TMI Blog1983 (11) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was liable to pay additional customs duty to the extent of Rs. 55,70,000 for which provision has been made in the accounts of 1976. The said liability was estimated at the average additional rate at 65 per cent. Thus, it was claimed that the said sum is an allowable deduction as the liability has accrued in that year. The ITO did not accept this contention. He held that no demand has been raised by the customs authorities for the payment of additional duty for which provision has been made and as such it cannot be said that the liability has crystallised in the year 1976. He was of the view that it is not as if that even goods imported within the 10 per cent limit should be denied the benefits of 40 per cent concessional rate. He noticed that no provision for similar additional duty has been made in the accounts of the year 1977. Thus, the provision for additional customs duty of Rs. 55,70,000 was disallowed by him. On appeal, the Commissioner (Appeals) held that the liability for additional duty arose during this year, and so, the assessee was on firm ground when it provided the additional liability. The liability fairly estimated by the assessee is allowable as deduction. He d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not arise. He urged that the ratio laid down by the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. has been rightly applied by the Commissioner (Appeals). Thus, he supported the order of the Commissioner (Appeals) in allowing the deduction of Rs. 55,70,000. 4. We have considered the rival submissions. Under section 12 of the Customs Act, duties of customs shall be levied at such rates as may be specified in the Customs and Tariff Act, 1975 ; or any other law for the time being in force on goods imported into, or exported from India. Under section 18 of the Customs Act provisional assessment shall be made. Under section 46 of the Customs Act, importer of any goods shall make entries thereof by presenting to the proper officer a bill of entry for home consumption or warehousing in the prescribed manner. Section 143 deals with power to allow import or export on execution of bond in certain cases. It reads as under : " 143. Power to allow import or export on execution of bonds in certain cases---(1) Where this Act or any other law requires anything to be done before a person can import or export any goods or clear any goods from the control of officers of customs and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mports (Registration or Contract) Regulations, 1965. We do hereby bind ourselves, our legal representatives and successors to pay on demand and without any demur, the difference, if any, between the duty provisionally assessed by the Collector of Customs under the said section 18(1) of the Customs Act, 1962, the duty finally assessed by the Collector in respect of each consignment. It is also agreed that any amount due under this bond may be recovered in the manner laid down in sub-section (1) of section 142 of the Customs Act, 1962, without prejudice to any other mode of recovery. The guarantee hereby given under section 143 of the Customs Act on this, the Tenth Day of March 1973 shall be continuing one and shall not be revoked with or without the consent of the President or the Collector of Customs, Madras. " Item 72A(ii) of the Indian Customs and Central Excise Tariff reads as under : " All spare parts, other raw materials (including semi-finished material), or consumable stores imported, as a part of a contract or contracts, registered in terms of sub-item (i), provided the total value of such spare parts, raw materials and consumable stores are up to such value as does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e final decision in this behalf has necessarily to come from the customs authorities and the appellate authorities. It is precisely for this reason that section 143 also prescribes that the assessee has to execute a bond for the payment of additional customs duty that may become payable when the final assessment is made. Thus, we are unable to accept the contention of the assessee that the liability of additional customs duty has arisen in this year. Whatever be the interpretation of Item 72A, in view of the provisions of section 143 and the bond executed thereunder, the liability for additional customs duty will arise only when the final assessment is made and additional liability is demanded. Till then there is no additional liability which arises in this year. Thus, the claim for additional liability of Rs. 55,70,000 cannot be allowed as a deduction as no liability for additional duty has arisen in this year. 5. In Pope The King Match Factory v. CIT [1963] 50 ITR 495 (Mad.) a demand for excise duty amounting to Rs. 21,373 was served on the assessee by the Collector of Excise on 9-12-1954. The assessee debited this amount in its accounts and claimed the same as deductible allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 1954-55, the amount was allowable as business expenditure in that year. It was observed as under : ". . . As we have pointed out, there can be no liability, either notional or legal, unless and until a demand had been made by the appropriate authority. A demand in the exercise of the lawful authority conferred by the Central Excise and Salt Act imposes a legal liability upon the assessee and it is only at that point of time that he is called upon to incur the expenditure in question. It may be that the loss in processing was discovered at an earlier point of time, but that circumstance did not, as we have pointed out, impose a liability upon the assessee to pay any amount of tax. The determination of the quantum of tax was within the exercise of the administrative discretion conferred upon the excise authorities, and till they determined that the assessee was liable to pay any amount, there was no question of any liability arising. It is not disputed that such demands were made only during the accounting year relevant to the present assessment year and it should necessarily follow that it was a liability that arose and was discharged during that account year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition of Rs. 35,81,189 added by the ITO as undervaluation of work-in-progress, but deleted by the Commissioner (Appeals). The assessee has all along been valuing the work-in-progress at material cost plus direct wages. For the first time, as on 31-12-1976, relevant for the assessment year 1977-78, a change in the method of valuation has been adopted and the closing work-in-progress has been valued at material cost only. In the annual report for the year ending 1976, in item 10 of Schedule II, it is stated as under : " There has been a change in the mode of valuation of the closing work-in-progress, inasmuch as it has been valued at Material Cost as against the earlier practice of valuing the same at Materials Cost plus Direct Wages. This change has resulted in a reduction of profits to the extent of Rs. 35,81,189 for the year 1976. " In the director's report, there is no reference to the change in the method of valuation of closing work-in-progress. The assessee, in its letter dated 22-8-1978, which is extracted in the assessment order, explained that the direct cost is basically the input of raw materials and components and labour cost is not as directly related to the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. We have considered the rival submissions. The question of valuation of work-in-progress has been considered in some of the text books on accountancy. In Advanced Accounting by Jamshed R. Batliboi, 24th edition, it is observed as under : " Work-in-progress --- In a manufacturing concern, the item 'work-in-progress' would mean goods in process of manufacture, whereas in case of a contractor, the same expression would mean work partly executed but not completed. Where a separate manufacturing account is prepared, work-in-progress at commencement will appear on the debit, and that at the end of the financial period will appear on the credit side of the manufacturing account. Great care should be taken in valuing work-in-progress. The basis of valuation considered as sound and correct and the one that is generally followed in practice is the cost of raw materials and direct wages plus a reasonable proportion of works on cost, i.e., manufacturing expenses. Manufacturing Expenses or Factory Charges --- Under this head are generally included all the various expenses which have a direct bearing on the running of the factory or works, such as Factory Rent, Factory Insurance, Motive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant read as under : " 25. A manufacturing expense may be a direct cost or an overhead. A direct cost is an expense which is specifically attributable to units of production. An overhead on the contrary, is an expenditure which is related to the general environment in which manufacture takes place and normally accrues wholly or partly on a time basis. Thus, where manufacturing wages are paid on a time basis, e.g., per month, they may be considered as an overhead. But where manufacturing wages are paid on a piece work basis, they must necessarily be considered as a direct manufacturing cost. 26. The above considerations must hold good whether the method of determination of cost is based on 'direct costing' or 'absorption costing'. Where the 'direct costing' system is used, the products manufactured bear only their share of manufacturing variable costs of the period. When the 'absorption costing' system is used the products bear an appropriate share of all costs associated directly or indirectly with the manufacturing activities of the period. " It is mentioned in para 25 that a manufacturing expense may be direct cost or an overhead. Where manufacturing wages are paid on a tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l cost, the assessee cannot adopt such method. We do not know whether those companies were adopting that method from the beginning or they had changed to that mode in the middle and for what reasons. There may be number of companies also which may be following the method of material cost and direct wages. We cannot be guided by the practice followed by few companies. What is to be examined is what is the correct method of valuing the closing work-in-progress. In our view, the correct method of valuing the closing work-in-progress is material cost plus direct wages. This is the method which the assessee has been following consistently all along for more than two decades. If the assessee has been consistently adopting a particular method in the past, it should not be changed unless there are very good reasons. In B.S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes) [1972] 83 ITR 269, the House of Lords held that if a method had been consistently applied in the past, it should not be changed unless there were good reasons sufficient to outweigh any difficulties. In the instant case, no good reasons have been given for the change in the method in this year. The only reason given by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommercial Bank Ltd. v. CIT [1962] 44 ITR 22. In this case, the bank valued the securities at cost at the commencement of 1951 but valued them at the market value at the end of 1951. This was done as the Reserve Bank allowed the scheduled banks to value their holdings of securities at the current market price. Thus, in that case, the Reserve Bank had allowed the assessee-bank to value their holdings of securities at the market price. There is no such circumstance in the assessee's case. Further, the assessee has not valued the closing work-in-progress at cost or market price, whichever is lower, as laid down in the above cases. Thus, in our view, the reasons given by the Commissioner (Appeals) in accepting the change in the method of valuation of the closing work-in-progress by reference to material cost are not valid and cannot be upheld. Thus, we reverse his order on this point and restore the addition of Rs. 35,81,189. 12. The next item is with regard to the filing fee of Rs. 66,920 paid to the Registrar of Companies. The assessee has paid filing fee amounting to Rs. 66,920 to the Registrar of Companies for the increase of its authorised capital. The ITO held that it is a capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion for gratuity for the year 1976 made in the accounts on actuarial basis. This ground was not raised before the ITO. It was raised as an additional ground before the Commissioner (Appeals) which he admitted. The admission of additional ground is objected in this appeal. In our view, the Commissioner (Appeals) is justified in admitting the additional ground as all the facts were on record. On merits, the Commissioner (Appeals) held that it is an additional provision for gratuity made in the accounts for the year 1976 based on actuarial valuation. It is a provision made for the purpose of payment by way of contribution towards an approved gratuity fund within the meaning of the provisions of section 40A(7)(b((i) of the Income-tax Act, 1961. As per the actuarial valuation, the net liability for the payment of gratuity during the year 1976 is only Rs. 32,20,812. A sum of Rs. 19,07,643 has already been allowed as deduction on the basis of the assessee's claim and if a further sum of Rs. 31,48,082 is allowed as deduction, it will be in excess of the net actuarial liability for the year. Thus, he held that the assessee's claim to deduct the sum of Rs. 31,48,082 can be allowed only to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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