JUDGMENT
G.G. Sohani, J.
1. By this reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), the Income-tax Appellate Tribunal, Indore Bench, has referred the following questions of law to this court for its opinion :
” For assessment years 1964-65 and 1965-66 : At the instance of the assessee :
“(1) Whether, on the facts and in the circumstances of the case, it is legal and proper to reduce the rebate of super-tax at 7.5% on the whole of the amount of the dividend other than the dividend on preference shares having regard to the relevant provisions of the Finance Acts, 1964 and 1965, as the case may be ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the whole or a part, as the case may be, of the salary paid by the assessee to Smt. Taramani Mandelia, Smt. Damayanti Buch and Smt. Perry in the assessment years 1964-65 and 1965-66?
(3) Whether, on the facts and in the circumstances of the case, the litigation expenses of Rs. 90,204 and Rs. 86,188 incurred by the assessee in the assessment years 1964-65 and 1965-66, respectively, were allowable revenue deductions ?
At the instance of the Commissioner of Income-tax :
(4) Whether, on the facts and in the circumstances of the case, the amount of rebate allowable under Section 2(5)(a)(i) of the Finance Acts, 1964 and 1965, should be calculated by including in the export turnover the amounts representing the drawback of customs duty, refund of excise duty and premium gain on value of yarn entitlement ?
(5) Whether, on the facts and in the circumstances of the case, the amount of rebate allowable under Section 2(5)(a)(ii) of the Finance Acts, 1964 and 1965, should be calculated by including in the export turnover the amounts representing the drawback of customs duty, refund of excise duty and premium gain on value of yarn entitlement ?
Assessment year 1965-66 :
At the instance of the assessee :
(6) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 3,20,477 incurred by the assessee in connection with the purchase of 155 new looms is includible in the cost thereof for the purpose of allowing depreciation and development rebate in the assessment for 1965-66?”
2. The material facts giving rise to this reference, briefly are as follows:
The assessee is a public limited company carrying on various business activities. During the assessment years 1964-65 and 1965-66 for which the accounting years ended on March 31, 1964, and March 31, 1965, respectively, the assessee declared dividend on equity shares of Rs. 62.5 lakhs. The dividend was declared out of the General Reserve Fund. While framing the assessment for the aforesaid assessment years, the Income-tax Officer withdrew the rebate on this dividend at the rate of 7’5% in accordance with the provisions of the second proviso to the relevant paragraph of Part II/Part I of the First Schedule to the relevant Finance Act. The Income-tax Officer disallowed salary paid to Smt. Mandelia, Smt. Buch and Smt. Perry and further disallowed deduction for expenditure incurred by the assessee in connection with certain arbitration proceedings on the ground that it was not revenue expenditure. The Income-tax Officer also rejected the claim of the assessee that the amount of rebate allowable under Section 2(5)(a)(i) and (ii) of the Finance Act in force, should be calculated by including in the turnover the amounts representing drawback of customs duty, refund of excise duty and premium gain on the value of yarn entitlement. The Income-tax Officer also rejected the claim of the assessee that the expenditure of Rs. 3,20,477 incurred by the assessee in connection with the purchase of 155 new looms was includible in the cost thereof for the purpose of allowing depreciation and development rebate in the assessment year 1965-66. The findings of the Income-tax Officer were upheld on appeal by the Appellate Assistant Commissioner. On further appeal before the Tribunal, the Tribunal partly allowed the appeal in so far as the claim of the assessee with respect to the rebate allowable under Section 2(5)(a)(i) and (ii) of the relevant Finance Act was concerned. Aggrieved by the order passed by the Tribunal, the assessee as well as the Revenue submitted applications for making reference and it is at the instance of the assessee and the Revenue that the aforesaid questions of law have been referred to this court for its opinion.
Question No. (1):
Learned counsel for the assessee relied on the decision of the Supreme Court in CIT v. Khatau Makanji Spinning and Weaving Co. Ltd. [1960] 40 ITR 189 and contended that the reduction of rebate on the amount of dividend declared by the assessee was not justified. It was urged that in reducing the rebate as aforesaid, what was actually taxed was not part of the total income of the previous year ; that the provisions of the Finance Acts, 1964 and 1965, providing for reduction of rebate were outside the scope of the Finance Acts, and that they were discriminatory and penal in nature.
3. Now, as regards the challenge to the validity of the relevant provisions of the Finance Acts, it would not be permissible for us to go into that question in a reference to this court under Section 256 of the Act. Of course, the question as to whether the tax, in the instant case, has been legally charged under the relevant provisions of the Finance Acts Can certainly be examined by this court and it is, therefore, necessary to turn to that aspect of the matter.
4. Now, in the instant case, the Tribunal has upheld the finding of the Appellate Assistant Commissioner and held that what the Income-tax Officer had in fact done was not to levy tax on the income which did not form part of the total income of the assessee for the previous year but what had taken place was that the reduction in the tax which might have been available to the assessee by way of rebate was partly not allowed because of the declaration of dividend. The Tribunal, therefore, held that the reduction of rebate was not illegal in the circumstances of the case. We see no cogent reason to take a view different from that taken by the Tribunal in this behalf. The decision in CIT v. Khatau Makanji Spinning and Weaving Co. Ltd. [1960] 40 ITR 189 is distinguishable on facts. In that case, the Supreme Court dealt with the question as to whether levy of additional income-tax was valid in respect of dividends distributed in excess of the specified limit under Clause (ii) of the proviso to Paragraph B of Part I of the First Schedule to the Finance Act, 1951. As already observed, in the instant case, no additional income-tax has been levied in respect of dividend distributed by the assessee. In view of the relevant provisions of the Finance Act, which, it was not disputed before us, were attracted in the instant case, the amount of rebate allowable to the assessee has been reduced. On the facts and in the circumstances of the case, the Tribunal, in our opinion, was justified in upholding the order passed by the Income-tax Officer in this behalf.
5. Our answer to question No. (1) is, therefore, in the affirmative and against the assessee.
6. Questions Nos. (2) and (3) :
These questions were not pressed by learned counsel for the assessee and hence it is not necessary to answer these questions. We, therefore, decline to answer these questions.
7. Questions Nos. (4) and (5) :
A similar question came up for consideration before a Division Bench of this court in Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. v. CIT [1983] 143 ITR 590. It was held in that case that the amounts received by an assessee as drawback of customs duty and as refund of excise duty were received only because of the export business carried on by it and that these amounts, therefore, formed part of the turnover of the export business. It was further held that profits arising from import entitlements could not be included in the value of the turnover of exports. We see no cogent reason to take a view different from that taken by this court in Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. v. CIT [1983] 143 ITR 590.
8. Our answer to the aforesaid two questions is that, on the facts and in the circumstances of the case, the amount of rebate allowable under Section 2(5)(a)(i) and (ii) of the Finance Acts, 1964 and 1965, should be calculated by including in the export turnover the amount representing the drawback of customs duty and the refund of excise duty but not the amount representing the premium gain on the value of yarn entitlement.
9. Question No. (6) :
Now, the material facts in this behalf are that with a view to substantially expanding the Weaving Department at Birla Nagar, the assessee wanted to instal new looms but it could not get statutory permission for the purchase of new looms. The assessee was advised that permission could be granted for replacement of old looms by purchase of new looms. The assessee, therefore, purchased old looms from the Burhanpur Tapti Mills for Rs. 3,31,000. Inclusive of freight and other expenses for transporting these looms, the total expenditure incurred by the assessee in that behalf was Rs. 3,40,977. The assessee received permission for the purchase and installation of new looms on condition that the old looms would be discarded. The assessee purchased 155 new looms for a sum of Rs. 11,09,794. After adjusting the scrap value of the old looms, the expenditure incurred by the assessee in connection with the purchase of old looms was Rs. 3,20,477. The contention of the assessee before the Tribunal was that the actual cost of the new looms should be taken to be Rs. 14,34,272, inclusive of the sum of Rs. 3,20,477 for the purpose of allowing depreciation and development rebate. The Tribunal did not uphold the contention of the assessee on the ground that neither commercial practice nor any provision of law justified increasing the cost of a newly acquired asset by the cost of value of an asset which was replaced by the new asset. In our opinion, the finding of the Tribunal in this behalf cannot be held to be justified. In Challapalli Sugars Limited v. CIT [1975] 98 ITR 167, the Supreme Court has held that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such asset into existence. Following that decision, the Bombay High Court has held in CIT v. Tata Mills Limited [1979] 118 ITR 496 that acquisition of a right to expand the mill and to instal additional spindles was expenditure to bring the additional extension into existence and the assessee was entitled to depreciation and development rebate on the amount paid for acquiring the right to instal and operate additional spindles. In the instant case, the expenditure of Rs. 3,20,477 was incurred by the assessee for bringing into existence 155 new looms. The said expenditure, in our opinion, was, therefore, includible in the cost of new looms for the purpose of allowing depreciation and development rebate in the assessment year 1965-66. Our answer to question No. (6) is, therefore, in favour of the assessee and against the Revenue.
10. Reference answered accordingly. In the circumstances of the case, parties shall bear their own costs of this reference.
