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TMI Blog1990 (12) TMI 184X X X X Extracts X X X X X X X X Extracts X X X X ..... was Rs. 1,60,866 and the assessee claimed that this amount should be deducted while computing the total income. The assessee claimed that because the building was very old no materials have been salvaged. Since the demolition was done by a contractor, Shri P.N.M. Haneefa, the ITO verified this claim with him and he stated that only steel trusses and several steel doors and windows had been retrieved and had been utilised in Sri Vasavi College at Erode. This information being put to the assessee, Shri Kuppuraj, the managing director of the company stated that these items have been donated to Vasavi College and hence no value had been taken into account and that the value of these items may perhaps be estimated at Rs. 20,000. The ITO was of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the following deductions shall subject to the provisions of section 34 be allowed-- (iii) 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, if any, fall short of the written down value thereof : Provided that such deficiency is actually written off in the books of the assessee. Explanation - For the purposes of this clause,-- (1) 'moneys payable' in respect of any building, machinery, plant or furniture includes-- (a) any insurance, salvage or compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int, we have to solve this problem on first principles. Before we come to the terminal allowance granted under section 32 of the IT Act, we may take a look at the Accountancy Principles relating to the treatment of depreciation. The provision for depreciation itself depends upon the cost of an asset, the estimated residual or scrap value at the end of its life and the estimated number of years of its life. The amount to be written down is arrived at by the formula : Cost minus Estimated scrap value -------------------------------------------------------- Estimated Life Thus it will be seen that in the mercantile method of accounting, even at inception, the estimated scrap value is a factor to be taken into account. We notice that Para 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit or loss, as the case may be, on disposal. " The picture we get from these standards is that while the realisable, residual value is estimated as long as the asset is in use, it is actually the realised value that is to be taken into account while writing off the asset when it is retired by reason of demolition, destruction or being discarded. 6. A reading of the section 32(1)(iii) shows that the expression " if any " was required because the section refers to four situations, viz., sold, discarded, demolished or destroyed and the question of scrap value cannot arise in all the situations. In other words, where it is sold or destroyed, there could be no scrap value at all. On the other hand, where it is discarded or demolished some s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be taken, even though, the assessee had not realised any amount at all. 8. It must be remembered that in the mercantile system of accounting, the record is made on the basis of amounts having become due for payment or receipt. Consequently as long as the asset is held in the business its value has to be taken into account. But once it goes out of the business only the value realised can be taken into account, for, the actual amount due on sale would substitute the notional value of the asset. Consequently if the asset is simply thrown out without realising any scrap value the entire written down value will have to be written off the accounts. We arrive at the same conclusion with reference to the wording of the section also as the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... college in this case, shows that the said material had some value which had not been realised. The question is whether the assessee could have an option to refrain from taking into account the realisable value of scrap and thus write off the amount which was not realised even though it could have been realised if it had been sold instead of being donated. In this case, we must remember that the scrap material recovered from the demolished building had been retired. What is discarded is of no value to the assessee. The law does not require that the assessee should make a profit and it is for the assessee to decide what he would do with its assets. Even if he chose to give it away free without realising money the ITO cannot add a value of tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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