2007 (1) TMI 224 - AT - Income Tax

Method Of Accounting - trading addition - valuation of closing stock - HELD THAT - Since the closing stock has to be valued at the end of the year, the natural corollary that follows is that the NRV is also be considered as at the end of the year and not the average selling price prevailing throughout the year. We, therefore, hold that the ld. CIT(A) was not justified in approving the rate of Rs. 17,473 as the basis for valuation. In our considered opinion, the rate of Rs. 17,500 PMT should be applied which represents NRV as at the end of the year. The Assessing Officer is directed to value the relevant closing stock at this rate and workout the sustainable addition. This ground is partly allowed. Disallowance of Mill Lining expenses - HELD THAT - The position, which emerges is that the nature of mill lining expenses has been established to be a recurring cost, which falls upon the assessee from time to time and hence cannot be treated a capital expenditure. Once this conclusion is reached, there is no justification for making disallowance for the expenditure incurred in this year notwithstanding the fact that in the books of account a different treatment has been given. If the expenditure is of revenue nature, the same would call for deduction in the year in which it is incurred. In our considered opinion, the ld. CIT(A) was justified in granting deduction for this sum. Addition on account of 2/3rd disallowance out of ISO 9002 certification expenses - HELD THAT - This certificate is basically issued and renewed from time to time to bring forth the fact that the systems and procedures of operations implemented in the organization are in accordance with the standards laid down. We note that by making payments for obtaining ISO 9002 certification, the fixed capital of the company has not enhanced in any manner. It rather created a positive image of the products of the assessee for the smooth conduct of the business. In our considered opinion, the ld. CIT(A) was justified in treating the entire amount as revenue in nature. This ground is, therefore, not allowed. Deduction u/s 80-IB(3)(ii) - HELD THAT - The assessee has admittedly claimed this deduction in the preceding years, which was allowed by the Assessing Officer. It is only in this year that the claim was refused. The well-settled principle of consistency has been consistently followed by all the courts of the country to hold that the view adopted by the Assessing Officer in a particular year should not be deviated from in the subsequent years unless there is some change in the legal or factual scenario justifying departure therefrom. In the case of CIT v. A.R.J. Security Printers 2003 (3) TMI 41 - DELHI HIGH COURT when the department wanted to negative the assessee's claim, which was accepted in the past, the Hon'ble High Court held that; having accepted in three assessment years that the assessee's business activity of printing lottery tickets fall within the ambit of section 80-I, the revenue cannot be allowed to turn around and contend that the deduction under the said section is not allowable in respect of the assessment years in question . In the case of CWT v. M.K. Gupta 1990 (1) TMI 29 - DELHI HIGH COURT the Tribunal applied the same value of property which was considered in the case of other co-owners. The Hon'ble High Court declined to interfere with the Tribunal's view by dismissing the revenue's appeal. In view of the foregoing legal position emanating from the judicial pronouncements, it is clear that the principle of consistency does not empower the Assessing Officer to deviate from the stand taken by him in the previous year unless factual or legal position justifies departure in the instant year. In our considered opinion, the ld. CIT(A) was not justified in refusing deduction u/s 80-IB. This ground is allowed. In the result, the appeal of the revenue is partly allowed.

Issues Involved:
1. Deletion of trading addition of Rs. 3 lakhs.
2. Deletion of addition of Rs. 5,10,583 on account of disallowance of Mill Lining expenses.
3. Deletion of addition of Rs. 75,833 on account of 2/3rd disallowance out of ISO 9002 certification expenses.
4. Allowing of deduction under section 80-IB(3)(ii) amounting to Rs. 8,33,264.

Issue-wise Detailed Analysis:

1. Deletion of trading addition of Rs. 3 lakhs:
The assessee, engaged in the business of Zircon Sand/Micro ZR (Opacifier), declared a Gross Profit rate of 10.61% for the year under consideration, which was lower than the previous year's 12.6%. The Assessing Officer (AO) noted discrepancies in the valuation of closing stock, specifically with Zircon 100, valued below manufacturing cost. The AO made a lump sum trading addition of Rs. 3 lakhs, which was deleted in the first appeal. Upon review, it was found that the assessee followed the "cost or net realizable value whichever is less" method. The CIT(A) approved the valuation at Rs. 17,473, but the tribunal held that the NRV should be Rs. 17,500 as at the end of the year. The AO was directed to value the closing stock at this rate and make necessary adjustments. This ground was partly allowed.

2. Deletion of addition of Rs. 5,10,583 on account of disallowance of Mill Lining expenses:
The assessee claimed amortization of mill lining expenses in the manufacturing account but sought full deduction in the computation of income. The AO disallowed Rs. 5,10,583, allowing only the amortized amount. The CIT(A) deleted the addition, recognizing mill lining as a recurring cost and not capital expenditure. The tribunal upheld this view, stating that if the expenditure is of a revenue nature, it should be deducted in the year incurred, regardless of its treatment in the books. The CIT(A)'s decision to grant deduction was justified.

3. Deletion of addition of Rs. 75,833 on account of 2/3rd disallowance out of ISO 9002 certification expenses:
The assessee claimed ISO 9002 certification expenses as administration expenses. The AO allowed only 1/3rd of the expenses, disallowing Rs. 75,833 as it related to subsequent years. The CIT(A) allowed the full claim. The tribunal noted that such certification expenses create a positive image and facilitate business operations without enhancing fixed capital. Citing the Supreme Court's principle that enduring benefits facilitating business efficiency should be treated as revenue expenditure, the tribunal upheld the CIT(A)'s decision, allowing the full deduction.

4. Allowing of deduction under section 80-IB(3)(ii) amounting to Rs. 8,33,264:
The AO denied the deduction under section 80-IB(3)(ii), arguing that the assessee's activity of grinding Zircon Sand into powder did not constitute manufacturing, referencing Supreme Court decisions on similar matters. The assessee contended that the process resulted in a new product with different uses and characteristics. The tribunal analyzed the manufacturing process, noting that the transformation from Zircon Sand to micronized Zircon powder was irreversible, creating a distinct product. Citing precedents where similar processes were deemed manufacturing, the tribunal concluded that the assessee's activity qualified as manufacturing. Additionally, the principle of consistency was invoked, as the deduction had been allowed in previous years without any change in circumstances. The CIT(A)'s decision to allow the deduction was upheld.

Conclusion:
The tribunal partially allowed the revenue's appeal, directing adjustments in the valuation of closing stock but upheld the CIT(A)'s decisions on mill lining expenses, ISO certification expenses, and the deduction under section 80-IB(3)(ii).

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