1996 (9) TMI 73 - HC - Income Tax

Accounting Year, Assessing Officer, Bad Debt, Bench Of Tribunal, Business Expenditure, Business Income, Cash Payments, Change In Method, Development Allowance, Excise Duty, Expenditure On Scientific Research, High Court, Petition Against Order, Question Of Law, Supreme Court, Weighted Deduction, Write Off

Issues Involved:
1. Valuation of closing stock.
2. Weighted deduction under section 35B.
3. Extra shift allowance.
4. Inclusion of excise duty in the value of closing stock.
5. Cessation of excise duty liability under section 41(1).
6. Bad debt.
7. Perquisites under section 40(c) and section 40A(5).
8. Expenditure on scientific research.

Detailed Analysis:

1. Valuation of Closing Stock:
The questions on the method of valuation of closing stock for the assessment years 1982-83, 1983-84, and 1985-86 arise from the change in the method of accounting adopted by the assessee. The assessee switched from the absorption cost method to the direct cost method, arguing that the latter was a recognized and scientific method. The Tribunal allowed this change, noting it was bona fide and consistently followed in subsequent years. The consolidated question framed is whether this change was rightly allowed, considering it was not intended to defeat the Revenue.

2. Weighted Deduction Under Section 35B:
The assessee claimed weighted deduction on expenditures such as advertisement, marketing, foreign travel, and commissions paid to export agents. The Tribunal allowed 50% of foreign travel expenses and the entire expenditure on advertisement and marketing, holding that these were incurred for promoting sales outside India. The Tribunal found that payments to foreign agents qualified for deductions even without maintaining a branch or agency outside India.

3. Extra Shift Allowance:
The assessee claimed extra shift allowance on plant and machinery. The Tribunal agreed with the assessee's plea that the allowance should be on the basis of the working of the undertaking as a whole, not just the specific number of days the machinery worked extra shifts. The Tribunal's view was that depreciation is normally allowed even if the plant is acquired on the last day of the accounting period.

4. Inclusion of Excise Duty in the Value of Closing Stock:
The Tribunal directed the Assessing Officer to consider the Special Bench's decision in Modi Rubber Ltd.'s case regarding the inclusion of excise duty in the value of closing stock. Since the matter was not finally decided by the Tribunal, no question of law arises from this controversy.

5. Cessation of Excise Duty Liability Under Section 41(1):
The assessee had written back a sum of Rs. 56,02,176 in the books of account after winning a case from the High Court. The Tribunal held that no income had accrued as the matter was pending before the Supreme Court. The Tribunal relied on the Supreme Court's decision in J. K. Synthetics Ltd.'s case, which held that liability to tax under section 41 depends on the outcome of the appeal.

6. Bad Debt:
The assessee wrote off Rs. 1,71,73,148 as bad debt. The Tribunal allowed this deduction, noting that the resolution to write off the debt was passed by the board of directors and the entry was made in the relevant year. The Tribunal's decision was based on the financial position of the debtor and the timing of the resolution.

7. Perquisites Under Section 40(c) and Section 40A(5):
The Tribunal held that expenditures on group medical insurance, medical reimbursement, electricity, water, and gas charges were not to be treated as perquisites while computing disallowance under section 40(c) and section 40A(5). This view was aligned with the Supreme Court's decision in Mafatlal Gangabhai's case.

8. Expenditure on Scientific Research:
The Tribunal allowed deductions under section 35(1)(iv) for expenditures on air-conditioners, coolers, calculators, and fans, as these were used in the research and development wing. The Tribunal's decision was based on section 43(4)(ii), which includes expenditures incurred for providing facilities for scientific research.

Conclusion:
The Income-tax Appellate Tribunal is directed to state the case and refer to the court for its opinion on the questions of law framed concerning the valuation of closing stock, extra shift allowance, bad debt, and expenditure on scientific research. Ordered accordingly, with no costs.

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