Case Note & Summary
The case involves an Income Tax Reference under Section 256(1) of the Income Tax Act, 1961, by the Income Tax Appellate Tribunal for the opinion of the Bombay High Court. The assessee, Bajaj Auto Ltd., a manufacturer of scooters and three-wheelers, changed its method of valuing closing stock of stores, spares, tools, raw materials, and work-in-progress from 'lowest purchase price during the year' to 'weighted average cost' basis for the assessment years 1976-77 and 1977-78. The Income Tax Officer disallowed the change and made an addition of Rs. 12,03,509. The Tribunal upheld the disallowance. The High Court considered two questions: (a) whether the change in method of valuation was justified, and (b) whether packing expenses qualified for export market development allowance under Section 35B. The court held that the change was bona fide, scientific, and consistently followed, and thus permissible. Regarding packing expenses, the court held that they are integral to export and qualify for deduction under Section 35B. The court answered both questions in favor of the assessee.
Headnote
A) Income Tax - Valuation of Closing Stock - Change in Method - The assessee changed the method of valuing closing stock from 'lowest purchase price during the year' to 'weighted average cost' basis. The Tribunal held the change was not justified. The High Court reversed, holding that the change was bona fide, scientific, and consistently followed, and thus permissible under the Income Tax Act, 1961. (Paras 3-6) B) Income Tax - Export Market Development Allowance - Section 35B - Packing Expenses - The assessee claimed packing expenses as export market development allowance. The Tribunal disallowed it. The High Court held that packing expenses incurred for export sales are integral to export and qualify for deduction under Section 35B of the Income Tax Act, 1961. (Paras 7-9)
Issue of Consideration
Whether the change in method of valuation of closing stock from 'lowest purchase price during the year' to 'weighted average cost' was justified, and whether packing expenses qualify for export market development allowance under Section 35B of the Income Tax Act, 1961
Final Decision
The High Court answered both questions in favor of the assessee, holding that the change in method of valuation was justified and that packing expenses qualify for export market development allowance under Section 35B.
Law Points
- Change in method of valuation of closing stock is permissible if bona fide and consistently followed
- weighted average cost method is a more scientific method
- packing expenses qualify for export market development allowance under Section 35B of the Income Tax Act
- 1961
