1. In this case arising under I.T. Act, 1961, the assessee had made a claim for deduction of Rs. 59,465 in the account year ended May 31, 1969, relevant to the assessment year 1970-71. The deduction claimed was in respect of the value of certain tools and implements. The assessee is a manufacturing concern. It produce radiator parts. In the process of manufacturing these articles, tools and implements are being used. It is needless to say that the tools are short-lived. They become use less or obsolete in a couple of years, so that the assessee has to be constantly replacing old tools with new ones. In terms of accounting, what the assessee does is to writ down the value of the tools every year by a certain figure, claiming the figure as a deduction, in arriving at the year's net profits. This deduction does not represent either an outgoing or an item of expenditure, but was claimed as an allowance by the assessee apparently as an itemised loss or, at any rate, as a proper charge against revenue in the profit and loss account. Whatever be the basis of the claim, the assessee sought to deduct the amount of write-off in the value of the tools ever year in the computation of its profits for income-tax purpose. The ITO did not blindly allow the figure of write-off as claimed by the assessee. On the contrary, he went into details, and allowed only what he regarded really as the proper estimate of loss or depreciation in the value of the tools, disallowing the balance, in the computation of the assessable income. For instances, in the year ended March 31, 1966, the assessee wrote off Rs . 18,750 in the tools account. But the ITO allowed Rs. 9,750 disallowing almost a like amount. In the next year, the ITO allowed Rs. 30,000 as loss or depreciation in the tools account, as against Rs. 45,000 written off by the assessee in the books. In the next year, the assessee wrote off Rs. 9,500 and the ITO apparently having been satisfied about the legitimacy of the write-off of this figure, allowed the claim in its entirety. But in the year next following, the ITO allowed only Rs. 35,465 out of Rs. 85,215 written off in the books. The assessee accepted the disallowances made by the ITO in all these assessments. During the four-year period the disallowances made by the ITO in this fashion amounted in all to Rs. 59,465. Subsequently, in the year ended May 31, 1969, relevant to the assessment year 1970-71, the assessee happened to sell its properties and assets to a limited company. In the process, it also turned over to that concern all its tools in their existing condition at book value. Having done so, the assessee claimed in its income-tax assessment in the relevant year of sale, a deduction in the sum of Rs. 59,465, which represented the aggregate amount of disallowance made by the ITO in all the prior years out of the amounts written off by the assessee as and towards depreciation in the value of tools and implements. The assessee claimed that the sum of Rs. 59,465 was a proper debit item to be allowed in the computation of the profits for the concerned year ended May 31, 1969. The ITO, however, disallowed the claim. When the matter was taken in appeal before the Tribunal, they accepted the claim of the assessee as to one-half. Hence this reference brought at the instance of the I.T. Department.
2. In their order, the Tribunal have quite clearly discountenanced the assessee's contention that the amount of Rs. 59,465 represented the loss of the year in question arising on the sale by the assessee of the old tools and implements. The Tribunal, however, upheld the claim of the assessee on another footing, namely, that the deduction must be allowed because it represented an expenditure to be allowed in that particular year. The Tribunal expressed the view that the assessee was entitled, on a reasonable basis, to an allowance of 50% of Rs. 59,465 as expenditure (deduction).
3. The Department's case before us was that the amount cannot be allowed on any footing whatever in the year in question. We think we must agree purposes of income-tax, in the computation of business profits, can be granted only in one or other of four circumstances :- (1) that the claim is in respect of an item of expenditure or outgoing; (2) that it is an itemised loss; (3) that it is, in some sense, a proper charge against revenue; or (4) that it is other wise a legitimate debit item in drawing up the profits and loss account. In this case, even according to the Tribunal, no loss as such resulted to the assessee when the tools were sold to another company. This is quite obvious because the sale was only at book value involving no loss of any kind to the assessee. Having held that there was no loss to the assessee in the transaction, we think, the Tribunal was not right in holding that assessee's claim an item of expenditure. It is plain to see that no expenditure whatever was involved in the transaction, since there was no outgoing or laying out of any money by the assessee to the extent of Rs. 59,465 or any other sum. What is more, the assessee's claim does not relate at all to the year of account in question, namely, the year ended May 31, 1969. Hence, we do not see any justification for allowing the claim for deduction of Rs. 59,465 or any portion thereof as a proper item of allowance in this year for the purpose of computation of taxable profits. The figure of Rs. 59,465 merely represents the aggregate sum of disallowance effected by the ITO in the prior years. The ITO did not blindly disallow the write-off claimed by the assessee in the preceding years. He went into the details every year, and actually he accepted the claim of the assessee in its entirely in one particular year only. In these events, it could not be claimed by the assessee that the depreciation or deterioration in the value of the tools and implements did not occur in the earlier years for appropriate reckoning in those years, but it happened only in the subsequent year when the depreciated tools were turned over at book value to the purchaser. What the assessee now claims really is allowance of amounts which had been disallowed in the prior assessments, and which disallowance the assessee had accepted in those relevant assessments. We do not know of any principle of law or accountancy which allows a claim for deduction in a subsequent year of expenses disallowed by the ITO in the earlier years.
4. Mr T. V. Balakrishana for the assessee did not seek to support the Tribunal's view of the allowance as an item of expenditure. He conceded that there was no expenditure involved in this year of account. Nor did the learned counsel urge that the loss, if it were regarded as such, had occurred during the year under consideration. Nevertheless learned counsel argued that the assessee was entitled to the deduction since the amount presented the disallowed portion to the deduction since the amount represented the disallowed portion of the amounts written off by the assessee in several earlier years. His point was that it was only during the current accounting year that the tools were actually disposed of by the assessee at the written down book value and hence to the extent that the ITO earlier had disallowed any portion of the amount, such portion must properly come in for deduction during this year. Learned counsel submitted that the reason why the ITO had disallowed portions of the expenditure in the prior years was that there was absence of proof that the tools had become useless or deteriorated. The extent of the deterioration, according to learned counsel, has been proved by the fact that in the current; year the purchaser was prepared to take the tools at book value, as recorded and written down by the assessee in its books. Learned counsel, accordingly, urged that the purchase at book value by a third party must be accepted as proof that the tools had actually deteriorated in value.
5. He further urged that since the sale was effected by the assessee only during the current year, it was appropriate to allow whatever was earlier disallowed by the ITO as a proper deduction during this year. The argument seems quite attractive in a diffused kind of way. But an allowance for purposes of income-tax must be based on one or other of the principles which we have earlier set out. The claim must properly come in either for purposes of allowing expenditure or for purposes of write-off of an itemised loss or as a charge or proper debit item against revenue. The amount which the assessee seeks to claim in this case does not fall under any of these heads. The claim has no merit other than the fact that it represents what has been disallowed by the Department in the prior years. It is true that the Tribunal has accepted the factum of sale at book value during this year as proof enough of the real extent to which the tools had depreciated in value during the period of their user. But the fact that the used-up tools which had already been written down in value are sold in a subsequent year does not really make the subsequent year as the year in which a claim can appropriately be raised for an allowance, either as a deduction or as a charge against net profits.
6. At this rate, a mere delay in the furnishing of proof by a taxpayer can very well justify the claim for deduction or allowance of expenditure in a year later than the year to which it relates. That, however, is not the law or even the principle of accountancy. Items of expenditure are properly allowed only if they had occurred in the appropriate years, and can be regarded as proper debit items against profit in the respective years alone. The Tribunal has referred to us the following two question of law, as arising out of their order :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that 50% of the losses disallowed in earlier years and acquiesced by the assessee should be allowed as a deduction
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is competent to adjudicate on an issue which had become final and conclusive years back, viz., write off of losses disallowed in earlier years and never appealed by the assessee ?'
7. Having regard to the considerations we have stated above, the questions fairly answer themselves against the assessee and in favor of the Revenue. The Revenue will have its costs from the assessee. Counsel's fee Rs. 500 (Five hundred only).