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TMI Blog1992 (8) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... all first deal with the appeal of the Revenue. The AO reduced the cost of plant and machinery (from the figure of Rs. 21,91,13,820 as claimed by Rs. 1,27,78,332). This has resulted in short allowance on account of (i) development rebate; (ii) depreciation; and (iii) relief under s. 80J. The sum of Rs. 1,27,78,332 comprised of the following: (1) Over invoicing Rs. 61,58,000 (2) Non-capitalisation of certain pre production expenses Rs. 22,05,832 (3) Disallowance of part of expenses on foreign technicians Rs. 44,14,500 Rs. 1,27,78,332 There is minor variation in the figure of over invoicing due to certain arithmetical discrepancies in the assessment order. Whereas in the draft assessment order the AO had mentioned the figure of Rs. 61,58,000 on account of over invoicing as a result of directions under s. 144B. The amount was revised as (i) Over invoicing of machinery purchased from M/s Francies Shaw &Co.£ 40,000 Rs. 7,20,000 (ii) Over invoicing of machinery purchased from M/s Warner & Philendere DM 1,50,000 Rs. 4,50,000 (iii) 2 per cent handling charges referred to in cl. 1.1 of the secret agreement dt.9-11-1970 Rs. 15,14,300 (iv) Additional amounts payable as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement was different and that the benefit of doubt has wrongly been given to the assessee in respect of alleged contraventions of foreign exchange regulations. 6. The learned counsel for the assessee, on the other hand, contended that the Special Director of Enforcement Directorate has recorded a categorical finding that the complaint filed against the company and its directors was without any merit and that the said order has been accepted by the Government as no appeal or review petition has been filed. According to the learned counsel, the finding recorded by a quasi-judicial authority cannot be disregarded unless some serious infirmity is shown in the order. Shri Vaish supported the order of CIT(A) in this regard by submitting that the evidence on record does not establish the over-invoicing of imported machinery. Shri Vaish contended that even if for arguments sake it is admitted that there was a secret agreement as alleged, the actual cost paid for import of machinery to the assessee would remain the same as it is nobody's case that assessee did not pay the amount in respect of the machinery. Elaborating his arguments, the learned counsel contended that without prejudice to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that the existence of secret agreement between the assessee and its technical collaborators had not been established. The complaint that the technical collaborators had obtained 2per cent handling fee from the assessee and that there was over-invoicing in the purchase order with the machinery supplier Francies Shah and Warnter and Philenderer was also held as not proved. The finding of Special Director is that the complaint was based on conjectures and was fanciful. It has further been held that there is evidence on record to rebut the allegation in the form of certificates and affidavits from machinery suppliers and the certificate of the Chartered Accountant of the technical collaborators. On the one hand there is evidence by virtue of which the cost of machinery is established to be the same as disclosed by the assessee. On the other hand there is allegation and evidence that may give rise to suspicion. On consideration of totality of the facts and circumstances of this case and the evidence on record, we hold that the allegation over-invoicing of imported machinery is not established. Since the cost of machinery disclosed by the assessee is supported by evidence, the AO woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and machinery. The AO held that such expenditure may have publicity value but that would not be relevant for considering such expenditure for capitalisation. The CIT(A) has relied upon the decision of the Bombay High Court in the case of CIT vs. Nirlon Ltd. (1981) 25 CTR (Bom) 155 : (1982) 137 ITR 1 (Bom) in support of the finding that the ceremonial expenses form part of the capital asset. Since the decision of the CIT(A) is in consonance with the decision of the Bombay High Court in the case of Nirlon Ltd. and no contrary decision has been brought to our notice, we have no reason to interfere in the order of the CIT(A), in this regard. 11. Out of general charges amounting to Rs. 2,90,198 the learned CIT(A) has relied upon the decision of the Supreme Court in the case of Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC) in support of the finding that such revenue expenditure as would otherwise be allowable as a deduction but for the fact that these were incurred prior to commencement of production, are entitled to be capitalised for ascertaining the cost of plant and machinery. On the basis of ratio of the aforementioned decision the learned CIT(A) has al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capitalised for the purposes of determination of the cost of plant and machinery. The appeal of the Revenue thus fails on this ground as well. 12. Regarding the cross-objection filed by the assessee, we are satisfied that there is a totalling mistake of Rs. 1 lakh at page 20 of CIT(A)'s order. The sum total of the expenditure works out to Rs. 18,16,661. The order of the CIT(A) is modified to this extent. 13. We now deal with the disallowance of some expenditure made by the CIT(A) in respect of which assessee is aggrieved. 14. Out of general charges claimed by the assessee at Rs. 2,90,198 the CIT(A) has allowed capitalisation of Rs. 1,79,635. The expenditure on account of cost of furniture, soft furnishing and share issue expenses have been excluded on the ground that depreciation or replacement is otherwise permissible. We do not see any infirmity in this finding of the CIT(A). 15. The next disallowance is on account of advertisement expenses. The total expenditure claimed by the assessee under this head was Rs. 2,18,204. In the absence of details the expenditure attributable to installation of plant and machinery has been estimated by the CIT(A) at 50per cent at Rs. 1,09,192 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have given our careful consideration to the rival contentions. There is no dispute on facts. The demand relates to the year under appeal. The demand has admittedly been created after the end of the previous year but before the completion of the assessment proceedings. It is also not disputed that assessee has not accepted the claim but has challenged the levy by way of writ petition before the Supreme Court. The Supreme Court has granted interim stay of the order. However, as on today, the decision of the Asstt. Collector of Central Excise has not been cancelled. Therefore, the demand created subsists though the recovery of the demand has been deferred till the decision of the Supreme Court. The question for our consideration is as to whether in these circumstances it is permissible for the assessee to claim a deduction in the year to which the liability pertains. In Addl. CIT vs. Ratan Chand Kapoor, their Lordships of the Delhi High Court held that if a demand in respect of liability is raised for the period shortly after the year ended and before the assessment was completed then on the basis of decision of Kedar Nath Jute Mfg. Co., a revised return could be filed and deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rounds: (a) Inordinate delay of more than 4 years; and (b) Some of the issues are entirely new and hence not admissible under the Supreme Court's verdict in the case of Addl. CIT vs. Gurjargravures P. Ltd. The CIT(A) has considered the contentions on behalf of the assessee that additional grounds of appeal had been filed immediately after the appeal had been taken up for hearing and that some of the issues had arisen as a result of subsequent developments. Assessee's explanation that the delay in raising the grounds in any case was neither unreasonable nor wilful has also found favour with CIT(A). We also find that the CIT(A) has applied his mind on the issue of admission of additional grounds. For example, ground No. 4 raised before him has not been admitted for reasons recorded in para 27 of his order. In this connection, it may be useful to refer to the decision of the Hon'ble Supreme Court in the case of CIT vs. Jute Corporation of India Ltd., where their Lordships held as under: "(i) Power to tax on discovery of a new source of income is quite different from granting deduction on the admitted facts fully supported by the decision of the Supreme Court. If the tax liability o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development rebate on railway siding and engine, when this issue was never raised before the ITO. 6. The CIT(A) was not correct in law and on facts in directing to allow initial depreciation on plant and machinery installed after the dates relevant for grant of development rebate and work out relief admissible in accordance with law, when this issue was never raised before the ITO. 7. The CIT(A) was not correct in law and on facts in directing to allow deduction on account of depreciation on wooden shells or rolls under the proviso to s. 32(1)(ii) of the IT Act, when this issue was never raised before the ITO." 25. It appears from the above grounds that the grievance of the Revenue is regarding the admission of the additional ground when no such claim had been raised before the AO. As already noted, the powers of the CIT(A) are co-terminus with that of the AO. This proposition of law is well settled by the Hon'ble Supreme Court in the case of CIT vs. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC). In the case of Jute Corporation ofIndia, their Lordships have reiterated that the appellate authority has all the powers which the original authority may have in deciding the question be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of plant and machinery has been assailed. Initial depreciation was admissible on items of plant and machinery installed afterthe 31st May, 1974and upto31st March, 1976. Development, rebate was discontinued in respect of such items of plant and machinery except where the items of plant and machinery had been installed before 1st June, 1975 and the assessee had purchased or entered into a contract for the purchase with the manufacturer before 1st Dec., 1973. During the previous year relevant to asst. yr. 1976-77 the assessee had installed and put to use items of plant and machinery costing Rs. 21,91,13,819 out of which development rebate had been claimed on items of plant and machinery costing Rs. 19,82,18,084. Out of the balance of Rs. 2,08,95,736 neither initial depreciation nor development rebate was admissible in respect of machinery valued at Rs. 18,07,586. Assessee had omitted to claim additional depreciation on the value of plant and machinery costing Rs. 1,90,88,149. Full details of such machinery are available on assessment record and in fact depreciation had also been allowed by the AO. We agree with the contention raised on behalf of the assessee that the claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsurance spare parts form part of plant and machinery and accordingly directed to allow depreciation in respect of these parts. The CIT(A) has relied upon the following material in order to come to the conclusion that assessee is entitled to normal depreciation in respect of insurance spare parts: 1. Seminar proceedings on Spare Parts Management organised by National Productivity Council. 2. Extracts of letter written by Mr. Ray L. Allem, Manager, Management System Column, South America Rockwell Corporation; 3. International Accounting Standard on Accounting for property, plant and equipment; 4. Correspondence from machinery suppliers. 30. On careful consideration of rival contentions, we see no infirmity in the order of CIT(A) in directing to allow depreciation in respect of insurance spare parts. It may be pertinent to mention that out of Rs. 1,24,00,000 worth spare parts the insurance spare parts have been identified around Rs. 12 lakhs only. It has been found as a matter of the fact that the company had been advised by its technical collaborators and machinery suppliers that in order to ensure that the plant does not come to a standstill on account of sudden breakdown of v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yr. 1981-82. For asst. yr. 1976-77 i.e., the year under appeal the AO did not allow the change. The CIT(A) has, however, allowed the change. Revenue is aggrieved. 33. The learned Departmental Representative objected to the allowance of change of valuation of closing stock by the CIT(A) on the ground that the method sought to be adopted by the assessee does not give the true picture of assessable profits. According to the learned Departmental Representative, AO has the power to reject the method adopted by the assessee if it does not give true profits earned by the assessee in the business. According to the learned Departmental Representative, the expenditure incurred by the assessee has got to be included in working out the closing stock so that proper assessable profits are ascertained. In this connection, reliance was placed on the decision of the Supreme Court in. the case of CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108 : (1992) 188 1TR 44 (SC). 34. The learned counsel for the assessee Shri Vaish on the other hand, vehemently defended the order of the CIT(A). According to him, the Hon'ble Supreme Court in British Paints India has not overruled the decision of the M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods in process and finishing goods. On our enquiry we were informed that in the direct cost following expenditure has been taken into account : (a) Direct material cost (i) Raw material consumed (ii) Stores, spares and oil consumed (b) Direct labour cost Salary, wages, bonus, ex gratia, etc., to staff and workers. (c) Production overheads (i) Power and fuel consumed (ii) Repairs and maintenance to plant and machinery (iii) Repairs and maintenance to factory building Following items had not been included : (i) Administrative overheads and interest (ii) Selling and distribution overheads (iii) Depreciation. We would like to consider at the very outset as to whether the direct cost method adopted by the assessee is permissible systems of accounting and if so whether all the components that are to be taken into account in the direct cost methods have in fact been taken into consideration by the assessee in working the closing stocks. We would like to refer to the accounting standard Valuation of Inventories published by the Institute of Chartered Accountants of India, copy of which was made available to us by the assessee. 36. In para 7 of this publication it has been s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volume of production. This is defined in para 6.7. In para 6.8 'fixed costs' are defined to be those costs of production which by their very nature remain relatively unaffected in a defined period of time by variations in the volume of production. 'Net Realisable Value' has also been defined to be in the actual/estimated selling price in the ordinary course of business, less cost of completion and cost necessarily to be incurred in order to make the sale. Let us now test the method adopted by the assessee for valuation of its closing stock. The three factors are to be taken into account : (a) Cost of purchase (b) Cost of conversion (c) Other costs incurred in the normal course of business in bringing the inventories upto their present location and condition. In category (a) cost of purchase of raw material is to be taken into account including duties and taxes, freight inwards and other expenditure directly attributable to acquisition. This is provided in para 6.3 of the accounting standard Valuation of Inventories. It is nobody's case that cost of raw material has not been correctly taken by the assessee. 38. The second component to be taken into account is the cost of conve ..... 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