Obsolescence in machinery includes unfitness from various causes; profits from share sales considered capital appreciation, not taxable under revenue.

1 In pursuance of the directions contained in the order dated 17-3-1953 of the Travancore - Cochin High Court, in Income Tax Reference No. 1/1125, the Income Tax Appellate Tribunal, Madras Bench A has referred the following two questions for decision by this Court:
"(1) What is the legal implication of the term Obsolescence,' whether the term when applied to machinery will also include all cases of unfitness arising from whatever cause whether it is due to total destruction or supersession by new invention?"
"(2) Whether the transaction relating to the sale of shares is one involving revenue profit or capital appreciation, especially in the absence of a provision in the Memorandum of Association of the applicant to carry on trading in buying and selling of shares?"

2 The Assesses, The India Nut Company Ltd., Quilon (in liquidation) was a public limited company incorporated in 1937 for carrying on business in cashewnuts and extraction of oil from cashewnut and cashew shell.

3 In 1942, the Company installed a machinery for the extraction of cashew shell oil at a cost of about Rs. 6860-4-0. On 31st December, 1943, the whole of the said outlay of Rs. 6,860-4-0 was written off as old machinery discarded as obsolete. In its return for the assessment year 1120 for which the 'previous year' was the year ended 31-12-1943, the Company claimed the whole amount of Rupees 6,860-4-0 as loss from obsolescence. The Deputy Commissioner of Income Tax, the assessing officer rejected the claim by his order dated 22-4-1121.
According to the Deputy Commissioner, this claim for allowance under S.8(2)(vii) of the Travancore Income Tax Regulation -- Regulation VIII of 1096 -- was not permissible. The Company had erected the plant as an experiment and a new type of machinery, more economical and cheaper than the old one, was constructed and installed in 1943. It was in consequence of this that the plant was discarded and that will not be allowable as a claim based on obsolescence. The appeal to the Appellate Assistant Commissioner by the Assessee was also without any success. A further appeal to the Tribunal was not also accepted.

4 Similarly, the assessse-company purchased 11991 shares of Rajagiri Rubber Company Ltd., between 1941 and February 1942 at a cost of Rs. 1,07,314-5-0. The Company also purchased during the year ended 31-12-43, 20000 tea shares in Neela Mala; for Rs. 1,00,000/- and 1000 tea shares in Thomcos for Rs. 5,000/-. Out of the shares of Rajagiri Rubber Co., Ltd., 7400 shares were sold during the year ended 31-12-43 for Rs. 1,40,939-7-0. The Deputy Commissioner of Income Tax, the assessing officer, computed the profit on the said sale of 7400 Rajagiri shares at Rs. 1,00,340-15-0 and assessed it to tax in the assessment year 1120 for which the 'previous year' is the calendar year 1943.

5 On appeal by the assessee, the Appellate Assistant Commissioner rejected the claim of the assessee that the profit from the sale of the aforesaid shares was capital in nature and that the said sales represented only stray transactions, the profit from which was not taxable. The Appellate Assistant Commissioner agreed with the assessing officer and held that the sale was in pursuance of a profit-making scheme of the Company. As there were some mistakes committed by the assessing officer in calculating the actual profit from the snares, the Appellate Assistant Commissioner fixed the profits at Rs. 75.176/-.

6 The assessee appealed to the Tribunal against the orders of the two officers holding this amount taxable as a Revenue receipt. The Tribunal negatived the assessee's contention, and confirmed the orders of the Appellate Assistant Commissioner and the Deputy Commissioner of Income Tax.

7 As the Tribunal rejected the application of the assessee to refer questions of law to this Court on these and other matters, the assessee invoked the jurisdiction of the Travancore - Cochin High Court. The learned Judges, who heard the application, were of the view that only t