KERSONS MFG CO. OF INDIA LTD. v. INCOME TAX OFFICER
[Citation -1984-LL-0707-1]

Citation 1984-LL-0707-1
Appellant Name KERSONS MFG CO. OF INDIA LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 07/07/1984
Assessment Year 1976-77
Judgment View Judgment
Keyword Tags physical verification • method of accounting • plant and machinery • revenue authorities • written down value • alternative claim • profit on sale • business loss • original cost • audit report • capital loss • written off • book value
Bot Summary: The appellant took up the matter in appeal to the Commissioner and contended that it was entitled to this deduction either under section 29 or under section 32(1)(iii) of the Income-tax Act, 1961. The learned counsel submitted that the assessee's claim was allowable under section 32(1)(iii), as a balancing allowance or under section 28(i) of the Act as a business loss. Shri L.N. Joy, the learned departmental representative, relied on the order of the Commissioner and contended that what the assessee claimed was only a loss of capital assets and that the same would not be admissible either under section 32(1)(iii) or under section 28(i). From a perusal of the statement of depreciation claimed by the assessee under section 32(1)(iii), it is seen that the assessee had stated that the plant and machinery in question were discarded by it during the previous year. The question of allowing the assessee's claim under section 32(1)(iii) in the year under appeal, does not arise at all. Regarding the alternative claim of the appellant on the basis of section 28(i), we are inclined to agree with the contention of the revenue that it is a case of capital loss, which is not allowable under section 28(i). Mr. Joshi very fairly himself veered round to that view of the question, h a v i n g regard particularly to the application for reference which the Commissioner had himself made to the Tribunal .... Thus, it would be seen that the question of allowability of the claim under section 10(1) of the Indian Income-tax Act, 1922 corresponding to section 28(i) of the 1961 Act, was not the subject-matter of reference to the High Court.


appellant is company carrying on business of manufacture of electrical instruments, more particularly, starters, switch gears, etc. This appeal relates to its assessment for assessment year 1976-77 for previous year ended 31-3-1976. appellant had written off sum of Rs. 1,58,940 in its profit and loss account for this year as value of fixed assets, which were found missing on actual physical verification done by appellant. It was stated before ITO that said loss was on account of missing assets arose in regime of previous management and that all these adjustments had been done to arrive at realistic view of company's operations and financial position. ITO referred to para 5(iv) of auditors' report of company, wherein they had stated that they were unable to state whether accounts gave true and fair view due to these adjustments. ITO, therefore, held that this amount was in nature of capital loss and, accordingly, disallowed and added back same to income of assessee. 2. appellant took up matter in appeal to Commissioner (Appeals) and contended that it was entitled to this deduction either under section 29 or under section 32(1)(iii) of Income-tax Act, 1961 ('the Act'). It relied on decision of Bombay High Court, in case of CIT v. Tata Iron & Steel Co. Ltd. [1977] 106 ITR 363. Commissioner (Appeals) did not accept this contention. He agreed with ITO that deduction claimed by appellant in present case was in respect of capital assets, which were found to be missing and that, therefore, it could not be allowed under provisions of section 32(1)(iii). He was of view that said provisions of law were not attracted in present case. He then proceeded to examine question whether said amount could be allowed as loss incidental to carrying on of business and came to conclusion that assessee was not entitled to same. He pointed out that decision of Bombay High Court was based o n fact that regular method of accounting was regularly followed by assessee in said case. He pointed out in present case that it was for first time and that too after there was change in management that inventory of fixed assets was taken and that it was noticed at that time that some assets were found missing. He further held that claim of assessee could not be sustained because no regular method of accounting was ever followed by assessee in this regard as in case of Tata Iron & Steel Co. Ltd. . He, therefore, held that ITO was justified in treating this loss as capital loss. 3. Shri B.K. Khare, learned chartered accountant for appellant, stated that appellant-company, which was incorporated in 1949, was controlled and managed by family of one M.N. Shah, and that in 1974, Crompton Greaves acquired control of appellant-company and took over its management from 1-4-1975. Shri Khare submitted that from 1970-71 accounting year, till end of accounting year 1974-75, there was temporary lull in business activities of appellant-company on account of labour trouble and company had become sick unit financially. learned counsel referred to us director's report and submitted that though assets in question were inventorised, they were not found to be in existence on actual physical verification carried out by new management and that, therefore, amount of Rs. 1,58,940, representing value of missing assets, was written off in profit and loss account. learned counsel submitted that assessee's claim was allowable under section 32(1)(iii), as balancing allowance or under section 28(i) of Act as business loss. He argued that old management would not be faulted for this, as amount of Rs. 1,58,940 represented written down value of these assets as per books of company. He contended that these assets should be treated as either discarded, demolished or destroyed, since they were found to be missing. He next contended that assessee would be entitled to this deduction under section 28(i) on authority of decision of Bombay High Court, in Tata Iron & Steel Co. Ltd.'s case. He also relied on decision of Supreme Court, in P.K. Badiani v. CIT [1976] 105 ITR 642, 649, and contended that obsolete commercial assets would result in business loss. Shri Khare, therefore, argued that departmental authorities were not justified in disallowing assessee's claim for this loss. 4. Shri L.N. Joy, learned departmental representative, relied on order of Commissioner (Appeals) and contended that what assessee claimed was only loss of capital assets and that same would not be admissible either under section 32(1)(iii) or under section 28(i). He further relied admissible either under section 32(1)(iii) or under section 28(i). He further relied on distinction pointed out by Commissioner in his order to distinguish present case from decision in case of Tata Iron & Steel Co. Ltd. relied on by appellant. He, therefore, submitted that decision of Commissioner (Appeals) was correct and that same should be upheld. 5. We have carefully considered submissions urged on both sides, in light of materials placed before us and decisions referred to above. From perusal of statement of depreciation claimed by assessee under section 32(1)(iii), it is seen that assessee had stated that plant and machinery in question were discarded by it during previous year. In their audit report dated 31-1-1977, auditors of company have stated as follows in paragraph 2(i) regarding amount of Rs. 1,51,814.40: " 2(i) company has written off plant and machinery worth Rs. 1,51,814.40. company had suspended operations for last several years. list of individual items of plant and machinery (other than tools which gives original cost and written down value as on 31-3-1970 is available. management conducted physical verification soon after accounting year and inventory of plant and machinery items has been valued on basis of abovementioned list. Depreciation provided during years 1970-71 and 1971-72 has been proportionally allocated over value of present plant and machinery and value of plant and machinery to be written off. difference between written down value of present inventory of plant and machinery and book value as on 31-3-1975 has been written off during year. It is not possible to ascertain as to how said loss has arisen. " 6. However, assessee's case has all along been that amount of Rs. 1,58,940 represented value of fixed assets, which were found to be missing on actual physical verification carried out by appellant-company and, therefore, we have to decide case only on that basis. assessee's claim for balancing or obsolescence allowance under section 32(1)(iii) can be considered only if assets in question had been 'discarded, demolished or destroyed in previous year,' under consideration. Admittedly, assets in question were neither discarded, nor demolished, nor destroyed during previous year ended 31-3-1976. Therefore, question of allowing assessee's claim under section 32(1)(iii) in year under appeal, does not arise at all. 7. Regarding alternative claim of appellant on basis of section 28(i), we are inclined to agree with contention of revenue that it is case of capital loss, which is not allowable under section 28(i). At outset, we must point out that auditors of company have stated categorically in paragraph 2(i) of their report, that it was not possible to ascertain as to how this loss of Rs. 1,51,814.40 has arisen. We may point out that amount of Rs. 1,58,940, written off to profit and loss account, includes this amount of Rs. 1,51,814.40. It is, therefore, highly doubtful as to whether assessee would be entitled to claim of this loss at all, since it is not possible to ascertain as to how this loss has arisen. Even accepting what assessee says in its directors' report is true, it cannot be disputed that amount written off represented only loss of capital assets. In paragraph 7 of their report dated 3-2-1977, which is at pages 7 to 11 of assessee's paper book, directors state as follows: " 7. When physical verification of fixed assets, stocks of raw materials, components and semi-finished goods, etc., of company was taken, above discrepancies were discovered and as result large amount of assets had to be written off as follows: Rs. Fixed assets 1,58,940.39 Raw materials and components 3,97,586.46 Semi-finished products and parts in process 1,49,446.00 Packing materials 6,166.01. " It must be mentioned here that revenue has accepted write-off of t h e remaining three items relating to raw materials and components, semi- finished products and parts in process and packing materials. Since amount of Rs. 1,58,940 represented value of fixed assets, which was written off by assessee, revenue considered this to be capital loss and, in our view, this decision of revenue authorities is correct and it is fully supported by facts mentioned by us from auditors' report quoted above. 8. decision of Bombay High Court, in Tata Iron & Steel Co. Ltd.'s case is of no assistance or help to appellant in present case. This would be clear from discussion on Question No. 3 in said case. It is stated as follows: " . . . said amount of Rs. 1,78,277 could not be claimed by assessee-company as obsolescence allowance under section 10(2)(vii) of Act, but it had claimed that amount as deduction under section 10(1) of Act. Mr. Joshi sought to contend that this amount is not allowable as deduction under section 10(1) of Act but, in my opinion, Question No. 3 as framed does not raise that wider point but is restricted to question as to in which assessment year same could be allowed as deduction. After some argument, Mr. Joshi very fairly himself veered round to that view of question, h v i n g regard particularly to application for reference which Commissioner had himself made to Tribunal ...." Thus, it would be seen that question of allowability of claim under section 10(1) of Indian Income-tax Act, 1922 ('the 1922 Act') corresponding to section 28(i) of 1961 Act, was not subject-matter of reference to High Court. Therefore, we are of view that this decision is not authority for position canvassed by Shri Khare, learned chartered accountant for appellant, that this loss claimed by appellant in present case, is allowable under section 28(i). On contrary, perusal of facts discussed at pages 366 and 367 of report would disclose that it was case of claim of obsolescence allowance in respect of discarded plants under section 10(2)(vii) in respect of which assessee in said case had retained in its books 1 per cent of value of such discarded plants. When said discarded plants were eventually sold, profit on sale was duly brought into account, after making adjustment, in regard to value of discarded assets retained as stated above. Over period of years debit raised in respect of 1 per cent value of discarded plants got accumulated and could not be directly connected with sales thereof made from time to time. During year of account, TISCO had obtained surplus on sale of discarded plants of Rs. 7,89,211, and after making adjustment referred to above, had brought to account sum of Rs. 6,06,361 as profit liable to tax under section 10(2)(vii). TISCO also made simultaneous claim for deduction of Rs. 1,78,277 as representing value of discarded plants which had been retained in books, but which on physical verification were found to be non-existent. It was this amount of Rs. 1,78,277, which was disallowed by departmental authorities, but which was allowed by Tribunal by relying on section 13 of 1922 Act, having regard to regular method of accounting employed and followed by assessee. This decision of Tribunal was upheld by High Court and Question No. 3 was answered in affirmative and against revenue and in favour of assessee. But, in present case before us, facts are entirely different, as we have already stated above with reference to reports of auditors and directors of company in circumstances, we hold that decision of Bombay High Court in Tata Iron & Steel Co. Ltd.'s case relied on by assessee's learned counsel, is inapplicable to facts of present case. 9. On other hand, in Badridas Daga v. CIT [1958] 34 ITR 10, their Lordships of Supreme Court have held as follows: " At same time, it should be emphasised that loss for which deduction could be made under section 10(1) must be one that springs directly from carrying on of business and is incidental to it and not any loss sustained by assessee, even if it has some connection with his business. If, for example, thief were to break overnight into premises of money-lender and run away with funds secured therein, that must result in depletion of resources available to him for lending and loss must, in that sense, be business loss, but it is not incurred in running of business, but is one to which all owners of properties are exposed whether they do business or not. loss in such case may be said to fall on assessee not as person carrying on business but as owner of funds. This distinction, though fine, is very material as on it will depend whether deduction could be made under section 10(1) or not. " " 10. When we examine facts of present case, in light of above-mentioned principles laid down by Supreme Court, it is clear that loss in question is one arising on account of loss of capital or fixed assets of appellant. Therefore, it is in nature of capital loss, which is not admissible under section 28(i). We, therefore, respectfully follow this decision of Supreme Court and hold that assessee is not entitled to this deduction of Rs. 1,58,940 under section 28(i). Accordingly, appeal is dismissed. *** KERSONS MFG CO. OF INDIA LTD. v. INCOME TAX OFFICER
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