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TMI Blog2004 (2) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 1991-92. The principal question, which is a substantial question of law that arises for our consideration in this appeal is : Whether the sale proceeds received by the assessee on selling the scrapped bottles and crates (trays) could be taxed as income by virtue of section 41(1) of the Income-tax Act, 1961? Briefly stated, the assessee is a private limited company, which derives income from the manufacture and sale of soft drinks. The assessee was claiming depreciation in respect of the bottles and crates (trays) purchased by the assessee, being the full value of such purchase under the proviso to section 32(1)(ii) of the said Act. That was allowed to the assessee from time to time. During the financial year, relevant to the assessment year 1991-92, the assessee sold scrap of bottles and trays (crates) for Rs. 50,850. However, in the computation of income, the assessee reduced the sale consideration from the income on the ground that the amount received is a capital receipt and since it does not form part of the block of assets, even the provision of section 50 of the said Act, relating to short-term capital gain on the sale of depreciable asset was not attracted. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e concept of block of assets, section 41(2) of the Act became redundant, for which reason it was omitted. It conclusively held that section 41(1), as applicable at the relevant time, and on the plain language thereof, the same clearly applied to the case on hand and the omission of section 41(2) from the statute book at the relevant time would make no difference. Accordingly, it held that the conclusion reached by the first appellate authority required no interference. The above decision is the subject matter of challenge in this appeal at the instance of the assessee. In the appeal memo, following two substantial questions of law have been formulated, which, according to the appellant, may arise for consideration of this court, namely: "(a) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 50,850 was liable to tax under the provisions of section 41(1) of the Act? (b) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of section 41(1) of the Act are attracted so as to bring to tax the excess realised by an assessee over and above the written down va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mposes the obligation, and which is lacking in the present case. Reliance is also placed on another decision of the apex court in Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966] 61 ITR 428, which has observed that there is no warranty for the assumption that whatever is included in total income under section 4 must be liable to tax as section 3 does not provide that the entire total income shall be chargeable to tax. Learned counsel has also placed extensive reliance on the Notes on Clauses of the Finance Minister's Budget Speech for 1986-87 and the objects of the Finance Bill of 1995 to buttress his argument that reintroduction of section 41(2) is a pointer that the subject cannot be said to be covered by section 41(1) of the Act, for there would have been no reason for the Legislature to reintroduce section 41(2) of the Act from 1998-99 onwards. On the other hand, learned counsel for the Revenue has defended the decision passed by the appellate authority contending that the assessee made expenditure in paying for bottles and crates for its business, on which deduction in the form of depreciation under section 32(1)(ii) of the Act was allowed to the assessee. Subsequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case and for considering the question which arises for our consideration. He has also relied on the decision of the apex court in Poly flex (India) Pvt. Ltd. v. CIT [2002] 257 ITR 343, to contend that the expressions "remission and cessation thereof" occurring in section 41(1) are referable to the expression "trading liability" and not to the expression "loss and expenditure". On the above arguments, learned counsel submits that no interference is warranted in this appeal. Before we proceed to examine the rival submissions, we would think it apposite to advert to section 41(1) of the Act, as it obtained during the assessment year 1991-92. The same reads thus: "41. Profits chargeable to tax.-(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cession thereof, the amount obtained by him or the value of benefit accruing to him, sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 1991-92. The moot question is : Whether section 41(1), as reproduced above, would envelop the transaction effected by the assessee so as to be treated as profits and gains of business and, accordingly, chargeable to income tax as income? It is, therefore, necessary to revert back to section 41(1) of the Act. If on the plain language of section 41(1) of the Act, it is seen that the transaction was covered by that provision, then no other argument would be of any assistance to the assessee. In our view, section 41(1), as it existed during the assessment year 1991-92, cannot be interpreted on the basis of the provisions which obtained prior to 1988 or as existing at present after 1998. We shall now turn to section 41(1) as it existed during the assessment year 1991-92. In our opinion, section 41(1) will be attracted if-(i) any loss, expenditure or trading liability has been incurred by the assessee in the assessment for any year; (ii) allowance or deduction therefor has been made in the assessment for any year; (iii) subsequently, during any previous year, the assessee obtains whether in cash or in any manner whatsoever any amounts in respect of such loss or expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure. Reliance was placed on the decision of Indian Molasses Co. (Pvt.) Ltd. [1959] 37 ITR 66 (SC), to support the argument that depreciation cannot be considered as expenditure. Relying on the dictum of the apex court, it was argued that "expenditure" is what is paid out or away or something which has gone irretrievably. In our opinion, the said decision will be of no assistance to the assessee. In that case, the court was considering the meaning of the expression in the context of the argument of actual liability in preasenti and a liability de futuro, which, for the time being, is only contingent. The court went on to observe that the former is deductible but not the latter. In our opinion, this is not an authority for the proposition that depreciation is not in the nature of expenditure. On the other hand, we find force in the submission canvassed on behalf of the Revenue that the expression "expenditure" occurring in section 41(1) of the Act is wide enough not only to include revenue, but also capital expenditure. The Act does not provide for the definition of the term" depreciation" nor, for that matter, the expression of "expenditure". It will be useful to advert to B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay income-tax on such amount, being tax deduction availed of. There can be no dispute that the amount spent towards purchase of bottles and crates (trays) will be covered by the expansive definition of "plant and machinery". The amount spent for that purpose is obviously capital expenditure, but in view of 100 per cent. depreciation as was provided on account of section 32 of the Act, as the cost thereof did not exceed five thousand rupees, the actual cost was allowed as deduction in respect of the previous year in which such items were first put to use by the assessee for the purpose of its business or profession. As 100 per cent. depreciation was claimed in respect of the said purchases, that was in the nature of expenditure and deductible from tax liability. If it is so, the assessee having made provision for allowance or deduction in the earlier assessment. year in respect of such expenditure and subsequently during the previous year (i.e., the assessment year 1991-92) the assessee having sold the items and obtained cash being sale proceeds thereof, in respect of the said expenditure, the amount so obtained is deemed to be profits and gains from business or profession and, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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