1993 (3) TMI 197 - AT - Income Tax

A Firm, Assessing Officer, Bona Fide, Cash Basis, Change In Method, Dissolution Of Firm, Market Value, Partnership Firm, Set Off, Written Down Value

Issues Involved:
1. Provision for gratuity deduction.
2. Addition under "Sales-tax set off" on accrual basis.
3. Depreciation on revalued machinery taken over from a dissolved firm.
4. Liability to interest under section 215.
5. Applicability of section 40(c) versus section 40A(5) for remuneration paid to the Export Director.
6. Allowance of advertisement expenses.
7. Jurisdiction of CIT under section 263.

Issue-wise Detailed Analysis:

1. Provision for Gratuity Deduction:
The appellant's claim for a provision of gratuity amounting to Rs. 12,16,085 was disallowed by the Assessing Officer and confirmed by the CIT(Appeals). During the appeal hearing, the appellant's counsel did not press this ground, leading to its dismissal.

2. Addition under "Sales-tax Set Off" on Accrual Basis:
The appellant contested the addition of Rs. 9,88,095 under "Sales-tax set off" assessed on an accrual basis. The appellant argued that the change in the method of accounting from accrual to cash basis was bona fide. However, both the Assessing Officer and the CIT(Appeals) found no valid reasons for the change and deemed it not bona fide. The Tribunal upheld this view, emphasizing that the change of method in accounting should not result in a loss of revenue and must be bona fide. The appellant's reliance on previous decisions in similar cases was found distinguishable on facts, leading to the rejection of this ground.

3. Depreciation on Revalued Machinery:
The appellant sought depreciation on machinery valued at Rs. 16,06,628, taken over from a dissolved partnership firm. The Assessing Officer restricted the depreciation claim to the written down value in the firm's books, suspecting the revaluation as a tax avoidance device. The CIT(Appeals) confirmed this view. The Tribunal supported the Assessing Officer's application of Explanation 3 to section 43, rejecting the inflated valuation by the approved valuer. The Tribunal noted that machinery generally depreciates over time and the revaluation appeared motivated to claim higher depreciation and benefit related parties. Consequently, the appellant's claim was rejected.

4. Liability to Interest under Section 215:
The charging of interest under section 215 was deemed consequential, depending on the outcomes of other grounds. Since the appellant failed on all other grounds, no interference was warranted in charging interest under section 215.

5. Applicability of Section 40(c) versus Section 40A(5) for Remuneration Paid to the Export Director:
The revenue argued that the CIT(A) erred in applying section 40(c) instead of section 40A(5) for remuneration paid to the Export Director, resulting in a disallowance of Rs. 7,922. The CIT(A) held that section 40(c), being specific, should take precedence over the general provisions of section 40A(5). The Tribunal agreed with the CIT(A), finding no reason to interfere with the order.

6. Allowance of Advertisement Expenses:
The Assessing Officer disallowed Rs. 3,000 as advertisement expenses, treating it as a donation. The CIT(A), following the Calcutta High Court decision in British Electrical & Pumps (P.) Ltd. v. CIT, directed the allowance of this expenditure. The Tribunal upheld the CIT(A)'s decision, supported by the CBDT circular and the Calcutta High Court's ruling.

7. Jurisdiction of CIT under Section 263:
The appellant contested the CIT's revisional order under section 263, arguing that the assessment order had merged with the CIT(A)'s order, thus barring the CIT's jurisdiction. The Tribunal, citing the Bombay High Court decision in CIT v. P. Muncherji & Co., agreed, holding that the CIT lacked jurisdiction under section 263. On merits, the Tribunal also found that the machinery had worked during the relevant period, entitling the appellant to the extra shift allowance. Consequently, the CIT's order was set aside, and the ITO's order was restored.

Conclusion:
The appeals resulted in the dismissal of the appellant's claims regarding gratuity provision, sales-tax set off, and machinery depreciation. The revenue's appeal on remuneration and advertisement expenses was also dismissed. The appellant succeeded in challenging the CIT's jurisdiction under section 263, leading to the restoration of the ITO's order.

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