B.P.SARAF, J. - (1.) BY this reference under S. 256(1) of the IT Act, 1961 made at the instance of the Revenue, the Tribunal has referred the following two questions of law to this Court for opinion : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the premium paid on leasehold land was includible in the cost of the building constructed thereon for allowance of depreciation to the assessee for the accounting period relevant to the asst. year 1975 76 ? 2. Whether, on the facts and in the circumstances of the case, the assessee was eligible for deduction in respect of the amount of Rs. 7,10,238 being the cost of the PAN catalyst written off by the assessee during the year, in the determination of the total income for the year ?"
(2.) COUNSEL for parties are agreed that the first question is covered in favour of the Revenue by the decision of the Supreme Court in CIT vs. Alps Theatre (1967) 65 ITR 377 (SC) : TC 27R.145 and it may be answered accordingly. In view of the above, we answer question No. 1 in the negative and in favour of the Revenue. The only question now left for our consideration is question No. 2. The material facts relevant for determination of the controversy in the said question are as follows : In course of the assessment of the assessee for the asst. year 1975 76, the ITO noticed that the assessee had claimed deduction of a sum of Rs. 7,10,238 representing the cost of a PAN catalyst. The catalyst was purchased by the assessee in the accounting year 1971 and it was lying in stock as a stand by for phthalie unhydride plant. In the previous year relevant to the year under reference, the assessee claimed deduction of Rs. 7,10,238 being the cost of the catalyst as obsolescence allowance in computation of its income. In support of the above claim for deduction, it was contended by the assessee before the ITO that over the course of years the production process for its chemical had completely changed whereby the catalyst plant was rendered superfluous and since it had become obsolete, its cost had been written off. The ITO disallowed the claim as, according to him, the assessee was not entitled to claim obsolescence allowance under s. 32(1)(iii) of the Act in respect of the plant in question which had never been used by it for the purposes of its business. Aggrieved by the rejection of its above claim for obsolescence allowance by the ITO, the assessee appealed to the CIT(A). Before the CIT(A), it was contended by the assessee that the PAN catalyst was an item of current asset used in the production process ad not an item of fixed asset and, hence, the claim for deduction of the loss occurred to the assessee on account of the same becoming obsolete or superfluous should not have been considered with reference to S. 32(1)(iii) of the Act. The case of the assessee before the CIT(A) was that the PAN catalyst having been rendered superfluous as a result of change in the production process of the chemical over the course of the years, was of no use to the assessee and hence, the assessee was entitled to deduction in respect of the value thereof in computation of its income under S. 29 of the Act. The CIT accepted the above contention of the assessee and allowed its claim for deduction. Against the above order of the CIT(A), Revenue appealed to the Tribunal. The Tribunal upheld the order of the CIT(A). Hence, reference of question No. 2 at the instance of the Revenue.
(3.) WE have heard Mr. T.U. Khatri, learned counsel for the Revenue, who submits that the assessee is not entitled to deduction of the amount of Rs. 7,10,238 representing the cost of the PAN catalyst either as obsolescence allowance under S. 32(1)(iii) of the Act or as business expenditure. He, therefore, submits that the Tribunal committed manifest error of law in confirming the order of the CIT(A) and accepting the claim of the assessee for deduction of the value of the same from its income.;