M. S. MENON, C.J. - This is a reference by the Income-tax Appellate Tribunal, Madras Bench, under section 66 (1) of the Indian Income-tax Act, 1922. The assessment year concerned is 1957-58 and the accounting period, the twelve months ended March 31, 1957.
The assessee, the Forest Industries (Travancore) Limited, claimed a deduction of Rs. 4,14,413. The claim was disallowed by the Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The first question referred relates to this claim and reads as follows :
'Whether, on the facts and in the circumstances of the case, a sum of Rs. 4,14,413 being the loss on obsolete machinery and equipment is deductible under section 10 (2) (vii) of the Indian Income-tax Act, 1922 ?'
It is settled law that in order to obtain a deduction under section 10 (2) (vii) of the Act the machinery should have been used in the previous year. This is clear from Liquidators of Pursa Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. National Syndicate. In the former case, the Supreme Court said :
'The word used has been read in some of the pools cases in a wide sense so as to include a passive as well as active user. It is not necessary, for the purposes of the present appeal, to express any opinion on that point on which the High Courts have expressed different views. It is, however, clear that in order to attract the operation of clauses (v), (vi) and (vii) the machinery and plant must be such as were used, in whatever sense that word is taken, at least for a part of the accounting year. If the machinery and plant have not at all been used at any time during the accounting year no allowance can be claimed under clause (vii) in respect of them and the second proviso also does not come into operation.'
It is not contended that there was any active use of the machinery in question at any time during the accounting period. The only contention before us - mainly on the strength of Niranjan Lal Ram Chandra v. Commissioner of Income-tax - is that a passive use is sufficient and that there was a passive use during the said period. No such contention was urged before the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, and consequently, there has been no investigation on the subject.
As a matter of fact the indications are to the effect that the machinery became useless long before the accounting year and was never in use, in any sense of the term, during that year or for many years prior to that year. Paragraph 1 of the assessment order says :
'In or about 1947 the company acquired forest operation machinery from the war disposals. A lot of stores and appear parts were acquired for the various items of machinery for the forest operations. After about two years of working it was found that the mechanised working of the forest and adopted the extraction of timber from the forest through contractors. These machineries have been stated to be out of use ever since then.'
And paragraph 4 of the order of the Appellate Assistant Commissioner :
'In the present case, it is common ground that the assets in question were used only for 3 or 4 years and after 1949, they were not used at all.'
There is a similar statement in paragraph 2 of the order of the Appellate Tribunal :
'There is no dispute as to the figures. Nor is there any dispute that the machinery in question was not used at all for any time during the relevant accounting year. The only contention is that the loss should be allowed under section 10 (2) (vii) notwithstanding the fact that the machinery was not used at any time during the relevant accounting year.'
In the light of what is stated above we cannot but hold that the machinery was not used at all during the accounting period relevant to the assessment year in any sense of that term, that, as a result, the deduction was denied and that the first question referred should be answered in the negative and against the assessee. We do so.
The assessee also claimed by way of deduction, without success, another sum of Rs. 1,41,035. The second of the two questions referred relates to this claim and reads as follows :
'Whether the assessees claim to deduct a sum of Rs. 1,41,035 as loss on revaluation of stores and spares is tenable in law ?'
Counsel for the assessee and the department agree that the stores and spares represent the stock-in-trade of the assessee. The assessee was valuing the trading stock at cost. As stated by the Appellate Tribunal paragraph 4 of the statement of the case :
'The assessee wrote off 75 per cent. of the book value on the last day of the previous year. On the basis of a certificate from Paul Pothen, Engineer, that 25 per cent. of the original value can be taken as the reasonable value for accounting purposes the assessee company debited to the profit and loss account under the head loss on revaluation of stores and spares a sum of Rs. 1,41,035 arrived at as under and claimed the aforesaid loss as a deduction :
Total value of stores and spares as on 31-3-1957.
Total realisable value (25 per cent. of the original value).
The Appellate Assistant Commissioner said :
'I am of the view that the loss has been rightly disallowed by the Income-tax Officer. These has been market change in the mode of valuation of the stocks. As stated above, even since the inception of the company, the stocks were valued were valued at cost. This year the appellant made a sudden departure and valued stock at realised market value which necessitated writing off the value by 75 per cent. There has, therefore, been a clear change in the method of valuation which cannot be accepted, having regard to the method adopted in the earlier years. Again, as stated by the Income-tax Officer, the loss was not actually ascertained by valuing each item separately. On a rough basis, the entire stock, in whatever state they were, was valued at 25 per cent. of the book value. Again the loss written off by the appellant is virtually the accumulated loss incurred over a period of years by the steady depreciation in the value of the articles.'
The Appellate Tribunal endorsed the statement.
A similar question arose before the High Court of Madras in Indo-Commercial Bank Ltd. v. Commissioner of Income-tax. In that case the assessee, the Indo-Commercial Bank Ltd., held securities and shares as part of its stock-in-trade. Those securities and shares were valued in its accounts at the commencement and close of each year, at cost, down to 1950. There was a fall in the market price of the securities and shares in 1950, 1951 and 1952. The assessee valued the securities and shares at cost at the commencement of 1951, at the market value at the end of 1951 and claimed the difference of Rs. 5,91,250 as a trading loss. For 1952 the securities and shares were valued at the market price both at the beginning and at the end of the year and the resultant difference of Rs. 18,491 was also claimed as a business loss. The court held :
(1) that as the change in the basis of valuing the securities and shares at the close of 1951 was made by the assessee bona fide and that basis was continued thereafter, the requirements of section 13 of the Act were satisfied;
(2) that the change in the method of valuation may be detrimental to the revenue; but that was not a relevant factor in deciding whether the assessee had the right to change the basis of valuation; and
(3) that in deciding whether the changed method of valuation of closing stock attracted the proviso to section 13 it was not a correct approach to see whether the losses of previous years would also enter into the claim made by the assessee for the accounting year.
Dealing with the last point the court said :
'An actual loss sustained by the sale of securities below the cost price cannot obviously be disallowed on such a ground. A notional or anticipatory loss resulting from a valuation of closing stock, which an assessee is permitted to take into account in ascertaining his trading profits, stands on no different footing. It is a concession given to the assessee based on the well recognised usage of the trade, and the principle underlying that concession is in no way violated when the assessee changes his method of valuation from cost to market value, if the latter was less than the cost price. If the revised basis of valuation is continued thereafter the profits and losses thereafter would be correctly computed.'
There is no allegation in this case of any lack of bona fides or a statement to the effect that the changed method was not followed in subsequent years. We are also not satisfied that the reduced value put upon the stock-in-trade by a competent engineer does not represent its market value. In these circumstances, the second question referred has to be answered in the affirmative and in favour of the assessee. We do so.
The reference is answered as above. No costs.
A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Appellate Tribunal as required by sub-section (5) of section 66 of the Indian Income-tax Act, 1922.