THE issues before the Bench are - Whether when assessee makes emergency purchases for immediate consumption, clearing charges paid for the same are to be included in the value of closing stock; Whether first time insurance premium paid to register a vehicle purchased for business purposes is to be included in the actual cost of the asset and the same is to be treated as capital in nature; Whether when assessee sponsors gifts to winners of a game show on TV, any TDS obligation arises on such gifts and Whether TDS is deductible on stitching charges
invoiced for making uniform of the assessee's employees. And the verdict partly goes in favour of assessee.
invoiced for making uniform of the assessee's employees. And the verdict partly goes in favour of assessee.
Facts of the case
A) Assessee company is engaged in the manufacturing and selling of two-wheelers. Assessee purchased material on CIF basis. Therefore, freight, cost of delivery of goods was ordinarily included in purchase price. In exceptional circumstances, where assessee had to immediately lift material, transport charges were paid, which were not loaded to the purchase price, but were separately debited to profit and loss account, since invoices of transporters were received after consumption of material. The freight amount was not included in the valuation of closing stock, as per the method of accounting for valautaion of stock consistently followed by the assesse and accepted by the Revenue in the past. But the AO did not accept the same.
B) Assessee entered into service agreement with HCSL for availing advisory services in relation to various corporate services like human resource, I.T., etc., and availing supervisory services for evaluating data processing work carried out by M/s Results Mcann Pvt. Ltd. under passport scheme launched by the assessee company.The AO admitted that the services were availed from HCSL inasmuch as the expenditure of Rs.20 lacs out of the total payment of Rs.1.70 crores were allowed as deduction. Only part of the total expenditure was disallowed on the ground of the same being excessive, having regard to the services availed.
C) During the relevant previous year, the assessee incurred expenditure of Rs.11.90 lacs on account of first insurance premium paid at the time of purchase of vehicles used for purposes of business, which were claimed as revenue deduction. The AO disallowed the aforesaid expenditure on the ground that the same was capital in nature, having been incurred for putting the vehicle to use as per provision of Motor Vehicles Act. The Assessing officer made net disallowance of Rs.10.27 lacs, after allowing depreciation. Assessee argued that the insurance premium was paid to cover loss on happening of specified events, for the specified period after the date of purchase, and was to be renewed annually. The same was not in relation to acquisition of car. Thus, premium paid either before/at the time of purchase of car cannot be capitalized as part of the cost of car and is allowable revenue expenditure.
D) During the relevant previous year, the assessee incurred expenditure of Rs.7.49 lacs on account of distribution of motor vehicles to winners of game shows organized by TV channels. The Assessing Officer disallowed the aforesaid expenditure under section 40(a)(ia) on the ground that the assessee failed to deduct tax at source therefrom under section 194B of the Act.
E) The assessee entered into contract for purchase of uniform for staff. The vendor was to use own cloth for stitching and no material was supplied by the assessee. The assessee paid Rs. 54,000 to the vendors for purchase of uniforms, which was recorded in the books of accounts as stitching charges paid for uniform of employees. The Assessing officer held that since the vendor raised separate invoice for cloth and for stitching charges, therefore, the same was in the nature of work contract. Accordingly, the assessee was liable to deduct tax under section 194C of the Act.
Having heard the parties, the Tribunal held that,
A) + the primary contention of the assessee is that it had to make emergency purchases and that these stocks so purchased were immediately consumed. In such exceptional situations, the assessee has directly accounted the freight and import clearing charges to the profit and loss account. This means that such raw material stocks are not part of closing stock at all. Further, this fact is not rebutted by the DR;
+ though technically it can be argued that the value of closing inventory must include freight/ import clearing charges, the facts explained by the assessee are that the purchases in question are done under exceptional circumstances (which are well known in this ttype of industry) for immediate consumption. They are in fact consumed immediately i.e. as soon as raw material enters the factory premises which is not disputed by assessing officer, hence the question of such purchases being part of closing stock does not arise at all. In such a situation, when freight/ import charges are directly debited to the P&L A/c along with the value of the purchases, naturally the question of treating them as part of closing inventory does not arise. The assessee has acted and accounted in a proper and acceptable method. Therefore, the relief should be granted on this count alone;
+ alternatively, the undisputed fact remains that the assessee has been consistently following the said method of accounting in the last many years and the Revenue has been accepting these facts and method of accounting without any demur. The contention of the DRP that, the principle of res-judicata does not apply in Income tax proceedings and therefore, the Assessing officer is correct to come to independent conclusion and is not bound by past acceptance of a factual legal point by the department is untenable. Technically the principle of res judicata may not apply to the income tax proceedings as each year is is an independent year, yet there ought to be uniformity in treatment and consistency as propounded by Hon’ble Supreme Court in the case of Radhasoami Satsang Vs. CIT (2002-TIOL-745-SC-IT), when the facts and circumstances are identical. It is a judicially accepted principle that when the facts are same, a uniform view should be adopted for the subsequent years in the income tax proceedings. Unless there is a material change in the facts, which is neither demonstrated by assessing officer nor DRP, the view which is taken earlier, should not be changed, as held by various courts;
+ in the present case, the Revenue has rejected the method of accounting which is consistently followed by the assesseee on the ground that there may be chance where in a particular year, the method adopted by the assessee may result in underestimation of profits. However, the Revenue failed to demonstrate with facts and figures that the impugned method of accounting may result in material underestimation of profits. On the contrary, the assessee has demonstrated that the change in the method of accounting for year under appeal would result in loss to the revenue as the opening stock would also require similar adjustment and the cascading effect will be loss to revenue. We observe that in many of the additions made in this case by the revenue, the consistent method of accounting is unnecessarily disturbed, though it has been accepted in many years. In our view such tinkering with the method is unjustified when the exercise does not materially alter the profits. The facts and figures in many additions demonstrate that the issue raised is revenue neutral in the long run. Such petty additions should be avoided on the ground of materiality, as AS-1 which talks about materiality, consistency, prudence etc. is part of the I.T. Act after it is notified u/s 145(2);
+ in view of the settled law, we are of the opinion that adjustment of Rs. 31.38 lacs made to total value of closing stock of Rs. 275 crores and consumption of stock of Rs. 7178 crores is uncalled for. If valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method. The closing stock of a particular year is the opening stock of the subsequent year. It is not the case of the Revenue that the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee. This adjustment sought to be made is revenue neutral and at best may result in preponment or postponement of revenue. The issue is whether such exercise is at all required on the ground of materiality. Materiality is a concept which is well recognized both in accountancy and law. Accounting standards notified by the CBDT u/s 145(2) mandate that the concept of materiality be taken into consideration when finalizing the accounts of an assessee;
B) + the assessing officer in this case made an ad hoc disallowance by allowing an amount of Rs. 20 lacs as expenditure for the services availed by the assessee from HCSL and disallowing the rest. The assessing officer has by observing in his order that various reports have been provided by HCSL admitted the fact that certain services were rendered in this case. His only doubt is how these services were needed in the business of the assessee. We also note that the parties are not related to each other in terms of sec. 40A(2)(b). While it is so, the action of the Revenue in disallowing the certain portion of the expenditure is not justified unless the revenue demonstrates that the transaction is primarily a device to evade tax.
+ it is well settled that the assessing officer cannot place himself in the arm chair of businessman and decide the amount of expenditure that is to be incurred for the purpose of running of the business. The expenditure in question cannot be disallowed for the reason that the expenditure was incurred for business and was in the revenue field and was not a personal expenditure. In the result, this ground of the assessee is allowed;
C) + under the Act, depreciation has to be computed on the actual cost of the assesse. The expression "actual cost" has been defined under section 43(1) of the Act to mean the actual cost of the assets to the assesse, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. In the case of Challapalli Sugars Ltd vs. CIT (2002-TIOL-593-SC-IT), the expression "actual cost" came for consideration before the Hon’ble Supreme Court, it was held that all the expenditure necessary to bring assets into existence and to put these assets in working condition was part of actual cost of the assets to the assesse.
+ the principal though rendered in the context of section 10(5) of the 1922 Act would equally govern even under the 1961 Act. Payment of vehicle insurance premium is mandatory as per the provisions of the Motor Vehicles Act. Practically, the insurance premium is paid by customers before taking the delivery of the car.Applying the above principle, we are of the view that the "actual cost" of vehicles not only includes its price but also all other expenses like registration fees, first time insurance and other cost incurred to acquire the vehicle. Accordingly, we hold that the first payment of insurance premium is in the nature of capital expenditure. Thus, we dismiss this ground of the asseeee;
D) + the assessee’s argument is that the TV channel had organized a game show and it is the responsibility of organizer of the show to deduct the tax at source thereon. However, the fact remains that the assessee has sponsored gift for this particular TV show and this may be a mode of advertising. The entire show was organized by the TV channel for and on behalf of the assessee for advertising its products. It is not a case where the motorcycles were given to the company which owned the TV channel and thereafter the T.V. Channel gifted the same as its own asset. The T.V. channel organizing the game show is just a conduit through which the assessee gifts the motorcycles to various winners of the contest of the TV show;
+ in our view a reading of Sec 194B leads to the conclusion that the assessee was liable u/s 194B to deduct tax at source and having not done so attracts disallowance u/s 40(a)(ia). This ground of the assessee is dismissed;
E) + it is an undisputed fact that the payment in question was made seperatly towards purchase of cloth and for stitching charges. If the arguments of the assessee it is to be accepted that it was purchase of goods and not contract for work, we do not see a reason as to why the vendor has to raise a separate bill for sitching charges. Though the assessee submitted that this is a composite contract, no evidence is led in this direction. Thus, we uphold the findings of the assessing officer and dismiss this ground of the assessee.
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