1. This appeal is by the revenue. The revenue challenges the deletion of Rs. 80,000 paid by the assessee to the Administrative Staff College of India. This was paid for undertaking study of the working of the factory with a view to improve its efficiency. The ITO was of the opinion that such expenditure had resulted in an enduring advantage to the assessee and, therefore, was capital in nature. It was urged before the Commissioner (Appeals) that the fees were paid to the Administrative Staff College of India for studying the working of the factory and giving suggestions for reorganisation of the stores department and the expenditure was of a revenue nature. The Commissioner (Appeals) agreed with the assessee.
2. In the revenue's appeal, it is contended that the above expenditure is capital in nature. By applying the usual tests for determining whether an expenditure is of capital or revenue nature, we have no hesitation in holding that the expenditure incurred by the assessee, in order to rationa- lize its working, is not capital in nature. We reject the ground raised by the revenue in this regard.
3. The next objection is to the direction of the Commissioner (Appeals), deleting the addition of Rs. 3,35,688 made by the ITO under shortages. The assessee claimed a shortage of Rs. 6,71,376. The claim in the earlier year was only Rs. 91,000. The assessee's claim before the ITO was that in the relevant year of account, it took an exhaustive inventory and found shortages to the extent of Rs. 6,71,376. The ITO was of the opinion that the shortage was not attributable for this year only and disallowed the claim to the extent of Rs. 3,35,688. Before the IAC, under proceedings of Section 144B of the Income-tax Act, 1961 ('the Act'), it was submitted that the fact that shortages written off during the year are far in excess of the claim in the earlier year, cannot be the sole reason for not admitting the claim in full. The number of items were large and it was not possible to under take verification every year. The items were verified on a selective basis and shortages adjusted after verification. An exhaustive list of shortages and excesses on various items was given to the IAC. According to the assessee, the discrepancies arose since materials were drawn without indent when they were required urgently. To avoid the recurrence of such irregular accounting, the company sought the services of the Administrative Staff College of India at Hyderabad. It was thus urged before him that the full claim was allowable. The IAC on an ad hoc basic allowed half the claim made by the assessee.
4. The Commissioner (Appeals) noticed that the IAC noted the contentions urged on behalf of the assessee. He held as follows : ...It appears to me that in the light of the contentions noted by the IAC himself, the conclusion to which he came is not justified.
For instance, it has been noted that the shortages which were found during the year after physical verification had been exhaustively recorded in the register and this register was produced to auditors for verification and there was no adverse comments relating to these shortages. The IAC has also noted that the fact that shortages written of during the year were far in excess of the previous year, cannot be the sole reason for not admitting the entire amount of Rs. 6,71,376. It had been explained to him that the number of items being large, it was not possible to undertake verification each year and, therefore, items were physically verified on selective basis and shortages adjusted after verification. It had also been noted by him that he had been given an exhaustive list of items found in excess and found short during inventory. From the letter dated 11-8-1981 filed by the appellant before the IAC and the proceedings under Section 144B dated 13-8-1981 of the IAC, it becomes clear that the appellant became aware of the deficiency only during the accounting year. Hence, the whole of it should be allowed as deduction in computing the income of the year and there is no justification for restricting the allowance to half the amount only.
The disallowance of Rs. 3,35,688 is, therefore, deleted.
5. It was strenuously urged by the learned departmental representative that a loss of one year cannot be shifted to another year. The assessee cannot take embargo under wrong accounting procedure. The raw materials drawn in one year should by debited to the accounts in that year. The shortage noticed in any particular year would be the loss of that year.
It cannot be shifted to another year. He relied upon the decisions in the observations at page 306-Devi Films (P.) Ltd. v. CIT  75 ITR 301 (Mad.) and the observations at page 914-O.RM.OM.SP. Firm v. CIT  52 ITR 907 (Mad.). The learned counsel for the assessee relied on the order of the Commissioner (Appeals).
6. We have heard the rival submissions. We have to observe that the disallowance made by the ITO is on an ad hoc basis. Apparently, the ITO has no basis to say that the shortages relating to the earlier years could be Rs. 4 lakhs nor for the IAC to hold that such shortages amounted to Rs. 3,35,688. It is a fact that the accounting procedures in the factory were not perfect. If shortages are not determined at the end of each accounting year, there is also the possibility of the assessee having returned excess profits in the earlier years. The assessee being a company, the rates of taxation will be uniform. It cannot be said that the assessee was knowingly debiting such shortages in the earlier years and it had anything to gain by claiming all the shortages in one year. In fact, it was submitted by the counsel for the assessee that the shortages were determined periodically as the number of items were too many and it was not possible for the assessee to undertake an exhaustive check of the inventory every year. Having noticed that the accounting procedure required to be streamlined, the assessee sought the services of the Administrative Staff College of India. Hence, it can safely be said that there was no mala fides on the part of the assessee in following the present system of accounting.
Having once accepted the method of determining shortages at periodical intervals and actual verification of stocks once in alternate years, as contended by the learned counsel for the assessee, it is not open to the ITO to challenge that method. No detailed examination of the accounts have been made by the authorities below to correlate the raw materials drawn in various years and the production. In the absence of further investigation, it is not possible to hold that the assessee was deliberately following a wrong procedure in accounting. As already stated by us, the accounting procedure followed by the assessee has been accepted by the revenue in the past. We therefore, do not see any reason to differ from the final conclusion arrived at by the Commissioner (Appeals). The ground raised by the revenue in this behalf is rejected.