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 ... Method of accounting regularly employed by the assessee - valuation of closing stock - bona fide change in accounting/valuation method - retrospective application of change in valuation - power of Assessing Officer to reject method if income cannot be properly deduced - admissibility of guarantee commission as revenue expenditure - aggregation of employee tour expenditures for application of rule 6DMethod of accounting regularly employed by the assessee - valuation of closing stock - retrospective application of change in valuation - bona fide change in accounting/valuation method - power of Assessing Officer to reject method if income cannot be properly deduced - Tribunal's allowance of a change in the method of valuation of closing stock (including its retrospective effect) was not a question of law referable to the High Court. - HELD THAT: - The Court held that the core controversy concerning change in valuation of closing stock and its application to earlier years engages the statutory principle that income under business heads is computed according to the method of accounting regularly employed by the assessee, subject to the Assessing Officer's power to reject a method if it prevents proper deduction of income. The Tribunal found as a factual matter that the change adopted by the assessee was a recognised, scientific method and was bona fide, would be followed regularly and would not cause loss to the Revenue. Those findings are questions of fact and discretion and therefore do not give rise to a question of law warranting a statement of case. The Court declined to direct the Tribunal to refer these questions for the High Court's opinion.No mandamus to the Tribunal to draw up a statement of case on the change in valuation; the question does not arise as a question of law.Entertainment of additional grounds on appeal by Commissioner (Appeals) - Questions concerning whether the Commissioner (Appeals) could entertain additional grounds (as raised by the Revenue) in the appeal for assessment year 1976-77 and related admissions were not pressed before the Court and therefore were not answered. - HELD THAT: - The record shows the Revenue did not press certain questions before the Court. Where questions were not pursued by the Revenue at the hearing, the Court declined to answer them and treated them as not requiring determination.No answer given because the questions were not pressed by the Revenue.Admissibility of guarantee commission as revenue expenditure - The question whether guarantee commission paid to bankers is an admissible deduction was held to be settled by binding Supreme Court decisions and therefore no answer was called for from this Court. - HELD THAT: - Relying on the authoritative decisions of the Supreme Court affirming that guarantee commission paid to ensure deferred payment for machinery is deductible under section 37(1), the Court observed that the law on this point is settled. Consequently, the question raised in ITC No. 48 (assessment year 1981-82) required no further adjudication here.No referable question of law to be drawn on the guarantee-commission issue; law is settled by the Supreme Court.Admission of fresh ground contrary to procedural rule 46A - The issue whether the Tribunal was justified in confirming admission of a fresh ground regarding special excise duty (contrary to rule 46A) was not pressed by the Revenue and was not answered. - HELD THAT: - The Court records that certain contentions relating to admission of fresh grounds were not advanced before it by the Revenue; accordingly, those questions were not decided.Not answered as the questions were not pressed by the Revenue.Aggregation of employee tour expenditures for application of rule 6D - rule 6D - Whether, for the purpose of applying rule 6D, disallowance should be made by aggregating expenditure incurred on various tours undertaken by an employee in a year is a question of law arising from the Tribunal's order and is referable for the opinion of the High Court. - HELD THAT: - The Court concluded that the particular question concerning the construction and application of rule 6D-whether tour expenditures of an employee across multiple tours in a year must be aggregated for disallowance-presents a legal question suitable for determination. Two Division Bench decisions of the Court supported the view that this point is arguable as a question of law arising from the Tribunal's order. Consequently the Court allowed the revenue's application in part and directed the Tribunal to draw up and refer that question of law arising out of assessment year 1981-82 for the High Court's opinion.Tribunal directed to draw up a statement of case and refer the specified rule 6D aggregation question to the High Court.Final Conclusion: Applications ITC Nos. 40 of 1995 (AY 1976-77) and 48 of 1995 (AY 1981-82) are dismissed; ITC No. 57 of 1995 (AY 1981-82) is allowed in part by directing the Tribunal to refer for opinion the question whether expenditures on various tours by an employee in a year must be aggregated for the purpose of applying rule 6D; no order as to costs. 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.