Tulzapurkar, J.:— The question that has been referred to us by the Tribunal under s. 66(1) of the Indian Income-tax Act, 1922, at the instance of the Commissioner of Income-tax is as under:

“Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,70,593 is liable to tax under s. 10(2A) of the Act?”

2. The question pertains to the assessment year 1957–58, the corresponding accounting year being a period from April 1, 1956, to December 31, 1956, and it arises in these circumstances: The respondent-assessee, M/s. Gagalbhai Jute Mills Ltd., runs a jute mill and owns machineries of different kinds forming part of its assets. During the relevant accounting period from April 1, 1956, to December 31, 1956, the assessee sold some items of machinery on which it earned profits, part of which related to machineries actually used during the relevant previous year, but the major part arose in respect of items of machinery which were admittedly not used for its business during the relevant account year. The profit in respect of items of machinery not used during the said period amounted to Rs. 2,70,593.

3. The ITO held the said amount to be liable to tax under the second proviso to s. 10(2)(vii) of the Act, but on appeal the AAC held the said sum to be exempt from tax following the Supreme Court decision in the case of Liquidators of Pursa Ltd. v. CIT, [1954] 25 ITR 265 and two unreported judgments of this court, one in the case of Western India Match Co. Ltd. v. CIT (I.T.R No. 25 of 1950) and the other in Gujarat Ginning & Mfg. Co. Ltd. v. CIT (Income-tax Reference No. 24 of 1954).

4. On further appeal by the department, it was contended before the Tribunal that the AAC erred in directing the ITO to delete the profit of Rs. 2,70,593 on the sale of machinery on the ground that the machinery was not used at any time during the relevant accounting period. It was urged that the AAC should have held that such profit was assessable by virtue of s. 10(2A). In the alternative, it was also urged by the department that the AAC having held that the profits made on the sale of assets was not a revenue profit assessable under s. 10(2)(vii), should have directed the ITO to assess capital gains to tax under the second or third proviso to s. 12B(2), as the case may be. A further contention was also urged at the time of hearing before the Tribunal that the profit would be assessable alternatively under s. 10(2)(vii) and for this reliance was placed on the decision of the Supreme Court in the case of CIT v. National Syndicate, [1961] 41 ITR 225. The Tribunal negatived all the contentions that were urged on behalf of the department and upheld the AAC's order.

5. As regards the contention raised under s. 10(2A), the Tribunal held that the two conditions that were required to be satisfied in order to attract the provisions of s. 10(2A) were not satisfied in the case, and, therefore, the sum of Rs. 2,70,593 could not be brought to tax under the said provisions. At the instance of the Commissioner, the question set up at the commencement of this judgment has been referred to us by the Tribunal for our determination. Incidentally, it may be mentioned that the Commissioner by filing a revised application also sought to expand the question that was to be referred to this court by including in it the question of assessability of the profits under s. 10(2)(vii) of the Act, but that attempt did not succeed and the Tribunal has not referred the question of assessability of the profits under s. 10(2)(vii) of the Act to this court.

6. In order to appreciate the contentions that have been raised by Mr. Joshi on behalf of the revenue on the question of applicability of s. 10(2A) of the Act, it would be necessary to set out the relevant provisions of s. 10(2A), which runs as follows:

“Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accruing to him, shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year.”

7. It was not disputed before us by Mr. Joshi that depreciation allowance that had been allowed in the earlier years on those items of machinery which were not in use for the relevant previous year could not be regarded either as an expenditure or a trading liability incurred by the assessee. But he contended that such allowance would come within the expression “loss” suffered by the assessee within the meaning of s. 10(2A) and, according to him, if depreciation allowance could be treated as a loss suffered by the assessee in terms of s. 10(2A), then the proceeds out of the sale of such assets could be considered to be receipts in the hands of the assessee in respect of such loss and, therefore, the amount of Rs. 2,70,593, which represented the profits which arose in respect of items of machinery that were sold in the relevant year of account, items of machinery which were not used during the said period, should be held to be liable to tax under the aforesaid provisions.

8. In support of his contention Mr. Joshi relied upon the decision of this court in CIT v. P.K Badiani, [1970] 76 ITR 369 (Bom), where the true nature of depreciation allowance has been clearly indicated. It has been held in that case that allowance for depreciation is to replace the value of an asset to the extent it has depreciated during the period of accounting relevant to the assessment year and as the value has, to that extent, been lost, the corresponding allowance for depreciation takes its place and, therefore, when arriving at the profits for that period the amount of depreciation has to be deducted, because the amount of the value lost by depreciation is a capital loss which must be replaced first, as, otherwise, the initial capital would, to that extent, be incorrectly and falsely converted into and treated as profits. Relying upon this decision, Mr. Joshi contended before us that after all depreciation allowance is a provision for the loss of capital by user of the asset in the course of the year's business and unless depreciation is so provided from year to year, profits would be overstated. In this sense the depreciation allowance could be treated as a loss within the terms of s. 10(2A), the loss suffered by the assessee on account of wear and tear of the particular asset having been used in a particular year. He further contended that when, later on, that particular asset is sold and monies are realised, it will be possible for one to know whether or not the amount provided for loss of capital by wear and tear was proper, deficient or excessive and that when the loss provided for is excessive, then, to that extent, the provision for loss is recouped, i.e, recovered. It is in this manner that Mr. Joshi urged before us that the provision of s. 10(2A) of the Act could be said to have been satisfied in the instant case and, therefore, the amount of Rs. 2,70,593 should have been held to be liable to tax under s. 10(2A) of the Act.

9. As the Tribunal has pointed out in its order, two conditions have got to be satisfied before the amount of Rs. 2,70,593 could be brought within the purview of s. 10(2A) of the Act, viz., (1) that a loss must have been suffered by an assessee because of an allowance or deduction that has been made in the assessment for any year, and (2) that there must be a receipt, whether in cash or in any other manner whatsoever, of an amount in respect of such loss in the year of account relevant to the assessment year in question in which provisions of s. 10(2A) are sought to be invoked. It is possible to take a view that the first of the two conditions mentioned above can be said to have been satisfied in the instant case. Though one may not be able to say so with an amount of certainty, it is possible to take a view that the depreciation allowance, which was allowed to the assessee in the earlier years on the items of machinery in question, could be regarded as a loss—capital loss—suffered by the assessee by user of that asset in the course of its business in those earlier years. But the question is whether the second condition could be said to have been satisfied by the assessee. It is not possible to accept Mr. Joshi's contention that the amount by way of profit that was received by the assessee by sale of the items of machinery in question is in respect of or related to such loss suffered by the assessee in the earlier years on account of depreciation allowance being allowed to it. The amount of Rs. 2,70,593 must be regarded as capital gains having arisen to the assessee by reason of having realised the price in excess of the written down value thereof in the year in question and this amount can, by no stretch of imagination, be regarded as being in respect of the loss suffered by the assessee on account of depreciation allowance allowed to it for the earlier years for user of items of machinery in those years. The fact that there is a specific provision in the second proviso to s. 10(2)(vii) for assessing the profits arising out of a sale of certain depreciated assets under certain circumstances is also a pointer in the same direction. In our view, therefore, the second condition that is required to be fulfilled under s. 10(2A) can never be said to have been satisfied and, therefore, the item of Rs. 2,70,593 cannot be brought to tax under the provisions of s. 10(2A) of the Act.

10. In the circumstances, the question referred to us is answered in the negative and against the department. The department will pay the costs of the reference.