1993 (1) TMI 110 - AT - Income Tax

Business Expenditure Carrying On Business Closing Stock In Part Insurance Company Manufacture And Sale Raw Material Written Down Value

Summary

Issues Involved:
1. Inclusion of custom duty in the valuation of closing stock.
2. Losses suffered by the assessee due to riots.
3. Disallowance of various expenses including Deevali expenses, general expenses, payment to club, disallowance under section 43B, staff welfare, and traveling expenses.
4. Disturbance of opening stock valuation.

Analysis:

1. Inclusion of Custom Duty in the Valuation of Closing Stock:
The primary issue was whether the custom duty on imported raw materials should be included in the valuation of closing stock. The assessee argued that their consistent method of valuing raw materials at invoice price without including import duty should be maintained, as it was accepted in previous years. The Department, however, insisted on including the import duty, citing the Supreme Court decision in CIT v. British Paints India Ltd. The Tribunal concluded that the raw materials must include the element of custom duty in their valuation to reflect the true income, aligning with commercial practices and accounting standards. The Tribunal also referenced the decision in K.G. Khosla & Co. (P.) Ltd.'s case, which supported the inclusion of custom duty in the closing stock valuation.

2. Losses Suffered by the Assessee Due to Riots:
The assessee claimed losses due to riots, including damage to the building, furniture, and stock, which were partially compensated by the insurance company. The Tribunal agreed with the assessee that the uncompensated losses should be allowed as deductions. The Tribunal differentiated between salvage value and scrap value, stating that the balance of the loss suffered by the assessee should be allowed as a deduction. The expenses incurred on repairs to the building were allowed as revenue expenditure, but the claim for reduction in the written down value of the building was not accepted, as the building was partially damaged and capable of restoration.

3. Disallowance of Various Expenses:
Regarding the disallowance of Deevali expenses, the Tribunal followed its previous decision and allowed these expenses based on the Board's circular. For club payments, the Tribunal directed the allowance of club subscriptions but not other related expenses. The disallowance under section 43B was to be allowed in the year of actual payment. The Tribunal did not interfere with the disallowance of staff welfare expenses.

4. Disturbance of Opening Stock Valuation:
The Department's appeal contested the CIT(A)'s direction to disturb the opening stock valuation. The Tribunal reversed the CIT(A)'s decision, referencing the Madras High Court decision in Carborandum Universal Ltd.'s case, which stated that disturbing the opening stock would imply disturbing the closing stock of the preceding year, beyond the jurisdiction of the current assessment year.

Conclusion:
The appeal filed by the assessee was allowed in part, while the appeal by the revenue was also allowed. The Tribunal's decisions were based on established accounting principles, legal precedents, and the need to accurately reflect the true income of the assessee.