Case: Burmah Shell Oil Storage and Distributing Company of India Limited Vs. Commissioner of Income Tax

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 w as 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 pack ages 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. 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 Ta x 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 , 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-Companys 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 sub sequent 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) ofthe 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 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?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 ason the facts and in the circumst ances 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?"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 ason 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?"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 ofthe 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. (c) Whether the interpretation by the learned Judges of the expression cost of package s 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 ofthe 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.

Reasoning:
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.