1983 (11) TMI 119 - AT - Income Tax

Summary

Issues:
1. Valuation of closing stock method change.
2. Disallowances under section 40A(5).

Analysis:

1. Valuation of closing stock method change:
The first issue in this appeal pertains to the valuation of closing stock method change by the assessee company. The Income Tax Officer (ITO) noted that the assessee had changed its method of valuation during the relevant accounting year, resulting in a significant difference in the valuation of the stock of tea. The ITO added back a sum to the trading results of the assessee, which was confirmed by the CIT (Appeals). The assessee contended that the change was approved by the Board of Directors and was based on a scientific and widely accepted method. The ITAT considered the arguments presented by both parties. The assessee's representative argued that the change was bona fide and had been initiated during the accounting year itself. Reference was made to legal precedents to support the contention that the change in valuation method should be accepted by the department. The revenue, on the other hand, argued that the method of accounting employed by the assessee should result in the proper deduction of income. The ITAT analyzed the facts and circumstances of the case, emphasizing that the value of closing stock cannot be determined solely on the last day of the accounting year. Considering the bona fides of the change and the acceptance of similar changes in other cases, the ITAT concluded that the change in valuation method was bona fide and should be accepted. Therefore, the addition on account of under-valuation of the closing stock was directed to be deleted.

2. Disallowances under section 40A(5):
The second issue in the appeal revolves around certain disallowances under section 40A(5) concerning expenses incurred on quarters allotted to an employee. The ITO considered these expenses as a perquisite. The CIT (Appeals) sustained the addition under section 40A(5) based on the nature of repairs and the value of rent-free accommodation enjoyed by the employee. The assessee argued that the repairs should not be added for the purpose of applying section 40A(5), citing a decision of the Gujarat High Court. However, the ITAT noted that the value of rent-free accommodation had not been included in the total perquisite amount. Therefore, the ITAT upheld the decision of the CIT (Appeals) regarding the disallowances under section 40A(5). Ultimately, the appeal was partly allowed based on the analysis of both issues presented before the tribunal.