TMI Blog1992 (8) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment order and consideration of the objections by the IAC have been followed in this case. 3. Assessee succeeded in part in an appeal before the CIT(A) and the revenue is aggrieved by the relief allowed to the assessee. Cross objection has been filed by the assessee. 4. We shall first deal with the appeal of the revenue. The Assessing Officer reduced the cost of plant and machinery (from the figure of Rs. 21,91,13,820 as claimed by Rs. 1,27,78,332). This has resulted in short allowance on account (i) development rebate ; (ii) depreciation ; and (iii) relief under section 80J. The sum of Rs. 1,27,78,332 comprised of the following : (1) Over-invoicing Rs. 61,58,000 (2) Non-capitalisation of certain pre-production expenses Rs. 22,05,832 (3) Disallowance of part of expenses on foreign technicians Rs. 44,14,500 ------------------------- Rs. 1,27,78,332 ------------------------- There is minor variation in the figure of over-invoicing due to certain arithmatical discrepancies in the assessment order. Whereas in the draft assessment order the Assessing Officer had mentioned the figure of Rs. 61,58,000 on account of over-invoicing as a result of directions under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rector of Enforcement Directorate was not binding upon the Assessing Officer and that it was open to the latter to record his own findings on the basis of evidence on record. By reference to para 3 of the assessment order the learned D. R. contended that there was lot of evidence available on record to justify the inference that assessee had resorted to over-invoicing of imported machinery. It was further contended that the issue before the Special Director of Enforcement was different and that the benefit of doubt has wrongly been given to the assessee in respect of alleged contraventions of foreign exchange regulations. 6. The learned counsel for the assessee, on the other hand, contended that the Special Director of Enforcement Directorate has recorded a categorical finding that the complaint filed against the company and its directors was without any merit and that the said order has been accepted by the Government as no appeal or review petition has been filed. According to the learned counsel, the finding recorded by a quasi-judicial authority cannot be disregarded unless some serious infirmity is shown in the order. Shri Vaish supported the order of CIT(A) in this regard b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the complaint, was organised through over-invoicing of the cost of plant and machinery. It was further alleged that the arrangement arrived at included unauthorised provisions for supply of certain items of equipment and plant and machinery which might have been required in the project. The complaint had thoroughly been investigated by the Director of Enforcement and by an order dated19-9-1979the assessee acquitted of all charges. The Special Director of Enforcement has recorded a finding that the existence of secret agreement between the assessee and its technical collaborators had not been established. The complaint that the technical collaborators had obtained 2% handling fee from the assessee and that there was over-invoicing in the purchase order with the machinery supplier Francies Shah and Warner and Philenderer was also held as not proved. The finding of Special Director is that the complaint was based on conjectures and was fanciful. It has further been held that there is evidence on record to rebut the allegation in the form of certificates affidavits from machinery suppliers and the certificate of the Chartered Accountant of the technical collaborators. On the on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion expenses to the tune of Rs. 22,05,832. The details of these expenses are as under : (i) Ceremonial expenses Rs. 40,343 (ii) Charges general Rs. 2,90,198 (iii) Business promotion expenses Rs. 85,163 (iv) Commitment charges Rs. 8,78,313 (v) Rent Rs. 2,96,504 (vi) Advertisement expenses Rs. 2,18,204 (vii) Ex-gratia allowance Rs. 1,95,101 (viii) Erection bonus Rs. 1,72,502 (ix) Commitment charges Rs. 29,304 ------------------------ Rs. 22,05,832 ------------------------ The expenditure of Rs. 40,343 incurred by the assessee on ceremonial expenses, according to the Assessing Officer, has nothing to do with the installation and commissioning of the plant and machinery. The Assessing Officer held that such expenditure may have publicity value but that would not be relevant for considering such expenditure for capitalisation. The CIT(A) has relied upon the decision of the Bombay High Court in the case of CIT v. Nirlon Synthetic Fibres Chemicals Ltd. [1982] 137 ITR 1 in support of the finding that the ceremonial expenses form part of the capital asset. Since the decision of the CIT(A) is in consonance with the decision of the Bombay High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue expenses which would otherwise be allowable as deduction but for the fact that these are incurred prior to commencement of production are entitled to be capitalised for ascertaining the cost of plant and machinery. The learned CIT(A) has followed the aforementioned decision of the Supreme Court as also the decision of the Delhi High Court in the case of Addl. CIT v. Rajindra Flour Allied Industries (P.) Ltd. [1981] 128 ITR 402 and the decision of the Madras High Court in the case of CIT v. Lucas TVS 118 ITR 306 (Sic). We, therefore, have no reason to interfere with the finding of the CIT(A) that the expenditure which would have been otherwise allowable as a revenue expenditure is entitled to be capitalised for the purposes of determination of the cost of plant and machinery. The appeal of the revenue thus fails on this ground as well. 12. Regarding the Cross-Objection filed by the assessee, we are satisfied that there is a totalling mistake of Rs. 1 lakh at page 20 of CIT(A)'s order. The sum total of the expenditure works out to Rs. 18,16,661. The order of the CIT(A) is modified to this extent. 13. We now deal with the disallowance of some expenditure made by the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction in respect of this demand could not be allowed. 19. The learned counsel for the assessee, on the other hand, relied upon the decision of Delhi High Court in the case of Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 and the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. to support the order of CIT(A). Shri Vaish contended that the mere fact that assessee has disputed the demand or that no provision had been made in the books of accounts is not a bar for allowance of deduction. According to Shri Vaish, even if the demand was created in the subsequent year it relates to the year under appeal and accordingly assessee was justified in making the claim before the Assessing Officer. 20. We have given our careful consideration to the rival contentions. There is no dispute on facts. The demand relates to the year under appeal. The demand has admittedly been created after the end of the previous year but before the completion of the assessment proceedings. It is also not disputed that assessee has not accepted the claim but has challenged the levy by way of writ petition before the Supreme Court. The Supreme Court has granted interim stay of the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable with the Assessing Officer at the time of assessment. In such circumstances, the CIT(A), according to the learned counsel, was justified in entertaining additional grounds of appeal. The learned counsel further contended that the objection of the revenue is only technical in nature as the Assessing Officer was present before the CIT(A) in the course of appellate proceedings. The Assessing Officer had in fact been given an opportunity under Rule 46A during the course of hearing of the appeal. 23. We have given our careful consideration to the rival contentions. It is observed from para 26 of the CIT(A)'s order that copy of the additional grounds raised had been forwarded to the Assessing Officer for his comments/objections. The Assessing Officer had objected to the admission on the following grounds : (a) Inordinate delay of more than 4 years ; and (b) Some of the issues are entirely new and hence not admissible under the Supreme Court's verdict in the case of Gurjargravures (P.) Ltd. The CIT(A) has considered the contentions on behalf of the assessee that additional grounds of appeal had been filed immediately after the appeal had been taken up for hearing and that s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the ground raised was bona fide and that the same could not have been raised earlier for good reasons. While permitting the assessee to raise an additional ground, the Appellate Assistant Commissioner should exercise his discretion in accordance with law and reason. " In the case before us Assessing Officer has been allowed an opportunity before admission of the additional grounds and the first appellate authority has found material on record enabling him to take a decision on the issues raised. The circumstances under which the grounds had not been raised originally have also been explained. In such circumstances, we do not find any fault with the decision of the CIT(A) in admitting the additional grounds. We accordingly dismiss this ground of appeal. 24. The 5th, 6th and 7th ground of appeal read as under : " 5. The CIT(A) was not correct in law and on facts in directing to allow development rebate on Railway Siding Engine, when this issue was never raised before the ITO. 6. The CIT(A) was not correct in law and on facts in directing to allow initial depreciation on plant and machinery installed after the dates relevant for grant of development rebate and work out r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of business had been looked into by the Assessing Officer during the course of assessment proceedings. The seeking of development rebate on the cost of railway siding was enlargement of the claim for development rebate and therefore, the CIT(A) was justified in admitting the same. This is permissible in view of the decisions of Gujarat High Court in the case of CIT v. Cellulose Products of India Ltd. [1985] 151 ITR 499 (FB) and the Calcutta High Court in the case of CIT v. Gordhandas Jerambhai [1985] 154 ITR 288. The issue as to whether development rebate is available in respect of cost of railway siding is covered by the decision of Orissa High Court in the case of Kalinga Tubes Ltd. v. CIT [1974] 96 ITR 20. We, therefore, confirm the decision of the CIT(A) in directing the grant of development rebate on the cost of railway sidings. 27. In the 6th ground of appeal the direction of the CIT(A) relating to grant of additional depreciation in respect of plant and machinery has been assailed. Initial depreciation was admissible on items of plant and machinery installed afterthe 31st May, 1974and upto31st March, 1976. Development rebate was discontinued in respect of such items of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 29. The next ground of appeal is relating to claim in respect of insurance spares and stand-by equipments. Assessee had set up a tyre manufacturing plant which was largely imported. In order to ensure that the breakdown of critical parts does not lead to virtual stoppage of plant, assessee had purchased critical spare parts from time to time and debited these to Stores Account. For assessment year 1980-81 assessee claimed period write off at 20% per annum of such stock of insurance spares on straightline basis which was disallowed by the Assessing Officer in that year on the ground that the claim was made in that year for the first time. In the course of assessment proceedings for the year under appeal, assessee had submitted a note explaining the nature and user of these spare parts. During the course of appellate proceedings additional ground was raised claiming normal depreciation in respect of these spare parts. The CIT(A) examined the claim of the assessee and held on merits that the insurance spare parts form part of plant and machinery and accordingly directed to allow depreciation in respect of these parts. The CIT(A) has relied upon the following material in order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hanged this method of valuation of closing stock of finished goods during the previous year relevant to assessment year 1980-81 as under : (c) Finished goods Lower of cost or realisable value. This change effected by the assessee in the method of valuation was rejected by the Assessing Officer. However, CIT(A) allowed the appeal of the assessee against which department is stated to be in appeal. For assessment year 1981-82 assessee effected yet another change in the method of valuation of closing stock, which is as under : (a) Raw material, stores spares Cost, periodic LIFO basis (b) Goods in process Direct cost (c) Finished goods Direct cost. This change in the method of valuation of closing stock was also rejected by the Assessing Officer. However, the CIT(A) allowed the change against which order appeal is stated to be pending before the Tribunal. 32. The year under appeal is stated to be the first year of assessment. Assessee accordingly raised an additional ground of appeal before the CIT(A) seeking to adopt the method of valuation as adopted for assessment year 1981-82. For assessment year 1976-77 i.e., the year under appeal the Assessing Officer did not allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is well settled proposition of law that a taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade in accordance with established method of stock valuation. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the Assessing Officer unless in his opinion the income of the trade cannot be properly deduced therefrom. This view is supported by the decision of the Supreme Court in the case of Investment Ltd. v. CIT [1970] 77 ITR 533. It is also well settled that assessee is permitted to change the method of accounting as well as method of valuation of closing stock from time to time subject to the condition that the Assessing Officer is satisfied that the change effected by the assessee is bona fide for meeting changed situation or changed circumstances and provided the change is for regular adoption. As is mentioned in para 31 of this order assessee has adopted the direct cost method in respect of goods in process and finishing goods. On our enquiry we were informed that in the direct cost following expenditure has been taken into account : (a) Direct Mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quisition less trade discount, rebates, duty drawbacks and subsidies, in the year in which they are accounted, whether immediate or deferred, in respect of such purchase. Para 6.4 defines cost of conversion as the cost which are specifically attributable to units of production i.e., the direct labour, direct expenses and sub-contracted work ; and (ii) production overheads, ascertain in accordance with either the direct costing or absorption costing method. Production overheads, it has been provided shall exclude expenses which relate to general administrative finance, selling and distribution. Para 6.5 defines direct costing whereby the cost of inventories is determined so as to include appropriate share of variable cost only, all fixed costs being charged against revenue in the period in which they are incurred. Since in the definition of direct costing, the words ' variable costs ' and ' fixed costs ' have been used, their definitions also become relevant. ' Variable costs ' are those costs of production which vary directly or nearly directly, with the volume of production. This is defined in para 6, 7. In para 6.8 ' fixed costs ' are defined to be those costs of production which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d costs are defined in para 6.8 to be those costs of production which by their very nature remain relatively unaffected in a definite period of time by variations in the volume of production. Depreciation would be such of the items which is charged on fixed percentage irrespective of volume of production. In our view, it could be excluded in working out the production overheads for determination of cost of conversion of goods. The only other item in respect of which a doubt has, arisen is in relation to interest on finance. Since the expenditure on finance has specifically been provided to be excluded in determining the cost of production, we are of the view that it is permissible to exclude the interest in respect of the finances. Thus it is seen that the method adopted by the assessee for valuation of closing stock is one of the recommended methods by the Institute of Chartered Accountants of India,New Delhi. The assessment year before us is the first accounting year of the business of assessee i.e., assessment year 1976-77. If the system of accounting is regularly followed in the subsequent assessment years there would not, in our view, be any loss to the revenue. Once a uniform ..... X X X X Extracts X X X X X X X X Extracts X X X X
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