Calcutta High Court
Sriram Bearings Limited vs Commissioner Of Income-Tax on 22 August, 1989
Equivalent citations: [1993]199ITR579(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In the reference at the instance of the assessee, the Tribunal referred the following two questions of law for the opinion of this court under Section 256(1) of the Income-tax Act, 1961, for the assessment years 1972-73, 1973-74, 1974-75 and 1976-77 ;
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the rejection of the method of valuation of stock of finished goods adopted by the assessee was just and proper ?
2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to the extra shift allowance at 100% of the normal depreciation in respect of the plant and machinery installed during the year and the disallowance of the said claim was justified in law ? "
2. Subsequently, the following further question was referred by the Tribunal in accordance with the directions issued by this court under Section 256(2) of the Income-tax Act, 1961 :
" Whether the inference of the Tribunal that there were changes effected in regard to the valuation of stock of finished goods from time to time was based upon material and/or evidence on record and is otherwise perverse ? "
3. This reference is numbered as I. T. Reference No. 163 of 1986. Both the references were heard together. The facts are that the assessee-company is engaged in the business of manufacture and sale of ball bearings. In the course of the assessment proceedings, it was found by the Income-tax Officer that, for and up to the assessment year 1971-72, the assessee-company valued its closing stock of finished goods, on the basis of listed selling price less expenses to the extent of 26 per cent. But, during the previous years relevant to the assessment years under reference, it adopted a new method of valuation of finished goods. In these years, the closing stock of finished goods was valued at the listed selling price less 30 per cent. to 32 per cent. on account of selling expenses and a further reduction of 20 per cent. on account of unrealised profits. The Income-tax Officer did not accept the new method of valuation of finished goods adopted by the assessee-company. He rejected the disclosed trading results and, after applying the earlier method of valuation of stock as was followed by the assessee-company year after year, he made certain additions to the trading account of the assessee-company for each of the assessment years under reference.
4. On appeal, the Appellate Assistant Commissioner accepted the contentions of the assessee-company and deleted the additions. On further appeal by the Department, the Tribunal set aside the Appellate Assistant Commissioner's order and remanded the case to him for fresh decision after taking into consideration the real nature of the change made by the assessee-company in regard to the method of valuation of its closing stock.
5. In the course of rehearing before the Commissioner of Income-tax (Appeals), it was submitted on behalf of the assessee-company that, in the previous years prior to the assessment year 1972-73, the profits were very small and, therefore, in valuing the closing stock of finished goods, the listed price was not reduced by the margin of profit to arrive at the cost price. However, with effect from the assessment year 1972-73, the listed price had been reduced by selling expenses as well as by unrealised margin of profit and this basis was consistently adopted in the subsequent years as well. It was also submitted on behalf of the assessee that the new method adopted by it was a sound commercial practice to value the closing stock at cost or market price whichever was lower. It was also submitted that an assessee was entitled to change the method of valuation of closing stock provided the new method was followed regularly. The Commissioner of Income-tax, however, confirmed the action of the Income-tax Officer for all the years under reference.
6. The assessee-company filed a further appeal before the Tribunal for each of the said four years. The Tribunal, inter alia, held and observed that an assessee was not allowed to arbitrarily change the method of valuation of closing stock to suit his purpose. The valuation of closing stock was no doubt a part of the method of accounting. If an assessee did not regularly adopt a consistent method of valuation of stock, the income-tax authorities were entitled to reject the same. The Tribunal noted that, in the present case, the assessee-company did not follow a uniform method of valuation in respect of its stock of finished goods. While in the earlier years, for and up to the assessment year 1971-72, the assessee-company reduced the listed selling price by only 26 per cent. thereof on account of selling expenses, such reduction for the assessment year 1972-73 was 50 per cent. which included, inter alia, deduction for estimated unrealised profit at 20 per cent. and in some years for excise duty as well. Even this new method was not followed by the assessee company consistently in the sense that another method was substituted in its place on and from the assessment year 1978-79. In other words, the new method was followed by the assessee-company only during the assessment years 1972-73 to 1977-78 and, even in those years, the method of valuation of closing stock was not consistent.
7. In this view of the matter, the Tribunal affirmed the orders of the tax authorities all of whom rejected the method of valuation of stock of finished goods adopted by the assessee-company in the years under reference.
8. At the hearing of this reference, Dr. Pal, learned counsel appearing for the assessee company, submitted, inter alia, that the assessee-company was consistently valuing its closing stock of finished goods at cost or market price, whichever was lower. In ascertaining the cost of closing stock, the assessee-company had been consistently following the method of deducting from the selling price the selling expenses which could vary from year to year depending upon the quantum of annual selling expenses incurred by the assessee in any year. In the previous year relevant to the assessment year 1972-73, the assessee-company also reduced the excise duty which was levied on industrial ball bearings for the first time in that year in valuing the closing stock and, therefore, the percentage of deduction from selling price increased from 26 per cent. to 30 per cent. Furthermore, in the earlier years, the margin of profit being very small, the reduction was made on that account in valuing the closing stock with reference to the State selling price. But, from the assessment year 1982-83 and onwards, a further reduction of 20 per cent. on account of unrealised margin of profit was also made in arriving at the cost price of finished goods lying in stock. Me further submitted that the assessee did not change its method of valuation of closing stock and the Tribunal in his view proceeded on an erroneous assumption that there was a change in the method of valuation and that the assessee was not regularly adopting any consistent method of valuation of stock. This particular finding of the Tribunal has been specifically challenged by the assessee-company and it was submitted that such a finding was based on an assumption inasmuch as there was no evidence for such finding. It was further submitted that the method followed by the assessee-company was a well-accepted method of valuation of closing stock.
9. Learned counsel for the Revenue, on the other hand, supported the order of the Tribunal and laid stress on the finding of fact recorded by the Tribunal to the effect that there was clearly a change in the method of stock valuation in the years under reference in so far as the assessee made two further reductions from the listed selling price on account of excise duty as well as on account of estimated margin of profit. These two items were definitely considered as part of cost by the assessee-company in the earlier years, but not so in the four years under reference. Furthermore, the assessee company did not follow even the changed method of valuation consistently inasmuch as the Tribunal has clearly recorded a further finding of fact that the new method adopted by the assessee-company for the assessment years 1972-73 to 1977-78 was discontinued and was not followed in the subsequent years.
10. We have considered the rival contentions. It is by now well settled that the method of stock valuation is a part of the method of accounting. Where an assessee regularly employs a method of accounting, its income has to be computed in accordance with such regular method. An assessee is also entitled to change his regular method of accounting by another regular method. But there cannot be any casual departure in regard to the method of accounting adopted by the assessee. It has been held by this court in Champalal Baid v. CIT [1967] 65 ITR 670 that the tax authorities can reject the method of stock valuation adopted by an assessee if it is not followed by him consistently year after year. In this case, the Tribunal has recorded a finding of fact that, for and up to the assessment year 1971-72, the assessee-company was valuing its closing stock by making a uniform reduction of 26 per cent. on account of selling expenses from its listed sale price. It is not the contention of the assessee that, in the years earlier to the assessment year 1972-73, the selling expenses were uniform and were equivalent to 26 per cent. of the listed sale price. This is not so and cannot be so. In the subsequent years right from the assessment year 1972-73, the assessee-company has been making reduction on account of selling prices at varying percentages from 26 per cent.
to 33 per cent. The explanation of the assessee was that these varying percentages were adopted having regard to the fact that the selling expenses were not uniform in any of these years. But this was also a fact that, even in the assessment year 1971-72 as well as the earlier years, in spite of this, the assessee in those years reduced the listed selling prices on account of selling expenses by a uniform 26 per cent. thereof. Furthermore, from the assessment year 1972-73 and onwards, the assessee-company also reduced the selling price by the margin of profit as well as by the excise duty. It was explained that while the excise duty was levied only during the previous year relevant to the assessment year 1972-73, there was no proper explanation as to why the listed selling price was reduced by the margin of profit in these years under reference even when no such reduction was made in the assessment year 1971-72 as well as the years earlier thereto. It may be true that it is more appropriate in determining the cost of finished goods held by way of closing stock to reduce the selling price not only by the selling expenses but also by the margin of profit. But it has been found by the Tribunal that even this changed method of valuation was not adopted by the assessee-company consistently and that the new method was followed by the assessee-company only for the assessment years 1972-73 to 1977-78. In the later years, this new method was again discontinued. This, in our view, was nothing but a casual departure in the method of stock valuation which is certainly not permitted under Section 145 of the Income-tax Act, 1961.
11. For the foregoing reasons, we answer the first question in the affirmative and in favour of the Revenue. Consequently, the only question in the reference under Section 256(2) being I. T. Reference No. 163 of 1986 is answered by saying that the inference of the Tribunal was based upon material and/or evidence on record and such inference is not perverse.
12. As regards the second issue relating to extra shift allowance, the Tribunal decided the matter against the assessee-company by holding that allowance for double shift and triple shift working should be calculated with reference to the number of days for which the particular plant or machinery had actually worked extra shift. This view of the Tribunal finds support in the decision of this court in Anantapur Textiles Ltd. v. CIT [1979] 116 ITR 851.
13. Dr. Pal, appearing for the assessee, invited our attention to the decision of the Kerala High Court in CIT v. Punalur Paper Mills Ltd. [1988] 170 ITR 37. In this case, their Lordships of the Kerala High Court referred to the Circular of the C.B.D.T. F.No. 10/83/63-ITA(II) dated September 28, 1970, wherein it was clarified by the Central Board of Direct Taxes that where a concern has worked double shift or triple shift, extra shift allowance will be allowed in respect of the entire plant or machinery used by the concern without making any attempt to determine the number of days on which each machine actually worked double or triple shift during the relevant previous year. Their Lordships of the Kerala High Court, following the said circular which was benevolent in nature, rejected the reference application filed by the Department under Section 256(2) of the Income-tax Act, 1961. Our attention has also been drawn by Dr. Pal to Instruction No. 1605 dated February 26, 1985, issued by the Central Board of Direct Taxes, which is reproduced herein below :
" Sub : Calculation of depreciation for extra shift working of plant and machinery under Section 32 of the Income-tax Act, 1961, read with Rule 5 of Income-tax Rules, 1962--Instructions under Section 119(1) of the Income-tax Act.
The Board had laid down in their letter No. 10/83/69-ITA.II dated September 28, 1970, that extra shift allowance will be allowed in respect of the entire plant and machinery used by a concern which has worked extra shift, without making any attempt to determine the number of days on which each machinery or plant actually worked extra shift during the relevant previous year. In Circular No. 109, dated March 20, 1973, it was mentioned that the said allowance should be calculated for the period for which the concern has actually worked extra shift expressed in terms of the proportion which such period bears to the "normal number of working days during the previous year". Except machinery or plant against which the letters NESA appear and those listed under Clause (iv) of Item III in Part I of the Schedule, the balance of the machinery or plant of the concern would be entitled to extra shift allowance.
The Revenue Audit has been raising objections (on the basis of decisions of the Allahabad, Calcutta and Madras High Courts) where the Assessing Officers had allowed extra shift on the basis of the working of the concern as a whole instead of the working of individual plant and machinery.
The instructions issued earlier have been considered again by the Board. In exercise of the powers conferred by Section 119(1) of the Income-tax Act, 1961, the Central Board of Direct Taxes, being of the opinion that it is expedient for the proper administration of these provisions, directs that the grant of extra shift allowance for plant and machinery be calculated with reference to the working of a factory situated at a place and not with reference to the number of days each machinery or plant has worked. Where a concern has more than one factory, the extra shift allowance will be regulated for each factory in the above manner. As the determination of the number of days each machinery or plant worked in a factory is cumbersome, the existing instructions and the present clarification are aimed at simplifying the calculation of extra shift allowance. "
14. The Revenue contends that this question is now concluded by the decision of this court in I. T. Reference No. 31 of 1983 (National Standard Duncan Ltd. v. CIT), where the judgment was delivered on July 10, 1989. There, Dr. Pal only relied on the decision in Punalur Paper Mills Ltd. , but our attention was not drawn to the subsequent instruction dated February 26, 1985, issued by the Central Board of Direct Taxes. We have held in National Standard Duncan Ltd. that the Board's circular or instruction contrary to the interpretation of the rule made by the court cannot bind the court. However, a benevolent circular issued by the Board, not on the basis of construction of the rule contrary to the decisions of the court but to mitigate any hardship on the application of statutory provisions as interpreted by the court even if it deviates from the statutory provision, may be issued, which would be binding on the income-tax authorities. It appears to us that in the instruction dated February 26, 1985, the Central Board of Direct Taxes, after taking note of several decisions of different High Courts, have directed the tax authorities to grant extra shift allowance for plant and machinery with reference to the working of a factory situated at a place and not with reference to the number of days its plant or machinery had worked. It has been clarified that as such a determination of the number of days each plant or machinery has worked in a factory is cumbersome, instructions are being issued to simplify the calculation of extra shift allowance. It is for the tax authorities to follow this instruction as the intention is to simplify the calculation of the extra shift allowance. This instruction was issued only on February 26, 1985, long after the decision of the Tribunal in the instant case. It also appears that this instruction will be effective prospectively.
15. For the reason aforesaid, we answer the second question in the reference made under Section 256(1) of the Act by saying that the assessee was not entitled to the extra shift allowance as claimed, in view of the provisions of the rule and, accordingly, the disallowance of the said claim was justified in law.
16. This will not, however, prevent the assessee from making a representation before the Board for such relief in the light of the said instruction dated February 26, 1985, as the assessee may be advised.
17. There will be no order as to costs.
J.N. Hore, J.
18. I agree.