1989-VIL-78-ITAT-DEL

Equivalent Citation: ITD 031, 079,

Income Tax Appellate Tribunal DELHI

Date: 21.02.1989

JACKSON ENGINEERS PVT. LIMITED.

Vs

INCOME-TAX OFFICER.

BENCH

Member(s)  : F. C. RUSTAGI., P. J. GORADIA.

JUDGMENT

Per F.C. Rustagi, J.M. -- Since identical disputes are raised in appeal nos. 5928 & 2928/Del/87, which are also raised in third appeal being ITA no. 2385/Del/88, with other disputes, raises therein all these appeals were heard together and are being disposed of by this consolidated order, for the sake of convenience.

2. ITA no. 2703/Del/87 pertains to assessment year 1985-86, whereas ITA no. 5928/Del/87 pertains to assessment year 1984-85. For the sake of convenience we first take up these two appeals, because the main dispute in both these appeals is, whether the assessee-company, which is a private limited company, is an industrial company or not. The three aspects projected in the ground are, in case the company is industrial company, it has to be subjected to concessional rate of tax ; it is to be allowed relief u/s 80-I ; and benefit of investment allowance is also to be granted. Regarding the last ground, which pertains to levy of interest u/ss 217 and 139(8), the learned counsel for the assessee, himself, was fair enough to say that the same is to be consequential. For the assessment year 1986-87, besides the dispute whether the company was the industrial company and dispute pertaining to interest, which action was admitted to be consequential by the learned counsel for the assessee, there are other disputes pertaining to valuation of closing stock ; sales promotion expenses ; and disallowance u/s 43-B, with which we shall be dealing separately seriatum, after we adjudicate the issue whether the company is an industrial company.

3. The learned counsel for the assessee submitted that assessee assembles diesel engines, styled asJacksonfor which different parts are purchased from different persons, which are number ten in all. He drew our attention to note claimed by the company for being considered as industrial undertaking. He submitted that assessee on one hand buys (i) engine ; (ii) alternators ; (iii) engine instrument panels ; (iv) base plate ; (v) fuel tank ; (vi) control panels ; (vii) batteries ; (viii) measuring instruments & gauges ; (ix) radiators/silencers ; and other components and converts them into several types of engines of different horse powers. He drew our attention to the said note and volumineous paper book, giving photographs of what actually the company manufactures. He placed reliance on large number of circulars from well known concerns, like Kirloskar ; NGEF ; Crompton Greaves ; Jyoti Ltd. ; Ashok Leyland etc., which are placed on assessee's compilation. He submitted that it is through manual labour that the said diesel engines are manufactured or assembled. He drew our attention to details of establishment expenses and details of salaries paid to staff. After dealing at length with factual aspects, he relied on catena of judgments, such as Ashok Motors Ltd. v. CIT [1961] 41 ITR 397 (Mad.), CIT v. Standard Motor Products of India Ltd. [1962] 46 ITR 814 (Mad.), CIT v. Ajay Printery (P.) Ltd. [1965] 58 ITR 811 (Guj.), CIT v. Tata Locomotive & Engg. Co. Ltd. [1968] 68 ITR 325 (Bom.) and Addl. CIT v. A. Mukherjee & Co. (P.) Ltd. [1978] 113 ITR 718 (Cal.) and submitted that some of the cases are absolutely identical and the CIT (Appeals) is wrong in distinguishing some of them from the instant case. The learned D.R. on the other hand besides relying on the orders of the two lower authorities submitted that assessee does not make any new engine. What is written on the engine is Jackson Engineers. He submitted that since it is only assembling of certain parts, purchased from different parties, the assessee cannot be treated as an industrial undertaking.

4. After taking into consideration the rival submissions and going through the facts of the case carefully, we are unable to uphold the finding of the CIT (Appeals) that the assessee is not an industrial undertaking. From the perusal of pictures given by the assessee in respect of diesel generating sets, assembled or manufactured by the assessee it is clear that the same are named as "Jackson". The said engines are required by large industrial houses for meeting their power requirements. May be that a part of the completed machine, at a place it is written Jackson Engineers, but the lobo which is placed mainly on the engine, is "Jackson" and the same are made in various kinds and ranges up to 1,000 KVA. There is no controversy about the fact that there are as many as ten components of the said machine. When we see the chart regarding manufactured products of the assessee, we find it gives details of very class and kinds of engines and alternators, procured and purchased by the assessee in the manufacture of diesel generating sets and all these engines have different capacities. The perusal of list of salaries and workers also shows that the assessee is using different components which may not be, technically speaking, raw material, but something between raw material and parts of engine, which are assembled and put together to make a diesel generating set. There is no controversy about the fact that the assessee-company purchases its alternators and engines separately from leading manufacturers, such as, Kirloskar, NGEF, Crompton Greaves, Jyoti Ltd. and Ashok Leyland etc. What the assessee assembles and manufactures through its assembling is not the same name which is assigned to the parts. The engine made by the assessee is known as diesel generating set. With this process in view and there being a separate name in the market for what the assessee makes, the assessee cannot be treated as non-industrial undertaking. When we peruse the order of the CIT (Appeals) and that of the ITO, we find that they are in error while distinguishing certain cases, relied upon by the assessee. Their Lordships of Bombay High Court in the case of Tata Locomotive & Engg. Co. Ltd., held that assembling of the imported parts into a finished chassis amounted to the manufacture or production of an article within the meaning of section 15C(2)(ii) of the Income-tax Act, 1922. Their Lordships dealing with the wider and narrower connotation of the word "manufacture", held as under :

"that in the present case the assembly stage was a part and parcel of the entire industrial undertaking of the assessee, whereby they manufactured or produced bus/truck chassis which were wholly indigenous. The assembly stage, upon the facts, was not a different industrial undertaking but one intimately connected with the subsequent stages, whereby the Indian bus/truck chassis were progressively manufactured."

4.1 It will not be out of place to mention that Their Lordships in the said case of Tata Locomotive & Engg. Co. Ltd., relied on i.e. the well known case of Ajay Printery (P.) Ltd. In the said case the Hon'ble Gujarat High Court went on to consider even the business of printing balance-sheets, profit and loss accounts, pamphlets, dividend warrants and share certificates etc. as manufacture of goods. Even Ashok Motors Ltd.'s case came to be considered by the Hon'ble Bombay High Court in case of Tata Locomotive & Engg. Co. Ltd. In Ashok Motors Ltd.'s case, their Lordships of Madras High Court had occasion to deal with the issue, whether the assessee was an industrial undertaking and if the said case is gone through carefully, it indicates that assembling of cars by imported parts was industrial undertaking, though the main theme of the case was different.

4.2 EvenCalcuttaHigh Court in case of A. Mukherjee & Co. (P.) Ltd., went a step further to hold that the assessee, which was purchasing papers and hit upon a suitable format for the books, got it printed as per its requirements under its supervision and guidance and after the books were printed, they were got bounded after suitable change, the assessee was held to be a manufacturer and the undertaking as an industrial undertaking. On the basis of facts, available on record and by looking to the law from different High Courts, the assessee has got to be treated as industrial undertaking. We, therefore, reverse the finding of the CIT (Appeals) for all the three years and direct the ITO to accept assessee's contention, regarding levy of concessional tax and its claim u/s 80-I and investment allowance. In course of discussion it was mentioned that though the assessee has mainly assembled diesel generating sets, some alternators were directly sold. In course of discussion the assessee's reply was that these were alternators which were utilised for assembling certain diesel generating sets at the place of the customers. Even this the ITO while giving effect to its order would see to it that assessee is an industrial undertaking ; is entitled to concessional rate of tax and benefit of investment allowance and 80-I, but would be at liberty to see that the percentage of trade is in conformity as warranted by the statutes. About the ground pertaining to charge of interest we have already stated above that the learned counsel for the assessee has himself admitted that the same is to be consequential after appeal effect of this order is taken into account.

4.3 Before we part with the matter we shall be failing in our duty in case we do not point out that the CIT (Appeals) in its order pertaining to assessment year 1985-86 has mentioned that he has followed the earlier year's order, whereas in his order for assessment year 1984-85, it is mentioned by him that he has adjudicated the matter in appeal pertaining to assessment year 1985-86. We may mention here that appeal for assessment year 1985-86 came to be decided by the CIT (Appeals) on2-4-1987, whereas appeal for assessment year 1984-85 was decided on16-10-1987. Therefore in appeal for assessment year 1985-86 the order for assessment year 1984-85 could not be available to the CIT (Appeals).

5. Now what survives for our consideration, are certain grounds in assessee's appeal pertaining to assessment year 1986-87. One of which pertains to addition of Rs. 60,000 made by the learned ITO on account of difference arising as a result of change in method of valuation of closing stock in course of assessment proceedings. When the ITO made the addition of Rs. 60,000 it came to be observed by him that ordinarily the assessee had been valuing the closing stock on the basis of actual cost, but w.e.f. assessment year 1986-87 the assessee adopted the method of cost price or market price, whichever was lower. The assessee though contended that hereafter same method has been consistently adopted, but it did not find any favour with the ITO. The assessee also contended that change in the valuation of stock had been necessitated because at the close of the accounting year, at times the assets lying in stock in trade, due to lapse of time, had not been sold or had their saleable value even below their actual cost. When the matter came before the CIT (Appeals), he also confirmed the action of the ITO, observing that method of valuation of closing stock was changed in respect of certain items only and not in respect of all items. The learned counsel for the assessee submitted that revenue affect of this would be insignificant and still he argued at length that once mode of valuation of closing stock is changed and if it is thereafter consistently adopted, there could not be anything wrong with that and no addition was warranted on that account. He relied on Ramswarup Bengalimal v. CIT [1954] 25 ITR 17 (All.), Forest Industries Travancore Ltd. v. CIT [1964] 51 ITR 329 (Ker.) and Ram Luxman Sugar Mills v. CIT [1967] 63 ITR 51 (All.). He had drawn our attention to pages 20 to 25 of the paper book, giving details of the two units of Cummins diesel engines model which were built for Rs. 3,32,421. The learned D.R. on the other hand besides relying on the orders of the two lower authorities, submitted that if method was to be changed, it should have been for everything.

6. After taking into consideration the rival submissions and looking to the facts available on record, we are unable to uphold the finding of the CIT (Appeals). The assessee is entitled under law to adopt any method of account with regard to business activities and under the system of accounting adopted by an assessee he can also choose any method with regard to valuation of closing stock in trade. The stocks in trade at the end of the year may be valued either at cost or at market value or at lower of the two, all that is required under the law is that once the method is changed, it should be consistently followed thereafter. The assessee earlier was valuing his closing stock at cost price. Now the assessee has changed the method of valuing the closing stock at cost price or market value whichever is lower and there is no controversy about the fact that thereafter although the assessee has been consistently adopting the same. The assessee is a limited company and if some benefit is drawn in the year under consideration, the same will be undone next year if the same mode of valuation of closing stock is adopted. Their Lordships of Allahabad High Court in case of Ramswarup Bengalimal, observed that, an assessee is entitled to value his closing stock either at cost price or market value, whichever is lower. They further observed that the assessee who was valuing his closing stock at cost price for several years, valued the stock during the relevant year at market rate, which was found lower than the cost price. It was not shown on behalf of the Department that in any of the previous years, market price was less than the cost price. On these facts what was held by Their Lordships, reads as under :

"that, in the circumstances, it was not possible to draw an inference that the assessee had adopted the regular method of valuing his stock at cost price even if the market price was lower and, consequently, in valuing his stock in the relevant accounting year at the lower market price, it could not be said that the assessee was changing the regular method of accounting employed by him in the past. It could not, therefore, be said that the assessee was not entitled to value his closing stock at market rate."

6.1 In the instant case, as well, similar is the position from all angles. In the case of Ram Luxman Sugar Mills as well, the Hon'ble Allahabad High Court held that assessee is entitled to value the closing stock of any accounting year either at cost price or at market price, whichever is lower, though the value of the closing stock must be the value of the opening stock in the succeeding year, the rate to be applied need not be the same for the opening stock and closing stock of the same accounting year. It is so in the instant case.

6.2 Their Lordships of Kerala High Court in the case of Forest Industries Travancore Ltd., held regarding change of method of valuation of closing stock, as under :

"that the assessee was entitled to change his method of valuation of stock in this manner even though the revenue may be affected adversely by such change. It is a concession given to the assessee based on the well recognised usage of the trade, and the principle underlying that concession is in no way violated when the assessee changes his method of valuation from cost to market value, when the latter is less than the cost price, provided the change is bona fide and the new system is continued in subsequent years. The assessee's claim for deduction of Rs. 1,41,035 was allowable in law."

7. The Revenue has nowhere proved that it was not bona fide. The action of the CIT (Appeals) is, therefore, reversed and the assessee's contention is accepted.

8 to 10. [These paras are not reproduced here as they involved minor issues.]

11. In the result assessee's appeals for all the three years shall be treated as partly allowed for statistical purposes.

 

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