1983 (8) TMI 97 - AT - Income Tax

Summary

Issues Involved:

1. Whether the subsidy received by the assessee should be considered in determining the market rate for valuing the closing stock of superphosphate.

Detailed Analysis:

Issue 1: Consideration of Subsidy in Valuing Closing Stock

The primary contention of the assessee was that the subsidy amounting to Rs. 21,16,691 should not be included in the market rate for valuing the closing stock of superphosphate. The assessee had a stock of 10,583.454 MT of superphosphate and followed the practice of valuing the closing stock at market rate or cost, whichever was lower. The Income Tax Officer (ITO) observed that the subsidy received at Rs. 200 per tonne was not considered in the valuation, which was pointed out by the auditors in the profit and loss account. The assessee argued that the subsidy is claimable only when the product is cleared and sold, not on stock lying in the factory, as per the scheme finalized on 16-6-1976. The ITO, however, included the subsidy as part of the market price for valuation, leading to an addition of Rs. 1,53,000 in the trading account.

Upon appeal, the Commissioner (Appeals) upheld the ITO's decision, stating that the subsidy should be considered part of the market price. The Commissioner reasoned that the subsidy was receivable not only for sales made but also for stock on which excise duty had been paid, as per the Government's scheme. The Commissioner noted that the market price was artificially lowered due to the subsidy, and thus, the real market price should include the subsidy.

The assessee's counsel argued that the subsidy was not part of the sale consideration, as the sale was complete upon delivery to the buyer at the government-fixed price, and the subsidy was receivable post-sale, subject to conditions. The counsel emphasized that the method of valuing the closing stock at market price or cost, whichever is lower, was a recognized method consistently followed by the assessee. The subsidy, being independent of the sale, should not be included in the valuation. The counsel also pointed out that the subsidy was accounted for and taxed in the subsequent year, not subjected to sales tax, and cited the case of Dhrangadhra Chemical Works Ltd. v. CIT to support the argument that subsidy accrues when granted by the Government.

The departmental representative supported the Commissioner's order, asserting that the subsidy was part of the sales and should be included in the closing stock valuation.

The Tribunal concluded that the subsidy did not form part of the sale. The sale was made to consumers, and the subsidy was receivable post-sale, subject to conditions. The Tribunal referenced the Supreme Court's definition of sale in CIT v. Dewas Cine Corpn., which emphasized the transfer of property for a price. Since the property did not pass to the Government and the subsidy was not part of the sale price, it could not be considered in the closing stock valuation.

The Tribunal further noted that the subsidy did not accrue simultaneously with the sale. The sale occurred when the property was transferred to the buyer, while the subsidy accrued when granted by the Government. The subsidy was taxed in the subsequent year, not included in the total sale, and not subjected to sales tax.

Additionally, the Tribunal considered the argument that revaluing the closing stock would necessitate revaluing the opening stock in the subsequent year, resulting in no net tax effect due to the flat rate of income tax for the company. Citing the Bombay High Court in CIT v. Nagri Mills Co. Ltd., the Tribunal opined that disputes over the year of deduction were immaterial when the tax rate was uniform.

Conclusion:

The Tribunal ruled that the subsidy received by the assessee should not be included in determining the market rate for valuing the closing stock of superphosphate. The subsidy was not part of the sale, did not accrue simultaneously with the sale, and revaluing the closing stock would not affect the overall tax liability due to the flat tax rate. Thus, the revaluation of the closing stock was deemed improper.