TaxTMI 
TaxTMI 
2014 (10) TMI 1026
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..... 31.1 crores) which was brought to tax? 2. Whether the Tribunal was correct in holding that once the valuation of closing stock ischanged, the corresponding opening stock also has to be changed by ignoring the judgment of this Hon'ble Court in CIT. vs. Corporation Bank Ltd., 174 ITR 616? 3. Whether the Tribunal was correct in holding that expenses incurred towards professional charges press announcements statutory fees etc., incurred towards buying back the assessee's shares from its share holders is an allowable deduction? 4. Whether the Tribunal was correct in holding that the proceeds from sale of raw material, stores etc. should be excluded from the total turnover for the purpose of computation of deduction under Section 80HHC of the Act by following the view of its earlier order? 5. Whether the Tribunal was correct in setting aside the finding of the lower authority that the interest component for allowing deduction under Section 80HHC should be computed as per Explanation i.e. at 90% to Section 80HHC of the Act by following the view of its earlier order?" 3. The assessee is a public limited company manufacturing fuel injection pumps, sp....
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....assessee with regard to valuation of inventory was rejected. He proceeded to assess the income to the best of his judgment, based on the material gathered during the course of hearings. After computation of the correct consumption of material, he computed the correct and true profits and the additional profit of Rs. 48,26,21,428/- arising from current year's sales was brought to tax. 5. During the relevant year, the assessee formulated a proposal to buy back equity shares from existing share holders on a proportionate basis and through a tender. In this connection, the company had incurred expenses towards professional charges, press announcements and statutory fees amounting to total of Rs. 27,82,411/- and an expenditure by way of professional fees of Rs. 6,01,250/- as a consequence thereof. The assessee claimed the entire expenditure as revenue expenditure on the ground that it was incurred exclusively for the purpose of the business. However, the assessing authority rejected the said claim on the ground that the said expenditure is incurred in connection with restructuring of share capital and with a view to improve return on equity over a period of time and this is an enduri....
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....ontrary to the Accounting Standard 2 as stated by the auditor's report. It is in that context, the assessee contended in the alternative that in case the method of valuation of closing stock is changed by the assessing authority then the opening stock also has to be revalued on the same basis which argument has been accepted by the Tribunal and the relief is granted to the assessee. 9. The learned counsel for the revenue assailing these findings contends relying on several judgments of various High Courts that there is no obligation to change the valuation in the opening stock because valuation of closing stock is changed. In support of his contention, he relied on judgment of the Madras High Court in the case of Commissioner of Income Tax .vs. Carborandum Universal Limited [149 ITR 758] where at Paragraph 15 it has been held as under:- "Further, even though the change of the method has resulted in a detriment to the Revenue in the year in question, since the method is to be followed consistently year after year in future, this apparent detriment to the Revenue will get adjusted and disappear. Therefore, in view of the findings of the Tribunal that the change of the met....
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....the assessee to apply new method to the closing stock alone without reference to opening stock. The value of the closing stock in the previous year must be the value of opening stock in the succeeding year and, therefore, if the argument of the Revenue is accepted, there cannot be change in the valuation at all. However, the effect of the ruling in Chainrup Sampatram .vs. CIT (1953) 24 ITR 481(SC):TC2R.124 is that there is no rule that the opening stock and closing stock of the same accounting year must necessarily be valued on one and the same basis. It is permissible, therefore, for the assessee to adopt either market value or at cost price to value the closing stock as long as such change in the method of valuation is adopted bonafide and is thereafter continued year to year. In a year where the opening stock value adopted is in one method and closing stock is another, there is bound to be some anomaly in the year of change, but that will get ironed out and absorbed in course of time as the new method of valuation of stock is going to be appliedon a permanent basis thereafter in later years. I derive support for this view from CIT .vs. Carborandum Universal Ltd. (1984) 39 CTR (M....
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....ges which involve no more than a greater degree of accuracy, or a refinement, should not be treated as a change of basis, whether the change results in a higher or a lower valuation. In such cases the new valuation is applied at the end of the year without amendment of the opening valuation. This principle is accepted by all the Courts and therefore in the aforesaid judgments it was held there is no need to change or amend the opening valuation. If such a change in the closing valuation is not bonafide, the revenue is under no obligation to accept it. They could insist on the valuation without the change. 15. But the question now is whether such a change is on account of assessing officer not accepting the valuation given by the assessee. As in this case, if the valuation made by the assessee is not in accordance with the accounting standards 2 and it requires to be brought in conformity with the same then is it necessary to correct the valuation of the opening stock. It is in this context, reliance is placed on the judgment of the Bombay High Court in the case of Commissioner of Income Tax, Bombay .vs. Ahmedabad New Cotton Mills Co.,[AIR 1928 BOMBAY 510] wherein it has been hel....
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....us year, then the ITO may reopen the assessment for the purpose of bringing into tax the income that has escaped assessment. The escapment may be due to undervaluation of stock in the earlier years. But because the income of the earlier year has escaped assessment is not ground for assessing the current year's profit at a distorted figure. The general rule of accountancy is that the value of the closing stock of a year becomes the value of the opening stock of the next year. But in a case like this where the ITO has made an allegation of undervaluation and has valued the closing stock at the market rate rejecting the assessee's valuation, then to arrive at the correct figure of profit, the ITO must also value the opening stock in a similar fasion. If the assessee's method of valuation of the opening stock is accepted and at the same time that method is rejected for valuation of the closing stock, then a highly distorted figure of profit will emerge. This will be beyond the scope of the charging section." 18. The Apex Court in the case of Chainrup Sampatram .vs. Commissioner of Income-Tax, West Bengal [(1953) 24 ITR 481] stated as under:- "The true purpose of crediting t....
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....vision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-Section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act." As is clear from the charging Section, the income tax shall be charged for the year in respect of total income of the previous year of the very person. Therefore, if the basis for arriving at the valuation at the end of year is changed by the assessing authority without correspondingly changing the valuation of the opening stock then it results in charging income on a distorted figure which is not permissible in law. Therefore, when the assessee changes the valuation of the closing stock, there is no necessity to change the opening stock. But when the assessing authority changes the closing stock it becomes obligatory that the opening stock valuation has to be correspondingly changed on the basis of which the valuation of the closing stock is changed in order to arrive at correct figure of tax which is chargeable as tax under Se....
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....ment, it was contendedby the assessee that the aforesaid judgment was rendered with reference to a case where issue of fresh lot of shares which resulted in the expansion of the capital and therefore, it was rightly treated as the capital expenditure. But in the instant case, the effect of buy back of shares resulted in shrinking of the capital. Therefore, there is no expansion of the capital structure of the company and as such that expenditure is revenue in nature. In support of this contention, reliance was placed on the judgment of the Apex Court in Commissioner of Income-Tax .vs. General Insurance Corporation [(2006)286 ITR 232(SC)] where it was held as under:- "The capital base of the company prior to or after the issuance of bonus shares remains unchanged. Issuance of bonus shares does not result in any inflow of fresh funds or increase in the capital employed, the capital employed remains the same. Issuance of bonus shares by capitalization of reserves is merely a reallocationof the company's funds. As observed earlier, the issue of bonus shares by capitalization of reserves is merely a reallocation of company's funds. There is no inflow of fresh ....
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....rise as capital employed had, in fact, gone down. The expenditure incurred had not resulted into bringing into existence any asset. Therefore, it was rightly held to be an expense of revenue nature." 25. In this context, it is equally useful to refer to Section 77(A) of the Companies Act in particular Section 77A(7) which reads as under:- "77A(7)Where a company buy-back its own securities, it shall extinguish and physically destroy the securities so brought-back within seven days of the last date of completion of buy-back." Similarly Section 77AA reads as under:- "77AA.Transfer of certain sums to capital redemption reserve account.-Where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account referred to in clause(d) of the proviso to sub-section(1) of section 80 and details of such transfer shall be disclosed in the balance sheet". From the aforesaid Sections, it is clear that if the company purchases its own shares out of free reserves then the sum equal to the nominal value of the share so purchased shall be transferred to the....