1. appellant is a company carrying on the business of manufacture of electrical instruments, more particularly, starters, switch gears, etc.
This appeal relates to its assessment for the assessment year 1976-77 for the previous year ended 31-3-1976. The appellant had written off a sum of Rs. 1,58,940 in its profit and loss account for this year as the value of fixed assets, which were found missing on actual physical verification done by the appellant. It was stated before the ITO that the said loss was on account of missing assets arose in the regime of the previous management and that all these adjustments had been done to arrive at a realistic view of the company's operations and financial position. The ITO referred to para 5(iv) of the auditors' report of the company, wherein they had stated that they were unable to state whether the accounts gave a true and fair view due to these adjustments. The ITO, therefore, held that this amount was in the nature of capital loss and, accordingly, disallowed and added back the same to the income of the assessee.
2. The appellant took up the matter in appeal to the Commissioner (Appeals) and contended that it was entitled to this deduction either under ection 29 or under Section 32(1)(iii) of the Income-tax Act, 1961 ('the Act'). It relied on the decision of the Bombay High Court, in the case of CIT v. Tata Iron & Steel Co. Ltd.  106 ITR 363. The Commissioner (Appeals) did not accept this contention. He agreed with the ITO that the deduction claimed by the appellant in the present case was in respect of capital assets, which were found to be missing and that, therefore, it could not be allowed under the provisions of Section 32(1)(iii). He was of the view that the said provisions of law were not attracted in the present case. He then proceeded to examine the question whether the said amount could be allowed as a loss incidental to the carrying on of the business and came to the conclusion that the assessee was not entitled to the same. He pointed out that the decision of the Bombay High Court was based on the fact that a regular method of accounting was regularly followed by the assessee in the said case. He pointed out in the present case that it was for the first time and that too after there was a change in the management that an inventory of the fixed assets was taken and that it was noticed at that time that some assets were found missing. He further held that the claim of the assessee could not be sustained because no regular method of accounting was ever followed by the assessee in this regard as in the case of Tata Iron & Steel Co. Ltd: (supra). He, therefore, held that the ITO was justified in treating this loss as a capital loss.
3. Shri B.K. Khare, the learned chartered accountant for the appellant, stated that the appellant-company, which was incorporated in 1949, was controlled and managed by the family of one M.N. Shah and that in 1974, Crompton Greaves acquired control of the appellant-company and took over its management from 1-4-1975. Shri Khare submitted that from 1970-71 accounting year, till the end of the accounting year 1974-75, there was a temporary lull in the business activities of the appellant-company on account of labour trouble and the company had become a sick unit financially. The learned counsel referred to us the director's report and submitted that though the assets in question were inventorised, they were not found to be in existence on actual physical verification carried out by the new management and that, therefore, the amount of Rs. 1,58,940, representing the value of the missing assets, was written off in the profit and loss account. 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. He argued that the old management would not be faulted for this, as the amount of Rs. 1,58,940 represented the written down value of these assets as per the books of the 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 the assessee would be entitled to this deduction under Section 28(i) on the authority of the decision of the Bombay High Court, in Tata Iron & Steel Co. Ltd.'s case (supra). He also elied on the decision of the Supreme Court, in P.K. Badiani v. CIT  105 ITR 642, 649 and contended that obsolete commercial assets would result in business loss. Shri Khare, therefore, argued that the departmental authorities were not justified in disallowing the assessee's claim for this loss.
4. Shri L.N. Joy, the learned departmental representative, relied on the order of the Commissioner (Appeals) 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). He further relied on the distinction pointed out by the Commissioner in his order to distinguish the present case from the decision in the case of Tata Iron & Steel Co. Ltd. (supra) relied on by the appellant. He, therefore, submitted that the decision of the Commissioner (Appeals) was correct and that the same should be upheld.5. We have carefully considered the submissions urged on both sides, in the light of the materials placed before us and the decisions referred to above. 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. In their audit report dated 31-1-1977, the auditors of the company have stated as follows in paragraph 2(i) regarding the amount of Rs. 1,51,814.40 : 2(i) The company has written off plant and machinery worth Rs. 1,51,814.40. The company had suspended operations for the last several years. A list of individual items of plant and machinery (other than tools which gives the original cost and written down value as on 31-3-1970 is available. The management conducted a physical verification soon after the accounting year and the inventory of plant and machinery items has been valued on the basis of the abovementioned list.
Depreciation provided during the years 1970-71 and 1971-72 has been proportionally allocated over the value of present plant and machinery and the value of the plant and machinery to be written off. The difference between the written down value of the present inventory of plant and machinery and the book value as on 31-3-1975 has been written off during the year. It is not possible to ascertain as to how the said loss has arisen.
6. However, the assessee's case has all along been that the amount of Rs. 1,58,940 represented the value of fixed assets, which were found to be missing on actual physical verification carried out by the appellant-company and, therefore, we have to decide the case only on that basis. The assessee's claim for balancing or obsolescence allowance under Section 32(1)(iii) can be considered only if the assets in question had been 'discarded, demolished or destroyed in the previous year,' under consideration. Admittedly, the assets in question were neither discarded, nor emolished, nor destroyed during the previous year ended 31-3-1976. Therefore, the question of allowing the assessee's claim under Section 32(1)077) in the year under appeal, does not arise at all.
7. Regarding the alternative claim of the appellant on the basis of Section 28(7), 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). At the outset, we must point out that the auditors of the company have stated categorically in paragraph 2(7) 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 the amount of Rs. 1,58,940, written off to the profit and loss account, includes this amount of Rs. 1,51,814.40. It is, therefore, highly doubtful as to whether the assessee would be entitled to the claim of this loss at all, since it is not possible to ascertain as to how this loss has arisen. Even accepting what the assessee says in its directors' report is true, it cannot be disputed that the 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 the assessee's paperbook, the directors state as follows : 7. When a physical verification of the fixed assets, stocks of raw materials, components and semi-finished goods, etc., of the company was taken, above discrepancies were discovered and as a result large amount of the assets had to be written off as follows : Rs.Fixed assets 1,58,940.39Raw materials and components 3,97,586.46Semi-finished products and parts in process 1,49,446.00Packing materials 6,166.01.
It must be mentioned here that the revenue has accepted the write-off of the remaining three items relating to raw materials and components, semifinished products and parts in process and packing materials. Since the amount of Rs. 1,58,940 represented the value of fixed assets, which was written off by the assessee, the revenue considered this to be capital loss and, in our view, this decision of the revenue authorities is correct and it is fully supported by the facts mentioned by us from the auditors' report quoted above.
8. The decision of the Bombay High Court, in Tata Iron & Steel Co.
Ltd.'s case (supra) is of no assistance or help to the appellant in the present case. This would be clear from the discussion on Question No. 3 in the said case. It is stated as follows : ... The said amount of Rs. 1,78,277 could not be claimed by the assessee-company as obsolescence allowance under Section 10(2)(vii) of the Act, but it had claimed that amount as a deduction under Section 10(1) f the Act. Mr. Joshi sought to contend that this amount is not allowable as a deduction under Section 10(1) of the Act but, in my opinion, Question No. 3 as framed does not raise that wider point but is restricted to the question as to in which assessment year the same could be allowed as a deduction. After some argument, Mr. Joshi very fairly himself veered round to that view of the question, having regard particularly to the application for reference which the Commissioner had himself made to the Tribunal.... (p. 366) Thus, it would be seen that the question of allowability of the claim under Section 10(1) of the Indian Income-tax Act, 1922 ('the 1922 Act') corresponding to Section 28(i) of the 1961 Act, was not the subject-matter of reference to the High Court. Therefore, we are of the view that this decision is not an authority for the position canvassed by Shri Khare, the learned chartered accountant for the appellant, that this loss claimed by the appellant in the present case, is allowable under Section 28(i) On the contrary, a perusal of the facts discussed at pages 366 and 367 of the report would disclose that it was a case of claim of obsolescence allowance in respect of discarded plants under Section 10(2)(vii) in respect of which the assessee in the said case had retained in its books 1 per cent of the value of such discarded plants. When the said discarded plants were eventually sold, the profit on sale was duly brought into account, after making an adjustment, in regard to the value of the discarded assets retained as stated above.
Over a period of years the debit raised in respect of the 1 per cent value of the discarded plants got accumulated and could not be directly connected with the sales thereof made from time to time. During the year of account, TISCO had obtained a surplus on sale, of discarded plants of Rs. 7,89,211 and after making adjustment referred to above, had brought to account the sum of Rs. 6,06,361 as profit liable to tax under Section 10(2)(vii). TISCO also made a simultaneous claim for a deduction of Rs. 1,78,277 as representing the value of the discarded plants which had been retained in the 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 the departmental authorities, but which was allowed by the Tribunal by relying on Section 13 of the 1922 Act, having regard to the regular method of accounting employed and followed by the assessee. This decision of the Tribunal was upheld by the High Court and Question No. 3 was answered in the affirmative and against the revenue and in favour of the assessee. But, in the present case before us, the facts are entirely different, as we have already stated above with reference to the reports of the auditors and the directors of the company. In the circumstances, we hold that the decision of the Bombay High Court in Tata Iron & Steel Co. Ltd.'s case (supra) relied on by the assessee's learned counsel, is inapplicable to the facts of the present case.
9. On the other hand, in Badridas Daga v. CIT  34 ITR 10, their Lordships of the Supreme Court have held as follows : At the same time, it should be emphasised that the loss for which a deduction could be made under Section 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, even if it has some connection with his business. If, for example, a thief were to break overnight into the premises of a money-lender and run away with funds secured therein, that must result in the depletion of the resources available to him for lending and the loss must, in that sense, be a business loss, but it is not incurred in the running of the business, but is one to which all owners of properties are exposed whether they do business or not. The loss in such a case may be said to fall on the assessee not as a 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. (p. 16) 10. When we examine the facts of the present case, in the light of the above-mentioned principles laid down by the Supreme Court, it is clear that the loss in question is one arising on account of the loss of capital or fixed assets of the appellant. Therefore, it is in the nature of capital loss, which is not admissible under Section 28(i).
We, therefore, respectfully follow this decision of the Supreme Court and hold that the assessee is not entitled to this deduction of Rs. 1,58,940 under Section 28(i). Accordingly, the appeal is dismissed.