1999 (2) TMI 90 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 68,89,089 on account of alleged under-valuation of the closing stock.
2. Disallowance of Rs. 2,73,682 on account of Foreign Travel expenses.
3. Inclusion of Excise Duty paid in the computation of turnover for the purpose of deduction u/s 80HHC.

Summary:

Issue 1: Addition of Rs. 68,89,089 on account of alleged under-valuation of the closing stock
The CIT(A) upheld the addition made by the Assessing Officer (AO) of Rs. 68,89,089 due to alleged under-valuation of the closing stock. The AO argued that the assessee did not consider certain costs for valuation, referencing the Supreme Court decision in CIT v. British Paints India Ltd. The assessee contended that it had consistently followed the "Direct Costing Method," a recognized method of valuation, and that the AO misinterpreted the Supreme Court's decision. The Tribunal agreed with the assessee, stating that "Direct Costing Method" is a recognized method by the Institute of Chartered Accountants of India and has not been disapproved by any notification from the Central Government. The Tribunal held that the AO and CIT(A) failed to appreciate that the items of cost in dispute were not to be considered under the "Direct Costing Method." Consequently, the addition of Rs. 68,89,089 was deleted.

Issue 2: Disallowance of Rs. 2,73,682 on account of Foreign Travel expenses
The CIT(A) upheld the disallowance of Rs. 2,73,682 on account of Foreign Travel expenses incurred for inspecting machinery. The assessee argued that the expenditure was for determining the condition of second-hand machinery, referencing the Bombay High Court decision in Bralco Metal Industries (P.) Ltd. v. CIT. However, the Tribunal followed the jurisdictional High Court decision in McGaw Ravindra Laboratories v. CIT, holding that the expenditure was capital in nature as it was incurred for acquiring fixed assets. Therefore, the disallowance was upheld.

Issue 3: Inclusion of Excise Duty paid in the computation of turnover for the purpose of deduction u/s 80HHC
The CIT(A) upheld the AO's action of including Excise Duty in the turnover for calculating the deduction u/s 80HHC. The assessee argued that this issue was covered in its favor by the Tribunal's decision in Sudarshan Chemical Industries Ltd. v. Dy. CIT. The Tribunal agreed with the assessee, stating that statutory levies like excise duty do not have elements of profit and should not be included in the turnover. Consequently, the inclusion of Excise Duty in the turnover for the purpose of deduction u/s 80HHC was disallowed.

Conclusion:
The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the issues of under-valuation of closing stock and inclusion of Excise Duty in turnover, while upholding the disallowance of Foreign Travel expenses.