2015 (2) TMI 119 - HC - Income Tax

Deduction under Section 80M allowed on gross amount of dividend received allowed - Held that - In respect of the first substantial question of law, it is held that the decision of the Tribunal in allowing the deduction under Section 80M is contrary to Distributors (Baroda) P. Ltd. s case ( 1985 (7) TMI 1 - SUPREME Court). Thus, the order of the Tribunal is set aside and that of the Assessing Officer is restored. - Decided in favour of revenue. Addition made on account of Closing Stock of stores, spare parts and tools etc - Held that - At best, even if the addition is to be made, it could be on the basis of closing stock of the previous year i.e. 1988-89. Such argument seems to be attractive, but cannot be accepted at this stage. It has come on record from the assessment year 1983-84 till the assessment year 1988-89, the assessee made to believe that stocks purchased by him stands consumed by the end of the year. Such accounting method even in respect of petty items cannot be said to be an accepted accounting procedure, the notice of such method could be taken by the Assessing Officer while making assessment. We find that the finding of the Commissioner of Income Tax (Appeals) as well as of the Tribunal is not based upon sound reasoning. The reason given is on the basis of the finality of the assessment proceedings in the previous years. The opening and the closing stocks have to be certain and cannot be left to the rule of thumb, as adopted by the assessee in the present case.Thus, the findings of the Tribunal and of the Commissioner of Income Tax (Appeals) in respect of setting aside the addition relating to the closing stock are set aside and that of the Assessing Officer are restored. - Decided in favour of revenue.

Summary

Issues:
1. Deduction under Section 80M on gross amount of dividend received.
2. Deletion of addition made on account of Closing Stock of stores, spare parts, and tools.

Issue 1: Deduction under Section 80M on gross amount of dividend received:

The appellant raised a substantial question of law regarding the allowance of deduction under Section 80M on the gross amount of dividend received by the Assessee, disregarding Section 80AA of the Income Tax Act, 1961. The Tribunal allowed the deduction, but the Revenue contended that it should be based on net income as per Distributors (Baroda) P. Ltd.'s case. The Court held that the Tribunal's decision was contrary to the law and set it aside, restoring the Assessing Officer's order.

Issue 2: Deletion of addition made on account of Closing Stock:

The Assessing Officer disallowed a deduction claimed under Section 80M and estimated the Closing Stock, making an addition. The Commissioner of Income Tax (Appeals) partly allowed the appeal, setting aside both additions. The Commissioner found that the Assessing Officer had accepted the assessee's accounting method in previous years. The Tribunal upheld the Commissioner's findings, stating that the issue was covered in favor of the Assessee. However, the Court found that the assessee's accounting method of disclosing opening and closing stocks without correlation to production or turnover was not acceptable. The Court referred to Commissioner of Income Tax Vs. British Paints India Ltd. to emphasize the importance of adopting an accounting method that reflects the true profits. The Court set aside the Tribunal's and Commissioner's findings regarding the deletion of the addition related to the Closing Stock, restoring the Assessing Officer's decision.

In conclusion, the Court allowed the Revenue's appeal, holding in favor of the appellant on both substantial questions of law. The judgment emphasized the importance of adopting appropriate accounting methods and ensuring that deductions are calculated based on net income rather than gross amounts.