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TMI Blog1985 (6) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) of the Act discussing 19 aspects of the variations to the returned income. These 19 items did not include the question of allowance of deduction claimed under machinery spares for which the directors and auditors' report and notes were staring at him. It is not clear whether the ITO has applied his mind to this aspect. The directors' report dated 9-4-1979 is as under: "10. Write off of machinery spares.---In their report, auditors have referred to Note No. 18 on the profit and loss account, which deals with the writing off of machinery spares. Your directors wish to state that the method now adopted by the company in this report is in line with the modern accounting practice already followed elsewhere." 3. The note No. 18 was as below: "From the year 1978, the company has adopted the practice of 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. The figures for repairs to plant and machinery for the year therefore include--- (a) Rs. 16,11,203---spare parts purchased during the year. (b) Rs. 40,54,730---charge for cost of spare parts as on 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he spares are used for day-to-day working and have also not been shown to be of no use to other parties collectively or individually. Without prejudice the Commissioner held that at least the scrap value or secondhand value should have been reflected. Accordingly, he set aside the order of the ITO with the observations mentioned in paragraph 1 above. The question whether the ITO in the fresh assessment is going to add Rs. 44,21,741 or lesser figure is, thus, not germane to the issues before us. 7. Shri Dastur did not dispute the basic facts. He, however, contended that the method adopted by the management takes into consideration certain well recognised principles of accountancy approved by the profession. Whilst the assessee-company has given the reason for its departure, though, it was not bound to give, there are other public limited companies having a similar line of thinking. For example, MICO Bangalore, though not referring to it specifically in the directors' report have adopted this method as seen from item 3 of the auditors' report as below: "From the current year, the method of accounting of consumable stores and machinery spares has been changed and these items are c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same unless he doubts the bona fides or finds that the new method is not consistently followed up in later years. There are no such allegations in this case. Relying on certain observations in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) at p. 175 Shri Dastur submitted that it is proper to refer to manual of auditing and other accountancy literature. He then referred to certain Tribunal judgments regarding a similar item, viz., import entitlements purchase price. It has been held that the unutilised portion of such entitlements need not appear in closing stock. Valuation of stock-in-trade is a necessary requirement of proper accounting but this principle does not apply to spares, packing material, etc., which are not intended for sale as such. He further referred to the case of CIT v. Kusum Products Ltd. [1984] 149 ITR 250 (Cal.) at page 252, regarding valuation of import entitlements remaining unutilised. He then explained his point with reference to case of film distribution rights. Without prejudice, as the assessee's method is cost or market whichever is less, and that the unused spares have no market, as the sale in respect of items imported under actual user's licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost and LIFO and the observations of the Third Member in IT Appeal No. 143 of 1979 in paras 15-22 would clearly show that although the assessee is entitled to choose initially any approved method, subsequent changes, if any, in the method have to answer the test prescribed in section 145 particularly as to how the old method which was giving true profits admittedly, would no longer do so. Computation of income cannot be allowed to be distorted beyond the legitimate needs of the occasion. Apart from bona fides, the assessee has to prove the circumstances which warrant distortion and the extent to which section 145 proviso would not apply. Relying on Minister of National Revenue v. Anaconda American Brass Ltd. [1956] 30 ITR 84 (PC), Shri Walvekar contended that a method of accounting not disapproved by accountancy profession does not ipso facto make it a regular method of accounting from which the profits can be deducted. 11. Shri Walvekar then invited our attention to the fact that the assessee has picked only one item for such overstatement of consumption. Why has the assessee not adopted the same system for packing materials also ? The assessee has not been consistent even in ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also concerned more with capitalisation than with determination of the legitimate outgoings in respect of the current year. Paragraph 5 of the Tribunal's order shows that the nominal value of the materials weighed in the mind of the Tribunal. In the case before us page 21 of the compilation gives classification (broad) below as on 31-12-1978: Rs. Items below Rs. 750 each 10.34 lakhs Items costing less than Rs. 10,000 each 10.41 lakhs Obsolete items 0.40 lakh Imported items less than Rs. 20,000 each 13.94 lakhs Other imported items 10.01 lakhs From this Shri Walvekar's contention was that full write off at the price of purchase cannot be called a regular and acceptable method of accounting and even if it does, the ITO is duly bound to make adjustments in accordance with the powers vested in him under section 145 proviso. 14. In his rejoinder Shri Dastur contended that the allegation of understatement of profit is more easily made than proved. Recommendations of the institute cannot be lightly brushed aside. What applies t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) (write-back of credit by managing agents and Associated Banking Corpn. of India Ltd. v. CIT [1965] 56 ITR 1 (SC). Summary of the case law is given in Sampath Iyengar's Law of Income-tax, Vol. 1, 7th edn., p 55. 16. Section 145 is worded in a manner different from the corresponding section 13 of the Indian Income-tax Act, 1922, insofar as the proviso is concerned. The relevant part of the proviso to section 13 is as under: "... If the method employed is such that, in the opinion of the Income-tax Officer the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner..." The corresponding provision applicable (to the facts of this case) in section 145 is as below: "... where the accounts are correct and complete to the satisfaction of the Income-tax Officer, but the method employed is such that, in the opinion of the Income-tax Officer the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner..." The pre-1961 provision did not specify in express terms that where accounts are correct and complete the ITO could still give a finding as to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period of years and the Income-tax Officer... merely took the profit as shown in the assessee-company's profit and loss account and balance sheet by which he held it to be bound, the Income-tax Officer was directed by the Privy Council to make a reassessment. Obviously, he could not conclude that the true profits could be ascertained on the basis of a gross undervaluation---CIT v. Sarangpur Cotton Co. [1938] 6 ITR 36 (PC)..." 18. The question, thus, is not whether change of method can be permitted but whether the changed method takes the case out of section 145 proviso. Indeed the changed method is also to be examined from the point of view whether it enables the ITO to determine whether the outgoings claimed in the accounts all qualify for deduction under sections 28 to 37 of the Act. Although 30 ITR 298 (sic) can have only a pursuasive value, there is no decision of the Indian Courts directly conflicting with the principles laid down therein. The case law cited at the bar regarding import entitlements, closing stock valuation, etc., is clearly distinguishable on facts. Even IT Appeal No. 1767 is to be taken as confined to the facts of that case. Import entitlements are mere ena ..... X X X X Extracts X X X X X X X X Extracts X X X X
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