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1973 Supreme(Guj) 144
IN THE HIGH COURT OF GUJARAT
P.N. Bhagwati, Divan, JJ.
H. Mohmed and Company – Petitioner
Versus
Commissioner of Income-Tax, Gujarat-I – Respondent
Income-Tax References Nos. 79 of 1970and 37 of 1971
Decided On : 13-03-1973
For the Petitioner:B.R. Shah, Advocate.
For the Respondent:K.H. Kaji with G.G. Mehta of Bhaishanker Kanga and Girdharlal, Advocates.
The essential characteristics of stock-in-trade are that it must be a commodity in which there is a dealing, i.e., which is bought and sold as distinguished from a commodity with which the business is carried on, viz., from the exploitation of which the income is derived. The distinction is between selling outright in the course of the business activity as distinguished from deriving income from exploitation of one's assets.
Headnote:
INCOME TAX - Furniture - Stock-in-trade or capital asset - Depreciation - Revenue expenditure - Whether furniture could have been taken as stock-in-trade of the business of the assessee - Whether the assessee was entitled to any depreciation or loss on his stock-in trade - Whether the assessee was entitled to any deduction for replacement, repairs or revenue expenditure - Whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital - Whether the expenditure was made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment - Whether the expenditure was made not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade - Whether the expenditure was incurred as and by way of initial outlay.
Fact of the Case:
The assessee, a partnership firm, carried on the business of hiring out furniture for marriage functions, circus shows and other public functions. During the relevant accounting year, the assessee claimed a sum of Rs. 25,127, being the deficit in stock of furniture. The Income-tax Officer rejected the loss but allowed depreciation on furniture according to the normal rules. The assessee went in appeal to the Appellate Assistant Commissioner and contended that the claim of loss should have been allowed inasmuch as the furniture which was let out for various functions would get destroyed or spoiled and the depreciation under the normal rules was inadequate. The Appellate Assistant Commissioner allowed a total allowance of Rs. 10,000 and since the Income-tax Officer had already allowed a sum of Rs. 6,204 as depreciation, the Appellate Assistant Commissioner allowed a further deduction of Rs. 3,796. The assessee went in further appeal before the Tribunal and the same contentions which were urged before the Appellate Assistant Commissioner were reiterated before the Tribunal. The assessee also contended before the Tribunal that the furniture was stock-in-trade of the assessee and as such the loss of stock-in-trade as worked out by it should be allowed as a trading loss. Both these contentions were examined by the Tribunal and it held that the furniture could not be treated as stock-in-trade but it was a capital asset. So far as the claim for higher depreciation was concerned, the Tribunal held that the assessee was not entitled to more than what is admissible under the normal rules and the Tribunal also examined the provisions of section 32(1)(iii) of the Income-tax Act, 1961, and ultimately held that the assessee could not get the benefit of section 32(1)(iii) for the relevant period under consideration.
Finding of the Court:
1. The furniture and different articles used by the assessee-firm in its business is not the stock-in-trade but the capital asset of the assessee. 2. The assessee was not entitled to any depreciation or loss on his stock-in trade. 3. The assessee was entitled to any deduction for replacement, repairs or revenue expenditure but the amount of Rs. 25,127 claimed by the assessee as trading loss on its stock-in-trade cannot be allowed as a deduction. 4. The expenditure incurred by the assessee for replacement of parts of the capital assets can be held to be deductible but if the replacement is of the whole machinery as such as distinguished from replacement of parts with a view to bring a new asset into existence, the expenditure again will not be deductible and will not be allowed to be treated as revenue expenditure. 5. The assessee was not entitled to the benefit of section 32(1)(iii) of the Income-tax Act, 1961, for the relevant period under consideration.
Issues: 1. Whether the furniture could have been taken as stock-in-trade of the business of the assessee? 2. Whether the assessee was entitled to any depreciation or loss on his stock-in trade? 3. Whether the assessee was entitled to any deduction for replacement, repairs or revenue expenditure?
Ratio Decidendi: 1. Stock-in-trade is something in which a trader or a businessman deals; whereas his capital asset is something with which he deals. It is possible that one and the same commodity may in the case of one assessee be his stock-in-trade, whereas in the case of another assessee it may be his capital asset. 2. The essential characteristics of stock-in-trade are that it must be a commodity in which there is a dealing, i.e., which is bought and sold as distinguished from a commodity with which the business is carried on, viz., from the exploitation of which the income is derived. The distinction is between selling outright in the course of the business activity as distinguished from deriving income from exploitation of one's assets. 3. If the furniture acquired by the assessee for the purpose of carrying on his business of hiring out furniture is not treated as the stock-in-trade, the amount of Rs. 25,127 claimed by the assessee as trading loss on its stock-in-trade cannot be allowed as a deduction. 4. The assessee is entitled to any deduction for replacement, repairs or revenue expenditure but the amount of Rs. 25,127 claimed by the assessee as trading loss on its stock-in-trade cannot be allowed as a deduction. 5. The expenditure incurred by the assessee for replacement of parts of the capital assets can be held to be deductible but if the replacement is of the whole machinery as such as distinguished from replacement of parts with a view to bring a new asset into existence, the expenditure again will not be deductible and will not be allowed to be treated as revenue expenditure.
Final Decision: 1. The question referred to us in Income-tax Reference No. 79 of 1970 is answered in the negative. 2. We decline to answer the question referred to us in Income-tax Reference No. 37 of 1971, with the observations made above. The assessee will pay the costs in Income-tax Reference No. 79 of 1970 to the Commissioner, and there will be no order as to costs in Income-tax Reference No. 37 of 1971.
JUDGMENT :
Divan, J.
1. Income-tax Reference No. 79 of 1970 has been made by the Tribunal at the instance of the assessee, but at the time of making that reference, the Tribunal referred only one question and did not refer the particular question which the assessee wanted to be included in the reference. Thereafter, the assessee applied to this court by Income-tax Application No. 44 of 1971, and in pursuance of the directions issued by this court in that application, another question relating to the same assessee and the same assessment year and the same assessment proceedings has been referred by the Tribunal. Since both these references deal with the same matter and arise out of the same order of the Tribunal, we will dispose of both of them by this common judgment.
2. In Income-tax Reference No. 79 of 1970, the question that has been referred to us is :
"Whether, on the facts and in the circumstances of the case, the furniture could have been taken as stock-in-trade of the business of the assessee?"
3. In Income-tax Reference No. 37 of 1971, the question which is referred to us is :
"Whether, on the facts and circumstances of the case, the claim of the assessee to allow Rs. 25,127 as revenue expenditure was allowable under the Income-tax Act, 1961?"
4. The assessee is a partnership firm and the assessment year is 1962-63, the relevant accounting year being S.Y. 2017. The assessee-firm carries on business of hiring out furniture for marriage functions, circus shows and other public functions and derives income from this business. During the relevant accounting year, the assessee claimed a sum of Rs. 25,127, being the deficit in stock of furniture. The Income-tax Officer rejected the loss but allowed depreciation on furniture according to the normal rules. Against this decision of the Income-tax Officer, the assessee went in appeal to the Appellate Assistant Commissioner and there it was contended on behalf of the assessee that the claim of loss should have been allowed inasmuch as the furniture which was let out for various functions would get destroyed or spoiled and the depreciation under the normal rules was inadequate. The Appellate Assistant Commissioner thought that the assessee deserved some relief and he allowed the total allowance of Rs. 10,000 and since the Income-tax Officer had already allowed a sum of Rs. 6,204 as depreciation, the Appellate Assistant Commissioner allowed a further deduction of Rs. 3,796. Against this decision of the Appellate Assistant Commissioner, the assessee went in further appeal before the Tribunal and the same contentions which were urged before the Appellate Assistant Commissioner were reiterated before the Tribunal. The assessee also contended before the Tribunal that the furniture was stock-in-trade of the assessee and as such the loss of stock-in-trade as worked out by it should be allowed as a trading loss. Both these contentions were examined by the Tribunal and it held that the furniture could not be treated as stock-in-trade but it was a capital asset. So far as the claim for higher depreciation was concerned, the Tribunal held that the assessee was not entitled to more than what is admissible under the normal rules and the Tribunal also examined the provisions of section 32(1)(iii) of the Income-tax Act, 1961, and ultimately held that the assessee could not get the benefit of section 32(1)(iii) for the relevant period under consideration. Thereafter, at the instance of the assessee, the questions above set out have been referred to us, one by the Tribunal on the application of the assessee before it and the other in pursuance of the directions given by this court.
5. The first question that arises for consideration is whether the furniture and different articles used by the assessee-firm in its business is the stockin-trade or the capital asset of the assessee. It may be emphasized here that the assessee is not a dealer in furniture but hires out furniture for different functions.
