1992 (1) TMI 139 - AT - Income Tax

Summary

Issues Involved:
1. Change in accounting year and its impact on depreciation.
2. Investment allowance and depreciation due to foreign exchange rate fluctuations.
3. Revaluation of closing stock.
4. Additional bonus paid to employees.
5. Purchase of silver coins for employees.
6. Extra Shift Allowance (ESA) due to change in the previous year.
7. Investment allowance on electrical installations.
8. ESA on diesel generator sets.
9. Depreciation and investment allowance on guarantee commission.

Issue-wise Detailed Analysis:

1. Change in Accounting Year and Its Impact on Depreciation:
The assessee's appeal concerns the change in the accounting year to a 15-month period ending 31st Dec., 1982. The CIT found the ITO's assessment erroneous for allowing excess depreciation on new machinery. The Tribunal held that the ITO's action of allowing enhanced depreciation at 18.75% was correct, as it was in accordance with r. 5 read with the proviso. The assessment order by the ITO was not erroneous, and the CIT's order under s. 263 was set aside, restoring the ITO's order.

2. Investment Allowance and Depreciation Due to Foreign Exchange Rate Fluctuations:
The Revenue's appeal contested the CIT(A)'s direction to allow investment allowance and depreciation on additional liabilities due to exchange rate fluctuations. The Tribunal noted that the ITO had already allowed depreciation, and the CIT(A) correctly directed the ITO to verify and allow investment allowance and depreciation on the increased cost due to exchange rate fluctuations, provided other conditions were met. The Tribunal referred to the Supreme Court's judgment in CIT vs. Arvind Mills Ltd., confirming that adjustments due to exchange rate fluctuations should be accounted for in the year they arise, but investment allowance could not be granted in the year under consideration as the machinery was installed in earlier years.

3. Revaluation of Closing Stock:
The Revenue challenged the deletion of the addition made due to the change in the method of valuation of closing stock. The Tribunal upheld the CIT(A)'s decision, noting that the change to valuing stock at cost or market price, whichever is lower, was bona fide and consistently followed in subsequent years. This method is a well-recognized accounting principle, supported by the Supreme Court's judgment in CIT vs. British Paints India Ltd.

4. Additional Bonus Paid to Employees:
The Revenue disputed the deduction allowed for additional bonus paid on the occasion of the company's silver jubilee. The Tribunal agreed with the CIT(A) that the additional bonus was a business expenditure aimed at maintaining cordial relations with workers and was not covered by s. 36(1)(ii). This expenditure was allowable as business expenditure.

5. Purchase of Silver Coins for Employees:
The Revenue contested the deletion of the addition made for the purchase of silver coins distributed to employees during the silver jubilee celebrations. The Tribunal upheld the CIT(A)'s decision, recognizing the expenditure as a business expense aimed at goodwill, supported by judgments from the Gujarat and Madras High Courts.

6. Extra Shift Allowance (ESA) Due to Change in the Previous Year:
The Revenue's appeal included a ground related to ESA at the enhanced rate due to the change in the previous year. The Tribunal upheld the CIT(A)'s direction to grant ESA based on the enhanced amount of normal depreciation due to the extended 15-month accounting period.

7. Investment Allowance on Electrical Installations:
The Revenue argued that electrical installations were not part of plant and machinery. The Tribunal confirmed the CIT(A)'s decision that the electrical installations in the 7th and 8th bay of the factory premises formed part of plant and machinery, thus eligible for investment allowance.

8. ESA on Diesel Generator Sets:
The Tribunal upheld the CIT(A)'s decision to allow ESA on diesel generator sets, relying on the Special Bench decision in Schrader-Scovil Duncan Ltd. vs. ITO.

9. Depreciation and Investment Allowance on Guarantee Commission:
The Revenue's appeal also included the issue of depreciation and investment allowance on guarantee commission paid for acquiring capital assets. The Tribunal restored this matter to the ITO to decide afresh in light of the Tribunal's earlier directions and the provisions of Expln. 8 to s. 2(28A).

Conclusion:
The assessee's appeal was allowed, and the Revenue's appeal was partly allowed for statistical purposes. The Tribunal provided detailed reasoning for each issue, ensuring adherence to legal principles and precedents.