1. The High Court rightly remitted back the questions that (i) whether expenditure was of capital nature and (ii) whether it was an expenditure of the nature contemplated by
   section 37

Dy. CIT vs. S.T.N. Textile Ltd. [279 ITR 209 (SC)]

The assessee company, running a textile mill, claimed a deduction of a sum of Rs. 11,11,600/- incurred by it for replacement of the electric control panel for A.Y. 1991-92. The Assessing Officer disallowed the deduction on the ground that the expenditure was of capital nature and could not be allowed u/s. 31(1) of the Income-tax Act (for the sake of brevity hereinafter referred as ‘the Act’) but he allowed the depreciation of Rs. 2,77,900/-.

Two questions were framed by the Revenue for the opinion of the Kerala High Court which were as follows :

1. Whether, on the facts and in the circumstances of the case, could the expenditure incurred on replacing the power panel be considered as current repairs entitled to deduction
   under section 31 of the Income-tax Act?

2. Whether on the facts and in the circumstances of the case is not the expenditure of Rs. 11,11,600 incurred on replacement of electric control panel a capital expenditure?

The High Court answered the first question in favour of the Revenue holding that the expenditure was not for "current repairs".

The matter was brought up before the High Court again, and it was submitted that the High Court had to consider whether the expenditure did not answer the description of expenditure under section 37 and could be treated as revenue expenditure. The High Court felt that that question should be considered afresh by the Appellate Tribunal and while answering the first question in favour of the Revenue remitted the matter for fresh consideration by the Appellate Tribunal on the second and additional question.

On appeal by the Department their Lordships affirmed the order of the Kerala High Court and held that the High Court had not committed any illegality in remitting the matter back to the Tribunal. Further their Lordships held that it could not be disputed that the expenditure incurred in replacing the electric panel was not an expenditure contemplated by section 31 as "current repairs". The question as to whether it was the nature of capital expenditure had not been answered by the High Court. Further another question arose whether it was an expenditure of the nature contemplated by section 37. Their Lordships held that in view of the paucity of material, the court could not answer them and therefore, these questions must be considered afresh by the Tribunal.

Sanjeev Woollen Mills vs. CIT [279 ITR 434 (SC)]

The assessee, a firm, was engaged in import of synthetic waste and manufacture and export of woollen blankets. For the assessment year 1992-93 the assessee valued the closing stock at Rs. 130 per kg. whereas the opening stock was shown at Rs. 90 per kg. For that year the assessee claimed the benefit of special deduction under section 80HHC of the Income-tax Act, 1961. In the next assessment year 1993-94 it valued its opening stock at Rs. 130 per kg. and there was no closing stock, and the assessee returned a loss of Rs. 54,420. The assessee claimed that the market value was based on the price in US $ of blankets in the international market converted into rupees.

The Assessing Officer found that by adoption of this method there was a stark contrast in the gross profit ratio for the accounting years and held that the method of valuing the closing stock at market value resulted in a distorted picture and the assessee had inflated the profits in order to get benefit under section 80HHC. He held that the assessee had to value its closing stock at cost or market price whichever was lower, but that was not done. In the second year the assessee had valued the opening stock at Rs. 130 per kg. in the place of Rs. 90 per kg. The Assessing Officer applied the standard prescribed for "valuation of inventory" at cost price and added Rs. 2,67,38,280 to the income for the second year. The Commissioner (Appeals) confirmed the rejection of accounts. The Appellate Tribunal allowed the assessee’s appeals therefrom holding that the principle of the lower of cost or market value was not the only method of accounting. The High Court, on appeal, reversed the decision of the Appellate Tribunal and held that the method of valuing closing stock adopted by the assessee was not correct and the entire device was to inflate the deduction under section 80HHC and suppress the profits of the second year.

On appeal before the Supreme Court their Lordships affirmed the order of the Bombay High Court and held that on no principle can one justify the valuation of the closing stock at a market rate higher than the cost. Permissibility of valuation of the stock at market value would be only if the market value of the stock is lower than the cost of the stock.