2003 (7) TMI 743 - AT - Income Tax

Summary

Issues Involved:
1. Addition to the valuation of closing stock.
2. Exclusion of contract receipts from income.
3. Depreciation on expenditure.
4. Disallowance of expenditure on repairs at employees' residence.
5. Disallowance of deduction for interest accrued but not due.
6. Disallowance of interest on excess levy sugar price.
7. Disallowance of provision for bad and doubtful debts.
8. Disallowance of entertainment expenditure.

Issue-Wise Detailed Analysis:

1. Addition to the valuation of closing stock:
The assessee changed the method of valuing closing stock from averaging the cost of levy and free sale sugar to valuing them independently at the lower of cost or realizable value. The AO noted that this change resulted in a lower valuation of closing stock by Rs. 1,68,71,980, thereby reducing the profit. The AO and CIT(A) both found this change not bona fide, as the method was reverted in subsequent years. The Tribunal upheld this view, emphasizing the need for consistency and bona fide changes in accounting methods, referencing judgments such as ITO vs. Food Specialties and Harinagar Sugar Mills Ltd. vs. CIT.

2. Exclusion of contract receipts from income:
This ground was not pressed by the assessee and was therefore rejected.

3. Depreciation on expenditure:
The AO allowed only 10% depreciation on certain expenditures, treating them as part of furniture and fixtures instead of temporary structures eligible for 100% depreciation. The CIT(A) and Tribunal upheld this, stating that the nature of the material (aluminum structures) indicated a longer life span, thus not qualifying as temporary erection. The Tribunal also noted that the assessee's new claim for treating these expenditures as current repairs was not raised earlier and required proper verification.

4. Disallowance of expenditure on repairs at employees' residence:
The AO disallowed Rs. 9,100 spent on repairs at the residence of the Vice President, treating it as non-business expenditure. The CIT(A) and Tribunal upheld this disallowance, as the assessee failed to prove that the expenditure was incurred as per the terms of employment or in the regular course of business.

5. Disallowance of deduction for interest accrued but not due:
The AO disallowed Rs. 21,15,615 claimed as interest on a Sugar Development Fund loan, stating that the interest accrued only from 18.11.96. The CIT(A) and Tribunal upheld this, referencing Section 43B(d) which mandates that interest is only deductible when actually paid. The Tribunal also rejected the alternative plea to restrict the disallowance to Rs. 9 lakh.

6. Disallowance of interest on excess levy sugar price:
The AO disallowed Rs. 15,54,540 claimed as interest payable on excess levy sugar price, stating that the liability was contingent and not crystallized. The CIT(A) and Tribunal upheld this, noting that the liability was under dispute and not finalized by the Supreme Court. The Tribunal emphasized that contractual liabilities disputed in court cannot be claimed until crystallized.

7. Disallowance of provision for bad and doubtful debts:
This ground was not pressed by the assessee and was therefore dismissed.

8. Disallowance of entertainment expenditure:
The AO estimated disallowance under Section 37(2A) at Rs. 14,80,175 against Rs. 12,76,373 surrendered by the assessee. The CIT(A) directed the AO to exclude 35% of such expenditure on account of employees' participation. The Tribunal upheld this, finding no infirmity in the CIT(A)'s directions.

Conclusion:
The Tribunal dismissed the appeal, confirming the CIT(A)'s orders on all grounds, emphasizing the need for consistency and bona fide changes in accounting methods, and upholding disallowances where the assessee failed to substantiate its claims.