Commissioner Of v. M/S.anop Udai Works Income-Tax, Jodhpur

Reportable 1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHANAT JODHPUR ORDER Commissioner ofVs.M/s.Anop Udai Works Income-Tax, Jodhpur D.B. INCOME TAX REFERENCE APPLICATION NO.64/1998 Date of Order:28[th] May 2007 HON’BLE MR.JUSTICE P.B.MAJMUDARHON’BLE MR. JUSTICE DINESH MAHESHWARI Mr.Sangeet Lodha for revenue Mr.Sanjeev Johari for assessee … BY THE COURT: (Per Hon’ble Maheshwari,J.) This application under Section 256(2) of the Income TaxAct, 1961 (‘the Act’) has been moved by the Commissioner ofIncome Tax, Jodhpur because the Income Tax AppellateTribunal, Jaipur Bench, Jaipur has refused the applicationmade by the Department to refer the following as a question oflaw to this Court:- ‘’Whether on the facts and in the circumstances of thecase the Hon’ble Tribunal was legally justified inallowing terminal allowance under sec.32(1) (iii) of the ITAct?’’ The question aforesaid was proposed for reference inthe background of the facts that the assessee M/s.Anop UdaiWorks is a registered firm engaged in manufacture of sarees. 2 During the period relevant to the assessment year 1983-84,the assessee debited an amount of Rs.1,97,926/- towardsrepairs and maintenance; and this included a sum ofRs.1,31,305/- which was claimed as terminal allowance by theassessee under Section 32 (1)(iii) of the Act towards thealleged discarded copper rolls. The Assessing Officer (‘theAO’) referred to the relevant entry in the accounts and posed aquestion in relation thereto that the rolls seem only to havebeen revalued and not discarded to which the assesseesubmitted a copy of rolls accounts and claimed the amount tobe allowable under Section 32(1) (iii) of the Act. The learnedAO was not satisfied with the reply and observed that the rollsin question have neither been sold nor destroyed nordiscarded. The learned AO further observed thatmanufacturing process could not have been undertakenwithout such rolls; and the amount claimed by the assessee atRs.1,31,305/- was the depreciated value of the existing rollsbut no new rolls were purchased during the year underconsideration. The learned AO thus disallowed the claimmade on the basis of alleged discard of rolls and considered itto be a case only of revaluation. The contention of the assessee against rejection of suchclaim towards terminal allowance on rolls account was notaccepted in appeal either; and the Appellate Commissionerobserved that the claim of the appellant was not covered 3 under any of the instances mentioned in Section 32(1) (iii) ofthe Act and confirmed disallowance in that regard. However, the Income Tax Appellate Tribunal, JaipurBench, Jaipur accepted the contention of the assessee withthe observation that it was only the assessee who wascompetent to judge the utility or obsolescence of anyequipment; and once the assessee decides that the rolls areno longer usable, they are said to be discarded even though,physically they might remain with the assessee, and terminalallowance has to be granted unless evidence was brought onrecord about they being used. The Tribunal observed thatmerely because there was no new purchase of rolls, it cannotmean that written off rolls were used because the assesseewas having with it the stock of usable rolls. The considerationby the learned Tribunal in its judgment dated 12.07.1995reads thus: ‘’10. During the year the assessee debitedRs.1,97,926/- as repairs and maintenance. Thisincluded Rs.1,31,305/- on account of discardedcopper rolls which was claimed as terminalallowance by the assessee u/s. 32(1)(iii). TheAO refused to allow the claim of the assessee as,in his opinion, the assessee had not discardedthe rolls but had merely revalued them. The ld.CIT (A) also confirmed the disallowance. ‘’10. During the year the assessee debitedRs.1,97,926/- as repairs and maintenance. Thisincluded Rs.1,31,305/- on account of discardedcopper rolls which was claimed as terminalallowance by the assessee u/s. 32(1)(iii). TheAO refused to allow the claim of the assessee as,in his opinion, the assessee had not discardedthe rolls but had merely revalued them. The ld.CIT (A) also confirmed the disallowance. “11. We see no reason to disbelieve and disallowthe claim of the assessee. It is only the assesseewho is competent to judge the utility orobsolescence of any equipment. Once theassessee decides that the rolls are no longerusable, they are said to be discarded eventhough, physically they may be with the assessee, 4 and terminal allowance has to be granted unlessan evidence that they are being used is broughton record. No such evidence has been broughton record by the department. The fact that thereare no new purchasers of rolls does not meanthat the written of rolls are used, because theassessee is having a stock of usable rolls with it.Hence, we allow the ground of the assessee witha direction that terminal allowance ofRs.1,31,305/- be allowed u/s. 32 (1)(iii).’’ Upon the department seeking a reference under Section256(1) of the Act, the Tribunal was of opinion that its decisionwas based on two essential findings that the assesseediscarded the rolls and that the assessee had a stock ofusable rolls; and, considering both these to be the findings offact, the Tribunal was of opinion that the order in questiondoes not give rise to any question of law. It has been contended in this reference application thatthe Tribunal has erred in not considering the fact that theassessee never discarded the rolls but only revalued them andclaimed as a deduction under Section 32(1) (iii) and suchclaim has rightly been disallowed by the AO. It has beensubmitted that the assessee had the stock of rolls whose valueaccording to the books of accounts was Rs.2,29,491/-; andthat the assessee devalued the entire lot by applying a marketrate of Rs.25/- per kg. thereby showing the value of rolls atRs.98,197/- and claimed the balance amount as deduction byway of terminal allowance. According to the department, therebeing no other items of rolls as per the balance-sheet and as 5 per the material on record, the assessee had used only thedevalued rolls in its manufacturing process and, therefore, itcannot be said that such rolls were discarded; and when theywere not discarded, no terminal allowance could have beenallowed. Submission of the Department has been contested onbehalf of the assessee with the submissions that the casedoes not give rise to any question of law; that the assesseewas competent to decide about utility of the rolls and in view oftheir substantial devaluation in the earlier years, the assesseehad rightly discarded the same and the claim for terminalallowance has rightly been allowed by the Tribunal. Learnedcounsel for the assessee has relied upon a decision of Hon’bleGujarat High Court in Commissioner of Income-Tax, GujaratVs. Nagari Mills Ltd.: 127 ITR 230 and submitted that the onlyrequirement of clause (iii) of Section 32(1) is the factum ofplant and machinery being discarded by the assesseeaccompanied by writing off of the same in the books ofaccounts. Whether an alternative was available or not werethe questions to be decided on commercial consideration bythe assessee and it is not the requirement of law thatdiscarding should be to the satisfaction of the income taxauthorities. During the course of submissions, at our request,learned counsel for the assessee has placed on record a 6 photostat of the disputed accounting entry relating to the saidamount of rolls that are claimed to be discarded by theassessee but are said to be merely revalued by theDepartment. The entry in question reads thus: During the course of submissions, at our request,learned counsel for the assessee has placed on record a 6 photostat of the disputed accounting entry relating to the saidamount of rolls that are claimed to be discarded by theassessee but are said to be merely revalued by theDepartment. The entry in question reads thus: “श� र�ल ख�त� जम� वलत� श� र�ल र�प�यर व घ�स�ई ख�त�ल�ख� स�. 2035, 2036 व 2037 म� घ�स�ई कमश: 10; 15; 10%स�जम� खर� क�व� परनत� स�.2038म� क�ल र�ल स!�क क�वजन 3927.500ककल� थ� जजसम� स� बह�त स� र�ल पतल� ह(अत: इनक� म�क+ ! व�लय- लगभग @ 25 पघत ककल� स� इनक�क�मत 98187.50 अथ�त1 98188/- ह�ई अत: र�ल ख�त� क�रकम 2,29,491/-म� स� 98188/-�!�कर श�ष रकम131303/- र�ल र�प�यर व घ�स�ई ख�त� ल�ख� म�ड�.” Having given a thoughtful consideration to the rivalsubmissions and having examined the record, we are notsatisfied with the correctness of the decision of the AppellateTribunal and in the circumstances of the case, we are of theopinion that the Tribunal ought to state the case and refer thesame to us on the question as proposed by the Department. A perusal of the order passed by the AO makes it clearthat in the rolls accounts there had been certain additions inthe assessment years 1980-81 and 1981-82; but there has notbeen any addition in the assessment year 1982-83 and so alsoin the assessment year 1983-84 (the year underconsideration). The opening balance of the rolls account forthe assessment year 1983-84, has been Rs.2,29,491/- and theassessee has found their weight at 3927.500 kg and largenumber of them having gone thinner and has calculated their 7 market value at the rate of Rs.25/- per kg. at Rs.98,188/-.After deducting this amount from the opening balance, theassessee has debited entire of the remaining amount ofRs.1,31,303/- towards repairs and depreciation. The copper rolls in question being essential part of themachinery for the manufacturing process undertaken by theassessee is a fact not in dispute. It is also not in dispute thatno new rolls were purchased during the year underconsideration. It is also not in dispute that the assessee hascontinued with its manufacturing process during the relevantyear. It becomes a serious question for consideration if theaforesaid accounts entry could be said to be only ofrevaluation as claimed by the Department or of discarding ofthe rolls as claimed by the assessee. The AO and the Appellate Commissioner havedisallowed such claim for terminal allowance on the findingthat it was a matter of revaluation only; and the AO has givencogent reasons for such finding that taking the rolls asdiscarded would stand contrary to the fact that themanufacturing process did continue in the relevant yearthough no new rolls were purchased. We have noticed thatthe Tribunal has proceeded directly on the assumption that theamount of Rs.1,31,305/- was that of ‘discarded copper rolls’and has further observed that merely because no new rollswere purchased does not mean that written off rolls were used 8 because assessee was having a stock of usable rolls with it.The Tribunal has totally missed the point that there was noother stock of usable rolls but entire of the rolls valued atRs.2,29,491/- has been taken up in the said accounting entry;and after deducting their market value calculated at Rs.25/-per kg., entire of the remaining amount has been claimedtowards terminal allowance. The proposition of discarding, asstated by the assessee, and accepted by the Tribunal,appears to be seriously questionable. If entire of the stock ofrolls were accepted to have been discarded, the questionobviously would be as to how the manufacturing process wasundertaken? The Tribunal has proceeded on assumptionabout availability of other usable rolls; and such assumption isfundamentally contrary to the record. The decision relied upon by the learned counsel for theassessee cannot be considered having direct application tothe facts of the present case. The assessee therein had sunka bore-well that had written down value of Rs.46,414/- afteryears to year depreciation. The bore-well was treated as partof the plant of the assessee but in the year underconsideration the assessee discarded the same, for it wasfound that the water from the said bore-well was hard and notsuitable and after writing off the said bore-well claimedbalance amount under Section 32(1)(iii). The Tribunaldisallowed the claim on the ground that the assessee has not 9 brought any evidence to show that the water from the saidbore-well could not have been used for any other purpose; thatthe assessee had not produced any evidence that installationof a softening plant was commercially inexpedient; and thatthe said bore-well had not been discarded or destroyed. TheHon’ble Gujarat High Court was of opinion that the only thingthat Section 32(1)(iii) calls for is that there should be a factumof discarding accompanied by the actual writing off of thediscarded building, machinery, plant or furniture and thatdesirability of discarding or putting the machinery to somemore years of service has to be taken by the assessee alone. However, the Hon’ble Court further observed,- ‘’Of course, if they come to the conclusion thatdiscarding was a device to evade income-tax,they can disallow the claim of the assessee onthis ground but that can be done only upon thefactum of discarding rather than advisability ordesirability of discarding of a particular asset, if itotherwise falls under s.32(1)(iii).’’ In the case at hands, the question of advisability ordesirability of so-called discarding is not at all germane to theissue involved. As noticed, the copper rolls were essentialparts of machinery for manufacturing process and the Tribunalhas proceeded on an incorrect premise as if usable rolls wereavailable with the assessee other than those in relationwhereof terminal allowance was claimed. Whether it is amatter of discarding or revaluation does definitely require 10 consideration. In the aforesaid view of the matter, we areclearly of opinion that the question posed by the Departmentdoes arise for consideration in this case. Though the present one is an old matter but havingregard to the factual aspects involved, we would like theAppellate Tribunal to draw up the case with all necessary factsand particulars for decision by this Court; and it does notappear appropriate to take up the proposition of deciding thecase on merits at this stage as feebly suggested by thelearned counsel during the course of arguments. Accordingly, this reference application is allowed; andthe Appellate Tribunal is required to state the case and referthe same to this Court keeping in view the observations madehereinabove and on the question as noted at the outset. (DINESH MAHESHWARI), J. (P.B.MAJMUDAR),J. MK