Commissioner of Income Tax vs Rameshwar Prosad Kejriwal and Sons (P.) Ltd.

Sengupta, J.—In this reference made at the instance of the revenue, the following four questions are referred by the Tribunal for the opinion of this Court u/s 256(1) of the income tax Act, 1961 (''the Act''):

Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the expenditure of Rs. 1,77,708 incurred for repairs and replacement of plant and machinery worth Rs. 1,30,000 was on account of current repairs and was revenue in nature and was based on any relevant evidence or partly relevant and partly irrelevant evidence and is otherwise arbitrary and perverse ?

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the expenditure of Rs. 1,77,708 made for the maintenance and replacement of plant and machinery worth Rs. 1,30,000 was in the nature of revenue and thereby deleting the addition of Rs. 1,77,708 made under the head ?

Whether, on the facts and in the circumstances of the case and having regard to the finding of the Assessing Officer and the Commissioner (Appeals), that the change in the method of valuation of closing stock was not bona fide and was intended only to reduce the taxable profit, the finding of the Tribunal that there are no good reasons to reject the change in the method of valuation of closing stock adopted by the assessee was perverse and/or is based on any evidence or material ?

Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in deleting the addition of Rs. 10,83,865 to the assessee''s income on account of undervaluation of closing stock ?

This reference relates to the income tax assessment of the respondent-assessee for the previous year ending 31-7-1983 corresponding to the assessment year 1984-85. The assessee-company is engaged in the business of manufacture and sale of tea. The first two questions in this reference relate to the expenditure of Rs. 1,77,708 incurred by the assessee-company by way of replacement of three parts, viz., CTC Segment, Conveyer Belt and Motor of an old CTC Machine which was purchased by the assessee-company in the previous year relevant to the assessment year 1982-83 for a sum of Rs. 1,30,000. The Assessing Officer held that the expenditure in question was capital in nature. On appeal by the assessee, the Commissioner(Appeals) found that the expenditure in question was incurred for replacement of spare parts in the CTC Machine, which was being used by the assessee-company for its business purposes. The Commissioner (Appeals) referred to the several decisions of different High Courts as well as the decisions of the Supreme Court in Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., and held that the expenditure on replacement of CTC Segment, Motors and Conveyer Belt was nothing but a revenue expenditure. On appeal by the revenue, the Tribunal held and observed that the replacement of some of the parts of a machine is nothing but in the nature of current repairs and the expenses in question must be treated as revenue in nature. We find that an almost identical issue came up before this Court in Commissioner of Income Tax Vs. Tea Estate (P.) Ltd., . In that case, the petrol engine of a truck was replaced by a diesel engine. This Court held that it was only replacement of a physical, commercial and functional inseparable part of an entire asset. By such replacement, only the operating cost is reduced and no asset or new advantage of an enduring benefit is brought into existence because what is done is to preserve and maintain an already existing asset. The expenditure incurred on such replacement was held to be revenue in nature. In this case, it was submitted before the Commissioner (Appeals) as well as before the Tribunal on behalf of the assessee that it had 7 CTC Machines. In each of these machines, parts like CTC Segment, Motors, Conveyer Belt, etc., have to be replaced from time to time in order to maintain good cutting of the green tea leaves and for maintaining the manufacture of quality tea. The expenditure of Rs. 1,77,708 was incurred by the respondent-assessee only in replacement of some existing parts of a machine, which was being used by the assessee wholly and exclusively for business purposes. No new asset or new advantage of enduring benefit is brought into existence by any such expenditure. In this view of the matter and following the decision of this Court in Tea Estate (P.) Ltd. (supra), we answer the second question in the affirmative and in favour of the assessee. The first question is also accordingly answered by saying that the finding of the Tribunal that the expenditure of Rs. 1,77,708, was incurred for repair and replacement of spare parts of an existing machine was based on relevant evidence and was not perverse.

The last two questions in this reference relate to the change in the method of stock valuation. The assessee-company had all along been valuing its closing stock of made tea at ''since realised or estimated realisable value''. But, with effect from the previous year relevant to the assessment year 1984-85, now in reference before us, the assessee-company changed its method of stock valuation to ''estimated cost'' basis. The Assessing Officer found that the average cost price of tea for this year was Rs. 11.29 per kg. as against the average sale price of Rs. 17.68 per kg. The Assessing Officer felt that had the closing stock of tea been valued by the respondent-assessee at ''realisable value'', the book profits for the year under reference would have gone up by Rs. 10,83,885. In view of the change in the method of stock valuation, the Assessing Officer felt that the book profit of the assessee-company has been reduced by Rs. 10,83,885. He, therefore, held that such change in stock valuation was not bona fide and was intended only to reduce the taxable profits of the assessee-company for the year under reference.

On appeal by the assessee, it was submitted on its behalf before the Commissioner (Appeals) that the assessee-company was facing difficulty in valuing its closing stock of tea at ''since realisable value'', that the method of valuing stock at estimated cost was one of the recognised methods and that the changed method was being followed by the assessee-company year-after-year. The Commissioner (Appeals), how ever, upheld the order passed by the Assessing Officer and rejected the new method of stock valuation adopted by the assessee-company in the year under reference. On further appeal by the assessee, the Tribunal held and observed that there were no good reasons to reject the change in method of valuation of stock affected by the assessee-company. It was, inter alia, submitted on behalf of the assessee-company before the Tribunal that although in the earlier years, the assessee was valuing its stock of tea at ''since realisable value'' it decided to change its method of stock valuation to estimated cost price with effect from the previous year relevant to the assessment year 1984-85. The bona fides of the assessee cannot be doubted since the changed method of valuation was being consistently followed by the assessee-company in future too and that the method of valuing stock at cost was one of the recognised methods.

The assessee-company is engaged in the business of manufacture and sale of tea. The stock of tea at the end of the year can be valued either at cost or at market price or at cost or market value, whichever is lower. All these three methods of stock valuation are well recognised. In the earlier years, the assessee-company was valuing its closing stock at ''since realisable value''. In other words, the closing stock of tea was being valued by the assessee-company at the market price actually realised on sale of such closing stock after the end of the relevant previous year. The stock of tea at the end of any year can also be valued at the average cost, the principle which the assessee-company has now adopted as a changed method of valuation in the previous year relevant to the assessment year under appeal. This is one of the recognised methods. It is also found that this method is being consistently followed by the assessee-company year- after-year. There appears to be no mala fide in changing the method of stock valuation from one recognised method to another recognised method so long as the new method is also being consistently followed year-after-year. In this view of the matter, we find no justification to interfere with the order of the Tribunal. We, therefore, answer the third question in the negative by saying that the order of the Tribunal upholding the change in the method of valuation of closing stock was not perverse. We also answer the fourth question in the affirmative and in favour of the assessee. There will be no order as to costs.

Sen, J.

I agree.