Case Note & Summary
This appeal arose from a certificate granted by the High Court at Calcutta under Section 261 of the Income Tax Act, 1961, challenging the High Court's judgment dated June 8, 1977 in Income Tax Reference No. 336 of 1970. The appellant-company, Burmah Shell Oil Storage and Distribution Company of India Ltd. (now Bharat Petroleum Corporation Ltd.), was engaged in distributing liquid petroleum gas manufactured by Burmah Shell Refineries Ltd. For that business, from 1955 to the beginning of 1961, being the previous year for assessment year 1962-63, the company purchased iron cylinders at a total cost of Rs 1,09,63,754. The cylinders were used as returnable packages, accounted as capital assets, and no depreciation was claimed or allowed on them up to assessment year 1961-62. In 1961, the refinery offered to purchase the cylinders, and they were sold for Rs 82,19,947, resulting in a shortfall of Rs 27,43,807, which the company claimed as a deduction in assessment year 1962-63. The Income Tax Officer disallowed the claim, holding that Rule 5 of the Income Tax Rules, 1962, permits revenue expenditure only when packages are actually used up by wear and tear and consumption, not when sold in good condition; and Section 32(1)(iii) terminal loss applies only to assets on which depreciation was granted. The Appellate Assistant Commissioner dismissed the assessee's appeal. The Income Tax Appellate Tribunal, however, allowed the appeal in part, holding that the cylinders were returnable packages and the loss was allowable as revenue expenditure under Rule 5, but rejected the alternative claim under Section 32(1)(iii). On reference by the Commissioner, the High Court reframed the questions and answered both in favour of the Revenue, disallowing the loss and also the development rebate claim. The High Court granted a certificate of appeal limited to four questions: whether Section 32(1)(iii) applies to machinery and plant listed in the schedule, whether there can be any written down value of returnable packages, whether the interpretation of 'cost of packages' and 'actually used up' is correct, and whether excess development rebate reserve of past years can be taken into account under Section 33 read with Section 34(3)(a). Before the Supreme Court, the appellant contended that Section 32(1)(iii) applied and the written down value of the cylinders was Rs 1,09,63,754, so the deficiency should be allowed; the High Court had rejected this because there was no finding by the Tribunal on written down value and the company had not written off the loss in its books. The appellant also contended that 'actually used up' should include loss of usefulness to the assessee, but the High Court had rejected this interpretation, holding that the term meant exhaustion by use. On development rebate, the High Court had referred to Indian Overseas Bank Ltd. v. CIT, holding that Section 34(3)(a) compliance is mandatory and the assessee had not transferred excess reserves from earlier years to make up the shortfall. The provided judgment text ends before the Supreme Court's final order is recorded, so the ultimate decision is not stated in the extract.
Headnote
A) Income Tax - Deductions - Returnable Packages - Rule 5 of Income Tax Rules, 1962 read with Item M(2)(2)(d)(i) of Appendix 1 Part I - Loss on sale of gas cylinders claimed as revenue expenditure - The assessee company purchased cylinders at Rs 1,09,63,754 and sold them for Rs 82,19,947, claiming the difference of Rs 27,43,807 as deductible loss. The High Court held that Rule 5 allows cost of returnable packages as revenue expenditure only when packages are 'actually used up' by wear and tear and consumption, not when disposed of by sale in good condition; hence the claim was not allowable. (Paras 2-8) B) Income Tax - Depreciation - Terminal Loss - Section 32(1)(iii) of Income Tax Act, 1961 - Whether terminal loss applies to returnable packages listed in depreciation schedule - The Income Tax Officer and High Court held that terminal loss under Section 32(1)(iii) applies only to assets on which depreciation allowances had been granted; since no depreciation was claimed or allowed on the cylinders, there was no written down value, and the assessee had also not written off the loss in its books. The claim was rejected. (Paras 3, 8-10) C) Income Tax - Development Rebate - Statutory Reserve Requirement - Sections 33 and 34(3)(a) of Income Tax Act, 1961 - Whether excess reserve of earlier years can cover current year shortfall - The Tribunal allowed full development rebate of Rs 24,15,622 despite shortfall of Rs 34,827 in the development rebate reserve account. The High Court reversed, holding that Section 34(3)(a) compliance is mandatory, entries in account books are not idle formality, and excess reserve from earlier years cannot be taken into account unless actually transferred by debiting profit and loss account and crediting development rebate reserve account in the relevant year. The assessee had not made such transfer. (Paras 5, 8-9, 11) D) Income Tax - Interpretation - 'Actually Used Up' - Rule 5 of Income Tax Rules, 1962 - Whether expression includes loss of usefulness to assessee - The assessee argued that after selling cylinders to the refinery, the cylinders lost usefulness to the assessee, so they were 'actually used up'. The High Court rejected this, holding that 'used up' means exhausted by use or rendered unfit by wear and tear, not mere sale or transfer of ownership. (Para 12)
Issue of Consideration
Whether Section 32(1)(iii) of the Income Tax Act, 1961 applies to machinery and plant specially listed in Part I of Appendix I to Income Tax Rules, 1962; whether there can be any written down value of returnable packages specified in item M(2)(2)(d)(i); whether interpretation of expressions 'cost of packages' and 'actually used up' in the remarks against the said item is correct; whether excess development rebate reserve of earlier years can be taken into account for allowing deduction under Section 33 read with Section 34(3)(a) of the Income Tax Act, 1961
Final Decision
Not mentioned (judgment text ends before the Supreme Court's final order is stated)
Law Points
- Rule 5 of Income Tax Rules
- 1962 allows cost of returnable packages as revenue expenditure only when packages are actually used up by wear and tear and consumption
- not on sale in good condition
- Section 32(1)(iii) of Income Tax Act
- 1961 applies to terminal loss only on assets on which depreciation allowances had been granted
- written down value requires actual cost less depreciation actually allowed
- Section 34(3)(a) of Income Tax Act
- 1961 mandates creation of development rebate reserve in the relevant year and entries in account books are not idle formality
- excess reserve from earlier years cannot automatically cover shortfall unless actually transferred by debiting profit and loss account and crediting development rebate reserve account
