S.P. KAPUR, J.M.: assessee, resident Ltd. Company, is in appeal. assessment year involved being 1982-83, relevant accounting period ended on 30th June, 1981. Following specific grounds have been raised before us: "1.1. ld. CIT(A) erred in upholding addition of Rs. 19,84,665 to closing stock of refrigerators. ld. CIT(A) erred in stating that appellant had not filed copies of relevant sale bills after 11th April, 1981. ld. CIT(A) erred in holding price of warranty is part and parcel of cost of refrigerators ignoring principles of accountancy and detailed submissions made before him by assessee. ld. CIT(A) erred in holding that appellant was dealing in commodity like warranty. ld. CIT(A) erred in not considering submissions of appellant that warranty charges were item debatable to Profit & Loss account and therefore could not be included in calculating cost of refrigerators for purposes of closing stock. ld. CIT(A) erred in upholding addition of Rs. 11,200 being perquisite in respect of use of car by managing director. ld. CIT(A) erred in upholding addition of Rs. 1717 as telephone expenses for personal office/home of managing director as perquisite. ld. CIT(A) erred in upholding addition of Rs. 16,774 out of bonus paid to staff." As regards ground Nos. 1.1. to 1.5, in fairness to both parties, we are reproducing hereunder in verbatim from impugned order of ld. CIT(A), facts of case and stand of parties alongwith reasoning of ld. Lower authorities as detailed in paragraph 2 of impugned order: "During relevant accounting period manufacturers i.e. Kelvinator of India Ltd. allowed appellant company to exercise option to buy warranty or not to buy same. Upto 10th April, 1981, suppliers of refrigerators were submitted one bill that cost of these items are covered in cost of goods as well as cost of warrant against manufacturing defects discovered in complete unit during period of 12 months after date of sale and cost of warranty against manufacturing defects discovered in sealed-in system included in unit for period of four years after expiry of 12 months from date of sale. With effect from 11th April, 1981 manufacturers took view that cost of warranty against manufacturing defects in sealed-in unit is not cost of manufacture and they separated cost and gave option to appellant company to buy warranty separately and pay for same separately. Accordingly, manufacturer started issuing two bills-one for cost of refrigerator plus warranty for period of 12 months and separate bill for cost of warranty for sealed unit. appellant company exercised these options and purchase warranty w.e.f. 11th April, 1981 to close of accounting period i.e. 30th June, 1981 and total amount of warranty paid in respect of refrigerator and deep freezers purchased during this period amounting to Rs. 51,35,250. above amount was debited as expenditure outgoings in P & L account. During relevant period appellant sold most of refrigerators and recovered warranty amounting to Rs. 51,35,250 minus Rs. 19,84,665 i.e. Rs. 31,50,585. closing stock of refrigerators of various sizes was shown on 1,244-286 litres, 4,826- 165 litres, 80-135 litres, 58-90 litres, and 6-65 litres. Similarly, appellant also has shown closing stock of deep freezes numbering 3, 22, & 17 of capacity of 400 litres, 275 litres and 85 litres respectively. total closing stock in respect of refrigerators and deep freezes of different sizes was, therefore, shown at 6,256 in number. total warranty paid by appellant company pertaining to those refrigerators and deep freezes (which were) shown as closing stock was Rs. 19,84,665. As stated earlier, appellant had debited entire amount of Rs. 51,35,350 paid as warranty amount to manufacturers of freezes in respect of refrigerators, etc. purchased during period 11th April, 1981 to 30th June, 1981. appellant did not show warranty paid in respect of refrigerators and deep freezes shown as closing stock in trading a/c. contention of appellant was that appellant had paid entire amount and was entitled to deduction of expenditure as out-goings and as warranty paid to manufacturing company was not part of cost of refrigerators but separate item there was no reason to show balance amount of warranty pertaining to refrigerators, etc. held in stock either as part of value of closing stock or as separate item. IAC, however, rejected contention of appellant and added above amount to value of closing stock of refrigerators and deep freezes. contention of appellant was that IAC was not justified in making said addition as it was option of purchasers either to buy warranty or not to buy warranty. appellant company had exercised its option while purchasing warranty from manufacturers and had paid above amount was out-going and rightly debited to P & L account and as customers were at liberty either to buy warranty or not to buy warranty. appellant was not required to show balance amount on credit side or as part of value of closing stock as above amount was not part of cost of refrigerators, etc. but separate item. During appellate proceedings, appellant was specifically required to state whether there was any option given to customers either to purchase warranty or not to purchase warranty. It was admitted that no such option was given to customers. As far as sale of refrigerators, etc. is concerned, appellant was again specifically required to file copies of sale bills after 11th April, 1981 to verify whether warranty was shown separately or not. appellant has not filed copies of relevant sale bills. Ordinarily, cost of refrigerators to customers includes warranty for both items, namely, warranty for manufacturing defects for period of 12 months from date of purchase as well as warranty for sealed-in unit for further period of four years. As there was no option with customer question of treating above amount separately and not being part of cost of refrigerators does not arise. As one sale bill is prepared as far as customer is concerned which includes cost of refrigerators including cost of both types of warranty, closing stock has to be computed on basis of cost of refrigerator as well as warranty as paid by appellant to manufacturer and in turn charged by appellant from customers. period of warranty is part and parcel of cost of refrigerators as same stands embedded and included in sale price as advertised by appellant. appellant while selling its refrigerators does not show sale price of refrigerators and sale price of warranty separately but as one item i.e. sale price which is inclusive of warranty. contention that above warranty is in nature of after sale service or consumer service is not well founded. warranty which gives right to purchaser to get replaced in case there is manufacturing defect in sealed- in unit for period of four years beyond period of 12 months from date of purchase. above right of purchaser or customer to get sealed-in unit replaced is entirely different in nature from after sale service or consumer service. contention that warranty with right to get sealed-in unit replaced is same to consumer service is without any basis. It is also not acceptable that even if appellant allows option to purchaser of refrigerator to either purchase warranty or not to purchase warranty there will not be any such customer which will take risk to buy refrigerator without buying warranty against manufacturing defects either in refrigerator or in sealed-in unit. As stated earlier even this option was not available to any customer during relevant period. Even if it is assumed that appellant company was dealing in something called warranty separate item then it will b e treated as if appellant is dealing in commodity like warranty by purchasing warranty from manufacturer of refrigerators and in turn selling warranty to customer. As appellant has purchased warranties in respect of thousands of refrigerators and deep freezes during period 11th April onward and has also sold warranties in respect of thousands of refrigerators sold to customers during above period balance amount of warranty purchased by appellant in respect of refrigerators in stock will be separate item and above commodity has to be shown at cost price as available in stock with appellant. In these circumstances and for reasons as discussed above and in assessment order in details, I hold that IAC was justified in making said addition of Rs. 19,84,665 to closing stock of appellant being cost of warranty pertaining to refrigerators etc. held in stock at close of accounting period. This is specifically so in view of fact that no option was allowed to customers and sale price advertised by appellant and sale price shown in bills was inclusive of warranty charged from customers." On above issues ld. authorised representatives of parties were heard at length on 21st April, 1986 and 24th April, 1986 when hearing concluded. Assessee's paper-book (51 pages) have been duly noted. It, inter alia, contains copy of letter dt. 6th April, 1981 from Kelvinator of India Limited to assessee regarding separate charges for four years additional optional warranty; copy of sample bill, sample sale invoices, extract from international accounting standard dealing with valuation and presentation of inventories in context of historical cost system-booklets issued by Institute of Chartered Accountants of India and International Accounting Standards committee. Sample of warranty card, subject matter of controversy has also been placed on our file as page 9 of assessee's paper-book. controversy seems to fall in very narrow compass and it is as to whether on stated facts 'warranty can be treated as part of cost of refrigerator, hence stock-in-trade of assessee'. warranty is against manufacturing defects discovered in complete unit during period of 12 months after date of sale and against manufacturing defects discovered in sealed-in system included in unit for period of 4 years after expiry of 12 months from date of sale. In plain and simple language we can say that this warranty is for advantage to be derived in future after sale in cases and eventualities stipulated therein viz. manufacturing defect in complete unit and manufacturing defect in sealed-in system included in unit. former advantage being for one year from date of sale and latter being for four years from date of sale. Now this advantage can in no case be said to be good or property, but is advantage and warranty gives right to person, who buys refrigerator right to sue. mere right to sue cannot be said to be any goods, much less, property since mere right to sue is not actionable claim even. Sec. 12 of Sale of Goods Act, 1930 (Central Act No. III of 1930) defines 'Conditions and Warranties' and reads as under: "12. (1) stipulation in contract of sale with conditions and reference to goods which are warranties subject thereof may be condition or warranty. (2) condition is stipulation essential to main purpose of contract, breach of which gives rise to right to treat contract as repudiated. (3) warranty is stipulation collateral to main purpose of contract, breach of which gives rise to claim for damages but not to right to reject goods and treat contract as repudiated. (4) Whether stipulation in contract of sale is condition or warranty depends in each case on construction of contract. stipulation may be condition though called warranty in contract." According to above definition warranty is stipulation collateral to main purpose of contract, but not right to reject goods or else right to treat contract as repudiated. It means that warranty gives rise to right to sue in case of breach and gives rise to cause of action to claim damages, but breach of warranty in itself does not gives rise either to reject goods or to repudiate contract of sale. If warranty is part and parcel of goods then warranty must give right to reject goods as also right to repudiate contract but according to s. 12 of Act as reproduced above, this being not warranty cannot be said to be goods, property or else stock-in-trade. Desired fortification to above finding can be had from s. 59 of said Sale of Goods Act, 1930, which reads as under: "59, (1) Where there is breach of warranty, by remedy for breach seller, or where buyer of warranty, elects or is compelled to treat any breach of condition on part of seller as breach of warranty, buyer is not by reason only of such breach of warranty entitled to reject goods but he may (a) set up against seller breach in of warranty in diminution or extinction of price; or (b) sue seller for damages for breach of warranty. (2) fact that buyer has set up breach of warranty in diminution or extinction of price does not prevent him from suing for same breach of warranty if he has suffered further damage." This section deals with topic 'remedy for breach of warranty'. It provides that in case of breach of warranty by seller or where buyer elects or is compelled to treat any breach in condition on part of seller as breach of warranty, buyer is not, by reason only of such breach of warranty entitled to reject goods. said section provides further that in such situation, buyer can set up, against seller, for breach of warranty, claim for damages for breach of warranty, and (ii) claim for diminution or extinction of price. So under this s. 59, right of purchaser is limited under warranty and under law of land to claim damages or claim diminution or extinction of price. Again, according this section, claim is limited as provided in section and buyer in case of breach of warranty is not entitled to reject goods. So irrespectable inference is that that warranty is advantage and not goods, less, part of property or goods covered by warranty. On facts and in circumstances of case and in view of ss. 12 and 59 of Sale of Goods Act, 1930, warranty cannot be said to be goods or property, but gives rise only to sue for damages. warranty amount, as such, made subject matter of addition as closing stock of assessee was not warranted in light of discussion as above. same stands deleted. That apart, assessee has placed on our file, booklet issued by Institute of Chartered Accountants of India titled as 'Accounting Standards Valuation of Inventories'. Paragraph 6 in said booklet deals with 'definitions' and reads as under: "Definitions: 6. following terms are used in statement with meanings specified: 'Inventories' mean tangible property held (i) for sale in ordinary course of business, or (ii) in process of production for such sale, or (iii) for consumption in production of goods or services for sale, including maintenance, supplies and consumable other than machinery spares. 'Historical Cost' represents appropriate combination of (a) cost of purchase, (b) cost of conversion, and (c) other costs in normal course of business in bringing inventories upto their present location and condition. 'Cost of purchase' consists of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to acquisition, less trade discounts, rebates, duty drawbacks and subsidies, in year in which they accounted, whether immediate or deferred, in respect of such purchase. 'Cost of conversion' consists of (i) costs which are specifically attributable to units of production i.e. direct labour, direct expenses and sub-contracted work; and (ii) production overheads, ascertained in accordance with either direct costing or absorption costing method. (Iii) Production overheads exclude expenses which relate to general administration, finance, selling and distribution. 'Director costing' is method whereby cost of inventories is determined so as to include appropriate share of variable costs only, all fixed costs being charged against revenue in period in which they are incurred. 'Absorption Costing' is cost whereby cost of Inventories is determined so as to include appropriate share of both variable and fixed costs, latter being allocated on basis of normal level of production. 'Variable Costs' are those of production which vary directly, or nearly directly, with volume of production. 'Fixed Costs' are those costs of production which by their very nature remain relatively unaffected in defined period of time by variation in volume of production. 'Net Realisable value' is actual/estimated selling price in ordinary course of business, less cost of completion and cost necessarily to be incurred in order to make sale." Paragraph 7 in said booklet is 'Explanation' about Historical Cost as Basis of Inventory Valuation. It reads as under: "Explanation Historical Cost as Basis of Inventory Valuation. "7. Inventories are held in expectation of deriving revenue directly or indirectly from their sale or use. In order to determine results of business for given period, it is necessary to carry forward cost related to inventories until inventories are sold or consumed. However, if there is no reasonable expectation that net realisable value would cover cost incurred, (as result, for example, of deterioration, obsolescence or change in demand), it is necessary that cost which cannot be recovered should be charged against Revenue of current period. Therefore, inventories are normally stated at lower of historical cost and net realisable value." reading of above paragraphs makes it clear that 'inventories' mean tangible property held: (i) For sale in ordinary course of business, (ii) In process of production for such sale or (iii) For consumption in production of goods or services for sale, including maintenance, supplies and consumable other than machinery spares. So according to this Accounting Standard Valuation of Inventories, inventories should be tangible property and warranty is not tangible property, since as discussed above, within meaning of ss. 12 and 59 of Sale of Goods Act, 1930, breach of warranty only give rise to right to sue. right to sue, as such, cannot be said to be 'tangible property', hence cannot form part of inventory. 'International Accounting Standard' Valuation and Presentation of Inventories in Context of Historical Cost System' as authorised by International Accounting Standard Committee as in paragraphs 4 to 11 put same thing as under: Definitions following terms are used in this Statement with meanings specified. Inventories are tangible property (a) held for sale in ordinary course of business, (b) in process of production for such sale, or (c) to be consumed in production of goods or services for sale. Historical cost of inventories is aggregate of costs of purchase, costs of conversion, and other costs incurred in bringing inventories to their present location and condition. Costs of purchase comprise purchase price including import duties and other purchase taxes, transport and handling costs, and any other directly attributable costs of acquisition less trade discounts, rebates, and subsidies. Cost of conversion are those costs, in addition to costs of purchase, that relate to bringing inventories to their present location and condition. Net realisable value is estimated selling price in ordinary course of business less costs of completion and less costs necessarily to be incurred in order to make sale. Explanation Inventories comprise significant portion of assets of many enterprises. valuation and presentation of inventories therefore have significant effect in determining and presenting financial position and results of operations of those enterprises. Determination of Historical Cost In determining historical cost as defined in paragraph 4 different interpretations arise in practice as regards production overhead, other overheads, and cost formula to be used. Production Overhead Production overhead is comprised of costs incurred for production other than direct materials and labour. Examples are indirect materials and labour, depreciation and maintenance of factory buildings and equipment, and cost of factory management and administration. Production overhead requires analysis to determine portion related to bringing inventories to their present location and condition and thus to be included in costs of conversion when determining historical cost of inventories Both fixed and variable production overheads incurred during production are usually allocated to costs of conversion. That practice is based on view that they are both incurred in putting inventories in their present location and condition. Fixed production overhead is sometimes excluded in whole or in part from costs of conversion on grounds that it is not considered to relate directly to putting inventories in their present location and condition. In period of low production or if there is idle plant, it is customary to restrict allocation of fixed production overhead to cost of conversion by relating it to capacity of production facilities and not to actual level of throughout. Capacity of production facilities is variously interpreted, for example, as normal production expected to be achieved over number of periods or seasons or as maximum production that as practical matter can be achieved. interpretation is determined in advance and applied be achieved. interpretation is determined in advance and applied consistently, and is not modified for temporary conditions. Similarly, exceptional amounts of waste material, labour, or other expenses which do not relate to bringing inventories to their present location and condition are excluded from conversion costs. above definition and other discussion in 'International Accounting Standard Committee brochure' is to same effect as that of other one, referred to above and issued by Institute of Chartered Accountants of India. crux of matter boils down to that to fall within definition of inventories, it should be tangible property and once it is so, then only inclusion of same goods, as is warranted on facts of assessee's case, warranty cannot be said to be tangible property, hence cannot be included as 'inventories'. On this reasoning also, amount of Rs. 19,84,665 was not includible as closing stock being cost of refrigerators in hands of present assessee. This addition stands deleted. We hold and direct accordingly. As regards ground No. 2.1, reasoning of ld. CIT(A) is that for immediate preceding year, this addition was upheld by first appellate authority and in view of this, we having not been enlightened about fate of assessee's case at Tribunal stage disallowance stands upheld. Ground No. 2.1 stands rejected. As regards ground No. 2.2, reasoning of ld. CIT(A) as also ours remain same as for ground No. 2.2, and in that view of matter, this also stands rejected. As regards ground No. 3, reasoning of ld. CIT (A) is that disallowance has been computed by ld. IAC in respect of bonus paid to employees drawing salary between Rs. 750 per month too Rs. 1,600 per month keeping in view provisions contained in Bonus Act which provides that in respect of staff drawing salary in excess of Rs. 750 and upto Rs. 1,600 per month, bonus will be computed as if staff was drawing salary of Rs. 750. assessee has been paying bonus at rate of 20 per cent to all its employees right from accounting period ending on 30th June, 1977 i.e. relevant to asst. yr. 1978-79 and all along it has been allowed. We have, for ourselves, perused assessee's paper-book pages 72 to 76 which are copies of employment letters issued by assessee as employer to various employees whereby it is proved that payment of bonus at rate of 20 per cent of salary is term of employment in all cases and in view of this, payment of bonus to employee has to form part of salary, hence is allowable under s. 37(1) of Act. Sec. 36(1)(ii) of Act under which disallowance has been sustained by ld. Lower authorities, reads as under: "36. (1) deductions provided for in following clauses shall be allowed in respect of matters death with therein, in computing income referred to in s. 28 (i) (ia) (ii) any sum paid to employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission: [Provided that deduction in respect of bonus paid to employee employed in factory or other establishment to which provisions of Payment of Bonus Act. (1965) (2) of 1965), apply shall not exceed amount of bonus payable under that Act): (Provided further that amount of bonus (not being bonus referred to in first proviso or commission) is reasonable with reference to-: (a) pay of employee and conditions of his service, (b) profits of business or profession for previous year in question; and (c) general practice in similar business or profession." Even this provision of law entitles assessee to claim of bonus if it is reasonable with reference to pay of employee and condition of his service and is conformably to general practice in similar business or profession also keeping in view profits of business for previous year. Now in case of assessee as pages 72 to 76 of assessee's paper-book reveal, payment of bonus is stipulation of employment i.e. contract of service as part of salary and it is specifically mentioned in all three appointment letters that 20 per cent of salary shall be paid as bonus, hence even s. 36(1) (ii)(proviso) claim is admissible as deduction. We hold and direct accordingly. On ground No. 3, assessee succeeds. In net result, appeal stands allowed partly, since on ground Nos. 1 and 3, assessee succeeds and on ground No. 2, assessee fails. *** GEM INDIA LTD. v. INSPECTING ASSISTANT COMMISSIONER OF INCOME TAX