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Motor Industries Co. Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Bangalore
Decided On
Judge
Reported in(1984)7ITD745(Bang.)
AppellantMotor Industries Co. Ltd.
Respondentincome-tax Officer
Excerpt:
1. one appeal is by the assessee and the other by the revenue. they relate to the assessment year 1977-78. we will first take up the appeal preferred by the revenue.2. we will first deal with the item relating to the provision for additional customs duty of rs. 55,70,000. the assessee was given an import licence by the government of india for import of plant and machinery including spare parts, consumable stores, tools, etc. the assessee had paid customs duty at the rate of 40 per cent as per the provisional assessments made in the years 1973-74 to 1976-77. the contention of the assessee before the ito was that once the value of the imports of tools and spare parts exceeded 10 per cent of the total value of the machinery imported, the concessional rate of 40 per cent would not be.....
Judgment:
1. One appeal is by the assessee and the other by the revenue. They relate to the assessment year 1977-78. We will first take up the appeal preferred by the revenue.

2. We will first deal with the item relating to the provision for additional customs duty of Rs. 55,70,000. The assessee was given an import licence by the Government of India for import of plant and machinery including spare parts, consumable stores, tools, etc. The assessee had paid customs duty at the rate of 40 per cent as per the provisional assessments made in the years 1973-74 to 1976-77. The contention of the assessee before the ITO was that once the value of the imports of tools and spare parts exceeded 10 per cent of the total value of the machinery imported, the concessional rate of 40 per cent would not be applicable and the assessee was liable to pay at higher rates. Since the 10 per cent limit exceeded in the year 1976, the assessee was liable to pay additional customs duty to the extent of Rs. 55,70,000 for which provision has been made in the accounts of 1976.

The said liability was estimated at the average additional rate at 65 per cent. Thus, it was claimed that the said sum is an allowable deduction as the liability has accrued in that year. The ITO did not accept this contention. He held that no demand has been raised by the customs authorities for the payment of additional duty for which provision has been made and as such it cannot be said that the liability has crystallised in the year 1976. He was of the view that it is not as if that even goods imported within the 10 per cent limit should be denied the benefits of 40 per cent concessional rate. He noticed that no provision for similar additional duty has been made in the accounts of the year 1977. Thus, the provision for additional customs duty of Rs. 55,70,000 was disallowed by him. On appeal, the Commissioner (Appeals) held that the liability for additional duty arose during this year and so, the assessee was on firm ground when it provided the additional liability. The liability fairly estimated by the assessee is allowable as deduction. He did not agree with the ITO's view that it will be the excess over 10 per cent only that will be liable for the enhanced rate of duty. He referred to the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. Thus, he allowed the sum of Rs. 55,70,000 as deduction.

3. Mr. P.O. George, the learned departmental representative, strongly urged that this is a case where Section 143 of the Customs Act, 1962, is applied. Under the said provision, the assessee is required to execute a bond for payment of the demand raised finally. Accordingly, the assessee has executed the bond. Once bond is executed the liability for additional customs duty will arise only when the final demand is raised. So far the final assessment is not made. So no liability for additional duty has arisen. Further, there is nothing to indicate that even in respect of imports, which were below 10 per cent, the concessional rate of 40 per cent will not be applicable. He also urged that the imports of each year have to be taken separately and then it has to be seen whether it exceeded 10 per cent of the total income. He submitted that the opinion of the legal advisor of the assessee cannot be taken as an authority. Thus, he urged that the additional liability for customs duty did not arise in this year and the Commissioner (Appeals) was wrong in allowing the claim of the assessee. Mr. S.P.Mehta, the learned counsel for the assessee, strongly urged that once the value of the imports of spare parts exceed 10 per cent of the total value of the machinery, the assessee will lose the benefit of concessional rate at 40 per cent and will have to pay the duty at higher rates. In this connection, he drew our attention to item 72A of the Indian Customs and Central Excise Tariff. Thus, it is not each year that is to be taken in finding out whether the imports of spare parts exceeded 10 per cent, but it is the total imports that is to be taken to find out whether such imports exceeded 10 per cent. Since it exceeded 10 per cent limit in 1976, the liability for additional duty has arisen in that year though it is not yet quantified by the final assessment. Thus, the provision for Rs. 55,70,000 made in the accounts for 1976 as additional duty is allowable as deduction. He also urged that if there is no liability for additional duty, the question of executing bond also does not arise. He urged that the ratio laid down by the Supreme Court in the case of Kedamath Jute Mfg. Co. Ltd. (supra) has been rightly applied by the Commissioner (Appeals). Thus, he supported the order of the Commissioner (Appeals) in allowing the deduction of Rs. 55,70,000.

4. We have considered the rival submissions. Under Section 12 of the Customs Act, duties of customs shall be levied at such rates as may be specified in the Customs and Tariff Act, 1975 ; or any other law for the time being in force on goods imported into, or exported from India.

Under Section 18 of the Customs Act provisional assessment shall be made. Under Section 46 of the Customs Act, importer of any goods shall make entries thereof by presenting to the proper officer a bill of entry for home consumption or warehousing in the prescribed manner.

Section 143 deals with power to allow import or export on execution of bond in certain cases. It reads as under : 143. Power to allow import or export on execution of bonds in certain cases-(1) Where this Act or any other law requires anything to be done before a person can importer export any goods or clear any goods from the control of officers of customs and the Assistant Collector of Customs is satisfied that having regard to the circumstances of the case, such thing cannot be done before such import, export or clearance without detriment to that person, the Assistant Collector of Customs may, notwithstanding anything contained in this Act or such other law, grant leave for such import, export or clearance on the person executing a bond in such amount, with such surety or security and subject to such conditions as the Assistant Collector of Customs approves, for the doing of that thing within such time after the import, export or clearance as may be specified in the bond.

(2) If the thing is done within the time specified in the bond, the Assistant Collector of Customs shall cancel the bond as discharged in full and shall, on demand deliver it, so cancelled, to the person who has executed or who is entitled to receive it ; and in such a case that person shall not be liable to any penalty provided in this Act or, as the case may be, in such other law for the contravention of the provisions thereof relating to the doing of that thing.

(3) If the thing is not done within the time specified in the bond, the Assistant Collector of Customs shall, without prejudice to any other action that may be taken under this Act or any other law for the time being in force, be entitled to proceed upon the bond in accordance with law.

In this case, the assessee executed the bond under Section 143. The said bond executed is as under : BOND IN REGARD TO PROJECT IMPORT (REGISTRATION OF CONTRACT) REGULATIONS, 1965 Whereas the Collector of Madras (herein called the Collector) may under Section 18(1) of the Customs Act, 1962, make provisional assessment under Project Import (Registration of Contract) Regulations, 1965 extending the benefit of item 72A in respect of the main equipments, spares and raw materials noted below to be imported from time to time for the initial setting up a plant by us, namely, motor industries company limited on our undertaking to produce before him within three months from the date of arrival of the last consignment of goods, further documents as proof regarding the real value or quantity of the said goods and any other documents that may be required under the Project Imports (Registration or Contract) Regulations, 1965.

We do hereby bind ourselves, our legal representatives and successors to pay on demand and without any demur, the difference, if any, between the duty provisionally assessed by the Collector of Customs under the said Section 18(1) of the Customs Act, 1962, the duty finally assessed by the Collector in respect of each consignment. It is also agreed that any amount due under this bond may be recovered in the manner laid down in Sub-section (1) of Section 142 of the Customs Act, 1962, without prejudice to any other mode of recovery.

The guarantee hereby given under Section 143 of the Customs Act on this, the Tenth Day of March 1973 shall be continuing one and shall not be revoked with or without the consent of the President or the Collector of Customs, Madras.

Item 72A(ii) of the Indian Customs and Central Excise Tariff reads as under : All spare parts, other raw materials (including semi-finished material), or consumable stores imported, as a part of a contract or contracts, registered in terms of Sub-item (i), provided the total value of such spare parts, raw materials and consumable stores are up to such value as does not exceed ten per cent of the value of the goods covered by Sub-item (i) and further provided that such spare parts, raw materials or consumable stores are essential for the maintenance of the plant or project mentioned in Sub-item (i).

In the instant case, under the above provisions of Section 143, the assessee has executed a bond undertaking to pay the difference between the duty provisionally assessed and the duty finally assessed in respect of each consignment and the said amount may be recovered in the manner laid down in Sub-section (1) of Section 142 of the Customs Act.

In the assessee's case, provisional assessments have been made for the years in which imports have been made and demand raised thereunder is allowed as deduction. The final assessments have not yet been made.

Hence, no final demand has been raised. In view of the provisions of Section 143 and the bond having been executed thereunder, the liability for the payment of additional duty arises only when the final assessment has been made. The words used in Section 143 are 'notwithstanding anything contained in this Act or such other law'.

Irrespective of the other provisions in the Act or any other law or Item 72A of the Indian Customs and Central Excise Tariff, once a bond is executed under Section 143 and after the provisional assessment is made, additional liability will arise only when the final assessment is made and the final demand is raised. Till then there is no liability for additional duty. Once bond is executed, it is the terms of that bond that would prevail and the other provisions of the Customs Act or any other law or tariff would not be applicable. The liability arises only when the final assessment is made and the demand is raised. The legal opinion given by the assessee's advocate cannot be accepted as an authority. Coming to the interpretation of Item 72A(ii), in order to minimise the customs liability, it is possible for an importer to argue before the customs authorities that imports of all spare parts, etc., would attract a duty at 40 per cent up to a total value of 10 per cent of total imports of machinery, etc., and, only on the excess, a higher duty will be leviable. The customs authorities may as well decide the issue against the assessee. As this is a matter involving interpretation of the Customs Tariff Rules, the final decision in this behalf has necessarily to come from the customs authorities and the appellate authorities. It is precisely for this reason that Section 143 also prescribes that the assessee has to execute a bond for the payment of additional customs duty that may become payable when the final assessment is made. Thus, we are unable to accept the contention of the assessee that the liability of additional customs duty has arisen in this year. Whatever be the interpretation of Item 72A, in view of the provisions of Section 143 and the bond executed thereunder, the liability for additional customs duty will arise only when the final assessment is made and additional liability is demanded. Till then there is no additional liability which arises in this year. Thus, the claim for additional liability of Rs. 55,70,000 cannot be allowed as a deduction as no liability for additional duty has arisen in this year.

5. In Pope The King Match Factory v. CIT [1963] 50 ITR 495 (Mad.) a demand for excise duty amounting to Rs. 21,373 was served on the assessee by the Collector of Excise on 9-12-1954. The assessee debited this amount in its accounts and claimed the same as deductible allowance though the demand was contested in appeal. The claim was disallowed. The matter was carried to the High Court. The Madras High Court held that the assessee had incurred an enforceable legal liability on and from the date on which he received the Collector's demand and that accrued liability was a proper allowance. The assessee was entitled to debit the amount as an accrued liability and the amount was properly debitable in computing the assessee's income. It was observed as under : The true question to be considered in this case is whether the assessee had incurred an enforceable legal liability on and from the very date he received the Collector's demand for payment which was dated December 9, 1954. If he had incurred such liability undoubtedly the amount of excise duty was due and payable by him and that accrued liability would be a proper allowance in computing the income of that year, namely, the accounting year 1954-1955 (April 13, 1954 to April 13, 1955). The endeavour made by the assessee to get out of that liability by preferring appeals to the statutory authorities cannot in any way detract from or retard the efficacy of the liability imposed upon him by the competent excise authority levying the duty and making the demand for payment of that duty. (p.

499) This decision has been approved by the Supreme Court in the case of Kedamath Jute Mfg. Co. Ltd. (supra). The same view has been taken by the Bombay High Court in the case of CIT v. Central Provinces Manganese Ore Co. Ltd. [1978] 112 ITR 734. In this case, provisional demand was raised initially. Subsequently, final demands were raised. The additional demand was claimed as deduction which was disallowed on the ground that neither the payment has been made in this year nor the payment has been accepted. On appeal, the Tribunal allowed the additional demand. The matter was carried in reference. The Bombay High Court held that the Tribunal was right in taking the view that the assessee was entitled to deduction.

6. In T.M. Abdul Rahim Sahib & Co. v. CIT [1963] 50 ITR 508 (Mad.) demand notices were issued by the excise authorities for the payment of excise duty. The assessee claimed the amounts as deduction which was disallowed. On those facts, the Madras High Court held that the liability to pay excise duty arose only after the determination of the quantum of duty and as the liability to pay arose in the assessment year 1954-55, the amount was allowable as business expenditure in that year. It was observed as under : ...As we have pointed out, there can be no liability, either notional or legal, unless and until a demand had been made by the appropriate authority. A demand in the exercise of the lawful authority conferred by the Central Excise and Salt Act imposes a legal liability upon the assessee and it is only at that point of time that he is called upon to incur the expenditure in question. It may be that the loss in processing was discovered at an earlier point of time, but that circumstance did not, as we have pointed out, impose a liability upon the assessee to pay any amount of tax.

The determination of the quantum of tax was within the exercise of the administrative discretion conferred upon the excise authorities and till they determined that the assessee was liable to pay any amount, there was no question of any liability arising. It is not disputed that such demands were made only during the accounting year relevant to the present assessment year and it should necessarily follow that it was a liability that arose and was discharged during that account year.(p. 512) Thus, it was held therein that there can be no liability either notional or legal unless and until a demand had been made by the appropriate authority.

7. The ratio laid down therein squarely applies to the instant case.

The decision in the case of Kedarnath Jute Mfg. Ltd. Co. (supra) is a case dealing with sales tax liability. It was held by the Supreme Court that the moment a dealer made either purchases or sales which were subject to sales tax, an obligation to pay tax arose. The liability for payment of tax was independent of the assessment. The assessee, which followed the mercantile system of accounting, was entitled to deduct from the profits and gains of the business, liability to sales tax which arose on sales made by it. The above decision has no application to the facts of the instant case. As already pointed out, under the Customs Act, normally, when goods are imported that is the point of levy of customs duty. The statutory liability arises at the point of import. But in the instant case, the provisions of Section 143 have been applied and under that provision a bond has been executed by the assessee. When goods were imported, a provisional demand was raised which has been paid by the assessee. As per the bond executed, the difference between the provisional assessment and the final assessment shall be paid by the assessee. In view of the provisions of Section 143 and the execution of bond thereunder, the payment of additional duty will arise only when the final assessment is made. In view of these facts, the decision of the Supreme Court in Kedarnath Jute Mfg. Co.

Ltd.'s case (supra) is not applicable to the facts of the instant case.

In our view, the Commissioner (Appeals) was not right in applying the ratio laid down therein to the facts of the instant case. The decisions of the Madras High Court in the case of Pope The King Match Factory (supra), which has been approved by the Supreme Court in the above case and in T.M. Abdul Rahim Sahib & Co.'s case (supra), would govern the instant case. Thus, on a careful consideration of the entire facts, we are of the view that the provision made for the additional customs liability of Rs. 55,70,000 is not allowable as deduction in this year and the Commissioner (Appeals) was wrong in allowing the same. Thus, we reverse his order on this point and restore the disallowance of Rs. 55,70,000.

8. The next item is with regard to the addition of Rs. 35,81,189 added by the ITO as undervaluation of work-in-progress, but deleted by the Commissioner (Appeals). The assessee has all along been valuing the work-in-progress at material cost plus direct wages. For the first time, as on 31-12-1976, relevant for the assessment year 1977-78, a change in the method of valuation has been adopted and the closing work-in-progress has been valued at material cost only. In the annual report for the year ending 1976, in item 10 of Schedule IT, it is stated as under : There has been a change in the mode of valuation of the closing work-in-progress, inasmuch as it has been valued at Material Cost as against the earlier practice of valuing the same at Materials Cost plus Direct Wages. This change has resulted in a reduction of profits to the extent of Rs. 35,81,189 for the year 1976.

In the director's report, there is no reference to the change in the method of valuation of closing work-in-progress. The assessee, in its letter dated 22-8-1978, which is extracted in the assessment order, explained that the direct cost is basically the input of raw materials and components and labour cost is not as directly related to the level of production as the cost of raw materials. Many companies in the recent past have already switched over to this basis for the valuation of work-in-progress inventory. Hence, the valuation of work-in-progress on the basis of the material cost is considered as more appropriate.

Thus, it was urged before the ITO that the change in the valuation of work-in-progress, should be accepted. The ITO refused to accept the change in the valuation of work-in-progress.

He held that there is no valid reason, necessity and basis for changing the method of valuation of work-in-progress. Thus, he made an addition of Rs. 35,81,189 as undervaluation of work-in-progress. On appeal, the Commissioner (Appeals) held that the valuation by reference to materials cost only has to be accepted as a recognised method of valuation. The assessee is entitled to change the method followed in the past. The rejection of the method adopted by the assessee and the addition of Rs. 35,81,189 as a result are not justified. Thus, he deleted the addition.

9. Mr. George, the learned departmental representative, strongly urged that for more than two decades the assessee has all along been following the method of valuing the work-in-progress at material cost plus direct wages. The change made in this year in valuing it at material cost is not a recognised one in the accountancy practice. It is also not a bona fide change. By adopting the cost of material only and excluding the direct wages, etc., the value of work-in-progress is reduced and the value of the finished product is thereby increased.

This does not reflect the real profits earned in this year. The accepted method of valuation of work-in-progress is material cost plus direct wages. In this connection, he referred to some authorities on accountancy and also to the notes in The Chartered Accountant, December 1978 issue. Mr. Mehta, the learned counsel for the assessee, strongly urged that the change in the valuation of work-in-progress in this year is a bona fide one and it is according to the accountancy practice and a recognised method. He submitted that a large number of companies have switched over to this method and, thus, it is a commercially recognised method. He also referred to the notes in The Chartered Accountant, December 1978 issue and submitted that direct wages need not be taken into account in valuing the work-in-progress.

10. We have considered the rival submissions. The question of valuation of work-in-progress has been considered in some of the text books on accountancy. In Advanced Accounting by Jamshed R. Batliboi, 24th edition, it is observed as under : Work-in-progress - In a manufacturing concern, the item 'work-in-progress' would mean goods in process of manufacture, whereas in case of a contractor, the same expression would mean work partly executed but not completed. Where a separate manufacturing account is prepared, work-in-progress at commencement will appear on the debit and that at the end of the financial period will appear on the credit side of the manufacturing account. Great care should be taken in valuing work-in-progress. The basis of valuation considered as sound and correct and the one that is generally followed in practice is the cost of raw materials and direct wages plus a reasonable proportion of works on cost, i.e., manufacturing expenses.

Manufacturing Expenses or Factory Charges - Under this head are generally included all the various expenses which have a direct bearing on the running of the factory or works, such as Factory Rent, Factory Insurance, Motive power, Engine-room Stores, Non-productive Wages, Factory Lighting, Repairs of Plant, Depreciation on Plant, etc. (pp. 59-60) It is pointed out therein that the basis of valuation which is considered as sound and correct and generally followed is the cost of raw materials and direct wages plus a reasonable proportion of works on cost, i.e., manufacturing expenses. In Wheldon's Cost Accounting and Costing Methods, 14th edition (Chapter 21), it is observed as under : It will be understood that in many firms manufacture is on a continuous basis, so that at the end of any given period some uncompleted work remains to be carried forward to the next period.

This work-in-progress consists of direct materials, direct labour and production overhead. (p. 405) In the discussion in that chapter, it is pointed out that material cost, direct labour and overhead expenses are to be taken into account in valuing the work-in-progress. This is clear from the examples pointed out in that chapter. In fact, it is observed as under : Work-in-progress - These units are not yet completed, but according to the estimate will be charged with 100 per cent of material cost and 50 per cent of labour and overhead charges. (p. 409) Thus, it is clear that in valuing work-in-progress the material cost as well as labour and overhead charges are to be taken into account. In the same book it is observed as under : If we undervalue the closing work-in-progress because we say it has not been completed, then all we should succeed in doing would be to push up the materials cost of the completed work in an unfair manner. (p. 405) It is clear from the above passage that if there is an undervaluation of the work-in-progress, the value of the completed work would go up in an unfair manner. Even according to the text book on Accountancy by William Pickles, 3rd edition at page 1278, it is clear that to the material cost, the labour and overhead charges are to be added in valuing the work-in-progress.

11. Thus, the above authorities on accountancy clearly indicate that the correct and accepted method of valuing the work-in-progress is material cost as well as labour and overhead expenses. In the Discussion Paper on Accounting Treatment for Excise Duties published by the Institute of Chartered Accountants of India in The Chartered Accountant, Vol. XXVII, No. 6, December 1978 issue, paras 25 and 26 which are relevant read as under: 25. A manufacturing expense may be a direct cost or an overhead. A direct cost is an expense which is specifically attributable to units of production. An overhead on the contrary, is an expenditure which is related to the general environment in which manufacture takes place and normally accrues wholly or partly on a time basis.

Thus, where manufacturing wages are paid on a time basis, e.g., per month, they may be considered as an overhead. But where manufacturing wages are paid on a piece work basis, they must necessarily be considered as a direct manufacturing cost.

26. The above considerations must hold good whether the method of determination of cost is based on 'direct costing' or 'absorption costing'. Where the 'direct costing' system is used, the products manufactured bear only their share of manufacturing variable costs of the period. When the 'absortption costing' system is used the products bear an appropriate share of all costs associated directly or indirectly with the manufacturing activities of the period.

It is mentioned in para 25 that a manufacturing expense may be direct cost or an overhead. Where manufacturing wages are paid on a time basis, e.g., per month, they may be considered as an overhead. But where manufacturing wages are paid on a piece work basis, they must necessarily be considered as a direct manufacturing cost. It is clear from para 26 that when the absorption costing system is used, the products bear an appropriate share of all costs associated directly or indirectly with the manufacturing activities of the period. This para does not support the assessee's plea. Even if the manufacturing wages are paid on a time basis, e.g., per month, they have to be considered as overhead expenses as stated in para 25. Even then, the overhead expenses have to be added to the material cost as pointed out in various other text books referred to earlier. Thus, the above passage also does not help the assessee. Even in the commentary on the Law and Practice of Income-tax by Kanga and Palkhivala, 7th edition, Vol. 1, it is observed as under : ...The value of work-in-progress may be arrived at by the direct cost method under which the cost of direct materials and labour are alone taken into account, or by the on-cost method under which a proportion of indirect expenditure, i.e., factory and office expenses, is added to the direct cost....(p. 879) The above passage also does not support the assessee's case. Thus, in our view, the change in the method of valuation of work-in-progress from material cost plus direct wages to material cost alone is not correct. The proper method recognised in the accountancy principles is cost of material and direct wages which was followed by the assessee all these years. No reasons have been given in the director's report for the change of the method of valuation of work-in-progress. Even in the assessee's letter dated 22-8-1978 filed before the ITO, no valid reason is given. The argument put forth in that letter that the labour cost is not directly related to the level of production as the cost of material components is not correct as pointed out by us with reference to various texts books on accountancy, jn valuing the closing work-in-progress, material cost as well as direct wages have to be added, otherwise, the value of closing work-in-progress will be less and the value of the finished goods will be more and it will not reflect the correct position. Merely because some other companies have adopted the method of valuing the closing work-in-progress at material cost, the assessee cannot adopt such method. We do not know whether those companies were adopting that method from the beginning or they had changed to that mode in the middle and for what reasons. There may be number of companies also which may be following the method of material cost and direct wages. We cannot be guided by the practice followed by few companies. What is to be examined is what is the correct method of valuing the closing work-in-progress. In our view, the correct method of valuing the closing work-in-progress is material cost plus direct wages. This is the method which the assessee has been following consistently all along for more than two decades. If the assessee has been consistently adopting a particular method in the past, it should not be changed unless there are very good reasons. In B.S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes) [1972] 83 ITR 269, the House of Lords held that if a method had been consistently applied in the past, it should not be changed unless there were good reasons sufficient to outweigh any difficulties. In the instant case, no good reasons have been given for the change in the method in this year. The only reason given by the assessee is that some other companies have adopted this method. That cannot be a proper and valid reason for the assessee to change the method consistently adopted at material cost and direct wages in the past to the method of valuing at material cost only. The decision of the Calcutta High Court in British Paints India Ltd. v. CIT [1978] 111 ITR 53 is distinguishable. In that case, the assessee had been following the practice in the past to value the goods-in-process and finished goods at the cost of raw materials only.

It was also noticed that paintings had very short shelf life. On those facts, it was held that there was evidence that the method followed was a regular method having regard to the nature and type of business carried on by a particular assessee. That decision has no application to the instant case as there, from the beginning, the work-in-progress was valued at material cost whereas in the instant case, the regular method followed by the assessee all along was material cost plus direct wages and in this year, the method has been changed to material cost.

The product manufactured by the assessee is not one which had short shelf life as was the position in the above case. Hence, that decision has no application. In fact, in that very decision it is observed as under : ...But the method adopted and regularly followed by the assessee and accepted by the revenue should not be departed from unless there is good reason for the same....(p. 63) We have already pointed out that no good reasons have been shown for the change in the method. Thus, in our view, the change in the method adopted in this year is not abonafide one. The correct and recognised method of valuing the closing work-in-progress is only material cost plus direct wages. The change adopted by the assessee in this year is not a valid one and cannot be accepted. The Commissioner (Appeals) was wrong in holding that the valuation by reference to material cost only has to be accepted as a recognised method of valuation and commercially recognised one. The other decisions relied on by the Commissioner (Appeals) have no bearing with regard to the valuation of work-in-progress. In Chainrup Sampatram v. CIT [1953] 24 ITR 481, the Supreme Court held that the closing stock is to be valued at cost or market price, whichever is lower. This decision was followed by the Madras High Court in Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22.

In this case, the bank valued the securities at cost at the commencement of 1951 but valued them at the market value at the end of 1951. This was done as the Reserve Bank allowed the scheduled banks to value their holdings of securities at the current market price. Thus, in that case, the Reserve Bank had allowed the assessee-bank to value their holdings of securities at the market price. There is no such circumstance in the assessee's case. Further, the assessee has not valued the closing work-in-progress at cost or market price, whichever is lower, as laid down in the above cases. Thus, in our view, the reasons given by the Commissioner (Appeals) in accepting the change in the method of valuation of the closing work-in-progress by reference to material cost are not valid and cannot be upheld. Thus, we reverse his order on this point and restore the addition of Rs. 35,81,189.

12. The next item is with regard to the filing fee of Rs. 66,920 paid to the Registrar of Companies. The assessee has paid filing fee amounting to Rs. 66,920 to the Registrar of Companies for the increase of its authorised capital. The ITO held that it is a capital expenditure and allowed the same. On appeal, the Commissioner (Appeals) allowed it as revenue expenditure.

13. Mr. George, the learned departmental representative, submitted that filing fees paid to the Registrar of Companies was for the increase in its authorised capital. Hence, it is a capital expenditure. He referred to few decisions. Mr. Mehta, the learned counsel for the assessee, submitted that the increase in authorised capital was effected to facilitate issue of bonus shares. No capital has come in. The reserve is converted to issue bonus shares. Thus, the fees paid is allowable as revenue expenditure. For this point he relied on a decision of the Bombay High Court in Bombay Burmah Trading Corporation Ltd. v. CIT [1983] 12 Taxman 178.

14. We have considered the rival submissions. The decision of the Madras High Court in CIT v. Kishenchand Chellaram (India) (P.) Ltd. [1981] 130 ITR 385, relied on by the Commissioner (Appeals), has not been accepted by many other High Courts. That was a case where the authorised capital was increased by issuing fresh shares. Hence, that decision is slightly different but the decision which is directly on the point is the one of the Bombay High Court in Bombay Burmah Trading Corpn. Ltd.'s case (supra).

The Bombay High Court held that the sum of Rs. 5,250 incurred by the assessee by way of fees paid to the Registrar of Companies in connection with the issue of bonus shares was allowable as revenue expenditure. So far as the fees paid to the Registrar of Companies for enhancement of capital was considered, it was held that it was a capital expenditure. The decision of the Madras High Court, referred to above, was not accepted in this case.

15. In the instant case, the increase in the authorised capital is by way of issue of bonus shares. Thus, the fees paid to the Registrar of Companies for increase in the authorised capital by issue of bonus shares is revenue expenditure. The ratio laid down by the Bombay High Court in the above case squarely applies to the instant case. For the above reasons, we uphold the allowance of Rs. 66,920 as revenue expenditure.

16. The next ground is with regard to the sum of Rs. 13,13,169 allowed by the Commissioner (Appeals) as gratuity liability relating to this year. The assessee had raised an additional ground before the Commissioner (Appeals) in respect of a sum of Rs. 31,48,082 being provision for gratuity for the year 1976 made in the accounts on actuarial basis. This ground was not raised before the ITO. It was raised as an additional ground before the Commissioner (Appeals) which he admitted. The admission of additional ground is objected in this appeal. In our view, the Commissioner (Appeals) is justified in admitting the additional ground as all the facts were on record. On merits, the Commissioner (Appeals) held that it is an additional provision for gratuity made in the accounts for the year 1976 based on actuarial valuation. It is a provision made for the purpose of payment by way of contribution towards an approved gratuity fund within the meaning of the provisions of Section 40A(7)(b)(i) of the Income-tax Act, 1961. As per the actuarial valuation, the net liability for the payment of gratuity during the year 1976 is only Rs. 32,20,812. A sum of Rs. 19,07,643 has already been allowed as deduction on the basis of the assessee's claim and if a further sum of Rs. 31,48,082 is allowed as deduction, it will be in excess of the net actuarial liability for the year. Thus, he held that the assessee's claim to deduct the sum of Rs. 31,48,082 can be allowed only to the extent of Rs. 13,13,169, i.e., Rs. 32,20,812 minus Rs. 19,07,643. Accordingly, he directed the ITO.17. Mr. George submitted that it is a future liability on the basis of actuarial valuation and it does not come under Section 40A(7)(b)(i).

Hence, it is not allowable. The Commissioner (Appeals) was wrong in allowing the same. Mr. Mehta submitted that the liability for this year as per the actuarial valuation is Rs. 32,20,812. The provision made relates to the liability of this year. It has been paid to the trust in the next year. Since the assessee maintains accounts on mercantile system, the provision made is allowable. The Commissioner (Appeals) was right in allowing the sum of Rs. 13,13,169.

18. We have considered the rival submissions. As per the certificate dated 6-2-1977 of Shri R. Rarnaswamy, the actual value of the net liability for payment of gratuity arisen during the year 1976 is Rs. 32,20,812. A sum of Rs. 19,07,643 has been allowed as deduction on the basis of the assessee's claim. The balance of Rs. 13,13,169 has been rightly allowed by the Commissioner (Appeals). Section 40A(7)(b)(i) reads as under : (18) any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year ; The assessee comes under the first part of the above provision. The above Sub-section in the first part speaks of the provision made for the purpose of payment to the trust. The second part speaks of the actual payment. The amount actually paid is allowed and there is no dispute about it. The dispute is with regard to the provision made with regard to the gratuity liability of this year. This is a provision made for the gratuity liability of 1976 for the purpose of payment by way of contribution towards an approved gratuity fund. The payment has been made to the trust in the next year. Thus, the Commissioner (Appeals) was right in allowing the deduction of Rs. 13,13,169 being the gratuity liability of 1976 for which provision is made for the purpose of payment to the trust. Thus, we uphold the order of the Commissioner (Appeals) in allowing the sum of Rs. 13,13,169.

19 to 41. [These paras are not reproduced here as they involve minor issues.]


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