THE DEPUTY CIT BARODA Circle-1, V. HIMALAYA MACHINERY LTD.,

ITA 144/AHD/2003

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5832 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 year(s) 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 09-06-2010
• Assessment Year: 1998-1999
• Appeal Filed On: 10-01-2003
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Principle of natural justice; Corroborative evidences; Valuation report
• Section: 43B; 143(3); 148

Judgement Text

FIT FOR PUBLICATION GROUND NO.1 (PARAS 2 TO 7.2.) (AM) (JM) IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B BEFORE SHRI MUKUL SHRAWAT, JUDICIAL MEMBER AND SHRI D.C. AGRAWAL, ACCOUNTANT MEMBER DATE OF HEARING : 08/06/2010 DRAFTED ON: 0 8/06/2010 ITA NO.144/AHD/2003 ASSESSMENT YEAR : 1998-99 THE DCIT CIRCLE-1 BARODA VS. HIMALAYA MACHINERY LTD. 608, GIDC MAKARPURA BARODA PAN/GIR NO. : 31-070-CT-9354 (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI K.MADHUSUDAN, SR. D.R. RESPONDENT BY: SHRI J.P. SHAH O R D E R PER SHRI MUKUL SHRAWAT, JUDICIAL MEMBER : THIS IS AN APPEAL FILED BY THE REVENUE ARISING FR OM THE ORDER OF THE LEARNED CIT(APPEALS)-I, BARODA DATED 18/10/2002. SEVERAL GROUNDS HAVE BEEN RAISED WHICH ARE HEREBY DECIDED AS FOLLOW S:- GROUND NO.(I) :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A)-I, BARODA HAS ERRED IN DELETING THE DISALLOWANCE OF LOSS ON OBSOLESCENCE OF INVENTORY OF RS.96,36,531/-. 2. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S. 143(3) OF THE I.T. ACT, 1961 DAT ED 31/03/1998 WERE THAT THE ASSESSEE-COMPANY IS IN THE BUSINESS OF MANUFACT URING OF VARIOUS TYPES OF MACHINES. AS PER BOOKS OF ACCOUNT, THE IN COME FROM SUCH ACTIVITY WAS DIVIDED INTO TWO DIVISIONS; ONE IS M ACHINE TOOL DIVISION ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 2 - AND THE OTHER IS WIND ENERGY DIVISION. TOTAL TUR NOVER FOR THE YEAR UNDER CONSIDERATION AS PER PROFIT & LOSS ACCOUNT WA S AT RS.3.84 CRORES. THE BIFURCATION OF THE SAME AS NOTED BY THE ASSESSI NG OFFICER WAS THAT UNDER THE HEAD MACHINE TOOL DIVISION THE TURNOVER WAS RS.3.81 CRORES AND UNDER THE HEAD WIND ENERGY DIVISION THE TURNO VER WAS 2.81 LACS. IT HAS ALSO BEEN NOTED THAT IN THE DIVISION OF WIN D ENERGY DIVISION, THERE WAS A LOSS OF RS.1,36,92,846/-. THE ASSESSEE HAS SHOWN PROFIT IN THE MACHINE TOOL DIVISION OF RS.1,26,16,975/-. T HEREFORE, DURING THE YEAR UNDER CONSIDERATION OVER ALL LOSS OF RS.10,75, 871/- WAS DISCLOSED. IN RESPECT OF THE ABOVE GROUND, THE OBSERVATION OF THE ASSESSING OFFICER WAS THAT ON PERUSAL OF TRADING ACCOUNT IN WIND ENE RGY DIVISION IT WAS FOUND THAT THE EXPENDITURE BY WAY OF OBSOLESCENCE LOSS OF RAW-MATERIAL WAS CLAIMED AT RS.96,36,531/-. A SHOW-CAUSE NOTICE WAS ISSUED AND THE EXPLANATION WAS THAT DUE TO CHANGE OF POLICY OF THE STATE GOVERNMENT REGARDING WIND ENERGY DIVISION THE ASSESSEE WAS U NABLE TO SELL THE WIND MILLS. THEREFORE, THE RAW-MATERIAL PURCHASED FOR THE PRODUCTION OF WIND MILLS WAS RE-VALUED AND THERE HAPPENED A LOSS WHICH WAS CLAIMED. THE ASSESSING OFFICER HAS ALSO TAKEN A NOTE OF A VA LUATION REPORT OF AN APPROVED VALUER DATED 11/08/1998. IT WAS FOUND THA T THE INVENTORY SO MADE WAS BIFURCATED INTO TWO CATEGORIES; I.E. WORKI NG PROCESS AND RAW- MATERIAL PERTAINING TO WIND ENERGY DIVISION. IT WAS FURTHER CLARIFIED BY THE ASSESSING OFFICER THAT OUT OF THE ENTIRE VAL UE OF WORK-IN-PROGRESS OF RS.1,90,02,992/-, THE ASSESSEE HAD WORKED OUT T HE VALUE OF THE STOCK AT RS.1,10,13,826/-. THEREFORE, THERE WAS A REDUCT ION OF RS.79,89,166/-. ACCORDING TO ASSESSING OFFICER, THE SAID CATEGORIZA TION WAS INCORRECT AND THERE WAS NO POSSIBILITY OF EXISTENCE OF WORK-IN-PR OGRESS BECAUSE THE ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 3 - ASSESSEE FOUND TO BE MANUFACTURING THE WIND MILLS O NLY AFTER GETTING THE NECESSARY PURCHASE ORDERS. IN RESPECT OF THE VALUA TION OF THE BLADES THE OBSERVATION OF THE ASSESSING OFFICER WAS THAT THEIR VALUATION COULD NOT BE AT RS.NIL AND THE VALUER HAS ASSESSED THE SAME ARBI TRARILY AT NIL VALUE. IT WAS ALSO COMMENTED BY THE ASSESSING OFFICER THAT THE APPROVED VALUER HAS ARBITRARILY WORKED OUT THE VALUE OF CANOPS AT R S.NIL AS AGAINST THE COST OF RS.46,656/-. THE ASSESSING OFFICER HAS ALS O COMMENTED THAT THE SPARE-PARTS AND THE RAW-MATERIAL, VIZ. IRON-SHEETS, BLADES, NUT & BOLTS AND ELECTRICAL ITEMS WERE BEING USED BY THE ASSESSEE FO R ITS MAIN MANUFACTURING BUSINESS OF MACHINE TOOLS. THE ASSES SING OFFICER WAS NOT IN AGREEMENT THAT THE MARKET VALUE OF ALL SUCH ITEM S HAD GONE DOWN TO NIL VALUE JUST BECAUSE OF THE REASON, AS GIVEN BY T HE ASSESSEE, THAT THERE WAS CHANGE IN POWER POLICY OF GUJARAT GOVERNMENT. HE HAS OPINED THAT THE RAW-MATERIAL EITHER PROCURED FROM INDIGENOUS M ARKET OR FROM THE ABROAD DEFINITELY HAD COST PRICE WHICH COULD BE FETCHED IF SOLD IN THE OPEN MARKET. IN HIS OPINION, SUCH RAW-MATERIAL CO ULD NEVER BE AN OBSOLETE ITEM SPECIALLY WITHIN A PERIOD OF YEAR OR TWO MERELY DUE TO THE CHANGE IN THE POWER POLICY OF THE GOVERNMENT. FEW CASE LAWS CITED BY THE ASSESSING OFFICER WERE AS UNDER:- SL.NO(S) DECISION IN THE CASE OF REPORTED IN 1. CIT VS. BHARAT COMMERCE AND INDUSTRIES LTD. 240 ITR 256 (DEL.) 2. FOREST INDUSTRIES TRAVANCORE VS. CIT 51 ITR 329 (KER.) 3. INDIA MOTOR PARTS AND ACCESSORIES VS. CIT 60 ITR 531 (MAD.) ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 4 - 2.1. WITH THE RESULT, THE CLAIM OF LOSS WAS DISALLO WED AND ADDED BACK IN THE TOTAL INCOME. BEING AGGRIEVED THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 3. THE FIRST APPELLATE AUTHORITY HAS EXAMINED THE FACTS OF THE CASE AND THE IMPUGNED VALUATION REPORT AND THEN ARRIVED AT A CONCLUSION THAT IN SUCH TYPE OF SITUATION CERTAIN DECREE OF ESTIMATIO N HAD TO BE DONE BY THE ASSESSING OFFICER AND, THEREFORE, HE HAS APPROVED T HE VALUATION. HE WAS NOT IN AGREEMENT WITH THE ASSESSING OFFICER THAT TH ERE WAS NO WORK-IN- PROGRESS. THERE WAS A MENTION OF SURVEY U/S.133A OF THE I.T. ACT, 1961 IT WAS FOUND THAT MACHINERIES LIKE CRANES WERE USE D IN BOTH THE DIVISIONS. HOWEVER, HE HAS ALSO VIEWED THAT THE IT EMS OF ONE UNIT WOULD NOT AUTOMATICALLY BE USED BY THE OTHER UNIT. HE HA S APPROVED THE VALUATION REPORT AND CAME TO THE CONCLUSION THAT TH E APPELLANT WAS JUSTIFIED IN RE-VALUING ITS INVENTORY. FINALLY, H E HAS PLACED RELIANCE ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE O F CIT VS. BRITISH PAINTS INDIA LTD. REPORTED AS 188 ITR 44 (SC) AND D ECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF K.MOHAMMED ADAM S AHIB VS. CIT REPORTED AS 56 ITR 360(MAD.). HE CONCLUDED THAT THE FACT OF NON- PRODUCTION AND NON-SALE OF TWO BLADED WEGS WAS PRO VED FROM THE RECORDS. THEREFORE, THERE WAS NO REASON TO DISCLO SE THE VALUE OF SUCH ITEMS. IT WAS ALSO MENTIONED THAT, IN FACT, THOSE ITEMS COULD NOT BE SOLD AS ON THAT DATE. IN HIS OPINION, THERE WAS NO CAS E FOR REJECTION OF THE VALUATION DONE BY THE ASSESSEE, HENCE, THE ADDITION WAS DIRECTED TO BE DELETED. ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 5 - 4. FROM THE SIDE OF THE REVENUE SHRI K.MADHUSUDAN L EARNED DEPARTMENTAL REPRESENTATIVE APPEARED AND ARGUED THA T WITHOUT PLACING SUFFICIENT EVIDENCE ON RECORD THE ASSESSEE HAS DISC ARDED THE VALUE OF THE MACHINERY PERTAINING TO WIND ENERGY DIVISION HE HAS STRESSED UPON THE POINT THAT THE VALUATION REPORT OF SHRI P.T. S HAH DATED 11/08/1998 HAS NOT REVEALED THE EXACT BASIS ON WHICH CERTAIN V ALUE WAS TAKEN AT RS.NIL. THE LEARNED DEPARTMENTAL REPRESENTATIVE HA S POINTED OUT THAT THE REGISTERED VALUER HAS ARBITRARILY WORKED OUT TH E VALUE OF CERTAIN BLADES VIZ. L/C 95/10 AND L/C 95/76 WHICH WERE WORT H OF RS.67,34,010/- WAS TAKEN AT RS.NIL WITHOUT ASSIGNING ANY ACCEPTABL E REASONS. LIKEWISE, THE VALUE OF THREE CANOPS HAVING COST OF RS.1,59,030/- WERE RECORDED AT RS.NIL. SINCE THERE WAS NO JUSTIFICATI ON BY THE APPROVED VALUER, THEREFORE, THE ASSESSING OFFICER WAS CORREC T IN IGNORING THE FINDINGS OF THE VALUER. HE HAS ALSO MENTIONED THA T TILL RECENT PAST THE ASSESSEE WAS ABLE TO OBTAIN THE ORDERS AND ADMITTED LY HE HAS SUPPLIED IN THE LAST ASSESSMENT YEAR, THEREFORE, THOSE VERY ITE MS HAD NOT BECOME OBSOLETE AS CONVEYED BY THE ASSESSEE. ACCORDING T O HIS ARGUMENT, IT WAS TOTALLY INCORRECT TO SAY THAT THE ENTIRE MATERIAL H AD BECOME OBSOLETE WITHIN A PERIOD OF YEAR OF PURCHASE. AN ANOTHER FA CT HAS ALSO BEEN HIGHLIGHTED THAT DURING THE COURSE OF SURVEY U/S.13 3A OF THE I.T. ACT, 1961 IN THE PAST YEARS, IT WAS NOTED THAT THE BASIC MACHINERY WAS USED FOR MANUFACTURING OF WIND MILLS AS WELL AS OTHER GENERA L MACHINERIES IN THE TRADITIONAL LINE OF MANUFACTURING BUSINESS OF THE A SSESSEE, THEREFORE, THE ENTIRE MACHINERY WAS WRONGLY TREATED AS USELESS OR OBSOLETE. HE HAS CONCLUDED THAT THE ASSESSEE IS VALUING THE RAW-MATE RIAL AT THE COST PRICE AND NOT AT THE MARKET PRICE, THEREFORE, THE LOSS OF THE COST OF THE ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 6 - MACHINERY WAS WRONGLY CLAIMED BY THE ASSESSEE. HE HAS PLEADED THAT THE CASE LAWS CITED BY THE ASSESSING OFFICER MUST B E APPRECIATED AND, THEREFORE, THE SAID ACTION DESERVES TO BE UPHELD. 4.1. FROM THE SIDE OF THE RESPONDENT-ASSESSEE, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SHRI J.P.SHAH APPEAR ED AND MENTIONED THAT THE ASSESSEE WAS IN THE BUSINESS OF MANUFACTURING T WO BLADED WIND ELECTRICAL GENERATOR (WEG IN SHORT) SINCE ASSESSM ENT YEAR 1994-95. REFERRING VALUATION REPORT OF SHRI P.T.SHAH DATED 1 1/08/1998 HE HAS FURTHER ELABORATED THAT AS PER THE OBSERVATION IN THE SAID VALUATION REPORT THE COMPANY HAD SOLD 18 NUMBERS OF WEG IN 1 994-95, 4 NUMBERS IN 1995-96 AND 1 IN 1997-98. THE SAID TWO BLADES MACHINES HAD CERTAIN PROBLEMS AND DUE TO ANY FURTHER ORDERS OF SUPPLY SINCE MARCH-1996 THE COMPANY WAS UNABLE TO SALE TWO BLADE D WEG. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE H AS FURTHER MENTIONED THAT FROM THE RECORDS IT COULD BE PROVED THAT THE L AST SALE OF WEG WAS EXECUTED IN JUNE-1996. IN THE SAID REPORT, IT WAS CONFIRMED THAT THE COMPANY HAD DEVELOPED THREE-BLADED WEG WHICH WAS CL AIMED TO BE COMPARATIVELY BETTER THAN THE TWO-BLADED WEG. HE H AS ALSO POINTED OUT THAT DUE TO SAID FAILURE IT COULD BE CATEGORICALL Y STATED THAT THE BLADES OF TWO-BLADED WEG HAD BECOME TOTALLY OBSOLETE BECAUSE THE SAME COULD NOT BE RECYCLED AND EVEN HAD NO SCRAP VALUE, THEREF ORE, TAKEN AT RS.NIL. LIKEWISE, THE VALUE OF CANOPS WAS TAKEN AT RS.NIL B ECAUSE IT WAS ALSO NOT RECYCLABLE HAVING NO SCRAP VALUE. AS FAR AS T HE GENERATORS, CONTROLLERS, TOWER COMPONENTS, ETC. WERE CONCERNED, THE APPROVED VALUER HIMSELF WAS OF THE OPINION THAT THOSE COMPONENTS W ERE EXPECTED TO BE ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 7 - USED IN MANUFACTURING OF THREE-BLADED WEG, HENCE, C ONTINUED TO BE VALUED AT COST. PLACING STRONG RELIANCE ON THE SA ID VALUATION REPORT, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE H AS ARGUED THAT THE VALUER BEING AN TECHNICAL PERSON WAS CORRECT IN GIV ING HIS ASSESSMENT OF THE VALUATION AS AGAINST THE ASSESSING OFFICER BEIN G A NON-TECHNICAL PERSON, HENCE, ON PRESUMPTION AND WITHOUT ANY TECHN ICAL BASIS REJECTED THE SAID VALUATION. HE HAS SUPPORTED THE VIEW OF LEARNED CIT(APPEALS) THAT THE ASSESSING OFFICER HAS REJECTED THE TECHNIC AL VALUATION ON GENERAL GROUND WITHOUT ANY SCIENTIFIC REASON, THEREFORE, TH E LEARNED CIT(APPEALS) HAS RIGHTLY DELETED THE ADDITION. PLA CING RELIANCE ON K.MOHAMMED ADAM SAHIB VS. CIT REPORTED AS 56 ITR 36 0 (MAD.), IT WAS CONCLUDED THAT THE ASSESSEE HAS A RIGHT TO VALU E HIS CLOSING STOCK AT COST PRICE OR MARKET PRICE WHICHEVER IS LOWER, BUT IN A SITUATION WHERE GOODS ARE NOT SALABLE, THEN THE ASSESSEE IS ENTITLE D TO VALUE THE GOODS AT RS.NIL. 5. WE HAVE HEARD BOTH THE SIDES AT LENGTH. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE EXAM INED THE COMPILATION FILED IN THE LIGHT OF THE CASE LAW CITED. AS FAR A S THE BASIC FACTS ARE CONCERNED, THERE IS NO DISPUTE THAT THE COMPANY IS IN THE BUSINESS OF MANUFACTURING OF VARIOUS TYPES OF MACHINES. SINCE THE COMPANY WAS IN THE SAID LINE OF BUSINESS, THEREFORE, IT HAD UNDERT AKEN TO DEVELOP WIND ENERGY MACHINES, UNDER THE DIVISION WIND ENERGY DI VISION. THE FACTS HAVE REVEALED THAT THE COMPANY HAS DEVELOPED TWO-BL ADED WIND ELECTRIC GENERATOR, SINCE FY 1994-95. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, IT WAS DECIDED NOT TO CONTINUE WITH THE SAID TWO-BLADED ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 8 - WEG ON ACCOUNT OF FACT THAT THERE WERE CERTAIN CHAN GES IN THE POLICY OF GUJARAT GOVERNMENT. IT WAS ALSO EXPLAINED THAT THE ASSESSEE-COMPANY WAS FACING CERTAIN TECHNICAL PROBLEMS IN RESPECT OF TWO BLADED WEGS. THEREFORE, THE COMPANY HAS DECIDED TO WRITE OFF THE VALUE AND FOR THAT PURPOSE UNDERTAKEN THE ADVICE OF A GOVERNMENT APPRO VED REGISTERED VALUER DR. P.T.SHAH, CHARTERED CONSULTING ENGINEER WHO HAS SUBMITTED HIS VALUATION REPORT AND THEREUPON WRITTEN OFF A SU M OF RS.96,36,531/- BY CLAIMING OBSOLESCENCE DURING THE YEAR. 5.1. THE TERM USED BY THE ASSESSEE FOR CLAIM OF LOS S WAS OBSOLESCENCE, THEREFORE, WE HAVE THOUGH IT PROPER AND JUDICIOUS TO EXAMINE THIS TERM, IN LEGAL SENSE. WE HAVE FOUND T HAT OBSOLESCENCE IS THE STATE OF BEING WHICH OCCURS WHEN AN OBJECT, SER VICE, OR PRACTICE IS NO LONGER WANTED EVENTHOUGH IT MAY WILL BE IN GOOD WO RKING ORDER. OBSOLESCENCE MAY OCCUR DUE TO THE AVAILABILITY O F A REPLACEMENT. THEREFORE, OBSOLESCENCE WAS OF VARIOUS TYPES, NAM ELY, TECHNICAL OBSOLESCENCE, PLANED OBSOLESCENCE, ETC. THESE CA TEGORIES ARE BASICALLY BASED UPON THE PROCESS THROUGH WHICH A PARTICULAR M ACHINERY OR AN ITEM BECOME OBSOLETE OR GRADUALLY NOT IN USE. AT ONE PL ACE, IN TECHNICAL SENSE IT IS DESCRIBED THAT THE DECREASE IN VALUE IS ON AC COUNT OF FUNCTIONAL REASON OR TECHNOLOGICAL CHANGES RATHER THAN DETERIO RATION OF THE OBJECT. TO DESCRIBE THE TERM OBSOLESCENCE IN THE ENGLISH DICTIONARY IT IS MENTIONED THAT DECREASE IN THE VALUE OF PROPERTY IS THE RESULT OF TECHNOLOGICAL ADVANCEMENT. OBSOLESCENCE OR DECRE ASE IN VALUE MAY ALSO OCCUR DUE TO CHANGING CIRCUMSTANCES OR REDUCED DESIRABILITY. USEFULNESS OF A STRUCTURE OR A MACHINE IS BASED UPO N ITS DESIGN OR ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 9 - CONSTRUCTION. A LOSS COULD OCCUR DUE TO A STRUCTU RE BECOMING OLD FASHIONED. A LOSS CAN ALSO OCCUR BECAUSE OF MODER N NEEDS. THEREFORE, AN OBSOLESCENCE IS FURTHER CATEGORIZE INTO TWO, I .E. ECONOMIC OBSOLESCENCE OR FUNCTIONAL OBSOLESCENCE AT THE OUTSET AND AT THIS STAGE, WE CAN CAUTIOUSLY MAKE A REMARK THAT THE VAL UER HAS NOT ASSIGNED THAT OUT OF THE SEVERAL CATEGORIES OF OBSOLESCENCE UNDER WHICH SPECIFIC CATEGORY HE HAS PLACED THE MACHINERY IN QUESTION AS AN OBSOLETE MACHINERY. RATHER IT IS EXPECTED FROM HIM BEING A TECHNICALLY QUALIFIED PERSON TO PINPOINT THE FACTORS HE HAS USED TO MEASU RE THE ACTUAL DETERIORATION IN COST VALUE. HOW HE HAS DETERMINE D THE ACTUAL VALUE AT RS.NIL WHEN THE MACHINERY WAS IN THE IMMEDIATE PAS T WAS VALUED AT COST PRICE? ALL THESE REQUISITE DETAILS ARE NOT A PPEARING FROM THE SAID VALUATION REPORT. IF HE WAS OF THE VIEW THAT THE M ACHINERY WAS IN THE CATEGORY OF ECONOMIC OBSOLESCENCE THEN HE HAS TO GIVE HIS REASONS AND THE SUPPORTING EVIDENCE. ON THE OTHER HAND, IF HE WAS OF THE VIEW THAT THE MACHINERY IN QUESTION WAS IN THE CATEGORY OF F UNCTIONAL OBSOLESCENCE, THEN ALSO HE HAS TO SUPPORT HIS VIEW , BUT IN BOTH THE CASES IT MUST NOT BE ON IMAGINATION THAT THE MACHINERY AN D ITS PART DO NOT HAVE EVEN THE SCRAP VALUE. RATHER BEING A TECHNICAL PERS ON HE HAS TO GIVE SOME SCIENTIFIC REASON TO STATE THAT THE MACHINERY AND I TS PARTS EVEN DID NOT HAVE A SINGLE RUPEE, AS A SCRAP VALUE; MORE PARTIC ULARLY WHEN IN THE IMMEDIATE PAST IT WAS VALUED BY THE ASSESSEE ITSELF AT A SIGNIFICANT AMOUNT OF RS.96,36,531/-. 5.2. AN ANOTHER IMPORTANT FEATURE HAS BEEN OBSERVED THAT TILL RECENT PAST, I.E. UPTO THE FINANCIAL YEAR 1996-97, THERE W AS SALE OF TWO WEGS. ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 10 - HOWEVER, IN THE NEXT FOLLOWING FINANCIAL YEAR, I.E. THE YEAR UNDER CONSIDERATION, THERE WAS NO SALE WHICH MEANS THAT W ITHOUT PATIENTLY OBSERVING THE MARKET CONDITIONS AND FUTURE PROSPEC TS OF THE MACHINERY LYING AS A STOCK A PRE-MATURE DECISION WAS TAKEN TO WRITE OFF THE ENTIRE MACHINERY WHICH OTHERWISE HAD A SUBSTANTIAL COST IN ITS HANDS. ON ONE HAND, IT APPEARS TO BE A PRE-MATURE DECISION TAKEN IN A HASTE AND ON THE OTHER HAND, IT WAS NOT ON RECORD HOW IMMEDIATELY I T HAD BECOME USELESS? RATHER, IT IS AN ADMITTED POSITION THAT FROM FINANCIAL YEAR 1994-95, THE ASSESSEE WAS IN THE SAID BUSINESS AND TILL FINANCIAL YEAR 1996-97, I.E. IMMEDIATELY PRECEDING FINANCIAL YEAR HE HAS SUPPLIED TWO WEGS WITH A WARRANTY OF FIVE YEARS, THEREFORE, THE WARRANTY PERIOD FOR SALE OF 18 MACHINERIES FOR 1994-95 HAD EVEN NOT EXP IRED DURING THE YEAR UNDER CONSIDERATION. IF THAT PERIOD OF FIVE YEARS O F WARRANTY HAD NOT EXPIRED, THEN NATURALLY THE TOOLS AND EQUIPMENTS AS ALSO MACHINERY SHOULD NOT HAVE BEEN DISCARDED, KEEPING IN MIND ITS PROBABLE UTILITY IF DEMANDED BY ANY OF THE CUSTOMER BEING FALLEN WITHIN THE WARRANTY CLAUSE THOUGH IT IS A SETTLED LAW THAT A BUSINESS MAN IS F REE TO TAKE A COMMERCIAL DECISION BUT IN THE PRESENT CASE IT IS NOT ON RECOR D THAT WHY SUCH A COMMERCIAL DECISION WAS TAKEN TO DISCARD A MACHINER Y WHICH HAD ITS UTILITY AND POTENTIAL CONSIDERING THAT THE FIVE YEA RS WARRANTY OBLIGATION HAD NOT YET EXPIRED. 5.3. FROM THE WRITTEN SUBMISSIONS AS PLACED BEFORE THE LOWER AUTHORITIES, WE HAVE GATHERED THAT A WIND MILL CONS ISTS IRON ANGLES FOR TOWER OF ABOUT 100 FT HEIGHT, DIP FOUNDATION, FRP B LADES, GENERATORS, ELECTRONIC CONTROLLER, TRANSFORMER, ELECTRONIC ITEM S, NESSLE. IT WAS STATED ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 11 - IN THOSE WRITTEN STATEMENTS THAT THOSE ITEMS WERE N OT REQUIRED IN ASSESSEES TRADITIONAL PRODUCTS. IN ONE OF THE PAR AGRAPHS IT WAS ALSO MENTIONED THAT THOSE VARIOUS PARTS OF THE WIND MILL THOUGH FABRICATED OUT OF STEEL MATERIALS, BUT SUCH MATERIAL I.E.F IRON PL ATES, SHEETS, ROUND BARS, ETC. WOULD NEVER BE UTILIZED IN ASSESSEES TRADITIO NAL MANUFACTURING PRODUCTS. IT WAS EMPHASIZED THAT THE TRADITIONAL P RODUCTS ARE SO TAILOR- MADES THAT THE RAW-MATERIAL AND COMPONENTS OF THE W IND MILL COULD NEVER BE THE COMMON RAW-MATERIAL. EVEN IF IT WAS SO; TH E VALUER SHOULD HAVE PLACED ON RECORD CERTAIN SPECIFIC EXAMPLES BUT THE SAID VALUATION REPORT IS DEVOID OF MERITS AND MORE PRECISELY DEVOID OF SP ECIFICATIONS. SPECIFICALLY GENERATORS; IRON-SHEETS, ELECTRONIC I TEMS AND LIKE NATURE OTHER ARTICLES ARE VERY COMMONLY USED BUT IN CASE I T WAS NOT USABLE AT ALL, EVEN THEN IT WAS EXPECTED FROM A TECHNICAL PERSON T O GIVE THE SPECIFICATIONS OF THE MACHINERY AND ITS COMPONENTS THOUGH BEING USED COMMONLY IN THE PRODUCTION OF TRADITIONAL MACHINERI ES BUT IN COMPARISON TO THE MACHINERIES SPECIFIED FOR WIND MILL DIVISION HAD RENDERED TOTALLY WORTHLESS. 5.4. THERE IS ONE MORE ANGLE TO EXAMINE THIS CONT ROVERSY. AS BETWEEN THREE STANDARD METHODS OF STOCK VALUATION: (I) STOC K, (II) MARKET, (III) COSTS OR MARKET WHICHEVER IS LOWER, IT IS TRUE THE SELEC TION IS FOR THE ASSESSEE TO MAKE AND NOT FOR THE DEPARTMENT. HOWEVER, THE ASSE SSEE IS EXPECTED TO REGULARLY AND CONSISTENTLY STICK TO ONE METHOD AND FOLLOW THE SAME YEAR- AFTER-YEAR. IF AN ASSESSEE IS FOLLOWING COST OR MA RKET WHICHEVER IS LOWER, AS STATED TO BE IN THE PRESENT CASE, THEN HE SHOULD ALWAYS BE GOVERNED BY THIS METHOD. IN A SITUATION, WHEN COST OR MARKET WHICHEVER IS LOWER IS ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 12 - THE CRITERIA FOR THE VALUATION OF THE STOCK, THEN T HE CRITERIA OF MARKETABILITY HAS NO SIGNIFICANCE. UTMOST THE ARGUMENT FOR LIMIT ING THE VALUATION OF WORK-IN-PROGRESS TO MATERIAL COST IS THAT THE LABOU R INPUT MAY GO WASTE, IF THE WORK IS NOT COMPLETED OR NOT IN DEMAND, SO THAT WHAT IS CONSIDERED RELEVANT IS ONLY MATERIAL, BUT THEN ON THIS LOGIC, SUCH MATERIAL COST SHOULD ALSO BE LIMITED TO RETRIEVABLE MATERIAL VALUE AND N OT WHAT IS IRRETRIEVABLE. ON STUDY OF THE SUBJECT AN EXAMPLE HAS COMMONLY BEE N QUOTED THAT IN THE CASE OF A PAINT MANUFACTURER WHERE PAINT ONCE MIXED MAY NOT RESULT IN MARKETABLE QUALITY, IT MAY WELL HAVE TO BE THROW N OUT COMPLETELY, SO THAT THERE IS NO RETRIEVABLE MATERIAL VALUE, UNLIKE THE CASE OF A STEEL MANUFACTURER WHERE THE FAILURE IN COMPLETING THE PR ODUCT MAY NOT MEAN THE LOSS OF MATERIAL, SINCE EVEN SCRAPS AND THE REJ ECTS ARE STILL REUSABLE. IT IS QUITE A LOGICAL VIEW AND SUCH A VIEW WHICH IS BA SED UPON THE CONCEPT OF RETRIEVABLENESS IS ALSO ACCEPTABLE FROM THE ACC OUNTING POINT OF VIEW. THIS IS ONE OF THE FUNDAMENTAL REASONS DUE TO WHICH WE ARE UNABLE TO ACCEPT THE THEORY AS ADVANCED BY THE ASSESSEE THOUG H CONFIRMED BY THE LEARNED CIT(APPEALS), BUT WITHOUT ADDRESSING THIS FUNDAMENTAL ASPECT OF METHOD OF ACCOUNTING. 6.1. IN THE LIGHT OF THE ABOVE FACTUAL AND LEGAL D ISCUSSION, WE HAVE ALSO EXAMINED THE CASE LAWS CITED FORM THE RIVAL SIDES. IN THIS REGARD, WE HAVE COME ACROSS AN ORDER OF HON'BLE MADRAS HIGH COURT I N THE CASE OF INDIA MOTOR PARTS AND ACCESSORIES (P.) LTD. VS. CIT REP ORTED AS 60 ITR 531 (MAD.) WHEREIN FACTS OF THE CASE HAVE REVEALED THAT THE WRITE OFF WAS SUPPORTED BY THE STOCK CARDS. THOSE STOCK CARDS H AVE DEMONSTRATED THAT THE STOCK HAD BECOME OBSOLETE OR IT WAS SLOW-MOVING . TO ASCERTAIN THE ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 13 - QUESTION OF OBSOLESCENCE OR SLOW-MOVING STOCK, TH E HON'BLE COURT HAS REPRODUCED FROM THE INDUSTRIAL ACCOUNTANTS HANDBO OK, EDITED BY WYMAN P.FISKE AND JOHN A.BECKETT, AND SUGGESTED TH AT A CONSTANT REVIEW OF STORE-ROOM INVENTORY RECORD CARDS SHOULD BE MADE, AND PERIODICALLY LISTS SHOULD BE PREPARED SHOWING ITEMS THAT HAVE BEEN INACTIVE FOR SPECIFIC PERIODS, WHICH WILL DEPEND ON THE BASIC STOCK GROUPS AND NATURE OF THE INDUSTRY. IT HAS ALSO BEEN SUGGE STED THAT THE LISTS OF INACTIVE ITEMS SHOULD BE REVIEWED BY PROPER OFFICIA LS. IN THIS ORDER, THEREAFTER, THE HON'BLE COURT HAS STATED THE POINTS TO PREVENT OBSOLESCENCE AND IT IS WORTH TO REPRODUCE THAT PO RTION AS FOLLOWS:- ' THE EXTENT OF OBSOLESCENCE CAN BE REDUCED TO A CE RTAIN DEGREE BY PROPER PROCEDURES. WHEN A DESIGN CHANGE OR ENGINEERING CHA NGE IS DETERMINED, THE MATERIAL CONTROL DIVISION SHOULD BE IMMEDIATELY NOTIFIED, SO THAT OUTSTANDING PURCHASE ORDERS OF AFFECTED PARTS OR RA W MATERIALS CAN BE CANCELLED WHERE POSSIBLE. SOMETIMES, WHEN ENGINEERI NG CHANGES ARE CONTEMPLATED, THE AVAILABLE INVENTORY AND FIRM COMM ITMENTS OF APPLICABLE MATERIALS ARE FIRST DETERMINED TO ASCERTAIN THE PRO BABLE EXTENT OF RESULTANT OBSOLESCENCE DUE TO THE PROPOSED CHANGES. IF A SERI OUS DEGREE OF OBSOLESCENCE WOULD RESULT FROM AN IMMEDIATE ENGINEE RING CHANGE, THE EFFECTIVE DATE OF CHANGE OR 'BREAKING POINT' MAY BE DELAYED. HOWEVER, IF AN ENGINEERING CHANGE MUST BE MADE AS A SAFETY FACT OR OR TO PREVENT ANY SERIOUS COMPETITIVE MARKET LOSSES, MATERIAL OBSOLES CENCE MUST FOLLOW AS A NECESSARY EVIL. OTHER FACTORS THAT MIGHT CAUSE OBSO LESCENCE, SUCH AS FAULTY PROCUREMENT PRACTICES, INEFFICIENT RECORDS, INEFFICIENT STOREKEEPING AND LACK OF STANDARDIZATION, SHOULD ALSO BE WATCHED AND CORRECTED BEFORE THEY CAUSE SERIOUS OBSOLESCENCE LOSSES. ALSO, IF MA TERIAL CONTROL IS KEPT INFORMED OF THE COMPANY'S FUTURE DESIGNING PLANS, R ESEARCH ACTIVITIES, AND PROJECTS, THE PROCUREMENT OFFICIALS CAN KEEP ALERT AS TO MATERIALS WHICH MIGHT BE AFFECTED IN THE FUTURE. ' 6.3. WE THINK THE GUIDELINES AS OBSERVED BY THE HON 'BLE COURT ARE THE CORRECT GUIDING FACTOR TO EXACTLY DETERMINE THE OB SOLESCENCE OF A STOCK. RATHER IN THE PRESENT CASE, IT WAS THE DUTY OF THE ASSESSEE TO DEMONSTRATE TO ASSESSING OFFICER THE STEPS TAKEN TO PREVENT THE OBSOLESCENCE AND EVEN AFTER TAKING ALL THOSE STEPS, THE OBSOLESCENC E OF THE STOCK COULD ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 14 - NOT BE AVOIDED, HENCE, FINALLY THE COMPANY HAD NO O PTION BUT TO WRITE-OFF DURING THE YEAR. 7. WE HAVE ALSO PERUSED THE DECISION OF HON'BLE DEL HI HIGH COURT IN THE CASE OF CIT VS. BHARAT COMMERCE AND INDUSTRIES LTD. REPORTED AS 240 ITR 256 (DELHI) FOR THE PROPOSITION THAT CHANGE IN THE METHOD OF VALUATION IS PERMISSIBLE IF FOUND BONA FIDE. IT IS TRUE THAT AN ASSESSEE IS FREE TO ADOPT A PARTICULAR METHOD OF VALUATION OF I TS CLOSING STOCK BUT THE SAME HAS TO BE FOLLOWED REGULARLY FROM YEAR-TO-YEAR . ONCE THE ASSESSING OFFICER IS AN INVESTIGATOR AND EXPECTED TO FIND FAC TS OF THE CASE AND AS FAR AS POSSIBLE IF THE CIRCUMSTANCES DO NOT WARRANT ON E MUST NOT GO BEHIND THOSE FACTS UNLESS AND UNTIL THOSE FACTS ARE CHALLE NGED. HOWEVER, THE LEARNED CIT(APPEALS) IS EXPECTED TO CONSIDER THOSE INVESTIGATIONS AND FACTS AND IN CASE, SOMETHING IS WANTING OR HE HAS TO GO BEHIND THOSE FACTS AND FOR THAT PURPOSE SOME INVESTIGATION IS REQUIRED , THEN ALSO IT IS EXPECTED EITHER TO GIVE A CHANCE TO THE REVENUE BY CALLING THE REMAND REPORT FROM THE ASSESSING OFFICER OR ALTERNATIVELY CAN REFER THE MATTER TO THE STAGE OF THE ASSESSING OFFICER FOR RE-ADJUDICAT ION. NEVERTHELESS, THE FUNDAMENTAL QUESTION IS TO BE SEEN THAT WHETHER THE CHANGE IN THE METHOD OF VALUATION WAS BONA FIDE ON THE PART OF THE ASSES SEE. EVEN THIS ASPECT HAS ALSO NOT BEEN TOUCHED, WHILE DECIDING THIS ISSU E, BY THE FIRST APPELLATE AUTHORITY. EVEN IN THE CASE OF FOREST I NDUSTRIES TRAVANCORE VS. CIT REPORTED AS 51 ITR 329 (KER.), IT WAS PROPOUNDE D THAT THE ASSESSEE IS ENTITLED TO CHANGE THE METHOD OF VALUATION AND THE CONCESSION GRANTED BY THE REVENUE IS BASED UPON THE WELL RECOGNIZED USAGE OF THE TRADE. HOWEVER, THE UNDERLYING PRINCIPLE IS THAT CONCESSI ON NOWHERE VIOLATED ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 15 - THE METHOD OF VALUATION FROM COST TO MARKET VALUE, WHEN THE LATTER IS LESSER THAN THE COST PRICE PROVIDED THE CHANGE IS B ONA FIDE AND THEN THE NEW SYSTEM IS CONTINUED IN SUBSEQUENT YEARS. UNDER ALL CIRCUMSTANCES, THE ASSESSEE IS, THEREFORE, DUTY BOUND TO ESTABLISH HIS BONA FIDES. 7.1. AS FAR AS THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF K.MOHAMMED ADAM SAHIB VS. CIT REPORTED AS 56 ITR 36 5 (MAD.) IS CONCERNED, IT WAS FOUND BY THE AUTHORITIES THAT THE RE WAS NO DEMAND FOR THE GOODS IN FOREIGN MARKET. IT WAS FOUND AS A MA TTER OF FACT THAT THE STOCK IN QUESTION WAS HAVING NO MARKET, HENCE, THE COURT HAS OBSERVED THAT THOUGH IN NORMAL COURSE OF ACCOUNTING, IT IS N OT ENTITLED TO VALUE THE PRICE AT NIL, HOWEVER, THE CONTINGENCY HAS PERMITTE D TO CHANGE THE METHOD. INTERESTINGLY, WE HAVE ALSO NOTED THAT TH E HON'BLE COURT HAS HELD THAT THE ASSESSEE WOULD HAVE AN INITIAL ADVAN TAGE BY VALUING THIS STOCK AT NIL, BUT HE IS BOUND TO VALUE THE GOODS AT THE SAME VALUE I.E. NIL IN THE OPENING ACCOUNTS OF THE SUCCEEDING YEAR OF ACCOUNT. MEANING THEREBY ANY SALE OF THOSE GOODS IN THE YEARS TO FOL LOW WOULD RESULT INTO ACCOUNT FOR THE ENTIRE SALE PRICE TO BE TREATED AS PROFIT LIABLE TO TAX IN THE YEAR OF SALE. CLEARLY AT THAT POINT OF TIME, IT WA S ADVANTAGEOUS TO THE REVENUE. EVEN IF WE STAND BY THIS LOGIC, IN THE P RESENT APPEAL, THE ASSESSEE HAS NOT DEMONSTRATED THAT AN INVENTORY OF THE OBSOLETE STOCK WAS MADE AND THE SAME IS PART AND PARCEL OF THE BOO KS OF ACCOUNT. IT HAS ALSO TO BE PLACED ON RECORD THAT THE STOCK REMAINE D LYING IN STORE-ROOMS AS SUCH AND IN THE CASE OF ANY MOVEMENT/SALE IN ANY OF THE SUBSEQUENT YEARS IT SHOULD BE PROPERLY DISCLOSED AND REFLECTED IN THE BOOKS OF ACCOUNT FOR TAX PURPSOE. IN THE ABSENCE OF SUCH D ETAILS OR AN ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 16 - UNDERTAKING, IT IS DIFFICULT TO AFFIRM IN TOTO THE VIEW TAKEN BY THE LEARNED CIT(APPEALS). THEREFORE, ON THE BASIS OF ABOVE DI SCUSSION, WE ARE OF THE CONSCIENTIOUS VIEW THAT THE QUESTION OF ALLOWAN CE OR DISALLOWANCE OF LOSS ON ACCOUNT OF OBSOLESCENCE OF STOCK HAS TO B E ANSWERED IN THE LIGHT OF THE DISCUSSION MADE HEREINABOVE. THE ENTIRE IS SUE REQUIRES RE- ADJUDICATION AT THE LEVEL OF ASSESSING OFFICER SO T HAT THE FOLLOWING RELEVANT POINTS CAN BE BROUGHT ON RECORD, NOW SUMMA RIZED BELOW:- (I) WHETHER THE ASSESSEE HAD MADE AN INVENTORY OF THE S TOCK WHICH WAS TREATED AS OBSOLETE STOCK. (II) WHETHER THAT INVENTORY OF OBSOLETE STOCK WAS MADE P ART AND PARCEL OF THE STOCK CARRIED OVER IN THE SUBSEQUENT YEARS. (III) WHETHER OBSOLETE STOCK WAS UNCONNECTED WITH THE MACHINERIES/EQUIPMENTS ALREADY SUPPLIED BY THE ASSE SSEE WHICH WAS UNDISPUTEDLY COVERED BY A WARRANTED CLAUS E. (IV) WHETHER OBSOLETE STOCK HAS ANY SCRAP VALUE OR RET RIEVABLE VALUE AT ALL. (V) HOW THE DECISION TO VALUE THE STOCK AT NIL WAS A BO NA FIDE AND ECONOMICALLY A VIABLE DECISION? 7.2. SINCE THESE QUERIES ARE NECESSARY TO BE ANSWER ED, HENCE NATURAL JUSTICE DEMAND TO REFER THE ENTIRE ISSUE BACK TO TH E INVESTIGATION STAGE , I.E. BEFORE THE ASSESSING OFFICER TO BE DECIDED DE NOVO AS PER DIRECTION. WITH THE RESULT, THE ISSUE BE TREATED AS ALLOWED ON LY FOR STATISTICAL PURPOSES. GROUND NO.(II) :- ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 17 - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A)-I, BARODA HAS ERRED IN DELETING THE DISALLOWANCE OF RS.6,22,000/- ON ACCOUNT OF VALUATION OF CLOSING ST OCK OF FINISHED GODS. THE EXCISE DUTY SHOULD BE CONSIDERED AS MANUFACTURI NG EXPENSES AND AN ELEMENT OF COST, FOR INVENTORY VALUATION. THE EXCI SE DUTY PAYABLE ON FINISHED GOODS SHOULD BE INCLUDED IN THE COST. TH IS VIEW IS ALSO EXPRESSED BY THE INSTITUTE OF C.A.S GUIDELINES COV ERED IN INSTRUCTION NO.1389 DATED 24.03.81 ISSUED BY CBDT. 8. IT WAS OBSERVED BY THE ASSESSING OFFICER THAT TH E FINISHED GOODS WERE VALUED WITHOUT TAKING INTO ACCOUNT THE EXCISE DUTY. IT WAS FOUND THAT THERE WAS AN ELEMENT OF EXCISE DUTY AMOUNTING TO RS.6,22,000/-. IT WAS ASKED BY THE ASSESSING OFFICER AS TO WHY THE VA LUE OF THE FINISHED GOODS FORMING PART OF THE CLOSING STOCK SHOULD NOT BE INCLUDED BY THE AMOUNT OF EXCISE DUTY IN VIEW OF THE CBDT CIRCULAR NO.1389 OF MARCH- 1981. ON THE OTHER HAND, IT WAS CONTESTED THAT THE GOODS WERE CLEARED IN THE IMMEDIATELY SUCCEEDING ASSESSMENT YEAR AND THE EXCISE DUTY WAS PAID BEFORE THE FILING OF THE RETURN OF INCOME, HEN CE, NECESSARY DEDUCTION WAS TO BE ALLOWED U/S.43B OF THE I.T. ACT, 1961. THE ASSESSING OFFICER WAS NOT CONVINCED AND ACCORDING TO HIM THE EXCISE D UTY HAD ACCRUED DURING THE COURSE OF THE MANUFACTURING PROCESS AND NO DEDUCTION WAS ALLOWABLE U/S.43B OF THE I.T. ACT, 1961 SINCE THE A SSESSEE HAD NOT PROVIDED THE SAME IN THE BOOKS OF ACCOUNT. THE IM PUGNED AMOUNT OF RS.6,22,000/- WAS ADDED IN THE VALUATION OF THE FIN ISHED GOODS. BEING AGGRIEVED THE MATTER WAS CARRIED BEFORE THE FIRST A PPELLATE AUTHORITY. 9. THE LEARNED CIT(APPEALS) WAS OF THE VIEW THAT TH E ACCOUNTING STANDARDS AS REVISED WERE APPLICABLE FROM 01/04/199 9 AND NOT FOR THE ASSESSMENT YEAR 1998-99, THE YEAR UNDER APPEAL. HE HAS ALSO OPINED ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 18 - THAT ONLY THE COST WHICH WAS DEBITED TO THE PROFIT & LOSS ACCOUNT COULD BE INCLUDED IN VALUING THE CLOSING STOCK. IN HIS O PINION, THERE WAS NO EXCISE DUTY PAYABLE TILL THE POINT OF ACTUAL SALE P LACING RELIANCE ON THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CA SE OF CIT VS. ENGLISH ELECTRIC CO. OF INDIA LTD. REPORTED AS (2000)243 IT R 512 (MAD.) HAS HELD THAT WHEN THERE WAS NO CHARGE TO THE PROFIT & LOSS ACCOUNT, THEN THE SAME WAS NOT TO BE ADDED IN THE VALUE OF THE UNSOLD STOCK. THE ACTION OF THE ASSESSING OFFICER WAS REVERSED WHICH IS THE CAU SE OF THE GRIEVANCE OF THE REVENUE. 10. WE HAVE HEARD BOTH THE SIDES. AS FAR AS THE A PPLICABILITY OF THE NEWLY INSERTED PROVISIONS OF SECTION 145A OF THE I. T. ACT, 1961 IS CONCERNED, THE SAME WAS INSERTED BY FINANCE (NO.2) ACT, 1998 WITH EFFECT FROM 01/04/1999, SO THE APPLICABILITY FROM T HE ASSESSMENT YEAR 1999-2000. HOWEVER, THE ASSESSMENT YEAR UNDER APPE AL IS ASSESSMENT YEAR 1998-99. AS FAR AS THE FACTS OF THIS CASE AR E CONCERNED, THE AMOUNT OF EXCISE DUTY WAS PAID IN THE SUCCEEDING ASSESSMEN T YEAR BEFORE THE FILING OF THE RETURN AND THE REQUISITE DEDUCTION WA S STATED TO BE ALLOWED U/S.43B OF THE I.T. ACT, 1961. THE FIRST APPELLATE AUTHORITY HAS ACCEPTED THE FACT THAT THE REVISED ACCOUNTING STANDARDS WERE MANDATORY FROM THE YEAR STARTING FROM 01/04/1999, HENCE, FOR THE YEAR UNDER CONSIDERATION THE OLD PROVISIONS WILL APPLY. HOWEVER, HE WAS OF THE VIEW THAT NO EXCISE DUTY WAS PAYABLE TILL THE ACTUAL SALE HAS HA PPENED. IN THIS REGARD, APART FROM THE DECISION OF HON'BLE MADRAS HIGH COUR T IN THE CASE OF ENGLISH ELECTRIC CO. OF INDIA LTD.(SUPRA) THERE IS AN ANOTHER DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CARPIH ANS INDIA LTD. VS. ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 19 - PRAKASH CHANDRA & OTHERS REPORTED AS (2002)256 ITR 721(BOM.) WHEREIN IT WAS EXPRESSED THAT WHEN THE METHOD OF AC COUNTING FOLLOWED BY THE ASSESSEE HAD BEEN ACCEPTED BY THE REVENUE AN D THE LIABILITY OF THE EXCISE DUTY ON THE BONDED GOODS CRYSTALLIZED ONLY O N THE DATE OF EXBONDING IT CANNOT BE SAID THAT THERE WAS ANY REAS ON TO BELIEVE THAT THE INCOME HAD ESCAPED ASSESSMENT, IF IT WAS NOT IN DIS PUTE THAT THE EXCISE DUTY AND THE CUSTOMS DUTY HAD BEEN PAID BEFORE THE DUE DATE OF FURNISHING THE RETURNS OF INCOME, THEN THE PROVISIO NS OF SECTION 43B OF THE I.T. ACT, 1961 WOULD BE SQUARELY APPLICABLE AND , IT COULD NOT BE SAID THAT THE INCOME HAD ESCAPED THE ASSESSMENT, HELD PO RTION IS REPRODUCED BELOW:- THAT WHEN THE METHOD OF ACCOUNTING FOLLOWED BY TH E ASSESSEE HAD BEEN ACCEPTED BY THE REVENUE FOR SUBSEQUENT YEARS A ND THE DUTY LIABILITY ON THE BONDED GOODS CRYSTALLIZED ONLY ON THE DTE OF EXBONDING IT CANNOT BE SAID THAT THERE WAS ANY REAS ON TO BELIEVE THAT THE INCOME HAD ESCAPED ASSESSMENT SO AS TO EMP OWER THE ASSESSING OFFICER TO INITIATE PROCEEDINGS UNDER SEC TION 148 OF THE ACT TO REOPEN THE ASSESSMENT. MOREOVER IT WAS NOT DISPUTED THAT THE EXCISE DUTY AND CUSTOMS DUTY HAD BEEN PAID BEFO RE THE DUE DATE OF FURNISHING THE RETURNS OF INCOME. IF THAT BE S O, THE PROVISIONS OF SECTION 43B OF THE ACT WOULD BE SQUARELY APPLICABLE AND, IT COULD NOT BE SAID THAT THE INCOME HAD ESCAPED THE ASSESSM ENT. THE NOTICE UNDER SECTION 148 WAS NOT VALID AND WAS LIAB LE TO BE QUASHED. 11. NOW THE QUESTION IS THAT WHETHER THERE WAS ANY OPENING BALANCE OF THE UNPAID EXCISE DUTY. IF WE EXAMINE THIS ASPECT IN THE LIGHT OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F CIT VS. INDO NIPPON CHEMICALS CO.LTD. REPORTED AS (2003) 261 27 5 (SC), THEN THE VIEW TAKEN THEREIN WAS THAT ANY MANUFACTURING UNIT THE GOODS ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 20 - MANUFACTURED ARE LIABLE TO EXCISE DUTY. UNDER THE MODVAT SCHEME, THE ASSESSEE GOT CREDIT FOR THE EXCISE DUTY ALREADY PAI D ON THE RAW-MATERIALS PURCHASED BY THEM AND UTILIZED IN THE MANUFACTURE O F EXCISABLE GOODS. WHEN SUCH GOODS ARE MANUFACTURED AND SOLD, THEN THE PROPORTIONATE PART OF THE MODVAT CREDIT WAS SET OFF AGAINST THE EXCIS E DUTY LIABILITY. IN THAT CASE, I.E. INDO NIPPON CHEMICALS CO.LTD., ADMITTEDL Y THE ASSESSEE WAS VALUING THEIR STOCK UNIFORMLY BY ADOPTING NET MET HOD I.E. VALUING THE RAW-MATERIALS AT THE PURCHASE PRICE MINUS THE MODVA T CREDIT. THE HON'BLE COURT HAS HELD THAT THE SAME METHOD WAS ALS O TO BE ADOPTED WHILE VALUING THE UNCONSUMED RAW-MATERIALS AND THE WORK-IN-PROGRESS AT THE END OF THE YEAR. IT WAS, THUS, HELD THAT MERE LY BECAUSE THE MODVAT CREDIT WAS AN IRREVERSIBLE CREDIT AVAILABLE TO MANU FACTURES UPON PURCHASE OF DUTY-PAID RAW-MATERIAL, THAT WOULD NOT AMOUNT TO INCOME WHICH WAS LIABLE TO BE TAXED UNDER THE ACT AND IT WAS ALSO HE LD THAT IT WAS NOT PERMISSIBLE TO ADOPT THE GROSS MEHTOD FOR VALUING OF RAW-MATERIALS AT THE TIME OF PURCHASE AND THE NET METHOD FOR VALUI NG OF STOCK ON HAND. MEANING THEREBY AN IDENTICAL METHOD AT BOTH THE PLA CES HAS TO BE ADOPTED. SINCE THE QUESTION HAS NOT BEEN ANSWERED BY LEARNED CIT(APPEALS) IN THE LIGHT OF THE VIEW EXPRESSED BY THE HON'BLE APEX COURT, THEREFORE, WE DEEM IT NECESSARY TO RESTORE T HIS GROUND BACK TO THAT STAGE TO BE DECIDED ACCORDINGLY. THIS GROUND OF T HE REVENUE THEREFORE MAY BE TREATED AS ALLOWED ONLY FOR STATISTICAL PURP OSES. GROUND NO.(III) :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A)-I, BARODA HAS ERRED IN DELETING THE DISALLOWANCE MADE OF RS.3,16,495/- BEING FOREIGN TRAVELLING EXPENSES. ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 21 - 12. THE SUM OF RS.11,37,525/- WAS DEBITED UNDER THE HEAD TRAVELLING EXPENSES. AS PER ASSESSING OFFICER, THE EXPENDITURE WAS CAPITAL EXPENSE IN NATURE. RATHER FOLLOWING THE P AST HISTORY OF THE CASE, THE EXPENDITURE WHICH WAS STATED TO BE TOWARDS TECH NICAL STUDY AMOUNTING TO RS.3,16,495/- WAS TAXED. THE ISSUE W AS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 13. THE LEARNED CIT(APPEALS) HAS NOTICED THAT IN TH E PAST FOR ASSESSMENT YEARS 1996-97 & 1997-98 SIMILAR DISALLOW ANCES WERE MADE, HOWEVER, IT WAS HELD THAT THE FOREIGN TOURS WERE TA KEN FOR THE PURPOSE OF IMPROVEMENT OF THE PRODUCT, HENCE, NOT A CAPITAL EX PENDITURE. THE IMPUGNED ADDITION WAS DELETED. 13.1. WITH THIS BACKGROUND, NOW BEFORE US FOR ASS ESSMENT YEAR 1996- 97 AN ORDER OF THE ITAT AHMEDABAD D BENCH IN ASS ESSEES OWN CASE BEARING ITA NO.465/AHD/2001(BY ASSESSEE) & ITA NO.7 64/AHD/2001 (BY REVENUE), DATED 08/08/2008 HAS BEEN FURNISHED T O DEMONSTRATE THAT AGAINST THE SAID DELETION NO APPEAL WAS PREFERRED B Y THE REVENUE. FOR ASSESSMENT YEAR 1997-98, IN ITA NO.3461/AHD/2003, T HE ITAT AHMEDABAD D BENCH VIDE ORDER DATED 08/08/2008 TH E VIEW TAKEN BY THE LEARNED CIT(APPEALS) WAS UPHELD. IN VIEW OF T HIS, ONCE THE AUTHORITIES BELOW HAVE SIMPLY FOLLOWED THE PAST HI STORY, THEREFORE, WE HAVE NOTHING MUCH TO CONSIDER EXCEPT TO FOLLOW THE DECISION OF THE TRIBUNAL (AS CITED-SUPRA) FOR ASSESSMENT YEAR 1997- 98 AND UPHELD THE VIEW OF THE LEARNED CIT(APPEALS). THEREFORE, THIS GROUND OF THE REVENUE IS DISMISSED. ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 22 - GROUND NO.(IV) & GROUND NO.(V) :- (IV) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A)-I, BARODA HAS ERRED IN DELETING THE DISALLOWANCE OF RS.59,615/- MADE UNDER THE HEAD TELEPHONE EXPENSES. (V) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED CIT(A)-I, BARODA HAS ERRED IN DELETING THE DISALLOWANCE OF RS.23,016/- MADE UNDER THE HEAD VEHICLE EXPENSES. 14. THESE TWO ISSUES; I.E. DISALLOWANCE OF TELEPHON E EXPENSES AND DISALLOWANCE OF VEHICLE EXPENSES BOTH WERE DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 1996-97 & 1997-98 AS CITED ABOVE. FOR ASSESSMENT YEAR 1996-97 IN ITA NO.764/A HD/2001, ORDER DATED 08/08/2008, VIDE PARAGRAPH NO.15 ON PAGE NO.6 THE RESPECTED CO- ORDINATE BENCH HAS CITED THE DECISION OF HON'BLE GU JARAT HIGH COURT IN THE CASE OF SAYAJI IRON AND ENGG. CO. VS. CIT REPO RTED AS (2002)253 ITR 749 (GUJ.) AND HELD THAT THERE COULD NOT BE ANY PERSONAL USER IN THE CASE OF THE COMPANY. LIKEWISE, FOR ASSESSMENT YEAR 1997-98 IN ASSESSEES OWN CASE BEARING ITA NO.1972/AHD/2001 ( REVENUES APPEAL) THE ITAT AHMEDABAD D BENCH VIDE ORDER DATED 08/08 /2008 HAS REITERATED THE SAID CITATION AND ALLOWED IN FAVOUR OF THE ASSESSEE. FOLLOWING THE PAST HISTORY, WE HEREBY DISMISS BOTH THESE GROUNDS OF THE REVENUE. GROUND NO.(VI) :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A)-I, BARODA HAS ERRED IN DIRECTING TO ALLOW DEDUCTION U/S.80HHC EVEN THOUGH FORM NO.10CCAC/10CCAB WAS NOT FILED ALONGWITH THE RETURN OF INCOME IF AT ANY POINT OF T IME THERE IS ASSESSABLE INCOME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS . ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 23 - 15. IN RESPECT OF THE CLAIM OF THE DEDUCTION U/S.80 HHC OF THE I.T. ACT, 1961, SINCE THERE WAS NO PROFIT AS PER THE RETURN, HENCE, NO CLAIM WAS MADE AND NECESSARY CERTIFICATE ON FORM NO.10CCAC/10 CCAB WAS FURNISHED. WHEN THE ISSUE WAS CARRIED BEFORE THE F IRST APPELLATE AUTHORITY, IT WAS HELD THAT THE APPELLANTS CLAIM C OULD BE ENTERTAINED AT ANY POINT OF TIME IF THE INCOME IS ASSESSABLE UNDER THE HEAD PROFITS AND GAINS OF THE BUSINESS. IT WAS DIRECTED TO CONSIDE R THE CLAIM OF THE ASSESSEE AS PER LAW AFTER OBTAINING RELEVANT CERTIF ICATE. IN THE LIGHT OF THE ABOVE FACTUAL BACKGROUND, NOW BEFORE US THERE ARE T WO DECISIONS OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1996-97 (ITA NO.764/AHD/2001-SUPRA) AND FOR ASSESSMENT YEAR 1997 -98 (1972/AHD/2001-SUPRA). IN THOSE CASES, THE TRIBUNA L HAS TAKEN A CONSISTENT VIEW TO DIRECT THE ASSESSING OFFICER IN THE FOLLOWING MANNER:- 16. LAST DISPUTE IN THE REVENUES APPEAL IS WITH REGARD TO ALLOWANCE DEDUCTION UNDER SECTION 80HHC. THE ASSESSEE HAD FI LED RETURN DECLARING A LOSS OF RS.32,22,280/- AND THEREFORE, D ID NOT CLAIM ANY DEDUCTION UNDER SECTION 80HHC. THE AO COMPUTED T HE INCOME AT RS.2,88,06,957/- AND THIS ENTITLED THE ASSESSEE TO CLAIM DEDUCTION UNDER SECTION 80HHC. AS THE DEDUCTION IS SUBJECT TO FILI NG OF AUDITORS REPORT UNDER SECTION 80HHC, THE CIT(A) HELD THAT IT IS NOT A MANDATORY BUT DIRECTORY AND DIRECTED THE AO TO ALLOW THE CLAIM O F THE ASSESSEE AFTER FULFILLING OTHER REQUIREMENT OF THE SECTIONS. IN THIS CASE, NO AUDIT REPORT HAS BEEN FILED AT ALL, AND THEREFORE, IN OUR OPINIO N CLAIM OF THE ASSESSEE COULD NOT BE ALLOWED AS SUCH, AS DEDUCTION. IT IS A REQUIREMENT THOUGH DIRECTORY, BUT HAS TO BE FULFILLED. WE, ACCORDING LY, MODIFY THE ORDER OF THE CIT(A) TO THE EFFECT THAT IF THE AUDITORS REPO RT IS FILED IN ACCORDANCE WITH THE PROVISIONS OF LAW AND THE ASSESSEE FULFILS ALL THE REQUIREMENT OF THE SECTION, ITS CLAIM SHOULD BE ALLOWED AS DEDUCTI ON. 15.1. FOLLOWING THE ABOVE DECISION OF THE TRIBUNAL, THIS GROUND OF THE REVENUE IS DISPOSED OF ACCORDINGLY ON SIMILAR LINE S. ITA NO.144/AHD/ 2003 THE DCIT VS. HIMALAYA MACHINERY LTD. ASST.YEAR - 1998-99 - 24 - 16. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOW ED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 30/ 06 /2010. SD/- SD/- ( D.C. AGRAWAL) ( MUKUL SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 30/ 06 /2010 T.C. NAIR, SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESP ONDENT 3. THE CIT CONCERNED. 4. THE LD. CIT(AP PEALS)-I, BARODA 5. THE DR, AHMEDABAD BENCH.6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD