QADEERUDDIN AHMED, C. J.-The Income-tax Appellate Tribunal, Karachi Bench, has referred to this Court the following question under subsection (1) of section 66 of the Income-tax Act, 1922: "Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the cost of the building to the assessee was Rs. 25 lakhs."
2. The facts which form the background, briefly stated, are that on the 21st of August 1961 the assessee purchased at a public auction the evacuee property which was at that time known as Nedous Hotel, Lahore. The assessee had given the highest bid of Rs. One crore 21 lakhs, which was accepted. The amount was payable in 36 instalments over a period of 3 years either in cash or by surrendering Compensation Books of that face value. The assessee had already deposited Rs.
50,000.00 in cash as "earnest money" before the auction. At the conclusion of the auction, another payment of Rs. 5,00,000 in cash was made by it. After the auction but on the same date the assessee entered the transaction in its books of account showing its liability to be of Rs. One crore 21 lakhs without clarifying that the consideration was payable in the form of Compensation Books also. Now it is admitted that out of the entire balance of the purchase price, which amounted to Rs.
One crore 15 lakhs, Rs. 50,000.00 were paid by the assessee by surrendering Com--pensation Books of that face value. This was done over a period of a few years according to the time allowed by the authorities. But in the year which followed the year of the auction the assessee claimed full depreciation on buildings. For this purpose the assessee had to apportion the price of Rs. One crore 21 lakhs between the superstructure and the land. An architect was employed by it who calculated the value of the buildings to be Rs. 25 lacs and that of the land to be Rs. 96 lakhs.
3. On the basis of the architect's calculations the assessee claimed depreciation for the buildings on the basis of their entire value in the year which followed the year of auction.
4. The Income-tax Officer found that the assessee had paid Rs. 3,79,485.00 including the above- mentioned two sums in the assessm ent year and that he had made the payment of R5. 25,29,485 by surrendering compensation books of that face value which it had purchased from the market for Rs. 13,46,015.00. The officer held that the respondent was entitled to depreciation of the buildings firstly in respect of the price which it had actually paid and not the price which was apportioned by the architect, and secondly that such depreciation could be claimed in the assessment year with respects to that part of the price which was actually paid in that year. The assessee, therefore, went in appeal to the Appellate Assistant Income-tax Commissioner who dismissed it. The assessee then went in appeal to the Income-tax Appellate Tribunal, Karachi Bench, which has accepted it and held "that depreciation is available to the assessee on Rs. 25 lakhs as a whole during the year under discussion and not on the lesser amount actually paid to satisfy the demand of Rs. 25 lakhs nor in the piecemeal manner as done by the assessing officer".
5. The Income-tax Department was not satisfied with the above view; therefore, the Commissioner of Income-tax applied to the Income-tax Appellate Tribunal and asked for reference to be made to the High Court under subsection (1) of section 66 of the Income-tax Act, 1922 of the following two questions:- "(1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the cost of the building to the assessee was Rs. 25,00,000.00 when this amount was not the actual cost incurred by the assessee?
(2) Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that depreciation should be allowed on the total cost of the building in the assessment year 1962-63 although actual payment was made in three years extending over assessment years 1962-63 to 1964-65?"
The Income-tax Appellate Tribunal has referred to this Court the first question with a little modification in it and declined to refer the second question.
6. The first question, as it has been referred to us, has been reproduced above in the opening paragraph. The law which is relevant to this reference is, according to counsel for the parties, contained in sections 10(5)(a) and section 10(2)(vi). The com--bined effect of the two provisions, according to counsel for the parties, is that we have to determine the original or actual cost of the transaction to the assessee. For this purpose we have firstly to know the meaning of the expressions 'actual', `cost' and `cost of the assessee' because we are not concerned with `original' cost in these proceedings, although the basically relevant principle of interpretation is common for the interpretation of `actual' and `original'.
7. Those expressions have been the subject of interpretation in Pakistan, India as well as in England.
The Income-tax Appellate Tribunal has noticed three cases which were cited on behalf of the Income-tax Department and two cases which were referred to on behalf of the assessee. The three cases on which the Department relied are:
(i) Pindi Kashmir Transport Co. Ltd. v. The Commissioner of Income-tax, Lahore (1954) 26 I T R 595;
(ii) Motiram Roshan Lal Coal Co. v. Commissioner of Income--tax (1933) 1 I T R 329; and
(iii) The Commissioner of Income-tax, Madras v. Messrs Harveys Ltd. (1940) 8 I T R 307.
"To accept the argument of the learned Advocate-General (that the Court could not go behind the contract) would mean that where an assessee had placed a fictitious value on his assets he would be entitled to the statutory allowance for depreciation on the fictitious figure and consequently would escape payment of income-tax. Therefore, to accept the argument would be to go against the true intent and meaning of the Indian Income-tax Act."
8. From the above exposition of law it follows that depreciation is allowable on genuine, or real cost and not on the face value of a contract or of shares as the sole determining factor of costs. In addition to this counsel for both the parties agreed with the correctness of the illustration given by the Appellate Assistant Commissioner in his order as follows: "`X' purchased machinery at a price of Rs. 10,000. He paid freight, octroi and incurred other capital expenses amounting to Rs. 2,000. In this case the actual or original cost would be Rs. 12,000 and not the contractual price which was Rs. 10.000. Similarly the actual or original cost of an article could also be below the contractual price."
We inquired from counsel whether the actual cost of the assessee for claiming depreciation on an imported article which was paid for by the assessee by purchasing bonus vouchers would be the price of the article to the exporter or the total of necessary expenditure incurred by the assessee for importing that article: and the joint reply of both counsel was that the total of necessary expenditure was the actual cost of the importer on which he could claim depreciation. We think that in principle there is no difference between making payment by buying and surrendering bonus vouchers and making payment by buying and surrounding compensation books. In both cases the price of the article quoted in money can be different from the actual cost incurred by the prayer of the price.
9. The case in hand is simpler because here the price was payable not only in money but also in the form of compensation books because the intention was, on the one hand, to enable the holders of compensation books to utilize them at their face value and on the other hand to enable the State to discharge its liability which was created by the issuance of compensation books. The compensation books were not money although they were valued in money. Had they been money, there would not have been the need to make it a term of auction that the price could be paid by surrendering compensation books. The bidders at the auction knew that compensation books were selling in the market at a heavy discount and could be purchased cheaply for paying off the auction price. According to the Income-tax Officer compensation books were available in the market at a discount of 40 % of their face value. The participants at the auction gave their bids against that background and the assessee in this case was one of such bidders. If he was the original holder of the compensation books which he surrendered to pay the auction price, he could perhaps contend that the face value of his compensation books represented their value to him; therefore, the face value and not the market value was the actual price which was paid by him. But in this case the assessee has not surrendered compensation books which were .Issued to him to compensate him for his property but were purchased by him from the market at a much lower price than their face value, therefore the auction price which he had actually paid by surrendering them is no more to him than the price of the compensation books paid by him. It is not possible to say that he has paid more money than that towards the auction price.
10. Mr. A.I Athar questioned the soundness of the above--mentioned point of view and cited the same two cases which he had cited before the Appellate Income-tax Tribunal as well as the judgment of the House of Lords which was relied upon in those two judgments. He said that the auction price of the property to the assessee was the actual amount for which he gave his bid. It was immaterial, if not irrelevant, how or by what means he managed to equip himself to defray that cost, because it made no difference to that price if we raised the question as to whether he had begged, borrowed or stolen the money which he used to meet his need. Neither the source of money nor the methods by which he procured it had, according to counsel, anything to do with the actual amount of the cost which he paid. He found support to this view in the judgments of Commissioner of Income-tax v. Poona Electric Supply Company Ltd. ((1946) 14 I T R 622), Commissioner of Income-tax, Behar and Orissa v. Ranchi Electric Supply Co. Ltd. ((1954) 26 I T R 89) and Corporation of Birmingham v. Barnes-H. M. Inspector of Taxes ((1935) 19 Tax Cas. 214). Since the judgment of the House of Lords given in the case of Corporation of Birmingham has been relied upon in the other two cases and contains elaborates as well as direct discussion on the meanings of the expression "actual", "cost" and "actual cost to that person", we would concentrate our attention on understanding that judgment.
11. In that case the Corporation of Birmingham claimed that it was entitled to get allowance for depreciation on the total expenditure made by the Corporation on a Tramway Track. Out of this amount, the Corporation had received a part from the Dunlop Rubber Company because that company was interested m the construction of the track at an early date. Some of that money was received by the Corporation while the work was in progress and some after the work was completed. The Corporation also received from time to time a big grant from the Government because reconstruction of certain tramway tracks provided employment for a substantial number of unemployed men. The Inspector of Taxes claimed that "the actual cost to the corporation" must be measured by deducting from the total expenditure the amount paid to the Corporation by the Dunlop Company and the Government. The question before the House of Lords was whether or not this was the correct meaning of the expression "actual cost to the person". Lord Atkin delivered the judgment to which all other four Lords agreed. He held that the word "actual" taken together with the word "cost" meant nothing more than that the cost was "the whole cost, and nothing but the cost." The words "to the person" in the phrase "actual cost to the person" referred to the money paid by him for the construction of a work or for the purchase of a work.
It is immaterial:- "Whether some one has given him the money to construct or purchase for himself, or before the event has promised to give him the money after he has paid for the work, or after the event has promised or given the money which recoups him what he has spent."
The judgment goes on to say in a picturesque language: "On the hypothesis that the Dunlop Company had recouped the Corporation the whole of the cost of the first tramway I should have thought the answer to "what did it cost `you?' or 'what did it actually cost you?" would have been `It actually cost us --54,752 but none of the burden of that cost `will fall on the Corporation, for the Dunlop Company have paid 'us the full amount'. I think the same result is arrived at by saying `actual cost to that parson' is the same thing as the amount ex- -pended by the person."
12. The above observations draw a distinction between cost and the burden of cost. The word "cost" is an ambiguous expression. In book keeping the cost of an article may be regarded separately from the burden of that cost but it is not so in the economic sense. If a man said: My actual cost of the tramway is --54,752 though not a penny of that burden has fallen on me, he would be right inasmuch as he has referred to the entries in his books of account. He would also be right inasmuch as he has explained the sense in which the expenditure of money made on the installation was his cost-it was his cost inasmuch as he mechanically made that expenditure but it was not his cost in the sense that he was not burdened with it. Looking at the provision itself it is not easy to see how the cost of anything to a person can be separated from the liability of that person to meet it, but the history of the English legislation could and did lead to that interpretation. The House of Lords was assisted by the history of the legislation to reach that conclusion. Lord Atkin has said so in his judgment and Justice Findlay whose judgment was restored by the House of Lords had explained the effect of legislative history as follows: "In considering legislation, and amending legislation particularly, one always must look at the state of the law before the legislation was introduced, with a view of ascertaining what it was that the Legislature was dealing with. Having done that, having ascertained what the position of the law was with a view of approaching, so to speak, from the proper angle, the new legislation, then one must look at the new legislation and see exactly what it says and give it what one conceives to be its proper construction. It was clearly in the light of John Hall, Junior & Co. v. Rickman, it was in conse--quence of that decision, that this legislation, or this rule 6, was introduced in the form in which it was introduced in 1907 and there is not the least doubt that the general object of the Legislature was to restrict the allowance which could be made from the prime cost of the article, that is to say, that you were to be prevented from getting back by way of depreciation more than the total initial cost, and I think that the words were undoubtedly drafted by the draftsman and adopted by the Legislature, as one would expect they would be, with special reference to the words of Mr. Justice Walton."
The House of Lords has indicated in the last paragraph of its judgment that various problems would be involved if a person who is carrying on business acquired a plant by gift because then he could not say that he incurred any cost on it with the result that the Inspector of Taxes could possibly contend that there was no cost to the assessee; therefore, there was no measure or yard stick by which depreciation allowance could be determined but they have left the question open.
13. The answer to this question has been provided in India by the insertion of subjection 5 (c) to section 10 of the Income-tax Act of that country. The provision is as follows:- "In the case of assets acquired by the assessee by way of gift or inheritance, the written-down- value as in the case of the previous owner or the market value thereof, whichever is less."
The above provision was made in 1953 with effect from the 1st of April 1952, but cases were decided in India before the above amendment was made and according to the commentary on section 10 of the Indian Income-tax Act by Kaga and Palkiwala the view which prevailed was the same. In the words of those writers the view was as follows:- "In the case of assets acquired by the assessee by way of gift or inheritance, the written-down- value should be taken to be the written-down-value in the case of the previous owner or the market value, whichever is less."
14. This means that a yardstick was found out for measuring depreciation, but a more important provision which in our view provides a complete solution of the problem of calculating depreciation when any person other than the assessee has met the cost of a building, machinery or plant is to be found fn subsection (3-A) of section 10 of our Income-tax Act of 1922. This subsection was inserted in 1948 and runs as follows:- (3-A) In computing the allowance provided for in clause (vi), clause (vii), clause (xiv) and clause
(xivb) of subsection (2) there shall be left out of account a proportion of the building, machinery or plant equal to the proportion of the cost thereof which is or is to be met directly or indirectly by any Government or local authority or by any person other than the assessee or in respect of which exemption is allowed under section 15-F and the computation of any excess under clause (vii), clause (xiv) and clause (xivb), as the case may be, of that subsection shall be regulated accordingly.
The above provision does not only exclude from consideration for purposes of calculating the depreciation allowance any contribution made by a Government or local authority, but also by any person other than the assessee. This provision is thus wider than the provision with which the House of Lords was dealing in the above-mentioned case.
15. The enlargement of the provision, according to Mr. A.I Athar, is not of much significance in this case, because the lower price which the assessee has paid in this case did not involve contribution from anybody whatsoever. He contended that the provision is applicable to those cases in which contributions are made by somebody and not to other cases. This contention losses sight of the larger argument, which was advanced by counsel himself by citing the judgments given in Poona Electric Supply Company Limited and in Commissioner of Income-tax Bihar and Orissa, both of which are based on the view expressed by the House of Lords in the case of Corporation of Birmingham v. Barnes. While citing those cases the view expressed by the House of Lords on the basis of the principle of contribution was pressed by counsel, because that was the principle which the House of Lords had applied. That principle loses its force on account of the above-mentioned legislative provision made in our Act. It is no doubt possible to draw a distinction between those cases in which a contribution was made by somebody and those in which lessor cost has been paid than the face value of the consideration which was paid. This distinction, however, appears to us to be more apparent than real, because the real question in both circumstances is as to what was the actual cost of the property, plant or machinery, which was acquired by the assessee. On this aspect of the matter we have already expressed our views earlier and need not repeat them.
16. Our answer to the question, which has been referred to us, is, therefore, in the negative.
17. We have also heard counsel for the parties on the application of the Commissioner of Income- tax bearing I. T. C. No. 37 of 1966 and containing a request that the refusal of the Income-tax Appellate Tribunal, Karachi Bench, to refer the second question, reproduced in paragraph 5 above, he reversed and the Tribunal be directed to refer that question to this Court. The Tribunal has refused to refer that question as follows:- "Regarding the second question posed by the Department though it is very much a question of law it is not one referable in our opinion, admittedly the system of accounts followed by the respondent is mercantile, and it is also a fact that necessary debit and credit entries in respect of the entire amount of Rs. 1,21,00,000 were made in the assessee's books during the period under appeal. On these admitted facts the whole of the depreciation was rightly claimed during the year when the said entries came to be made. The legal aspect of this issue is so simple and easily noticeable that we cannot prevail upon our--selves to refer the second question."
Mr. S. A. Nusrat appearing on behalf of the Commissioner of Income-tax contended that the Income-tax Appellate Tribunal could not refuse to refer the question after holding that it was "very much a question of law". The only reason for which it has not been referred is that it is too simple to be referred to this Court, but, according to counsel, the simplicity ceases to be of much avail when the stand taken by the Department is that the; view of the Income-tax Appellate Tribunal is not sound.
18. Mr. A.I Athar supported the order of the Income-tax Appellate Tribunal by saying that the question which the Tribunal was called upon to refer to this Court has already been decided by our Supreme Court. He referred to Cement Agencies Ltd. v. I. T. O. (PLD 1969 SC 318). In that case managing agency commission became due, according to the agreement of the parties, on the 31st of July 1947, although it was to be paid "immediately after the annual accounts of the company shall have been passed by the share-holders". A distinction, therefore, existed, according to counsel, in that case between accrual of income and its actual payability. Their Lordships of the Supreme Court have observed in that case as follows:- "While we agree with the learned Judges of the High Court that the Managing Agency Commission for the year did not become payable to the appellants until the 5th of December 1947, when the auditors submitted their report, we are unable to accept their view that the income did not accrue to the appellants before that date."
We respectfully agree with the observations of the Supreme Court, but feel that in this case it was a term of the auction sale that the price be paid by instalments which fact, according to one side, is open to the interpretation that the liability to pay was broken up into parts and that, therefore, payability with respect to the instalments may not be said to be separate from the liability which was prima facie broken up.
19. In deference to the above situation we consider it proper that the question be referred to this Court by the Income-tax Appellate Tribunal. We accordingly direct the Tribunal to do so.