the plant which converts them. The assessee, therefore, claims that ''roads'' should be taken to be plant and depreciation allowed thereon, accordingly. Alternatively, it claims depreciation on the footing that they are ''buildings''. The Appellate Tribunal held the roads to be ''plant'' for purposes of allowing depreciation and development rebate thereon.

There is no direct decision of any High Court holding roads to be ''plant'' for the purpose of allowing deduction towards depreciation u/s 32.

It would be useful to refer to the several decisions relied upon by Mr. Dastur, the learned counsel for the assessee, and Mr. P.S. Sreerama Rao, the learned counsel for the revenue, and ascertain the principles or tests laid down therein to determine whether a particular item was to be treated as a ''building'' or a ''plant'' for the purpose of calculating the ''depreciation'' allowable u/s 32.

In Panyam Cements and Mineral Industries Ltd. Vs. Addl. Commissioner of Income Tax, the assessee-company, Panyam Cements and Mineral Industries Ltd., claimed that ''roads'' in a cement factory constituted ''buildings'' and that depreciation thereon should be allowed, accordingly. The Tribunal upheld its contention. The assessee did not claim them to be ''plant''. The revenue went up in appeal. The Court held ''roads'' to be ''buildings''. Thus, the question whether ''roads'' constituted ''plant'', not having been so claimed by the assessee, did not come up for consideration.

In Commissioner of Income Tax, Bombay City-I Vs. Colour-chem Ltd., two questions were preferred to the Bombay High Court :

Whether the roadways inside the factory premises of the assessee-company fall within the category of ''building'' and whether depreciation should be allowed u/s 10(2) (vi) of the Indian income tax Act, 1922?

If the answer to Question No. 1 is in the negative, whether, on the facts and in the circumstances of the case, the roadways in the factory premises would be entitled to depreciation as ''plant'' u/s 10(2) (vi) of the Act?

The Court answered the first question in favour of the assessee and held the roadways to be ''building'' and the assessee entitled to depreciation thereon u/s 10 and in view of the frame of the second question, did not answer that question.

In CIT v. Taj Mahal Hotel 1972 Tax LR 54, the Supreme Court affirming the judgment of our High Court in TAJ MAHAL HOTEL Vs. COMMISSIONER OF Income Tax., held that the sanitary and pipeline fittings installed in one of the branches of the Tajmahal Hotel, on which depreciation allowance was claimed under the head ''Furniture and fittings'', fell within the definition of ''plant'' in section 10 and the assessee was entitled to development rebate in respect thereof u/s 10(2) (vi-b). The Court went further and held that the facts that the respondent claimed depreciation on the basis that the sanitary and pipeline fittings fell under ''furniture and fittings'' in rule 8(2) of the Indian income tax Rules, 1922, did not detract from the position. The Court also pointed out that the intention of the Legislature was to give the word ''plant'' a wide meaning and held that the income tax Rules, 1922 are meant only for carrying out the purposes of the Act, they cannot take away what is conferred by the Act or whittle down the effect of its provisions. The tests applied by the Court in reaching that conclusion are :

Whether the assets in question were required by the nature of the business, which the assessee was carrying on ?

Whether it is one of the essential amenities or conveniences which are normally provided in such business ? The test ultimately is whether the apparatus or convenience is used for purpose of carrying on the business or was not merely a part of the building in which the business was carried on ?

In Additional Commissioner of Income Tax Vs. Madras Cements Ltd., the question whether special reinforced foundations constructed at a cost of over Rs. 2 lakhs constituted an item of ''plant'' and machinery and the depreciation and development rebate should be allowed thereon on that basis came up for consideration before the Madras High Court. The assessee was in the business of manufacture of cement. The rotary machinery which was part of the production machinery was supported on a specially reinforced foundation which cost over Rs. 2 lakhs for laying. The Court held that :

The definition of ''plant'' in section 43(3) of the income tax Act, 1961, being an inclusive definition, the term should be given its ordinary meaning as understood by the common man. The various decisions also go to show that the expression ''plant'' has to be construed in the context of particular kind of trade or manufacture carried on by the assessee and if in the context it could be taken as ''plant'' as understood in the popular sense it would be eligible for the allowance of depreciation and development rebate. The dictionary meaning of the word ''plant'' comprehends buildings employed in carrying on trade or other industrial business and hence the special reinforced concrete foundation for the purpose of locating or installing the rotary kiln in the assessee''s factory would come within the scope of the expression ''plant'' and would be entitled to depreciation and development rebate." (p. 281)

In Commissioner of Income Tax, Bombay Vs. Tata Hydro Electric Power Supply Company Ltd., the question that arose was whether dams constructed for generating electricity and strengthened by Coyne method were treated as ''plant''. The Tata Hydro Electric Power Supply Company Ltd., the assessee, was engaged in generating and supplying electric power for which purpose it had constructed a dam to mount generators and store water. These dams were strengthened by the Coyne method which involved anchoring high tension steel into the bedrock of the dams and subsequently tensioned and grouted. The assessee claimed depreciation and development rebate u/s 33, read with section 43(3). The Bombay High Court held that the expression ''plant'' must be given a wide meaning and dam constructed for generating electricity was ''plant'' and the assessee was entitled to inclusion of the expenditure incurred for strengthening the dam by Coyne method for the purpose of calculating the development rebate allowable thereon.

In Commissioner of Income Tax Vs. Warner Hindustan Ltd., a well dug and constructed by Warner Hindustan Ltd., a public limited company, carrying on the business of manufacture of Pharmaceuticals, was held to be the ''plant'' within the meaning of section 43(3), provided the well was dug for the purpose of carrying on the business of the assessee. It was found as a fact that the well was dug by the assessee to meet the needs of the factory which was engaged in manufacturing Pharmaceuticals and on that basis the well was held to be ''plant''.

In Commissioner of Income Tax, Gujarat-II Vs. Elecon Engineering Co. Ltd., even drawings and patterns received from a foreign company under a collaboration agreement by the Elecon Engineering Co. Ltd., as part of the technical know-how, were held to be ''plant'' on which depreciation was allowable u/s 32. On the analogy of books, which one consults to inform one''s mind and, thus, uses them in the course of one''s business or profession, and which are included within the meaning of '' plant'', the Court held that there is no reason to exclude from the wide meaning of the term ''plant'', objects of similar nature such as drawings, patterns, designs, etc., which, like books, are the embodiments of know-how and serve the purpose of teaching at long range. Having regard to the legislative intent to give a wide meaning to the word ''plant'', materials, record of know-how as held to be clearly included within the meaning of the word ''plant'' in section 32 and the depreciation allowance allowable.

In Kalinga Tubes Ltd. Vs. Commissioner of Income Tax, Central and Another, , a railway siding was held to be ''plant''. The Court held that ''plant'' in its ordinary sense includes whatever apparatus is used by a businessman for carrying on his business not his stock-in-trade which he buys or makes for sale, but all goods and chattels, fixed or movable, which he keeps for employment in his business with some degree of durability. Kalinga Tubes Limited, which constructed a railway siding, was held entitled to development rebate and depreciation allowance for the railway siding on the footing that it constituted ''plant''. In Commissioner of Income Tax, Bombay City-I Vs. Caltex Oil Refining (I) Ltd., the Caltex Oil Refinery Ltd. was allowed depreciation allowance and development rebate on fencing put up around a factory on the footing that it was ''plant''. In Commissioner of Income Tax Vs. Kanodia Cold Storage, factory building of an ice storage plant was held to be ''plant'' within the meaning of section 43(3), though undoubtedly it is a ''building''. In coming to that conclusion, the Court applied the test whether it is an item in and by which business is carried on; and finding that it is an item by which business is carried on, held it to be ''plant''. But, if that were one used in business and not one by which business is carried on, it would not be ''plant''.

It was, however, contended by Sri Sreerama Rao, the learned counsel for the revenue, that roads can never be treated as ''plant'' for, according to him, it is not an item by which business is carried on but only an item used in carrying on business. He strongly relied upon the judgment of the Calcutta High Court in Commissioner of Income Tax Vs. Kalyani Spinning Mills Ltd., , wherein ''roads'' within a factory were held to be ''buildings''. It must, however, be pointed out that in that case the assessee claimed depreciation allowance on the footing that roads were buildings and never claimed that they constituted ''plant''. He also relied upon the decision of the Gujarat High Court in COMMISSIONER OF Income Tax, GUJARAT-III Vs. MCGAW RAVINDRA LABORATORIES (INDIA) LTD., , wherein roads were held to be ''building'' and not ''plant''. This was a decision based on a concession made by the counsel and not upon a discussion of the legal position as to whether they were ''plant'' or ''building''. Further, the roads in that case were not laid within the factory premises but were outside it. These roads were not exclusively used by the assessee''s factory but used by the general public. These roads could be said to be used in business but not roads used by the general public. These roads could be said to be used in business but not roads by which the business was carried on, which is a very tangible test for determining whether the roads constituted ''buildings'' or ''plant''.

What is deductible from the several decisions cited at the Bar is that the term ''plant'' is a term of wide import. The definition in section 43(3) itself is an inclusive definition and must be given a liberal construction and not a literal construction. One of the tests to be applied to determine whether a particular item is ''plant'' or not, is to ascertain whether it is an item by which business is carried on or only an item used in carrying on the business. That determination depends upon the type of business the assessee is carrying on. To find out whether ''roads'' laid by an assessee constitute ''plant'', for the purpose of allowing depreciation and development rebate under the Act, we have to ask ourselves the question ''is it an item by which the assessee carries on the business''. These are all relevant factors to be kept in view. No hard and fast rule can be laid down that every road is a ''plant'' or all roads constitute ''building''. That must depend on the facts and in the circumstances of each case. If the roads are an integral part of the factory and are means by which the business of the assessee is carried on, then they constitute ''plant'' notwithstanding that they may also constitute ''buildings'' for some other purpose. We must, however, make it clear that whether roads constitute buildings or plants or neither is a question which has be to determined on the facts and in the circumstances of each case. It depends upon the particular situation of the roads, the use to which they are put and in particular whether they are an integral part of the factory by which the business is carried on. Roads, in the instant case, are actual adjuncts to the factory and are within the factory premises. Without these roads, the transport of very essential raw material for the manufacture of the fertilisers, which is the main business of the assessee-company, cannot be carried on at all. They are not roads used by others but constitute part of the fertilizer factory. They are as much necessary for the purpose of the assessee''s business as the factory building and machinery itself. Without these roads, the raw material cannot be put into the factory machinery. They are used for no other purpose.

''Plant'' by virtue of its inclusive definition, when the term ''plant'' takes in vehicles, books, scientific apparatus and surgical equipment used for the purpose of the business, profession or vocation, must take in ''roads within the factory premises'' which are laid and used for the purpose of the business of transporting raw material to the factory machinery and which converts this raw material into fertilizers.

We, therefore, agreeing with the Tribunal, held that the roads of the assessee-company lying within the factory premises constitute ''plant'' and not mere ''buildings''. The assessee is entitled to depreciation allowance and development rebate on the cost of the roads treating them as ''plant''. We, accordingly, answer the first question both in R.C. No. 82 of 1978 and R.C. No. 144 of 1977, in favour of the assessee.

The second question in R.C. No. 144 of 1977 is :

Whether, on the facts and in the circumstances of the case, development rebate is allowable on the enhanced cost of plant and machinery due to devaluation ?

The few facts out of which this question arises may be briefly noticed. The assessee- company is an Indian company. It purchased machinery from USA prior to 6-6-1966 on deferred payment of the consideration in US dollars, a foreign currency. On 6-6-1966, Indian rupee was devalued. Consequently, the assessee- company had to expend more rupees in Indian currency for paying the consideration in US dollars for the purchase of that machinery. The total amount of Indian currency spent for raising the consideration payable in US dollars for the purchase of the machinery was claimed by the assessee-company to be the actual cost of the machinery and on the actual cost so calculated, it claimed deduction of both depreciation and development rebate. The increase in the liability of the assessee-company due to the devaluation was Rs. 4,27,69,143. The 1TO permitted the inclusion of this additional liability for calculating the actual cost of the machinery for the purpose of allowing depreciation, but not for the purposes of allowing development rebate claimed by the assessee-company. He applied section 43A(2) and rejected the assessee''s contention that the general provisions contained in section 33, read with section 43, would apply. On appeal, the AAC allowed the assessee''s claim and calculated the actual cost as claimed by the assessee by applying section 33 read with section 43. The Tribunal confirmed the AAC''s order and directed the ITO to include the actual cost as claimed by the assessee and allow thereon not only depreciation but also development rebate. Hence, this reference at the instance of the revenue.

Section 43 provides for calculating development rebate in general. Section 43A(2) is inserted to provide for certain contingencies arising out of devaluation of the rupee. Of course, even when there is no statutory devaluation of the currency, the exchange rate of rupee and US dollar would be fluctuating from time to time. But that is due to normal fluctuation in the trade balances of the two countries and not due to any statutory devaluation of the currency of any one country. Parties to a contract for purchase of goods, supplied by a party in one country from a party in another country, reckon with the normal fluctuations of prices and the exchange rates occurring in the ordinary course of business. Statutory devaluation gives rise to a situation not normally in the contemplation of the parties. This statutory devaluation may result in unforeseen increase or decrease in the liability of a party to pay the consideration for the goods purchased by it from the other country. Development rebate allowed under the income tax Act is intended to mitigate the tax liability of infant industries during their formative period. If this abnormal and unforeseen increase in the liability to pay higher amount of consideration for the purchase of machinery is not duly taken into account for the grant of development rebate, the growth of industry may be stifled and the very purpose of granting development rebate may be defeated. It would be noticed that due to the deval- uation of the Indian currency vis-a-vis the dollar of United States of America, from where the goods are supplied to the assessee-company, while the liability of the purchaser of the goods in India increased abnormally in direct proportion to the devaluation of the rupee, the seller of the goods was rot receiving any additional consideration in terms of US dollars. The seller received the same amount of dollars which he was entitled to receive prior to devaluation of Indian currency. But the assessee-company had to raise more amount of Indian currency to pay the same amount of dollars which it had agreed to pay under the contract for the purchase of the machinery. So much so the price of the machinery purchased by the assessee-company in terms of US dollars remained the same: only the actual cost to be assessed increased. This highlights the fact that while the price of the machinery supplied as calculated by the seller of the machinery may remain constant, the amount payable by the purchaser of the goods may increase due to devaluation. So far as the purchaser of the goods is concerned, the total amount of expenditure, he has incurred for purchasing the goods, would be his actual cost. In other words, from the seller''s standpoint, while there is no increase in the price of machinery, it has cost the purchaser more than what it would have cost him before devaluation of the rupee. Depreciation and development rebate are claimed on the actual cost and not the price. The question referred has to be considered against this background.

There is no direct binding authority on the point now for consideration before us. It has to be decided on principle and not on precedent. To answer the question referred, one has to consider :

What does actual cost mean and whether the introduction of section 43A by way of amendment under the Finance Act (No. 2) of 1967, with effect from 1-4-1967, has, in any way, altered the position with regard to the calculation of actual cost where the increased liability of the purchaser of the machinery is not due to normal fluctuation of the exchange rate between dollar and rupee but is due to statutory devaluation of the rupee?

For a satisfactory answer to the question referred, it is necessary to bear in mind the distinction between ''cost'' and ''price''.

That there is a real distinction between ''cost'' and ''price'' is well recognised. In Arvind Mills Ltd. Vs. Commissioner of Income Tax, Gujarat-II, the distinction is brought about very clearly :

... The word ''cost'' is not synonymous with ''price''. Besides the price of machinery or plant, ''cost'' takes in many other items of expenditure such for instance as freight, warehouse or insurance charges, legal expenses incurred in connection with its acquisition and interest incurred before the commencement of production on the capital contributed or borrowed to acquire such asset. In other words, in determining the ''actual cost'' of a fixed asset, all expenditure necessary to bring such asset into existence and to put it in working condition may legitimately be taken into account. (p. 64)

What is actual cost for the purpose of determining the development rebate, which an assessee may be allowed, was considered by the Supreme Court in Challapalli Sugar Ltd. Vs. The Commissioner of Income Tax, A.P., Hyderabad, The question before their Lordships of the Supreme Court was whether the interest paid by the assessee-company before the commencement of the production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery forms part of the ''actual cost'' of the assets to the assessee within the meaning of the expression in section 10(5) of the 1922 Act. The Supreme Court observed :

As the expression ''actual cost'' has not been defined, it should be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed asset is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. (p. 167)

The Supreme Court held :

The assessee will be entitled to depreciation allowance and development rebate with reference to such interest also. The decision of the Andhra Pradesh High Court in Commissioner of Income Tax Vs. Challapalli Sugars Ltd., to the contrary was reversed and that of the Calcutta High Court, in Commissioner of Income Tax (Central) Vs. Standard Vacuum Refining Co. of India Ltd., was affirmed on this point.

The principle enunciated by the Supreme Court must logically lead to the conclusion that any increased monetary liability imposed upon the purchaser of the machinery would form part of the actual cost of the purchase of that machinery. One assessee may be in a position to raise funds on his own for the purchase of machinery; another assessee may have to borrow for raising the consideration to pay for the machinery and in the process may become liable to pay interest on the sum borrowed by him; and in yet another case, liability may be incurred due to unforeseen circumstances of rupee being devalued. In all these instances, liability of the assessee is in creased in terms of rupees and the assessee ha: to spend more amount of rupees for purchasing the machinery, the price of which has remained unaltered in terms of US dollars. Thus, while the price has remained constant, the actual cost of the machinery to the purchaser in all these cases has gone up. If the actual cost of machinery for the purpose of depreciation includes the additional sum of Rs. 4,27,69,143 paid by him consequent upon the devaluation, we do not see any reason how, on principle, actual cost could be different for the purpose of calculating the development rebate which the infant industry is entitled to claim.

Mr. Rama Rao, the learned counsel for the revenue, however, contends that actual cost need not be the same figure both for the purpose of calculating depreciation and for calculation of development rebate; depreciation and development rebate being two different items of deduction and those being governed by different provisions of law, the particular provision of law applicable to the calculation of development rebate alone would be relevant for determining the actual cost of the machinery for that purpose. How the expression ''actual cost'' is understood in common parlance is immaterial for determining the statutory entitlement to development rebate. According to him, if section 43 applies, as contended by the assessee, no doubt, the actual cost may also include this additional liability incurred by the assessee-company due to devaluation. But, according to the learned counsel for the revenue, when for calculating development rebate, special provision is made in section 43A of the Act, the general provision contained in section 43 would not apply, and u/s 43A(2), the additional liability incurred by the assessee consequent upon the devaluation of the currency cannot be included for ascertaining the ''actual cost'' for this purpose. On the other hand, it is argued by Mr. Dastur, the learned counsel for the assessee, that section 43A does not constitute an exception or proviso to section 43. Section 43 takes in development rebate in general. Section 43A was inserted by the Finance (No. 2) Act, 1967, with effect from 1-4-1967, with the intention of providing additional relief on account of increased liability incurred by the assessee consequent upon devaluation; it was never intended to take away the benefit conferred by section 43 itself. Hence if the assessee-company is entitled to the calculation of the actual cost, on the particular facts of the case, u/s 43 then, being a beneficial provision, benefit must not be withheld to the assessee by applying section 43A. When one provision does not constitute an exception to the other, it is open to the assessee to invoke the more beneficial provision. It is, therefore, necessary to read sections 33 and 43 insofar as they are relevant for our present purpose and section 43A in its entirety.

Section 33 makes provision for allowing deduction of a sum by way of development rebate as specified in sub-clause (B) thereof in respect of previous year in which the machinery or plant was installed. Section 33(1) (b) (B) which is relevant for our present purpose is in the following words :

(B) in the case of machinery or plant,?

(i) where the machinery or plant is installed for the purposes of business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule,?

(a) thirty-five per cent of the actual cost of the machinery or plant to the assessee, where it is installed before the 1st day of April, 1970, and

(b) twenty-five per cent of such cost, where it is installed after the 31st day of March, 1970;

(ii) and (iii) ******

(iv) in any other case,?

(a) twenty per cent of the actual cost of the machinery or plant to the assessee, where it is installed before the 1st day of April, 1970, and

(b) fifteen per cent of such cost, where it is installed after the 31st day of March, 1970;

Section 43 defines ''actual cost'' for the purpose of sections 28 to 41. That definition, so far as it is relevant for our present purpose, contained in section 43 reads as follows :

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

''Written down value'' is also defined in section 43(6) and so far as it is relevant for the present discussion is as under :

(a) in the case of assets acquired in the previous year, the actual cost to the assessee;

What is relevant for the present discussion is the method of assessment of ''actual cost''. u/s 33(1) (a), depending upon the date when the machinery or plant was installed, the Actual cost'' of the machinery or plant to the assessee has to be assessed and the specified percentage thereof would have to be allowed by way of deduction as development rebate. If we look into the definition of ''actual cost'' contained in section 43(1), which must be applied for allowing the deduction u/s 33 by way of development rebate, it would include the actual cost of the assets of the assessee. If machinery is purchased from a foreign country and the amount has to be paid in foreign currency and the assessee is an Indian resident whose income in India is undoubtedly assessable in terms of rupees, he would have to raise sufficient funds in rupees to obtain the requisite foreign exchange. The amount of rupees spent by him for obtaining the requisite foreign currency for paying the price for the purchase of machinery would be the assessee''s actual cost of the asset. Having regard to the devaluation of the rupee on 6-6-1966 and having regard to the fact that the assessee had prior to that date ordered for the machinery in United States, the price of which was to be paid in US dollars, the assessee had to raise additional sum of money in rupees for purchasing the US dollars for paying the consideration due from him to the suppliers of the machinery. Unless he raised additional sum in Indian currency, the assessee could not have acquired the asset. Though in terms of foreign currency his liability remained the same, he being an assessee in India whose income is assessed in Indian currency would have to necessarily incur additional expenditure for obtaining the said asset. Though the amount of foreign currency payable by the assessee remained constant and the price of machinery in terms of foreign currency did not increase, the cost of the asset to the assessee had undoubtedly increased. What is relevant for the purpose of calculating the sum allowable by way of deduction towards the development rebate is the actual cost of the machinery to the assessee and not the price received by the buyer in US dollars.

Section 43A, which was inserted by the Finance (No. 2) Act, 1967, with effect from 1-4-1967, was inserted after devaluation of Indian rupee on 6-6-1966. Section 43A is in the following words :

"43A. Special provisions consequential to changes in rate of exchange of currency. ?(1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession 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 (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), 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 of the asset as defined in clause (1) of section 43 or the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35 or in section 35A or in clause (ix) of sub-section (1) of section 36 or, in the case of a capital asset (not being a capital asset referred to in section 50), the cost of acquisition thereof for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid.

Explanation : In this sub-section, unless the context otherwise requires,?

(a) ''rate of exchange'' means the rate of exchange determined or recognised by the Central Government for the conversion of Indian currency into foreign currency or foreign currency into Indian currency;

(b) ''foreign currency'' and ''Indian currency'' have the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1947 (7 of 1947).

Section 43A(1) opens with a non-obstante clause and makes provision for addition or deduction of the amount of liability of the assessee as expressed in Indian currency in calculating the actual cost of the asset to the assessee on account of acquiring any asset from a country outside India for the purpose of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset. The several conditions for the application of sub- section (1) of section 43A are : (1) that the assessee should have acquired an asset for the purpose of his business or profession from a country outside India; and (2) that the increase or reduction in liability of the assessee, as expressed in Indian currency for making payment towards the cost of the asset, should have been occasioned by change in the rate of exchange. Any amount borrowed by him from any person directly or indirectly in any foreign currency specifically for the purpose of acquiring the asset is also to be taken into account in arriving at the actual cost of the asset to the assessee. In other words, even if this addition to, or deduction in, the liability consequent upon the fluctuation in the rate of exchange were not to be taken into account (sic). Section 43, read with section 33, for the purpose of calculating the development rebate allowable (sic). Section 43A enjoins the calculation of the difference consequent up to the change in rate of exchange due to devaluation and addition or deduction, as the case may be, of such sum, in arriving at the actual cost of the asset to the assessee. Even the learned counsel for the revenue does not dispute this proposition. What he, however, points out is that this additional liability of the assessee which increases the cost of the assets to the assessee, if occasioned by the change in the rate of exchange due to devaluation of rupee by the Government, the additional liability or increased cost, having regard to sub-section (2) of section 43A cannot be taken into account for the purpose of allowing the deduction on account of development rebate u/s 33. He points out that sub-section (2) of section 43A is very specific and categoric and does not admit of any doubt.

Sub-section (2) of section 43A reads as follows :

The provisions of sub-section (1) shall not be taken into account in computing the actual cost of an asset for the purpose of the deduction on account of development rebate u/s 33.

This argument, prima facie, is attractive, but a deeper consideration reveals a different picture. It would be seen that sub-section (2) itself does not contain a non-obstante clause. In other words in the matter of calculation of development rebate which an assessee is entitled to u/s 43, read with section 33, subsection (2) of section 43A has no overriding effect. Only where the actual cost of the machinery to the assessee is to be calculated u/s 43A and section 43 cannot be applied and only on such calculation an assessee can claim development rebate, then alone subsection (2) of section 43A would apply. In such a case perhaps for the purpose of arriving at the development rebate allowable to an assessee, the increase or decrease in the liability of the assessee as expressed in Indian currency for making payment towards the cost of the asset occasioned due to the devaluation of the Indian currency may not be taken into account. But, if, as discussed above, the actual cost of the asset to the assessee by virtue of the definition contained in section 43(7) itself includes the additional liability occasioned due to devaluation of Indian rupee, the assessee would be entitled to claim development rebate on the basis of such increased cost of the machinery because of section 33 read with section 43 itself and not because of section 43A(1). The assessee, in such a case, need not and does not claim the benefit of section 43A(1) for the calculation of the actual cost of the asset to him. Section 43A gives an additional benefit in cases to which section 43, read with section 33, is not specifically applicable for certain purposes.

Mr. Sreerama Rao, the learned counsel for revenue, contends that if such an interpretation is given, section 43A would become redundant. He asserts that the increase or decrease in liability occasioned due to the change in the rate of exchange is specifically provided for u/s 43A and as such section 43A would override section 43, read with section 33, and sub-section (2) of section 43A would apply. Therefore, this increased liability may be taken into account for allowing other deductions like depreciation, but not for allowing development rebate. This, in our opinion, is not a correct reading of section 43A. That result neither follows from a literal interpretation of section 43A as a whole nor from an interpretation based on the legislative intent of the provision.

The context in which section 43A was inserted cannot be overlooked in this behalf. If before insertion of section 43A, the additional cost of the asset to the assessee had to be calculated having regard to the actual amount of Indian currency which the assessee had to raise for paying the price in foreign currency and the assessee could claim deduction o n account of development rebate on that bas is, it does not appear to have been the intention of the Parliament to take away that benefit; on the other hand, for certain purposes the benefit of calculating the actual cost by including therein the increased liabilities occasioned by devaluation of the rupee was sought to be allowed for certain purposes even though it may not be allowable u/s 43, read with sections 22 to 41 of the Act; it is the benefit available by virtue of section 43A(1) alone that was sought to be withheld under sub-section (2) of Section 43A for the purposes of calculating the deduction allowable towards development rebate.

If an assessee is entitled to the calculation of the actual cost of the asset by inclusion of this additional liability occasioned due to change in the rate of exchange even without the aid of section 43A(1), section 43A(2) does not stand in the way of such calculation and allowing of development rebate on that basis. If the assessee is entitled to deduction of development rebate on the actual cost of the machinery to the assessee as determined u/s 43, then sub-section (2) of section 43A would have no application. The contention of the revenue can succeed only if it can be shown that section 43, read with section 33, is not applicable to this case. Section 43A(2) applies where only section 43A(1) applies. Section 43A is in addition to the other provisions contained in the Act and in particular section 43 and not in derogation or substitution there of. When one provision does not exclude the operation of the other, it is for the assessee to claim the deduction under a provision which is more beneficial to him.

In Union Carbide India Ltd. Vs. Commissioner of Income Tax, , the Calcutta High Court at page 380 interpreting section 43 in the context of section 33 held that whatever was necessary to pay back in dollars must be treated as actual cost. The Punjab and Haryana High Court took the same view in Commissioner of Income Tax Vs. Arun Spinning Mills, In Additional Commissioner of Income Tax Vs. Kwality Spinning Mills (Private) Ltd., , a Division Bench of the Madras High Court held that the effect of sub-section (2) of section 43A of the income tax Act is only to exclude the applicability of sub-section (1) thereof to the computation of the actual cost for determining the development rebate allowable u/s 33. In computing the actual cost of an asset for the purpose of development rebate, the only statutory provision relevant is section 43(7) defining ''actual cost''. In that view, it allowed a sum of Rs. 48,342 which was the increase in the actual cost of the acquisition of certain machinery from Russia consequent upon the devaluation of rupee.

In Arvind Mills Ltd.''s case (supra), the Gujarat High Court, considering a case in which the claim for calculating the actual cost by adding the increased liability occasioned by the devaluation during the middle of the previous year relevant for the assessment year, held that the assessee had to pay for the imported machinery acquired by it during the course of the relevant previous year in foreign currency. It was not possessed of the foreign currency of its own and it had, therefore, to borrow the requisite amount of foreign currency. The loan was, thus, borrowed for purchase of machinery and its repayment and all costs incidental thereto will, therefore, partake the character of capital expenditure. The repayment of the loan had to be made from the next succeeding year in the foreign currency or in the rupee equivalent of the cost of purchasing such currency. In either case, the cost of the imported machinery to the assessee had to be determined in terms of rupees for the purpose of its own accounts. Since the devaluation took place in the midst of the year of account to the extent to which repayment obligation in respect of the machinery during the said year remained outstanding, the additional cost of repayment in terms of rupees can legitimately by considered by a commercial man as enhancing the cost of the corresponding machinery purchased. This additional liability, which added up to the cost by the actual acquiring of the asset, must be allowed. The Court observed that there is no need to resort to section 43A and the provisions of section 43A(2) cannot, therefore, be pressed into service to deny to the assessee the benefit which was available to it u/s 33 itself. The Court further held that a close scrutiny of section 43A(1) will show that it applies only to such cases in which increase or decrease in the cost of an asset arises for the first time in consequence of a change in the rate of exchange at any time after the acquisition of the asset. Therefore, cases like the present where the increased liability is in fact incurred prior to the actual acquisition of the asset and it, therefore, becomes part of the acquisition in its ordinary signification, are not within the ambit of section 43A(1). The Court rejected the contention of the revenue that section 43A was a special provision and that it must prevail over or supersede section 43, read with section 33, which is a general provision. The Court concluded that the provisions of sub-section (1) of section 43A do not cover cases where the increased liability is increased before the acquisition and becomes part of the cost of the asset within the ordinary meaning of the said expression. Therefore, the development rebate and depreciation allowance will be available thereon de hors section 43A(1) in such cases. We find ourselves in agreement with the above view. The assessee cannot be denied the benefit of calculating the actual cost u/s 43, read with section 33, on account of any thing contained in section 43A(1) or section 43A(2) of the Act when, admittedly, as a consequence of devaluation, he had to raise more Indian currency for meeting his liability to pay the price in US dollars for acquiring the assets in terms of the contract entered into between the assessees and US suppliers of machinery prior to 6-6-1966. Even de hors section 43A, the actual cost of acquiring asset to the assessee in such a case would include the increased liability occasioned due to devaluation. Since the machinery was installed in 1968 which is the previous year for the relevant assessment year, the assessee would be entitled to claim development rebate u/s 43, read with section 33. For these reasons, we hold that the assessee is entitled to development rebate on the enhanced cost of plant and machinery due to devaluation as claimed by him. We, accordingly, answer the second question in R.C. No. 144 of 1977, in favour of the assessee and against the revenue.

Question No. 4 in R.C. No. 144 of 1977 and Question No. 2 in R.C. No. 82 of 1978 :

The fourth question in R.C. No. 144 of 1977 and the second question in R.C. No. 82 of 1978, referred at the instance of the revenue, are one and the same and read as follows :

Whether, in working out the capital employed for purpose of section 80J, liabilities need not be deducted from the assets employed in the undertaking as provided under rule 19A and also whether the average capital employed by the assessee-company should be taken into account for the purpose of rule 19A and not the capital as on the first day of the accounting periods ?

The ITO had rejected the assessee''s claim that in computing the capital employed for the purpose of section 80J, the average capital employed during the year of account should be taken into account and not the capital employed as on the first day of the accounting year. The AAC, on appeal, directed the ITO to re-examine and compute the capital by deducting only those liabilities which had become due on the first day of the computation period. The assessee took the matter in appeal before the Tribunal and contended that the computation of capital for working out the relief u/s 80J should be made without deducting the liabilities from the assets employed in the undertaking. It was also argued that the average capital employed should be directed to be taken into account and not the capital as on the first day of the accounting period. Rule 19A, however, provides otherwise. It was, therefore, contended for the assessee that the rule framed under the Act cannot take away or whittle down the relief granted by the Act itself and that the rule should be declared as ultra vires or in any case should be so construed as to give effect to the relief granted by the Act in its entirety so that there is no conflict. The Tribunal, following the decision of the Calcutta High Court in Civil Rule No. 65640 of 1974, dated 29-4-1974, held that the relief allowable to the assessee-company u/s 80J should be on the basis of the computation of the capital without deducting liabilities from the assets employed in the undertaking and also by taking into account the average capital employed by the assessee during the entire year of account in question and not the capital found to be employed on the first day of the accounting period.

A similar question had come up before a Division Bench of this Court to which one of us, i.e., the Chief Justice was a party in Warner Hindustan Ltd. and Another Vs. Income Tax Officer and Others, . This Court held rule 19A to be ultra vires of the Act to the extent it prescribes the mode of calculating the capital employed at variance with the Act, in particular by excluding all borrowed capital and by directing capital employed to be calculated only as on the first day of accounting year and ignoring the capital employed during the rest of the year. Thus, the Bench upheld the assessee''s contention and held in favour of the assessee. We find our selves in agreement with the view expressed therein. Accordingly, we answer Question No. 4 in R.C. No. 144 of 1977 and the Question No. 2 in R.C No. 82 of 1978 in favour of the assessee and against the revenue [Question No. 3 in R.C. No. 144 of 1977].

The assessee-company computed the disallowance on account of perquisites paid to its employees at Rs. 2,58,197. It arrived at this figure taking into account the perquisite enjoy ed by its employees whose salary was exempt from tax u/s 10(6) (vii) of the Income- tax Act. By its letter dated 21-11-1972, the assessee-company requested the ITO for taking the figure to be disallowed at Rs. 56,983 instead of Rs. 2,58,197. The ITO rejected the assessee''s entire claim on the ground that though the salaries of foreign technicians were exempt u/s 10(6) (vii), they get the exemption after receipt of their salaries. The AAC, however, was of the view that salary payment to foreign technicians being exempt u/s 10(6) (vii), such salaries cannot be considered as chargeable under the head ''Salaries''. The Tribunal affirmed the view of the AAC. On the above facts and circumstances and at the instance of the revenue, the following question was referred :

Whether, in computing the disallowable perquisites u/s 40(a) (v), the perquisites relating to employees, whose salary is exempt from tax u/s 10(6) (vii) of the income tax Act, 1961, should be excluded ?

We affirm the view of the Tribunal and answer the question in favour of the assessee for the reason we set forth below :

Section 40(a) (v) reads as follows :

any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) or any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit, to the extent such expenditure or allowance exceeds one-fifth of the amount of salary payable to the employee, or an amount calculated at the rate of one thousand rupees for each month or part thereof comprised in the period of his employment during the previous year, whichever is less :

Provided that in computing the aforesaid expenditure or allowance, the following shall not be taken into account, namely :?

(a) any payment by way of gratuity;

(b) the value of any travel concession or assistance referred to in clause (5) of section 10;

(c) passage moneys or the value of any free or concessional passage referred to in sub-clause (i) of clause (6) of section 10;

(d) any payment of tax referred to in sub-clause (vii) of clause (6) of section 10;

(e) any sum referred to in sub-clause (vii) of clause (1) of section 17;

(f) any sum referred to in sub-clause (v) of clause (2) of section 17;

(g) the amount of any compensation referred to in sub-clause (i) or any payment referred to in sub-clause (i) of clause (3) of section 17;

(h) any payment referred to in clause (iv) or clause (v) of sub-section (1) of section 36; and

(i) any expenditure referred to in clause (ix) of sub-section (1) of section 36 :

Provided further that nothing in this sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head ''Salaries'' is seven thousand five hundred rupees or less.

Explanation 1 : The provisions of this sub-clause shall apply notwithstanding that any amount not to be allowed under this sub-clause is included in the total income of the employee.

Explanation 2 : In this sub-clause, the word ''salary'' shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule."

Clause (v) was inserted in section 40(a) by the Finance Act, 1968, with effect from 1-4-1969 and was again omitted by the Finance (No. 2) Act 1971, with effect from 1-4-1972. These provisions are re-enacted with modifications in section 40A with effect from the same date. During the assessment year with which we are now concerned, this provision was in force. Clause (2) (h) of Part A of the Fourth Schedule the word ''salary'' is defined as under :

''salary'' includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites;

This definition excluded perquisites from the ambit of ''salary''.

Section 40(a) (v) specifies the amount not deductible in computing the income chargeable under the head ''Profits and gains of business or profession''. This provision operates notwithstanding anything contained to the contrary in sections 30 to 39. Sub-clause (v) of clause (a) of section 40 lays down that any expenditure which results, directly or indirectly, in the provision of any perquisite to an employee to the extent such expenditure exceeds l/5th of the amount of the salary payable to the employee or an amount calculated at the rate of Rs. 1,000 for each month or part thereof, whichever is less, shall not be deducted. However, the second proviso thereto lays down as under:

Provided further that nothing in this sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head ''Salaries'' is seven thousand five hundred rupees or less.

In view of this proviso, the prohibition contained in section 40 shall not apply to an expenditure incurred by the assessee towards providing perquisites to an employee whose income chargeable under the head ''Salaries'' is Rs. 7,500 or less. In computing the total income of a previous year of any person, section 10(6) (vii) exempts from tax subject to certain conditions which it is not for the present purpose to notice; the remuneration due to or received by him chargeable under the head ''Salaries'' for services rendered as a technician in the employment of any business carried in India. The salary paid to the technician in the employment of such company is wholly exempt from tax. In view of the proviso, the expenditure incurred by an assessee for providing perquisites cannot be said to be an expenditure for providing perquisites to an employee whose income is chargeable under the head ''Salaries''. So the direction contained in section 40 that the amount incurred over and above l/5th of the salary or Rs. 1,000, whichever is less, contained in section 40(a) (v) will not apply in the case of an expenditure incurred for providing perquisites to an employee whose income chargeable under the head ''Salaries'' is Rs. 7,500 or less. It is argued for the assessee that remuneration paid to an employee of a company which was otherwise chargeable under the head ''Salaries'' in the case of a foreign technician is exempt. The salary of foreign technician being exempt from tax, the question of the perquisites provided to him being taxable would not arise.

The contention of the revenue is that in order that the proviso may apply, there should be some income chargeable under the head ''Salaries'' and such salary payable should be less than Rs. 7,500. Since the salary payable to foreign technician is wholly exempt and is not income chargeable under the head ''Salaries'' the proviso has no application. When, once the proviso is not applicable, the amount expended for providing perquisites insofar as it exceeds l/5th of the salary payable or Rs. 1,000, whichever is less, shall not be deducted in calculating the profits and gains of business or profession.

The scheme of section 40 is that in computing the income chargeable under the head ''Profits and gains of business or profession'' among others, any expenditure incurred in making provisions of any benefit or amenity or perquisite shall not be deducted even if provision for deduction of such submission is made under sections 30 to 39. This is because of the non-obstantc clause with which section 40 opens. But the proviso to sub-clause (v) of section 40(a) makes an exception and excludes expenditure incurred in making provision for any benefit or amenity or perquisite. In other words, if a case comes within the ambit of the proviso, any deduction permissible under sections 30 to 39 shall have to be allowed. In other words, it shall be deducted in arriving at the profits and gains of business or profession chargeable to tax notwithstanding section 40(a) (v). Though not directly in point, a somewhat similar question arose for consideration before the Bombay High Court reported in COMMISSIONER OF Income Tax, BOMBAY CITY Vs. BAI NAVAJBAI N. GAMADIA., viz., therein an assessee created a revocable trust in respect of certain securities with the object of paying the income for charitable purposes, the income derived therefrom can be deemed to be income of the assessee u/s 16(1) (c) of the 1922 Act. The Court held that, not only the income actually received but also what is deemed to have been received under the Act was included in section 4(3) and, as such, the income derived from the securities was not liable to tax. That view was taken because of the definition of ''total income'' contained in section 215 of the Act, which would, as a result of the exemption contained in section 4(3), render the income tax Act inapplicable to income enumerated in that sub-section. On the same parity of reasoning if ''salary'' payable to foreign technicians is exempt from tax, any provision made for the benefit of amenity or perquisite in respect of such foreign technicians would be a deductible item in assessing profits and gains from business of the assessee-company. In our view, it would rather create an anomalous situation if it were held that while an income is exempt and is not chargeable to tax, perquisites payable would have to be taken into account and cannot be deducted for purposes of assessing the profits and gains of business of which such foreign technician is an employee. So long as salary in the hands of foreign technician is exempt, it would be deductible expenditure so far as the assessee-company which employs him; consequently, perquisites payable to such an employee would also be deductible in calculating the income from ''profits and gains'' of such company.

In this view of the matter, we uphold the conclusion arrived at by the Tribunal and, accordingly, answer this question in favour of the assessee-company.

Third question in R.C. No. 82 of 1978 :

The assessee claimed that the relief u/s 80J of the Act should be granted in respect of depreciable assets, on capital employed representing assets of the under taking by taking into consideration the ''written down value'' of the assets as per the books of account and not as per the income tax assessment. According to the learned counsel for the assessee, in the absence of any definition of ''written down value'' in rule 19A, the ''written down value'' should be assessed on the basis of the method of accounting employed by the assessee. The Tribunal rejected the assessee''s contention and construed the rule 19A(2) (i). On the above facts, at the in stance of the assessee the following question is referred :

Whether, on the facts and in the circumstances of the case, the ''written down value'' in rule 19A(2) (i) should be taken as ''written down value'' as defined in section 43(a) of the income tax Act, 1961?

Rule 19A lays down the method of computation of capital employed, among others, in an industrial undertaking for the purpose of section 80J. In respect of assets on which depreciation is allowable, the ''written down value'' is directed to be ascertained under rule 19A(2) (i). But by what method the ''written down value'' should be ascertained is not stated in that rule. The assessee adopted in his accounts the straight-line method as per the provisions of section 205, read with section 350, of the Companies Act, 1956. According to the straight-line method the life of the asset is determined and certain amount of the value thereof is deducted every year so that at the end of the life of the asset, it would be of nil value. Another method of deducting the depreciation is what is known as ''diminishing value method'' under which certain percentage of the value of the asset is deducted every year towards depreciation and in each succeeding year that percentage is deducted from out of the balance of the value of the asset. Under this method, theoretically, the asset will at no time be of nil value. As every asset employed in business is liable to depreciation, in ascertaining the profits and gains arising from business, certain amount has to be deducted towards the depreciation of the asset. The only question is how is this depreciation to be calculated and the ''written down value'' of the asset arrived at ? If the ''written down value'' is calculated as per the straight-line method as against the ''diminishing value method'', then the assessee would get a much larger amount of deduction. Neither the Act nor the Rules specifically lay down as to which method should be adopted in arriving at the ''written down value'' of the capital employed. In Explanation 1 to rule 19A(2) with regard to computation period, it is directed that the period for which profits and gains of the industrial undertaking or business of a hotel are computed under sections 28 to 43A (sic). The learned counsel for the assessee argues that ''written down value'' also has to be ascertained with reference to the very same provision. On the other hand, the learned counsel for the revenue con- tends that when reference to those provisions is made only for determining the computation period, it cannot be extended to ascertain the written down value. In our view in determining which of the method is to be adopted for calculating the written down value, the purpose for which such calculation is being made must be the guide. The written down value of the capital employed is being computed for the purpose of ascertaining the deduction in respect of the profits and gains which a newly established industrial undertaking is entitled u/s 43A. If that be the purpose for which the written down value of the capital employed is to be ascertained and there is no special method laid down either under the Act or the Rules for the purpose of ascertaining the written down value, we see no reason why the provisions of sections 28 to 43A should be ignored. The computation of capital employed also, in our view, should be in accordance with those sections for that will affect the ultimate quantum of income liable to be taxed. We are not impressed by the contention that while in rule 19(6) (iv) written down value has been defined as meaning ''written down value'' computed under sub-section (6) of section 43 as if for the words ''previous years'' the words ''computation period'' were substituted, the same definition is not given u/s 19A and, therefore, the written down value as evidenced from the books of account of the assessee should be excluded. It is true that u/s 43(6) in the case of assets acquired before the previous year, the actual cost of the assessee, less all depreciation actually allowed to him under this Act or under the 1922 Act or any Act repealed by that Act, or under any executive orders issued when the English income tax Act, 1886 was in force, shall be taken as written down value. But merely because there is no specific provision to that effect in rule 19A, it does not follow that the written down value ascertainable as per the method adopted by the assessee in his accounts, should necessarily be adopted.

The learned counsel for the assessee proceeds to answer this by contending that when the method of accounting adopted by the assessee is accepted for all other purposes, there is no reason why the same should be ignored in ascertaining the ''written down value'' of the assets employed in the industrial undertaking. In our view the ascertainment of the ''written down value'' being for the purpose of determining the profits and gains from business, it would be more rational to adopt the method discernible from sections 28 to 41 rather than ascertain it by following the method of accounting adopted by the assessee. That the Companies Act envisages u/s 205 read with section 350 straight-line method is no ground for adopting the same method for the purpose of the income tax Act. The ''written down value'' of the asset has to be ascertained for the purpose of allowing the deductions towards depreciation and other benefits u/s 80J not only where the industrial undertaking is established by an assessee which is a company but also in the case of all assessees, whether a company is governed by the Companies Act or not. Since the computation of the ''written down value'' is for the purposes of the income tax Act, the method discernible for other provisions of the income tax Act and the method which presents a more accurate position of income of the assessee should be adopted. In our view, the ''diminishing value method'' adopted by the Tribunal is a more scientific method of calculating the ''written down value'' of the asset employed for the purpose of ascertaining the profits and gains of the business.

In this view of the matter, we answer the question in favour of the revenue and against the assessee. To sum up, except the third question in R.C. No. 82 of 1978 which is answered in favour of the revenue and against the assessee, all the questions in R.C. No. 144 of 1977 and all other questions in R.C. No. 82 of 1978 referred to this Court are answered in favour of the assessee and against the revenue. The R.Cs. are, accordingly, disposed of. No costs. Advocate''s fee Rs. 1,000 in each.

References answered.