The judgment of the court was delivered by
SRINIVASAN J. - One of the allowances which has to be taken into account in the computation of the profit and gains of a business is what is termed obsolescence allowance. Section 10(2)(vii) of the Income-Tax Act specifies this allowance and the condition under which it can be granted in these term :
'In respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold, or its scrap valu :
Provided that such amount is actually written of in the books of the assessee.'
The assessee in this case was operating a bus transport business as sole proprietor from the 1st of April, 1948. For the periods ending with the 31st of March, 1949, 31st March, 1950, and 31st of March, 1951, relevant to the assessment years 1949-50, 1950-51 and 1951-52, the assessee claimed this allowance, the sums in question being Rs. 14,927, Rs. 3,363 and Rs. 4,309. It is stated that in these account years, five, three and five buses respectively were condemned, their scrap value being nil according to the assessee, the written down value of these vehicles during the years was claimed as the allowance under this head. The Income-tax Officer, however, estimated the scrap value at 25 per cent. of the written down value and allowed Rs. 7,233, Rs. 1,488 and Rs. 3,231 during these years. The assessee appealed. What precisely were the grounds advanced by him in the appeals is not clear. But in the statement of the case, the Tribunal records that the assessee did not press any of these appeals. But the Appellate Assistant Commissioner took the view that the allowance granted under section 10(2)(vii) was improper and he accordingly directed the adding back of the allowance to the income. There were further appeals to the Tribunal in which the legality of the action of the appellate authority in withdrawing the obsolescence allowance was questioned. The Tribunal held that in order to qualify for this allowance, it was mandatory that the sum in question should have been written off in the books of the assessee. The Tribunal was of the view that this requirement contained in the proviso to section 10(2)(vii) was intended by the legislature to restrict the relief only to cases where an assessee maintains regular books of account. The Tribunal thought that as the assessee never kept any accounts and his income having been returned on the basis of his own estimates, the allowance was rightly refused.
It is in these circumstances that the questio :
'Whether the disallowance of the obsolescence allowance for the assessment years 1949-50, 1950-51 and 1951-52 is justifie ?'
stands referred to us.
It does not appear to be disputed as a question of fact that certain vehicles were in fact condemned as useless during the relevant account years. During the assessment proceedings, the assessee produced before the Income-tax Officer 'daily collection and expenditure book, conductors challans, trip sheets, tyre consumption stock book and other subsidiary books and vouchers for purchases and expenditure'. The assessee also explained to the Income-tax Officer that he submitted his return by estimating the income at a flat rate per bus for the reason that a regular day-book and ledger had not been maintained. The Income-tax Officer accordingly had to compute the income on an estimated basis by invoking the proviso to section 13. Notwithstanding the absence of a day-book and a ledger, the Income-tax Officer was satisfied that the obsolescence allowance claimed could be granted. When the matter came before the Appellate Assistant Commissioner that authority took the view that the loss under section 10(2)(vii) could be allowed only if such amount is actually written off in the books of the assessee. He proceeded to hold that the assessee did not maintain any regular books of account and, although some subsidiary records were produced, no cash book or ledger had been maintained and hence, the assessee had not written off such losses in the books of account. This view was accepted by the Tribunal notwithstanding the fact that the assessee produced before all the authorities an account called the 'buses valuation books' in which the value of the vehicles, that is to say, their written down value as at the commencement of the year, had been recorded and an entry had been made writing in the amount of allowance under section 10(2)(vii). The Tribunal observed that the term 'books' in section 10(2)(vii) must necessarily refer to the books of account maintained in the course of the business and concluded by saying that this was a case where the assessee never kept any account and his income was being returned on an estimated basis.
We are unable to agree that this is a case where, for lack of compliance with the requirement of the first proviso to section 10(2)(vii), the assessees claim to obsolescence allowance can be denied. It is not in dispute that the assessee did maintain a set of accounts. He had no doubt omitted to maintain a day-book and a ledger. It is true that these are important accounts in the conduct of a business. But, would it be correct to say that the assessee maintained no books of account at all, or, what is more important, that the amount in question had not been written off in such books of account as he found it necessary and sufficient to maintai It has been admitted by all the authorities that the assessee did maintain what he called the 'buses valuation book' in which the value of the vehicles was recorded and an entry had been made in respect of these condemned vehicles wiping out the relevant entry in this account. The Income-tax law does not specify that any particular set of accounts should be maintained by an assessee. Section 13 of the Act, which deals with the method of accounting, is the only provision which can give any clue in this regard. This provision required that the income, profits and gains shall be computed in accordance with the methods of accounting regularly employed by the assessee. But where no such methods of accounting has been regularly employed, or the method employed is such that the income, profits and gains cannot properly be dedicated therefrom, then it is open to the Income-tax Officer to make the computation upon such basis as he may determine. The expression 'method of accounting' obviously includes the manner in which the assessee displays the activities of his business by entries in such books of account as he maintains. If it appears that the complement of such books of account is not complete enough to enable the proper assessment of the income of the assessee, then it is open to the income-tax Officer to arrive at the income on the basis of an estimate, or adopting such other methods either with or without reference to the books of account available, as he may determine to be suitable in the circumstances of the case. The section does not, however, say, nor is there any provision in the Act that an assessee carrying on a business shall maintain a specified set of accounts. The expression 'books of the assessee' in the context in which it appears in section 10(2)(vii) cannot give any indication of the particular type of accounts which the assessee should maintain. That the accounts maintained by the assessee are defective, in the sense that they do not lead to a correct assessment of the income, profits and gains of the business, has nothing whatever to do with the allowance that can be granted under section 10(2)(vii). If the assessee has account in which the relevant entry with regard to this allowance appears, it would seem to be a sufficient compliance with the first proviso to section 10(2)(vii). Both the Appellate Assistant Commissioner and the Tribunal seem to have looked upon this proviso as a condition in the nature of a penalty, the failure to comply with which deprives the assessee of this allowance. We are unable to agree with this view.
It is contended by Mr. V. Balasubrahmanyan, learned counsel for the department, that according to general mercantile practice, the writing off can be done only in the profit and loss account, for this allowance represents a loss which goes to reduce the profit. In this case, there is no profit and loss account all, and it is therefore suggested that the writing off that is contemplated in the proviso cannot have been effected. Our attention has been drawn to Accountancy by William Pickles, where, at page 74, dealing with 'Depreciation', the learned author observes thu :
'The wearing our of a machine is a simple and obvious example, but it must be emphasised that this is but one of many causes. As with all other entries, there must be complete double entry for the depreciation adjustment. The required entry i : Debit trading and profit and loss account and credit the asset in respect of which depreciation is being recorded. This entry conforms with the principles already enunciated in that the trading and profit and loss account is necessary because the amount written off represents an expense and the credit of the asset is required as asset has, pro tanto, been reduced in value...'
This statement found in this text only explains the manner in which depreciation should figure in the accounts maintained on the double entry system. But it does not lay down any inviolable principle. If accounts are maintained on the double entry system, the author explains how it should be done. Nor are we able to agree with the learned counsel for the department that the profit and loss account is an account which can be said to be a book of account. It is only a statement representing the state of business as at the end of the accounting year and the details contained in the statement are culled out such other books of account which may be called primary books which a businessman generally maintains. It does not appear to us that this argument, that for lack of preparation of a profit and loss account the allowance should be refused, can be accepted.
We are satisfied that the Tribunal misconstrued the scope of section 10(2)(vii). It follows that the assessee would be entitled to the allowance as granted by the income-tax Officer. The question is answered accordingly.
In view, however, of the fact that this reference was rendered necessary through the shortcomings of the assessees own method of maintaining accounts, we do not see fit to award him any costs.
Question answered accordingly.