ORDER
T.A. Bukte, Judicial Member
1. All these appeals relate to the same assessee. They were therefore, heard together and disposed of by this common order for the sake of convenience.
2. ITA No. 1935/(PN)/1985 : This is appellant’s appeal against the order of the CIT (Appeals) Pune dated 2-8-1985 on several grounds. Ground No. 1 is in respect of the claim for provision of gratuity of Rs. 12,16,085. The assessee claimed this provision of gratuity as a deduction from the income without incurring any expenses. The Assessing Officer disallowed it and the CIT (Appeals) confirmed the same. At the time of hearing of this appeal, Shri V.G. Bhide, the learned counsel for the assessee did not press this ground. Hence the appeal stands dismissed on this ground.
3. Ground Nos. 2 and 3 relate to the confirmation of addition of Rs. 9,88,095 under the caption “Sales-tax set off. This amount was assessed on accrual basis. Now, the appellant claimed in the ground of appeal that the change in the method of accounting was bona fide and therefore, the said addition should not have been confirmed. The CIT (Appeals) mentioned in his order that no reason was adduced either before the Assessing Officer or the CIT (Appeals) why the addition should not be made under the caption “Sales-tax set off on accrual basis. Therefore, the appellant mentioned in the grounds of appeal that “during the course of proceedings it was cumbersome to keep a track of the claim of set off made in return and the claim of set off should be allowed in the assessment by passing the necessary adjustment entries in respect thereof”. What is mentioned by the Assessing Officer in para 5 of his order is as under :
The assessee has changed the method of accounting of sales-tax set on from accrual basis to cash basis. As in the past, such receipt was taxed on the accrual basis. The same is taxed on this year also on accrual basis. The reasons for change are not known. Addition on this account comes to Rs. 9,88,095.
4. It was submitted before the CIT (Appeals) that the addition under the caption “Sales-tax set off on accrual basis was unwarranted. Reliance was placed on his own order in the case of Matchwell Electricals for the assessment year 1977-78 and on the order of his predecessor in the case of Maharashtra Scooters Ltd. The CIT (Appeals)’s order in the case of Matchwell Eleciricals Ltd. [IT Appeal Nos. 248 and 249 (PN) of 1985] was in connection with duty draw back as cash assistance. The claim of sales-tax set off on accrual basis was not on the point of duty draw back as cash assistance. He held that the sales-tax set off cannot be compared with duty draw back as cash assistance. There was a material difference between the two and therefore, in his opinion, the decision in the case of Matchwell Electricals was not relevant to the facts of this case.
5. The CIT (Appeals) also distinguished the decision of his predecessor in the case of Maharashtra Scooters Ltd. According to the CIT (Appeals) the profits were required to be computed with reference to the method of accounting regularly employed by the assessee. The method of accounting changed without showing any valid reasons was bona fide and nor is a question for consideration. He held that the method of accounting in respect of sales-tax set off was changed from accrual basis to cash basis without adducing any reasons before the Assessing Officer or before the CIT (Appeals) himself. He came to a conclusion that the change of accounting resulted in the loss of revenue and the change was not bona fide and the change of method in the ordinary course should not be allowed if it results into a loss of revenue to the department. Therefore, he confirmed the addition.
6. There is no doubt that the assessee has right to change the method of accounting from mercantile system to cash system. There is also no doubt that such change of accounting may cause loss to the revenue. The change of accounting in these circumstances is allowable provided the change of accounting is bona fide. If it is bona fide the assessee can exercise option of change of accounting. Both the Assessing Officer as well as the CIT (Appeals) have arrived to a conclusion that the change of method of accounting relating to the sales-tax set off from accrual basis to cash basis was not bona fide and therefore, they have rejected the claim. The change of method of accounting is not a matter of right without adducing any proper reasons and without approving it to be bona fide.
7. The Assessing Officer has mentioned in para 5 of his assessment order the receipt of sales-tax set off was taxed on accrual basis in the past. Therefore, he taxed the said receipt of sales-tax set off on accrual basis in this year also rejecting the claim to tax the same on cash basis. The decision relied upon by the learned counsel in the cases of Matchwell Electricals Ltd. (supra) and Maharashtra Scooters Ltd. [IT Appeal Nos. 920 to 922 (PN) of 1983, 258, 832 to 836 (PN) of 1985, 670 & 693 (PN) of 1986] are distinguishable on facts. We also do not find any good reason either to allow the change of method of accounting regarding the sales-tax set off from accrual basis to cash basis without showing proper reasons and the same being bona fide. Therefore, the Assessing Officer as well as the CIT (Appeals) were right to reject the change of method of accounting so far the sales-tax set off was concerned from accrual basis to cash basis. The Tribunal in the case of Matchwell Electricals Ltd. (supra) for the assessment years 1977-78 and 1978-79 (pages 163 to 169 of the paper compilation) held that the change of method of accounting regarding cash incentive and duty draw back in respect of export sales from mercantile system to cash system was bona fide and therefore, no previous sanction of the ITO was needed. From the orders of the authorities, it is difficult to come to a conclusion in this case that the change of method of accounting from mercantile system to cash system was bona fide. The learned counsel for the assessee also relied on the decision of this Bench of the Tribunal in the case of Maharashtra Scooters Ltd. (supra) for the assessment years 1978-79, 1979-80, 1980-81, 1981-82 to 1983-84-1979-80 to 1983-84 dated 30-11-1988- vide pages 195 to 207 of the paper compilation. The Tribunal took a view in that case that for allowing the true profits of the business it was necessary to allow the changes of method of accounting from accrual basis to cash basis in respect of outstanding sales-tax liability and mere quantification of the same does not enable to arrive to compute the real profits. In that case it was not challenged that the assessee was following bona fide hybrid system of accounting as observed on page 205 of the paper compilation. The assessee cannot be prevented from following the hybrid system of accounting but it should be bona fide as held by the Tribunal in the case of Maharashtra Scooters Ltd. (supra). The assessment order makes it quite clear that the reasons for change were not adduced regarding receipt of sales-tax set off from accrual basis to cash basis. The CIT (Appeals) held that no reason was adduced before the Assessing Officer for changing the method of accounting in this respect. Once having employed a regular method of accounting the necessary reasons must be adduced to change that regular employed method of accounting when the loss causes to the revenue. Moreover, there was no doubt for receiving the sales-tax set off nor the assessee made out such a case. In this view of the matter, we are unable to agree with the learned counsel to accept the change of method of accounting pertaining to sales-tax set off from accrual basis to cash basis as the decisions relied upon by him are distinguishable on facts because in those cases the change of method of accounting was effected for proper reasons and bona fide. In this view of the matter, the appellant fails on ground Nos. 2 and 3 of the appeal.
8. Ground Nos. 4 to 6 of the appeal relate for not allowing the depreciation on an amount of Rs. 16,06,628 regarding taking over the machinery on dissolution of the firm in which the assessee-company was a partner.
9. The Assessing Officer restricted the claim of the depreciation as per the income-tax record of the partnership firm. The assessee contended to allow depreciation on the cost of the machinery of Rs. 16,06,628. The Assessing Officer held that the revaluation of the machinery was done with a view to claim additional depreciation based merely on guess work and the said valuation was not supported by any cogent evidence. It was also submitted that the CIT (Appeals) failed to appreciate the ratio of the Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148. According to the appellant the ratio of the said decision is not application and the depreciation on the valuation of machineries should be allowed. The relevant facts are as follows:
10. There was a firm of M/s ICI Plastics. The assessee-company was a partner in that firm. The assessee filed its return of income on 29-7-1982.
The assessment was made on 18-2-1985. The firm of M/s ICI Plastics was dissolved on 31-3-1981. The said dissolved firm owned machinery and the written down value of the said machinery in accordance with the firm’s books of accounts was Rs. 46,980. The other partners of the said firm were from Chhabria family. They are interested persons in the assessee-company. The assessee-company while taking over the machinery owned by the erstwhile partnership firm agreed for revaluation of the machineries. Accordingly the market value of the machinery was determined at Rs. 16,06,626. The Assessing Officer was unable to find out the reasons and necessity for dissolving the said firm. The machinery owned by the erstwhile firm was age old. The assessee-company agreed for the huge valuation of the machineries without furnishing proper reasons except contending that the machineries were needed for the assessee’s own business. In the opinion of the Assessing Officer it was motivated attempt on the part of the assessee to create the firm, to dissolve it later on and to take over the machineries at the market value at the time of dissolution of the firm amounted to a device of tax avoidance adopted by Chhabria group as all the persons of the erstwhile firm were from the said group. He also came to the conclusion that all these facts clearly indicate that the market value of the machinery of Rs. 16,06,626 was accepted by the assessee-company only to claim higher depreciation on the enhanced cost of the machineries on the one hand and to enable the partners of the erstwhile firm of ICI Plastics to claim higher capital balance at the time of dissolution without any tax liability attached thereto. Therefore, the Assessing Officer held that Explanation 3 to Section 43 was clearly applicable to the facts of the case and by applying the said Explanation he adopted that the actual cost of machinery as shown in the books of accounts of the erstwhile firm before the date of dissolution was at Rs. 46,980.
11. The assessee agitated this non-acceptance of alleged market value of the machinery taken over by it at the time of dissolution of the erstwhile firm before the CIT (Appeals). The CIT (Appeals) gave his own reasons and confirmed the disallowance made by the Assessing Officer.
12. Now, Shri Bhide argued that the return of wealth was also filed showing the market value of the machinery after 31-3-1981. According to him, therefore, the Explanation 3 to Section 43(1) is not applicable. He has placed much reliance on the report of the approved valuer (pages 113 to 118 of the paper compilation). He has also urged that the written down value is not material for determining the value of the machinery on commencement by the assessee-company. He has not disputed that the machineries were purchased by the erstwhile firm in 1960 as per page 117 of the paper compilation. It would be better to narrate a few undisputed facts from page 117 which are as under : (1) PVC compound fluidizing mixer, 150 litre capacity was purchased from Henschel Werke, W. Germany on 22-6-1966 for a price of Rs. 32,752. The value of the said item was determined as on 1-9-1979 at Rs. 2,50,000 by claiming depreciation at 75 per cent and showing the depreciated value as on 1-9-1979 at Rs. 62,500. (2) PVC Compound Fluidizing Mixer, 250 litre capacity with cooling mixer was purchased from Rhenstahi Henschel AC, Federal Republic of Germany on 5-9-1968 for a price of Rs. 45,819. The value of the said item was determined as on 1-9-1979 at Rs. 5,00,000 by claiming depreciation at 60 per cent and showing the depreciated value as on 1-9-1979 at Rs. 2,00,000. (3) 90mm PVC Extruder was purchased from Chemicanlagen Export Import, Berlin, Germany on 29-2-1968 for a price of Rs. 1,30,953. The value of the said item was determined as on 1-9-1979 at Rs. 7,00,000 by claiming depreciation at 60 per cent and showing the depreciated value as on 1-9-1979 at Rs. 2,80,000. (4) Anger PVC Extruder was purchased from M/s Anger APM in April 1971 for a price of Rs. 5,03,160. The value of the said item was determined as on 1-9-1979 at Rs. 10,50,000 by claiming depreciation at 50 per cent and showing the depreciated value as on 1-9-1979 at Rs. 5,25,000. (5) Tiewfals Rigid PVC film Blowing Head was purchased from M/s Anger APM on 29-10-1971 for a price of Rs. 28,877. The value of the said item was determined as on 1-9-1979 at Rs. 70,000 by claiming depreciation at 50 per cent and showing the depreciated value as on 1-9-1979 at Rs. 35,000. (6) Special Rotating Take up and Winding unit was purchased from M/s Nav Bharat Corporation, Bombay, on 29-10-1971 for a price of Rs. 1,35,000. The value of the said item was determined as on 1-9-1979 at Rs. 3,00,000 by claiming depreciation at 50 per cent and showing the depreciated value as on 1-9-1979 at Rs. 1,50,000. (7) Special 24 Injection Moulding Machine was purchased from R.H. Windsor (I) Ltd., Thana in April 1972 for a price of Rs. 4,31,200. The value of the said item was determined as on 1-9-1979 at Rs. 6,50,000 by claiming depreciation at 45 per cent and showing the depreciated value as on 1-9-1979 at Rs. 3,57,500. Shri Bhide has placed much reliance on pages 113 to 117 of the paper compilation. According to Shri Bhide certain replacements were made in the machineries and therefore, the determination of the value of the approved valuer is more. However, neither any replacement in the said machineries were pleaded either before the Assessing Officer or before the CIT (A) nor any evidence in that respect was produced before them. Therefore, the contention of replacement in the machineries to take enhanced value of the same cannot be accepted. There is nothing in the assessment order as well as the order of the CIT (Appeals) that the profits were shown or credited to the partners’ account and they were charged. From the record, it can be made out that neither the profits were credited nor the same were shown for income-tax purpose.
13. He has also tried to argue on the import policy, export duty rate and urgency. He has relied on the decision of the Delhi High Court in the case of Raj Narain Agarwala v. CIT [1970] 75 ITR 1. In that case, the assessee firm owned three factories, viz., (1) Prag Distilled Water Ice Factory; (2) Prag Cold Storage; and (3) Prem Raj Enamel Metal Factory. The three factories were valued by experts, the assets were divided into two lots by the assessee and the only other partner had the option to elect either of the two lots. The valuation was made and it was accepted as genuine. In the instant appeal, the valuation of the factory is not involved but only the machinery. The valuation of the factory including the immovable property was appreciable but the value of the machinery is always depreciable. The ratio of the said decision is not applicable. He has also relied on the decision of the Bombay High Court (Nagpur Bench) in the case of RB. Bansilal Abirchand Spg. and Wvg. Mills v. CIT [1970] 75 ITR 260. In that case also the mill and building was valued by an Architect and the plant and machinery was valued by a former manager of the mill. The family was disrupted and the mill and agency business was taken over by the assessee under the agreement. Again the Mill and the building were appreciable assets with the plant and machinery. Moreover, a sum of Rs. 1,00,000 was added to the income of the assessee on the ground that the excessive dead loss of cotton indicated suppression of production figures. The fraud, collusion, inflation or false transaction with ulterior purposes were not found. Again in the instant appeal, the valuation of the mill or building is not involved and therefore, the facts of that case are distinguishable from the facts of the instant appeal. Shri Bhide also cited the decision of the Bombay Bench of the Tribunal in the case of Sixth WTO v. B.R. Shelly [1986] 16 ITD 76. He has pointed out certain observations from page 88 of the said decision. In that case what was held by the Tribunal was that statutory valuation under Section 16A(1)(a) of the Wealth-tax Act, 1957 can be countered only by another valuer’s report. There is no dispute that if the valuation for valid reasons is not doubted then the valuer’s report is to be accepted. In that case again the valuation of immovable property was involved. The assessee’s wife was running guest house business on certain property held by her as tenant on certain monthly rent. Subsequently, the said property was sold by owner to assessee who became its owner and landlord while his wife continued to be tenant on payment of rent to him. Later, she bequeathed to her daughter tenancy right as well as business of running guest house. After her death assessee obtained probate of her will and became executor of beneficiaries of Will in which capacity he continued to pay rent to landlord, viz., himself. A question arose whether the said property was subject to rent control laws so that its value in assessee’s hand should be determined by rent capitalisation method and not by land and building method adopted by revenue on the ground that assessee-landlord was close relative of tenant-beneficiaries of Will where executor was assessee himself. The Tribunal held-yes and the valuation should not have been rejected. That decision of the Tribunal is also distinguishable as the tenanted premises involved with guest house business or immovable property and the value of the same was the subject matter of application year after year. In the instant case the revaluation of the machinery was only done for the purpose of adjustment or rights inter se between the old partners and newly admitted partners. On the basis of revaluation the value of the machinery in partnership firm was revised as it is already mentioned that the partnership firm was dissolved on 31-3-1981 and at the time of dissolution the machinery, the market value of which was determined at Rs. 16,06,626 was allotted to the share of the limited company i.e., the appellant and money equivalent thereto was paid to other partners towards the adjustment of rights inter se between the erstwhile partners of the partnership firm of ICI Plastics.
14. Shri Bhide has stressed upon the approved valuer’s valuation report. According to him, the valuation report should be accepted. Firstly, the approved valuer’s valuation report cannot be a conclusive evidence. It is a subject matter of scrutiny under the relevant facts and circumstances of the case. Those facts and circumstances of the case are, the date of purchasing the machineries as mentioned above, the price paid for them, the written down value as per the books of accounts of the erstwhile partnership and lastly the life of the machineries in question. These facts do not allow us to accept the valuation made by the approved valuer for another reason also. That reason is that it is well known and settled principle of law that generally the machineries is always depreciable and in the end they have only the scrap value.
15. The said valuation report is also not acceptable for the third reason that the valuation made is firstly on the higher side of the age-old machineries because, firstly the said value was payable to the assessee’s Director’s relatives who were co-partners in the erstwhile partnership firm and secondly to claim unreasonable depreciation. All these reasons also do not allow us to accept the valuation as made by the approved valuer which valuation is many times higher than the purchase price at the relevant time. The said valuation is also more than the written down value of the said machineries as per the books of accounts. The machineries as mentioned above were purchased between 1963 to 1973 and few machineries thereafter. It appears that the assessee wanted to make the claim of depreciation on the highly inflated valuation by way of test whether such a claim could be allowed or not.
16. There is no doubt that the app~eciation of the landed and immovable property can be there to any extent as within 15 to 20 years the prices of lands have appreciated to a greater extent but the prices of the machineries have not appreciated from year after year but there is a depreciation in the prices of the machineries every year. There is a trend of decrease in the prices of the machinery year after year. For the machine purchased and sold as a second-hand machine immediately after purchasing it, no purchaser can even pay the same price leave aside paying more price. The assessee has also not made any special case for valuing the age old machinery at a high and inflated values and that the said machineries were not the subject matter of depreciation. It is also not made out that the said age old machineries were very important whose valuation never depreciated but appreciated every time. The Tribunal is also a fact finding authority and no appreciable facts have been brought before it to accept the inflated valuation of the age old machineries. In this view of the matter, the assessee’s claim requires to be rejected. The appellant fails on these grounds and the appeal is dismissed.
17. The next grounds of appeal are in respect of liability to interest under Section 215. The charging of interest under Section 215 is a consequential. The finding on this ground depends upon the grounds already dealt with above. Since the assessee has failed on all the grounds, no interference is called for in charging interest under Section 215.
18. ITA No. 1925/(PN)/1985: This is revenue’s appeal against the order of the CIT (A) Pune dated 2-8-1985 for the assessment year 1982-83 raising two grounds of appeal. The first ground taken by the revenue is that the CIT (A) was not justified in invoking the provisions of Section 40(c) when the provisions of Section 40A(5) should have been applied to the remuneration paid to the Export Director. The Assessing Officer applying the provisions of Section 40A(5) to remuneration paid to the Export Director disallowed a sum of Rs. 7,922. It is the case of the assessee that in case of an employee-director provisions of Section 40(c) should have been applied. Observing that the provisions of Section 40(c) are specific provisions and therefore, should have precedence on the general provisions of Section 40A(5), the CIT (A) directed the Assessing Officer to compute the disallowable amount, if any, with reference to Section 40(c) and not Section 40A(5). After hearing the parties, we do not find any good reason to interfere with the order of the CIT (A). The revenue fails on this ground.
19. The second ground raised by the revenue in this appeal relates to allowance of expenditure of Rs. 3,000 as “advertisement expenses”. The Assessing Officer noticed that the assessee has debited an expenditure on advertisement in souvenirs. Since some of the advertisements were given to local clubs or organisations the Assessing Officer estimated such expenditure of Rs. 3,000 and disallowed the same as donation. On appeal, following the decision of the Calcutta High Court in the case of British Electrical and Pumps (P.) Ltd. v. CIT [1977] 106 ITR 620, the CIT (A) directed the Assessing Officer to allow the said expenditure.
20. After due consideration we find that the CIT (A) has rightly decided the issue in favour of the assessee directing the Assessing Officer to allow the said expenditure. The decision of the Calcutta High Court fully supports the case. Even the Central Board of Direct Taxes has issued a circular in which the expenses are held as allowable. In this view of the matter, the revenue fails on this ground also.
21. ITA No. 634/(PN)/1987 : The appellant has filed this appeal against the revisional order of the CIT passed under Section 263 of the Act for the assessment year 1982-83. The CIT has set aside the assessment order for the assessment year 1982-83 with a direction to the ITO to bring on record full particulars of the machineries purchased during the year, cost of the machinery and the exact number of days these machineries were actually used for the purpose of calculation for Extra Shift allowance on proportionate basis. At the outset it may be mentioned that the CIT had no jurisdiction to invoke the proceedings under Section 263 of the Act, inasmuch as the assessment order for the year under appeal has been merged with the order of the CIT (A). The CIT (A) dealt with the appeal filed by the assessee and decided the same on 2-8-1985. Thereafter the CIT tried to invoke his jurisdiction under Section 263 by passing an order on 26-2-1987. The Bombay High Court in the case of CIT v. P. Muncherji and Co. [1987] 167 ITR 671 held that since at the time of Commissioner was seeking to exercise powers of revision under Section 263 of the Act, the requisite orders had stood merged in those of the Appellate Asstt. Commissioner, the exercise of revisional jurisdiction by the CIT under Section 263 was not valid. In this view of the matter, we hold that the CIT had no jurisdiction to invoke powers under Section 263 of the Act. Even on merits as well, the machineries installed by the company have worked during the relevant previous year. It is a well principle of law that even the machinery worked for a single day, the extra shift allowance should be granted. Consequently, the assessee succeeds. The order of the CIT is set aside and that of the ITO is restored.
22. In the result, assessee’s appeal No. 1935/PN/85 and departmental appeal No. 1925/PN/1985 are dismissed and that ITA No. 634/PN/1987 is allowed as indicated above.