Income Tax Appellate Tribunal - Delhi
Income-Tax Officer vs Modi Rubber Ltd. on 12 August, 1992
Equivalent citations: [1992]43ITD396(DELHI)
ORDER
M.A. Bakhshi, Judicial Member
1. The appeal by the revenue and the Cross Objection by the assessee are directed against the order dated 17-9 1985 of CIT(A)-IX, New Delhi. We are passing a consolidated order for the sake of convenience.
2. Assessee is a public limited company engaged in the manufacture of automobile tyres and tubes. For the assessment year 1976-77 for which the previous year ended on 31st October, 1975, a loss return at Rs. 14,62,16,780 had originally been filed by the assessee which had been revised to Rs. 14,79,22,110. Assessment was completed vide order dated 25th September, 1980 by virtue of which net loss was computed at Rs. 80,34,236. The provisions of Section 144B regarding forwarding of the draft assessment order and consideration of the objections by the IAC have been followed in this case,
3. Assessee succeeded in part in an appeal before the CIT(A) and the revenue is aggrieved by the relief allowed to the assessee. Cross objection has been filed by the assessee.
4. We shall first deal with the appeal of the revenue. The Assessing Officer reduced the cost of plant and machinery (from the figure of Rs. 21,91,13,820 as claimed by Rs. 1,27,78,332). This has resulted in short allowance on account (i) development rebate; (ii) depreciation; and (iii) relief under Section 80J. The sum of Rs. 1,27,78,332 comprised of the following :
(1) Over -invoicing Rs. 61,58,000
(2) Non-capitalisation of certain pre-
production expenses Rs. 22,05,832
(3) Disallowance of part of expenses on
foreign technicians Rs. 44,14,500
Rs. 1,27,78,332
There is minor variation in the figure of over-invoicing due to certain arithmatical discrepancies in the assessment order. Whereas in the draft assessment order the Assessing Officer had mentioned the figure of Rs. 61,58,000 on account of over-invoicing as a result of directions under Section 144B, the amount was revised as under :
(i) Over-invoicing of machinery purchased from M/s. Francies Shaw & Co. £ 40,000 Rs. 7,20,000
(ii) Over-invoicing of machinery purchased from M/s. Warner & Philendere DM 1,50,000 Rs. 4,50,000
(iii) 2% handling charges referred to in Clause I.1 of the Secret Agreement dated 9-11-1970 Rs. 15,14,300
(iv) Additional amounts payable as per letter dated DM 4,98,000 Rs. 14,94,000 + DM 5,00,000 Rs. 15,00,000
(v) Reserve for additional machinery as per Clause III of the Secret Agree-
ment dated 9-11-1970 DM 1,25,000 Rs. 3,75,000
(vi) Additional amount payable as per
letter dated 16-5-1973 DM 24,900 Rs. 73,700
Rs. 61,27,000
However, the Assessing Officer has erroneously mentioned the figure of Rs. 61,58,000 in computation of the disallowance. The background of over-invoicing is the family dispute in Modi family. Sh. Sudhir Kumar Modi, who was associated with the project relating to the setting up of unit in the manufacture of automobiles tyre and tubes etc., at its initial stages and was later disassociated, gave certain documents to the Directorate of Enforcement alleging violation of Sections 4(1), 4(3) and 9 of the Foreign Exchange Regulation Act, 1947. One of the allegations made by Shri S.K. Modi was that there was over-invoicing in the cost of imported machinery. The Special Director of Enforcement vide order dated 19-9-1979 did not find any substance in the allegations made by Shri Sudhir Kumar Modi. The Assessing Officer did not agree with the finding of the Special Director of Enforcement and on the basis of the evidence referred to in the assessment order held that there was over-invoicing in the purchase of machinery to the tune of Rs. 61,58,000. The CIT(A) in para 14 of his order has held that the evidence relied upon by the Assessing Officer does not in any manner justify finding of over -invoicing. According to first appellate authority on the basis of some evidence a doubt may arise about the manner in which assessee settled certain accounts with the suppliers of machinery but there could be no doubt about the total payment made. He accordingly came to the conclusion that the over-invoicing of machinery was not based on any valid material.
5. Revenue is aggrieved. The learned Departmental Representative contended that the decision of the Special Director of Enforcement Directorate was not binding upon the Assessing Officer and that it was open to the latter to record his own findings on the basis of evidence on record. By reference to para 3 of the assessment order the learned D.R. contended that there was lot of evidence available on record to justify the inference that assessee had resorted to over-invoicing of imported machinery. It was further contended that the issue before the Special Director of Enforcement was different and that the benefit of doubt has wrongly been given to the assessee in respect of alleged contraventions of foreign exchange regulations.
6. The learned counsel for the assessee, on the other hand, contended that the Special Director of Enforcement Directorate has recorded a categorical finding that the complaint filed against the company and its directors was without any merit and that the said order has been accepted by the Government as no appeal or review petition has been filed. According to the learned counsel, the finding recorded by a quasi-judicial authority cannot be disregarded unless some serious infirmity is shown in the order. Shri Vaish supported the order of CIT(A) in this regard by submitting that the evidence on record does not establish the over-invoicing of imported machinery. Shri Vaish contended that even if for arguments sake it is admitted that there was a secret agreement as alleged, the actual cost paid for import of machinery to the assessee would remain the same as s nobody's case that assessee did not pay the amount in respect of the machinery. Elaborating his arguments, the learned counsel contended that without prejudice to the submission that there was no substance whatsoever in the complaint and the allegations, it did not lead to the conclusion that the actual cost of plant and machinery was less than the amount claimed as the allegation merely speaks of adjustments in the prices to accommodate the procurement costs which according to the allegation would not have been approved by Government. It was accordingly pleaded that the appeal of the revenue may be dismissed.
7. We have given our careful consideration to the rival contentions. The claim of the assessee about the cost of the machinery is supported by evidence. The allegation of over-invoicing had been made by Shri Sudhlr Kumar Modi. Firstly, the allegation is to be viewed in the light of family dispute. Secondly, the allegation has not been supported beyond reasonable doubts. The Special Director of Enforcement has also acquitted the assessee from charges of violation of foreign exchange regulations. The finding recorded by a quasi-judicial authority under a separate enactment may not be binding upon an authority under a different enactment. However, such a finding in our view has a definite evidenciary value and cannot be brushed aside simply because it has been recorded under a different statute. It is permissible for the Income-tax authorities to disagree with the said finding but in a judicial manner by giving reasons for such disagreement. In our view, the Assessing Officer was thus not justified in ignoring the finding of the Special Director of Enforcement Directorate regarding the contravention of foreign exchange regulations.
8. Secondly, the allegation broadly speaking is that the appellant had arranged to make certain payments to its technical collaborators outside India on account of their services for procurement of plant and machinery which payment was otherwise not likely to be authorised by the Government of India. That payment, according to the complaint, was organised through over-invoicing of the cost of plant and machinery. It was further alleged that the arrangement arrived at included unauthorised provisions for supply of certain.iterns of equipment and plant and machinery which might have been required in the project. The complaint had thoroughly been investigated by the Director of Enforcement and by an order dated 19-9-1979 the assessee acquitted of all charges. The Special Director of Enforcement has recorded a finding that the existence of secret agreement between the assessee and its technical collaborators had not been established. The complaint that the technical collaborators had obtained 2% handling fee from the assessee and that there was over-invoicing in the purchase order with the machinery supplier Francies Shah and Warner and Philenderer was also held as not proved. The finding of Special Director is that the complaint was based on conjectures and was fanciful. It has further been held that there is evidence on record to rebut the allegation in the form of certificates & affidavits from machinery suppliers and the certificate of the Chartered Accountant of the technical collaborators.
On the one hand there is evidence by virtue of which the cost of machinery is established to be the same as disclosed by the assessee. On the other hand there is allegation and evidence that may give rise to suspicion. On consideration of totality of the facts and circumstances of this case and the evidence on record, we hold that the allegation of over-invoicing of imported machinery is not established. Since the cost of machinery disclosed by the assessee is supported by evidence, the Assessing Officer would not be justified in reducing the cost on the basis of suspicion. We accordingly confirm the order of the CIT(A) in this regard.
9. The second item of dispute in determination of the cost of the assets is the expenditure incurred on foreign technicians who came for erection of plant and machinery. Assessing Officer found the following expenses having been capitalised on account of expenses incurred on foreign technicians :
Accounting year Amount
Rs.
1971-72 22,628.00
1972-73 1,92,022.00
1973-74 9,37,289.63
1974-75 (May to Oct. 74) 40,74,997.83
1974-75 24,08,965.00
76,29,401.91
Since Government had permitted payment to the tune of Rs. 32,15,400 only the balance was ignored. Before the CIT(A) it was pleaded that a sum of Rs. 66,70,386 had been permitted by the Government of India to be remitted on account of expenditure incurred on foreign technician for erection of the plant. It was explained that initially the Government had permitted remittance of Rs. 32,15,400 only but due to persistent efforts subsequently the total amount of remittance was authorised by the Government of India as under :
Up to 1975 Rs. 32,15,400
1-11-1978 Rs. 18,12,130
24-8-1984 Rs. 6,35,531
19-11-1984 Rs. 5,09,778
4-1-1985 Rs. 4,22,720
4-2-1985 Rs. 74,824
Total Rs. 66,70,386
On the basis of the pleading of the assessee, the CIT(A) directed the Assessing Officer to limit the disallowance to the amount of non-permitted remittance on account of foreign technicians up-to-date. The learned D.R. was not able to point out any infirmity in the order of the CIT(A) in this regard. We accordingly decline to interfere to modify the direction of the CIT(A).
10. The next item relating to reduction of cost of machinery and plant is the non-capitalisation of certain pre-production expenses to the tune of Rs. 22,05,832. The details of these expenses are as under :
(i) Ceremonial expenses Rs. 40,343
(ii) Charges general Rs. 2,90,198
(iii) Business promotion expenses Rs. 85,163
(iv) Commitment charges Rs. 8,78,313
(v) Rent Rs. 2,96,504
(vi) Advertisement expenses Rs. 2,18,204
(vii) Ex-gratia allowance Rs. 1,95,101
(viii) Erection bonus Rs. 1,72,502
(ix) Commitment charges Rs. 29,304
Rs. 22,05,832
The expenditure of Rs. 40,343 incurred by the assessee on ceremonial expenses, according to the Assessing Officer, has nothing to do with the installation and commissioning of the plant and machinery. The Assessing Officer held that such expenditure may have publicity value but that would not be relevant for considering such expenditure for capitalisation. The CIT(A) has relied upon the decision of the Bombay High Court in the case of CIT v. Nirlon Synthetic Fibres & Chemicals Ltd. [1982] 137 ITR 1 [1981] 6 Taxman 27. in support of the finding that the ceremonial expenses form part of the capital asset. Since the decision of the CIT(A) is in consonance with the decision of the Bombay High Court in the case of Nirlon Synthetic Fibres & Chemicals Ltd. (supra) and no contrary decision has been brought to our notice, we have no reason to interfere in the order of the CIT(A), in this regard.
11. Out of general charges amounting to Rs. 2,90,198 the learned CIT(A) has relied upon the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 in support of the finding that such revenue expenditure as would otherwise be allowable as a deduction but for the fact that these were incurred prior to commencement of production, are entitled to be capitalised for ascertaining the cost of plant and machinery. On the basis of ratio of the aforementioned decision the learned CIT(A) has allowed the following expenditure to be capitalised :
Rs.
(a) Charges general Rs. 1,79,635
(excluding the expenditure on
furniture, soft furnishing and
share issue expenses - furniture,
furnishings being entitled to
depreciation or replacement as
the case may be).
(b) Commitment charges being not 8,78,313
in the nature of penal charges but
contractual payments for keeping 29,504
+ credit facilities available.
(c) Rent 2,96,504
(d) Advertisement expenses (50% by estimate
as partly relatable to installation) 1,09,102
(e) Ex-gratia and erection 1,95,101
bonus relatable to timely 1,72,502
and quick erection of the plant
(Entertainment expenses are not
considered as allowable even as
capitalised expenses)
17,60,661
The business promotion expenses amounting to Rs. 85,163 had not been allowed to be capitalised and out of the advertisement expenses 50% of the expenditure has been attributed to installation of plant and machinery. Whereas the revenue is not satisfied with the decision of the CIT(A) assessee is also aggrieved to the extent of exclusion of Rs. 4,04,828 for which a cross-objection has been filed. Shri Vaish further pointed out that there is a mistake of Rs. 1 lakh in the total amount mentioned by the CIT(A). The total according to Shri Vaish works out to Rs. 18,60,661 and if the figure of Rs. 40,343 on account of ceremonial expenses is also added, the amount to be considered for capitalisation as held by CIT(A) would be Rs. 19,01,004. In the case of Challapalli Sugars Ltd. (supra), the Hon'ble Supreme Court has held that the expenditure on account of salaries, wages, electric engines, interest on loans and other revenue expenses which would otherwise be allowable as deduction but for the fact that these are incurred prior to commencement of production are entitled to be capitalised for ascertaining the cost of plant and machinery. The learned CIT(A) has followed the aforementioned decision of the Supreme Court as also the decision of the Delhi High Court in the case of Addl. CIT v. Rajindra Flour & Allied Industries (P.) Ltd. [1981] 128 ITR 402 6 Taxman 1. and the decision of the Madras High Court in the case of CIT v. Lucas TVS 118 ITR 306 (Sic). We, therefore, have no reason to interfere with the finding of the CIT(A) that the expenditure which would have been otherwise allowable as a revenue expenditure is entitled to be capitalised for the purposes of determination of the cost of plant and machinery. The appeal of the revenue thus fails on this ground as well.
12. Regarding the Cross-Objection filed by the assessee, we are satisfied that there is a totalling mistake of Rs. 1 lakh at page 20 of CIT(A)'s order. The sum total of the expenditure works out to Rs. 18,16,661. The order of the CIT(A) is modified to this extent.
13. We now deal with the disallowance of some expenditure made by the CIT(A) in respect of which assessee is aggrieved.
14. Out of general charges claimed by the assessee at Rs. 2,90,198 the CIT(A) has allowed capitalisation of Rs. 1,79,635. The expenditure on account of cost of furniture, soft furniture and share issue expenses have been excluded on the ground that depreciation or replacement is otherwise permissible. We do not see any infirmity in this finding of the CIT(A).
15. The next disallowance is on account of advertisement expenses. The total expenditure claimed by the assessee under this head was Rs. 2,18,204. In the absence of details the expenditure attributable to installation of plant and machinery has been estimated by the CIT(A) at 50% at Rs. 1,09,192. Even before us no separate details have been furnished to justify a higher estimate relatable to installation of plant and machinery. We, therefore, decline to interfere.
16. The Cross Objection filed by the assessee is accordingly dismissed subject to the modification of totalling mistake in the appellate order.
17. The next ground of appeal by Revenue is relating to allowance of deduction on account of excise duty amounting to Rs. 17,19,527. The accounting year of the assessee for assessment year 1976-77 ends on 31st October, 1975. On 17th June, 1977 Assistant Collector of Central Excise, Meerut passed an order claiming excise duty at a higher rate by including the post-manufacturing expenses for the determination of assessable value. Assessee challenged the order of the Assistant Collector of Central Excise by way of writ petition before the Supreme Court. The Supreme Court by an interim order stayed the order of the Assistant Collector of Central Excise on 24th June, 1977. Assessee by means of letter dated 24th March, 1980 claimed deduction in respect of the demand claimed by the Assistant Collector of Central Excise to the tune of Rs. 17,19,527. The Assessing Officer, however, did not consider the claim of the assessee. The CIT(A) has allowed the deduction in respect of disputed excise duty relying upon the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT[1971] 82 ITR 363. Revenue is aggrieved.
18. According to the learned Departmental Representative since the additional demand of excise duty has been created after the end of the previous year and the Supreme Court having granted stay of the order as well as that of demand, deduction in respect of this demand could not be allowed.
19. The learned counsel for the assessee, on the other hand, relied upon the decision of Delhi High Court in the case of Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 18 Taxman 491. and the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) to support the order of CIT(A). Shri Vaish contended that the mere fact that assessee has disputed the demand or that no provision had been made in the books of accounts is not a bar for allowance of deduction. According to Shri Vaish, even if the demand was created in the subsequent year it relates to the year under appeal and accordingly assessee was justified in making the claim before the Assessing Officer.
20. We have given our careful consideration to the rival contentions. There is no dispute on facts. The demand relates to the year under appeal. The demand has admittedly been created after the end of the previous year but before the completion of the assessment proceedings. It is also not disputed that assessee has not accepted the claim but has challenged the levy by way of writ petition before the Supreme Court. The Supreme Court has granted interim stay of the order. However, as on today, the decision of the Assistant Collector of Central Excise has not been cancelled. Therefore, the demand created subsists though the recovery of the demand has been deferred till the decision of the Supreme Court. The question for our consideration is as to whether in these circumstances it is permissible for the assessee to claim a deduction in the year to which the liability pertains. In Rattan Chand Kapoor's case (supra), their Lordships of the Delhi High Court held that if a demand in respect of liability is raised for the period shortly after the year ended and before the assessment was completed then on the basis of decision of Kedarnath Jute Mfg. Co. Ltd.'s case (supra), a revised return could be filed and deduction allowed. On the basis of the ratio of the aforementioned decision of the Delhi High Court assessee has the right to claim the liability pertaining to the year under appeal even when the demand is created in the subsequent year. The mere fact that there was no entry in the books of accounts made by the assessee is not a bar for allowance of deduction as held by their Lordships of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra). Respectfully following the decision of the Delhi High Court in the case of Rattan Chand Kapoor (supra) and that of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) we hold that assessee is entitled to claim the deduction in respect of excise duty demand created by the Assistant Collector of Central Excise. The CIT(A) was thus justified in allowing the claim of the assessee to the tune of Rs. 17,19,527. This ground of appeal raised by the asses.see is accordingly dismissed.
21. Ground No. 4 relates to admission of additional grounds raised before the CIT(A). The grievance of the revenue is that Rule 46A of the Income-tax Rules, 1962 has been contravened and that the decision of the CIT(A) was in contravention of the decision of the Supreme Court in the case of Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1.
22. The learned counsel for the assessee, on the other hand, relied upon the decision of the Supreme Court in the case of Jute Corpn. of India Ltd. v. CIT [1991] 187 ITR 688 in support of the contention that the powers of the first appellate authority are co-terminus with that of the Assessing Officer. It. was further contended that the entire evidence in support of the claim was available with the Assessing Officer at the time of assessment. In such circumstances, the CIT(A), according to the learned counsel, was justified in entertaining additional grounds of appeal. The learned counsel further contended that the objection of the revenue is only technical in nature as the Assessing Officer was present before the CIT(A) in the course of appellate proceedings. The Assessing Officer had in fact been given an opportunity under Rule 46A during the course of hearing of the appeal.
23. We have given our careful consideration to the rival contentions. It is observed from para 26 of the CIT(A)'s order that, copy of the additional grounds raised had been forwarded to the Assessing Officer for his comments/objections. The Assessing Officer had objected to the admission on the following grounds :
(a) Inordinate delay of more than 4 years; and
(b) Some of the issues are entirely new and hence not admissible under the Supreme Court's verdict in the case of Gurjargravures (P.) Ltd. (supra).
The CIT(A) has considered the contentions on behalf of the assessee that additional grounds of appeal had been filed immediately after the appeal had been taken up for hearing and that some of the issues had arisen as a result of subsequent developments. Assessee's explanation that, the delay in raising the grounds in any case was neither unreasonable nor wilful has also found favour with CIT(A). We also find that the CIT(A) has applied his mind on the issue of admission of additional grounds. For example, ground No. 4 raised before him has not been admitted for reasons recorded in para 27 of his order. In this connection, it may be useful to refer to the decision of the Hon'ble Supreme Court in the case of Jute Corpn. of India Ltd. (supra) where their Lordships held as under :
(i) Power to tax on discovery of a new source of income is quite different from granting deduction on the admitted facts fully supported by the decision of the Supreme Court. If the tax liability of the assessee is admitted and if the ITO is afforded an opportunity of hearing by the appellate authority in allowing the assessee's claim for deduction on the settled view of the law, there is no good reason to curtail the powers of the appellate authority under Section 251(1)(a) of the Income-tax Act, 1961.
(ii) An appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO.
(iii) The observation in the case of Gurjargravures (P.) Ltd. (supra) do not Rule out a case for raising an additional ground before the Appellate Assistant Commissioner if the ground so raised could not have been raised at the stage when the return was filed or when the assessment order was made or if the ground became available on account of change of circumstances or law. There may be several factors justifying the raising of such a new plea in an appeal, and each case has to be considered on its own facts. If the Appellate Assistant Commissioner is satisfied, he would be acting within his jurisdiction in considering the question so raised in all its aspects. He must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. While permitting the assessee to raise an additional ground, the Appellate Assistant Commissioner should exercise his discretion in accordance with law and reason.
In the case before us Assessing Officer has been allowed an opportunity before admission of the additional grounds and the first appellate authority has found material on record enabling him to take a decision on the issues raised. The circumstances under which the grounds had not been raised originally have also been explained. In such circumstances, we do not find any fault with the decision of the CIT(A) in admitting the additional grounds. We accordingly dismiss this ground of appeal.
24. The 5th, 6th and 7th ground of appeal read as under :
5. The CIT(A) was not correct in law and on facts in directing to allow development rebate on Railway Siding & Engine, when this issue was never raised before the ITO.
6. The CIT(A) was not correct in law and on facts in directing to allow initial depreciation on plant and machinery installed after the dates relevant for grant of development rebate and work out relief admissible in accordance with law, when this issue was never raised before the ITO.
7. The CIT(A) was not correct in law and on facts in directing to allow deduction on account of depreciation on wooden shells or rolls under the proviso to Section 32(l)(ii) of the Income-tax Act, when this issue was never raised before the ITO.
25. It appears from the above grounds that the grievance of the revenue is regarding the admission of the additional ground when no such claim had been raised before the Assessing Officer. As already noted, the powers of the CIT(A) are co-terminus with that of the Assessing Officer. This proposition of law is well settled by the Hon'ble Supreme Court in the case of CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225. In the case of Jute Corpn. of India (supra), their Lordships have reiterated that the appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitation if any prescribed by the statutory provision. Under the Income-tax Act, 1961 there are no restrictions or limitations for the exercise of the powers of appellate authority. Rule 46A of the Income-tax Rules, 1962 is regulatory in the matter of admission of additional evidence and in our view, not a fetter on the powers of the first appellate authority. The mere fact that the claim had not been made before the Assessing Officer does not take away the powers of the first appellate authority to admit additional ground of appeal provided the discretion vested in him is exercised in accordance with law and reason. The CIT(A) In this case has been satisfied that the additional grounds raised were bona fide and that the same could not have been raised for good reasons. We, therefore, reject the contention raised on behalf of the revenue regarding the consideration of issues for the first time by CIT(A).
26. We now revert to these issues on merit. The assessee had claimed development rebate on items of plant and machinery but had omitted to claim development rebate of the cost of railway siding put to use during the previous year relevant to assessment year 1976-77. The depreciation has been claimed and allowed by the Assessing Officer on the cost of these railway sidings as part of plant and machinery. The details regarding cost of railway siding, the fact that these had been used for the purposes of business had been looked into by the Assessing Officer during the course of assessment proceedings. The seeking of development rebate on the cost of railway siding was enlargement of the claim for development rebate and therefore, the CIT(A) was justified in admitting the same. This is permissible in view of the decisions of Gujarat High Court in the case of CIT v. Cellulose Products of India Ltd. [ 1985] 151 ITR 499 (FB) and the Calcutta High Court in the case of CIT v. Gordhandas Jerambhai [1985] 154 ITR 288 23 Taxman 44. The issue as to whether development rebate is available in respect of cost of railway siding is covered by the decision of Orissa High Court in the case of Kalinga Tubes Ltd. v. CIT [1974] 96 ITR 20. We, therefore, confirm the decision of the CIT(A) in directing the grant of development rebate on the cost of railway sidings.
27. In the 6th ground of appeal the direction of the CIT(A) relating to grant of additional depreciation in respect of plant and machinery has been assailed. Initial depreciation was admissible on items of plant and machinery installed after the 31st May, 1974 and up to 31st March, 1976. Development rebate was discontinued in respect of such items of plant and machinery except where the items of plant and machinery had been installed before 1-6-1975 and the assessee had purchased or entered into a contract for the purchase with the manufacturer before 1-12-1973. During the previous year- relevant to assessment year 1976-77 the assessee had installed and put to use items of plant and machinery costing Rs. 21,91,13,819 out of which development rebate had been claimed on items of plant and machinery costing Rs. 19,82,18,084. Out of the balance of Rs. 2,08,95,736 neither initial depreciation nor development rebate was admissible in respect of machinery valued at Rs. 18,07,586. Assessee had omitted to claim additional depreciation on the value of plant and machinery costing Rs. 1,90,88,149. Full details of such machinery are available on assessment record and in fact depreciation had also been allowed by the Assessing Officer. We agree with the contention raised on behalf of the assessee that the claim of the assessee before the CIT(A) for grant of initial depreciation on items of plant and machinery costing Rs. 1,90,88,149 was only an enlargement of claim for depreciation and that full facts regarding the claim were available on record. The CIT(A) has directed the Assessing Officer to allow the claim of the assessee after verification. We see no infirmity in this direction of the CIT(A).
28. The next ground of appeal is relating to allowance of depreciation on wooden shells or rolls tinder proviso to Section 32(1)(ii) of the Income-tax Act, 1961. Assessee had purchased wooden shells which are provided to the suppliers of fabric used as raw material for tyres. This facilitates in winding of raw material. The wooden shells with fabric wrapped on them are fixed to machine and the fabric keeps on unwinding itself. The empty wooden shells are again sent to the fabric suppliers for winding of raw material. The cost of these wooden shells per head was claimed to be less than Rs. 750 and accordingly 100% depreciation was claimed in respect of these wooden shells in appellate proceedings. Assessee omitted this claim during the course of assessment proceedings inadvertently. However, a note regarding the nature of these wooden shells and their user had been submitted to the Assessing Officer during the course of assessment proceedings. In these circumstances, CIT(A) was justified in entertaining the claim of the assessee.
29. The next ground of appeal is relating to claim in respect of insurance spares and stand-by equipments. Assessee had set up a tyre manufacturing plant which was largely imported. In order to ensure that the breakdown of critical parts does not lead to virtual stoppage of plant, assessee had purchased critical spare parts from time to time and debited these to Stores Account. For assessment year 1980-81 assessee claimed period write off at 20% per annum of such stock of insurance spares on straightline basis which was disallowed by the Assessing Officer in that year on the ground that the claim was made in that year for the first time. In the course of assessment proceedings for the year under appeal, assessee had submitted a note explaining the nature and user of these spare parts. During the course of appellate proceedings additional ground was raised claiming normal depreciation in respect of these spare parts. The CIT(A) examined the claim of the assessee and held on merits that the insurance spare parts form part of plant and machinery and accordingly directed to allow depreciation in respect of these parts. The CIT(A) has relied upon the following material in order to come to the conclusion that assessee is entitled to normal depreciation in respect of insurance spare parts :
1. Seminar proceedings on Spare Parts Management organised by National Productivity Council.
2. Extracts of letter written by Mr. Ray L. Allen, Manager, Management System Column, South America Rockwell Corporation.
3. International Accounting Standard on Accounting for property, plant and equipment.
4. Correspondence from machinery suppliers.
30. On careful consideration of rival contentions, we see no infirmity in the order of CIT(A) in directing to allow depreciation in respect of insurance spare parts. It may be pertinent to mention that out of Rs. 1,24,00,000 worth spare parts the insurance spare parts have been identified around Rs. 12 lakhs only. It has been found as a matter of the fact that the company had been advised by its technical collaborators and machinery suppliers that in order to ensure that the plant does not come to a standstill on account of sudden breakdown of vital part, it should maintain sufficient stock of what are described as insurance spares. These spares are such items as stand-by equipments which may or may not be required during the lifetime of the plant, for which the item is a spare part of equipment. Adequate stock of such spares and equipments have been found to be necessary to ensure against complete stoppage of plant and consequential loss on account of stoppage of production and heavy fixed expenditure. The Government regulations which would not ensure quick emergency import and the possibility of non-production of such spares due to fast changing technology in the supplier countries was added reason for purchase of insurance spares. These spares are part and parcel of plant as such. They could not be put to use separately. As such the CIT(A) was justified in holding these insurance spares as part of the plant and machinery and has rightly directed the Assessing Officer to allow depreciation on verification of the claim.
31. The last ground of appeal is relating to the change of method in valuation of closing stock. Assessee-company had followed a consistent method of valuation of closing stock up to assessment year 1979-80 as under :
(a) Raw material, stores & spares At cost, actual or weighted average
(b) Goods in process At cost
(c) Finished goods At realisable value.
The assessee-cornpany changed this method of valuation of closing stock of finished goods during the previous year relevant to assessment year 1980-81 as under :
(c) Finished goods Lower of cost or
realisable value.
This change effected by the assessee in the method of valuation was rejected by the Assessing Officer.
However, CIT(A) allowed the appeal of the assessee against which department is stated to be in appeal. For assessment year 1981-82 assessee effected yet another change in the method of valuation of closing stock, which is as under :
(a) Raw material, stores & spares Cost, periodic LIFO basis
(b) Goods in process Direct cost
(c) Finished goods Direct cost.
This change in the method of valuation of closing stock was also rejected by the Assessing Officer. However, the CIT(A) allowed the change against which order appeal is stated to be pending before the Tribunal.
32. The year under appeal is stated to be the first year of assessment. Assessee accordingly raised an additional ground of appeal before the CIT(A) seeking to adopt the method of valuation as adopted for assessment year 1981-82. For assessment year 1976-77 i.e,, the year under appeal the Assessing Officer did not allow the change. The CIT(A) has however allowed the change. Revenue is aggrieved.
33. The learned D.R. objected to the allowance of change of valuation of closing stock by the CIT(A) on the ground that the method sought to be adopted by the assessee does not give the true picture of assessable profits. According to the learned D.R. Assessing Officer has the power to reject the method adopted by the assessee if it does not give true profits earned by the assessee in the business. According to the learned D.R. the expenditure incurred by the assessee has got to be included in working out the closing stock so that proper assessable profits are ascertained. In this connection, reliance was placed on the decision of the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 54 Taxman 499.
34. The learned counsel for the assessee Shri Vaish on the other hand, vehemently defended the order of the CIT(A). According to him, the Hon'ble Supreme Court in British Paints India Ltd.'s case (supra) has not. overruled the decision of the Madras High Court in the case of CIT v. Canborandurn Universal Ltd. [1984] 149 ITR 759 16 Taxman 25. as also the decision of the Andhra Pradesh High Court in the case of CIT v. Mopeds India Ltd. [1988] 173 ITR 347 38Taxman 123. Shri Vaish contended that their Lordships of the Madras High Court in the above noted case have approved the Direct cost method of valuation of closing stock so also have their Lordships of Andhra Pradesh High Court. The decision of Delhi Bench of the Tribunal in the case of Modi Industries [IT Appeal No. 3899 (Delhi) of 1985, dated 30-12-1988] was also cited in support of the contention that the change in the method of valuation of closing stock was warranted in the facts and circumstances of this case. The learned counsel further pointed out that the Special Leave Petition against the decision of the Madras High Court in the case of Carborandum Universal Ltd. (supra) has been rejected by the Hon'ble Supreme Court as is cited in 187 ITR 38 Statutes. Shri Vaish invited our attention to the accounting standard 'Valuation of Inventories' issued by the Institute of Chartered Accountants of India, in support of the contention that Direct Cost method was permissible method of valuation of the closing stock. It was accordingly urged that the appeal of the revenue may be dismissed.
35. We have given our careful consideration to the rival contentions. It is well settled proposition of law that a taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade in accordance with established method of stock valuation. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the Assessing Officer unless in his opinion the income of the trade cannot be properly deduced therefrom. This view is supported by the decision of the Supreme Court in the case of Investment Ltd. v. CIT[1970] 77 ITR 533. It is also well settled that assessee is permitted to change the method of accounting as well as method of valuation of closing stock from time to time subject to the condition that the Assessing Officer is satisfied that the change effected by the assessee is bona fide for meeting changed situation or changed circumstances and provided the change is for regular adoption. As is mentioned in para 31 of this order assessee has adopted the direct cost method in respect of goods in process and finishing goods. On our enquiry we were informed that in the direct cost following expenditure has been taken into account:
(a) Direct Material Cost:
(i) Raw material consumed.
(ii) Stores, spares and oil consumed.
(b) Direct Labour Cost :
Salary, wages, bonus, ex-gratia, etc., to staff and workers.
(c) Production Overheads :
(i) Power and fuel consumed.
(ii) Repairs and maintenance to plant and machinery, (iii) Repairs and maintenance to factory building. Following items had not been included :
(i) Administrative overheads and interest.
(ii) Selling and distribution overheads.
(iii) Depreciation.
We would like to consider at the very outset as to whether the direct cost method adopted by the assessee is permissible systems of accounting and if so whether all the components that are to be taken into account in the direct cost methods have in fact been taken into consideration by the assessee in working the closing stocks. We would like to refer to the accounting standard valuation of inventories published by the Institute of Chartered Accountants of India, copy of which was made available to us by the assessee.
36. In para 7 of this publication it has been stated that inventories are normally evaluated at the lower of historical cost and net realisable value.
In para 24 it has been stated as under :
Subject to the exceptions stated in paras 29.1 to 29.4 inventories should be valued at lower of historical cost and net realisable value.
In para 27 it is however provided that the historical cost of manufactured inventories may be arrived at on the basis of either direct costing or absorption costing. Where absorption costing has been used, the allocation of fixed costs to inventories should be based on the normal level of production. It is evident from the above quoted paragraphs that the Institute of Chartered Accountants have recommended the lower of historical cost and net realisable value to be adopted for valuation of the closing stock. It is however provided that the historical cost of manufactured inventories may be arrived at on the basis of either direct costing or absorption costing.
37. Historical cost has been defined in para as the cost of purchase, cost of conversion and either cost incurred in the normal course of business in bringing the inventories up to their present location and condition. In para 6.3 the cost of purchase has been defined to include purchase price, duties, taxes, freight inward and other expenditure directly attributable to acquisition less trade discount, rebates, duty drawbacks and subsidies, in the year in which they are accounted, whether immediate or deferred, in respect of such purchase. Para 6.4 defines cost of conversion as the cost which are specifically attributable to units of production i.e., the direct labour, direct expenses and sub-contracted work; and (ii) production overheads, ascertain in accordance with either the direct costing or absorption costing method. Production overheads, it has been provided shall exclude expenses which relate to general administrative finance, selling and distribution. Para 6.5 defines direct costing whereby the cost of inventories is determined so as to include appropriate share of variable cost only, all fixed costs being charged against revenue in the period in which they are incurred. Since in the definition of direct costing, the words Variable costs' and 'fixed costs' have been used, their definitions also become relevant. 'Variable costs' are those costs of production which vary directly or nearly directly, with the volume of production. This is defined in para 6.7. In para 6.8 'fixed costs' are defined to be those costs of production which by their very nature remain relatively unaffected in a defined period of time by variations in the volume of production. 'Net Realisable Value' is has also been defined to be in the actual/estimated selling price in the ordinary course of business, less cost of completion and cost necessarily to be incurred in order to make the sale. Let us now test the method adopted by the assessee for valuation of its closing stock. The three factors are to be taken into account :
(a) Cost of purchase
(b) Cost of conversion
(c) Other costs incurred in the normal course of business in bringing the inventories up to their present location and condition.
In category (a) cost of purchase of raw material is to be taken into account including duties and taxes, freight inwards and other expenditure directly attributable to acquisition. This is provided in para 6.3 of the A.S. Valuation of Inventories. It is nobody's case that cost of raw material has not been correctly taken by the assessee.
38. The second component to be taken into account is the cost of conversion. In the cost of conversion direct labour, direct expenses and sub-contracted work is to be taken into account and in addition to that production overheads are to be ascertained in accordance with other direct costing or absorption costing method. This is where para 27 comes into play which permits direct costing. Assessee in this case has taken into account salary, wages, bonus ex gratia payments etc., to staff and workers. Production overheads being permissible to be taken on direct cost method, one has to consider as to whether the method adopted by the assessee is proper. It is clarified in para 6.4 of A.S. Valuation of Inventories that production overheads shall exclude expenses which relate to general administration, finance, selling and distribution. Assessee has taken into account power and fuel consumed, repair and maintenance to plant and machinery, repairs and maintenance to factory building. The items that have been excluded are administration overheads, selling and distribution overheads, interest and depreciation. There is no doubt about the exclusion of administrative, selling and distribution overheads. The doubt is in relation to interest and depreciation. Since in taking production overheads direct costing is permissible, the fixed costs are to be excluded in determining the cost. Fixed costs are defined in para 6.8 to be those costs of production which by their very nature remain relatively unaffected in a definite period of time by variations in the volume of production. Depreciation would be such of the items which is charged on fixed percentage irrespective of volume of production. In our view, it could be excluded in working out the production overheads for determination of cost of conversion of goods. The only other item in respect of which a doubt has arisen is in relation to interest on finance. Since the expenditure on finance has specifically been provided to be excluded in determining the cost of production, we are of the view that it is permissible to exclude the interest in respect of the finances. Thus it is seen that the method adopted by the assessee for valuation of closing stock is one of the recommended methods by the Institute of Chartered Accountants of India, New Delhi. The assessment year before us is the first accounting year of the business of assessee i.e., assessment year 1976-77. If the system of accounting is regularly followed in the subsequent assessment years there would not, in our view, be any loss to the revenue. Once a uniform system of accounting is adopted the determination of correct profit by such method would be fair and reasonable. Since the appeals for subsequent years are also pending at one stage or the other, we approve the method of accounting adopted by the assessee so that the method is consistently followed in the subsequent assessment years. We, therefore, confirm the decision of the CIT(A) in allowing the change in the method of accounting sought by the assessee.
39. In the result, appeal of the revenue as well as cross-objection by the assessee is dismissed.