1993 (1) TMI 126 - AT - Income Tax

Assessing Officer Assessment Proceedings Bona Fide Business Income Capital Gains Change In Method Of Valuation Of Stock Closing Stock Income Returned Interest On Borrowed Capital Interest Payable Mercantile System Per Annum Right To Receive Sale Proceeds Tax Liability The High Court

Issues Involved:
1. Valuation of Closing Stock
2. Disallowance of Interest
3. Claim under Section 43B of the Act
4. Interest Received in Advance from IDBI on Capital Gains Bond
5. Compensation for Termination of Selling Agreements
6. Guest House Expenditure

Issue No. 1: Valuation of Closing Stock

The assessee switched from the "Full Factory Cost Method" to the "Factory Direct Cost Method" for valuing closing stock and work-in-progress, reducing profits by Rs. 340.98 lakhs. The Assessing Officer (AO) rejected this change due to lack of explanation and inconsistency with the previous year's valuation method. The C.I.T. (A) upheld this decision, citing principles of consistency under Section 145 of the Income-tax Act and the Supreme Court ruling in CIT v. British Paints India Ltd. The assessee argued that the "Direct Cost" method is recognized by accounting standards and supported by the Madras High Court in Carborandum Universal Ltd. The Tribunal found the change justified and bona fide, noting that the "Direct Cost" method is recognized and approved by the jurisdictional High Court. The Tribunal concluded that the switch was bona fide and deleted the addition of Rs. 340.98 lakhs made by the AO.

Issue No. 2: Disallowance of Interest

The assessee advanced funds to its wholly-owned subsidiary, Dare House Investments Ltd., at 6% interest, while borrowing at 17.5% from banks. The AO disallowed the differential interest amount of Rs. 65,65,645, stating it was not for business purposes. The C.I.T. (A) upheld this decision. The assessee contended that the advances were for acquiring shares in Coromandel Fertilisers Ltd., enhancing its business interests. The Tribunal agreed, noting that the acquisition of additional shares through the subsidiary was for business purposes, enhancing the assessee's bargaining power. The Tribunal deleted the disallowance of Rs. 65,65,645.

Issue No. 3: Claim under Section 43B of the Act

The assessee claimed a deduction of Rs. 6,67,708 for excise duty included in the closing stock valuation, subject to adjustment of Rs. 80,007 for the opening stock. Both the AO and C.I.T. (A) rejected this claim. The Tribunal found the issue covered against the assessee by the I.T.A.T. Madras Bench decision in Southern Asbestos Cement Ltd. v. Dy. CIT and dismissed the related grounds.

Issue No. 4: Interest Received in Advance from IDBI on Capital Gains Bond

The assessee received Rs. 97,76,000 as discounted interest on IDBI Capital Bonds, opting for the discounted value option. The assessee credited only Rs. 5,35,671 to the Interest A/c, treating the balance as current liabilities to be taxed in subsequent years. The AO and C.I.T. (A) taxed the entire amount in the assessment year 1989-90. The Tribunal upheld this decision, stating that the discounted interest accrued and was received in the relevant year, making it taxable in that year.

Issue No. 5: Compensation for Termination of Selling Agreements

The assessee received Rs. 7 lakhs from Amphetronix Ltd. for terminating a selling agreement, which it initially treated as income but later claimed as a capital receipt. The AO and C.I.T. (A) treated it as revenue under Section 28(ii)(c). The Tribunal agreed, noting that the selling agreement was part of the assessee's regular business, and its termination did not impair the trading structure. The Tribunal dismissed the related ground.

Issue No. 6: Guest House Expenditure

The assessee claimed Rs. 1,90,709 for repairs, maintenance, and depreciation on a guest house. The AO and C.I.T. (A) disallowed this claim. The Tribunal upheld the disallowance of depreciation under Section 37(4)(ii) but remitted the repairs and maintenance expenditure of Rs. 1,30,024 to the AO for fresh consideration, directing exclusion of items allowed under other sections.

Conclusion:
The assessee's appeal was allowed in part, with specific relief granted on the valuation of closing stock and interest disallowance issues, while other claims were either dismissed or remitted for further consideration.

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