1999 (12) TMI 99 - AT - Income Tax

Method Of Accounting, Valuation Of Closing Stock, Business Disallowance, Business Expenditure, Allowability of

Summary

Issues Involved:
1. Deletion of addition on account of incentive wages.
2. Valuation of closing stock of raw material eligible to the account of MODVAT.
3. Disallowance under section 80HHC for profit from Haldia Export Factory.
4. Claim under section 32AB for deposits and utilization.
5. Deletion of addition paid to staff recreation club under section 40A(9).

Detailed Analysis:

1. Deletion of Addition on Account of Incentive Wages:
The Assessing Officer disallowed Rs. 30,40,000 as incentive wages, treating it as bonus subject to the Bonus Act. The CIT(A) deleted this disallowance, following the precedent from earlier years. The Tribunal upheld the CIT(A)'s order, noting that similar disallowances had been consistently deleted since the assessment year 1982-83 and no new material was presented by the Assessing Officer to justify the addition.

2. Valuation of Closing Stock of Raw Material Eligible to the Account of MODVAT:
The Assessing Officer made additions of Rs. 98.11 lacs and Rs. 6.6 lacs for the respective assessment years, arguing that the MODVAT benefit did not reduce the assessable value automatically. The CIT(A) deleted these additions, explaining that the MODVAT system allows for a set-off of input duty against duty on final products, without impacting profits. The Tribunal agreed, stating that the MODVAT scheme is revenue neutral and the CIT(A) had rightly deleted the additions, as there was no impact on profit whether the cost of raw material was debited gross or net of MODVAT.

3. Disallowance under Section 80HHC for Profit from Haldia Export Factory:
The Assessing Officer treated the Haldia Export Factory as a separate business and computed deductions under section 80HHC(3)(a) and (b) separately. The CIT(A) disagreed, considering the factory as part of the common business of the assessee. The Tribunal upheld the CIT(A)'s order, referencing the Supreme Court's parameters for determining whether activities constitute the same business, and confirming that the assessee had one composite business. Thus, the deduction should be computed under section 80HHC(3)(b) only.

4. Claim under Section 32AB for Deposits and Utilization:
The Assessing Officer disallowed the claim under section 32AB, questioning the source of deposits and utilization for plant and machinery. The CIT(A) deleted the addition, noting that the deposits and investments were made out of the business income, which was substantiated by the auditor's report. The Tribunal upheld this view, stating that the assessee had sufficient business profits to cover the deposits and investments, and the payments were presumed to be made out of profits embedded in the overdraft account.

5. Deletion of Addition Paid to Staff Recreation Club under Section 40A(9):
The Assessing Officer disallowed Rs. 1,75,304 paid to the staff recreation club, but the CIT(A) deleted the addition, following the Tribunal's earlier order in a similar case. The Tribunal upheld the CIT(A)'s decision, noting that section 40A(9) did not apply as the staff recreation club was part of the organization itself and the payments were subsidies for welfare activities, a common practice.

Cross Objections:
The assessee's cross objections were filed as a precaution and were dismissed as they did not merit discussion.

Conclusion:
Both the department's appeals and the assessee's cross objections were dismissed, with the Tribunal upholding the CIT(A)'s decisions on all grounds.