Khanna, J.
1. At the instance of the Commissioner of Income-tax, Delhi (Central), New Delhi, the Income-tax Appellate Tribunal has referred the following questions for the opinion of this court :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the cost of the drier plant shown by the assessed at Rs. 7,70,000 was the actual cost of the asset for the purposes of allowance of development under section 33 and depreciation under section 32 of the Income-tax Act, 1961, and it was not the cost as determined by the Income-tax Officer at Rs. 3,60,000
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 8,679 claimed by the assessed as legal and court expenses was an admissible deduction under section 37(1) of the Income-tax Act, 1961
(3) Whether, on the facts and in the circumstances of the case, the amount of Rs. 46,718, being interest paid on income-tax arrears, and Rs. 7,400, being commission paid on shares borrowed for the purpose of pledging them as security against income-tax demands, are permissible deductions under the provisions of the Income-tax Act, 1961 ?'
2. The assessed is the Dalmia Dadri Cement Ltd. and the assessment year 1963-64, the relevant previous year of which ended on December 31, 1962.
3. The ITO had during the course of assessment found that the assessed had capitalised a sum of Rs. 16,46,617 as cost of the plant and machinery installled during the year. The same included the amount of Rs. 7,70,000 paid to the Bhagwati Glass Works Ltd. (hereinafter referred to as 'Bhagwati Glass'). This resulted from an agreement dated May 19, 1961, which the assessed had entered into with Bhagwati Glass. Thereby the latter had undertaken to fabricate and install suitable dries for drying Kankar which was the main raw material for the manufacture of cement. Fabrication of certain inlet and outlet trolleys, manufacture of suitable spirals lifters and their proper fittings in four driers according to certain specification were to be undertaken along with some subsidiary jobs like designing of cyclones, screw conveyors and making arrangements for supervising and co-ordinating manufacture of machinery, accessories and parts. This was primarily a labour contract as all the material for fabrication of driers and accessories was to be supplied by the assessed. Bhagwati Glass was to be paid Rs. 3,50,000 for their jobs in terms of this agreements. There were, however, further agreements subsequent to this agreement in accordance with which the assessed paid in all Rs. 7,70,000 to Bhagwati Glass in order to cover the additional jobs said to have been undertaken by it. this amount was capitalised and included in the amount of Rs. 16,46,617 on which depreciation and development rebate were claimed.
4. The ITO in the course of assessment found that 90% of the above share capital of Bhagwati Glass was held by R. Dalmia. It was further noticed that 75% of the share capital of the assessed was owned by the Bharat Development Pvt. Ltd. and the South Asia Industries Pvt. Ltd., which were in turn controlled by R. Dalmia, having beneficial holding of more than 51%. The ITO next noticed that the expenses incurred by Bhagwati Glass in the execution of those jobs were in the form of wages paid to labourers. Bhagwati Glass was in this way found to have incurred a total expenditure of Rs. 3,11,954 for carrying out the entire work on behalf of the assessed. As against this, the payment of Rs. 7,70,000 by the assessed to Bhagwati Glass for executing those works was considered to be excessively inflated and collusive in order to enable the assessed to claim much larger depreciation, etc., than it would have been entitled to. Bhagwati Glass was found to have a brought forward loss of Rs. 7,05,083 and, in this way, the profit of about Rs. 4,58,000 allowed to be gained by Bhagwati Glass in the execution of those works, was designed to be set off against that loss with no incidence of tax liability.
5. The ITO, thereforee, held that the amount of Rs. 7,70,000 paid by the assessed to Bhagwati Glass was for considerations other than business requirements. He computed the actual cost, in the hands of the assessed, of those works at Rs. 3,11,954 (which Bhagwati Glass in fact incurred) plus 15% profit thereon of Rs. 46,793. The total actual cost thus allowed was Rs. 3,58,747 converted into a round figure of Rs. 3,60,000.
6. This decision was upheld in appeal by the AAC. He agreed that the expenses shown by the assessed to have been incurred were not incurred bona fide for the purpose of acquiring a capital asset but were incurred collusively. He was unable to accept the contention of the assessed that even if the transaction was collusive for inflating the purchase price, the same did not permit the ITO to compute some other cost. It was held that if the circumstances showed that an assessed had arranged to put an entirely fictitious price on its assets, it was open to the I.T. authority to refuse to accept that price and to ascertain what the true value was.
7. When the matte went before the Appellate Tribunal, it was not disputed that the assessed and Bhagwati Glass were connected concerns indirectly controlled by Shri R. Dalmia. The Tribunal was found some merit in the revenue's contention that the jobs said to have been done by Bhagwati Glass were not of such specialised or sophisticated character as to justify such huge profit. It also, to an extent, accepted that the claim of an assessed cannot be accepted always as its face value and the department can go behind the arrangement put forward by the assessed and determine the actual cost. It was, however, observed that there were clear limits within which the department could make these adjustments. They were considered confinable to cases where part of the cost was not paid or had been ploughed back and returned or that it was not the cost of the article purported to be transferred but of some other article as well. The mere fact that the assessed could have got the asset much cheaper from other agencies or that it gave to Bhagwati Glass more than it would have been entitled to get from other customers, were considered irrelevant and not to, in any manner, detract from the actuality of the amount paid by the assessed.
8. Considering the implication of the term 'actual cost' as mentioned in s. 43(1) of the I.T. Act, 1961, the Tribunal observed that it suggested two aspects, firstly, what may be called the aspect of actuality and, secondly, what may be called the aspect of cost of the asset to the assessed. The former, it was noted, would denote the reality or the genuineness of the payment. The second aspect would indicate what exactly the assessed had to surrender or give to acquire the asset. The Tribunal referred to Expln. (3) to s. 43 and pointed out that in cases covered by this specific Explanationn, the I.T. authority determine the actual cost having regard to all the circumstances. Apart from this situation, no other case of inflated cost, it was held, would justify substitution by the ITO of a figure of actual cost different from the actual cost paid by the assessed. Such a case of sale even though completed in circumstances which would suggest collusion, it was opined, would not entitled the I.T. authorities to substitute their own figure of actual cost. The appeal of the assessed was, thereforee, allowed.
9. The term 'actual cost' has been defined in s. 43 of the 1961 Act, to mean the actual cost of the asset to the assessed reduced by that portion of the cost thereof, if any, as had been met directly or indirectly by any other person or authority. According to the revenue, the Legislature has not without purpose laid emphasis on the actuality of the cost aspect. Had it been intended that depreciation and development rebate were permissible on whatever amount that had made the assessed to acquire it, it would have left the matter to the confined to cost aspect only. Instead, when the actuality part has been introduced, it has the implication of the reality or genuineness thereof. Any collusive, inflated or fictitious cost, it had been pleaded, cannot be brought within the scope of the term 'actual cost'. The object behind this legislation was contended to be to curb the malpractices and tendencies to inflate capital costs for obtaining higher depreciation while not burdening the other order with any material tax liability. This is what, it is pointed out, has been attempted in the present case when a profit of Rs. 4,58,000 was handed over to Bhagwati Glass for the work executed by it of the value of Rs. 3,11,954 only. Bhagwati Glass was allowed unusually high profit which the assessed would not have in any normal commercial transaction allowed to any other concern. Rather the object of this inflated cost was clear as Bhagwati Glass had a carried forward loss of over Rs. 7 lakhs was able to get the huge profit adjusted against the same without implication of any tax liability, and at the same time entitled the assessed to much higher depreciation and development rebate than it would have been entitled to. Rather the Explanationn added to this section, it is pointed out, shows that the so-called cost can be in certain circumstances reduced. the word 'actual', it is pleaded, has the implication of what is real. A collusive, fictitious and inflated cost motivated by extra-commercial consideration, it has been asserted, has to be treated as unreal. It has also been pointed out from the aside of the revenue that this job work was originally entrusted to a German concern at much lower cost but it was cancelled as that concern could not ensure that the drier plant would reduce the moisture to 0%, which was the condition precedent to the supply. However, later when the work was got executed from Bhagwati Glass, the drier moisture of 3% was accepted. In the original agreement dated May 19, 1961, the consideration at which Bhagwati Glass was to execute the jobs was settled at Rs. 3,50,000. However, it was later raised to as high as Rs. 7,70,000, although there was no material to show that any substantial additional job works had been undertaken by Bhagwati Glass.
10. From the side of the assessed, however, it has been pleaded that the expression 'actual cost' signifies the amount of consideration actually paid or payable for the acquisition of the asset and that the ITO cannot substitute that with any notional value on the basis of reasonableness. It is urged that in tax matters, the motive of a transaction has no effect on the consequences as to its taxability, and a person has to be taxed on such income or loss as he has actually earned or suffered and not what he could have earned or suffered with an added amount of prudence. Wherever the legislature had envisaged to substitute notional cost in place of the cost incurred, it has made specific provisions in that direction. Reference is made in this regard to s. 52 of the Act, which dealt with matters relating to capital gains. It is vehemently contended that 'cost' means what has gone out of the pocket irretrievably, and further that the appliance of certain profit rate would not provide a guide, as different traders run their business on different margins of profits. Once the cost is found to have passed between the contracting parties, it is pleaded, it made the lest difference that those parties were strangers or were closely connected.
11. We have heard the parties and given our utmost consideration to all the circumstances. As is clear from the narration of facts, in the books of Bhagwati Glass, the total expenditure incurred by it in the execution of the contract jobs was Rs. 3,11,945. As against that the assessed has paid Rs. 7,70,000 to it for execution of those jobs. This, on the face of it, appears to be a very high payment, specially when the Tribunal has noted that the jobs did not require any specialised or sophisticated skill. It was mostly a labour contract as the material was entirely supplied by the assessed. It is next also clear that the assessed and Bhagwati Glass were connected concerns indirectly owned by R. Dalmia, and that Bhagwati Glass had a carried forward loss of over Rs. 7 lakhs this year. The result has been that although Bhagwati Glass enjoyed a profit of about Rs. 4,58,000 in the execution of this contract, no tax liability ensued to it and the entire profit was wiped off against the large brought forward loss. At the same time, the assessed has claimed to be entitled to depreciation, etc., on the capital value of those works at Rs. 7,70,000. The I.T. authorities were, thereforee, right in observing that there was considerable element of collusion in the entire which could not be treated as the result of normal commercial considerations. The capital cost has no doubt been inflated in the hands of the assessed to enable it to claim higher depreciation, etc.
12. We find that the term 'actual cost' came up for consideration before the Supreme Court in the case of Guzdar Kajora Coal Mines Ltd. v. CIT : [1972]85ITR599(SC) . It was observed that the original cost of a particular asset is a question of fact which has to be determined on the evidence of the material produced before or available to the I.T. authorities.Any document or formal deed mentioning the consideration or the cost paid for the purchase of an asset by an assessed would be a piece of evidence and, prima facie, the statements or figures given therein would show how much the cost of the asset to the assessed is. But if circumstances exist showing that a fictitious price has been put on the asset there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value fro ulterior purpose, it is open to the I.T. authorities to refuse to accept the price mentioned in the deed or alleged by the assessed and to ascertain what the actual cost was. These observations in our view render the approach adopted by the Tribunal in the present case as unsustainable when it observed that collusion and inflation would not entitled the I.T. authorities to substitute their own figure of actual cost.
13. In the case of Guzdar Kajora Coal Mines Ltd. : [1972]85ITR599(SC) , the deed of conveyance executed in favor of the assessed purported to transfer certain assets for a consideration of Rs. 6 lakhs paid by the assessed. Those assets included machinery, plants, stores, building, etc. The I.T. authorities found that some of the directors and shareholders of the assessed and the vendor-company were the same and connected, and there were certain inflations and deflations of the written down values of the assets. No provision had been made for goodwill of the business. The ITO, thereforee, allocated part of Rs. 6 lakhs to goodwill. The value of the depreciable assets was computed at Rs. 33,973 only. The Appellate Tribunal then rejected the assessed's claim holding, inter alia, that the allocation in the deed of conveyance was arbitrary. On a reference of the question whether the ITO was competent to go beyond the conveyance and fix a valuation of the assets on his own, the High court answered the question in the affirmative. On a appeal to the Supreme Court, it was held that there was no error on infirmity that would justify interference by the Supreme Court.
14. Similarly, the Calcutta High Court in Jogta Coal Co. Ltd. v. CIT : [1965]55ITR89(Cal) , observed that if the circumstances showed than an assessed had arranged to put a fictitious price on his assets in a contract or conveyance, it was open to the I. T. authorities to refuse to accept that price, to behind the contract or conveyance and ascertain what the original cost was. The Lahore High court (Pakistan) has also in the case of Pindi Kashmir Transport Co. Ltd. [1954] 26 ITR (Lah-Pak), observed that the I.T. authorities were justified in law in going behind the contract for determining the original cost to the company, for the purpose of making allowance of depreciation.
15. So far as the Explanationn added to s. 43 of the Act, specially Expln. No. 3, under which alone the Tribunal has observed the interference by way of determination of actual cost can be made, we are of opinion that such Explanationns are only elaborative and tend to bring out some of the circumstances in which the main provision of the law can operate. They can by no stretch be treated as exhaustive or to otherwise limit the wide scope which the provision of law may embrace. Rather the incorporation of some of these Explanationns by itself shows that the Legislature envisaged interference in given circumstances in the amount of purported actual cost.
16. We are further of opinion that the Tribunal was not justified in restricting the operation of the actuality of cost to cases where part of that consideration was not paid or ploughed back or covered some other items. In these cases, the cost would be what is in fact paid. What was not paid or was returned would never be considered as cost. This will independent of the provisions contained in the I.T. Act. The provisions of this Act have not been introduced for this purpose. They have rather a special objective and is directed towards nullifying the malpractices, sometimes indulged in in some quarters, of disproportionately inflating capital cost in order to earn high depreciation, and pass on in collusion substantial amounts to sister concerns or closely connected parties to whom those amounts may have little or negligible bearing on the incidence of tax. This is what appears to have happened in the present case. In our opinion, when the Legislature has prefixed the word 'actual' to the 'cost', it was to lay emphasis on the reality and genuineness thereof and exclude collusive, inflated, deflated or fictitious costs.
17. The next question that arises is as to what should be the actual cost treated in the present case. The I.T. authorities have estimated that by adding 15% profit to the total expenditure of Rs. 3,11,954 incurred by Bhagwati Glass. We in this respect find that the Tribunal has not applied its mind to this aspect of the matter as it erroneously proceeded on the assumption that it could at all go into the same. Since we have held otherwise, let the Tribunal now go to into the actual cost of the capital asset in dispute.
18. So far as question No. 3, the controversy came up before this court for the year 1961-62, in the present assessed's case and we have answered a similar question in the negative and against the assessed (Income-tax Reference No. 34 of 1971, decided on November 12, 1979). Following that decision we answer this question against the assessed.
19. We next advert to question No. 2 relating to the amount of Rs. 8,679 claimed by the assessed as fee paid to lawyers for preparation and pursuing of income-tax appeals. The assessed has in this regard placed reliance upon the observations of the Supreme Court in the case of CIT v. Birla Cotton Spinning & Weaving Mills Ltd. : [1971]82ITR166(SC) , to the effect that the earning of profit and payment of taxes are not isolated and independent activities of a business. These are continuous and take place from year to year during the whole period for which the business continues. If the assessed takes any step for reducing its liability to tax which results in more funds being left for the purpose of carrying on of business there is always the possibility of higher profit. Similarly, in Sree Meenakshi Mills Ltd. v. CIT : [1967]63ITR207(SC) ,, the Supreme Court observed that in order than an expenditure may be admissible as a deduction, it is not necessary that the primary motive in incurring it must be directly to earn income thereby.
20. The Allahabad High court too has in the case of Modi Sugar Mills Ltd. v. CIT : [1973]90ITR201(All) allowed expenditure reasonably and honestly incurred in connection with legal proceedings taken by an assessed by way of a write for escaping tax liability consequent upon the discovery of concealed income. The Delhi High Court too in a Division Bench case, D. S. Bist and Sons v. CIT : [1972]85ITR254(Delhi) , has held that the expenses incurred by an assessed in payment of professional fees to chartered accountants in connection with representation to the Central Board of Revenue and other legal proceedings in appeal and in connection with settlement of old assessments with the Directorate of Inspection were allowable as business expenditure under s. 10(2)(xv) of the Indian I.T. Act, 1922, In view of this chain of decisions, we are unable to interfere with the order of the Tribunal holding that sum of Rs. 8,679 claimed by the assessed as legal and court expenses for preparation and pursuing of income-tax appeals was permissible. Question No. 2 is answered in favor of the assessed.
21. Looking at the circumstances, we make no order as to costs.