Tulzapurkar, J.
1. In this excess profits tax reference made by the Tribunal to this court under s. 21 of the EPT Act, 1940, three questions have been referred for our determination, viz. :
'(1) Whether, on the facts and in the circumstances of the case, in computing the excess profits for the chargeable accounting periods ending 31-3-1942, 31-3-1943, 31-3-1944, 31-3-1945 and 31-3-1946, the depreciation of Rs. 5,68,898, Rs. 4,85,102, Rs. 4,12,994, Rs. 3,59,759 and Rs. 2,99,298, respectively, referable to capitalised interest included in the cost of machinery, was deductible
(2) Whether, on the facts and in the circumstance of the case, in computing the capital employed in the assessee's business for the chargeable accounting periods ending 31-3-1945 and 31-3-1946 voluntary deposit of Rs. 50,36,928 was deductible and
(3) Whether, on the facts and in the circumstances of the case, the allowance of Rs. 95,21,000 granted by the Central Board of Revenue under s. 26(3)(a) of the EPT Act in determining the excess profits for the year ending 31-3-1945 was deductible from the opening capital of the company as on 31-3-1945 (1-4-1945) while computing the average amount of capital employed by the company in its business for the chargeable accounting period ending 31-3-1946 ?'
2. Assessments in dispute are the assessments under the EPT Act, 1940. The assessee, which is a public limited company, is doing business in the manufacture of steel and the relevant chargeable accounting periods are the financial years ending 31-3-1942, 31-3-943, 31-3-1944, 31-3-1945 and 31-3-1946. We shall deal with the facts pertaining to each one of these years separately.
3. The first question relates to all the five chargeable accounting periods and the facts giving rise to the question may be stated : The assessee-company had borrowed considerable amount in connection with its scheme of extension of the plant and it had paid interest amounting to Rs. 39,97,000 on the borrowings during the period from 1925-26 to 1940-41. This amount of interest was, however, not charged to the profit and loss account in the respective years but was capitalised in suspense account. Subsequently, this amount in the suspense account was allocated to different assets for the first time in the accounts for the year ended March 31, 1942. Consequently, depreciation allowed on plant and machinery for the assessment year 1942-43, onwards was also correspondingly increased because of this addition to the cost of machinery. In the income-tax assessment this additional depreciation was allowed and such additional depreciation so allowed in the income-tax assessments came to Rs. 5,68,898 for the assessment year 1942-43, Rs. 4,85,102 for the assessment year 1943-44, Rs. 4,12,894 for the assessment year 1945-46 and Rs. 2,99,298 for the assessment year 1946-47. In the excess profits tax assessment a question was raised whether for the chargeable accounting periods ending March 31, 1942, to March 31, 1946, such additional depreciation which was allowed in income-tax assessments on account of additional cost of machinery consequent upon capitalization of interest was allowable in determining the excess profits for the respective profits. The EPTO disallowed the deduction of this additional depreciation claimed by the assessee and when the matter was carried in appeal by the assessee-company to the AAC, the AAC reversed should be deducted in determining the excess profits for these chargeable accounting periods. In the further appeal to the Tribunal, which was preferred on behalf of the revenue, it was contended on its behalf that the allowance of additional depreciation on capitalized interest was not a normal allowance, that it was given in special circumstances for income-tax purposes and that there was no warrant for allowing the same in determining the excess profits. The Tribunal did not except the contentions that were urged on behalf of the revenue and held that additional depreciation by reason of capitalization of interest should be allowed as a deduction in determining the profit for the purpose of the EPT Act. Joshi for the revenue has raised the self-same contentions before us that were urged on behalf of the revenue before the Tribunal. In our view, the question really depends upon whether there is any difference indicated in the provisions of the EPT Act on the question as to whether such depreciation by reason by capitalization of interest should not be allowed as a deduction in determining the excess profits and, therefor, it will be necessary to consider the scheme of the relevant provisions of the EPT Act and the rules made in Sch. I to that Act for the purpose of determining the excess profits. Before we go to the provisions of the Act, we might refer to a decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT : [1975]98ITR167(SC) , where the question of allowing such depreciation for the purpose of income-tax was considered by the court. In that case, the Supreme Court after considering the meaning of the expression 'actual cost' occurring in s. 10(5) of the Indian I.T. Act, 1922, has taken the view that interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery formed part of the 'actual cost' of the assets to the assessee within the meaning of the expression in s. 10(5) of the 1922 Act and that the assessee would be entitled to depreciation allowance and development rebate with reference to such interest also. The Supreme Court has observed that as the expression 'actual cost' has not been defined, it should be construed in the sense which no commercial man would misunderstand, that 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 and that the accepted accountancy rule for determining cost of fixed assets was to include all expenditure necessary to bring such assets into existence and to put them in working condition. It, therefore, held that in case money was borrowed by a newly started company which was in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money could be capitalized and added to the cost of the fixed assets created as a result of such expenditure; in other words, the position with regard to allowing additional depreciation on the amount of interest paid on borrowings made for the purpose of income-tax is made abundantly clear by the Supreme Court in the aforesaid case. The question is whether there is any difference while determining excess profits under the EPT Act and whether while determining such excess profits such additional depreciation on the amount of interest paid on borrowings effected should similarly be deducted or not. On this aspect of the matter, at the outset it may e stated that the charging section under the EPT Act, 1940, is s. 4 under which it had been provided that : 'subject to the provisions of this ACt, there shall, in respect of any business to which this Act applies, be charges, levied and paid on the amount by which he profits during any chargeable accounting period exceed the standard profits a tax (in this Act referred to as 'excess profits tax') which shall, in respect of any chargeable accounting period ending on or before the March 31, 1941, be equal to 50% of that excess and shall in respect of any chargeable accounting period beginning after that date, be equal to such percentage of that excess as may be fixed by the annual Finance Act'. The expression 'standard profits' has been defined in s. 2(2) as meaning 'standard profits as computed in accordance with the provisions of s. 6'. The scheme of s. 6 has been explained by this court in Killick Nixon & Co.'s case : [1945]13ITR445(Bom) as to compare the average amount of capital during the standard period with the average amount of capital during the chargeable accounting period and that for this purpose the figure that is relevant is the average amount of capital for the standard period and not the amount of capital ascertained as in issue on the last date of the standard period. For the purpose of considering the first question it will now be necessary to consider rr. 1 and 3 of Sch. I to the Act, which deal with the manner of computation of excess profits for the purpose of the Act. Under r. 1 it is provided that the profits of a business during the standard period, or during any chargeable accounting period shall be separately computed on the principles on which the profits of a business are computed for the purposes of income-tax under s. 10 of the Indian I.T. Act, 1922. Now the question is whether there is anything in the schedule which says that depreciation to be allowed for excess profits tax purpose will be different from that allowed for income-tax purpose and the only restriction on the allowance for depreciation that is to be found in the schedule is contained in r.3(1) which provides that the principles of adding the allowance of depreciation for any one period to the allowance for depreciation for any subsequent period shall not be followed. in other words, the restriction pertains to disallowing unabsorbed depreciation of earlier years from being carried to the subsequent years, although such carrying forward in regard to unabsorbed depreciation that was claimed by the assessee was depreciation due to it on the written down value of the machinery as determined under s. 10(5) of the I.T. Act and that this depreciation brought forward from the earlier year. If that be so, it is difficult to appreciate as to how the capitalisation of interest could be disallowed in determining the profits for the purpose of EPT. The Tribunal, in our view, was right in allowing such deduction and the question referred to us, therefore, must be answered in the affirmative in favour of the assessee.
4. The second question is confined only to the two chargeable accounting periods ending March 31, 1945 and March 31,1946 and the question relates to computation of capital employed by the assessee in the business in those two years and the question raised is thus : Whether in computing the capital employed in the assessee's business for the chargeable accounting periods the amount of voluntary deposits of Rs. 50,36,928 made by the assessee under s. 10 of the Finance Act, 1942, was deductible or not.
5. It appears that under the scheme of the EPT Act an account was taken in the increase in the capital employed by an assessee in his business in a chargeable accounting period as compared to the capital employed in the pre-war standard profits which were deductible before arriving at the excess profits which were liable to excess profits tax. Sch. II of the Act contains rules according to which the capital employed in the business had to be computed and the broad principle was that out of the assets of the business, debts had to be deducted and these debts included debts incurred in respect of the business for income-tax, super-tax or excess profits tax or for advance payment of income-tax or for any further sum payable in relation to excess profits tax under s. 2 of the EPT Ordinance of 1943. The liabilities in respect of these taxes were to be treated as debts with effect from the dates given in the proviso to r. 2(1) of Sch. II to the EPT Act. It appears that under the Ordinance the assessee was bound to deposit in addition of excess profits a further amount which was refundable after the war and this amount was payable as required by the notice of the EPTO along with the excess profits tax dues. This was a sort of compulsory deposit under the EPT Ordinance, 1943. However, prior to the said Ordinance, under the Indian Finance Act of 1942, s. 10, there was already a provision for voluntary deposit almost on the same lines and it is in respect of this deposit that was made by the assessee under the voluntary scheme that the aforesaid question has been raised. On May 11, 1943, the assessee-company deposited under the voluntary scheme, an amount of Rs. 50,36,923 which was in respect of chargeable accounting period ending March 31, 1942. It appears that the assessee made further deposits under the compulsory scheme during the relevant chargeable accounting periods under the compulsory scheme during the relevant chargeable accounting periods also. It was not disputed that in the company's balance-sheet as on March 31, 1944, there were total deposits of Rs. 68,36,923 which included the aforesaid sum of Rs. 50,36,923 deposited under the voluntary scheme and similarly in the company's balance-sheet as on March 31, 1945, there were deposits amounting to Rs. 1,17,98,941 which also included the afore said amount of Rs. 50,36,923. These figures appear very clearly from the balance-sheets which have been produced before us by the assessee-company at the hearing. While calculating the average capital employed in the business in the chargeable accounting period ending March 31, 1945, the EPTO commenced with the opening capital as on April 1, 1944, and the determined the starting capital at Rs. 15,86,03,354 but in arriving at this figure he deducted from the assets of the company its debts and liabilities and one of the debts so deducted was the amount of Rs. 50,36,923. Similarly, while determining the capital employed in the business in the chargeable accounting period ending March 31, 1946, the said officer started with the opening capital of Rs. 14,42,30,207 as on April 1, 1945, and in arriving at this figure he deducted among other debts the aforesaid amount of Rs. 50,36,923. Such exclusion of this amount while determining the average capital employed in the business in the chargeable accounting periods ending March 31, 1945, and March 31, 1946, adversely affected the assessee-company, inasmuch as, the capital of the company in the business was reduced by the aforesaid amount and the company was deprived of the benefits of the proportionate deduction in determination of its excess profits. The assessee-company appealed to the AAC who upheld the computation made by the EPTO on the ground that voluntary deposits under the Ordinance of 1943 were deductible as debts he held that the voluntary deposits made under the Finance Act, 1942, were also required to be treated as debts and, therefore, deductible. The matter was carried further by the assessee-company to the Tribunal and it was contended on behalf of the assessee that the voluntary deposits and, therefore, the amount of Rs. 50,36,923 was not deductible while calculating the average capital employed in the business in each of the aforesaid chargeable accounting periods. On behalf of the revenue, a two-fold contention was urged. In the first place, it was urged that no distinction should be made between the voluntary deposits and compulsory deposits and, therefore, the order of the AAC was sought to be justified and in the alternative, it was urged that in any case the aforesaid amount locked up in the voluntary deposits was not money used for the purpose of the business or could be regarded as amount in the nature of investment and ad to be excluded from the capital employed in the assess's business. The Tribunal rejected both these contentions that were urged on behalf of the revenue and held that the voluntary deposit was not deductible from the capital employed in the assessee's business.
6. On the question as to whether the voluntary deposit made under s. 10 of the Finance Act, 1942, should be regarded as being on a par with the compulsory deposit that was required to be made under the Ordinance of 1934, it seem to us clear that the Tribunal was right in taking the view that the two could not be regard as being on par. There is no doubt that under the EPT Ordinance of 1943, s. 2 made such additional deposits in connection with payments of excess profits tax compulsory and it will be pertinent to mention that such deposits have been expressly included as deductible debts under Sch. II to the EPT Act, 1940. r. 2(1) of Sch. II provided as follows;
'Any borrowed money and debts shall be deducted, and in particular there shall be deducted any debts incurred in respect of the business for income-tax or super-tax or excess profits tax, or for advance payments due under any provision of the Indian Income-tax Act, 1922 (XVI of 1922), or for any further sum payable in relation to excess profits tax under section 2 of Excess Profits Tax Ordinance, 1943 (XVI of 1943).' It may be mentioned that the latter part commencing with the words 'and in particular there shall be deducted, etc.' have been added to r. 2(1) by s. 8 of the Indian Finance Act, 1944. Since the provisions of r. 2(1) of Sch. II were amended by s. 8 of the Indian Finance Act, 1944, nothing would have prevented the legislature from adding in this rule even the voluntary deposits which were made by the assessee under s. 10 of the Finance Act, 1942, but nothing of the kind was done and since express provision seems to have been made by way of amendment in Indian Finance Act, 1944, so as to include only the compulsory deposit paid under the 1943 Ordinance, it should stand to reason that voluntary deposits made by the assessee under s. 10 of the Finance Act, 1942, were not intended to be included in this rule. Apart from this aspect of the matter, it seems to us clear that after all the amount of Rs. 50,36,923 had been deposited by the assessee-company on May 11, 1943, under s. 10 of the Finance Act, 1942, under the voluntary deposit scheme and it is difficult to accept the proposition that when such deposit is voluntarily made, the same could be said to be in respect of any liability or made in discharge of any debt. The deposit being voluntary there cannot arise in favour of anybody a right to receive it so that there is no basis for creation of a debt. In our view, therefore, the Tribunal was right in rejecting the contention of the revenue that voluntary deposits made under s. 10 of the Finance Act, 1942, as well as compulsory deposits made under the Ordinance of 1943, would be on par. On that account the aforesaid amount is clearly not deductible while arriving at the average capital employed by the assessee in its business during the relevant chargeable accounting periods.
7. Joshi, however, pressed for our acceptance the alternative contention that was urged before the Tribunal. He contended that if the aforesaid amount of Rs. 50,36,923 was not deductible as a debt from capital computation for the purpose of computing capital employed by the assessee in its business, then, the case would fall under r. 3(1) of Sch. II to the Act. r. 3(1) runs as follows :
'Any investments the income from which is by virtue of the provisions of the First Schedule not to be taken into account in computing the profits of the business, and any moneys... not required for the purpose of the business. shall be left out of account,....' What was urged by Joshi was that since, in May, 1943, the assessee-company itself has voluntarily deposited the aforesaid amount of Rs. 50,36,923, under the voluntary deposit scheme as per s. 10 of the Finance Act, 1942, the said amount must be regarded as 'any money not required for the purpose of its business' falling within r. 3(1) and as such the same will have to be required to be left out of account while computing the profits of the business which will require proper computation of the capital employed. The emphasis was on the aspect that since the amount was deposited voluntarily by the assessee-company, it must be regarded as an amount which was not required by the assessee for the purpose of business. It is not possible to accept this contention of Joshi either, for the simple reason that s. 10 of the Finance Act, 1942, under which voluntary deposit could be made itself provide for certain reliefs in future in the excess profits tax. s. 10(1) of the (Finance) Act provides thus : 'If before the July 1, 1942, or within thirty days of the date on which any excess profits tax, charged under the provisions of the Excess Profits Tax Act, 1940, at the rate of sixty-six and two-thirds per cent. becomes payable, whichever on these dates is later, a further sum not exceeding one-fifth of the amount of the said excess profit tax is deposited with the Central Government, the Central Government shall repay, at such date and subject to such conditions as it may hereafter determine, so much of the said profits tax as shall be equal to one-tenth of the amount thereof or to one-half of such further sum deposited, whichever is the less :............' It will thus appear clear that by making this voluntary deposit of Rs. 50,36,923 in May, 1943, the assessee-company utilised this amount for the purpose of making this deposit and ensured for itself the benefits mentioned in the aforesaid provisions of s. 10(1). If that position, it would be difficult to say that the amount of Rs.50,36,923, would be said to be moneys not required for the purpose of business of the assessee-company. On the other hand, the deposit could be regarded as monies as having been utilised for the purpose of ensuring to the assessee-company the future benefits in the matter of the excess profits tax as indicated in the aforesaid provision. That being so, in our view, the Tribunal was right in coming to the conclusion that the said amount of Rs. 50,36,923 which had been deposited under the voluntary deposit scheme was not deductible in computing the capital employed in the business of the assessee-company in chargeable accounting periods ending March 31, 1945, and March 31, 1946. The second question, therefore, is answered in the negative in favour of the assessee.
8. Coming to the third question, it could be said that the same is confined to the chargeable accounting period ending March 31, 1946, and that also relates to the computation of capital employed in the business and the item in dispute is the amount of Rs. 95,21,000 which had been granted as special allowance to the assessee-company by the CBR under s. 26(3)(a) of the Act while computing the profits for the chargeable accounting period ending March 31, 1946.
9. Under s. 26 of the Act power had been conferred upon the CBR to grant certain reliefs in special cases and one of such special cases is indicated in s. 26(3). Under that provision, it has been stated that if on an application made to it through the EPTO, the CBR was satisfied that the computation in accordance with the provisions of Sch. I of the profits of a business during any chargeable accounting period could be inequitable, owing to any postponement or suspension, as a consequence of the present hostilities, of renewals or repairs, the CBR may direct that such allowances shall be made in computing the profits of the business during that chargeable accounting period as the CBR thinks just. Under the proviso thereto it was open to the CBR while giving such direction to impose such conditions as it deems appropriate. It appears that on account of some representations that were made by the assessee-company the CBR passed an order dated February 27, 1947, that it was satisfied that by reason of suspension or postponement of renewals as a consequence of the hostilities the computation of profits of the company's business during the chargeable accounting period ending March 31, 1945, in accordance with the provisions of Sch. I to the Act was unquestionable and, therefore, the CBR directed that the allowance of Rs. 95,21,000 should be made in respect of such circumstances in computing the profits of chargeable accounting period, but while granting this special allowance the only condition laid down by the board was that if any of the items in respect of which the above allowance was made had been executed during the year ending March 31, 1946, the cost thereto except in so far as it exceeded the apportioned amount of above allowance will be disallowed in computing the profits of that year for excess profits tax purposes. A copy of the letter dated February 27, 1947, issued by the CBR was produced before us at the hearing for our persual. The excess profits tax authorities allowed the deduction of Rs. 95,21,000 while determining the excess profits in the chargeable accounting period ending March 31, 1945, but they took up the position that the amount of Rs. 95,21,000 was required to be deducted from the capital employed in the business as on April 1, 1945, while arriving at the average amount of capital employed in the business for the chargeable accounting period ending March 31, 1946. The matter was carried to the Tribunal by the assessee and it was contended on its behalf that the allowance of Rs. 95,21,000 was a concessional allowance made with a view to ensure that the assessee did not suffer for postponing renewals and repairs which had to be postponed due to continuance of hospitality; it was pointed out that the allowance did not reduce the actual profit earned by the company nor did it reduce the actual capital employed in the business. On behalf of the revenue it was contended that the amount in question had gone to reduce the company's profits liable to excess profits tax and it must necessarily go to reduce its capital. It was also contended in the alternative that the allowance was just like an allowance on account of accrued liabilities, it should be deducted while determining the capital employed in the business for the chargeable accounting period ending March 31, 1946. The Tribunal rejected the contention urged on behalf of the revenue and accepted the contention of the assessee, and ultimately held that the amount of Rs. 95,21,000 was also not deductible in determining the capital employed in the business of the assessee. It may be stated that Mr. Joshi was not really in a position to successfully challenge the reasoning of the Tribunal in regard to this item. We may, however, state that it was open to the CBR under the proviso to sub-s. (3) of s. 26, while granting the special allowance of Rs. 95,21,000 to the assessee company, to impose such conditions which could have had the effect of making this amount deductible while computing the capital employed in the assessee-company in the chargeable accounting period ending March 31, 1946. Instead, as we have stated above, while granting this special allowance of Rs. 95,21,000 in computing the profits of the chargeable accounting period ending March 31, 1945, the only condition that was imposed by the Board was that if any of the items in respect of which special allowance had been made had been executed during the year ending March 31, 1946, the cost thereof, except in so far as it exceeded the apportioned amount of the above allowance, should be disallowed in computing the profits of that year for excess profits tax purposes. In view of such condition that was imposed, it seems to us clear that the only result of this special allowance that was granted was that the real profits of the company were not reduced nor was the actual capital employed in the business reduced and, therefore, the Tribunal, in our view, was right in coming to the conclusion that there was no justification for deducting this amount while ascertaining the opening capital employed by the assessee-company in its business as on April 1, 1945, for the chargeable accounting period which ended on March 31, 1946. The result is that the third question is also answered in the negative and in the favour of the assessee.
10. Revenue will pay the cost of the reference to the assessee.