9911796707
TMI Blog1991 (3) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... le of such imported raw material was not consumed during the previous year. A part of the imports remained unutilised as at the end of the accounting year. The customs duty paid in respect of such imported raw materials which were remaining in stock as at the close of the accounting year was Rs. 24,72,651. The assessee for the purpose of audited accounts took the cost of such closing stock at Rs. 92,61,206 which included the customs duty component of Rs. 24,72,651. The assessee's contention before the IAC (Asst.) was that this customs duty component represents the customs duty paid and in view of the special provisions of section 43B, the amount of Rs. 24,72,651 should be allowed as a deduction in computing the total income for the year. The Inspecting Asstt. Commissioner (Asst.) did not accept this contention and did not allow the assessee's claim for amending the method of valuing the closing stock of imported raw materials. The Commissioner(Appeals) confirmed the said action of the IAC (Asst.) 4. In the further appeal before us, the learned counsel for the assessee heavily relied on the decision of the Gujarat High Court in the case of Lakhanpal National Ltd. v. ITO [1986] 162 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come. It has been made abundantly clear by the authoritative pronouncement of the Supreme Court that section 145 confers not only a power on the assessing officer, but imposes a duty upon him, to make such computation for the purpose of deducing the correct profits and gains. This means that where accounts are prepared without properly valuing the stock-in-trade, it becomes the duty of the assessing officer to determine the income after making adjustments for the deficiency in the method of valuing the closing stock. The learned Departmental Representative further heavily relied on the order of the CIT(Appeals) in support of his contentions. He submitted that the decision of the Gujarat High Court in the case of Lakhanpal National Ltd. is not applicable to the facts of the case. 6. We have carefully considered the rival contentions and perused the records. Section 43B does not govern the valuation of closing stock and deals only with the disallowance of claim for deduction under section 43B where taxes remained unpaid. The established method of claiming deduction in the mercantile system of accounting based on the provision made in the accounts has all been disturbed by the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the rules of the Income-tax Act, or of that Act as modified by the provisions and schedules of the Acts regulating excess profits duty, as the case may be. For example, the ordinary principles of commercial accounting require that in the profits and loss account of a merchant's or manufacturer's business the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower, although there is nothing about this in the taxing statutes .. .. . " Where the market value has fallen before the date of valuation and, on that date, the market value of the article is less than its actual cost, the assessee is entitled to value the articles at market value and thus anticipate the loss which he will probably incur at the time of the sale of goods. Valuation of the stock-in-trade at cost or market value, whichever is the lower, is a matter entirely within the discretion of the assessee. But whichever method he adopts, it should disclose a true picture of his profits and gains. If, on the other hand, he adopts a system which does not disclose the true state of affairs for the determination o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kely to produce stock valuations which were seriously and substantially incorrect, thereby causing distortion of the assessment of the profits and gains for the year. " It is not only the right but the duty of the Assessing Officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say, as contended on behalf of the assessee, that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and the officer is not bound by the method followed in the earlier years. " and again the following observations at page 56 are relevant :-- " Section 145 of the Income-tax Act, 1961, confers sufficient power upon the officer -- nay it imposes a duty upon him -- to make such computation in such manner as he determines for deducing the correct profits and gains. This means that where accounts are prepared without disclosing the real cost of the stock-in-trade, albeit on sound expert advice in the interest of efficient administration of the company, it is the duty of the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -1982 through cheques on Hongkong Bank where the assessee had overdraft facilities. The IAC (Asst.) held that to this extent of borrowing the funds are diverted for advancing to the subsidiary company. On a proportionate basis, interest of Rs. 2,77,740 on a sum equal to the sum advanced to the subsidiary company was disallowed. The contention of the assessee that such transfer of funds was made for business purposes for purchase of shares was not accepted by the IAC(Asst.). The Commissioner(Appeals) found that the subsidiary company is wholly owned by the assessee and the Commissioner(A) found that the assessee could have paid the entire sum of Rs. 25 lakhs to its subsidiary with the accumulated profits of Rs. 114.53 lakhs and depreciation of Rs. 8.74 lakhs, even after meeting other outgoings and capital expenditure. Following the decision of the Calcutta High Court in Woolcombers of India Ltd. v. CIT [1982] 134 ITR 219, the CIT(A) allowed the assessee's claim. It was noticed by the CIT(A) that the assessee was operating a combined account with the Hongkong Bank and all business transactions are carried through that account. All the credits by way of receipts in the business were a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the assessee-company to divert its own funds in favour of its 100% subsidiary. In fact, the profits and gains of the subsidiary are ultimately the profits and gains of the assessee-company. The assessee's representative, therefore, submitted that factually and functionally the control of the subsidiary having vested with the assessee-company, the disallowance under section 36(1)(iii) is not justified and the CIT(A) has rightly deleted the same. Alternatively, he submitted, relying on the fund-flow statement, that the assessee-company had profits of Rs. 114.53 lakhs which is sufficient to finance the diversion of funds to the extent of Rs. 25 lakhs. The overdraft account is embedded with all the revenue receipts of the assessee. So, the earlier revenue receipts should be taken to have sufficed to finance the diversion of funds in favour of 100% subsidiary. The assessee's representative further vehemently argued that the Department has not proved any non-business purpose in which the diverted funds have come to be used. The disallowance, under section 36(1)(iii), according to him, is therefore, not justified in the facts and circumstances of the case. He relied on the decisions i ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
