1963 (8) TMI 31 - HC - Income Tax

Depreciation Allowance of Assessment year 1957-58 - Held, Whether where loss was calculated on revaluation of stock-in-trade due to change in method of accounting, deduction of said loss was to be allowed as changed method of accounting had been followed even in subsequent year

Summary

Issues:
1. Deduction claim of Rs. 4,14,413 for loss on obsolete machinery and equipment under section 10(2)(vii) of the Indian Income-tax Act, 1922.
2. Claim of Rs. 1,41,035 as loss on revaluation of stores and spares.

Analysis:

Issue 1:
The case involved a deduction claim of Rs. 4,14,413 for loss on obsolete machinery and equipment under section 10(2)(vii) of the Indian Income-tax Act, 1922. The machinery in question was found to have been out of use since 1949, well before the relevant accounting year. The court cited precedents to establish that to claim a deduction under section 10(2)(vii), the machinery must have been used at least for a part of the accounting year. The court noted that there was no active use of the machinery during the relevant period, and the claim of passive use was not raised earlier in the proceedings. The court referred to various statements indicating that the machinery had not been used for many years, leading to the conclusion that the deduction claim was rightly denied. The first question was answered in the negative against the assessee.

Issue 2:
The second issue pertained to a claim of Rs. 1,41,035 as loss on revaluation of stores and spares. The assessee valued the trading stock at cost but wrote off 75% of the book value based on a certificate suggesting a lower reasonable value. The Appellate Assistant Commissioner and the Tribunal disallowed the claim, citing a marked change in the valuation method and lack of individual item valuation. The court referenced a similar case involving valuation of securities and shares as stock-in-trade, where a change in valuation method was accepted if made in good faith and consistently followed. The court emphasized that a change in valuation method, if bona fide, should not be disallowed merely because it may result in a loss. Since there was no evidence of lack of bona fides or inconsistency in the changed valuation method, the court held in favor of the assessee, allowing the deduction claim for loss on revaluation of stores and spares. The second question was answered in the affirmative in favor of the assessee.

In conclusion, the court ruled against the assessee regarding the deduction claim for loss on obsolete machinery and equipment but in favor of the assessee for the claim of loss on revaluation of stores and spares. The judgment was delivered by the High Court of Kerala and the reference was answered accordingly, with no costs awarded.