Commissioner of Income Tax vs Godavari Sugar Mills Ltd.

Dr. B.P. Saraf, J. 1. By this reference u/s 256(1) of the Income Tax Act, 1961, made at the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following question of law to this court for opinion :

"Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the assessee was entitled to the loss of Rs. 2,42,624 arising from revaluation of items of machinery purchased by the assessee but not installed or put to use in arriving at the commercial or accounting profit of the assessee for the year concerned ?"

The controversy pertains to the assessment year 1972-73, the corresponding previous year being the accounting year ended on March 31, 1971.ssessment of income for the above assessment year, the assessee claimed a loss of Rs. 2,42,624 on account of fall in the value of the machinery lying at its Sakarwadi and Laxmiwadi factories. The contention of the assessee was that the above machinery had never been installed and was being shown as current assets as stock of stores, chemicals, spares, etc. No depreciation had also been claimed in respect thereof. The assessee, therefore, claimed that the machinery was its current asset and the amount written off should be allowed as revenue loss. The claim of the assessee was disallowed by the Income Tax Officer. The disallowance was confirmed by the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax in his order, observed that it was not possible to agree with the assessee that since the machinery was shown under the head "Stores and spares, etc.", it should be treated as current assets and loss on account of fall in its value as a result of revaluation should be allowed as a revenue loss. The assessee appealed to the Tribunal. The Tribunal allowed the claim of the assessee and reversed the findings of the Income Tax Officer and the Commissioner of Income Tax (Appeals). The Tribunal observed that though the machinery was purchased by the assessee, it had not been installed or put use for whatever reason, and the fall in its value as certified by the valuer had been written off. The Tribunal did not accept the contention of the Revenue that the fall in the value of the capital goods cannot be claimed as a deduction by the assessee in the computation of his profits and held that as the assessee itself had treated it as stores, it would become a capital asset only when it is installed or put use and hence, it could only be regarded as "part of the stock and material lying in stock" and any fall in its value can be taken into consideration for ascertaining the loss for accounting purposes. The Tribunal accordingly directed the Income Tax Officer to allow the claim of the assessee on that account. Hence this reference at the instance of the Revenue.

Counsel for the assessee submits that the machinery in question having not been installed by the assessee or put to use ever since its purchase and the same having been described in the accounts of the assessee as "stores", the loss occasioned as a result of fall in the value therefore is an allowable deduction in computation of the commercial profits of the assessee. We have carefully considered this submission. We, however, find it extremely difficult to accept the same. The admitted position in this case is that the machinery in question was purchased by the assessee as capital goods for installation in its factories. It was a capital asset in the hands of the assessee. It is not the case of the assessee that it was dealing in this machinery and that it was purchased as its stock-in-trade. It is also not the case of the assessee that at any point of time, the said machinery was concerted the assessee as its stock-in-trade. The inevitable conclusion is that the machinery remained the capital asset of the assessee. The fact that it was not installed by the assessee for one reason or the other does not in any way affect its real character as a capital asset in the hands of the assessee. So far as its description as "stores" in the accounts of the assessee is concerned, we are clear in our mind that the meaning of the expression "stores and spares" cannot be extended to include "plant and machinery" purchased by the assessee for installation but lying uninstalled for any reason. Moreover, the description of a particular asset in the accounts is not decisive. It is now well-settled that the entries in the books of account of an assessee or the description given to a particular transaction or any asset or liability in its accounts is not conclusive. It is necessary to consider the true nature of the transaction or asset or liability. In the instant case, the admitted position is that the machinery in question was purchased by the assessee for installation in its factories for use in manufacturing operations. This machinery, therefore, formed part of the capital assets of the assessee. The fact that pending installation, the assessee chose to describe it in its accounts as "stores and spares" cannot affect the real nature of these assets. They continue to be capital assets despite the erroneous description in the accounts of the assessee and are to be treated as such for all purposes.

It is also well settled that the assessee is not entitled to revalue its capital assets at the end of the year and to deduct from its profits any fall in the value of such assets. Such loss will be a loss of capital nature. It cannot be claimed as deduction in the computation of the profits even u/s 37 of the Act in view of the specific prohibition contained therein on deduction of any expenditure in the nature of capital expenditure. The reliance of learned counsel for the assessee on the decision of the Supreme Court in Badridas Daga Vs. The Commissioner of Income Tax, and the decisions of this court in Shantikumar Narottam Morarji Vs. Commissioner of Income Tax, Bombay City, and in Commissioner of Income Tax, Bombay City-III Vs. Bombay State Transport Corporation, , in our opinion, is wholly misplaced. The ratio of these decisions has no application to the facts of the present case. These decisions have laid down when and under what circumstances even in the absence of specific provisions in the Act, revenue expenditure can be allowed as a deduction in the computation of the income of the assessee. They do not say that expenditure of capital nature or capital loss can be allowed as a deduction in computing the taxable income by taking resort to any commercial or accounting principles.

In view of the foregoing discussion, we are of the clear opinion that the Tribunal was not justified in holding that the assessee was entitled to claim deduction of a sum of Rs. 2,42,624 arising from revaluation of the items of machinery purchased by it but not installed or put to use in arriving at its commercial or accounting profit for the relevant assessment year. The question referred to us is, therefore, answered in the affirmative (sic), i.e., in favour of the Revenue and against the assessee.

Under the facts and circumstances of the case, there shall be no order as to costs.