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TMI Blog2003 (4) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... k valued at Rs. 13,44,777 claimed by the assessee on account of change in the method of account and valuation: (ii) Allowing deduction of legal expenses of Rs. 1,16,572 as revenue expenditure." 4. Briefly the facts are that the respondent assessee is a wholly owned subsidiary of ITC Ltd., Calcutta, engaged in the business of running hotels. For the year under consideration, it had filed a return declaring loss of Rs. 1,34,08,012, which was subjected to assessment under s. 143(3) by the AO vide his order dt. 30th Sept., 1983. The assessment resulted in a reduced loss of Rs. 32,12,851. The assessee challenged the various additions and disallowances made, before the first appellate authority. The decision of the CIT(A) in relation to the two aforesaid grounds are now presently assailed by the Department before us. 5. In relation to the addition of Rs. 13,35,777 on account of closing stock, the facts are as follows. The AO noticed that the assessee had changed its method in relation to closing stock as a result of which stock valued at Rs. 13,34,777 was written off in the current year. The difference arose on account of the assessee's action in adopting the practice of writing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Reliance was placed on Reform Flour Mills (P) Ltd. vs. CIT (1978) 114 ITR 227 (Cal). Our attention was also drawn to the decision of the Delhi Bench of the Tribunal in the case of Delhi Cold Storage (P) Ltd., in ITA 6653/Del/92, dt. 1st July, 1996, in this regard. 7. We have heard the rival submissions and have perused the material on record and proceed to dispose of the issue in the following manner. The business of the assessee is of running hotels. The stand of the assessee is that in view of the nature of the business and generally accepted business practices, the assessee decided to charge the consumables issued straightaway to the revenue account, as against the method in the earlier assessment year, according to which the consumables were taken as a part of the closing inventory at the end of the year. In our view, there is ample force and merit in the stand of the assessee. It is an accepted legal proposition that the choice of accounting policies and method of determination of income essentially lie with an assessee. However, a method chosen by the assessee should have relevance to the nature of business carried on by the assessee and is expected to be regularly employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation or accounting. In fact, the case of the Revenue in British Paints was that the method of valuation adopted by the company was not one of the recognised methods. 10. Now coming back to the instant case, it is not the case of the Revenue that the changed method of accounting resulting in the lower closing stock is a method not recognised or is inconsistent with the practices of the business in which the assessee operates. Therefore, the ratio of the decision of the apex Court in British Paints cannot be made applicable to the facts of the instant case. Hence, the Revenue has to fail on this ground. 11. The second ground taken by the Revenue is against the decision of the CIT(A) in holding that the legal expenses of Rs. 1,16,572 were allowable as Revenue expenditure. In brief, the facts giving rise to the present dispute are that the assessee had taken on lease land from one M/s Monarch Corporation who in turn had taken it an lease from Aga Ali Asker Wakf. It appears that some time in 1978-79, an injunction was obtained against the assessee from City Civil Judge, Bangalore, refraining the assessee from selling pork and wine in the hotel. The assessee, which was holding a val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case. 14. This appeal is accordingly disposed of. ITA No. 4925/Del/1989 Asst. yr. 1985-86: 15. In this appeal the Revenue has raised the following three grounds, which we shall deal in seriatim: On the facts and in the circumstances of the case the learned CIT(A) has erred in: "(i) allowing deduction of legal expenses of Rs. 2,69,967 as revenue expenditure; (ii) directing the AO to exclude amount paid for car insurance, while working out disallowance under s. 37(3A) of the IT Act, 1961: (iii) directing the DC (Asst) to allow depreciation for 18 months." 16. The first issue, with regard to the treatment of the legal expenses has been adjudicated upon by us is paras 11 to 13 above, while dealing with Revenue's appeal in ITA 4695/Del/1989, for the asst. yr. 1984-85. Our decision therein holds good in the present appeal as well. 17. The second ground preferred by the Revenue is with respect to the directions of the CIT(A) in excluding the amount of car insurance expenditure while working out the disallowance under s. 37(3A) of the Act. The AO had made a disallowance of Rs. 4,02,407 under s. 37(3A) of the Act, which, inter alia, included a sum of Rs. 5,300 representi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible. In this manner, he allowed the claim of the assessee for depreciation for a complete period of 18 months. Hence, the present appeal of the Revenue. 20. The rival counsel have made submissions in support of the contrary stands. After hearing the rival counsel and perusing the material on record, we find ample force in the stand of the assessee. While we do not dispute the fact that the AO is competent to impose such conditions as he may deem fit at the time of giving permission to the assessee to vary its previous year, however, it would also be fair to conclude that the conditions imposed must not only be valid and legal but should also stand the tests of reasonableness also. The High Court of Allahabad in the case of J.K. Synthetics Ltd. vs. ITO 1975 CTR (All) 256 : (1976) 105 ITR 864 (All) has clearly opined that the conditions which the AO may impose cannot run contrary to the provisions of the IT Act. In the present case, the condition imposed was that the depreciation claim of the assessee shall correspond to a previous year of 12 months alone while the actual previous year was to be reckoned with a period of 18 months. Undisputably, the said condition is contrary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal Representative reiterated the stand canvassed by the AO in the assessment order. According to him, the observations of the apex Court in the case of Cambay Electric Supply have a direct bearing on the dispute and, therefore, in terms of the same, the unabsorbed depreciation is required to be deducted for the purposes of computing the profits of business for the purposes of s. 80HHD. It is also canvassed by the learned Departmental Representative that the provisions of s. 80AB was required to be taken into consideration before computing the deduction allowable under s. 80HHD of the Act. Reference was made to the decision of the apex Court in Motilal Pesticides (I) (P) Ltd. vs. CIT (2000) 160 CTR (SC) 389 : (2000) 243 ITR 26 (SC) in this regard. According to the learned Departmental Representative, the provisions of s. 80HHD are akin to these of s. 80HHC. The learned Departmental Representative placed reliance on the decision of the High Court of Kerala in the case of CIT vs. V.T. Joseph (1997) 137 CTR (Ker) 318 : (1997) 225 ITR 731 (Ker), wherein it has been opined that the claim of deduction under s. 80HHC was restricted by the provisions of s. 80AB and, therefore, it was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an approved tour operator or as an approved travel agent is allowed a deduction, in computing its total income, of an amount equal to (i) 50 per cent of the profits derived from services provided to foreign tourists, payments for which are received in convertible foreign exchange and, (ii) so much of the remaining profits referred to above as are credited to a reserve fund to be utilised for the purpose of assessee's business in the prescribed manner. Sub-s. (3) to s. 80HHD prescribes the formula or method for determination of the profit derived from services provided to foreign tourists referred to in sub-s. (1). The relevant portion of sub-s. (3) as is applicable for the year under consideration is reproduced hereinafter: "Sec. 80HHD(3): For the purposes of sub-s. (1), profits derived from services provided to foreign tourists shall be the amount which bears to the profits of the business (as computed under the head "Profits and gains of business or profession") the same proportion as the receipts specified in sub-s. (2) bear to the total receipts of the business carried on by the assessee." In other words, according to s. 80HHD(3), for the purposes of s.80HHD(1), profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits of the current year were required to be taken into account and hence s. 72 of the IT Act did not apply. The position is, therefore, clean. Sec. 80HHC(3) refers to the above formula. It says that export profits shall be equal to Business profits x Export turnover/Total turnover In the case of s. 80P, s. 80M as it then stood, and other set of sections under Chapter VI-A, the business profits in the above formula is required to be worked out by computing the same as per the provisions of the Act. This could include s. 72 also. However, when it comes to s. 80HHC(3), the special definition of the words "profits of the business" as mentioned in cl. (baa) of the Explanation is required to be kept in mind. This clause expressly refers to profits of the business under the head 'Profits and gains of business". It refers to ss. 28 and 29. Therefore, the legislature has provided for an artificial formula only in s. 80HHC(3) under which the profits of the business are required to be computed on the basis of ss. 28 to 44D. It excludes s. 72. This is because the legislature wanted the profits of the current year to be taken into account. Hence, the legislature intended s. 72 to be kep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent year's depreciation and hence, needs to be deducted from the profits and gains of business. In this regard, reference can be made to the decision of the apex Court in CIT vs. Mother India Refrigeration Industries (P) Ltd. (1985) 48 CTR (SC) 176 : (1985) 155 ITR 711 (SC). According to the apex Court, the legal fiction envisaged under s. 32(2) for deeming the unabsorbed depreciation as a part of the current year's depreciation is only to achieve for the limited purpose of carry forward and adjustment of the same against other heads of income, in the absence of which, the aforesaid set off against other incomes would not have been available. The following extract of the decision in CIT vs. Mother India Refrigeration Industries (P) Ltd. throws ample light on the issue: "In other words, it clearly provides that in the matter of set off, the unabsorbed business losses of the earlier years will have preference over unabsorbed depreciation that is required to be carried forward under proviso (b) to s. 10(2)(vi) and no preference over the current depreciation is intended. It is true that proviso (b) to s. 10(2)(vi) creates a legal fiction and under that fiction, unabsorbed deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not attempt to judge the efficacy of the two contrary judgments of the Hon'ble High Court, we are inclined to follow the parity of reasoning old down in the case of A.B. Thomas Co. The Hon'ble Mumbai High Court in Shirke Construction had also noticed the cleavage of judicial opinion in the two contrary decisions of the High Court of Kerala, but it chose to adopt the ratio of A.B. Thomas Co. for the reasons discussed therein. It would be appropriate for us to refer to the well-known rule of construction that is, if two interpretations of a taxing statute are possible, the interpretation which is favourable to the assessee must be adopted, especially in cases involving interpretation of benefit giving legislation. Sec. 80HHD is indeed a piece of beneficial legislation intended to provide fillip and encouragement to the Indian tourism industry to earn the much needed foreign exchange. Hence, the reasons for us, to follow the decision of the Hon'ble High Court of Kerala in A.B. Thomas Co. 30. The reliance placed by the learned Departmental Representative in the case of Cambay Electric also, in our view, does not help the case of the Revenue. In Combay Electric, the apex Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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