Dr. Beck and Co. (India) Ltd. Vs. Inspecting Assistant - Court Judgment

Excerpt:
1 to 3. [these paras are not reproduced here, as they involve minor issues.] 4. ground no.3 in assessee's appeal is concerning investment allowance for machinery used for scientific research, the whole cost of which was allowed in the assessment year 1982-83 under section 35(2)(ia) of the act. the assessee's claim that proviso (d), to section 32a(1) would apply when both the deductions are in one year and not in a case where whole of the actual cost was allowed as a deduction in two different previous years, namely, year ending on 30-6-1981 and 30-6-1982 was not accepted by the assessing officer. he held that the actual cost of the machinery as at the end of the accounting period was the actual cost incurred till the end of the accounting year which was allowed in full while computing the income for assessment year 1982-83 and, therefore, proviso (d) to section 32a(1) prohibited the deduction. the cit (appeals) upheld the order of the iac by observing that though the argument was plausible, it could not be accepted if one considered the intention of the legislature in granting the investment allowance in the light of various provisions contained in the act; and the provisions interpreted in a harmonious way.5. the learned counsel for the assessee, submitted that proviso (d), to section 32a(1) prohibits allowance in respect of that machinery, the whole of the actual cost of which was allowed as a deduction in any one previous year. "any one" previous year, according to the learned counsel for the assessee, means the same previous year like a provision finding a mention in section 35(2)(iu) prior to the amendment with retrospective effect by finance (no. 2) act, 1980. in other words, according to him, the prohibition for allowance of investment allowance is for the same year in which the whole of the cost was allowed under section 35 and not for the other years in which the plant and machinery was actually installed or put to use. the deduction under section 35 was allowed in the assessment year 1982-83; the plant and machinery was installed in the year under consideration, therefore, there was no prohibition to allow the investment allowance in the year under consideration. the learned departmental representative, sri v.r. desai on the other hand, submitted that what the proviso (d), to section 32a(1) of the act provides is that no investment allowance shall be allowed to an assessee in respect of a plant and machinery, the entire cost of which has been allowed as a deduction in any one previous year."any one" previous year, according to him, would not necessarily mean the same previous year; it may include a year prior to and also a subsequent year. the entire cost of the plant and machinery in respect of which investment allowance is claimed by the assessee in the year under consideration has been allowed to the assessee in the assessment year 1982-83 and, therefore, the assessee would not be entitled to any investment allowance.6. we have heard the parties and considered their rival submissions.section 32a(1) provides that investment allowance equal to twenty-five per cent of the actual cost of the machinery or plant, which is owned by the assessee and is wholly used for the purposes of the business carried on by him in respect of a previous year in which the plant and machinery was installed or is first put to use in the immediately succeeding previous year, shall be allowed in respect of that previous year. the proviso to this section, as it stood at the relevant time, enumerates certain plant and machinery in respect of which no deduction under section 32a(1) is to be allowed. clause (d) of this proviso, with which we are concerned in this appeal, reads as under: provided that no deduction shall be allowed under this section in respect of -- (d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "profits and gains of business or profession' of any one previous year.the emphasis in the proviso, in our opinion, is on the allowance of the entire actual cost to the assessee and, if it has been allowed so in any year, the assessee would not be entitled to investment allowance in respect of that plant and machinery. the term "any one" previous year does not necessarily mean the same year in which the entire or whole of the actual cost, of a plant or machinery was allowed under section 35(2). it may mean and include any year, either preceding or succeeding or the same previous year. the words "any one", in our opinion, do not restrict its meaning to the same previous year. section 35(2)(iu) prohibiting grant of depreciation in respect of such plant and machinery specifically provided that "where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clause (i), (ii), (iia), (iii) and (iv), of sub-section (1), or sub-section (1a) of section 32 for the same previous year in respect of that asset." this section specifically prohibited the allowance for the same previous year in which a deduction had been allowed to an assessee in respect of the expenditure represented wholly and partly by an asset and it was in that context, the courts have held that the restriction was only for that year and not for other years. that analogy adopted by the learned counsel for the assessee for interpreting the provisions of clause (d), of the proviso to section 32a does not appear to have any force, wherein the word "same" has not been used and in contradiction, the words "any one previous year " have been used. the deduction of the entire actual cost has been allowed to the assessee in the assessment year 1982-83 under section 35 and, therefore, the assessee would not be entitled to investment allowance by virtue of proviso (d), to section 32a(1). we, therefore, do not find any merit in the claim of the assessee on this point. the ground is, accordingly, rejected.7. the next ground in assessee's appeal is concerning the disallowance made of the expenditure incurred by way of fees paid to the registrar of companies for increase in authorised share capital. the assessee had its authorised capital at rs. 1.5 crore. it was increased to rs. 15 crore. the assessee claimed that the increase was pre-dominantly to enable the assessee to issue bonus shares. its paid up capital was rs. 96,47,120. the assessee had to issue bonus shares of the equivalent value of rs. 96,47,120 which increased the paid up capital to rs. 1,92,94,240 which was more than its authorised capital of rs. 1.5 crore. that was the reason stated by the learned counsel for the assessee for the increase of the authorised capital. the iac disallowed the entire fees paid to the registrar of companies, amounting to rs. 2,02,500 following the decision of the bombay high court in the case of bombay-burmah trading corpn. ltd. v. cit[ 1984] 1451tr 793. the cit (appeals) allowed the proportionate expenditure pertaining to the increase which was for the issue of bonus shares. both the revenue and the assessee are in appeal before us.8. we have heard the parties and considered their rival submissions. in the aforesaid case, the bombay high court held that the expenditure incurred in raising capital are expenses of exactly the same character whether the capital is raised at the floation of the company or thereafter. it was further held that if the cost of raising the original capital cannot be deducted from profits after the first year, it is difficult to see how the cost of raising additional capital can be treated in a different way. the court, therefore, held that the fees paid by the assessee to the registrar of companies for the enhancement of capital was not allowable as revenue expenditure. the court further held that the fees paid to the registrar of companies in connection with the issue of bonus shares is not capital expenditure and they are allowable as revenue expenditure. in that case, the assessee paid a total sum of rs. 52,500 as fees to the registrar of companies for enhancement of the capital. the capital of the company had been raised from rs. 3 crores to rs. 10 crores. the value of the bonus shares was only rs. 70 lacs. the tribunal had allocated 1/10th of the expenditure as being allowable in connection with the issue of bonus shares of rs. 70 lacs. in these circumstances, the court held that the fees relatable to the bonus shares was allowable and the other fees relatable to the enhancement of the capital was held to be not allowable. in the present case, the authorised capital of the assessee was rs. 1.5 crore as against the paid up capital of rs. 96,47,120. it was to issue bonus shares of the equivalent amount of rs. 96,47,120, which would have increased the paid up capital to rs. 1,92,94,240, which was more than the authorised capital of rs. 1.5 crore. the increase of the capital to this extent of rs. 1,92,94,240 alone could be attributed to the issue of bonus shares and the other increase would be for enhancement of capital. we, therefore, do not find any force in assessee's contention that the entire; increase in the authorised capital was attributable to the issue of bonus shares. the cit (appeals), in our opinion, was justified in allowing the fees paid to the registrar of companies only to the extent it represented the issue of bonus shares. his order on the point does not call for any interference. both the revenue and the assessee fail on their respective grounds.10. the next ground in revenue's appeal is against allowance of weighted deduction on the entire amount of inspection charges claimed at rs. 12,55,181. by invoking the proviso to rule 6aa(c) of the income-tax rules, 1962, the assessing officer held that 51.93 per cent of the expenditure alone was eligible to weighted deduction, le., proportionate to the value of turnover in respect of export bears to the total turnover of the business. this was besides the weighted deduction on laboratory expenses amounting to rs. 3,62,647 claimed by the assessee itself at 51.93 percent of the total expenses of rs. 6,98,339. the assessee claimed before the assessing officer that the restriction mentioned in the proviso to rule 6aa(c) would be applicable only to such expenditure which was incurred for goods both meant for export as well as local sales. according to the assessee, the expenditure which was exclusively on goods exported, the restriction in the proviso would not apply. the assessee's contention was not accepted by the assessing officer. according to him, sub-rule (c), of rule 6aa only prescribes a particular type of expenditure if the goods were both exported as well as locally sold. it does not say, according to him, that the restriction would apply only in respect of that expenditure which is incurred both on export sale and local sales; and that it would not apply to that expenditure which is exclusively incurred for the goods exported. according to him, once the goods are found to have been both exported as well as sold locally, whatever may be the expenditure, whether or not the expenditure pertains to both types of goods or the expenditure pertains to only exported goods, the restriction applies.11. the cit (appeals) allowed weighted deduction on the entire claim of inspection charges of rs. 12,51,181, accepting the contention of the assessee. according to him, the restriction contained in the proviso to rule 6aa(c) applies only to expenses for the maintenance of laboratory or other facilities and not to inspection charges, 12. the learned departmental representative, submitted that rule 6aa provides for deduction of expenditure incurred by the assessee on maintenance of laboratory and other facilities which is for the quality control or inspection of such goods. both types of expenditure, namely, on maintenance of laboratory and other facilities are made subject to restricted allowance in case the assessee's turnover were both local and export. the learned counsel for the assessee, sri b.k. khare, on the other hand, supported the order of the cit (appeals) and submitted that the proviso does not apply to inspection charges which is a category by itself unconnected with and apart from the expenditure on laboratory or other facilities for quality control. he further submitted that the proviso applies only to such a case where there is a possibility of mixed expenditure. when the entire expenditure is for export sale, there would be no need to apply the proportional method, which as a matter of accountancy principle, is resorted to when the exactness of the expenditure is not known or easily discernible.13. we have heard the parties and considered their rival submissions.rule 6aa is prescribed to sub serve the purpose of clause (ix), of section 35b(1) (b), which provides for the allowance of weighted deduction on the expenditure incurred wholly and exclusively on such other activities for the promotion of sales outside india of such goods, services or facilities as may be prescribed. section 35b(1)(a) provides for a weighted deduction of one and one-third time the amount of expenditure incurred by an assessee as is referred to in clause (b) thereof. clause (b) reads as under: the expenditure referred to in clause (a) is that incurred wholly and exclusively on - (ix) such other activities for the promotion of the sale outside india of such goods, services or facilities as may be prescribed.clause (c) of rule 6aa provides one of such activities. it reads as under: maintenance of a laboratory or other facilities for quality control or inspection of such goods: provided that in a case where only part of the sales is made outside india, the amount of expenditure incurred on the maintenance of such laboratory or other facilities which shall qualify for deduction under clause (a) of subsection (1) of section 35 shall not exceed the amount which bears the same proportion as the value of the turnover of the business in respect of which the laboratory or other facilities are maintained.on a bare reading of these provisions, it would be clear that the scope of rule 6aa is only to enumerate "such other activities" the expenditure on which would be eligible to weighted deduction under clause (a), of subsection (1), of section 35b. if the provisions contained in rule 6aa are read in this context, the activities would be "maintenance of laboratory or other facilities" and the purpose thereof would be "quality control" or "inspection of goods". neither the words "quality control" nor "inspection of such goods" independently constitute an activity by themselves. they are the objects to be achieved through the activity of maintenance of a laboratory or other facilities. allowance of weighted deduction by the cit (appeals) on the entire expenditure on inspection of goods on the ground that the inspection of goods is a separate activity and not subject to proviso to rule 6aa(c) is not in accordance with the law.14. we, however, find force in the alternate contention of the assessee. the proviso to rule 6aa(c) is inserted to find expenditure relating to the export turnover. a rough and ready method is provided to deduce the expenditure relatable to export by adopting a proportion of export sales to the entire turnover of the assessee. it, therefore, applies to the expenditure of mixed nature. it should not be invoked in a case where the expenditure is exclusively on export sale. proviso to rule or a section has to be read within the parameters of the main provision for which it is inserted. rule 6aa, as aforesaid, is meant, to prescribe the activities to sub serve the purpose of item (ix), of clause (b), of section 35b(1) which allows deduction of one and one-third times of the expenditure incurred wholly and exclusively on such prescribed activity. there is nothing in the language of section 35b to provide or authorise the restricted allowance, once it is ascertained that the expenditure was on an activity for promotion of sales etc. outside india. therefore, any provision contained in the rule or a proviso thereto restricting such allowance would be against the provisions of the act and could not be said to be for carrying out the purpose of the act. such a rule or the proviso has to be ignored.it is true that the rule made under the act has the same force as the section in the act. but, no exercise of the rule making power can affect, control or detract from the full operative effect of the provisions of the section. in case of a conflict, effect is to be given to the provisions of the section than to the rule. to conclude, the literal meaning of the proviso below rule 6aa(c) cannot be given effect to in this case, firstly, on the ground that by prescribing the limit on expenditure it goes beyond the scope of rule 6aa(c) which is to prescribe certain activities for the purposes of section 35b(1)(b)(ix): and, secondly, because it makes a provision of restricted allowance contrary to the provisions of section 35b(1), clause (a) and clause (b)(ix) thereof, where there is no such restriction. the assessee would, thus, in our opinion, be entitled to the weighted deduction on the entire expenditure as it was on an activity prescribed, le., the maintenance of a facility for inspection of goods within the meaning of section 35b(1)(b)(ix), read with rule 6aa(c). the order of the cit (appeals) allowing weighted deduction on the entire amount is accordingly upheld, though for different reasons.18. the next ground in revenue's appeal is against exclusion of excise duty while valuing the closing stock. the assessing officer noted that during the year under consideration, the assessee did not include central excise duty of rs. 3,55,974 paid on excisable intermediates acquired for captive consumption and lying in stocks as well as on the intermediates in finished goods. the assessee contended that it has been following a consistent practice of not adding the excise duty on the stock and, therefore, no interference should be made in the value of the closing stock. the assessee's contention was not accepted by the assessing officer, as, according to him, once the expenditure was incurred by way of excise duty, it. should be reflected in the stock.the assessee's method, he held, was not in accordance with the principles of accountancy and, therefore, the excise duty amounting to rs. 3,55,974 was included for the purposes of valuing the closing stock. the cit (appeals) in appeal held that the assessing officer was not justified in changing the method followed by the assessee in the past. according to him, there was no law holding that the excise duty paid should be reflected in the stock of goods remaining with the assessee at the end of the year. the valuation of closing stock, according to him, is a matter of accountancy principle and commercial practice. the cit (appeals) further observed that the method of valuation followed by the assessee was not altogether unrecognised by the accepted commercial principles. in this connection, he referred to the guidance note given by the research committee of the chartered accountants and the order of the tribunal in the case of goodlass nerolac paints ltd. v. iac [1985] 13 itd 270 (bom.) and deleted the inclusion of rs. 3,55,974 from the valuation of the closing stock of the assessee.17. we have heard the parties and considered their rival submissions.after hearing the parties, we find that the matter stands covered against the assessee by the third member decision of the tribunal in the case of raymond woollen mills ltd. v. ito [1986] 18 itd 64 (bom.), wherein it was held that the manner in which the assessee had taken the cost of the closing stock did not result in determination of true and correct profits of the year and the departmental authorities were justified in rejecting the assessee's method of valuation and in revaluing the closing stock, by including the excise duty paid by the assessee. it was further held that the method of determination of the cost of stock-in-trade must be fair both to the tax payer and the revenue and the method must be one recognised by the accountancy practice and sanctioned by commercial practice. it was further held that, if however, the method adopted does not result in the determination of the true and correct profits for tax purposes even of one year, the department would be entitled to reject such a method. in that case, the assessee was admittedly valuing its stock-in-trade at cost which was one of the recognised methods of valuing the closing stock. however, while taking the cost of the closing stock what the assessee had done was that it had taken some of the components of the cost leaving quite a few important components such as fiscal levies and direct labour and expenses for bringing the closing stock to their present location and condition. it was further stated that this was certainly not a proper method and, in any event, it was not a method which was recognised by the principles of accountancy and sanctioned by commercial practice and it was like the assessee saying that it values its closing stock at cost but it will take the cost at 75 per cent of the actual cost. according to the tribunal, such a method could not be accepted as a proper method, fair both to the assessee and the department.18. the contention of the learned counsel for the assessee that that case was rendered for valuation of finished products and, therefore, it should not be applied in valuing the intermediate products, in our opinion, does not carry any force. we do not find that this distinction is based on any sound principle of accountancy or law. the closing stock has to be valued on a similar basis; be that is for valuing the closing stock, or the finished goods, or the intermediates used for captive consumption in its own factory. for the reasons given in raymond woollen mills ltd. 's case (supra), the order of the cit (appeals) on the point is, accordingly, reversed and that of the assessing officer restored.19. the next ground is against allowance of section 80hh deduction.while computing the relief under section 80hh, the assessing officer has reduced weighted deduction of rs. 1,42,223 for arriving at the income entitled to deduction. this amount is one-third of the total expenditure entitled to weighted deduction of rs. 4,26,670. the assessee claimed before the cit (appeals) that the profits for the purposes of section 80hh should be arrived at after deducting only the actual expenses for export market development and not weighted deduction. the cit (appeals), relying upon the decision of the tribunal in the case of bihar mercantile union (p.) ltd. v. ito [1984] 10 itd 887 (cal.) accepted the claim of the assessee and held that only the actual expenditure should be deducted for arriving at the income on which relief under section 80hh is to be allowed.20. we have heard the parties and considered their rival submissions.in our opinion, the assessee's claim that deduction under section 80hh should be computed without deducting weighted deduction has no force.the view, in our opinion, finds support from the decision of the supreme court in the case of distributors (baroda) (p.) ltd. v. union of india [1985] 155 itr 120, wherein it has been held that as a matter of plain grammer, the words "such income by way of dividends" (in that case under section 80m) ("such profits and gains" in section 80hh in this case) must have reference to the income of profits and gains mentioned earlier in the section and that would be income or profits and gains, as the case may be which was included in the gross total income. "gross total income" of an assessee includes that profits and gains as are computed as per the provisions of the act, that is to say, after allowing weighted deduction under section 35b as against the actual expenditure incurred by the assessee. in the circumstances, we reverse the order of the cit (appeals) on the point and restore that of the assessing officer.21 and 22. [these paras are not reproduced here as they involve minor issues.]

Judgment:
1 to 3. [These paras are not reproduced here, as they involve minor issues.] 4. Ground No.3 in assessee's appeal is concerning investment allowance for machinery used for scientific research, the whole cost of which was allowed in the assessment year 1982-83 under Section 35(2)(ia) of the Act. The assessee's claim that proviso (d), to Section 32A(1) would apply when both the deductions are in one year and not in a case where whole of the actual cost was allowed as a deduction in two different previous years, namely, year ending on 30-6-1981 and 30-6-1982 was not accepted by the Assessing Officer. He held that the actual cost of the machinery as at the end of the accounting period was the actual cost incurred till the end of the accounting year which was allowed in full while computing the income for assessment year 1982-83 and, therefore, proviso (d) to Section 32A(1) prohibited the deduction. The CIT (Appeals) upheld the order of the IAC by observing that though the argument was plausible, it could not be accepted if one considered the intention of the legislature in granting the investment allowance in the light of various provisions contained in the Act; and the provisions interpreted in a harmonious way.

5. The learned counsel for the assessee, submitted that proviso (d), to Section 32A(1) prohibits allowance in respect of that machinery, the whole of the actual cost of which was allowed as a deduction in any one previous year. "Any one" previous year, according to the learned counsel for the assessee, means the same previous year like a provision finding a mention in Section 35(2)(iu) prior to the amendment with retrospective effect by Finance (No. 2) Act, 1980. In other words, according to him, the prohibition for allowance of investment allowance is for the same year in which the whole of the cost was allowed under Section 35 and not for the other years in which the plant and machinery was actually installed or put to use. The deduction under Section 35 was allowed in the assessment year 1982-83; the plant and machinery was installed in the year under consideration, therefore, there was no prohibition to allow the investment allowance in the year under consideration. The learned Departmental Representative, Sri V.R. Desai on the other hand, submitted that what the proviso (d), to Section 32A(1) of the Act provides is that no investment allowance shall be allowed to an assessee in respect of a plant and machinery, the entire cost of which has been allowed as a deduction in any one previous year.

"Any one" previous year, according to him, would not necessarily mean the same previous year; it may include a year prior to and also a subsequent year. The entire cost of the plant and machinery in respect of which investment allowance is claimed by the assessee in the year under consideration has been allowed to the assessee in the assessment year 1982-83 and, therefore, the assessee would not be entitled to any investment allowance.

6. We have heard the parties and considered their rival submissions.

Section 32A(1) provides that investment allowance equal to twenty-five per cent of the actual cost of the machinery or plant, which is owned by the assessee and is wholly used for the purposes of the business carried on by him in respect of a previous year in which the plant and machinery was installed or is first put to use in the immediately succeeding previous year, shall be allowed in respect of that previous year. The proviso to this section, as it stood at the relevant time, enumerates certain plant and machinery in respect of which no deduction under Section 32A(1) is to be allowed. Clause (d) of this proviso, with which we are concerned in this appeal, reads as under: Provided that no deduction shall be allowed under this section in respect of -- (d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession' of any one previous year.

The emphasis in the Proviso, in our opinion, is on the allowance of the entire actual cost to the assessee and, if it has been allowed so in any year, the assessee would not be entitled to investment allowance in respect of that plant and machinery. The term "any one" previous year does not necessarily mean the same year in which the entire or whole of the actual cost, of a plant or machinery was allowed under Section 35(2). It may mean and include any year, either preceding or succeeding or the same previous year. The words "any one", in our opinion, do not restrict its meaning to the same previous year. Section 35(2)(iu) prohibiting grant of depreciation in respect of such plant and machinery specifically provided that "where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under Clause (i), (ii), (iia), (iii) and (iv), of Sub-section (1), or Sub-section (1A) of Section 32 for the same previous year in respect of that asset." This section specifically prohibited the allowance for the same previous year in which a deduction had been allowed to an assessee in respect of the expenditure represented wholly and partly by an asset and it was in that context, the courts have held that the restriction was only for that year and not for other years. That analogy adopted by the learned counsel for the assessee for interpreting the provisions of Clause (d), of the Proviso to Section 32A does not appear to have any force, wherein the word "same" has not been used and in contradiction, the words "any one previous year " have been used. The deduction of the entire actual cost has been allowed to the assessee in the assessment year 1982-83 under Section 35 and, therefore, the assessee would not be entitled to investment allowance by virtue of Proviso (d), to Section 32A(1). We, therefore, do not find any merit in the claim of the assessee on this point. The ground is, accordingly, rejected.

7. The next ground in assessee's appeal is concerning the disallowance made of the expenditure incurred by way of fees paid to the Registrar of Companies for increase in authorised share capital. The assessee had its authorised capital at Rs. 1.5 crore. It was increased to Rs. 15 crore. The assessee claimed that the increase was pre-dominantly to enable the assessee to issue bonus shares. Its paid up capital was Rs. 96,47,120. The assessee had to issue bonus shares of the equivalent value of Rs. 96,47,120 which increased the paid up capital to Rs. 1,92,94,240 which was more than its authorised capital of Rs. 1.5 crore. That was the reason stated by the learned counsel for the assessee for the increase of the authorised capital. The IAC disallowed the entire fees paid to the Registrar of Companies, amounting to Rs. 2,02,500 following the decision of the Bombay High Court in the case of Bombay-Burmah Trading Corpn. Ltd. v. CIT[ 1984] 1451TR 793. The CIT (Appeals) allowed the proportionate expenditure pertaining to the increase which was for the issue of bonus shares. Both the revenue and the assessee are in appeal before us.

8. We have heard the parties and considered their rival submissions. In the aforesaid case, the Bombay High Court held that the expenditure incurred in raising capital are expenses of exactly the same character whether the capital is raised at the floation of the company or thereafter. It was further held that if the cost of raising the original capital cannot be deducted from profits after the first year, it is difficult to see how the cost of raising additional capital can be treated in a different way. The Court, therefore, held that the fees paid by the assessee to the Registrar of Companies for the enhancement of capital was not allowable as revenue expenditure. The Court further held that the fees paid to the Registrar of Companies in connection with the issue of bonus shares is not capital expenditure and they are allowable as revenue expenditure. In that case, the assessee paid a total sum of Rs. 52,500 as fees to the Registrar of Companies for enhancement of the capital. The capital of the company had been raised from Rs. 3 crores to Rs. 10 crores. The value of the bonus shares was only Rs. 70 lacs. The Tribunal had allocated 1/10th of the expenditure as being allowable in connection with the issue of bonus shares of Rs. 70 lacs. In these circumstances, the Court held that the fees relatable to the bonus shares was allowable and the other fees relatable to the enhancement of the capital was held to be not allowable. In the present case, the authorised capital of the assessee was Rs. 1.5 crore as against the paid up capital of Rs. 96,47,120. It was to issue bonus shares of the equivalent amount of Rs. 96,47,120, which would have increased the paid up capital to Rs. 1,92,94,240, which was more than the authorised capital of Rs. 1.5 crore. The increase of the capital to this extent of Rs. 1,92,94,240 alone could be attributed to the issue of bonus shares and the other increase would be for enhancement of capital. We, therefore, do not find any force in assessee's contention that the entire; increase in the authorised capital was attributable to the issue of bonus shares. The CIT (Appeals), in our opinion, was justified in allowing the fees paid to the Registrar of Companies only to the extent it represented the issue of bonus shares. His order on the point does not call for any interference. Both the revenue and the assessee fail on their respective grounds.

10. The next ground in revenue's appeal is against allowance of weighted deduction on the entire amount of inspection charges claimed at Rs. 12,55,181. By invoking the Proviso to Rule 6AA(c) of the Income-tax Rules, 1962, the Assessing Officer held that 51.93 per cent of the expenditure alone was eligible to weighted deduction, Le., proportionate to the value of turnover in respect of export bears to the total turnover of the business. This was besides the weighted deduction on laboratory expenses amounting to Rs. 3,62,647 claimed by the assessee itself at 51.93 percent of the total expenses of Rs. 6,98,339. The assessee claimed before the Assessing Officer that the restriction mentioned in the Proviso to Rule 6AA(c) would be applicable only to such expenditure which was incurred for goods both meant for export as well as local sales. According to the assessee, the expenditure which was exclusively on goods exported, the restriction in the Proviso would not apply. The assessee's contention was not accepted by the Assessing Officer. According to him, Sub-rule (c), of Rule 6AA only prescribes a particular type of expenditure if the goods were both exported as well as locally sold. It does not say, according to him, that the restriction would apply only in respect of that expenditure which is incurred both on export sale and local sales; and that it would not apply to that expenditure which is exclusively incurred for the goods exported. According to him, once the goods are found to have been both exported as well as sold locally, whatever may be the expenditure, whether or not the expenditure pertains to both types of goods or the expenditure pertains to only exported goods, the restriction applies.

11. The CIT (Appeals) allowed weighted deduction on the entire claim of inspection charges of Rs. 12,51,181, accepting the contention of the assessee. According to him, the restriction contained in the Proviso to Rule 6AA(c) applies only to expenses for the maintenance of laboratory or other facilities and not to inspection charges, 12. The learned Departmental Representative, submitted that Rule 6AA provides for deduction of expenditure incurred by the assessee on maintenance of laboratory and other facilities which is for the quality control or inspection of such goods. Both types of expenditure, namely, on maintenance of laboratory and other facilities are made subject to restricted allowance in case the assessee's turnover were both local and export. The learned counsel for the assessee, Sri B.K. Khare, on the other hand, supported the order of the CIT (Appeals) and submitted that the Proviso does not apply to inspection charges which is a category by itself unconnected with and apart from the expenditure on laboratory or other facilities for quality control. He further submitted that the Proviso applies only to such a case where there is a possibility of mixed expenditure. When the entire expenditure is for export sale, there would be no need to apply the proportional method, which as a matter of accountancy principle, is resorted to when the exactness of the expenditure is not known or easily discernible.

13. We have heard the parties and considered their rival submissions.

Rule 6AA is prescribed to sub serve the purpose of Clause (ix), of Section 35B(1) (b), which provides for the allowance of weighted deduction on the expenditure incurred wholly and exclusively on such other activities for the promotion of sales outside India of such goods, services or facilities as may be prescribed. Section 35B(1)(a) provides for a weighted deduction of one and one-third time the amount of expenditure incurred by an assessee as is referred to in Clause (b) thereof. Clause (b) reads as under: The expenditure referred to in Clause (a) is that incurred wholly and exclusively on - (ix) such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed.

Clause (c) of Rule 6AA provides one of such activities. It reads as under: maintenance of a laboratory or other facilities for quality control or inspection of such goods: Provided that in a case where only part of the sales is made outside India, the amount of expenditure incurred on the maintenance of such laboratory or other facilities which shall qualify for deduction under Clause (a) of Subsection (1) of Section 35 shall not exceed the amount which bears the same proportion as the value of the turnover of the business In respect of which the laboratory or other facilities are maintained.

On a bare reading of these provisions, it would be clear that the scope of Rule 6AA is only to enumerate "such other activities" the expenditure on which would be eligible to weighted deduction under Clause (a), of subSection (1), of Section 35B. If the provisions contained In Rule 6AA are read in this context, the activities would be "maintenance of laboratory or other facilities" and the purpose thereof would be "quality control" or "inspection of goods". Neither the words "quality control" nor "inspection of such goods" independently constitute an activity by themselves. They are the objects to be achieved through the activity of maintenance of a laboratory or other facilities. Allowance of weighted deduction by the CIT (Appeals) on the entire expenditure on inspection of goods on the ground that the inspection of goods is a separate activity and not subject to Proviso to Rule 6AA(c) is not in accordance with the law.

14. We, however, find force in the alternate contention of the assessee. The Proviso to Rule 6AA(c) is inserted to find expenditure relating to the export turnover. A rough and ready method is provided to deduce the expenditure relatable to export by adopting a proportion of export sales to the entire turnover of the assessee. It, therefore, applies to the expenditure of mixed nature. It should not be invoked in a case where the expenditure is exclusively on export sale. Proviso to Rule or a section has to be read within the parameters of the main provision for which it is inserted. Rule 6AA, as aforesaid, is meant, to prescribe the activities to sub serve the purpose of item (ix), of Clause (b), of Section 35B(1) which allows deduction of one and one-third times of the expenditure incurred wholly and exclusively on such prescribed activity. There is nothing in the language of Section 35B to provide or authorise the restricted allowance, once it is ascertained that the expenditure was on an activity for promotion of sales etc. outside India. Therefore, any provision contained In the Rule or a Proviso thereto restricting such allowance would be against the provisions of the Act and could not be said to be for carrying out the purpose of the Act. Such a Rule or the Proviso has to be ignored.

It is true that the Rule made under the Act has the same force as the section in the Act. But, no exercise of the rule making power can affect, control or detract from the full operative effect of the provisions of the section. In case of a conflict, effect is to be given to the provisions of the section than to the Rule. To conclude, the literal meaning of the proviso below Rule 6AA(c) cannot be given effect to in this case, firstly, on the ground that by prescribing the limit on expenditure it goes beyond the scope of Rule 6AA(c) which is to prescribe certain activities for the purposes of section 35B(1)(b)(ix): and, secondly, because it makes a provision of restricted allowance contrary to the provisions of Section 35B(1), Clause (a) and Clause (b)(ix) thereof, where there is no such restriction. The assessee would, thus, In our opinion, be entitled to the weighted deduction on the entire expenditure as it was on an activity prescribed, Le., the maintenance of a facility for inspection of goods within the meaning of Section 35B(1)(b)(ix), read with Rule 6AA(c). The order of the CIT (Appeals) allowing weighted deduction on the entire amount is accordingly upheld, though for different reasons.

18. The next ground in revenue's appeal is against exclusion of excise duty while valuing the closing stock. The Assessing Officer noted that during the year under consideration, the assessee did not include central excise duty of Rs. 3,55,974 paid on excisable intermediates acquired for captive consumption and lying in stocks as well as on the intermediates in finished goods. The assessee contended that it has been following a consistent practice of not adding the excise duty on the stock and, therefore, no interference should be made in the value of the closing stock. The assessee's contention was not accepted by the Assessing Officer, as, according to him, once the expenditure was incurred by way of excise duty, it. should be reflected in the stock.

The assessee's method, he held, was not in accordance with the principles of accountancy and, therefore, the excise duty amounting to Rs. 3,55,974 was included for the purposes of valuing the closing stock. The CIT (Appeals) in appeal held that the Assessing Officer was not Justified in changing the method followed by the assessee in the past. According to him, there was no law holding that the excise duty paid should be reflected in the stock of goods remaining with the assessee at the end of the year. The valuation of closing stock, according to him, is a matter of accountancy principle and commercial practice. The CIT (Appeals) further observed that the method of valuation followed by the assessee was not altogether unrecognised by the accepted commercial principles. In this connection, he referred to the guidance note given by the Research Committee of the Chartered Accountants and the order of the Tribunal in the case of Goodlass Nerolac Paints Ltd. v. IAC [1985] 13 ITD 270 (Bom.) and deleted the inclusion of Rs. 3,55,974 from the valuation of the closing stock of the assessee.

17. We have heard the parties and considered their rival submissions.

After hearing the parties, we find that the matter stands covered against the assessee by the Third Member decision of the Tribunal in the case of Raymond Woollen Mills Ltd. v. ITO [1986] 18 ITD 64 (Bom.), wherein it was held that the manner in which the assessee had taken the cost of the closing stock did not result in determination of true and correct profits of the year and the departmental authorities were justified in rejecting the assessee's method of valuation and in revaluing the closing stock, by including the excise duty paid by the assessee. It was further held that the method of determination of the cost of stock-in-trade must be fair both to the tax payer and the revenue and the method must be one recognised by the accountancy practice and sanctioned by commercial practice. It was further held that, if however, the method adopted does not result in the determination of the true and correct profits for tax purposes even of one year, the department would be entitled to reject such a method. In that case, the assessee was admittedly valuing its stock-in-trade at cost which was one of the recognised methods of valuing the closing stock. However, while taking the cost of the closing stock what the assessee had done was that it had taken some of the components of the cost leaving quite a few important components such as fiscal levies and direct labour and expenses for bringing the closing stock to their present location and condition. It was further stated that this was certainly not a proper method and, in any event, it was not a method which was recognised by the principles of accountancy and sanctioned by commercial practice and it was like the assessee saying that it values its closing stock at cost but it will take the cost at 75 per cent of the actual cost. According to the Tribunal, such a method could not be accepted as a proper method, fair both to the assessee and the department.

18. The contention of the learned counsel for the assessee that that case was rendered for valuation of finished products and, therefore, it should not be applied in valuing the intermediate products, in our opinion, does not carry any force. We do not find that this distinction is based on any sound principle of accountancy or law. The closing stock has to be valued on a similar basis; be that is for valuing the closing stock, or the finished goods, or the intermediates used for captive consumption in its own factory. For the reasons given in Raymond Woollen Mills Ltd. 's case (supra), the order of the CIT (Appeals) on the point is, accordingly, reversed and that of the Assessing Officer restored.

19. The next ground is against allowance of Section 80HH deduction.

While computing the relief under Section 80HH, the Assessing Officer has reduced weighted deduction of Rs. 1,42,223 for arriving at the income entitled to deduction. This amount is one-third of the total expenditure entitled to weighted deduction of Rs. 4,26,670. The assessee claimed before the CIT (Appeals) that the profits for the purposes of Section 80HH should be arrived at after deducting only the actual expenses for export market development and not weighted deduction. The CIT (Appeals), relying upon the decision of the Tribunal in the case of Bihar Mercantile Union (P.) Ltd. v. ITO [1984] 10 ITD 887 (Cal.) accepted the claim of the assessee and held that only the actual expenditure should be deducted for arriving at the income on which relief under Section 80HH is to be allowed.

20. We have heard the parties and considered their rival submissions.

In our opinion, the assessee's claim that deduction under Section 80HH should be computed without deducting weighted deduction has no force.

The view, in our opinion, finds support from the decision of the Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120, wherein it has been held that as a matter of plain grammer, the words "such income by way of dividends" (in that case under Section 80M) ("such profits and gains" in Section 80HH in this case) must have reference to the income of profits and gains mentioned earlier in the section and that would be income or profits and gains, as the case may be which was included in the gross total income. "Gross total income" of an assessee includes that profits and gains as are computed as per the provisions of the Act, that is to say, after allowing weighted deduction under Section 35B as against the actual expenditure incurred by the assessee. In the circumstances, we reverse the order of the CIT (Appeals) on the point and restore that of the Assessing Officer.

21 and 22. [These paras are not reproduced here as they involve minor issues.]