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Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Ratnam
  • Thanikkachalam, JJ.
Acts
  • section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as the Act),
  • section 10(2)(vii) of the Indian Income-tax Act, 1922,
  • section 10(2)(vib) of the Indian Income-tax Act, 1922,
  • section 10(2)(vib) of that Act
  • section 32(1)(iii)
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Ratnam
  • Thanikkachalam, JJ.
Acts
  • section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as the Act),
  • section 10(2)(vii) of the Indian Income-tax Act, 1922,
  • section 10(2)(vib) of the Indian Income-tax Act, 1922,
  • section 10(2)(vib) of that Act
  • section 32(1)(iii)
See more information ...
Smart Summary

Case Summary — Opinion of Ratnam, J.

Factual and Procedural Background

The reference arises under section 256(2) of the Income-tax Act, 1961. The assessee, a highway contractor, during the previous year ending 31 March 1972 (assessment year 1972-73) sold two cars on which depreciation had earlier been allowed, resulting in a loss of Rs. 3,613. The assessee claimed that loss as allowable under section 32(1)(iii) of the Act on the basis of a profit and loss account. The Income-tax Officer disallowed the claim on the ground that the assessee had not maintained accounts. The Appellate Assistant Commissioner allowed the claim, viewing the loss as written off in the profit and loss account and relying on authorities including CIT v. A.S. Kuppa Ammal. On further appeal by the Revenue, the Tribunal held that a profit and loss account cannot be treated as a "book of account" and that the proviso to section 32(1)(iii) requires the loss to be written off in the books of account; hence the Tribunal reversed the Appellate Assistant Commissioner's order. The question of law — whether the Tribunal was right in holding that the applicant is not entitled to claim the loss of Rs. 3,613 under section 32(1)(iii) — was referred to this court for opinion.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the applicant is not entitled to claim the loss of Rs. 3,613 under section 32(1)(iii) of the Income-tax Act, 1961.

Arguments of the Parties

Assessee's Arguments

  • The profit and loss account produced by the assessee showed that the loss had been written off; that, the assessee contended, sufficed to claim allowance under section 32(1)(iii) of the Act.
  • The assessee relied on authorities including Commissioner Of Income-Tax, Bombay City II v. London Hotel; CIT v. Kartar Singh; CIT v. A.S. Kuppa Ammal; and Circular No. 212 (1977) to support the contention that the profit and loss account was sufficient in the circumstances to claim the allowance.

Revenue's Arguments

  • The Revenue contended that section 32(1)(iii) corresponds to section 10(2)(vii) of the Indian Income-tax Act, 1922, and that the proviso requires the loss to have been brought into the books of the assessee and actually written off; a mere write-off in the profit and loss account would not satisfy the proviso.
  • The Revenue relied on decisions including CIT v. National Syndicate, P. Appavu Pillai v. Commissioner Of Income-Tax, Madras, and Commissioner Of Income-Tax, Tamil Nadu-V v. Aruna Sizing Mills to support the contention that writing off in proper books of account is an essential statutory requirement.
  • The Revenue submitted that Circular No. 212 dealt only with whether the amount actually written off or the amount arrived at on the basis of written-down value should be allowed, and that the circular did not address the statutory requirement of writing off in the books of account under the proviso to section 32(1)(iii).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner Of Income-Tax, Bombay City II v. London Hotel [1968] 68 ITR 62 (Bom) Held in that case that, due to peculiar factual features, loss was allowable even without a write-off in the books. The court noted the factual peculiarities of that case and found it difficult to accept a general rule dispensing with statutory writing-off requirements; the decision was distinguished and treated with reservation.
Commissioner Of Income-Tax, Tamil Nadu-V v. Aruna Sizing Mills [1981] 127 ITR 186 (Mad) Doubted the correctness of London Hotel and emphasized that there must be substantial compliance with statutory provisions, including write-off. The court respectfully agreed with the view in Aruna Sizing Mills that substantial compliance and write-off are required and relied on it to reject London Hotel as a general precedent.
CIT v. Kartar Singh [1970] 77 ITR 338 (P&H) Tribunal found that a memorandum book produced was a book of account showing relevant entries and that the loss had been calculated and written off. The court held that Kartar Singh proceeded on the footing that the assessee had complied with the proviso's requirement (i.e., the loss was written off in a book of account) and so it was not applicable to the present facts where no books were maintained.
CIT v. A.S. Kuppa Ammal [1972] 85 ITR 633 (Mad) Arising under section 10(2)(vib) (1922 Act); held that production of a profit and loss account showing a particular debit and credit could be sufficient in that statutory context, especially where books were lost. The court distinguished Kuppa Ammal because it arose under a different provision (section 10(2)(vib) of the 1922 Act) and on facts involving loss of books; it held Kuppa Ammal not applicable to the present case.
CIT v. National Syndicate [1961] 41 ITR 225 (SC) Established that to claim deduction under section 10(2)(vii) of the 1922 Act one essential condition was that the loss be brought into the books and written off (first proviso). The court relied on National Syndicate to affirm that the statutory proviso requires the loss to be brought into the books and written off; if not fulfilled, the allowance cannot be granted.
P. Appavu Pillai v. Commissioner Of Income-Tax, Madras [1965] 58 ITR 622 (Mad) Considered whether relief under section 10(2)(vii) (1922 Act) could be given where the assessee did not keep regular books; held that if accounts produced contain the relevant entry, that may suffice; profit and loss account was characterised as a statement, not a primary book of account. The court drew from this decision the proposition that a profit and loss account is not itself a book of account and that where no books exist, production of accounts showing the relevant entry may suffice. The court found these facts distinguishable because here the assessee admitted that no account books at all were maintained.
Circular No. 212, dated February 26, 1977 (108 ITR (St.) 3) Clarified whether the amount actually written off only should be allowed or whether the amount based on written-down value as per income-tax records should be allowed. The court held the circular irrelevant to the question of statutory requirement that the loss be written off in the books of account; it deals only with quantum, not the requirement of writing off in books.

Court's Reasoning and Analysis

The court began by setting out section 32(1)(iii) of the Income-tax Act, 1961: where an asset (building, machinery, plant or furniture) which was sold, discarded, demolished or destroyed in the previous year (other than the year in which it was first brought into use) results in a deficiency (moneys payable plus scrap value falling short of written down value), that deficiency is allowable as a deduction; the proviso requires that such deficiency "should be actually written off in the books of the assessee."

The court observed that one essential requirement to claim the benefit is that the loss on sale must have been written off in the books. In the present case the assessee admittedly did not maintain any books of account. The Income-tax Officer's disallowance was therefore founded on that absence of books. The court further explained that there is no provision in the Act prescribing a specific form of books, but a profit and loss account prepared by extracting figures from other books cannot properly be called a "book of account."

Applying those legal principles to the facts, the court concluded that even assuming other requirements of section 32(1)(iii) were satisfied, the failure to write off the loss in the assessee's books (because no books were maintained) meant the assessee could not claim the allowance under the proviso.

The court then examined the authorities cited. It treated London Hotel as an authority decided on peculiar facts and expressed difficulty in accepting it as justifying a general exception to the statutory writing-off requirement. It noted that Aruna Sizing Mills doubted London Hotel and emphasized substantial compliance; the court agreed with Aruna. Kartar Singh was distinguished on the ground that it involved a factual finding that a memorandum book was a book of account and contained the required written-off entry; hence Kartar Singh presupposed compliance and was inapplicable here. Kuppa Ammal was held inapposite because it arose under a different statutory provision (section 10(2)(vib) of the 1922 Act) and on facts involving loss of books. National Syndicate and P. Appavu Pillai were cited for the proposition that the proviso requires the loss to be brought into and written off in the books; the court relied on them to support the statutory requirement. Finally, the court found Circular No. 212 irrelevant since it addresses quantum (amount actually written off versus written-down value) and not the statutory requirement of writing-off in the books of account.

Synthesizing the statutory text and the authorities, and given the undisputed fact that the assessee kept no books of account, the court held that the assessee could not claim the loss under section 32(1)(iii).

Holding and Implications

Holding: The court answered the referred question in the affirmative and against the assessee — i.e., the Tribunal was right in holding that the applicant is not entitled to claim the loss of Rs. 3,613 under section 32(1)(iii) of the Income-tax Act, 1961.

Implications:

  • The direct effect is that the assessee's claim for allowance of the loss of Rs. 3,613 under section 32(1)(iii) is disallowed because the proviso requires the loss to be actually written off in the books of account, and the assessee did not maintain such books.
  • The court awarded costs to the Revenue in the reference and directed payment of counsel fee of Rs. 500.
  • The opinion confines itself to application of the statutory proviso to the facts and distinguishes or limits earlier authorities; it does not purport to create a broader precedent beyond the statutory interpretation that the proviso requires writing off in books of account and that a profit and loss account, standing alone where no books are maintained, does not satisfy that requirement.

This summary is prepared strictly from the content of the provided opinion and does not add information beyond the opinion's text.

Show full summary ...

    S. Rajagopala Vandayar v. Commissioner Of Income-Tax.

    Ratnam, J.:— At the instance of the assessee, under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), the following question of law has been referred to this court for its opinion:

    “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the applicant is not entitled to claim of loss of Rs. 3,613 under section 32(1)(iii)?”

    2. The assessee carried on business as a highway contractor. During the previous year ended on March 31, 1972, relevant to the assessment year 1972-73, the assessee sold two cars, on which depreciation had already been allowed, and this resulted in a total loss of Rs. 3,613 which in the course of the assessment proceedings was claimed by the assessee to be allowable under section 32(1)(iii) of the Act on the basis only of a profit and loss account, but the Income-tax Officer disallowed the same on the ground that the assessee had not maintained accounts. Before the Appellate Assistant Commissioner, the assessee disputed the disallowance of loss on the sale of the cars contending that it is not absolutely essential that the loss on the sale of the cars should be written off in any account and relying upon CIT v. A.S Kuppa Ammal, [1972] 85 ITR 633 (Mad), the Appellate Assistant Commissioner took the view that the loss on the sale of cars had been written off in the profit and loss account and that would suffice to enable the assessee to claim allowance of the loss under section 32(1)(iii) of the Act.

    3. On further appeal at the instance of the Revenue, the Tribunal took the view that the profit and loss account, on which alone reliance was placed by the assessee, cannot be said to be a book of account and a write-off of the loss in such an account would not satisfy the requirements of the proviso to section 32(1)(iii) of the Act, and therefore, the Appellate Assistant Commissioner was in error in having granted the relief to the assessee. That is how the question of law set out earlier has been referred for the opinion of this court.

    4. Learned counsel for the assessee submitted that the profit and loss account produced by the assessee before the assessing authorities established that the loss was written off and that that would suffice for purposes of supporting a claim for allowance under section 32(1)(iii) of the Act. Reliance, in this connection, was also placed on Commissioner Of Income-Tax, Bombay City Ii v. London Hotel, [1963] 68 ITR 62 (Bom), CIT v. Kartar Singh, [1970] 77 ITR 338 (P&H), CIT v. A.S Kuppa Ammal, [1972] 85 ITR 633 (Mad) and Circular No. 212, dated February 26, 1977 (108 ITR (St.) 3). On the other hand, learned counsel for the Revenue contended that section 32(1)(iii) of the Act corresponds to section 10(2)(vii) of the Indian Income-tax Act, 1922, and the requirement of the proviso is that the loss should have been brought into the books of the assessee and written off and, therefore, a mere write off in the profit and loss account would not entitle the assessee to claim the allowance of loss on the sale of the cars. Our attention in this connection was also drawn to the decisions in CIT v. National Syndicate, [1961] 41 ITR 225 (SC), P. Appavu Pillai v. Commissioner Of Income-Tax, Madras., [1965] 58 ITR 622 (Mad) and Commissioner Of Income-Tax, Tamil Nadu-V v. Aruna Sizing Mills, [1981] 127 ITR 186 (Mad). Referring to the circular relied on, learned counsel for the Revenue contended that it related to the question whether the amount actually written off only should be allowed or whether the amount arrived at on the basis of the written down value as per the income-tax records should be allowed and that has nothing whatever to do with the requirements of writing off in the books of account contemplated under the proviso to section 32(1)(iii) of the Act.

    5. Before proceeding to consider the submissions so made, we may refer to the relevant provision under section 32 of the Act. While providing for a deduction by way of depreciation in respect of any building, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, it has been provided under section 32(1)(iii) of the Act that, 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, shall be allowed as a deduction. The proviso postulates that such deficiency should be actually written off in the books of the assessee.

    6. A careful consideration of the aforesaid proviso shows that one of the essential requirements to be fulfilled in order to claim the benefit of section 32(1)(iii) of the Act is that the loss on sale should have been written off in the books of the assessee. Admittedly, in this case, the assessee had not been maintaining any books of account at all. That was the ground on which the Income-tax Officer disallowed the claim of the assessee. Our attention has also not been drawn to any provision in the Act which requires the maintenance of certain books of account or certain specified books of account. Even so, a profit and loss account containing the figures culled from other books of account cannot be appropriately and properly called a book of account. Even on the footing that the other requirements of section 32(1)(iii) of the Act have been fulfilled by the assessee, inasmuch as the loss on the sale of the cars had not been written off in the books of account of the assessee as required in the proviso, the assesses would not be entitled to the relief.

    7. We may now refer to the decisions relied on by learned counsel for the assessee and the Revenue. In Commissioner Of Income-Tax, Bombay City Ii v. London Hotel, [1968] 68 ITR 62 (Bom), while construing section 10(2)(vii) of the Indian Income-tax Act, 1922, in relation to the proviso regarding the writing-off in the books of account, it was held, taking into account the peculiar features which obtained in that case, viz., disputes about the ownership of the property, whether the firm was eligible for the allowance of the loss, whether the property had been treated as a business asset or not and the absence of the property being shown as an asset and the consequential omission of the loss on account of demolition being shown in the books of the firm, etc., that the amount of loss was allowable in the hands of the firm even without a write-off. With respect it would be difficult to ignore the requirements imposed by the statute and hold that even without a write-off, the amount of loss could be allowed. We may also point out that in Commissioner Of Income-Tax, Tamil Nadu-V v. Aruna Sizing Mills, [1981] 127 ITR 186 (Mad), the correctness of the view taken in Commissioner Of Income-Tax, Bombay City Ii v. London Hotel, [1968] 68 ITR 62 (Bom) had been doubted and it had been pointed out that there must be substantial compliance with the provisions of the Act and without that, it would not be possible to accept the view that even without a write-off in the books, the assessee would be eligible for the allowance. We respectfully agree with the view taken in Commissioner Of Income-Tax, Tamil Nadu-V v. Aruna Sizing Mills, [1981] 127 ITR 186, 191 (Mad). In CIT v. Kartar Singh, [1970] 77 ITR 338 (P&H), on the factual finding rendered by the Tribunal that the memorandum book produced by the assessee was a book of account and that showed the relevant entry regarding the purchase and sale of vehicles and wherein the loss had been calculated and written off within the meaning of section 10(2)(vii) of the Indian Income-tax Act, 1922, the conclusion arrived at by the Tribunal allowing the loss was sustained. That decision, therefore, proceeded on the footing that the assessee had complied with the requirement of the proviso and it cannot, therefore, have any application to the facts of this case. CIT v. A.S Kuppa Ammal, [1972] 85 ITR 633 (Mad) arose under section 10(2)(vib) of the Indian Income-tax Act, 1922, and, in that context, Explanation 2 to section 10(2)(vib) of that Act was referred to as not making any reference to books of account maintained by an assessee, but merely postulating that the debit of an amount of 75% of the development rebate to the profit and loss account of the relevant previous year and crediting the same to a reserve account to be utilised during a period of ten years next following for the purposes of the business of the undertaking and it was held that the production of a profit and loss account showing this would be sufficient to enable the assessee to claim the benefit of development rebate. It was also further found in that case that the books of account had admittedly been lost and the profit and loss account filed by the assessee would not be rendered unreliable for the purpose of application of section 10(2)(vib) of the Indian Income—tax Act, 1922. It is thus seen that that decision not only turned upon section 10(2)(vib) of the Indian Income-tax Act, 1922, but also on the factual finding of the loss of the books of account and the consequent inability of the assessee to produce the same. We may point out that is not the situation here, as it had not been disputed by the assessee right through that no account books at all had been maintained. The Supreme Court, in CIT v. National Syndicate, [1961] 41 ITR 225, dealing with section 10(2)(vii) of the Indian Income-tax Act, 1922, laid down that in order to claim deduction of the loss sustained under that provision, one of the essential conditions to be fulfilled was that the loss should have been brought into the books of the assessee and written off as provided by the first proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. At page 234, the Supreme Court has catalogued the four conditions required to be fulfilled and the fourth condition, according to the Supreme Court, to be fulfilled is that in the books of account of the assessee, the loss should have been brought in and written off. It follows, therefore, that if this requirement is not fulfilled, the assessee is not entitled to the relief of allowance of the loss. We may now refer to the decision of this court in P. Appavu Pillai v. Commissioner Of Income-Tax, Madras., [1965] 58 ITR 622. In that case, the Tribunal took the view that relief under section 10(2)(vii) of the Indian Income-tax Act, 1922, could be given only in cases where the assessee maintains regular books of accounts and the loss had been written off in the books and that as the assessee did not keep any accounts, the allowance was rightly refused. The court found that though there is no indication in section 10(2)(vii) of the Indian Income-tax Act, 1922, as to the particular type of account book which should be maintained by the assessee, if accounts are produced, in which the relevant entry with regard to the allowance appeared, that would be sufficient compliance with the first proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. In that case, the assessee produced before the assessing authority the daily collection and expenditure account and notwithstanding the absence of a day-book and a ledger, the Income-tax Officer was satisfied that the obsolescence allowance claimed could be granted. But a contrary view was taken by the Appellate Assistant Commissioner and the Tribunal that the loss could be allowed only if such amount is actually written off in the books of the assessee and that books in that context would mean the books of account maintained by the assessee in the course of the business. However, the court took the view that though the accounts maintained by the assessee may be defective in that the entries therein do not lead to a correct assessment of the income, profits and gains of the business, that has nothing whatever to do with the allowance that can be granted under section 10(2)(vii) of the Indian Income-tax Act, 1922, if such accounts are available in which the relevant entry with regard to the allowance appears, that would be sufficient compliance with the requirement of the proviso and in that view, it was held that the details in the accounts produced in that case would be sufficient to comply with the requirements of the, first proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. We may, in this connection, point out that the argument of the Revenue in that case that the profit and loss account is the account which can be said to be a book of account was rejected and it was characterised as a statement representing the state of business as at the end of the accounting year with details culled from other books of account, which may be characterised as the primary books which a businessman generally maintains. In other words, according to that decision, a profit and loss account is not a book of account. We are, therefore, of the view that merely by relying upon the profit and loss account, the assessee in this case cannot claim the benefit of allowance of loss sustained on the sale of the cars.

    8. That leaves for consideration Circular No. 212, dated February 26 (see [1977] 108 ITR (St.) 3), to which our attention was drawn. That circular, in our view, has no relevance whatever in the context of the fulfilment of the requirements under the proviso referred to earlier. The circular clarifies whether the amount actually written off only should be allowed or whether the amount arrived at on the basis of the written down value as per the income-tax records should be allowed and that does not in any manner touch upon the requirement of the proviso to the effect that the loss must be brought in the books of account and written off in order that the benefit of section 32(1)(iii) of the Act could be claimed. For the foregoing reasons, we answer the question referred to us in the affirmative and against the assessee. The Revenue will be entitled to the costs of this reference. Counsel fee Rs. 500.

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    Comments

    S. Rajagopala Vandayar v. Commissioner Of Income-Tax.
    (Jan 23, 1990)