1983 (9) TMI 143 - AT - Income Tax

Summary

Issues Involved:
1. Addition towards revaluation of closing stock.
2. Disallowance of provision for minimum wages.
3. Disallowance of part of the amount paid as overriding amount to distributors.
4. Claim for provision of gratuity.

Summary:

1. Addition towards revaluation of closing stock:
The assessee, Mopeds India Ltd., objected to the addition of Rs. 3,85,000 made by the IAC towards revaluation of closing stock. The assessee had shifted from the 'total cost' method to the 'works cost' method for stock valuation, which excludes administrative overheads. The first appellate authority recognized the change as bona fide and in line with international accounting standards, but directed revaluation of the opening stock as well. The Tribunal found no justification for this further direction, citing the decision in British Paints India Ltd. v. CIT [1978] 111 ITR 53 (Cal.), and allowed the assessee's ground, permitting the change without disturbing the opening stock.

2. Disallowance of provision for minimum wages:
The dispute involved the disallowance of Rs. 97,991 out of a total provision of Rs. 2,13,000 for minimum wages. The assessee had initially made the provision based on the Labour Commissioner's memorandum, but later negotiated a lower liability. The Tribunal held that the provision was justified at the time it was made and allowed the deduction of Rs. 97,991, directing the ITO to tax the amount written back in the year of negotiation.

3. Disallowance of part of the amount paid as overriding amount to distributors:
The assessee contested the disallowance of 15% of Rs. 1,80,055 paid as incentive bonus to distributors u/s 37(3A) of the Income-tax Act, 1961. The Tribunal concluded that the incentive bonus was akin to selling commission and not an expenditure on advertisement, publicity, or sales promotion. Therefore, the disallowance u/s 37(3A) was not justified, and the assessee's appeal on this point was allowed.

4. Claim for provision of gratuity:
The assessee claimed a provision of Rs. 2,18,672 for gratuity, which was disallowed on the grounds that the gratuity fund was approved after the accounting year. The Tribunal noted that the fund was created before the end of the accounting year and that subsequent recognition should not debar the assessee's claim. The matter was remitted back to the ITO to reconsider the allowance, ensuring that the fund's existence at the end of the accounting year was taken into account.

Conclusion:
The appeal was partly allowed, with the Tribunal providing relief on the major issues of stock revaluation, provision for minimum wages, and incentive bonus disallowance, while remitting the gratuity provision issue back to the ITO for fresh consideration.