2015 (11) TMI 1438 - AT - Income Tax

Capitalization of Insurance Expenses incurred in respect two new Cars - Held that - Disallowance of Assessing Officer on the basis that it is capital expenditure because the same is required to be incurred before the new car can be used. Before CIT(A) reliance was placed by Learned A.R. of the assessee on a judgment of Hon ble Andhra Pradesh High Court rendered in the case of Nathmal Bankatlal Parikh And Company vs. CIT A.P.-III 1979 (8) TMI 46 - ANDHRA PRADESH High Court . Learned CIT(A) has observed in Para 4.3 of his order that this judgment is distinguishable on facts but in our considered opinion CIT(A) is not correct in saying so. In fact this is the ratio of this judgment of full Bench of Hon ble Andhra Pradesh High Court that the question whether a particular expenditure is capital or revenue in nature is only relevant for the purpose of allowing a claim u/s 37(1) of the Act and for allowing the claim of deduction u/s 30 to 36 the condition whether the expenditure is capital or revenue in nature is immaterial. The deduction on account of insurance expenses is allowable u/s 31 of the Act. Therefore for allowing the claim of insurance expenditure u/s 31 of the Act this aspect is not relevant as to whether this is capital expenditure or not as per this judgment of Hon ble Andhra Pradesh High Court. Respectfully following this judgment of Hon ble Andhra Pradesh High Court we hold that the disallowance made by the Assessing Officer and confirmed by CIT(A) on account of payment of insurance premium is not proper and justified. We therefore delete the same. - Decided in favour of assessee. Addition in the value of closing stock - CIT(A) confirming the addition by discarding the recognized method of valuation of closing stock namely weighted average cost as consistently adopted by the assessee and accepted by the Department and by imposing the Fifo- Method of valuation of closing stock by the A.O. - Held that - The addition made by the Assessing Officer is not justified because he cannot reject a recognized method of valuation of closing stock followed by the assessee and accepted by the Department in assessment year 1997-98 and 2004-05 as per assessment orders passed by the Assessing Officer in those years u/s 143(3) of the Act. The judgment of Hon ble Rajasthan High Court cited by Learned A.R. of the assessee rendered in the case of CIT vs. Wolkem India Ltd. (2009 (1) TMI 241 - RAJASTHAN HIGH COURT) also supports this view of us because it was held by Hon ble Rajasthan High Court in this case that if the method of valuation adopted by the assessee is a recognized method it cannot be rejected on the ground that the net realizable value/market value has been determined on the basis of estimate. Respectfully following this judgment of Hon ble Rajasthan High Court and in view of above discussion we hold that the addition made by the Assessing Officer by rejecting the method of valuation of closing stock adopted by the assessee and by adopting FIFO method is not justified. We therefore delete the same.- Decided in favour of assessee. Disallowance of claim of deduction U/s 80IB - Held that - We find that as per the assessment order a clear finding has been given by the Assessing Officer that the assessee has not adduced any documentary evidence to show that the assessee is manufacturing or producing any article or thing. He has also observed that the assessee has employed its sister concern M/s Sunrise Tannery for tanning of raw hides to finished hides and manufacture of shoe upper on job basis as also purchase of finished hides and export thereof. He has also noted that as per schedule of fixed assets there is shoe upper machine of 1, 96, 515/- and embossing plate of 4, 26, 293/- and wages paid are 2, 25, 497/-. He has also noted that the electric power expenses debited to manufacturing account relates to M/s Sunrise Tannery which is borne by the assessee. He has also given a finding that all the hides have been processed on job basis. Learned CIT(A) has also given a finding that no evidence have been brought on record to substantiate that manufacturing and production is undertaken by the assessee to justify its claim of deduction u/s 80IB of the Act. But in the present case this is not coming out that the manufacturing was done by sister concern under direct supervision and control of the assessee because the assessee is not debiting any amount on account of salary being paid to any technical expert who can do this direct supervision and control of the manufacturing process being done by the sister concern. - Decided against assessee.

Issues:
1. Disallowance of General Expenses
2. Capitalization of Insurance Expenses
3. Valuation of Closing Stock
4. Rejection of Assessee's Books
5. Fall in Gross Profit Rate
6. Inconsistencies in AO's Stand
7. Adjustment of Value of Closing Stock
8. Disallowance of Deduction U/s 80IB

1. Disallowance of General Expenses:
The appeal challenged the disallowance of Rs. 5,000 under General Expenses. The Learned A.R. did not press Ground No. 1, leading to its rejection as not pressed.

2. Capitalization of Insurance Expenses:
The issue revolved around the capitalization of Insurance Expenses for two new cars amounting to Rs. 32,112. The Assessing Officer disallowed it as capital expenditure. The CIT(A) upheld the disallowance, but the ITAT disagreed. Citing a judgment of the Andhra Pradesh High Court, the ITAT held that the nature of expenditure is immaterial for allowing the claim under Section 31 of the Income Tax Act. Thus, the disallowance was deemed improper, and Ground No. 2 was allowed.

3. Valuation of Closing Stock:
The dispute concerned the addition of Rs. 26,15,237 to the closing stock value by rejecting the weighted average cost method in favor of FIFO. The ITAT noted the consistent method used by the assessee in previous and subsequent years, accepted by the department. Relying on a Rajasthan High Court judgment, the ITAT ruled that the recognized method of valuation cannot be discarded without justification. Consequently, the addition was deleted, and the related grounds were allowed.

4. Rejection of Assessee's Books:
The rejection of the assessee's books for stock valuation was based on Section 145(3). The ITAT found no merit in the AO's rejection, as the method used was consistent and recognized. The grounds challenging the rejection were allowed.

5. Fall in Gross Profit Rate:
The CIT(A) was criticized for not considering the explanation provided for the fall in gross profit rate. This issue was part of the interconnected grounds and was addressed in the overall decision.

6. Inconsistencies in AO's Stand:
The ITAT noted inconsistencies in the AO's application of the FIFO method for stock valuation at different stages of assessment but ultimately ruled in favor of the assessee based on the recognized method consistently followed.

7. Adjustment of Value of Closing Stock:
The failure to allow adjustment of the enhanced closing stock value in the subsequent assessment year was highlighted. The ITAT considered this aspect in conjunction with the valuation method and ruled in favor of the assessee.

8. Disallowance of Deduction U/s 80IB:
The disallowance of the deduction under Section 80IB was upheld by the CIT(A) due to lack of evidence showing manufacturing by the assessee. Despite reliance on a Bombay High Court judgment, the ITAT found no direct supervision and control by the assessee over the manufacturing process, leading to the rejection of related grounds.

In conclusion, the ITAT partly allowed the appeal, addressing various issues related to expenses, stock valuation, and deduction disallowance under different sections of the Income Tax Act. The decision was based on legal interpretations, precedents, and consistency in method application.

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