1998 (1) TMI 68 - HC - Income Tax

High Court rulings on ITC cases: valuation methods, guarantee commission, direct cost basis upheld

The High Court dismissed ITC Nos. 40 and 48 of 1995 and partially allowed ITC No. 57 of 1995. The Tribunal's decision in favor of the assessee regarding ... Business Expenditure, Change In Method, Question Of Law, Supreme Court, Travel Expenditure Issues Involved:1. Change in the method of valuation of closing stock.2. Admissibility of guarantee commission as revenue expenditure.3. Admission of fresh ground regarding special excise duty.4. Valuation of opening stock on direct cost basis.5. Application of rule 6D for disallowance of expenditure on tours.Summary:Issue 1: Change in the Method of Valuation of Closing StockThe primary controversy centered around the change in the method of valuation of closing stock. The assessee-company had followed a consistent method of valuation up to the assessment year 1979-80. The Tribunal found in favor of the assessee, stating that a taxpayer is free to employ his own method of keeping accounts and valuing stock-in-trade. The Tribunal opined that the method adopted by the assessee was in accordance with the accounting standards published by the Institute of Chartered Accountants of India. The Tribunal confirmed the decision of the Commissioner of Income-tax (Appeals) in allowing the change in the method of accounting sought by the assessee. The High Court upheld this view, stating that the method of accounting regularly employed may be discarded only if the income of the trade cannot be properly deduced therefrom.Issue 2: Admissibility of Guarantee Commission as Revenue ExpenditureFor the assessment year 1981-82, the Tribunal held that the guarantee commission paid to the bank was a revenue expenditure. This was supported by the Supreme Court's decision in Asst. CIT v. Akkamamba Textiles Ltd. and CIT v. Sivakami Mills Ltd., affirming that such commission is an admissible deduction u/s 37(1) of the Income-tax Act, 1961. The High Court found no reason to question this conclusion.Issue 3: Admission of Fresh Ground Regarding Special Excise DutyThe Tribunal was justified in confirming the decision of the Commissioner of Income-tax (Appeals) for admitting a fresh ground regarding the claim of special excise duty, in contravention of rule 46A. The High Court did not find it necessary to address this issue further as it was not pressed by the Revenue.Issue 4: Valuation of Opening Stock on Direct Cost BasisThe Tribunal directed the Assessing Officer to value the opening stock on a direct cost basis and accordingly adopt the closing stock of the earlier year as the opening stock on a direct cost basis. The High Court upheld this decision, noting that the method adopted by the assessee was a recognized and scientific method, and having been allowed for the assessment year 1976-77, it was not going to cause any loss to the Revenue.Issue 5: Application of Rule 6D for Disallowance of Expenditure on ToursThe Tribunal held that for the purpose of applying rule 6D, a disallowance should have been made by aggregating expenditure incurred on various tours undertaken by an employee in a year. The High Court directed the Tribunal to draw up a statement of the case and refer this question for the opinion of the High Court, as it was a question of law arising from the order of the Tribunal.Conclusion:The High Court dismissed ITC Nos. 40 and 48 of 1995 and partially allowed ITC No. 57 of 1995, directing the Tribunal to refer the question regarding the application of rule 6D for the High Court's opinion. There was no order as to the costs.