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PETITIONER: BURMAH SHELL OIL STORAGE & DISTRIBUTING CO. OF INDIA LTD.

       Vs.

RESPONDENT: C.I.T.

DATE OF JUDGMENT06/04/1994

BENCH: RAY, G.N. (J) BENCH: RAY, G.N. (J) VENKATACHALLIAH, M.N.(CJ)

CITATION:  1994 SCC  Supl.  (2) 239 JT 1994 (3)   162  1994 SCALE  (2)481

ACT:

HEADNOTE:

JUDGMENT: The Judgment of the Court was delivered by G.N. RAY, J.- This is an appeal on a certificate granted  by the  High Court at Calcutta under Section 261 of the  Income Tax  Act, 1961, against the judgment and order of  the  said High  Court dated June 8, 1977 in Income Tax  Reference  No. 336 of 1970. 2.   The  Burmah Shell Oil Storage and Distribution  Company of  India  Ltd. (now known as Bharat  Petroleum  Corporation Ltd.) hereinafter referred to as the appellant-Company,  was engaged in the business of distributing liquid petroleum gas manufactured   by  the  Burmah  Shell   Refineries   Limited (hereinafter referred to as the Refinery).  For the  purpose of  such  distribution, the appellant-Company had  from  the year  1955 to the beginning of 1961, which was its  previous year for the assessment year 1962-63 acquired iron cylinders at  a  total cost of Rs 1,09,63,754.  Those  cylinders  were used  as ’returnable packages’.  They were accounted by  the appellant-Company as its capital assets but no allowance for depreciation  thereon was claimed or allowed in any  of  its assessment up to the year 1961-62.  The said cylinders  were used  to  be  filled  with the gas  by  the  Refinery.   The Refinery later on offered to purchase the cylinders owned by the appellant-Company.  The sale of cylinders took place  in 1961  for  a  total sum of Rs  82,19,947  as  against  their original cost of Rs 1,09,63,754.  There was thus a shortfall of  Rs  27,43,807 which the appellant Company claimed  as  a deduction in the assessment year 1962-63. 3.   By an assessment order, the Income Tax Officer  Central Circle V, disallowed the said claim.  The Income Tax Officer rejected  the contention of the appellant-Company  that  the loss  on the sale of cylinders should be allowed as loss  on ’returnable  packages’ by observing that under Rule  5,  the cost  of  returnable packages was to be allowed  as  revenue expenditure  when  ’actually used up’ and the  same  implied that the packages must have been rendered unused by wear and

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tear  and must have been consumed.  The Income  Tax  Officer held  that the said rule had no application  where  packages were  disposed  of  in good condition  by  sale.   The  said officer further observed that the loss would also not  arise under Section 32(1)(iii) of the Income Tax Act, 1961, as the terminal  loss applied only to assets on which  depreciation allowances had been granted. 4.   The  appellant-Company  filed  an  appeal  before   the appellate Assistant Commissioner of Income Tax being  Appeal No.  26  CC.V of 1963-64 which was  dismissed.   On  further appeal,  the  Income Tax Appellate  Tribunal,  however,  was pleased to allow the appeal holding inter alia that the said cylinders were  241 ,returnable  packages’  and  the loss  of  Rs  27,43,807  on account  of  disposal of cylinders was a loss  allowable  as revenue expenditure within the meaning of Rule 5. The  claim under  Section  32(1)(iii)  of the Income Tax  Act  was  not allowed   on  the  finding  that   the   appellant-Company’s contention on that score did not   survive. 5.   Thereafter,  the  Commissioner of Income  Tax  made  an application to the Income     Tax     Appellate     Tribunal requiring  it to draw up a statement of the  case  referring the  following  two questions for the opinion  of  the  High Court at Calcutta :               (a)   Whether   on  the  facts  and   in   the               circumstances  of  the case,the  Tribunal  was               right in holding that the sum of Rs  27,43,807               being  the difference between the cost of  gas               cylinders purchased by the assessee and  their               sale   value  was  allowable  as   a   revenue               expenditure  under  Rule 5 of the  Income  Tax               Rules,  1962, read with the ’Remarks’  against               the  entry relating to returnable packages  in               the statement of rates contained in Part 1  of               Appendix 1 to the said Rules?               (b)   Whether   on  the  facts  and   in   the               circumstances  of  the case the  Tribunal  was               right  in holding that the Company could  make               up the shortfall in the statutory reserve  for               the  year under consideration by falling  back               on the excess reserves created in the  earlier               years and that the said excess reserves should               be  taken  into  account  in  determining  the               quantum  of the statutory  development  rebate               reserve required to be made in any  subsequent               year  and  in allowing  the  full  development               rebate  of  Rs 24,15,622 although  the  actual               reserve   fell   short   of   the    statutory               requirement? 6.   The appellant-Company opposed the said application  and in reply it was pointed out that at the hearing of appeal by the  Tribunal,  it had alternatively been  argued  that  the claim  for the allowance of Rs 27,43,807 should be  admitted as  depreciation under Section 32(1)(iii) of the Income  Tax Act, 1961.  The appellant-Company, therefore, submitted that if  the  Tribunal would decide to make  the  reference,  the question should be in terms suggested by it. 7.   After  hearing the parties, the Tribunal finalised  the statement  of the case and referred the following  questions for the opinion of the High Court of Calcutta :               (1)   Whether,  on  the  facts  and   in   the               circumstances of the case, the loss of Rs               27,43,807 arising on the sale of gas cylinders               was  allowable  as a  revenue  expenditure  as

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             provided   for   in   the   remarks    against               ’Returnable Packages’ under the classification               ’Mineral  Oil  Concerns’  in  item  M(2)(2)(d)               under  the heading (iii) ’special rates to  be               applied to other machinery and plant’ in  Part               1n  of Appendix 1 to Rule 5 of the Income  Tax               Rules, 1962 or under Section 32(1)(iii) of the               Act?               (2)   Whether,   on  the  facts  and  in   the               circumstances  of  the case,  the  Income  Tax               Appellate  Tribunal was right in holding  that               the  shortfall in the statutory provision  for               development  rebate  reserve  created  by  the               Company for the year under consideration could               be  made  up  by  the  excess  provisions  for               development  rebate  reserve  created  in  the               earlier  years  and that the  full  amount  of               development  rebate of Rs 24,15,622  could  be               allowed  in  that year on the  basis  of  such               adjustment? 242 8.  Such reference was registered before the High  Court  as Reference  No. 336 of 1970.  After a contested hearing,  the High Court while delivering the judgment reframed the  first part of Question No. 1 which reads as follows :               "Whether,   on   the   facts   and   in    the               circumstances   of  the  case,  Rs   27,43,807               (realised  by  the  assessee on  sale  of  the               cylinders)    was   allowable    as    revenue               expenditure  under  Rule 5 of the  Income  Tax               Rules,  1962  read  with  item   M(2)(2)(d)(i)               of  ...  Part  1 of Appendix  1  to  the  said               Rules?" and  answered this part of the question in the negative  and in favour of the Revenue.  The High Court also held that the question  of law under Section 32(1)(iii) of the Income  Tax Act was an independent question of law and the Tribunal  not having dealt with must be deemed to have decided against the appellant-Company.  The High Court answered the second  part of  the Question No. 1 in the negative and in favour of  the Revenue and it reframed Question No. 2 as follows:               "Whether,   on   the   facts   and   in    the               circumstances  of the case, the  Tribunal  was               right in allowing the development rebate of Rs               24,15,622 although there was a shortfall of Rs               34,827  in  the  development  rebate   reserve               account   created  by  the  assessee  in   the               accounting year?" 9.   The High Court answered Question No. 2 reframed in  the negative  and in favour of the Revenue.  The High  Court  at Calcutta,  however, was pleased to allow the application  of the appellant-Company to appeal to this Court under  Section 261  of  the  Income Tax Act, 1961 and  the  certificate  of appeal was granted limited to the following questions of law :               (a)   Whether the general provision of Section               32(1)(iii)  of  tile  Income  Tax  Act,   1961               applies  to  machinery  and  plant   specially               listed in Section III (iii)    of          the               statement  in  Part  1 of Appendix  1  to  the               Income Tax Rules, 1962.               (b)   Whether  there can be any  written  down               value of returnable packages specified in item               M(2)(2)(d)(i) in the said section of the  said               statement.

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             (c)   Whether   the  interpretation   by   the               learned  Judges  of the  expression  ’cost  of               packages’ and ’actually used up’ appearing  in               the remarks against the said   item         is               correct.               (d)   Whether in deciding the question if  the               deduction referred to in Section    33 of  the               Income  Tax  Act, 1961 may be allowed  in  any               year  the  amount  credited  to  the   reserve               account  in  past  years  in  excess  of   the               requirement prescribed by Section 34(3)(a) may               be taken into account. 10.  Mr  S. Rajappa, the learned counsel appearing  for  the appellant  Company contended that Section 32(1)(iii) of  the Income  Tax  Act, 1961 applies to the  machinery  and  plant specially  listed  in Part 1 of the Appendix to  Income  Tax Rules,  1962  and the High Court had gone wrong  in  holding that  the  said general provision of Section  32(1)(iii)  of Income  Tax  Act, 1961 was not applicable in the  facts  and circumstances  of  the case.  It has been  contended  by  Mr Rajappa  that  admittedly  the  cost  of  cylinders  was  Rs 1,09,63,754  and as no depreciation was allowable  on  those returnable packages, the written down value of the cylinders must be held to be Rs 1,09,63,754.  Since the cylinders were sold  for  Rs 82,19,947 the deficiency of  Rs  27,43,807  is allowable  under  Section 32(1)(iii).  Such  contention  was also raised before the High Court but the same was  rejected by the High Court by indicating that quantum of written  243 down value being a pure question of fact and in the  absence of any finding of the Tribunal as to the written down  value of  the  cylinders such contention could not  be  considered within the scope and ambit of Question No. 1. The High Court has  also held that even if it was assumed that the  written down value of the cylinders was Rs 1,09,63,754 the claim  of the  appellant-Company  could  not be  allowed  because  the Company  had  not written off Rs 27,43,807 in its  books  of account. 11.  Mr  Rajappa  also urged that the High  Court  had  gone wrong  in  not  accepting  the  development  rebate  for  Rs 24,15,622  since  allowed by the Tribunal in  answering  the reference.   In this context, Mr Rajappa has reiterated  the contentions made before the High Court.  It transpires  that there  was shortfall in the development reserve  account  in the  accounting  year.  But the  appellant-Company  did  not debit  the excess amount of the earlier years in the  profit and  loss account of the accounting year in  question.   The appellant-Company also did not credit the said excess amount to  the development reserve account of this accounting  year to  make  up the said deficiency.  The High  Court  has  not accepted  the  submission  of  the  appellant-Company   that Section  34(3)(a)  was  not inflexible  and  in  appropriate cases,  such provision was relaxable and the shortfall of  a small   amount  arising  due  to  genuine  mistake  of   the appellant-Company  should not stand in the way  of  relaxing the  provision  of Section 34(3)(a) of the Income  Tax  Act. The  High Court has referred to a decision of this Court  in Indian  Overseas  Bank  Ltd.  v. CIT1  to  the  effect  that development  rebate  is  "a  concession  granted  but   that concession   is  made  subject  to  fulfilment  of   certain requirements" and "entries in the account books required  by the proviso are not idle formality".  It has been  indicated by the High Court that decision in Indian Overseas Bank Ltd. v. CIT1 was concerned with proviso (b) to Section  10(2)(vi- b) of the Income Tax Act, 1922 which is in pari materia with

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Section  34(3)(a) of Income Tax Act, 1961.  The  High  Court has  held  that  (a)  excess amount  in  the  earlier  years development rebate reserve account is not freezed by Section 34(3)(a)  of the Act in view of its clear language; (b)  the directors  of  a  company are entitled to  free  the  excess amount and after doing so, the company by debiting it in the profit  and  loss  account  and  by  crediting  it  to   the development rebate reserve account can make up the shortfall of  the accounting year in which the development  rebate  is actually claimed or allowed and (c) except in these cases in which  the Central Board of Revenue or the Central Board  of Direct Taxes have relaxed the provisions of Section 34(3)(a) it  must be complied with in order to earn  the  development rebate  claimed  in a particular year.  The High  Court  has held that the appellant-Company did not transfer the  excess amounts of the earlier years in the accounting year for  the purpose of making up the corresponding reserve and it is  an admitted fact that the appellant-Company did not comply with the provisions of Section 34(3)(a) of the Act. 12.  Mr Rajappa has next urged that so far as the appellant- Company is concerned, the said cylinders must be held to  be "actually  used up".  The question as to whether or not  the packages  are "actually used up" needs to be determined  not in abstract term but with reference to the actual usefulness to  the  assessee.  Mr Rajappa has also contended  that  the expression "actually used up" (1970) 2 SCC 4 : (1970) 77 ITR 512 244 in item M(2)(2)(d)(i) of Part 1 of the Depreciation Schedule Appendix 1 of Rule 5 of the Income Tax Rules, 1962  includes both  total and partial ’use up’.  Mr Rajappa has  submitted after  the  sale  of  the cylinders  to  the  Refinery,  the cylinders  did not belong to the appellant-Company and  they lost  their  usefulness to the appellant-Company and  it  is immaterial  if  the  very same cylinders were  used  by  the Refinery  to fill up with gases and sending the same to  the appellant-Company for distribution to the consumers.  It may be noted that similar contentions were also made before  the High Court but the same were rejected by holding inter  alia that expression "used up" means "exhausted by use,  rendered unserviceable".   In view of the expression  "actually  used up",  the case of "partial use up" was not acceptable.   The High  Court has also held that the words "actually used  up" qualifies the word "packages".  Hence the expression is  not required to be interpreted with reference to the user by the assessee.  It has been indicated by the High Court that  the cylinders  in fact, after the sale, were put to use  by  the Refinery and such cylinders filled up with gas were sent  to the appellant-Company which in its turn distributed the same to the consumers.  Since the cylinders were actually used up in  the  trade both by the Refinery and  by  the  appellant- Company after the sale, it cannot be held that the cylinders were "actually used up".  Hence, the claim for deduction  of Rs  27,43,807 as a revenue expenditure under Rule 5  of  the Income Tax Rules, 1962 read with item M(2)(2)(d)(i) of  Part 1 of Appendix 1 to the rules was inadmissible and  reference on this question must be answered against the assessee. 13.Mr J. Ramamurti learned Senior Advocate appearing for the respondent  has  submitted that the Appellate  Tribunal  has found  as  a  fact that the  gas  cylinders  are  returnable packages.   Hence,  the  schedule  entry  M(2)(2)(d)(i)   of Appendix 1 is applicable.  Such schedule refers only to cost and not loss.  As the cylinders were not "actually used  up" for  reasons indicated by the High Court, the  assessee  was not entitled to any benefit of this entry.  Mr Ramamurti has

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also  urged that where entry M(2)(2)(d)(i) of Appendix 1  to the  rules is applicable, Section 32(1)(iii) of  the  Income Tax  Act  does  not  apply.   Even  assuming  that   Section 32(1)(iii)  applies,  the Tribunal has not  found  any  fact relating to written down value.  Written down value being  a question of fact must be found on consideration of  relevant materials.   The Tribunal has not dealt with this issue  and the question therefore did not arise for consideration.   Mr Ramamurti  has also submitted that in any event, as  rightly pointed out by the High Court, the assessee is not  entitled to  claim  any  benefit  under  Section  32(1)(iii)  as  the assessee has not written off the deficiency in its books  of account.  Such writing down is a condition which is required to  be  satisfied.   Mr Ramamurti  in  this  connection  has referred to a decision of Madras High Court in S. Rajagopala Vandayar v. CIT2’ which according to Mr Ramamurti has  taken into consideration earlier decisions including the  decision of  this  Court in CIT v. National  Syndicate3  and  Board’s circulars.   Mr Ramamurti has also submitted that  amendment of  Section 34(3)(a) regarding development  rebate  reserves being effective from April 1, 1962, the assessee’s claim for such rebate was not at all entertainable.  He has therefore, submitted that there is no occasion to 2 (1990) 184 ITR 450 3 41 ITR 225:(1961)2 SCR 229 245 interfere with the decision of the High Court and the appeal should be dismissed. 14.  After  giving our careful consideration to the  matter, we approve the decision of the High Court which has  already been  indicated in some detail.  In our view, the  cylinders in  question did not satisfy a case of  returnable  packages "actually  used  up".  It also appears to us that  the  High Court  has held, for good reasons, that the  assessee  could not claim any deduction under Section 32(1)(iii) of the  Act and a claim on account of development reserve under  Section 34(3)(a)  of the Act was also inadmissible for  the  reasons indicated   by   the   High   Court.    In   the   aforesaid circumstances,  this appeal fails and is dismissed  without, however, any order as to costs.