12th February, 2020
The Editor
The Bombay
Chartered Accountant Journal
Jolly Bhavan
No. 2
New Marine
Lines
Mumbai 400
020
Dear Sir,
Re:
Article titled “Case study: Section 36(1)(iii) of the I.T. Act, 1961 with special reference to Proviso” in the January 2020
issue of the BCAJ
This has
reference to the above article published in your January, 2020 issue on page
Nos. 15 to 18.
I am not on the
subject of the article nor am I on the correctness or otherwise of the
conclusion of the article. I am writing this letter only on the narrow issue of
interpretation of the term “acquisition” discussed in this article on page 16
since it could be of general importance. If I am not mistaken, it is tried to
canvass in the article that the word “acquisition” used in the proviso
to clause (iii) of sub-section (1) of section 36 of the Income-tax Act, 1961
connotes acquisition of an asset from a third party and it does not
include an asset which is “self-created” or “self-constructed” or
“self-acquired”. This interpretation would apply irrespective of whether the
asset is work-in-progress (which is the subject of this article) or a capital asset, because the word employed in the proviso is “asset”.
If this interpretation
is applied to a capital asset like, say, a plant, it would lead to a strange
situation. For example, if a power generation company erects on its own a power
plant by buying various components, machines, spares, etc. from various third
parties and by utilising the services of outside technical consultants as well
as its own technicians, workers and employees, going by the interpretation
placed on the term “acquisition” in this article, the plant as a whole cannot
be called “acquired”, because the plant as a whole did not already exist (as is
stated in this article) over which the power generation company gains
possession; the plant is its own creation. It is therefore submitted that the
word “acquisition” used in the proviso would mean not merely a thing
acquired from a third party, but also a thing which is “self-created”,
“self-constructed” or “self-acquired”. The following observations of the
Gujarat High Court on the interpretation of the term “acquire” [though in the
context of the term “acquisition” used in section 48(ii)] in CIT vs.
Mohanbhai Pamabhai [1973] 91 ITR 393, 408-409 (Guj.) [later affirmed by
the Supreme Court in [1987] 165 ITR 166 (SC)] would throw light
on this issue:
“The word
‘acquire’, according to its plain natural meaning, is a word of very wide
import. It is not confined to obtaining of a thing from a third party.
When an assessee gains a thing by his own exertions or comes to own it or have
it by any recognised mode which would doubtless include the mode of
creation, he can be said to have acquired the thing. There
are various modes of acquisition by which a thing may be acquired by an
assessee and creation is one of them. When an assessee creates a
painting, sculpture or a building, he gains it, he comes to have
it or own it. He acquires the painting, sculpture or building
by creating it. When a capital asset is created by an assessee, it becomes his
property, he comes to own it and, therefore, he acquires it the moment it is
created. Creation or production of a capital asset is not foreign to the
concept of acquisition…” (Emphasis supplied)
Before making
the above observations, the Court took cognisance of the following meaning of
the term “acquire” given in Black’s Law Dictionary:
“To gain
by any means, usually by one’s own exertions; to get as one’s own; to obtain by search,
endeavour, practice, or purchase; receive or gain in whatever manner; come to
have.”1 (Emphasis supplied)
With regards,
Yours truly,
Jignesh R. Shah
Advocate, High
Court
____________________________________________________
1 See also Advanced Law Lexicon by P. Ramanatha
Aiyar, 3rd edition, 2005, page 73.
