Calcutta H.C : Caluation of closing stock is to be made ignoring amount of cess paid.

High Court Of Calcutta

CIT VS. Mcleod Russel (India) Ltd.

Section : 80HHC, 145, 32

Girish Chandra Gupta And Tapash Mookherjee, JJ.

IT Appeal No. 254 Of 2001

February 10, 2014

JUDGMENT

1. The appeal is directed against a judgment and order dated March 30, 2001, passed by the learned Appellate Tribunal. Aggrieved by the order, the Revenue has come up in appeal which was admitted by an order dated April 4, 2003. Three several questions of law were formulated. The first question reads as follows :

“(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that vibro bed dryer is an item covered under Appendix 1 III.(3)(iii)A of the Income-tax Rules, 1962, and is entitled for 100 per cent. depreciation?”

2. Mr. Bhowmick, learned advocate appearing for the Revenue, drew our attention to the Schedule appearing in the Appendix to the Income-tax Rules, 1962, and wanted to impress upon us that vibro bed dryer is not an energy saving device as per the aforesaid Schedule and, therefore, 100 per cent. depreciation could not have been permitted. Mr. Bagaria, learned advocate appearing for the assessee, drew our attention to item No. 3C of the Schedule applicable to “waste heat recovery equipment”. He submitted that there is a clear finding that the consumption of electricity was reduced by 40 per cent. Therefore, the instrument in question is eligible for 100 per cent. depreciation. He in support of his submission relied on an earlier judgment of the Tribunal in the case of Dy.CIT v. Assam Brook Ltd. I.T.A. No. 370 (Cal.) of 1990, wherein the learned Tribunal allowed 100 per cent. depreciation in the case of identical instrument. It appears from the said judgment that the aforesaid view was taken by the learned Tribunal following the earlier views expressed in the case of Warren Tea Ltd. in I.T.A. No. 193 (Cal) of 1990. Mr. Bhowmick replied by stating that the Schedule on a plain reading does not appear to cover an equipment which is merely energy efficient. It applies only to those items installed for the purpose of saving consumption of energy. Mr. Bhowmick may be correct but we express no opinion with regard thereto. The judgment in the case of Assam Brook Ltd. (supra) was rendered by the learned Tribunal after taking into consideration, the views of experts recorded by the learned Tribunal which are as follows :

“It is seen from the records that the kilnburn vibro fluid bed dryer is a waste heat recovery equipment and is also energy economiser enabling a saving of over 40 per cent. as compared to conventional dryer. This is the opinion of the experts which has to be accepted in the absence of any findings to the contrary by the Assessing Officer.”

3. From the aforesaid views of the Tribunal it appears that energy efficient instrument was considered to fall within the relevant entry of this Schedule and, therefore, 100 per cent. depreciation was allowed. The question is a mixed question of fact and law. The Department at the appropriate stage did not try to lead any evidence to show that the instrument in question cannot be brought within entry 3B or entry 3C of the Schedule. We are as such unable to find any fault with the views expressed by the Tribunal. Accordingly, the first question is answered in the affirmative and in favour of the assessee.

4. The second question formulated in this case reads as follows :

“(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that valuation of closing stock is to be made ignoring the amount of cess paid when the same was debited, and the net effect will be nil on deduction of the same has to be allowed from the income of the next year ?”

5. Mr. Bhowmick, learned advocate for the Revenue-appellant, submitted that the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 opined that (page 56):

“Any system of accounting which excludes, for the valuation of stock-in-trade, all costs other than the cost of raw materials for the goods in-process and finished products, is likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system may produce a comparatively lower valuation of opening stock and the closing stock, thus showing a comparatively low difference between the two.”

6. He, relying on the judgment, contended that the amount of cess paid by the assessee should have been included in the valuation of the closing stock. Mr. Bagaria, on the other hand, drew our attention to the judgment in the case of Berger Paints India Ltd. v. CIT [2004] 266 ITR 99/135 Taxman 586 (SC) wherein their Lordships held that the views expressed by the Gujarat High Court in the case of Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240/27 Taxman 462 were binding on the Department and the Department could not be permitted to take a contrary stand. The views of the Gujarat High Court were considered by the Special Bench of the Income-tax Appellate Tribunal and the following observations were made by them :

“We would like to make it absolutely clear that the removal of the amount in question from the figure of closing stock is not tantamount to a ‘tinkering’ of the closing stock but allowing to the assessee the effective deduction to which it is entitled under section 43B. We would also like to emphasise that in the subsequent assessment year, the assessee’s opening stock would stand reduced by a corresponding figure since it cannot avail of a ‘double deduction’.”

7. We have considered the rival submissions advanced by the learned counsel appearing for the parties. In the case of British Paints India Ltd. (supra) relied upon by Mr. Bhowmick what had happened was that the stock-in-trade was valued at 84.49 per cent. representing the actual cost of raw materials. The overhead charges representing 15.51 per cent. of the total cost were excluded from the valuation of the closing stock. It is in those circumstances that their Lordships opined that the aforesaid method of valuation was not justified. It is in this backdrop that the views of the Supreme Court, relied upon by Mr. Bhowmick, as quoted above, has to be understood. Therefore, the judgment in the case of British Paints India Ltd. (supra) is not an authority for the purpose of deciding the question either way. The judgment in the case of Berger Paints India Ltd. (supra) relied upon by Mr. Bagaria appear to us to be relevant to the subject. The Gujarat High Court in the case of Lakhanpal National Ltd. (supra) took the following view :

“The entire amount of excise duty/customs duty paid by the asses-see in a particular accounting year was an allowable deduction in respect of that year irrespective of the amount of excise duty/customs duty which was included in the valuation of the assessee’s closing stock at the end of the accounting year.”

8. In the event the contention of the Revenue is to be accepted, then it would follow that the amount of cess paid by the assessee to that extent cannot be deducted under section 43B of the Income-tax Act. In that case, the assessee shall not be permitted in the next year to obtain the deduction. We are as such of the opinion that the question has to be answered in the affirmative and in favour of the assessee.

9. The third question formulated in this case reads as follows :

“(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the export turnover should be the total of the amount brought to India and the amount paid as brokerage/commission outside India ignoring the fact that the amount paid as brokerage/commission was not made by appropriate remittances from India ?”

10. Mr. Bhowmick, learned advocate appearing for the Revenue-appellant, drew our attention to Explanation (b) to section 80HHC which reads as follows :

“(b) ‘export turnover’ means the sale proceeds received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) ;”

11. Mr. Bhowmick submitted that no elaborate reasoning is required to demonstrate that the benefit can be availed of by the assessee only for such amount which has in fact been received and brought into the country by the exporter. In this case, the amount of commission or brokerage paid outside India was never received or brought into the country by the exporter. The money spent on account of brokerage or commission was deducted from the price of the goods and the balance amount even, according to the assessee, was received in the country in foreign exchange. Mr. Bhowmick contended that the assessee, in the circumstances, cannot claim the benefit for any amount more than what was actually received or brought into the country. Mr. Bagaria, on the other hand, drew our attention to the judgment in the case of J. B. Boda & Co. (P.) Ltd. v. CBDT [1997] 223 ITR 271/[1996] 89 Taxman 311 (SC). What had happened in that case was that the assessee remitted the money received by him to the foreign reinsurer after retaining his commission. The commission received by him was treated to be the money received or brought inside the country for the purpose of section 80U. It was held that it was not necessary that the entire money has to be remitted to the foreign insurers and, thereafter, the balance has to be brought inside the country for the purpose of obtaining the benefit because that would be an idle formality. This judgment has no manner of application to the facts and circumstances of this case. The other judgment cited by him is in the case of CIT v. Bannariamman Exports Ltd. [2014] 360 ITR 591/221 Taxman 199 (Mag.)/42 taxmann.com 382 (Mad.). In that case, the assessee exported molasses worth Rs. 6,14,87,164 but the foreign buyer paid the amount after deducting the amount of demurrage and dead freight. It was held by the Madras High Court that in the facts of the case it could not be said that the sale deduction under section 80HHC. Mr. Bagaria, relying on the aforesaid judgment of the Madras High Court, submitted that the amount of commission paid should also be treated to have been received or brought into the country. We are unable to accept this submission. The language used in Explanation (b) does not admit of any such interpretation. We are, as such, unable to agree with the views expressed by the Madras High Court.

12. Therefore, the third question is answered in the negative and in favour of the Revenue. To that extent the appeal is allowed.

[Citation : 361 ITR 663]