2007 (4) TMI 249 - HC - Income Tax

Valuation of closing stock of bagasse - assessee had not disclosed the closing stock of Bagasse as it was not being sold by it in open market & it is only used as fuel - Tribunal was justified in concluding that closing stock to be valued at cost or market price which ever is lower - valuation shown by assessee at the cost price was correct guest house expenses not allowable regarding interest levied u/s 220(2), no liability to pay interest arise prior to date of notice of demand u/s 156

Issues Involved:
1. Deletion of addition on account of closing stock of Bagasses.
2. Restriction of disallowance out of guest house expenses.
3. Cancellation of interest levied under Section 220(2) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Deletion of Addition on Account of Closing Stock of Bagasses

The primary issue was whether the Income Tax Appellate Tribunal (ITAT) was justified in deleting the addition of Rs. 1,52,565 on account of the closing stock of Bagasses. The assessee, a company engaged in manufacturing sugar and liquor, did not disclose any value for 7265 bales of Bagasses, claiming it was used as fuel and had no sale value. The Assessing Officer (AO) disagreed, valuing the Bagasses at Rs. 700 per metric ton based on market rates and added the amount to the closing stock. The Commissioner of Income Tax (Appeals) [CIT(A)] reduced this valuation to Rs. 360 per metric ton but upheld the addition. The ITAT, however, found that the assessee consistently valued Bagasses based on baling charges and wire costs, not market value, and had not sold any Bagasses. The Tribunal held that the cost to the assessee could not be substituted by market value, thus deleting the addition. The High Court upheld the ITAT's decision, noting that the valuation method used by the assessee was consistent and justified as Bagasses were used as fuel, not sold.

Issue 2: Restriction of Disallowance Out of Guest House Expenses

The second issue concerned the restriction of disallowance to 30% of guest house expenses amounting to Rs. 55,629. The AO disallowed Rs. 62,291, which included guest house expenses, depreciation, and repairs. The CIT(A) confirmed this disallowance. The ITAT, following its earlier orders, restricted the disallowance to 30%, considering the expenses related to providing food to employees. The High Court, however, disagreed with the ITAT, stating that under Sections 37(4) and 37(5) of the Act, all expenses related to the maintenance of a guest house, including those for employees, are disallowable. Thus, the Tribunal was not justified in restricting the disallowance to 30%.

Issue 3: Cancellation of Interest Levied Under Section 220(2)

The third issue was the cancellation of interest amounting to Rs. 3,64,734 levied under Section 220(2) of the Act. The AO charged this interest on a refund initially allowed but later adjusted against a tax demand. The CIT(A) upheld this levy. The ITAT, however, held that interest under Section 220(2) could only be charged after the service of notice under Section 156, which occurred on 18th February 1989. Therefore, interest could not be levied for the period before this notice. The High Court agreed with the ITAT, stating that the interest could only start accruing after the notice was served, thus cancelling the interest levied.

Conclusion:

The High Court answered the first and third questions in the affirmative, in favor of the assessee, and the second question in the negative, in favor of the Revenue. There was no order as to costs.

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