1991 (6) TMI 116 - AT - Income Tax

Closing Stock, Custom Duty, Deduction In Respect, Excise Duty, Foreign Exchange, Investment Allowance, Plant And Machinery, Previous Year, Raw Material

Issues Involved:
1. Claim for Revenue Deduction under Sec. 43B in respect of Customs Duty and Central Excise Duty.
2. Claim for Investment Allowance.
3. Capitalisation of amount spent on repairs.

Issue 1: Claim for Revenue Deduction under Sec. 43B in respect of Customs Duty and Central Excise Duty

The assessee, a public limited company, manufactures and markets asbestos cement products, importing raw asbestos fibre and paying customs duty on it. The company also pays excise duty on manufactured products. The customs and excise duties paid were included in the cost of raw materials and finished goods, respectively, and accounted for in the books. The assessee claimed that these duty components of the closing stock should be deducted from book profits under Sec. 43B of the Income-tax Act, arguing that the duties paid are statutory liabilities and should be deductible in the year they are paid.

The Assessing Officer rejected this claim, arguing that:
1. The Gujarat High Court decision in Lakhanpal National Ltd. v. ITO was not accepted by the Department.
2. Section 43B does not permit altering the value of closing stock.
3. The customs and excise duties were already debited to the Profit & Loss Account.
4. The ITAT Delhi Bench-C decision in Hindustan Computers Ltd. v. ITO goes against the assessee's claim.

The CIT(A) upheld the Assessing Officer's decision, stating that Sec. 43B was introduced to curb the practice of claiming deductions without payment and that the assessee seeks a double deduction, which is not permissible.

Upon appeal, the Tribunal held that:
- The assessment of income must be in accordance with commercial principles and methods of accounting regularly employed by the assessee.
- The method of valuing stock is an aspect of the method of accounting, and the customs/excise duty must be included in the cost of closing stock.
- Section 43B stipulates deduction on actual payment basis but does not support the exclusion of the duty component from the closing stock value.
- The mischief rule of construction and the principles of valuation of closing stock, as elucidated by the Supreme Court in Chainrup Sampatram v. CIT, do not support the assessee's claim.
- The Gujarat High Court decision in Lakhanpal National Ltd. does not apply due to the lack of consideration of the mischief rule and valuation principles.

Therefore, the Tribunal declined to interfere with the lower authorities' decision, upholding the rejection of the assessee's claim for deduction under Sec. 43B.

Issue 2: Claim for Investment Allowance

The assessee installed imported plant and machinery on a deferred payment basis and was allowed investment allowance in the assessment year 1983-84. During the assessment years under consideration, the assessee claimed additional investment allowance due to an increase in the cost of machinery from foreign exchange rate fluctuations.

The Assessing Officer disallowed the claim, stating that investment allowance is a one-time allowance and cannot be granted over multiple years. The CIT(A) upheld this decision, noting that Sec. 32A allows investment allowance in the year of installation or first use, and Sec. 43A does not override this provision.

Upon appeal, the Tribunal held that:
- Sec. 43A, introduced to mitigate the hardship from the devaluation of the rupee, allows for the adjustment of the actual cost of assets due to exchange rate fluctuations.
- Sec. 43A does not contain any embargo against applying its provisions to investment allowance.
- The incremental cost from exchange rate fluctuations should augment the actual cost of the asset, applicable to Sec. 32A for investment allowance.
- Practical difficulties in allowing investment allowance for incremental cost can be resolved by allowing it in the year the incremental cost arises, provided the assessee creates a suitable reserve.

The Tribunal directed the Assessing Officer to allow the assessee's claim for investment allowance on the incremental cost in the respective years, subject to verification of the arithmetical accuracy and the creation of an adequate investment allowance reserve.

Issue 3: Capitalisation of Amount Spent on Repairs

The assessee did not press the grounds relating to the capitalisation of the amount spent on repairs during the hearing. Therefore, these grounds were dismissed.

Conclusion:

All three appeals of the assessee were allowed in part. The Tribunal upheld the rejection of the claim for revenue deduction under Sec. 43B but allowed the claim for investment allowance on the incremental cost due to foreign exchange rate fluctuations, subject to conditions. The issue of capitalisation of repairs was dismissed as not pressed.

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