The judgment of the court was delivered by
G. N. RAY J.--This is an appeal on a certificate granted
by the High Court at Calcutta under section 261 of the Income-tax Act, 1961,
against the judgment and order of the said High Court dated June 8, 1977, in
Income-tax Reference No. 336 of 1970 (see [1978] 115 ITR 891).
The Burmah Shell Oil Storage and Distribution Company of
India Ltd. (now known as "Bharat Petroleum Corporation Ltd.")
(hereinafter referred to as "the appellant-company"), was engaged in
the business of distributing liquid petroleum gas manufactured by the Burmah
Shell Refineries Limited (hereinafter referred to as "the Refinery").
For the purpose of such distribution, the appellant-company had from the year
1955 to the beginning of 1961, which was its previous year for the assessment
year 1962-63, acquired iron cylinders at a total cost of Rs. 1,09,63,754. Those
cylinders were used as "returnable packages". They were accounted by
the appellant-company as its capital assets but no allowance for depreciation
thereon was claimed or allowed in any of its assessments up to the year 1961-62.
The said cylinders were used to be filled with gas by the refinery. The refinery
later on offered to purchase the cylinders owned by the appellant-company. The
sale of cylinders took place in 1961 for a total sum of Rs. 82,19,947 as against
their original cost of Rs. 1,09,63,754. There was thus a shortfall of Rs.
27,43,807 which the appellant-company claimed as a deduction in the assessment
year 1962-63.
By an assessment order, the Income-tax Officer, Central
Circle V, disallowed the said claim. The Income-tax Officer rejected the
contention of the appellant-company that the loss on the sale of cylinders
should be allowed as loss on "returnable packages" by observing that
under rule 5, the cost of returnable packages was to be allowed as revenue
expenditure when "actually used up" and the same implied that the
packages must have been rendered unusable by wear and tear and must have been
consumed. The Income-tax Officer held that the said rule had no application
where packages were disposed of in good condition by sale. The said Officer
further observed that the loss would also not arise under section 32(1)(iii) of
the Income-tax Act, 1961, as the terminal loss applied only to assets on which
depreciation allowances had been granted.
The appellant-company filed an appeal before the Appellate
Assistant Commissioner of Income-tax being Appeal No. 26 CC.V of 1963-64, which
was dismissed. On further appeal, the Income-tax Appellate Tribunal, however,
was pleased to allow the appeal holding, inter alia, that the said cylinders
were "returnable packages" and the loss of Rs. 27,43,807 on account of
disposal of cylinders was a loss allowable as revenue expenditure within the
meaning of rule 5. The claim under section 32(1)(iii) of the Income-tax Act was
not allowed on the finding that the appellantcompany's contention on that score
did not survive.
Thereafter, the Commissioner of Income-tax made an
application to the Income-tax Appellate Tribunal requiring it to draw up a
statement of the case and refer the following two questions for the opinion of
the High Court at Calcutta :
(a) Whether, on the facts and in the circumstances of the
case, the Tribunal was right in holding that the sum of Rs. 27,43,807 being the
difference between the cost of gas cylinders purchased by the assessee and their
sale value was allowable as a revenue expenditure under rule 5 of the Income-tax
Rules, 1962, read with the 'remarks' against the entry relating to returnable
packages in the statement of rates contained in Part I of the Appendix I to the
said rules ?
(b) Whether, on the facts and in the circumstances of the
case, the Tribunal was right in holding that the company could make up the
shortfall in the statutory reserve for the year under consideration by falling
back on the excess reserves created in the earlier years and that the said
excess reserves should be taken into account in determining the quantum of the
statutory development rebate reserve required to be made in any subsequent year
and in allowing the full development rebate of Rs. 24,15,622 although the actual
reserve fell short of the statutory requirements ?"
The appellant-company opposed the said application and in
reply it was pointed out that at the hearing of the appeal by the Tribunal, it
had alternatively been argued that the claim for the allowance of Rs. 27,43,807
should be admitted as depreciation under section 32(1)(iii) of the Income-tax
Act, 1961. The appellant-company, therefore, submitted that if the Tribunal
decided to make the reference, the question should be in terms suggested by it.
After hearing the parties, the Tribunal finalised the
statement of the case and referred the following questions for the opinion of
the High Court of Calcutta (at page 896 of 115 ITR):
" (1) Whether, on the facts and in the circumstances
of the case, the loss of Rs. 27,43,807 arising on the sale of gas cylinders was
allowable as a revenue expenditure as provided for in the remarks against
'returnable packages' under the classification 'Mineral oil concerns' in item
M(2)(2)(d) under the heading '(iii) special rates to be applied to other
machinery and plant' in Part I of Appendix I to rule 5 of the Income-tax Rules,
1962, or under section 32(1)(iii) of the Act ?
(2) Whether, on the facts and in the circumstances of the
case, the Income-tax Appellate Tribunal was right in holding that the shortfall
in the statutory provision for development rebate reserve created by the company
for the year under consideration could be made up by the excess provision for
development rebate reserve created in the earlier years and that the full amount
of development rebate of Rs. 24,15,622 could be allowed in that year on the
basis of such adjustment?"
The reference was registered before the High Court as
Reference No. 336 of 1970. After a contested hearing, the High Court while
delivering the judgment reframed the first part of question No. 1 which reads as
follows :
" Whether, on the facts and in the circumstances of
the case, Rs. 27,43,807 (realised by the assessee on sale of the cylinders) was
allowable as revenue expenditure under rule 5 of the Income-tax Rules, 1962,
read with item M(2)(2)(d)(i) of Part I of Appendix I to the said rule ? "
and answered this part of the question in the negative and
in favour of the Revenue. The High Court also held that the question of law
under section 32(1)(iii) of the Income-tax Act was an independent question of
law and the Tribunal not having dealt with it must be deemed to have decided
against the appellant-company. The High Court answered the second part of
question No. 1 in the negative and in favour of the Revenue and it reframed
question No. 2 as follows :
" Whether, on the facts and in the circumstances of
the case, the Tribunal was right in allowing the development rebate of Rs.
24,15,622 although there was a shortfall of Rs. 34,827 in the development rebate
reserve account created by the assessee in the accounting year?"
The High Court answered question No. 2 reframed in the
negative and in favour of the Revenue. The High Court at Calcutta, however, was
pleased to allow the application of the appellant-company to appeal to this
court under section 261 of the Income-tax Act, 1961, and the certificate of
appeal was granted limited to the following questions of law :
" (a) Whether the general provision of section
32(1)(iii) of the Income-tax Act, 1961, applies to machinery and plant specially
listed in section III(iii) of the statement in Part I, Appendix I, to the
Income-tax Rules, 1962 ?
(b) Whether there can be any written down value of
returnable packages specified in item M(2)(2)(d)(i) in the said section of the
said statement ?
(c) Whether the interpretation by the learned judges of
the expression 'cost of packages' and 'actually used up' appearing in the
remarks against the said item is correct ?
(d) Whether in deciding the question whether the deduction
referred to in section 33 of the Income-tax Act, 1961, may be allowed in any
year the amount credited to the reserve account in past years in excess of the
requirement prescribed by section 34(3)(a) may be taken into account? "
Mr. S. Rajappa, learned counsel appearing for the
appellant-company, contended that section 32(1)(iii) of the Income-tax Act,
1961, applies to machinery and plant specially listed in Part I of the Appendix
to the Income-tax Rules, 1962, and the High Court had gone wrong in holding that
the said general provision of section 32(1)(iii) of Income-tax Act, 1961, was
not applicable in the facts and circumstances of the case. It has been contended
by Mr. Rajappa that admittedly the cost of cylinders was Rs. 1,09,63,754 and as
no depreciation was allowable on those returnable packages, the written down
value of the cylinders must be held to be Rs. 1,09,63,754. Since the cylinders
were sold for Rs. 82,19,847, the deficiency of Rs. 27,43,807 is allowable under
section 32(1)(iii). Such contention was also raised before the High Court but
the same was rejected by the High Court by indicating that the quantum of the
written down value being a pure question of fact and in the absence of any
finding of the Tribunal as to the written down value of the cylinders, such
contention could not be considered within the scope and ambit of question No. 1.
The High Court has also held that even if it was assumed that the written down
value of the cylinders was Rs. 1,09,63,754, the claim of the appellant company
could not be allowed because the company had not written off Rs. 27,43,807 in
its books of account.
Mr. Rajappa also urged that the High Court had gone wrong
in not accepting the development rebate for Rs. 24,15,622 since allowed by the
Tribunal in answering the reference. In this context, Mr. Rajappa has reiterated
the contentions made before the High Court. It transpires that there was a
shortfall in the development reserve account in the accounting year. But the
appellant-company did not debit the excess amount of the earlier years in the
profit and loss account of the accounting year in question. The
appellant-company also did not credit the said excess amount to the development
reserve account of this accounting year to make up the said deficiency. The High
Court has not accepted the submission of the appellant-company that section
34(3)(a) was not inflexible and in appropriate cases, such provision was
relaxable and the shortfall of a small amount arising due to genuine mistake of
the appellant-company should not stand in the way of relaxing the provision of
section 34(3)(a) of the Income-tax Act. The High Court has referred to the
decision of this court in Indian Overseas Bank Ltd. v. CIT [1970] 77 ITR 512 to
the effect that development rebate is "a concession granted but that
concession is made subject to fulfilment of certain requirements" and
"entries in the account books required by the proviso are not an idle
formality". It has been indicated by the High Court that the decision in
Indian Overseas Ban Ltd. v. CIT [1970] 77 ITR 512 (SC) was concerned with
proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, which is
in pari materia with section 34(3)(a) of the Income-tax Act, 1961. The High
Court has held that (a) an excess amount in the earlier year's development
rebate reserve account is not frozen by section 34(3)(a) of the Act in view of
its clear language ; (b) the directors of a company are entitled to free the
excess amount and after doing so, the company by debiting it in the profit and
loss account and by crediting it to the development rebate reserve account can
make up the shortfall of the accounting year in which the development rebate is
actually claimed or allowed ; and (c) except in those cases in which the Central
Board of Revenue or the Central Board of Direct Taxes have relaxed the
provisions of section 34(3)(a), it must be complied with in order to earn the
development rebate claimed in a particular year. The High Court has held that
the appellant-company did not transfer the excess amounts of the earlier years
in the accounting year for the purpose of making up the corresponding reserve
and it is an admitted fact that the appellant-company did not comply with the
provisions of section 34(3)(a) of the Act.
Mr. Rajappa has next urged that so far as the
appellant-company is concerned, the said cylinders must be held to be
"actually used up". The question as to whether or not the packages are
"actually used up" needs to be determined not in abstract terms but
with reference to the actual usefulness to the assessee. Mr. Rajappa has also
contended that the expression "actually used up" in item M(2)(2)(d)(i)
of Part I of the Depreciation Schedule Appendix I of rule 5 of the Income-tax
Rules, 1962, includes both total and partial "use up". Mr. Rajappa has
submitted that after the sale of the cylinders to the refinery, the cylinders
did not belong to the appellant-company and they lost their usefulness to the
appellant-company and it is immaterial if the very same cylinders were used by
the refinery to fill up with gases and send the same to the appellant-company
for distribution to the consumers. It may be noted that similar contentions were
also made before the High Court, but the same were rejected by holding, inter
alia, that the expression "used up" means "exhausted by use,
rendered unserviceable". In view of the expression "actually used
up", the case of "partial use up" was not acceptable. The High
Court has also held that the words "actually used up" qualify the word
"packages". Hence the expression is not required to be interpreted
with reference to the user by the assessee. It has been indicated by the High
Court that the cylinders in fact, after the sale, were put to use by the
refinery and such cylinders filled up with gas were sent to the
appellant-company who in its turn distributed the same to the consumers. Since
the cylinders were actually used up in the trade both by the refinery and by the
appellant-company after the sale, it cannot be held that the cylinders were
"actually used up". Hence, the claim for deduction of Rs. 27,43,807 as
revenue expenditure under rule 5 of the Income-tax Rules, 1962, read with item
M(2)(2)(d)(i) of Part I, Appendix I, to the Rules was inadmissible and the
reference on this question must be answered against the assessee.
Mr. J. Ramamurti, the learned senior advocate, appearing
for the respondent, has submitted that the Appellate Tribunal has found as a
fact that the gas cylinders are returnable packages. Hence, the Schedule entry
M(2)(2)(d)(i) of Appendix I is applicable. This Schedule refers only to cost and
not loss. As the cylinders were not "actually used up" for reasons
indicated by the High Court, the assessee was not entitled to any benefit
of this entry. Mr. Ramamurti has also urged that where
entry M(2)(2)(d)(i) of Appendix I to the Rules is applicable, section 32(1)(iii)
of the Income-tax Act does not apply. Even assuming that section 32(1)(iii)
applies, the Tribunal has not found any fact relating to written down value.
Written down value being a question of fact must be found on consideration of
relevant materials. The Tribunal has not dealt with this issue and the question
therefore did not arise for consideration. Mr. Ramamurti has also submitted
that, in any event, as rightly pointed out by the High Court, the assessee is
not entitled to claim any benefit under section 32(1)(iii) as the assessee has
not written off the deficiency in its books of account. Such writing down is a
condition which is required to be satisfied. Mr. Ramamurti in this connection
has referred to a decision of the Madras High Court in S. Rajagopala Vandayar v.
CIT [1990] 184 ITR 450, which according to Mr. Ramamurti has taken into
consideration earlier decisions including the decision of this court in CIT v.
National Syndicate [1961] 41 ITR 225 and the Board's circulars. Mr. Ramamurti
has also submitted that the amendment of section 34(3)(a) regarding development
rebate reserve being effective from April 1, 1962, the assessee's claim for such
rebate was not at all entertainable. He has, therefore, submitted that there is
no occasion to interfere with the decision of the High Court and the appeal
should be dismissed.
After giving our careful consideration to the matter, we
approve the decision of the High Court which has already been indicated in some
detail. In our view, the cylinders in question did not satisfy a case of
returnable packages "actually used up". It also appears to us that the
High Court has held, for good reasons, that the assessee could not claim any
deduction under section 32(1)(iii) of the Act and a claim on account of
development reserve under section 34(3)(a) of the Act was also inadmissible for
the reasons indicated by the High Court. In the aforesaid circumstances, this
appeal fails and is dismissed without, however, any order as to costs
