TMI Blog1983 (9) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... e change inasmuch as it is considered preferable to write off the administrative overheads incurred in the same year instead of attributing a part of it to closing stock. The first appellate authority also recognised the assessee's claim on merits. In fact, the assessee has shown that international accounting standards also recommend such a method. The first appellate authority had only remitted the question back to the ITO for verification as to whether the assessee had included direct labour, factory overheads, etc. It is the assessee's case that it had included these items as works overheads. If so, we cannot have any complaint with the direction of the first appellate authority that the assessee's claim should be accepted after verification. However, the first appellate authority went further and found that the opening stock also should be similarly revalued. It is the assessee's case that it is not necessary to do so. There has been no suggestion that the assessee has changed its method with a view to manipulate its profits. In fact, the facts clearly show that the assessee has shifted to better and approved method of Closing stock valuation. It is the assessee's claim that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. (P.) Ltd. [1978] 113 ITR 294 (Cal.) and Reform Flour Mills (P.) Ltd. v. CIT [1978] 114 ITR 227 (Cal.) are all decisions rendered by different High Courts taking the uniform view that it is open to the assessee to make a change in the accounting method provided he satisfies the revenue on proper evidence that he has in fact changed the regular basis of accounting bona fide and not casually. No doubt, in Sarupchand's case, it was pointed out by Beaumont, Chief Justice that too frequent a change may disentitle the assessee from changing his method. Even granting that it is open to the ITO to impose conditions before permitting such a change, the direction of the first appellate authority, which has the effect of reducing the opening stock which was accepted as closing stock of the preceding year, could hardly be taken as a reasonable condition, unless, of course, he had also directed and the revenue had accepted a consequential relief by revaluation to the same extent of the closing stock of the earlier year as well. After considering the decisions, we do not find any justification for the further direction of the first appellate authority to revalue the opening stock as well. His ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to salvage part of the liability does not mean that the assessee could be credited with hindsight at the time of closing of the accounts. The opinion of the Labour Department could not, in our opinion, be brushed aside in the manner done by the first appellate authority. Under the circumstances, the assessee succeeds on this claim. This amount of Rs. 97,991 will be allowed as a deduction. It is needless to point out that the amount written back to the accounts when the actual liability fell short of the provision has to be taxed in the year in which the negotiation was completed, We empower and authorise the ITO to bring it back to taxation in case he had not done so consistent with the view taken by him in the assessment. 8. The next contention relates to the disallowance of 15 per cent of Rs. 1,80,055 being part of the amount paid as overriding amount to distributors. Though the assessee seems to contest the entire disallowance, under section 37(3A) of the Income-tax Act, 1961 ('the Act') on the grounds, it is clear that it has now confined its objection to the disallowance of 15 per cent of Rs. 1,80,055 only. The total amount paid was Rs. 10,01,382. Section 37(3A) authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uture customers though it may also be intended to retain present customers in a general sense. There is no quid pro quo between the outlay and the result. " In the assessee's case, the payment is nothing more than an additional compensation of the same nature as selling commission which has been allowed and has not been treated as sales promotion expenses. A selling agent's commission, in our opinion, can never be treated as an outlay on advertisement, publicity or sales promotion. This is part of selling cost. If it is allowed directly as a discount to the buyer, it is an abatement in the price. Even if the goods are routed through a distributor, or a selling agent, the commission (and bonus) is an expenditure in the nature of sale commission which, in our opinion, is totally distinct from expenditure on advertisement, publicity or sales promotion. The expenditure contemplated under sub-section (3A) of section 37 is an expenditure on appeal to the potential customers at large and not a remuneration for service rendered to the assessee. In an advertisement outlay, there is no quid pro quo. A person who sees the advertisement may or may not buy the product advertised. Our interpre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of the revenue that the assessee had not applied for recognition during the year and that the recognition clearly stated that it was with effect from 24-10-1978 which is after the end of the accounting year. The ITO seems to have gone by the impression that if the fund was in existence during the accounting year, subsequent recognition is good enough especially in view of section 155(13) which enables the ITO to allow the provision on such recognition. We are not able to say that his view was incorrect in view of the fact that the Madras Bench of this Tribunal, in the case of Palani Andavar Mills [IT Appeal No. 479 of 1980], accepted this view and this was followed in another case in Deccan Sugar Bakari Co. Ltd. [IT Appeal No. 1426 of 1982] by 'B' Bench at Hyderabad by order dated 17-5-1983. Even creation of the fund subsequent to the year was considered permissible for the assessment year 1976-77 by this Tribunal in IT Appeal No. 773 (Mad.) of 1981 dated 9-1-1982. Orient Pharma (P.) Ltd. v. ITO [1983] 16 TTJ (Mad.) 423. Section 40A(7) bars a provision when there is no recognised fund. If there was a provident fund in existence as at the end of the year, we do not see how a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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