Commissioner Of Income-Tax, Tamil Nadu-V v. Aruna Sizing Mills

The Judgment of the Court was delivered by

Sethuraman, J.:— The Income-tax Appellate Tribunal has referred the following questions at the instance of the Commissioner of Income-tax:

“(1) Whether, on the facts and in the circumstances of the case, it has been rightly held that the assessee was entitled to the deduction of loss on the sale of machinery under section 32(1)(iii) of the Income-tax Act, 1961? and

(2) Whether the Tribunal's view, that the requirements of the provisions of section 32(1)(iii) are met when the assessee showed the sale proceeds in their books, is sustainable in law (and on the materials on record)?”

2. The assessee is a firm assessed for the assessment year 1969-70. The relevant previous year ended on 4th September, 1968. Among the machinery used by the assessee, there was a sizing machine the written down value of which was Rs. 40,526 at the beginning of the year. This machine was sold during the year for a sum of Rs. 29,500 resulting in a loss of Rs. 11,026, if the written down value is the criterion. The book value of the machinery was Rs. 39,495. The machinery account was credited with the sale proceeds. The difference between the book value and the realised price was Rs. 9,995. Neither in the balance-sheet nor, in the profit and loss account, the loss of Rs. 9,995 was shown. It was, however, shown as a loss on the first day of the next year, namely; on the 5th September, 1968. In the assessment for 1969-70, the assessee claimed the difference between the written down value in the income-tax records and the sale proceeds as loss and this amounted to Rs. 11,026 which the ITO originally allowed in the assessment made by him. Subsequently, he withdrew the allowance in the reassessment proceedings under s. 147 of the Act. The basis for the disallowance was that under the proviso to s, 32(1)(iii), the deficiency or loss should have actually been written off in the books for the relevant year and it had not been done inthepresent case. The AAC, on appeal, held that the deficiency had only to be actually written off in the account books and that it was not a condition precedent to the allowance. He held also that the loss was shown in the account books for the next year and that, therefore, the assessee was eligible for the allowance. The ITO appealed to the Tribunal. In the view of the Tribunal, the assessee had already entered in its books the sale proceeds of the machinery, and in order to balance the book entries, the assessee should have reduced the debit balance in the machinery account and thus reduced the assets position as shown in the balance-sheet. In its view, this was a concomitant of the machinery being sold and the deficiency was actually reflected when the books showed that the machinery worth Rs. 39,459 was sold for Rs. 29,500. The Tribunal, therefore, confirmed the order of the AAC and thus the matter is now before us under reference at the instance of the Commissioner of Income-tax.

3. Section 32(1)(iii) is the relevant provision and it runs as follows:

“In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed—…

(iii) in the case of any building, machinery, plant or furniture which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value;, if any, fall short of the written down value thereof:

Provided that such deficiency is actually written off in the books of the assessee.”

4. This is a case where the assets were sold and the assessee incurred a loss thereby. The only ground on which the department contests the allowance as given by the Tribunal is that the assessee had not actually written off the deficiency in the books for the relevant year. The learned counsel for the Commissioner described the proviso as laying down a condition precedent for the allowance. According to him, unless there were entries in the books of the relevant year showing a write-off of the loss, the assessee would not be eligible for the allowance. It is this contention that requires to be examined.

5. The sub-section uses the following expressions “sold, discarded, demolished or destroyed”. We shall consider the case of “sale” separately presently. Where the building, machinery, plant or furniture is discarded or demolished or destroyed, there is no scope for making any automatic entries in the books as in a sale. In order to see that the assessee establishes the discarding, demolition or destruction, appropriate entries have to be made in the books. There is no other way of accounting for them. It is, therefore, provided that there should be an actual write-off in the books. In other words, in the cases of discarding, demolition or destruction, it would be necessary for the assessee to show specifically in the books that the machinery is no longer there by making appropriate entries as deficiency or loss. When it comes to the question of sale, there is a kind of automatic accounting. By crediting the sale proceeds, the assessee would be showing the surplus or deficiency reflecting the difference between the book value and the sale value.

6. It is necessary to examine whether the proviso imposed a condition precedent, as contended by the learned counsel for the Commissioner. In s. 34, for instance, in respect of development rebate or depreciation, the conditions for such allowance are set out. It is provided in sub-s. (3)(a) of s. 34 of the Act that the deduction referred to in s. 33 (development rebate) shall not be allowed unless an amount equal to seventy-five, per cent, of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised in the manner provided in the provision. Similarly, in s. 36(2), there is a provision for the allowance of a bad debt. Section 36(2) provides:

“In making any deduction for a bad debt or part thereof, the following provisions shall apply:—

(i) no such deduction shall be allowed unless such debt or part thereof—…

(b) has been written off as irrecoverable in the accounts of the assessee for that previous year.”

7. The use of the expression “unless” in sub-s. (2) of s. 36 also indicates that it is a condition precedent for the allowance. The earlier law relating to the allowance of a bad debt was couched in a slightly different language. Section 10(2)(xi) of the 1922 Act provided that where the accounts were kept on cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation, and in the case of an assessee carrying on a banking or money-lending business, such sum in respect of loans made in the ordinary course of such business, as the ITO may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee. The writing-off was considered to be necessary only to show the maximum up to which alone the assessee could claim a deduction. There were also cases where this was not treated to be a condition precedent. In order to get over this position, Parliament in s. 36(2) made a special provision for writing off the irrecoverable amount in that particular year, in which the claim was made. However, in s. 32(1)(iii), the proviso does not mention that the amount should be written off in that particular previous year. It cannot be assumed that the absence of the expression “for that previous year” in s. 36(2) is without significance and has to be ignored. In the context of the language of the proviso, as it is in s. 32(1)(iii), it is enough if the amount is written off in the books of the assessee. As the AAC has pointed out, the amount has been written off on the very first day in the next year. Therefore, even the condition which the learned standing counsel for the Commissioner contended for is satisfied in the present case.

8. In this particular case, as has been earlier indicated, in the machinery account, there is an entry relating to the receipt of sale proceeds. What is absent in the accounts for that particular year is the mathematical calculation of the difference between the book value of the machinery and the sale proceeds, and its display separately as a loss. It has been recorded as a loss on the very opening day of the next year. As the statute does not require the writing-off in the same year, there is compliance with the statutory requirements in this case.

9. In considering a similar case, though under the corresponding provisions of the 1922 Act, which is in pari materia, this court in P. Appavu Pillai v. Commissioner Of Income-Tax, Madras., [1965] 58 ITR 622 pointed out that if the assessee had accounts in which the relevant entry with regard to this allowance appeared, it would be sufficient compliance with the first proviso to s. 10(2)(vii). It was contended in that case that the amount should be written off in the profit and loss account. It was pointed out at page 626 of the reports that this was not strictly necessary and that merely for the lack of preparation of a proper profit and loss account, the allowance should not be refused. The position cannot be different in the present case.

10. A similar question was considered by the Bombay High Court in Commissioner Of Income-Tax, Bombay City Ii v. London Hotel, [1968] 68 ITR 62. In that case, the firm was running a hotel in its own premises. The three partners of the firm purchased the said premises at the time of dissolution of the firm. The firm claimed deduction of the loss that arose on account of such a sale. The claim of the assessee was resisted on the ground that the amount had not been actually written off in the books of the assessee. It was also contended in that case that the proviso to s. 10(2)(vii), which corresponds to s. 32(1)(iii), required as a condition precedent a write-off in the books. This contention was raised on the basis of an earlier decision of the Supreme Court in CIT v. National Syndicate, [1961] 41 ITR 225. The Bombay High Court contrasted the language in the other sub-clauses of s. 10(2) of the 1922 Act, which we have compared earlier with reference to the provisions of the 1961 Act, and held that the writing-off was not a condition precedent. It would be unnecessary for our present purpose to go to the extent of saying that even in the absence of writing off in the books of the assessee, the assessee would be eligible for the allowance of the loss. In that particular case, the court had to take into account certain peculiar features. There was some dispute about the ownership of the property. While the department took the property as belonging to the firm and gave depreciation year after year, the assessee was proceeding on the basis that the property belonged to the partners. When the partners took over the building, there was, therefore, some dispute as to whether the firm was eligible for the allowance of the loss. As the firm had obtained depreciation in all the years, the Bombay High Court held that the amount of loss was allowable in the hands of the firm, even without a writing-off. It would be difficult to agree with the proposition that a statutory requirement can be ignored. Wherever the statute imposed certain requirements in the context of an allowance, it would be necessary to ensure compliance before granting the allowance. We would, therefore, not go to the extent of accepting the view that even in the absence of writing off in the books, the assessee would be eligible for the allowance. What is necessary is that there must be substantial compliance with the provisions of the Act and in this case there is such a compliance by the assessee, as already indicated. The learned counsel for the Commissioner drew our attention to the decision in Western States Trading Co. P. Ltd. v. CIT, [1971] 80 ITR 21 (SC) and also to a passage in the first volume of Sampath Iyengar's Law of Income-tax, 6th Edii. The Supreme Court, in the decision mentioned above ([1961] 41 ITR 225), merely points out that there are four conditions to be satisfied before the allowance could be claimed, one of the conditions being set out in the proviso. We have already pointed out that in the present case this condition is also complied with. Therefore, no help is to be obtained from this case by the department. The passage in Sampath Iyengar's book throws some doubt on the correctness of the decision of the Bombay High Court in Commissioner Of Income-Tax, Bombay City Ii v. London Hotel, [1968] 68 ITR 62. We may point out that the learned author refers to two decisions, namely, Muthukaruppan Chetliar v. CIT, [1939] 7 ITR 76 (Mad) [FB] and Rao Bahadur S. Ramanatha Reddiar v. CIT, [1928] 3 ITC 10 (Rang) as if both of them were rendered by the Madras High Court and as if they were inconsistent with the decision of the Bombay High Court. In fact, there was only one decision by the Madras High Court, the one reported in 7 ITR page 76 [FB], the other one being of the Rangoon High Court. The decisions are not in point.

11. The result is, we answer the first question in the affirmative and in favour of the assessee. The second question does not appear to call for any answer in the present case, as the assessee has complied with the provisions, and, therefore, the question in that form does not arise for consideration. The assessee will be entitled to its costs. Counsel's fee Rs. 500.