COMMISSIONER OF INCOME-TAX VS HEREDILLA CHEMICALS LTD.
1999 P T D 784
[225 I T R 532]
[Bombay High Court (India)]
Before Dr. B. P. Saraf and Dr. Mrs. Upasani, JJ
COMMISSIONER OF INCOME-TAX
Versus
HEREDILLA CHEMICALS LTD.
Income-tax Reference No.4 of 1984, decided on 10/01/1997.
(a) Income-tax---
----Business expenditure---Obsolescence allowance---Pan catalyst purchased by assessee as stand by for phthalic anhydride plant---Pan catalyst becoming obsolete and superfluous due to change in production process of chemical over the years---Pan catalyst neither sold or disposed of by assessee-- Assessee not entitled to claim deduction of cost of Pan catalyst---Deduction can be claimed only in year in which Pan catalyst was sold or disposed of-- Indian Income Tax Act, 1961, Ss.29 & 32(1)(iii).
(b) Income-tax-
----Depreciation---Premium paid on leasehold land---Not includible in cost of building constructed thereon for allowance of depreciation---Indian Income Tax Act, 1961, S.32.
The assessee purchased a Pan catalyst in the accounting year 1971, and it was lying in stock as a stand-by for its phthalic anhydride plant. In the previous year relevant to the assessment year 1975-76, the assessee claimed deduction of Rs.7,10,238 being the cost of the catalyst as obsolescence allowance in the computation of its income on the ground that over the course of years the production process for its chemical had completely changed whereby the catalyst plant was rendered superfluous and since it had become obsolete, its cost had been written off. The Income-tax Officer disallowed the claim on the ground that the assessee was not entitled to claim obsolescence allowance under section 32(l)(iii) of the income Tax Act, 1961, in respect of the plant, which had never been used by it for the purposes of its business. Before the Commissioner (Appeals), the assessee contended that the Pan catalyst was an item of current asset used in the production process and not an item of fixed asset and hence the claim for deduction of the loss on account of the same becoming obsolete or superfluous should not have been considered with reference to section 32(1)(iii) of the Act but should have been considered under section 29 of the Act. The Commissioner accepted the contention of the assessee and allowed its claim for deduction. The Tribunal upheld the order of the. Commissioner (Appeals). On a reference:
Held, (i) that though the Pan catalyst had become superfluous or obsolete, it was neither sold nor disposed of by the assessee. It was merely written off by the assessee in its accounts in the previous year relevant to the assessment year under consideration. It could not be said that the assessee suffered any loss in the previous year relevant to the assessment year under consideration.
(ii) That the production process of the chemical in the factory of the assessee did not undergo the change in the year under consideration. The production process had been changed over the course of the years. Hence, the assessee could net claim deduction for the cost of the Pan catalyst in any year it liked. The only year in which the deduction could be claimed was the year in which it was sold or disposed of. There must be something positive to show that its value became nil in the particular year to justify the claim for deduction in that year.
(iii) That, therefore, the assessee was not entitled to claim deduction of the amount of Rs.7,10,238 being the cost of the Pan catalyst in the computation of its total income.
Held also, that the Tribunal was not right in holding that the premium paid on leasehold land was includible in the cost of the building constructed thereon for allowance of depreciation.
C.I.T. v. Alps Theatre (1967) 65 ITR 377 (SC) fol.,
Zenith Steel Pipes Ltd. (No.2) v. C.I.T. (1990) 186 ITR 594 (Bom.) and C.I.T. v. Tata Iron and Steel Co. Ltd. (1977) 106 ITR 363 (Bom.) ref.
T. U. Khatri with J. P. Deodhar instructed by S. G. Shah for the Commissioner.
J. D. Mistry instructed by Crawford Bayley & Co. for the Assessee.
JUDGMENT
DR. B. P. SARAF, J.---By this reference under section 256(1) of the Income Tax Act, 1961, made at the instance of the Revenue, the Income tax Appellate Tribunal ("the Tribunal") has referred the following two questions of law to this Court for opinion:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the premium paid on leasehold land was includible in the cost of the building constructed thereon for allowance of depreciation to the assessee for the accounting period relevant to the assessment year 1975-76?
(2) Whether, on the facts and in the circumstances of the case, the assessee was eligible for deduction in respect of the amount of Rs.7,10,238 being the cost of the Pan catalyst written off by the assessee during the year in the determination of the total income for the year?"
Counsel for the parties are agreed that the first question is covered in favour of the Revenue by the decision of the Supreme Court in C.I.T. v. Alps Theatre (1967) 65 ITR 377 and it may be answered accordingly. In view of the above, we answer question No. l in the negative and in favour of the Revenue.
The only question now left for our consideration is question No.2. The material facts relevant for determination of the controversy in the said question are as follows: In course of the assessment of the assessee for the assessment year 1975-76, the Income-tax Officer noticed that the assessee had claimed deduction of a sum of Rs.7,10,238 representing the cost Pan catalyst. The catalyst was purchased by the assessee in the accounting year 1971, and it was lying in stock as a stand-by for its phthalic anhydride plant. In the previous year relevant to the year under reference, the assessee claimed deduction of Rs.7,10,238 being the cost of the catalyst as obsolescence allowance in the computation of its income. In support of the above claim for deduction, it was contended by the assessee before the Income-tax Officer that over the course of years the production process for its chemical had completely changed whereby the catalyst plant was rendered superfluous and since it had become obsolete, its cost had been written off. The Income-tax Officer disallowed the claim as, according to him the assessee was not entitled to claim obsolescence allowance under section 32(1)(iii) of the Act in respect of the plant in question, which had never been used by it for the purposes of its business. Aggrieved by the rejection of its above claim for obsolescence allowance by the Income-tax Officer, the assessee appealed to the Commissioner of Income-tax (Appeals). Before the Commissioner (Appeals), it was contended by the assessee that the Pan catalyst was an item of current asset used in the production process and not an item of fixed asset and hence the claim for deduction of the loss which occurred to the assessee on account of the same become obsolete or superfluous should not have been considered with reference to section 32(1)(iii) of the Act. The case of .the assessee before the Commissioner (Appeals was that the Pan catalyst having been rendered superfluous as a result of change in the production process of the chemical over the course of the years, was of no use to the assessee and hence the assessee was entitled to deduction in respect of the value thereof in the computation of its income under section 29 of the Act. The Commissioner accepted the above contention of the assessee and allowed its claim for deduction. Against the above order of the Commissioner (Appeals), the Revenue appealed to the Tribunal. The Tribunal upheld the order of the Commissioner (Appeals). Hence, reference of question No.2 at the instance of the Revenue.
We have heard Mr. T. U. Khatri, learned counsel for the Revenue, who submits that the assessee is not entitled to deduction of the amount of Rs.7,10,238 representing the cost of the Pan catalyst either as obsolescence allowance under section 32(1)(iii) of the Act or as business expenditure. He, therefore, submits that the Tribunal committed a manifest error of law in confirming the order of the Commissioner (Appeals) and accepting the claim of the assessee for deduction of the value of the same from its income.
On the other hand, Mr. Mistry, learned counsel for the assessee, submits that deduction of the value of the Pan catalyst had been claimed by the assessee as a trading loss and not as obsolescence allowance under section 32(1)(iii) of the Act. According to Mr. Mistry, the moment the assessee discovered that the Pan catalyst had become superfluous as a result of change in the production process of the chemical by the assessee, it was entitled to claim deduction for the full value thereof. Reliance is placed by in support of the above contention on two decisions of this Court in Zenith Steel Pipes Ltd. (No.") (now Zenith Ltd.) v. C.I.T. (1990) 186 ITR 594 and C.I.T. v. Tata Iron and Steel Co. Ltd. (1977) 106 ITR 363. Counsel for the assessee further submits that the deduction has been claimed in the previous year relevant to the assessment year 1975-76 because it is the year in which it was discovered by the assessee that on account of the change in the production process, it had become obsolete. Our attention was also drawn to the statement made by the assessee before the Commissioner (Appeals) that as and when the Pan catalyst would be sold by the assessee the sale proceeds thereof would be accounted for. It was, therefore, submitted that the assessee is entitled to get deduction in respect of the above amount in the assessment year under consideration and the Tribunal was right in allowing the same.
We have carefully considered the rival submissions. The Pan catalyst was purchased by the assessee in the year 1970. It was lying with the assessee as a standby for the pathalic anhydride plant. It is the case of the assessee that over the course of years the production process of the chemical had changed whereby the catalyst plant was rendered superfluous and as a result thereof, the Pan catalyst became obsolete. Admittedly, even on its becoming superfluous or obsolete, it was neither sold or otherwise disposed of by the assessee. It was merely written off by the assessee in its accounts in the previous year relevant to the assessment year under consideration and deduction claimed in respect of the entire cost of acquisition thereof in the computation of its income for the said assessment year. In fact, it was with the assessee even at the time of hearing of the appeal by the Tribunal. The assessee, however, assured the authorities to bring back the sale proceeds of the same for assessment as and when it was sold. In such a situation, in our opinion, it cannot be said that the assessee suffered any loss in the previous year relevant to the assessment year under consideration.
Moreover, the production process of the chemical in the factory of the assessee did not undergo the change in the year under consideration. Admittedly, as set out in paragraph 8 of the statement of the case, the production process had been changed over the course of the years. In such a situation, the assessee cannot claim deduction for the cost of the Pan catalyst in any year it likes. The only year in which the deduction can be claimed is the year in which it is sold or disposed of. Merely by writing off the value thereof, the assessee is not entitled to claim deduction in the year in which he had written off the same. There must be something positive to show that its value became nil in the particular year to justify the claim for deduction in that year. This legal position would not change with the assurance of the assessee to bring back the sale price as and when it was sold. In fact, the assessee will have to wait till it is sold or otherwise disposed of and only then if may be justified in claiming deduction of the difference between the purchase price and sale price in the computation of its income.
In view of the above, in our opinion, in the instant case, the assessee is not entitled to claim deduction of the amount of Rs.7,10,238 being the cost of Pan catalyst in computation of its total income for the year under consideration.
Accordingly, we answer question No.2 in the negative and in favour of the Revenue.
In the facts and circumstances of the case, there shall be no order as to costs.
M.B.A. 742/FCReference answered.