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TMI Blog1999 (10) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... based on surmises and conjectures ? 3. Whether, on the facts and in the circumstances of the case, should not the Tribunal have equated the contribution to FACT with the contribution to Government School, Eloor (vide paragraph 7 of the order) and considered and decided the ground, accordingly ? 4. Whether, on the facts and in the circumstances of the case and also in the light of the provisions of section 145(1) read with the decision of the Supreme Court in CIT v. British Paints India Ltd. [1991] 188 ITR 44, the Tribunal is right in law and fact in deleting the addition of Rs. 9,00,000 made to the closing stock ? 5. Whether, on the facts and in the circumstances of the case and also for the reasons stated in the enclosure to the R. A., the assessee is right in law and fact in changing the method of valuation of closing stock?" The facts are as follows : The assessee is a public sector unit engaged in the manufacture and sale of certain chemicals like caustic soda, chlorine, etc. During the previous year, the assessee had made payments of Rs. 5,34,406 to the FACT School. The claim of the assessee was that the above amount should be included under the welfare expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further argued that the above expenditure shall not come within the purview of section 40A(9) of the Act and the expenditure made by the assessee for the welfare of the employees of the assessee is allowable under section 40A(10) and also section 37(1) of the Act. It would be relevant to extract sub-sections (9) and (10) of section 40A. Section 40A(9) reads : "No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution, for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (v) of sub-section (1) of section 36, or, as required by or under any other law for the time being in force." Sub-section (9) of section 40A is intended to impose restrictions on the expenditure towards setting up or formation of or contribution to, any fund or trust, or association, etc., except in respect of the contribution to any recognised provident fund or as required under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplete discretion of the trustees. Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposit. With a view to discouraging the creation of such trusts, the Bill seeks to make a provision that no deduction shall be allowed in the computation of taxable profits in respect of any sums paid by the taxpayer as an employer towards the setting up of, or as contribution to, any fund or trust for any purpose, except where such sum is paid or contributed (within the limits laid down under the relevant provisions) to a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes of and to the extent required under any other law." The object and reasons for the introduction of sub-sections (9) and (10) in the Act would make it clear that any expenditure met by an assessee wholly and exclusively for the welfare of the employees of the assessee is an allowable deduction in computing the income of the assessee. Section 37(1) reads : "General.---(1) Any expenditure (not being expenditure of the nature de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iency or commercial expediency might require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex-employees. Any expenditure laid out or expended for their benefit, if it satisfied the other requirements, must be allowed as a deduction under section 37(1) of the Act. The fact that somebody other than the assessee was also benefited or incidentally took advantage of the provision made, should not come in the way of the expenditure being allowed as a deduction under section 37(1) of the Act. Nevertheless, it is an expenditure allowable as deduction under the Act." The Supreme Court in CIT v. Bombay Dyeing and Manufacturing Company Ltd. [1996] 219 ITR 521, held that the amount contributed to the State Housing Board for constructing tenements for the workers of the assessee was for carrying on the business of the assessee-company more effectively by having a contented labour force and was in the form of revenue expenditure. There, the assessee contributed an amount of Rs. 2,25,000 to the Maharashtra Housing Board towards construction of tenements for the workers of the company. The assessee contended that the above expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Government but also obtained this advantage or privilege for an indefinite period, and hence the expenditure in question was capital in character and hence not admissible for deduction under section 37(1) of the Act. The facts of the above case do not have any similarity with the facts of the present case and the principles laid down in the above case have no application. In the case in hand, the expenditure met by the assessee was wholly and exclusively for the welfare of its employees and also for carrying on the business of the assessee-company more efficiently by having a contented labour force. It was neither a donation covered under section 40A(9) nor of a capital in nature not covered under section 37(1) of the Act. Hence, the Tribunal is fully justified in allowing the above expenditure towards contribution for the running of the FACT school, as an expenditure for the smooth functioning of the business of the assessee and also an expenditure wholly and exclusively for the welfare of the employees of the assessee and thus allowable under section 37(1) as well as section 40A(10) of the Act. Thus questions Nos. 1 to 3 are answered in favour of the assessee and against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be included for assessment." Learned senior counsel for the Revenue placed reliance on the decision of the Supreme Court in CIT v. British Paints India Ltd. [1991] 188 ITR 44. That was a case where the assessee-company, as a consistent practice, valued its goods-in-process and finished products exclusively at cost of raw materials totally excluding overhead expenditure. The assessee adopted the above method on the ground that the goods being paints had limited storage life and if not quickly disposed of were liable to lose their market value. The Tribunal held that there was no evidence to show that the goods in stock deteriorated in value and there was no justification for excluding the overhead expenditure in valuing the stock. The High Court reversed the decision of the Tribunal holding that having regard to the consistent practice of the assessee, the Tribunal was not justified in rejecting the method of valuation of the stock-in-trade. The Supreme Court reversed the decision of the High Court and held that the assessee was not following the correct system of accounting and the method of valuation in the stock-in-trade was likely to result in a distorted picture of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The change has to be effected by adopting the new method for valuing the closing stock which will, in its turn, become the value of the opening stock of the next year. If, instead, a procedure is adopted for changing the value of the opening stock also, it will lead to a chain reaction of changes in the sense that the closing value of the stock of the year preceding will also have to change and correspondingly the value of the opening stock of that year and so on." The assessee was compelled to change the method of valuation at the instance of the Accountant-General (Audit), Kerala, The assessee had followed the same changed method of valuation in the subsequent year. Whenever there is a change in the method of valuation, there is bound to be some distortion in the calculation of profits in the year in which the change takes place. The change adopted by the assessee was bona fide and intended to be followed in the future years and it was not adopted for the same assessment year only but to be consistently followed for the subsequent years. Hence, the revised method of valuation of closing stock was rightly accepted by the Tribunal and we find no reasons to interfere with the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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