2015 (1) TMI 435 - HC - Income Tax

Hireing of plastic moulds - Nature of expenditure incurred on plastic moulds - TDS liability u/s 194C - Applicability of findings recorded by the Settlement Commission relating to valuation of good for levy of excise duty in the Income tax proceedings - Held that - There is no dispute about the payments made by the respondent-assessee to the overseas group entities for hire of moulds. The international transactions were not made subject matter of any transfer pricing adjustments. - it is difficult to understand the logic and reasoning of the Assessing Officer and the stand of the Department that hire charges paid for the moulds, which were used to manufacture the products sold by the respondent-assessee after being manufactured at their behest and cost, should not be treated as expenditure under Section 37(1) of the Act. TDS u/s 194C- Held that - Reliance placed on Section 194C is also misconceived as the respondent-assessee had not charged any amount from Dart Manufacturing India Private Limited and Innosoft Technology Limited. In fact, Section 40(a)(ia) was not invoked and applied by the Assessing Officer. On hire charges paid to the overseas group companies, tax at source would have been deducted under Section 195 of the Act. It is not stated that tax at source had not been deducted. Provision for obsolete stock - valuation of stock - Held that - One cannot appreciate and understand how the principle of matching can apply, without examining the question whether the market price of obsolete and unsalable items was less than or lower than the manufacturing costs. If the market price of obsolete or unsaleable items is less than or lower than the cost price, the said position can be the basis for computing closing stock. It is noticeable that the respondent-assessee has been following this practise for several years and similar issue had arisen in the assessment year 2005-06, but the Revenue has not filed any appeal in respect of the said year. In fact, in the assessment year 2008-09, some of the obsolete items were sold and sale consideration received has been duly accounted for. This fact has been noted by the Tribunal in the impugned order. Thus, on the second issue, we see no reason to interfere. - Decided against Revenue.

Summary

Issues:
1. Disallowance of expenditure on plastic moulds by the Assessing Officer.
2. Provision of obsolete stock by the respondent-assessee.

Issue 1: Disallowance of Expenditure on Plastic Moulds
The Assessing Officer disallowed the expenditure on plastic moulds incurred by the respondent-assessee for assessment years 2006-07, 2007-08, and 2008-09. This disallowance was based on the Settlement Commission's order under the Central Excise Act, 1944, regarding the manufacturing cost and excise duty. However, the High Court noted that the valuation for excise duty purposes does not correlate with the deductibility of the rent paid for moulds under Section 37(1) of the Income Tax Act, 1961. The respondent-assessee imported moulds on a hire basis and provided them to contract manufacturers. The court emphasized that the expenditure met the conditions of Section 37(1) and was wholly and exclusively for business purposes. The hire charges for the moulds were legitimate business expenses and should be allowed as a deduction.

Issue 2: Provision of Obsolete Stock
In the assessment year 2007-08, the respondent-assessee made a provision for obsolete stock amounting to a specific sum. This provision was based on the principle that closing stock should be valued at the cost price or market price, whichever is lower. The High Court acknowledged this principle but raised concerns about the Assessing Officer's application of the matching principle without evaluating how the market price of obsolete items was determined. The court highlighted that the valuation of closing stock based on market price should be supported by a proper computation method, not just arbitrary decisions. Despite the lack of detailed examination by the Assessing Officer, the court found that the respondent-assessee had consistently followed this valuation practice. Additionally, the court noted that some of the obsolete items were sold in the subsequent year, and the sale proceeds were duly recorded. Consequently, the court found no justification to interfere with the respondent-assessee's provision for obsolete stock, leading to the dismissal of the appeals.

In conclusion, the High Court dismissed the appeals by the Revenue concerning the disallowance of expenditure on plastic moulds and the provision for obsolete stock by the respondent-assessee. The judgment emphasized the distinction between excise duty valuation and income tax deductions, ensuring that legitimate business expenses are recognized and allowed under the relevant tax provisions.