(a) Income‑tax‑‑‑

‑‑‑‑Business loss‑‑‑Valuation of stock‑‑‑Change in method of valuation‑‑ Change is permissible if it is bona fide and followed regularly thereafter‑‑ Valuation of slow moving items at realisable value‑‑‑Finding that change was bona fide and followed regularly thereafter‑‑‑Change in method was justified‑‑‑Loss on revaluation of stock was deductible‑‑‑Indian Income Tax Act, 1961.

An assessee is free to adopt a particular method of valuation, of its closing stock which it has to follow regularly from year to year. At the same time it is well‑settled that irrespective of the basis adopted for valuation for earlier year, the assessee has an option to change the method of valuation of closing stock, provided the change is bona fide. and followed regularly thereafter.

The Appellate Tribunal being the final fact‑finding authority under the Act, the High Court in the exercise of its advisory jurisdiction can neither go behind the facts stated by the Tribunal nor can disturb the same unless a challenge is provided specifically by a question framed in a reference against the validity of the impugned findings of fact on the ground that there is no evidence to support them or they are result of a misdirection in law.

Held, that, in view of the findings of the Tribunal, the assessee had resorted to revaluation of the raw materials on the basis of specific instances of fall in value of the goods when such goods could not be sold even at cost price, there was nothing wrong in valuing the goods at an estimated realisable value. The assessee has an option to change the method of valuation of closing stock if the change is bona fide and followed regularly thereafter. The loss arising out of revaluation of closing stock was allowable.

(b) Income‑tax‑‑‑

‑‑‑‑Reference‑‑‑Finding of fact‑‑‑Final unless challenged specifically‑‑‑Indian Income Tax Act, 1956, S.256.

(c) Income‑tax‑‑‑

‑‑‑‑Business expenditure‑‑‑Reference‑‑‑Appeal to Appellate Tribunal‑‑ Surtax‑‑‑Supreme Court decision that surtax is not deductible‑‑‑Question whether Tribunal was justified in rejecting additional ground that surtax was deductible was academic‑‑‑High Court would not answer it‑‑‑Indian Income Tax Act, 1961, Ss.37, 254 & 256.

That in Smith Kline and French (India) Ltd. v. CIT (1996) 219 ITR 581, it has been held by the Supreme Court that surtax levied under the Companies (Profits) Surtax Act, 1964, squarely falls within the mischief of sub‑clause (ii) of clause (a) of section 40 of the Act and therefore cannot be allowed as deduction while computing the business income of the assessee under the provisions of the Act. In view of this authoritative pronouncement, the first question was academic and therefore, returned unanswered.

Smith Kline and French (India) Ltd. v. CIT (1996) 219 ITR 581 (SC) rel.

K. Mohammad Adam Sahib v. CIT (1965) 56 ITR 360 (Mad.) and Patnaik & Co. Ltd. v. CIT (1986) 161 ITR 365 (SC) ref.

(d) Income-tax---

‑‑‑‑New industrial undertaking‑‑‑Special deduction‑‑‑Computation of capital‑ Borrowed capital is not includible ‑‑‑Indian Income Tax Art, 1961, S. 80J.

For computing the capital employed under rule 19A of the Income Tax Rules, 1962, the borrowed capital has to be excluded for the purposes of relief under section 80J of the Income Tax Act, 1961.

Lohia Machines Ltd. v. Union of India (1985) 152 ITR 308 (SC) fol.

R.C. Pandey with Ms. Prem Lata Barisal for the Commissioner.

Satyen Sethi with T.V. Mallikarjun for the Assessee.

JUDGMENT

D.K. JAIN, J.‑‑In this reference under section 2560) of the Income Tax Act 1961 (for short "the Act"), at the instance of the Revenue, in respect of the assessment year 1973‑74, the Income‑tax Appellate Tribunal, Delhi, has referred the following question for the opinion of this Court:

"(1)Whether, on the facts and in the circumstances of the case, the Income‑tax Appellate Tribunal had erred in law in not entertaining and disposing of on merits the additional ground sought to be raised by the assessee that the surtax payable was an allowable deduction in the computation of income for the purposes of Income‑tax?

(2)Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in allowing the assessee's claim of loss of Rs.5,28,475, arising out of revaluation of slow moving raw material at estimated realisable value?

(3)Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that in computing the capital under rule 19A of the Income‑tax Rules, 1962, borrowed capital was not excludible for the purpose of relief under section 80J of the Income Tax Act, 1961?"

Since indisputably, the issues, subject‑matter of Question No 1, on merits, and Question No.3 wholly stand covered by the decisions of the Supreme Court, we may first dispose of these two questions.

In Smith Kline and French (India) Ltd. v. CIT (1996) 219 ITR 581, it has been held by the Supreme Court that surtax levied under the Companies (Profits) Surtax Act, 1964, squarely falls within the mischief of sub‑clause (ii) of clause (a) of section 40 of the Act and, therefore, cannot be allowed as deduction while computing the business income of the assessee under the provisions of the Act. In view of this authoritative pronouncement, the first question is rendered academic and is, therefore, returned unanswered.

Similarly in Lohia Machines Limited v. Union of India (1985) 152 ITR 308, the apex Court has been pleased to hold that for computing the capital employed under rule 19A of the Income‑tax Rules, 1962, the borrowed capital has to be excluded. Following the said decision, with respect, we answer Question No.3 in the negative, i.e., in favour of the Revenue and against the assessee.

The second question relates to the valuation of stock‑in‑trade held by the assessee. To appreciate the controversy, a few facts may be noticed.

The assessee was having some items of slow moving raw material of polyester fibre and nylon fibre in its Nagda and Kiran units. Finding that these were old items and may not even fetch the cost price, the assessee valued these items at estimated realisable value, thereby claiming a trading loss of Rs. 5,28,475 in this process. The said claim was, however, disallowed by the Assessing Officer on two grounds, namely, (i) that there was no scientific basis adopted for the revaluation of the goods, in question; and (ii) the assessee having followed the method of valuation at cost or market value, whichever was lower, it could not be permitted to change it at its sweet will, as the method once chosen should have been followed consistently. Being aggrieved, the assessee preferred an appeal to the Appellate Assistant Commissioner. Relying on certain instances, it was pleased by the assessee before the Appellate Assistant Commissioner that the goods valued at estimated realisable value did not have any ready market even at their cost and further even if there had been a change in the method of valuation in respect of certain items of slow moving raw materials, it had been adopted for bona fide reasons and the method was being followed in the subsequent years. The Appellate Assistant Commissioner accepted the plea of the assessee and accordingly allowed the said loss.

The Revenue carried the matter in further appeal to the Tribunal. While upholding the decision of the Appellate Assistant Commissioner, the Tribunal held as follows:

"On the material submitted before the Appellate Assistant Commissioner and that submitted before us, we agree with him that the revaluation was done on the basis of specific instances of fall in value and proper reasoning. We find little substance in the submission of the learned Departmental representative that the instance of sale on September 21, 1973, could not be relied upon for such revaluation. The assessee has cited several other instances before the Appellate Assistant Commissioner. The instance of September 21, 1973, was cited only to show that trend of the market even in the subsequent years. We also agree with the Appellate Assistant Commissioner that there was nothing wrong in valuing the slow moving stocks on estimated realisable value in the light of the authorities cited before us by learned counsel for the assessee. The Madras High Court in the case reported in K. Mohammad Adam v.CIT (1965) 56 ITR 360, laid down that the assessee has a right to value his closing stock at cost price or market price, whichever is lower. The Court further held that where the goods are saleable only in certain foreign markets, the assessee is entitled to value them at 'nil' and that he is not bound to show that he had made efforts to sell the goods in other foreign markets or in the local market, before valuing the stock at 'nil'. The same principle applies to the present case also. The assessee found that certain goods could not be sold even at the cost price. It, therefore, valued them at their estimated realisable value obviously because there was no market for them and the market quotations were also not available. We also agree with the Appellate Assistant Commissioner that if this involved any change in the method of valuation, that was permissible as it was bona fide and had been followed subsequent. This contention of the Department also therefore fails." (Emphasis supplied by us)

Thus, the Tribunal has held that: (a) the assessee had resorted to revaluation of the said items on the basis of specific instances of fall in value of the goods when it discovered that certain goods could not be sold even at the cost price; (b) there was nothing wrong in following the same at estimated resaleable value in the absence of any market for these items; and (c) a change in the method of valuation was permissible as it was bona fide and was being followed in subsequent years. Aggrieved by this order, as noted above, the Revenue had brought up this reference on the questions set forth, above.

We have heard Ms. Prem Lata Bansal, learned counsel for the Revenue, and Mr. Satyen Sethi, learned counsel for the assessee. We do not find any infirmity in the conclusion reached by the Tribunal.

An assessee is free to adopt a particular method of valuation of its closing stock which it has to follow regularly from year to year. At the same time it is well‑settled that irrespective of the basis adopted for valuation for earlier years, the assessee leas an option to change the method of valuation of closing stock, provided the change is bona fide and followed regularly thereafter.

In the instant case, according to the statement of the case drawn up on the basis of the appellate order of the Tribunal, extracted above, it has been found by the Tribunal that the change in the method of valuation adopted by the assessee was bona fide and the same method was followed by it subsequently. The Appellate Tribunal being the final fact‑finding authority under the Act, this Court in the exercise of its advisory jurisdiction can neither go behind the facts stated by the Tribunal nor can disturb the same unless a challenge is provided specifically by a question framed in a reference against the validity of the impugned findings of fact on the ground that there is no evidence to support them or they are the result of a misdirection in law (see Patnaik and Co. Ltd. v. CIT (1986) 161 ITR 365 (SC), which is not the case here. From the format of the question it is evident that it does not lay specific challenge to the correctness of the aforenoted findings arrived at by the Tribunal. Thus, in view of the undisputed findings of fact recorded by the Tribunal, namely, that the method of valuation adopted by the assessee was bona tide and it was being followed subsequently, we have no hesitation in holding that the view taken by the Tribunal in allowing the assessee's claim of loss of Rs.5,28,475, arising out of revaluation of slow moving items of raw material was correct in law. Accordingly, we answer the second question in the affirmative, i.e. in favour of the assessee and against the Revenue.

The reference is answered in the aforenoted terms. There will, however, be no order as to‑costs.

M.B.A./321/FCReference answered.