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2014 (10) TMI 1026 - KARNATAKA HIGH COURTValuation of closing stock - Method of valuation of inventory - change in method of valuation - Tribunal reversing the finding of AO that the assessee had valued the work in progress at material cost (closing stock) contrary to Accounting Standard-2 as opined by the assessee’s statutory Auditor that profit before tax and profit after tax are understated by the assessee - HELD THAT:- If the change is bonafide and is accepted by the revenue then the question of changing the opening stock would not arise. If such a change is not bonafide, it will be open to the Revenue not to accept such a change in valuation and assess without such valuation. Once the said change in the valuation is accepted by the Revenue, the consequence is the value of the closing stock in the previous year would become value of the opening stock in the succeeding year. But if the assessing authority rejects the assessee’s valuation of the closing stock then to arrive at the correct figure of profit, the assessing authority should value the opening stock in a similar fashion. If the assessee’s method of valuation of the opening stock is accepted and at the same time his valuation of the closing stock is rejected then a highly distorted figure of profit will be arrived at. This will be the scope of charging section. When the assessee changes the valuation of the closing stock, there is no necessity to change the opening stock. But when the assessing authority changes the closing stock it becomes obligatory that the opening stock valuation has to be correspondingly changed on the basis of which the valuation of the closing stock is changed in order to arrive at correct figure of tax which is chargeable as tax under Section 4 - order passed by the Tribunal holding that the opening stock should also be revalued cannot be found fault with. Accordingly, the substantial questions of law 1 and 2 framed are answered in favour of the assessee. Nature of expenditure - expenditure towards professional charges, press announcements and statutory fees - revenue or capital expenditure - assessee formulated the proposal to buy back equity shares from existing share holders on aproportionate basis and through a tender - HELD THAT:- The increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit-making. The expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Issue of bonus shares does not result in the expansion of capital base of the company. It does not lead to any inflow of fresh funds into the company. The capital structure is not expanded. On the contrary the consequence of such buy-back of shares is the capital base of the company gets reduced and the capital structure will go down. It is not of an enduring effect so as to bring the expenditure incurred in this regard as capital expenditure. Where there is no flow of funds or increase in the capital employed, the expenditure incurred would be revenue expenditure. Therefore, rightly the Tribunal held that it is in the nature of revenue expenditure and allowed the same. - Decided against revenue.
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