TMI Blog1992 (8) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. The AO 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 of (i) development rebate; (ii) depreciation; and (iii) relief under s. 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 arithmetical discrepancies in the assessment order. Whereas in the draft assessment order the AO had mentioned the figure of Rs. 61,58,000 on account of over invoicing as a result of directions under s. 144B. The amount was revised as (i) Over invoicing of machinery purchased from M/s Francies Shaw Co. 40,000 Rs. 7,20,000 (ii) Over invoicing of machinery purchased from M/s Warner Philendere DM 1,50,000 Rs. 4,50,000 (iii) 2 per cent handling charges referred to in cl. 1.1 of the secret agreement dt.9-11-1970 Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esorted 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 by submitting that the evidence on record does not establish the over-invoicing of imported machinery. Shri Vaish contended that even if for arguments sake it is admitted that there was a secret agreement as alleged, the actual cost paid for import of machinery to the assessee would remain the same as it is nobody s case that assessee did not p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd by an order dt.19th Sept., 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 2per cent handling fee from the assessee and that there was over-invoicing in the purchase order with the machinery supplier Francies Shah and Warnter 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 and affidavits from machinery suppliers and the certificate of the Chartered Accountant of the technical collaborators. On the one hand there is evidence by virtue of which the cost of machinery is established to be the same as disclosed by the assessee. On the other hand there is allegation and evidence that may give rise to suspicion. On consideration of totality of the facts and circumstances of this case and the evidence on record, we hold that the allegation over-invoicing of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 AO, has nothing to do with the installation and commissioning of the plant and machinery. The AO 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 vs. Nirlon Ltd. (1981) 25 CTR (Bom) 155 : (1982) 137 ITR 1 (Bom) 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 Nirlon Ltd. and no contrary decision has been brought to our notice, we have no reason to interfere in the order of the CIT(A), in this regard. 11. Out of general charges amounting to Rs. 2,90,198 the learned CIT(A) has r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 vs. Rajindra Flour Allied Industries Pvt. Ltd. (1981) 128 ITR 402 (Del) and the decision of the Madras High Court in the case of CIT vs. Lucas TVS Ltd. 118 ITR 306 (sic (1977) 110 ITR 346 (Mad)). 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) in respect of which assessee is aggrieved. 14. Out of general charges claimed by the assessee at Rs. 2,90,198 the CIT(A) has allowed capitalisati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Addl. CIT vs. Ratan Chand Kapoor (1984) 43 CTR (Del) 283 : (1984) 149 ITR 1 (Del) and the decision of the Supreme Court in the case of Kedar Nath Jute Mfg. Co. 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 AO. 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 order. However, as on today, the decision of the Asstt. Collector of Central Excise has not been cancelled. Therefore, the demand created subsists though the recovery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds of appeal. The learned counsel further contended that the objection of the Revenue is only technical in nature as the AO was present before the CIT(A) in the course of appellate proceedings. The AO had in fact been given an opportunity under r. 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 AO for his comments/objections. The AO 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 Addl. CIT vs. 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 some of the issues had arisen as a result of subsequent developments. Assessee s explanation that the delay in raising the grounds in any case was neither unreasonable nor wilful has also found favour with CIT(A). We also find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reads as under: "5. The CIT(A) was not correct in law and on facts in directing to allow development rebate on railway siding and 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 relief admissible in accordance with law, when this issue was never raised before the ITO. 7. The CIT(A) was not correct in law and on facts in directing to allow deduction on account of depreciation on wooden shells or rolls under the proviso to s. 32(1)(ii) of the IT Act, when this issue was never raised before the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR (Guj) 278 (FB) : (1985) 151 ITR 499 (Guj)(FB) and the Calcutta High Court in the case of CIT vs. Gordhandas Jarambhai (1985) 154 ITR 288 (Cal). 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. vs. CIT (1974) 96 ITR 20 (Ori). 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 Addl. 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 plant and machinery except where the items of plant and machinery had been installed before 1st June, 1975 and the assessee had purchased or entered into a contract for the purchase with the manufacturer before 1st Dec., 1973. During the previous year relevant to asst. yr. 1976-77 the assessee had installed and put to use items of plant and machinery costing Rs. 21,91,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claimed period (sic) write off at 20 per cent per annum of such stock of insurance spares on straight line basis which was disallowed by the AO 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 come to the conclusion that assessee is entitled to normal depreciation in respect of insurance spare parts: 1. Seminar proceedings on Spare Parts Management organised by National Productivity Council. 2. Extracts of letter written by Mr. Ray L. Allem, Manager, Management System Column, South America Rockwell Corporation; 3. International Accounting Standard on Accounting for property, plant and equipment; 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asst. yr. 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 AO. 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 asst. yr. 1981-82. For asst. yr. 1976-77 i.e., the year under appeal the AO did not allow the change. The CIT(A) has, however, allowed the change. Revenue is aggrieved. 33. The learned Departmental Representative objected to the allowance of change of valuation of closing stock by the CIT(A) on the ground that the method sought to be adopted by the assessee does not give the true picture of assessable profits. According to the learned Departmental Representative, AO has the power to reject the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regularly cannot be discarded by the AO 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. vs. CIT (1970) 77 ITR 533 (SC). 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 AO 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 material cost (i) Raw material consumed (ii) Stores, spares and oil consumed (b) Direct labour cost Salary, wages, bonus, ex gratia, etc., to staff and workers. (c) Production overheads (i) Power and fuel consumed (ii) Repairs and maintenance to plant and machinery (iii) Repairs and maintenance to factory building ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work; and (ii) production overheads, ascertained 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 by their very nature remain relatively unaffected in a defined period of time by variations in the volume of production. Net Realisable Value has also been defined to be in the actual/estimated selling price in the ordinary course of business, less cost of completion and cost necessarily to be incurred in order to make the sale. Let us now t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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., asst. yr. 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 system of accounting is adopted the determination of correct profit by such method would be fair and reasonable. Since the appeals for subsequent years are also pending at one stage or the other, we approve the method of accounting adopted by the assessee so that the method is consistently followed in the subsequent assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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