Madras High Court
S. Rajagopala Vandayar vs Commissioner Of Income-Tax on 23 January, 1990
Equivalent citations: [1990]184ITR450(MAD)
JUDGMENT Ratnam, J.
1. At the instance of the assessee, under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the following question of law has been referred to this court for its opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the applicant is not entitled to claim of loss of Rs. 3,613 under section 32(1)(iii) ?"
2. These assessee carried on business carried on business as a highway contractor. During the previous year ended on March 31, 1972, relevant to the assessment year 1972-73, the assessee sold two cars, on which depreciation had already been allowed, and this resulted in a total loss of Rs. 3,613 which in the course of the assessment proceedings was claimed by the assessee to be allowable under section 32(1)(iii) of the Act on the basis only of a profit and loss account, but the Income-tax Officer disallowed the same on the ground that the assessee had not maintained accounts. Before the Appellate Assistant Commissioner, the assessee disputed the disallowance of loss on the sale of the cars contending that it is not absolutely essential that the loss on the sale of the cars should be written off in any account and relying upon CIT v. A. S. Kuppa Ammal , the Appellate Assistant Commissioner took the view that the loss on the sale of cars had been written Off in the profit and loss account and that would suffice to enable the assessee to claim allowance of the loss under section 32(1)(iii) of the Act. On further appeal at the instance of the Revenue, the Tribunal took the view that the profit and loss account, on which alone reliance was placed by the assessee, cannot be said to be a book of account and a write-off of the loss in such an account would not satisfy the requirements of the proviso to section 32(1)(iii) of the Act, and therefore, the Appellate Assistant Commissioner was in error in having granted the relief to the assessee. That is how the question of law set out earlier has been referred for the opinion of this court .
3. Learned counsel for the assessee submitted that the profit and loss account produced by the assessee before the assessing authorities established that the loss was written off and that would suffice for purposes of supporting a claim for allowance under section 32(1)(iii) of the Act. Reliance, in this connection, was also placed on CIT v. Kartar Singh [1970] 77 ITR 338 (P & H) CIT v. A. S. Kuppa Ammal and Circular No. 212, dated February 26, 1977 (108 ITR (St.)3). On the other hand, learned counsel for the Revenue contended that section 32(1)(iii) of the Act corresponds to section 10(2)(vii) of the Indian Income-tax Act, 1922, and the requirement of the proviso is that the loss should have been brought into the books of the assessee and written off and, therefore, a mere write off in the profit and loss account would not entitle the assessee to claim the allowance of loss on the sale of the cars. Our attention in this connection was also drawn to the decisions in CIT v. National Syndicate , P. Appavu Pillai v. CIT [1965] 58 ITR 622 (Mad) and CIT v. Aruna Sizing Mills [1981] 127 186 (Mad). Referring to the circular relied on, learned for the Revenue contended that it related to the question whether the amount actually written off only should be allowed or whether the amount arrived at on the basis of the written down value as per the income-tax records should be allowed and that has nothing whatever to do with the requirements of writing off in the books of account contemplated under the proviso to section 32(1)(iii) of the Act.
4. Before proceeding to consider the submissions so made, we may refer to the relevant provisions under section 32 of the Act. While providing for a deduction by way of depreciation in respect of any building, machinery, plant or furniture owned by the assessee and used for the purpose of the business or profession, it has been provided under section 32(1)(iii) of the Act that, in the case of any building, machinery, plant or furniture which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture together with the amount of scrap value, it any, fall short of the written down value thereof, shall be allowed as a deduction. The proviso postulates that such deficiency should be actually written off in the books of the assessee.
5. A careful consideration of the aforesaid proviso shows that one of the essential requirements to be fulfilled in order to claim the benefit of section 32(1)(iii) of the Act is that the loss on sale should have been written off in the books of the assessee. Admittedly, in this case, the assessee had not been maintaining any books of account at all. That was the ground on which the Income-tax Officer disallowed the claim of the assessee. Our attention has also not been drawn to any provision in the Act which requires the maintenance of certain books of account or certain specified books of account. Even so, a profit and loos account containing the figures culled from other books of account cannot be appropriately and properly called a book of a account. Even on the footing that the other requirements of section 32(1)(iii) of the Act have been fulfilled by the assessee, inasmuch as the loss on the sale of the cars had not been written off in the books of account of the assessee as required in the proviso, the assessee would not be entitled to the relief.
6. We may now refer to the decisions relied on by learned counsel for the assessee and the Revenue. In CIT v. London Hotel [1968] 68 ITR 62 (Bom), while construing section 10(2)(vi)of the Indian Income-tax Act, 1922, in relation to the proviso regarding the writing-off in the books of account, it was held, taking into account the peculiar features which obtained in that case, viz., disputes about the ownership of the loss whether the property had been treated as a business asset or not and the absence of the property being shown as an asset and the consequential omission of the loss on account of demolition being shown in the books of the firm, etc., that the amount of loss was allowable in the hands of the firm even without a write-off. With respect it would be difficult to ignore the requirements imposed by the statute and hold that even without a write-off, the amount of loss could be allowed. We may also point out that in CIT v. Aruna Sizing Mills , the correctness of the view taken in CIT v. London Hotel [1986] 68 ITR 62 (Bom) had been doubted and it had been pointed out that there must be substantial compliance with the provisions of the Act and without that, it would not be possible to accept the view that even without a write-off in the books, the assessee would be eligible for the allowance. We respectfully agree with the view taken in CIT v. Aruna Sizing Mills . In CIT v. Kartar Singh [1970] 77 ITR 338 (P & H), on the factual finding rendered by the Tribunal that the memorandum book produced by the assessee was a book of account and that showed the relevant entry regarding the purchase and sale of vehicles and wherein the loss had been calculated and written off within the meaning of section 10(2)(vi) of the Indian income-tax Act, 1922, the conclusion arrived at by the Tribunal allowing the loss was sustained. That decision, therefore, proceeded on the footing that the assessee had complied with the requirement of the proviso and it cannot, therefore, have any application to the facts of this case. CIT v. A. S. Kuppa Ammal arose under section 10(2)(vib) of the Indian Income-tax Act, 1922, and, in that context, Explanation 2 to section 10(2)(vib) of that Act was referred to as not making any reference to books of account maintained by an assessee, but merely postulating that the debit of an amount of 75% of the development rebate to the profit and loss account of the relevant previous year and crediting the same to a reserve account to be utilised during a period of ten years next following for the purposes of the business of the undertaking and it was held that the production of a profit and loss account showing this would be sufficient to enable the assessee to claim the benefit of development rebate. It was also further found in that case that the books of account had admittedly been lost and the profit and loss account filed by the assessee would not be rendered unreliable for the purpose of application of section 10(2)(vib) of the Indian Income-tax Act, 1922. It is thus seen that that decision not only turned upon section 10(2)(vib) of the Indian Income-tax Act, 1922, but also on the factual finding of the loss of the books of account and the consequent inability of the assessee to produce the same. We may point out that is not the situation here, as it had not been disputed by the assessee right through here, as it had not been disputed by the assessee right through that no account books at all had been maintained. The Supreme Court, in CIT v. National Syndicate , dealing with section 10(2)(vii) of the Indian Income-tax Act, 1922, laid down that in order to claim deduction of the loss sustained under that provision, one of the essential conditions to be fulfilled was that the loss should have been brought into the books of the assessee and written off as provided by the first proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. At page 234, the Supreme Court has catalogued the four conditions required to be fulfilled and the fourth condition, according to the Supreme court, to be fulfilled is that in the books of account of the assessee, the loss should have been brought in and written, off. It follows, therefore, that if this requirement is not fulfilled, the assessee is not entitled to the relief of allowance of the loss. We may now refer to the decision of this court P. Appavu Pillai v. CIT [1965] 58 ITR 622. In that case, the Tribunal took the view the relief under section 10(2)(vii) of the Indian Income-tax Act, 1922, could be given only in cases where the assessee maintains regular books of accounts and the loss had been written off in the books and that as the assessee did not keep any accounts, the allowance was rightly refused. The court found that though there is no indication in section 10(2)(vii) of the Indian Income-tax Act, 1922, as to the particular type of account book which should be maintained by the assessee, if accounts are produced, in which the relevant entry with regard to the allowance appeared, that would be sufficient compliance with the first proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. In that case, the assessee produced before the assessing authority the daily collection and expenditure account and notwithstanding the absence of a day-book and a ledger, the Income-tax Officer was satisfied that the obsolescence allowance claimed could be granted. But a contrary view was taken by the Appellate Assistant Commissioner and the Tribunal that the loss could be allowed only if such amount is actually written off in the books of the assessee and that books in that context would mean the books of account maintained by the assessee on the course of the business However, the court took the view the though the accounts maintained by the assessee may be defective in that the entries therein do not lead to a correct assessment of the income, profits and gains of the business, that has nothing whatever to do with the allowance that can be granted under section 10(2)(vii) of the Indian Income-tax Act, 1922, if such accounts are available in which the relevant entry with regard to the allowance appears, that would be sufficient compliance with the requirement of the proviso and in that view, it was held that the details in the accounts produced in that case would be sufficient to comply with the requirements of the first proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. We many, in this connection point out that the argument of the Revenue in that case that the profit and loss account is the account which can be said to be a book of account was rejected and it was characterised as a statement representing the state of business as at the end of the accounting year with details culled from other books of account, which may be characterised as the primary books which a businessman generally maintains. In other words, according to that decision, a profit and loss account is not a book of account. We are, therefore, of the view that merely by relying upon the profit and loss account, the assessee in this case cannot claim the benefit of allowance of loss sustained on the sale of the cars.
7. That leaves for consideration Circular No. 212, dated February 26 (see [1977] 108 ITR (St.) 3), to which our attention was drawn. That circular, in our view, has no relevance whatever in the context of the fulfilment of the requirements under the proviso referred to earlier. The circular clarifies whether the amount actually written off only should be allowed or whether the amount arrived at on the basis of the written down value as per the income-tax records should be allowed and that does not in any manner touch the requirement of the proviso to the effect that the loss must be brought in the books of a account and written off in order that the benefit of section 32(1)(iii) of the Act could be claimed. For the foregoing reasons, we answer the question referred to us in the affirmative and against the assessee. The Revenue will be entitled to the costs of this reference. Counsel fee Rs. 500.