1989 (8) TMI 10 - HC - Income Tax

Summary

Issues Involved
1. Justification of the rejection of the method of valuation of stock of finished goods adopted by the assessee.
2. Entitlement of the assessee to the extra shift allowance at 100% of the normal depreciation in respect of the plant and machinery installed during the year.

Detailed Analysis

Issue 1: Justification of the Rejection of the Method of Valuation of Stock of Finished Goods
The Tribunal referred the question of whether the rejection of the method of valuation of stock of finished goods adopted by the assessee was just and proper. The assessee-company, engaged in the manufacture and sale of ball bearings, had changed its method of valuation of finished goods from the listed selling price less 26% of selling expenses to a new method where the listed selling price was reduced by 30% to 32% for selling expenses and an additional 20% for unrealized profits. The Income-tax Officer rejected this new method, reverting to the earlier method and making additions to the trading account.

The Appellate Assistant Commissioner initially accepted the assessee's contentions and deleted the additions, but the Tribunal later remanded the case for reconsideration. Upon rehearing, the Commissioner of Income-tax confirmed the Income-tax Officer's rejection of the new method.

The Tribunal found that the assessee did not follow a consistent method of valuation, noting changes in the percentage reductions and the introduction of new deductions like excise duty and unrealized profits. The Tribunal held that the method of valuation is part of the method of accounting, and any arbitrary changes not followed consistently year after year could be rejected by tax authorities.

The court agreed with the Tribunal, stating that the assessee's varying methods and lack of consistency justified the rejection of the new valuation method. The court cited the precedent in Champalal Baid v. CIT, which supports the rejection of inconsistent stock valuation methods.

Issue 2: Entitlement to Extra Shift Allowance
The second issue concerned whether the assessee was entitled to an extra shift allowance at 100% of the normal depreciation. The Tribunal held that the allowance for double and triple shifts should be calculated based on the actual days the plant or machinery worked extra shifts, supported by the decision in Anantapur Textiles Ltd. v. CIT.

The assessee's counsel referred to the Kerala High Court decision in CIT v. Punalur Paper Mills Ltd., which followed a C.B.D.T. Circular allowing extra shift allowance for the entire plant or machinery used by a concern without determining the number of days each machine worked extra shifts. The Tribunal, however, adhered to the precedent set by the Calcutta High Court, which required calculation based on actual usage.

The court noted that a subsequent instruction by the C.B.D.T. dated February 26, 1985, simplified the calculation of extra shift allowance by considering the working of the factory as a whole rather than individual machinery. However, this instruction was issued after the Tribunal's decision and was intended to be applied prospectively.

The court concluded that the disallowance of the extra shift allowance was justified under the existing rules at the time of the Tribunal's decision. The court suggested that the assessee could seek relief from the Board based on the new instruction.

Conclusion
1. The court affirmed the Tribunal's decision to reject the new method of valuation of stock of finished goods adopted by the assessee, citing inconsistency and lack of regular adoption.
2. The court upheld the disallowance of the extra shift allowance, noting that the calculation should be based on the actual number of days the machinery worked extra shifts, as per the rules in force at the time of the Tribunal's decision. The court acknowledged the subsequent C.B.D.T. instruction but indicated it would apply prospectively.