Obsolescence deduction needs use during the accounting year, while bona fide stock revaluation to realisable value is permissible.

Deduction for obsolescence of machinery under section 10(2)(vii) of the Indian Income-tax Act, 1922 depends on the machinery having been used during the relevant accounting year; where the record shows no use in that year and no factual basis for passive use, the claim fails. A separate claim for loss on revaluation of stores and spares was treated as a stock-in-trade valuation issue: a bona fide change from cost to realisable value is permissible if consistently adopted and the revised basis reflects actual value. The note states that the first claim failed while the second was accepted.

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Issues: (i) Whether a deduction for loss on obsolete machinery and equipment was allowable where the machinery was not used during the relevant accounting year. (ii) Whether a deduction for loss on revaluation of stores and spares was tenable where the assessee changed the basis of stock valuation from cost to realisable value.

Issue (i): Whether a deduction for loss on obsolete machinery and equipment was allowable where the machinery was not used during the relevant accounting year.

Analysis: The allowance claimed under section 10(2)(vii) of the Indian Income-tax Act, 1922 depended on the machinery having been used in the previous year. The record showed that the machinery had ceased to be used long before the accounting period and had not been used at all during that year. In the absence of any factual foundation before the lower authorities for a plea of passive use, the claim could not be sustained.

Conclusion: The deduction was not allowable and the issue was decided against the assessee.

Issue (ii): Whether a deduction for loss on revaluation of stores and spares was tenable where the assessee changed the basis of stock valuation from cost to realisable value.

Analysis: Stores and spares formed part of stock-in-trade. The assessee changed its valuation basis and wrote down the stock to realisable value on the footing of an engineer's certificate. A bona fide change in the method of valuing closing stock is permissible if it is consistently followed and the revised basis reflects the stock's real value. There was no finding of want of bona fides or any basis for rejecting the revised valuation.

Conclusion: The deduction was allowable and the issue was decided in favour of the assessee.

Final Conclusion: The reference was answered partly against the assessee on the machinery-loss claim and partly in its favour on the stock-revaluation claim.

Ratio Decidendi: A deduction for obsolescence under section 10(2)(vii) requires use of the machinery during the accounting year, and a bona fide change in the valuation of closing stock to reflect realisable value is permissible for computing trading profits.

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