1958 (12) TMI 33 - HC - Income Tax

Court defines 'obsolescence,' rules on capital appreciation vs. revenue profit, awards costs.

INDIA NUT CO. LTD. Versus COMMISSIONER OF INCOME-TAX, MYSORE, TRAVANCORE-COCHIN & COORG

The court held that the term 'obsolescence' includes machinery becoming outdated due to newer inventions. However, the assessee failed to provide ... - Issues Involved:1. Legal implication of the term 'obsolescence' as applied to machinery.2. Nature of the transaction relating to the sale of shares-whether it involves revenue profit or capital appreciation.Issue-wise Detailed Analysis:1. Legal Implication of 'Obsolescence' as Applied to Machinery:Facts and Background:The assessee, a public limited company, installed a machinery unit in 1942 for the extraction of cashew shell oil at a cost of Rs. 6,860-4-0. By December 31, 1943, this machinery was written off as obsolete. The company claimed this amount as a loss due to obsolescence under Section 8(2)(vii) of the Travancore Income-tax Regulation.Assessment and Appeals:- The Deputy Commissioner of Income-tax rejected the claim, stating the machinery was discarded not due to obsolescence but because a new, more economical plant was installed.- The Appellate Assistant Commissioner upheld this decision, noting the machinery was experimental and failed, thus not qualifying as obsolete.- The Income-tax Appellate Tribunal also rejected the claim, stating that the plant was an experimental failure and did not become obsolete by use or any other method contemplated by law.Court's Analysis:The court examined the meaning of 'obsolescence' and referenced several cases:- Rathan Singh v. Commissioner of Income-tax: Defined obsolete machinery as one that, although functional, is out of date and inefficient.- In the Matter of Shewdayal Jagannath Binjraj: Confirmed that obsolescence includes machinery that becomes outdated due to newer types or methods.- South Metropolitan Gas Co. v. Dadd: Clarified that obsolescence does not require the machinery to be worn out.The court concluded that the Tribunal's view that machinery must become obsolete by use was incorrect. However, the assessee failed to provide necessary information on depreciation and scrap value. Thus, the court answered the question affirmatively but did not allow reopening the assessment due to the assessee's failure to furnish required details.2. Nature of the Transaction Relating to the Sale of Shares:Facts and Background:The assessee purchased 11,991 shares of Rajagiri Rubber Co. Ltd. and additional shares in other companies. During the assessment year, 7,400 Rajagiri shares were sold, resulting in a profit. The company claimed this profit as capital appreciation, not revenue profit.Assessment and Appeals:- The Deputy Commissioner of Income-tax treated the profit as revenue income, citing the company's policy to invest surplus cash for capital appreciation.- The Appellate Assistant Commissioner reworked the profit and upheld the decision, stating the company engaged in a profit-making scheme.- The Income-tax Appellate Tribunal agreed, noting that the absence of a provision in the memorandum for trading in shares did not negate the profit's taxable nature.Court's Analysis:The court considered whether the profits from the sale of shares were revenue income or capital appreciation:- Radha Debi Jalan v. Commissioner of Income-tax: Emphasized that mere intention to sell at a profit does not constitute trade.- Rajputana Textile (Agencies) Ltd. v. Commissioner of Income-tax: Highlighted that isolated transactions need to show elements of trade to be taxable.- Leeming v. Jones: Stressed that capital accretion does not become income merely because it was expected to rise in value.- Gajalakshmi Ginning Factory v. Commissioner of Income-tax: Differentiated between capital receipts and revenue receipts based on the intention at the time of purchase.The court found that the Tribunal did not apply the correct principles and based its decision on insufficient evidence. The sixth annual report did not support the conclusion that the company was trading in shares. Thus, the court held that the transaction was capital appreciation, not revenue profit.Conclusion:- Question 1: The term 'obsolescence' includes machinery becoming outdated due to newer inventions, but the assessee failed to provide necessary details to claim the allowance.- Question 2: The transaction relating to the sale of shares was capital appreciation and not revenue profit, thus not liable to tax.The assessee was entitled to costs fixed at Rs. 250.