1985 (6) TMI 96 - AT - Income Tax

Summary

Issues Involved
1. Validity of the Commissioner's order under Section 263 of the Income-tax Act, 1961.
2. Examination of the method of accounting adopted by the assessee for machinery spares.
3. Determination of whether the Income-tax Officer (ITO) can deduce the true income from the accounts presented by the assessee.
4. Application of Section 145 of the Income-tax Act concerning the correct method of accounting.

Detailed Analysis

1. Validity of the Commissioner's Order under Section 263
The Commissioner issued an order under Section 263 of the Income-tax Act, 1961, setting aside the ITO's assessment order dated 29-1-1983. The Commissioner held that the ITO's omission to examine certain aspects of the case and accepting the adjustments without verifying the accounts was incorrect, erroneous, and prejudicial to the interests of revenue. The Commissioner directed a de novo assessment to bring on record the full details of the spares and assess the appropriate value thereof.

2. Examination of the Method of Accounting Adopted by the Assessee for Machinery Spares
The assessee, a public limited company engaged in the manufacture of cutting tools, adopted a new method of accounting for machinery spares from the year 1978. The company started writing off machinery spare parts to 'Repairs to plant and machinery' at the time of their purchase instead of charging them to consumption at the time of their issue from stocks. This change resulted in a higher charge of Rs. 44,21,741 to the profit and loss account, reducing the profit by the same amount. The auditors' report also indicated reservations about this method.

3. Determination of Whether the ITO Can Deduce the True Income from the Accounts Presented by the Assessee
The Commissioner examined the records and issued a notice under section 263, indicating that prima facie, the profits were understated by Rs. 44,21,741. The assessee argued that the new method was in line with modern accounting practices and that the spares had no readily realizable value. However, the Commissioner was not convinced, stating that the items had not been proved to be of nil value and that at least the scrap value or secondhand value should have been reflected.

4. Application of Section 145 of the Income-tax Act Concerning the Correct Method of Accounting
The Tribunal examined whether the method of accounting adopted by the assessee enabled the ITO to deduce true income. It was noted that Section 145 allows the ITO to reject the method of accounting if it does not enable the proper deduction of income. The Tribunal held that the new method adopted by the assessee did not meet the requirements of Section 145, as it did not enable the ITO to deduce true profits. The Tribunal also noted that the change in the method of accounting must be bona fide and consistently followed, which was not proven in this case.

Conclusion
The Tribunal upheld the Commissioner's order under Section 263, dismissing the appeal filed by the assessee. The Tribunal concluded that the new method of accounting adopted by the assessee for machinery spares did not enable the ITO to deduce true income, and thus, the provisions of Section 145 were applicable. The Tribunal also noted that the Commissioner had not closed the door for the assessee to furnish proper proof before the ITO in the fresh assessment.