1984 (1) TMI 156 - AT - Income Tax

Tribunal grants deduction for machinery loss to sister concern under Section 32(1)(iii).

Annamallais Engineering. Versus Income-Tax Officer.

The Tribunal allowed the appeal, ruling in favor of the assessee, and directed the ITO to grant the deduction under section 32(1)(iii) for the loss ... Balancing Allowance Issues:Disallowance of deduction under section 32(1)(iii) of the Income-tax Act, 1961.Analysis:The appeal was against the disallowance of a deduction claimed under section 32(1)(iii) of the Income-tax Act, 1961. The assessee, a registered firm engaged in various business activities, including bus body building, machine shops, foundries, and a unit for manufacturing bolts and nuts, claimed a deduction of Rs. 31,385.50 for the loss incurred from selling machinery to a sister concern. The Income Tax Officer (ITO) disallowed the deduction, stating that the sale was to a sister concern and that the nuts and bolts unit had been closed down two years earlier, with no income against which the loss could be written off. The Commissioner (Appeals) upheld this decision based on a Supreme Court ruling. The main contention before the Tribunal was whether the loss could be allowed under section 32, considering the conditions specified in the Act.The Tribunal analyzed the provisions of section 32, which allow for depreciation deduction in computing business income. It highlighted the factors involved in assessing depreciation, including the cost of the asset, probable value on disposal, and the asset's commercial usefulness period. Section 32(1)(iii) specifically deals with machinery sold, discarded, demolished, or destroyed, allowing a deduction for the shortfall between the sale value and the written down value, provided the loss is written off in the books. The Tribunal referred to a Supreme Court case outlining the conditions for this deduction, emphasizing that the business must be carried on by the assessee, and the machinery must have been used for business purposes.The Tribunal concluded that the assessee was entitled to the deduction. It clarified that the business closure of a specific unit did not mean the entire business had ceased, as the nuts and bolts unit was part of a larger ongoing business. The Tribunal interpreted the requirement of machinery use for business purposes in the previous year, stating that it could refer to the asset's commercial nature rather than current use. It reasoned that the period between asset discarding and sale should be considered passive use in the ongoing business. Therefore, the Tribunal directed the ITO to allow the deduction claimed by the assessee, recompute the total income, and amend the partners' assessments accordingly.In conclusion, the Tribunal allowed the appeal, ruling in favor of the assessee and directing the ITO to grant the deduction under section 32(1)(iii) for the loss incurred from selling the machinery to a sister concern.