S. 40A(9) + Valuation of Closing Stock + What Is “Manufacture”

DATE: (Date of pronouncement)
DATE: September 27, 2012 (Date of publication)

Sandur Manganese and Iron Ores Ltd vs. CIT (Supreme Court) Click here to download the judgement (sandur_manganese_40A_9.pdf)

S. 40A(9) applies to a "contribution" but not to "reimbursement"

The interpretation of Section 40A(9) of the Act clearly brings out a dichotomy between `contribution’ and `reimbursement’. Section 40A(9) of the Act was inserted by Finance Act No.2 of 1984. The Explanatory Memo to the Finance Bill, 1984 indicates the reasons why the word `contribution’ finds place in Section 40A of the Act. It appears that Section 40A(9) of the Act was inserted as a measure for combating tax avoidance.

CIT vs. Bannari Amman Sugars Ltd (Supreme Court) Click here to download the judgement (bannari_amman_valuation_stock_subsidy.pdf)

To implement the incentive scheme, sugar was rightly valued at levy price

Valuation of opening and closing stock is a very important aspect of ascertainment of true profits. An improper valuation could result in rejection of books of account though all that is needed for rectifying it, is to make an addition or necessary adjustment based on proper valuation. Valuation of stock, whatever be the method, should be consistently followed. Method of valuation is generally at cost or the market value whichever of the two, is lower. As the incentive scheme was held to be a capital receipt in Ponni Sugars 306 ITR 392 (SC), the assessee is right in valuing the closing stock of incentive sugar at levy price which was less than the cost of manufacture of sugar (cost price).

Morinda Cooperative Sugar Mills Ltd vs. CIT (Supreme Court) Click here to download the judgement (morinda_coop_sugar_manufacture.pdf)

To decide what is "manufacture" Dept should have a panel of experts

The terms `manufacture’ implies a change, but every change is not a manufacture, despite the fact that every change in an article is the result of a treatment of labour and manipulation. However, this test of manufacture needs to be seen in the context of the above process. If an operation/process renders a commodity or article fit for use for which it is otherwise not fit, the operation/process falls within the meaning of the word `manufacture. Q whether conversion of sugar into sucrose is “manufacture” should be decided by experts.

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