TMI Blog1991 (6) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts manufactured by it. It is common ground that the customs duty paid each year was debited to the raw material purchases account along with the cost of raw material. It is also common ground that the excise duty paid on finished goods was fully accounted for in the books of account of the assessee. 4. There is yet another undisputed fact, that is that while valuing the closing stock of (a) imported raw asbestos fibre and (b) finished products the assessee had taken into account the customs duty on the former and the excise duty relating to the latter. The customs duty and excise duty components of the closing stock, it is common ground, are as follows :-- Customs duty Central Excise Duty 1985-86 Rs. 60,10,873 Rs. 3,58,545 1986-87 Rs. 76,81,519 Rs. 1,10,658 1987-88 Rs. 77,28,023 Rs. 2,60,609 5. In the assessment proceedings relating to all the three assessment years under consideration the assessee, inter alia, set up a claim to the effect that the customs duty and excise duty components of the closing stock must be deducted from the book profits of the assessee. This claim was set up by the assessee through what it has labelled "Profit Loss Adjustment Account", wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars 1986-87 and 1987-88 also. The Assessing Officer negatived the assessee's claim. In this regard the following considerations weighed with him :-- (1) The decision of the Gujarat High Court in the case of Lakhanpal National Ltd. has not been accepted by the Department. (2) Section 43-B does not permit any tinkering with the value of closing stock, which has been valued by the assessee itself according to its own past practice and also according to the established commercial principles. (3) Customs duty and excise duty already stand debited to the Profit Loss Account and, hence, what in essence the assessee wants is to revalue indirectly the closing stock by excluding from the value of the closing stock "an important element of cost, namely customs and excise duty". (4) The decision of the I.T.A.T., Delhi Bench-C in the case of Hindustan Computers Ltd. v. ITO [1987] 21 ITD 524 goes against the claim of the assessee. 7. The C.I.T. (A) declined to interfere in the matter. According to him sec. 43-B was introduced into the Income-tax Act, 1961 for the specific purpose of curbing the practice of claiming a deduction without payment. The assesee, however, seeks "total claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respectively customs duty and excise duty prepaid by the assessee. (viii) The value of the closing stock of raw materials and finished products are credited to the manufacturing account. This means that deduction in respect of customs duty and excise duty actually paid is not allowed in its entirety, but is limited to the duty paid on the raw material consumed and the finished products sold by the assessee during the relevant year of account. In other words, contrary to the clear provisions of sec. 43B, the assessee has been denied the benefit of deduction in respect of the customs duty/excise duty component of the value of the closing stock. In support of the aforesaid contentions the learned counsel for the assessee referred to and relied upon the Gujarat case of Lakhanpal National Ltd. 10. To a specific query from the Bench as to whether the ratio laid down by the Supreme Court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 in the matter of valuation of closing stock does not militate against the assessee's claim, Shri K.R. Ramamani, the learned counsel for the assessee, contended that the provisions of sec. 43B will certainly avail the assessee. 11. Shri D. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell settled that the choice of the method of accounting lies with the assessee. But the method of accounting must not only be a recognised method of accounting, but also must be regularly followed by the assessee. There is a further rider that the method of accounting must also be such that the assessee's income can properly be deduced therefrom. 16. It is well settled that the method of valuing stock on hand is but an aspect of the method of accounting followed by the assessee. As has been pointed out by the Supreme Court in the case of CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122, "whichever method of book-keeping is adopted, in the case of a trading venture, for computing the true profits of the year the stock-in-trade must be taken into account. If the value of the stock-in-trade must be taken into account, in the ultimate result the profit or loss resulting from trading is bound to get absorbed or reflected in the stock-in-trade unless the value of the stock-in-trade remains unchanged at the commencement of the year and the end of the year". Further, if the method of valuation of stock in hand adopted by the assessee is such that it does not enable the assessing authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowable under this Act in respect of-- (a) any sum payable by the assessee by way of tax or duty under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which sum is actually paid by him. Explanation : For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983 or any other assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commonwealth, and 4th. the true reason of the remedy ; and then the office of all judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of the mischief, and pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bono publico." In In re Mayfair Property Co. [1898] 2 Ch. 28, Lindley, M.R., in 1898 found the rule "as necessary now as it was when Lord Coke reported Hleydon's case. In Eastman Photographic Materials Co. v. Comptroller General of Patents, Designs and Trade Marks [1898] A.C. 571 the Earl of Halsbury re-affirmed the rule is follows : 'My Lords, it appears to me that to construe the statute now in question, it is not only legitimate but highly convenient to refer both to the former Act and to the ascertained evils to which the former Act had given rise, and to the later Act which provided the remedy. These three things being compared, I cannot doubt the conclusion.' " In Thomson v. Lord Clanmorris [1900] 1 Ch. 718, Lord Lindley paraphrases the position thus : " In construing any.... st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , all along, the assessee was valuing the stock in hand at cost, which, according to well established accounting principles and trading practice, rightly, included the customs/excise duty component. The assessee's case is that it had been denied full revenue deduction in respect of customs and excise duties actually paid by it during the relevant previous years. Let us examine this claim, in the light of well-settled accounting principles. It is not disputed that the customs and excise duties actually paid were debited, in their entirety, to manufacturing account. This would mean that customs duty entered into the cost of imported raw asbestos fibre, becoming in the process and integral part of the cost of production of the goods manufactured by the assessee. Similarly, excise duty also become one of the components of the cost of production. 26. Now, had the entire stock of raw asbestos fibre imported by the assessee been utilised for manufacturing asbestos cement products, and had the entire stock of manufactured goods been sold during the relevant year of account itself, then the profit earned by the assessee would be represented by the excess of sale price over cost price. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arily enter into the computation of the value of closing stock. Any attempt to exclude from the value of closing stock the duty component will distort the true profits of the assessee. Therefore, such exclusion cannot be permitted. 32. As for the Gujarat case of Lakhanpal National Ltd. the report does not indicate that the attention of the learned Judges were drawn either to the mischief rule of construction or to the principles of valuation of closing stock as enunciated by the Supreme Court in the case of Chainrup Sampatram. Therefore, with respect, we hold that the said judgment of the Gujarat High Court cannot avail the assessee. 33. One of the points urged by Shri D. Ravindran, the learned Departmental Representative, was that the case before us is one of change in the method of accounting. As we see it, the case before us is not one of change in the method of accounting. The undisputed fact is that in its books of account the assessee, while valuing the closing stock at cost, had rightly taken into account customs/excise duty paid by it during the relevant year of account. It was only for income-tax purposes that, through what it had labelled as "Profit and loss adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration that sec. 32-A contemplates the grant of investment allowance either in the year of installation or in the year in which the plant and machinery was first put to use. The CIT(A) was not impressed by the argument that there is nothing in sec. 43A which puts an embargo on the grant of such allowance to the assessee because,' according to the first appellate authority, sec. 32-A is a complete code by itself. It is in these circumstances that the assessee is now before us. 40. Shri K. R. Ramamani, the learned counsel for the assessee reiterated the arguments that had been advanced unsuccessfully before the lower authorities on his part, the learned Departmental Representative strongly supported the impugned orders of the lower authorities. 41. Sec. 43A was introduced by the Finance (No. 2) Act, 1967 with effect from April 1, 1967. The said section was introduced in the wake of the 1966 devaluation of the Indian rupees and with a view to mitigating the hardship suffered by the assessees who had imported capital assets from abroad before the date of devaluation of the rupee on deferred payment terms or against loan in foreign currency, and who, as a result of the devaluatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 to 41 (both inclusive), the conclusion is inescapable that the augmenting of actual cost by the incremental cost occasioned by fluctuation in the rate of foreign exchange contemplated by sec. 43A(1) is also applicable to sec. 32A, which also talks of actual cost. It should, therefore, follow that the incremental cost would go to augment the actual cost even for purposes of computing investment allowance under sec. 32-A. 46. So far there is no difficulty. Difficulties, however, arise when we come to the modalities of giving effect to the provisions of sec. 43A(1), particularly in the context of investment allowance. 47. "Actual cost" has both a time dimension and a price dimension. Sec. 43A(1), which governs the price dimension, has this effect, namely that the incremental cost gets added to the actual cost. When we say that actual cost has a time dimension, we mean that, conceptually speaking, actual cost is necessarily related to the point of time at which an asset is purchased. 48. When we are dealing with the Income-tax Act, the time dimension assumes special significance. For example, to be entitled to depreciation in respect of a depreciable asset, the assessee must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stence during the relevant previous year. 51. Investment allowance, on the contrary, defies such a simple solution. It is allowed either in the year of installation or in the first year of user of the plant and machinery. Thus, investment allowance is a one-time allowance. Now, having regard to this special feature, how does one go about giving effect to sec. 43(1) ? Here, sec. 154 readily suggests itself. But considering the fact that a bar of limitation by time is incorporated into it, that section provides, only to a limited extent, the procedural modalities for adding the incremental cost to the actual cost. Stated differently, that section cannot be invoked to add to the actual cost the incremental cost that arises after the expiry of the limitation period incorporated into that section. 52. Section 155 is silent on the issue. 53. Again, the granting of investment allowance is, inter alia, subject to the creation by the assessee of investment allowance reserve. This would mean that even in cases where recourse is take n to sec. 154, the assessee will have to create incremental investment allowance reserve. But the difficulty here is that, as pointed out by the Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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