T N Pandey: AO can't change closing stocks' value

CHAT ROOM

I have given my residential house to the Hindu undivided family (HUF), comprising myself, two sons (one major and one minor) and wife. I filed a return for the assessment year 2002-03, showing the status as HUF for income from this source.

The assessment officer has, however, assessed income from this property also in my individual assessment, ignoring the HUF status. Is his decision correct? Can it be challenged?

Merely declaration in return as to throwing of house property into common hotch potch of HUF is not sufficient. A separate declaration of intention is required. Since the assessee did not file any such declaration, the accessibility in the individual income is justified.

No useful purpose will be served by filing an appeal. A separate declaration for thro-wing the individual property into family hotch potch should be made and this should be enclosed with return showing the status as HUF when the next return is filed. If this is done, the HUF status should be accepted by the department.

While completing the assessment for 2002-03, the assessment officer has raised the value of closing stocks (uncleared excisable goods lying in the factory)by including the amo-unt of excise duty at then existing rates payable thereon in future, when the goods will be removed from the factory. Is his approach justified?

No. The assessment officer has no legal basis to proceed in the matter of valuation of closing stock on the basis followed by him. In any event, the assessment officer's exercise should be revenue neutral because the higher profits resulting from higher valuation of closing stock will be adjusted by the higher value of the opening stock next year.

Further, it will also go against the consistency in the matter of stock valuation followed in the past by the assessee, which the assessment officer is not supposed to disturb.

I am a trustee of a trust, which runs a school for the mentally retarded children. Donations are the source of income of the trust. Also the trust does not generate any profit. From the accumulated funds, the trust started construction of a building for renting it out to augment its t income to carry on its primary objective.

It also borrowed funds and from the donations received, interest and loan amounts are being paid. The assessment officer has issued a notice that such payments are not application of trust's fund for charitable purposes and proposes to disallow exemption to the trust. Is such objection tenable?

It is clear that when the assessee is a trust, entitled to benefit under section 11 of the Income Tax Act, the only question, that arises for consideration is whether its annual income or the accumulated income thereof is applied for charitable purposes.

If investments have been made in the construction of a building, which, in turn, will augment its income, it should also be held that the application of the fund is for the trust's purpose.

On this principle, there cannot be any quarrel, in law, in holding that the repayment of the debt incurred by the trust for construction of the building, with interest, should be treated as application of the income of the trust for charitable purposes. Hence, the assessment officer's stand is not correct.

For supporting the above view, a reference can be made to the decision in the Commissioner of Income Tax vs Janmabhumi Press Trust case, (2000) 162 CTR (Kar) 264.

In my case, the sales tax department raised heavy unjustified demand, and for non-payment thereof, penalty has been imposed. Appeals against the demand raised and penalty imposed were filed separately.

Fees for lawyers and other expenses had to be incurred for this purpose. The assessment officer has disallowed fees and expenses relating to penalty, saying such expenses cannot be allowed, being relatable to infraction of law. Is his stand justified?

No. Firstly, the penalty has not been imposed for any illegality, but for the non-payment of an unjustified demand. The expenditure in question has been incurred for business purposes and is clearly allowable under section 37(1). It is unfortunate that such a stand is being taken by the assessment officer, which only proliferates litigation.

Can expenditure incurred in the issue of bonus shares be considered as revenue expenditure?

Bonus shares concern the basic structure of the company and the expenditure incurred brings benefit of permanent nature. Therefore, the same is capital expenditure. The above view gets support from a number of decisions. One such decision is from the Gujarat High Court in the Commissioner of Income Tax vs Ambika Mills Ltd case, (2000) 157 Taxman 524 (Gujarat).

The general manager of our company is retiring after 30 years of service. He knows our business secrets, way of working and other details. Our competitors have given him an offer of employment after retirement on the salary on which he is retiring.

He says that he is loyal to our organisation, but the company must compensate him for the financial loss that he will be suffering consequent to refusal to the offer made to him. We plan to pay him Rs 5 lakh in lieu of an undertaking that after retirement, he will not work anywhere. Can this payment be claimed as revenue expenditure?

Yes. It is well settled in law by the apex court that expenditure incurred for preservation or protection of a business asset is revenue in nature and not capital expenditure.