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Commissioner Of Income-Tax, Gujarat v. Nagari Mills Ltd.
Factual and Procedural Background
These two references arise out of the same order of the Tribunal. After the Tribunal passed its order in the relevant appeal, two applications under section 256(1) of the Income-tax Act were made to the Tribunal — one by the assessee and the other by the revenue — and the Tribunal referred four questions to the court for opinion. The four referred questions concerned (1) whether certain payments to the Textile Commissioner were in the nature of penalty, (2) whether those payments were allowable as business expenditure under sections 28 or 37, (3) whether a claim of Rs. 46,414 written off in relation to a bore-well was allowable under section 32(1)(iii) of the Income-tax Act, 1961, and (4) whether the cost of an electric motor of Rs. 4,000 was of capital or revenue nature.
Concerning question (3): the assessee (a limited company engaged in business) had sunk a bore-well capitalised in its books and had claimed depreciation year to year. In the relevant previous year the assessee discarded the bore-well because the water was very hard and unsuitable for boiler feed without special treatment. The written down value at that time was Rs. 46,414, which the assessee wrote off in its books and claimed as a balancing allowance under section 32(1)(iii). The assessing officer (ITO) disallowed the claim. On appeal the Appellate Assistant Commissioner (AAC) allowed the claim; the revenue appealed to the Tribunal which reversed the AAC and restored the ITO’s order. The Tribunal held that the assessee had not established by evidence that the water could not have been used for other purposes, that installation of a softening plant was commercially inexpedient, or that the bore-well had been discarded or destroyed as required by section 32(1)(iii); it also referred to an expert advice dated June 13, 1967, as undermining the timing of the write-off.
Legal Issues Presented
- Whether the payment to the Textile Commissioner by the assessee for contravention of the instructions given by the Textile Commissioner was in the nature of penalty and not incidental to the carrying on of the assessee's business?
- Whether, on the facts and in the circumstances of the case, the payments of Rs. 2,267 and Rs. 1,78,576 in the assessment years 1969-70 and 1970-71, respectively, made to the Textile Commissioner under clause 21c(b) of the Cotton Textile (Control) Order, 1968, were business expenditure allowable under section 28 or under section 37 of the Act?
- Whether the claim of the assessee of Rs. 46,414 written off in relation to the bore-well is allowable under section 32(1)(iii) of the Income-tax Act, 1961?
- Whether on the facts the cost of electric motor of Rs. 4,000 was of capital nature or revenue nature?
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Addl. CIT v. Rustam Jehangir Vakil Mills Ltd., [1976] 103 ITR 298 | The decision of this Court as to the legal questions corresponding to questions No. (1) and (2) in the reference. | The court held that questions No. (1) and (2) were directly covered by this decision; accordingly question No. (1) was answered in the negative (in favour of the assessee) and question No. (2) was answered in the affirmative (in favour of the assessee). |
| India Nut Co. Ltd. v. CIT, [1960] 39 ITR 234 (Ker) | Authority for the principle that an assessee may discard plant or machinery on commercial considerations even if it remains capable of giving further service; the wisdom of discarding is for the assessee. | The court relied on this authority to support its conclusion that the decision to discard an asset is to be taken by the assessee on commercial considerations, and that tax authorities cannot substitute their view on advisability or desirability of discarding where the statutory conditions are otherwise fulfilled. |
Court's Reasoning and Analysis
The court examined question No. (3) within the statutory framework of section 32(1)(iii) of the Income-tax Act, 1961. That clause allows a deduction where a building, machinery, plant or furniture is "sold, discarded, demolished or destroyed" in the previous year (other than the year in which it is first brought into use) and the deficiency (written down value less moneys payable together with scrap value) is actually written off in the books of the assessee.
The material facts accepted by the court were: the bore-well had been capitalised and treated as part of the assessee's plant; depreciation was allowed year to year; the assessee found the bore-well water to be very hard and unsuitable for boiler feed; the assessee sought expert advice (from Firdos & S. Khambata & Co. and Imperial Chemicals Ltd.) and, after consideration, discarded the bore-well in the year under consideration; no scrap value was realised; and the written down value of Rs. 46,414 was actually written off in the assessee's books in that year.
The Tribunal's approach was criticised on two principal points (as reflected in the opinion):
- The Tribunal required the assessee to establish by evidence that the bore-well could not have been used for any other purpose or that installation of a softening plant was commercially inexpedient. The court held that such questions of commercial advisability are for the assessee to decide and are not statutory preconditions under section 32(1)(iii).
- The Tribunal treated the timing and circumstances (referring to expert advice dated June 13, 1967) as undermining the claim, and concluded the assessee had not made a "strong case" for writing off the asset in the relevant year. The court found that the Tribunal thereby substituted its view for that of the assessee concerning the wisdom of discarding, contrary to the statutory requirement which only demands actual discarding and actual writing off in the books.
Relying on the statute's plain language and the authority in India Nut Co. Ltd. v. CIT, the court concluded that the only statutory requirements for allowance under section 32(1)(iii) are: (a) the factum of sale, discard, demolition or destruction of the asset in the previous year (other than the year in which first brought into use), and (b) that the deficiency be actually written off in the books. Since the assessee had discarded the bore-well and had actually written off the written down value in its books, the statutory condition was satisfied notwithstanding the Tribunal's enquiries into commercial expediency.
Holding and Implications
Holding:
- Question No. (1): Answered in the negative — in favour of the assessee and against the revenue.
- Question No. (2): Answered in the affirmative — in favour of the assessee and against the revenue.
- Question No. (3): Answered in the affirmative — in favour of the assessee and against the revenue; the assessee was entitled to the balancing allowance of Rs. 46,414 under section 32(1)(iii).
- Question No. (4): Not pressed; no answer given.
Implications: The direct consequence for the parties is that the assessee's claim for the balancing allowance of Rs. 46,414 in respect of the discarded bore-well is accepted. The court articulated the principle that the decision to discard plant or machinery is for the assessee to take on commercial considerations, and that tax authorities cannot reject a claim under section 32(1)(iii) by substituting their view on commercial expediency where the statutory conditions (discarding and actual writing off) are met. The opinion notes an existing authority (India Nut Co. Ltd. v. CIT) supporting that principle; it does not purport to lay down a new or wider precedent beyond applying the statute and the cited authority to the facts before it.
Costs
As to costs, in Income-tax Reference No. 192 of 1975 the Commissioner will pay the costs of the reference to the assessee. There will be no order as to costs of Reference No. 193 of 1975.
1. Both these references arise out of the same order of the Tribunal and one reference is at the instance of the revenue and the other is at the instance of the assessee. After the Tribunal had passed its order in the relevant appeal, two applications under s. 256(1) were made to the Tribunal, one by the assessee and the other by the revenue, and in the light of those two applications, the Tribunal has referred the following four questions to us for our opinion :
"(1) Whether the payment to the Textile Commissioner by the assessee for contravention of the instructions given by the Textile Commissioner was in the nature of penalty and not incidental to the carrying on of the assessee's business ?
(2) Whether, on the facts and in the circumstances of the case, the payments of Rs. 2,267 and Rs. 1,78,576 in the assessment years 1969-70 and 1970-71, respectively, made to the Textile Commissioner under the provisions of clause 21c(b) of the Cotton Textile (Control) order, 1968, was business expenditure allowable under section 28 or under section 37 of the Act ?
(3) Whether the claim of the assessee of Rs. 46,414 written off in relation to the bore-well is allowable under section 32(1)(iii) of the I.T. Act, 1961 ?
(4) Whether on the facts the cost of electric motor of Rs. 4,000 was of capital nature or revenue nature ?"
Questions No. (1) and (2) have been referred to us at the instance of the revenue and questions No. (3) and (4) have been referred to us at the instance of the assessee. At the hearing before us it was common ground that question No. (1) and (2) are directly covered by the decision of this court in Addl. CIT v. Rustam Jehangir Vakil Mills Ltd. [1976] 103 ITR 298, and in view of the decision in that case, question No (1) is decided in the negative, that is, in favour of the assessee and against the revenue. Question No (2) is decided in the affirmative, that is, in favour of the assessee and against the revenue,
2. At the hearing of the reference, Mr. K. C. Patel, learned counsel for the assessee, did not press question No (4) and, therefore, we are not called upon to give any answer to that question. That leaves us only with question No (3) for which we have to deliver this judgment.
3. Assessment years under reference are assessment years 1969-70 and 1970-71, the previous years being calendar years 1968 and 1969. So far as question No (3) is concerned, it pertains to the amount of Rs. 46,414 which the assessee claims in respect of the assessment year 1969-70. This amount was the written down value of a bore-well or a boring well which had been sunk by the assessee-company. The assessee-company is a limited company and is carrying on business some years earlier than the assessment year under consideration. The assessee had sunk this bore-well and on the expenditure incurred by it in connection with the bore-well depreciation was being allowed from year to year and in the year under consideration the written down value of the bore-well was Rs. 46,414. It had been capitalised in the books of account of the assessee and the bore-well was treated as part of the plant of the assessee. In the year under consideration, the assessee discarded this bore-well as it found that the water from the bore-well was very hard and was not suitable unless specially treated for the purposes of boiler feed for which the water was intended to be used. The assessee apparently was not prepared to instal special machinery for treating this hard water and turning it into soft water and in the year under consideration, it wrote off this particular asset and it claimed the balancing allowance under s. 32(1), clause (iii), because it said that it had not recovered any price in respect of this discarded bore-well. The ITO disallowed this claim of balancing allowance and rejected the contention of the assessee. On appeal by the assessee, the AAC allowed this claim and held that the balancing allowance under s. 32(1)(iii) should be allowed to the assessee. The matter was taken in appeal to the Income-tax Appellate Tribunal by the revenue and the Tribunal accepted the contention of the revenue and held that this amount of Rs. 46,414 could not be allowed to the assessee on the ground that the bore-well had been discarded. The Tribunal observed in para. 10 of its order that the assessee had not made out a strong case for writing off the sum of Rs. 46,000 and odd. The assessee had not brought any evidence, according to the Tribunal, on the record to show that water from this bore-well could not have been used or utilised for any other purpose. According to the Tribunal, the assessee had also not produced any evidence to show that the installation of softening plant was commercially inexpedient and that the said bore-well had not been discarded or destroyed as was required by section 32(1)(iii). Above all, according to the letter of Firdos & S. Khambata & Co., the advice was given on June 13, 1967, and this amount could not, therefore, have been written off in the assessment year under appeal. According to the Tribunal, the assessee had not established by cogent and convincing evidence that the writing off of this amount was necessary in that year. The Tribunal, therefore, reversed the order of the AAC and restored the order of the ITO.
4. Under s. 32 of the I.T. Act, 1961, in respect of depreciation of building, machinery, plant of furniture owned by the assessee and used for the purpose of the business or profession, deductions mentioned in the different clause of sub-s. (1) of s. 32 are to be allowed while computing profits or gains from business or profession and under clause (iii) of sub-s. (1) of s. 32, 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, deduction shall be allowed : Provided that such deficiency is actually written off in the books of the assessee. No, the case of the assessee in the instant case is that because it found that the water from the bore-well in question was very hard and was not suitable for boiler feed, it decided to discard the bore-well. It seems from the materials on record that they had consulted M/s. Firdos & S. Khambata & Co., and also the Imperial Chemicals Ltd. for the purpose of ascertaining as to whether the water from this bore-well could be suitable and after considering the pros and cons and after obtaining the opinion of experts in the year under considerations, the bore-well appears to have been discarded. Noscrap value from the bore-well was realised and, therefore, the scrap value was zero and, therefore, the entire amount of the written down value was claimed as balancing allowance under clause (iii) of sub-s. (1) of s. 32. The only requirement of clause (iii) is the factum of plant, machinery, etc., being discarded by the assessee concerned and the only requirement is in the form of the proviso that the deficiency must be actually written off in the books of the assessee. It is the case of the assessee-and that has not been disputed by the other side-that in the books of the assessee the amount of Rs. 46,414 has been written off in the year under consideration. Whether an alternative use for the water from the bore-well could or could not have been found and whether, by the installation of water softening plant, water from the bore-well could or could not have been utilised for the purposes of the business of the assessee, are questions which have to be decided on commercial considerations by the assessee itself and it is nowhere laid down that the discarding should be to the satisfaction of the ITO or the I.T. authorities. By considering the question of advisability of discarding the bore-well, the Tribunal has sought to substitute the decision of the I.T. authorities for the decision of the assessee regarding the advisability of discarding. The decision regarding discarding has to be taken by the assessee and by nobody else and that he has to do on commercial considerations and commercial expediency. Once that decision about discarding is taken, the only question that the I.T. authorities can ask is whether there was any scrap value and if there was any scrap value whether the scrap value fell short of the written down value of that particular asset made up of buildings, machinery, plant or furniture. Under these circumstances, it seems to us that the whole approach adopted by the Tribunal, with respect to it, was not correct and was contrary to the requirements of law. Here, it is not a question where facts have to be established by the assessee in accordance with the provision of the section. The only thing that the section calls for is that there should be the factum of discarding accompanied by the actual writing off of the discarded building, machinery, plant or furniture in the books of account of the assessee concerned. Beyond these two requirements nothing else is required and the decision about discarding or selling, destroying or demolishing has to be taken by the assessee concerned and by no one else. It may be, as has been pointed out in India Nut Co. Ltd. v. CIT [1960] 39 ITR 234 (Ker), at page 246, that the assessee concerned discards a piece of machinery because of obsolescence even though it may be capable of giving some more years of service but the decision has ultimately to be taken on commercial considerations by the assessee himself and by no one else and the wisdom of the discarding cannot be questioned by the I.T. authorities. Of course, if they come to the conclusion that discarding was a device to evade income-tax, they can disallow the claim of the assessee on this ground but that can be done only upon the factum of discarding rather than advisability or desirability of discarding of a particular asset, if it otherwise falls under s. 32(1)(iii).
5. Under these circumstance, it must be held that the conditions of s. 32(1)(iii) were satisfied in the instant case and, therefore, the assessee was entitled to the balancing allowance under that clause. We, therefore, answer question No (3) in the affirmative, that is, in favour of the assessee and against the revenue. We, therefore, answer the questions referred to us as under :
Question No (1)-in the negative, that is, in favour of the assessee and against the revenue.
Question No (2)-in the affirmative, that is, in favour of the assessee and against the revenue.
Question No (3)-in the affirmative, that is, in favour of the assessee and against the revenue.
Question No (4)-not pressed.
As regards cost, in Income-tax Reference No 192 of 1975 the Commissioner will pay the costs of the reference to the assessee. There will be no order as to costs of Reference No 193 of 1975.
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