Holding

The appellant was not entitled to any deduction under Section 32(1)(iii), to the development rebate under Section 34(3)(a), nor to treat the loss as revenue expenditure because the cylinders were not "actually used up".

Summary

The appellant, Burmah Shell Oil Storage and Distribution Co. (now Bharat Petroleum), purchased iron cylinders as returnable packages for LPG distribution, costing Rs 1,09,63,754, and claimed no depreciation. In 1961 it sold the cylinders to the refinery for Rs 82,19,947, incurring a loss of Rs 27,43,807, which it sought to deduct under Section 32(1)(iii), as a development rebate under Section 34(3)(a), and as revenue expenditure under Rule 5 ("actually used up"). The Income Tax Appellate Tribunal allowed the loss as revenue expenditure, but the Calcutta High Court reversed, holding none of the claims were permissible. The Supreme Court affirmed the High Court, ruling that the loss could not be claimed because the cylinders were not "actually used up", the assessee had not written off the loss in its books, and the development rebate reserve shortfall was not remedied as required. Consequently, the appeal was dismissed.

Issues considered

Whether the loss on sale of returnable packages can be allowed as revenue expenditure under Rule 5, Item M(2)(2)(d)(i) of the Income Tax Rules, 1962, requiring the packages to be "actually used up".
Whether deduction under Section 32(1)(iii) of the Income Tax Act, 1961 is available when no depreciation has been claimed and the loss has not been written off in the books of account.
Whether a development rebate under Section 34(3)(a) can be claimed when the statutory reserve shortfall is not made up by transferring excess reserves from earlier years.
Interpretation of the phrase "actually used up" in the context of returnable packages.
Whether a written‑down value can be presumed in the absence of a finding by the Tribunal.

Legislation cited

Income Tax Act, 1961s. 32(1)(iii), s. 33, s. 34(3)(a)
Income Tax Rules, 1962s. Appendix I, Item M(2)(2)(a)(i), s. Appendix I, Item M(2)(2)(d)(i), s. Rule 5

Subjects

depreciationreturnable packagesloss on salerevenue expendituredevelopment rebateSection 32Section 34Rule 5actually used upincome tax

Judgment

l - ...
A BURMAH SHELL OIL STORAGE AND DISTRIBUTING
COMPANY OF INDIA LTD. (NOW KNOWN AS BHARAT
PETROLEUM CORPORATION LTD.)
v.
THE COMMISSIONER OF INCOME TAX (CENTRAL),
CALCUTTA
B
APRIL 6, 1994

(M.N. VENKATACHALIAH, CJ. AND G.N. RAY, JJ.]

C Income Tax Act, 1961/Income Tax Rules, 1962.

Sections 32(1)(iii), 33, 34(3)(a)/R.5, Appendix I, Item M(2)(2)(d)(i)-
Depreciation-Development rebat..-Liquid petroleum gas cylinder,-Sale of
by Distributor to Refinery-Shortfall in sale-Distributor company claiming
deduction of t11e amount-Held, assessee was not entitled to claim deduction
D u/s. 32 (l)(iii) as it had not written off the amount in its books of account-
Nor was assessee entitled to development rebate as it did not transfer excess
amounts of earlier years in the accounting year for purposes of making up
corresponding reserve and did not comply with provisions of section 34(3) l

(a}-Claim for deduction as revenue expenditure was also inadmissibl,,_
E After sale of cylinders by assessee to refinery, cylinders can not be said to be
"actually used up" as the same were put to use by both the assessee and the
refinery.

Words and phrases :

F Phrase "actually used up'' occuning in Rule 5 of Income Tax Rules
1962--lnterpretation of l

The appellant-Company (assessee) was a distributor of liquid
petroleum gas manufactured by Burmah Shell Refineries (the Refinery).
It had, from 1955 to 1961, acquired Iron Cylinders at a total cost of
G Rs.1,0963,754. The Cylinders were used by the assessee as returnable
packages, accounted as capital assets but no allowance for depreciation
thereon was claimed. The assessee sold the Cylinders to the Refinery in
1961 for Rs. 82,19,947. there was a shortfall of Rs.27,43,807 which the
assessee claimed as deduction in the assessment year 1962-63. The claim
H of the assessee that the loss on sale of cylinders should be allowed as loss
374
BURMAH SHELL OIL STORAGE CO. v. COMMR. OF I. TAX 375

> .. on returnable packages was rejected by the Income-Tax Officer. The A
assessee's appeal was dismissed by the Appellate Assistant Commissioner.
On further appeal, the Income Tax A!Jpellate Tribunal held the cylinders
as 'returnable packages' and the loss allowable as revenue expenditure
within the meaning of Rule 5 of the Income Tax Rules, 1962.

At the instance of the Revenue, the Tribunal made a reference to the B
High Court, which answered the reference against the assessee bnt granted
the cei1ilicate of appeal. The assessee filed the appeal u/s. 261 of the Act.

The assessee contended that in view of the provisions of Section
32(1)(iii) of the Act which apply to machinery and plant listed in Part I of C
Appendix to the Rules, the cost of cylinders being Rs. 1,09,63,754 and no
depreciation being allowable on those returnable packages, the written
down value of Cylinders most be held to be Rs. 1,09,63,754 and since the
cylinders were sold at a loss of Rs. 27,43,809 the same was allowable u/s.
32(1)(iii); that the assessee was entitled to development rebate of Rs.
24,15,622 as there was a shortfall in the development rebate reserve D
account created by the assessee in the accounting year; that the cylinders
having been sold by the assessee, lost their usefulness to the assessee, and
J must be treated to be actually 'used up' since the expression actually 'used
up' in Item M(2)(2)(a)(l) of Part I of the Depreciation Schedule Appendix
I of Rule 5 of the Rules, includes both total as well as partial 'use up' E
Dismissing the appeal, this Court

HELD : 1. The assessee could not claim any deduction u/s.32(1)(iii)
of the Income Tax Act, 1961. The High Court was right in holding that
quantum of written down value being a pure question of fact must be F
founded on consideration of relevant materials, the Tribunal has not dealt
with the issue and in the absence of any finding of the Tribunal as to the
written down value of the cylinders, such claim could not be considered
within the scope and ambit of the reference. Assuming that section
32(1)(iii) applied and the written down value of the cylinders was Rs. G
1,09,63,754, the claim could not be allowed because the assessee had not
written off Rs. 27,43,807 in its books of account. [pp. 381-B-D; 384-A]

S. Rajagopala Vandaayar v. Commissioner of Income Tax, (1990) 184
I.T.R. 450 and Commissioner of Income Tax v. National Syndicate, (1961)
41 I.T.R. 225, referred to. H
376 SUPREME COURT REPORTS [1994J 3 S.C.R.

A 2. The assessee was not entitled to development rebate for Rs.
24,15,622 on account of development reserve u/s.34(3)(a) of the Act. Thr
High Court was right in holding 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
B debiting it in the profit and loss account and by crediting it to the
development rebate reserve acconnt <an make up the shortfall of the
accounting year in which the development rebate is actually claimed or
allowed; and (c) except in the cases in which the Central Board of Revenue
or the Central Board of Direct Taxes have relaxed the provisions of Section
C 34(3)(a) it must be complied with in order to earn the development rebate
claimed in a particular year; there was a shortfall in the development
reserve account in the relevant accounting year but 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
D .admitted fact that the appellant-Company did not comply with the
provisions of Section 34(3)(a) of the Act. [pp 382-A-D; 384-A]

3.1. The claim for deduction of Rs. 27,43,807 as a revenue expendi- 1
ture under rule 5 of the Income Tax Rules 1962 read with item "'-
M(2)(2)(d)(i) of Part I Appendix 1 to the Rules was inadmissible. The
E entry M(2)(2)(d)(i) refers only to cost and not loss. The cylinders did not
satisfy the case of returnable packages "actually nsed up," and as such the
assessee was not entitled to any benefit of this entry. [p. 383-B-H]

3.2. The expression 11 used up" means 'exhausted by use, rendered
F unserviceable', in view of the expression "actually used up", the case of
"partial use up" was not acceptable. The words "actually used up" qualify
the word "packages". Hence the expression is not required to be interpreted
with reference to the user by the assessee. The cylinders after the sale were
put to use by both, the Refinery and the assessee and, therefore, it can not
be said that the cylinders were "actually used up." [382-F-H; 383-A-B]
G
Indian Overseas bank Ltd. v. Commissioner of lllcome Tax, (1977)
I.T .R. 512, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1325 of
H 1979.
BURMAH SHELL OIL STORAGE CO. '· COMMR. OF!. TAX [G.N. RAY. J.] 377

From the Judgment and Order dated 8.6.77 of the Calcutta Rigl) A
Court in LT. Reference No. 336 of 1970.

S. Rajappa, T.N. Banerjee, R.S. Perumal, and D.N. Gupta for the
Appellants.

J. Ramamurthy, R. Satish and D.S. Mehra for the Respondents. B

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 C
the judgment and order of the said High Court dated June 8, 1977 in
Income Tax Reference No. 336 of 1970.

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 D
distributing liquid petroleum gas manufactured by the Burmah Shell
Refineries Limited (hereinafter referred to as the Refinery). For the pur-
-J pose 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 E
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 upto 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 F
sum of Rs. 82,19,947 as against their original cost of Rs. 1,09,63,754. There
l was thus a shortfall of Rs. 27,43,807 which the appellant-Company claimed
as a deduction in the assessment year 1962-63.

By an assessment Order, the Income Tax Officer Central Circle V,
disallowed the said claim. The Income Tax Officer rejected the contention G
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 tear and must have been consumed. H
378 SUPREME COURT REPORTS [1994] 3 S.C.R.

A The Income Tax Officer held that the said rule had no application wMre
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 has been granted.

B The appellant-Company filed an appeal before the appellate Assis-
tant Commissioner of Income Tax being Appeal No. 26 CC.V/63- 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 'returnable packages and the loss of Rs. 27,43,807 on
c account of disposal of cylinders was a loss allowable as revenue expendi-
ture 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.

D 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 refer the following two questions for the opinion of the High Court
at Calcutta :-
'
L
(a) Whether on the facts and in the circumstances of the case, the
E Tribunal was right in holding that the sum of Rs. 27,43,807 being
the difference between the cost of gas cylinder purchased by the
assessee and their sale value was allowable as a revenue expendi-
ture under Rule 5 of the Income Tax Rules, 1962, read with the
"Remarks" against the entry relating to Returnable packages in the
F statement of rates contained in Part I of the Appendix I to the said
Rules?

(b) Whether on the facts and in the circumstances of the case the
Tribunal was right to holding that the Company could make up
the shortfall in the statutory reserve for the year under considera-
G tion 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
H reserve fell short of the statutory requirements?
BURMAHSHELLOILSTORAGECO. '" COMMR.OFLTAX!G.N.RAY,J.! 379

The appellant-Company opposed the said application and in reply it A
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 (i) (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 B
terms suggested by it.

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,
c
the loss of Rs. 27,43,807 arising on the sale of gas cylinders
was allowable as a revenue expenditure as provided for in the
remarks against 11 Returnable Packages 11 under the classifica~
tion "Mineral Oil Concerns" in item M(2) (2) ( d) under the
heading (iii) "special rates to be applied to other machinery D
and plant" in Part I of Appendix I 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 E
the shortfall in the statutory provision for development rebate
reserve created by the company for the year under considera-
tion could be made up by the excess provisions for develop-
ment 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. F

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 the question No. 1 which reads as
follows :- .,.
G
"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) (1) of .... Part I of
Appendix I to the said Rule ?" H
.~
•

380 SUPREME COURT REPORTS [1994] 3 S.C.R.

A 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
B the question No. 2 as follows :'
i
"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
C development rebate reserve account created by the assessee in the
accounting year?

The High Court answered question No. 2 referred 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
D this Court uoder section 261 of the Income Tax Act, 1961 and the Certifi-
cate of appeal was granted limited to the following question of law :

(a) Whether the general provision of Section 32(1)(iii) of the I.

Income tax Act, 1961 applies to machinery and plant specially
listed in Section III (iii) of the statement in Part I Appendix
E I to the Income Tax Rnles 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.
F (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
G
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.
...
Mr. S. llajappa, the learned couosel appearing for the appellant-
H Company contended that Section 32(1) (iii) of the Income Tax Act, 1961
BURMAHSHELLOILSTORAGECO. v. COMMR. OF!. TAX(G.N. RAY.J.) 381
J. applies to the machinery and plant specially listed in Part I of the Appendix A
to Income Tax Rules, 1962 and the High Court had gone wrong in holding
that the said general provision of Section 32 (l)(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. 1,09,63,745 and as no depreciation was allowable on those returnable
B
packages, the "Titten down value of the cylinders must be held to be Rs.
1,09,63,754. Since the cylinders were sold for Rs. 82,19,847 the deficiency
'' of Rs. 27,43,807 is allowable unde; 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 down value being a pure
question of fact and in the absence of any finding of the tribunal as to the c
written down value of the cylinders such contention could not be con-
sidered within the scope and ambit of question No. 1 The High Court has
also held that even if it was assumed that the written 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
D
of account.

<,
-'
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 E
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 F
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 Sectio~ 34(3)(a) of the
Income Tax Act. The High Court has referred to a decision of this Court G
in Indian Overseas Bank Ltd. v. Commissioner of Income, Tax, (77 I.T.R.
512) to the effect that development rebate is "a concession granted but that
concession is made subject to fulfilment of certain requirements" and
11
entries in the account books required by the proviso are not idle for-
mality". It has been indicated by the High Court that decision in 77 I.T.R. H
382 SUPREME COURT REPORTS [1994) 3 S.C.R.
.-.I
A 512 was concerned with proviso (b) to Section 10(2) (vi-b) of the Income '
Tax Act 1922 which is in pari materia with 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
B 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
c of Section 34(3)(a) it must be complied with in order to earn the develop-
ment 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.
D
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 c
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
E usefulness to the assessee. Mr. Rajappa has also contended that the
~
expression "actually used up" in item M(2)(2)(a)(i) of Part I of the
Depreciation Schedule Appendix I of Rule 5 of the Income Tax Rules 1962 r
includes both total and partial 'use up'. Mr. Rajappa has submitted after
the eale of the cylinders to the Refinery, the cylinders did not belong to
F the appellant-Company and they lost their usefulness to the appellant- '
~
Cclmpany and is immaterial if the very same cylinders were used by the ,
Refinery to fill up with gases and sending the same to the appellant-Com- '
pany for distribution to the consumers. It may be noted that similar r
contentions were also made before the High Court but the same were
rejected by holding~nter alia that expression used up" means exhausted
11 11 t
G 11
by use, rendered unserviceable In view of the expression actually used
•
11

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
H cylinders in fact, after the sale, were put to use by the Refinery and such

r
r
I
BURMAHSHELLOILSTORAGECO. '· COMMROFI. TAX(G.N.RAY,J.] 383

Cylinders filled up with gas were sent to the appellant-Company who on A
its turn distributed the same to the consumers. Since the cylinders were
actually used up in the trade both. by the Refmery and by the appellant-
Company after the sale, it can not be held that the cylinders were ."actually
used up". Hence, the claim for deduction of Rs. 27, 43,807 as a revenue
expenditure under Rules 5 of the Income Tax Rule 1962 read with item
M(2)(2)( d)(i) of Part I Appendix I to the Rules was ioadmissible and
B
\ reference on this question must be answered agaiost the assessee.

Mr. J. Ramamurti, learned Senior Advocate appeariog 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 C
M(2)(2)( d)(i) of Appendix I 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 also urged that where entry M(2)(2)(d)(i)
of Appendix I to the Rules is applicable. Section 32(1)(iii) of the Income D
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 E
assessee is not entitled to claim any benefit under Section 32{1)(iii) as the
assessee has not written of the deficiency io its books of account. Such
writing down is a condition which is required to be satisfied. Mr.
Ramamurti io this connection has referred to a decision of Madras High
Court in S. Rajagopala Vandaayar v. Commissioner of Income Tax, 184 F
I.T.R. 450 which according to Mr. Ramamurti has taken into consideration
earlier decisions including the decision of this Court in 41 I.T.R. 225 and
Board's Circulars. Mr. Ramamurti has also submitted that ame.1dment of
Section 34(3)(a) regarding development rebate reserves being effective
from 1.4.1962, the assessee's claim for such rebate was not at all enter-
tainable. He has therefore, submitted that there is no occasion to interfere G
with the decision of the High Court and the appeal should be dismissed.

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 H
384 SUPREME COURT REPORTS [1994] 3 S.C.R.

A packages. "actually used up". It also appears to us that the High Court has
held, for goods reasons, that the assessee could not claim any deduction
under Section 32(1)(iii) of the Act and a claim on account development
reserve under Section 34(3)(a) of the Act was also inadmissibie for the
reasons indicated by the High Court. In the aforesaid circumstances, this
appeal fails and is dismissed y,ri_thout, however, any order as to costs.
B
R.P. Appeal diswissed.

t

''