TaxTMI 
TaxTMI 
1985 (6) TMI 96
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...., and framed an assessment on 29-1-1983 under section 143(3) of the Act discussing 19 aspects of the variations to the returned income. These 19 items did not include the question of allowance of deduction claimed under machinery spares for which the directors and auditors' report and notes were staring at him. It is not clear whether the ITO has applied his mind to this aspect. The directors' report dated 9-4-1979 is as under: "10. Write off of machinery spares.---In their report, auditors have referred to Note No. 18 on the profit and loss account, which deals with the writing off of machinery spares. Your directors wish to state that the method now adopted by the company in this report is in line with the modern accounting practice already followed elsewhere." 3. The note No. 18 was as below: "From the year 1978, the company has adopted the practice of writing off machinery spare parts to 'Repairs to plant and machinery' at the time of their purchase instead of charging them to consumption at the time of their issue from stocks. The figures for repairs to plant and machinery for the year therefore include--- (a) Rs. 16,11,203---spare parts purchased during the yea....
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....e become even obsolete individually or collectively. He also held that the spares are used for day-to-day working and have also not been shown to be of no use to other parties collectively or individually. Without prejudice the Commissioner held that at least the scrap value or secondhand value should have been reflected. Accordingly, he set aside the order of the ITO with the observations mentioned in paragraph 1 above. The question whether the ITO in the fresh assessment is going to add Rs. 44,21,741 or lesser figure is, thus, not germane to the issues before us. 7. Shri Dastur did not dispute the basic facts. He, however, contended that the method adopted by the management takes into consideration certain well recognised principles of accountancy approved by the profession. Whilst the assessee-company has given the reason for its departure, though, it was not bound to give, there are other public limited companies having a similar line of thinking. For example, MICO Bangalore, though not referring to it specifically in the directors' report have adopted this method as seen from item 3 of the auditors' report as below: "From the current year, the method of accounting of con....
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....the assessee has a sound scientific basis and that the ITO is bound to accept the same unless he doubts the bona fides or finds that the new method is not consistently followed up in later years. There are no such allegations in this case. Relying on certain observations in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) at p. 175 Shri Dastur submitted that it is proper to refer to manual of auditing and other accountancy literature. He then referred to certain Tribunal judgments regarding a similar item, viz., import entitlements purchase price. It has been held that the unutilised portion of such entitlements need not appear in closing stock. Valuation of stock-in-trade is a necessary requirement of proper accounting but this principle does not apply to spares, packing material, etc., which are not intended for sale as such. He further referred to the case of CIT v. Kusum Products Ltd. [1984] 149 ITR 250 (Cal.) at page 252, regarding valuation of import entitlements remaining unutilised. He then explained his point with reference to case of film distribution rights. Without prejudice, as the assessee's method is cost or market whichever is less, and that the unused spares h....
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....ot aware of the later events. In 1975 the assessee switched from FIFO or average cost and LIFO and the observations of the Third Member in IT Appeal No. 143 of 1979 in paras 15-22 would clearly show that although the assessee is entitled to choose initially any approved method, subsequent changes, if any, in the method have to answer the test prescribed in section 145 particularly as to how the old method which was giving true profits admittedly, would no longer do so. Computation of income cannot be allowed to be distorted beyond the legitimate needs of the occasion. Apart from bona fides, the assessee has to prove the circumstances which warrant distortion and the extent to which section 145 proviso would not apply. Relying on Minister of National Revenue v. Anaconda American Brass Ltd. [1956] 30 ITR 84 (PC), Shri Walvekar contended that a method of accounting not disapproved by accountancy profession does not ipso facto make it a regular method of accounting from which the profits can be deducted. 11. Shri Walvekar then invited our attention to the fact that the assessee has picked only one item for such overstatement of consumption. Why has the assessee not adopted the same ....
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....r literature shows that the Bench was concerned with items of small value. The Bench was also concerned more with capitalisation than with determination of the legitimate outgoings in respect of the current year. Paragraph 5 of the Tribunal's order shows that the nominal value of the materials weighed in the mind of the Tribunal. In the case before us page 21 of the compilation gives classification (broad) below as on 31-12-1978: Rs. Items below Rs. 750 each 10.34 lakhs Items costing less than Rs. 10,000 each 10.41 lakhs Obsolete items &nbs....
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.... of IT Appeal No. 1767 is squarely applicable in this case. 15. We have examined the facts and the arguments. This is the third occasion when the assessee-company has introduced refinements in its accounts. Such an action would doubtless show dynamism on the part of management. It may also represent an effort to keep abreast of the latest innovations in accountancy. We are, however, concerned not so much with accountancy principles as with income computation principles. The provisions of Companies Act as held in Shri Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28 (SC) are primarily meant for the protection of the shareholders and do not affect the tax liability. That book-keeping is not conclusive as established by a number of judgments, e.g., CIT V. Shoorji Vallabhdas & Co. [1959] 36 ITR 25 (Bom.) (write-back of credit by managing agents and Associated Banking Corpn. of India Ltd. v. CIT [1965] 56 ITR 1 (SC). Summary of the case law is given in Sampath Iyengar's Law of Income-tax, Vol. 1, 7th edn., p 55. 16. Section 145 is worded in a manner different from the corresponding section 13 of the Indian Income-tax Act, 1922, insofar as the proviso is concerned. The relevant part of....
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....for permitting the change. 17. The position is summarised in Commentaries on the Law of Income-tax in India, Eleventh edn., Vol. 3 by V.S. Sundaram as below: "It is the duty of the Income-tax Officer, even if there is a regular method of accounting, to consider whether the true income can be deduced therefrom... The method of accounting referred to in this section relates to the method used by the assessee for his own purposes and not to that of making the return of income. Even though the profit as shown in the accounts is not true profit for income-tax purposes it may be possible to deduce it from the accounts and the judgment of the Income-tax Officer must therefore be properly exercised.... Where, therefore, an assessee had built up a secret reserve by systematic undervaluation of stocks over a period of years and the Income-tax Officer... merely took the profit as shown in the assessee-company's profit and loss account and balance sheet by which he held it to be bound, the Income-tax Officer was directed by the Privy Council to make a reassessment. Obviously, he could not conclude that the true profits could be ascertained on the basis of a gross undervaluation---CIT v. ....