RAMANUJAM J.


The following questions of law have been referred to this court for its opinion by the Income-tax Appellate Tribunal at the instance of the Revenue.



"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the loss of Rs. 1, 15, 676 sustained by the assessee on the sale of spare parts should be allowed as a revenue loss for the assessment year 1967-68 ?


2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the loss on the sale of spare parts, spare engines and propellers did not arise out of the sale of "capital assets ?"


The assessee, M/s. Kasturi and Sons Limited, is a private limited company which is the proprietor of the Hindu and Allied Publications. In or about 1963, the assessee purchased four Heron aircraft fitted with engines and propellers in flying condition together with spare engines, spare propellers and stores for use in the aircraft later from the Indian Airlines Corporation for a sum of Rs. 9, 75, 000. The assessee capitalised the value of the four Heron aircraft fitted with engines and propellers amounting to Rs. 6, 50, 000 and claimed depreciation thereon which was allowed from year to year. In respect of spare engines, propellers as well as stores to the value of Rs. 3, 25, 000, there was no capitalisation and the assessee entered such value as the book value of the spares, spare engines and propellers. As and when such spares were used or utilised in the aircraft, the value was charged as an expense to the profit and loss account.


Since the assessee found the maintenance of the outmoded Heron aircraft costly, it went in for a change of aircraft. It sold the aircraft as also the spare engines, spare propellers and the spares (hereinafter referred to as "the spares"). The assessee had sold the aircraft in running condition for Rs. 3, 73, 334 which exceeded the written down value of the aircraft as per the books of the assessee as also the repair works by Rs. 59, 384. As regards the spares, spare engines and spare propellers, they had been sold for price of Rs. 2, 29, 883, as against the book value of Rs. 3, 45, 559. The assessee claimed the difference of Rs. 1, 15, 676 as a deduction on the ground that it is a revenue loss. This claim was disallowed by the ITO on the ground that the said amount would be a capital loss and, therefore, cannot be allowed under the provisions of s. 32(1)(ii) of the I.T. Act, 1961 (hereinafter referred to as "the Act"). The AAC, on appeal, rejected the assessee's claim on the ground that it is a revenue loss. The assessee took the matter in appeal. The Revenue also filed an appeal on the question of computation of profit under s. 41(2) of the Act in respect of the aircraft. But we are not concerned with that question in this reference. In the assessee's appeal, the Tribunal held that the loss of Rs. 1, 15, 676 sustained on the sale of spares should be allowed as an admissible deduction in arriving at the total income of the assessee-company for the assessment year 1967-68 as it constituted a loss. Aggrieved by the decision of the Tribunal, the Revenue has obtained this reference on the questions set out aboveThe Tribunal took into account the following facts for holding the loss sustained by the assessee on the sale of the spares to be a revenue loss. (1) The spares were purchased separately and not as part and parcel of the aircraft. (2) The assessee did not treat the spares as capital assets. (3) The assessee did not claim depreciation on spares. (4) The assessee did not claim the expenditure incurred for acquiring the spares as an outright deduction in the year of acquisition. (5) The assessee claimed the value of these items as revenue outgoing from time to time in the year in which it was consumed and the value was allowed by the Department as revenue outgoing. The Tribunal was of the view that for the purpose of its business of printing and publishing a newspaper, it acquired the aircraft as capital assets, that the purchase price of the aircraft was shown as a capital asset and depreciation has been claimed and allowed thereon, that the assessee also had purchased simultaneously spares of the value of Rs. 3, 25, 000, that the spares are not necessary immediately to keep the aircraft airworthy for the aircraft were already fit to fly, that the spares were not treated as capital assets by the assessee ; nor did the assessee claim depreciation on the spares, nor did the assessee claim the expenditure for the purchase of spares as an outright deduction. On the other hand, the assessee was charging to the profit and loss account the value of the items consumed in each year and allowed by the Department. Therefore, the loss incurred in respect of the spares which never formed part of the capital asset of the assessee should be taken to have been consumed in the year of sale and treated as a revenue loss. Thus the reasons given by the Tribunal for holding that loss in the sale of spares is a revenue loss are the following (1) The assessee has not treated the spares as capital assets. (2) The assessee has not claimed outright deduction on the cost of acquisition treating it as a capital asset. (3) The assessee has not claimed depreciation on the amount or value of the spares each year. (4) As and when the spares are used in the aircraft it has been claimed as a deduction towards repairs of the capital asset and, therefore, when the spares are sold, it should be taken to have been consumed and the deduction should be given on the ground that it is a trading lossThe Tribunal, taking note of the fact that the assessee is not a dealer in aircraft spares, held that the spares is not a stock-in-trade of the assessee. Thus, even according to the Tribunal, the spares are not stock-in-trade which alone can be treated as business assets. The question then is what is the nature and character of the spares-whether it is a capital asset or not. The Tribunal has merely proceeded on the basis of the treatment given to the asset by the assessee. According to the Revenue, any spares which are in excess of the minimum requirements should be taken to be capital assets. In this case, it cannot be disputed that if the spares are treated as capital assets, the loss should be taken to be a capital loss and not a trading loss. Thus the substantial question is whether the spares are capital assets or not.


While the case of the Revenue is that the spares are capital assets, the assessee's contention is that they are not capital assets. Before proceeding to consider the above question, we would like to observe that the Tribunal is in error in treating the sale of spares during the assessment year as amounting to consumption and saying that it is open to the assessee to claim the value of the spares sold as value of the spares consumed during the year and give deduction. The said observation of the Tribunal overlooks the obvious fact that since the aircraft have been sold, there is no question of consumption of the spares during the relevant year for the purpose of running the aircraft. Therefore the said reasoning given by the Tribunal for holding that the assessee is entitled to claim deduction on the basis of consumption cannot be accepted as tenable.


The learned counsel for the assessee refers to certain decisions which mainly deal with the question whether the expenditure in respect of which allowance is claimed is a revenue expenditure or a capital expenditure. Since there being no expenditure here, the cases dealing with expenditure will not throw any light on the question as to whether the spares are capital assets or notOn a due consideration of the matter, we are of the view that the spares can only be treated as capital assets. In this case, as already stated, the question as to how the assessee treated a particular asset in his books of account is not conclusive or determinative of the question whether it is a capital asset or not. Merely because the assessee in this case has not treated it as a capital asset, it cannot be said that it is not a capital asset. As already stated, the Tribunal itself found that it is not a trading asset and that the spares have been purchased for use in the aircraft if occasion or necessity arises. Such a stock of spares which is not immediately required to work or exploit the capital asset (aircraft) and which could be used only in future can only be treated as a capital asset. The fact that the assessee has not claimed any depreciation on the spares cannot throw any light on the question. The assessee can claim depreciation in relation to spares as and when the spares are used as a capital asset, or he can claim deduction of the cost of spares only when the spares are used in the course of repairs to the capital asset under the head" *


Current repairs coming under s. 31 of the Act. Therefore, without using the spares for current repairs, no deduction could be claimed, and depreciation can be claimed only when the asset is used in the course of the assessee's business. But where the asset has not been used at all but has been stocked for use on a future occasion, neither depreciation under s. 32 nor deduction towards current repairs under s. 31 could be claimed. The mere fact that the assessee has not capitalised the value of the spares and claimed depreciation nor an outright deduction had been claimed cannot also be taken to be conclusive.


As has been pointed out by the Gujarat High Court in H. Mohamed & Company v. CIT, the essential characteristics of stock-in-trade are that it must be a commodity in which there is a dealing that is, 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, that if there is a

substantial replacement of the existing capital assets of the assessee, the expenditure for such replacement will not be allowed as a deduction for repairs or replacements, that if the replacement is of parts only, the expenditure for such replacement is deductible and if the replacement is of the whole machinery as such, as distinguished from replacement of parts with a view to bring in a new asset into existence, the expenditure will not be deductible and will not be treated as revenue expenditureIn this case, if the spare parts had been used for repairs or replacement of the aircraft, then it could be allowed as a deduction for repairs or as cost of replacement. But where the assets have not been used but have been stored for future use and when the necessity for their use has ceased as the aircraft have been sold, then any loss arising out of the sale of such unnecessary spares can only be treated as a capital loss. In this view, we have to answer both the questions in the negative and in favour of the Revenue. The Revenue will get costs from the assessee. Counsel's fee Rs. 500.