1991 (3) TMI 216 - AT - Income Tax

Tribunal affirms stock valuation & interest deduction decisions, emphasizes business purpose

Durametallic (India) Limited. Versus Inspecting Assistant Commissioner.

The Tribunal upheld the Commissioner(Appeals)'s decision in the case regarding the valuation of closing stock of imported raw material, emphasizing that ... Closing Stock, Interest On Borrowed Capital, Sale Proceeds Issues Involved:1. Valuation of closing stock of imported raw material.2. Disallowance of interest paid on monies borrowed.Valuation of Closing Stock of Imported Raw Material:The assessee, a company engaged in the production of mechanical seals, disputed the inclusion of customs duty of Rs. 24,72,651 in the valuation of closing stock of imported raw material. The assessee argued that the customs duty paid should be allowed as a deduction u/s 43B, as it was paid during the relevant accounting year but not consumed. The IAC (Asst.) and the Commissioner(Appeals) did not accept this contention, maintaining that the established accounting principles and the provisions of section 43B do not alter the method of valuing closing stock.The Tribunal upheld the order of the CIT(A), emphasizing that section 43B deals with the disallowance of unpaid taxes and does not govern the valuation of closing stock. The Tribunal cited the Supreme Court decision in CIT v. British Paints India Ltd., which mandates that the method of accounting should disclose true profits and gains. The Tribunal concluded that the assessee, having included customs duty in the opening stock, cannot exclude it in the closing stock, as it would result in an arbitrary and distorted valuation.Disallowance of Interest Paid on Monies Borrowed:The Revenue's appeal involved the disallowance of Rs. 2,77,740 as interest paid on monies borrowed, which the IAC (Asst.) attributed to funds diverted to the assessee's subsidiary company. The Commissioner(Appeals) allowed the assessee's claim, noting that the subsidiary was wholly owned by the assessee and the funds could have been advanced from accumulated profits, not borrowed funds.The Tribunal upheld the CIT(A)'s decision, agreeing that the words 'for the purpose of the business' in section 36(1)(iii) should be construed broadly to include the business activities of the subsidiary. The Tribunal found that the assessee's business purpose justified the transfer of funds to the subsidiary and that the profits embedded in the overdraft account were sufficient to cover the advance. The Tribunal concluded that the disallowance was not justified, as the funds were used for business purposes and the CIT(A) had rightly deleted the addition.