TMI Blog2014 (10) TMI 1026X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses incurred towards professional charges press announcements statutory fees etc., incurred towards buying back the assessee s shares from its share holders is an allowable deduction? 4. Whether the Tribunal was correct in holding that the proceeds from sale of raw material, stores etc. should be excluded from the total turnover for the purpose of computation of deduction under Section 80HHC of the Act by following the view of its earlier order? 5. Whether the Tribunal was correct in setting aside the finding of the lower authority that the interest component for allowing deduction under Section 80HHC should be computed as per Explanation i.e. at 90% to Section 80HHC of the Act by following the view of its earlier order? 3. The assessee is a public limited company manufacturing fuel injection pumps, spark plugs andautomotive products. The assessee has been following the method of valuation of work-in-progress at material cost and of finished goods at prime cost (i.e. direct material + direct labour) from its inception consistently. The statutory auditor in his report qualifying the final accounts of the assessee for the year ending 31.3.2000 has stated in para(d) as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sales was brought to tax. 5. During the relevant year, the assessee formulated a proposal to buy back equity shares from existing share holders on a proportionate basis and through a tender. In this connection, the company had incurred expenses towards professional charges, press announcements and statutory fees amounting to total of ₹ 27,82,411/- and an expenditure by way of professional fees of ₹ 6,01,250/- as a consequence thereof. The assessee claimed the entire expenditure as revenue expenditure on the ground that it was incurred exclusively for the purpose of the business. However, the assessing authority rejected the said claim on the ground that the said expenditure is incurred in connection with restructuring of share capital and with a view to improve return on equity over a period of time and this is an enduring benefit sought to be achieved from buy back of shares. Therefore, total expenditure of ₹ 33,83,661/- incurred directly in relation to and in consequence to buy back is treated as capital expenditure and was disallowed. 6. The assessing authority included in the total turnover, sale of raw material, scrap. etc for the purpose of computati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal and the relief is granted to the assessee. 9. The learned counsel for the revenue assailing these findings contends relying on several judgments of various High Courts that there is no obligation to change the valuation in the opening stock because valuation of closing stock is changed. In support of his contention, he relied on judgment of the Madras High Court in the case of Commissioner of Income Tax .vs. Carborandum Universal Limited [149 ITR 758] where at Paragraph 15 it has been held as under:- Further, even though the change of the method has resulted in a detriment to the Revenue in the year in question, since the method is to be followed consistently year after year in future, this apparent detriment to the Revenue will get adjusted and disappear. Therefore, in view of the findings of the Tribunal that the change of the method is bona fide and is intended to be followed in future, year after year, the change has to be accepted by the Revenue, notwithstanding the fact that during the assessmenr year which is the first year when the change of method is brought about it has resulted in a prejudice or detriment to the Revenue. So long as the method of valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainrup Sampatram .vs. CIT (1953) 24 ITR 481(SC):TC2R.124 is that there is no rule that the opening stock and closing stock of the same accounting year must necessarily be valued on one and the same basis. It is permissible, therefore, for the assessee to adopt either market value or at cost price to value the closing stock as long as such change in the method of valuation is adopted bonafide and is thereafter continued year to year. In a year where the opening stock value adopted is in one method and closing stock is another, there is bound to be some anomaly in the year of change, but that will get ironed out and absorbed in course of time as the new method of valuation of stock is going to be appliedon a permanent basis thereafter in later years. I derive support for this view from CIT .vs. Carborandum Universal Ltd. (1984) 39 CTR (Mad) 272: (1984) 149 ITR 759 (Mad); TC2R.366 and British Paints India Ltd. .vs. CIT (1978) 111 ITR 53 (Cal): TC2R.122. 12. The Apex Court in the case of VKJ Builders Contractors (P) Limited .vs. Commissioner of Income Tax [318 ITR 204] at Paragraph 4 has held as under:- It is the fundamental principle of accountancy that the figure of the clo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid judgments it was held there is no need to change or amend the opening valuation. If such a change in the closing valuation is not bonafide, the revenue is under no obligation to accept it. They could insist on the valuation without the change. 15. But the question now is whether such a change is on account of assessing officer not accepting the valuation given by the assessee. As in this case, if the valuation made by the assessee is not in accordance with the accounting standards 2 and it requires to be brought in conformity with the same then is it necessary to correct the valuation of the opening stock. It is in this context, reliance is placed on the judgment of the Bombay High Court in the case of Commissioner of Income Tax, Bombay .vs. Ahmedabad New Cotton Mills Co.,[AIR 1928 BOMBAY 510] wherein it has been held as under:- Now what is common ground is that at any rate the stock at the end of the year 1925 was undervalued in the company s return. The company says it was also undervalued at the beginning of the year. That has not been strictly proved, but the whole case depends upon it, and therefore for the purposes of the present case we propose to assume tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the value of the closing stock of a year becomes the value of the opening stock of the next year. But in a case like this where the ITO has made an allegation of undervaluation and has valued the closing stock at the market rate rejecting the assessee s valuation, then to arrive at the correct figure of profit, the ITO must also value the opening stock in a similar fasion. If the assessee s method of valuation of the opening stock is accepted and at the same time that method is rejected for valuation of the closing stock, then a highly distorted figure of profit will emerge. This will be beyond the scope of the charging section. 18. The Apex Court in the case of Chainrup Sampatram .vs. Commissioner of Income-Tax, West Bengal [(1953) 24 ITR 481] stated as under:- The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from bothsides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realized on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income tax shall be charged for the year in respect of total income of the previous year of the very person. Therefore, if the basis for arriving at the valuation at the end of year is changed by the assessing authority without correspondingly changing the valuation of the opening stock then it results in charging income on a distorted figure which is not permissible in law. Therefore, 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 of the Act. Therefore, the 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 and against the revenue. 21. Substantial question No.3:- The facts are not in dispute. The assessee formulated the proposal to buy back equity shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructure of the company and as such that expenditure is revenue in nature. In support of this contention, reliance was placed on the judgment of the Apex Court in Commissioner of Income-Tax .vs. General Insurance Corporation [(2006)286 ITR 232(SC)] where it was held as under:- The capital base of the company prior to or after the issuance of bonus shares remains unchanged. Issuance of bonus shares does not result in any inflow of fresh funds or increase in the capital employed, the capital employed remains the same. Issuance of bonus shares by capitalization of reserves is merely a reallocationof the company s funds. As observed earlier, the issue of bonus shares by capitalization of reserves is merely a reallocation of company s funds. There is no inflow of fresh funds or increase in the capital employed, which remains the same. If that be so, then it cannot be held that the company has acquired a benefit or advance of enduring nature. The total funds available with the company will remain the same and the issue of bonus shares will not result in any change in the capital structure of the company. Issue of bonus shares does not result in the expansion of capital base oft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... destroy the securities so brought-back within seven days of the last date of completion of buy-back. Similarly Section 77AA reads as under:- 77AA.Transfer of certain sums to capital redemption reserve account.-Where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account referred to in clause(d) of the proviso to sub-section(1) of section 80 and details of such transfer shall be disclosed in the balance sheet . From the aforesaid Sections, it is clear that if the company purchases its own shares out of free reserves then the sum equal to the nominal value of the share so purchased shall be transferred to the Capital Redemption Reserve Account and after the company buys back its own security, it shall extinguish and physically destroy the securities within seven days after the completion of buy-back. 26. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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