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Commissioner Of Income Tax vs Sherwani Sugar Syndicate Ltd.

High Court Of Judicature at Allahabad|30 October, 2006

JUDGMENT / ORDER

JUDGMENT R.K. Agrawal, J.
1. The Income Tax Appellate Tribunal, Allahabad has referred the following two questions of law under Section 256(2) of the Income Tax Act, 1961, hereinafter referred to as "the Act" for opinion to this Court
1. Whether, in law and on facts of the case, the I.T.A.T. has not exceeded its jurisdiction by omitting and allowing the miscellaneous application of the assessee when it amounted to revision of its own order which is not permissible in law, and which cannot be covered as a mistake apparent from record, which only can be rectified Under Section 256(2)?
2. Whether in law and on facts, the I.T.A.T. was correct in holding that the closing stock of free sugar as on 30-6-1978 should be valued at two different rates i.e. 42704 Qtls. should be valued at Rs. 85,58,293/- being the amount realised on sale upto 30-11-1978 which is after the closing of the previous year and the balance from sugar of 28,789 Qtls. should be valued at Rs. 207.86 per qtls. which was the cost price as on 30-6-1978 and thus adopting an altogether new principle which has got no sanctity in law and in accountancy?
2. The present Reference relates to the Assessment Year 1979-80.
3. Briefly stated the facts giving rise to the present Reference are as follows:
4. The assessee is a private limited company and derives income from manufacture and sale of sugar. The previous year of the assessee ended on 30th June, 1978. The only dispute in the case was regarding the valuation of closing stock of free sale sugar. The assessee was having the following stock as on 30th June, 1978:
There was no dispute regarding the valuation of levy sugar but the assessee disputed that the valuation of free sale sugar weighing 42,704 quintals should be taken at the amount realised by the assessee till 30th November, 1978 and the balance quantity of 28,789 quintals should be valued @ Rs. 180/- per quintal, which was the prevailing market rate as on 30th November, 1978, the date on which the balance sheet of the year under consideration was signed. The assessee was, however, valuing its closing stock from the Assessment year 1974-75 to 1977-78 at cost or market price whichever was lower, but during the year under consideration the assessee made a departure and valued the stock after considering the realisable value on the date of signing of the balance sheet i.e., 30th November, 1978 because of special circumstances during the year. It is admitted that the sugar price has been de-controlled on 17th August, 1978.
5. The Tribunal, while deciding the appeal had held as under:
Though it has been discussed earlier about the principle of net realisable value and the concept of real income but the said two points are not going to solve the valuation of closing stock. The assessee from the assessment year 1974-75 till the assessment year 1977-78 was valuing the closing stock by applying the method of cost or market whichever is lower. The assessee honestly has given these facts on pages 1 & 2 of its paper book. If the same method is applied during the year under appeal, the assessee was having 95,144 quintals of levy sugar. The control of price and distribution for levy sugar was in force upto 30th June, 1978, i.e., the last date of the previous year of the assessee. Therefore, 95,144 quintals should be valued @ Rs. 186.60 per quintal. The assessee was having the free sugar 71.493 quintals. The assessee's cost, according to its books of account, was Rs. 207.86 per quintal. The market rate was Rs. 260 per quintal. Therefore, if the principle adopted by the assessee in the previous year is adopted, the assessee was required to value 71,493 quintals of free sugar @ Rs. 207.86 per quintal. The cost determined by the cost Auditor either at Rs. 212.60 per quintal or Rs. 193.10 per quintal which was amended subsequently could not be taken into consideration because the assessee in past was always taking the cost into consideration as cost worked out on the basis of its books of account.
6. Therefore, after considering the arguments, paper book and case laws, the Income-tax Officer is directed to value the closing stock as follows:
Levy Sugar 95,144 qtls. @ Rs. 186.60 Free Sugar 71,493 qtls. @ Rs. 207.86 The Income-tax Officer, therefore, will determine the amount which can be substituted for the addition. As the addition has been sustained, the assessee's appeal is also decided with reference to the above facts.
From the above, it is clear that the Tribunal even though had accepted in principle that the net realisable value is a recognised principle for valuing the closing stock yet it had applied the method of valuation adopted by the assessee in the previous years i.e., 1974-75 to 1977-78.
7. The assessee being aggrieved with the said directions moved a Misc. Application against the order dated 15th May, 1987 referring paragraphs 18, 19 and 20 of the Tribunal's order wherein the principle of valuation of closing stock, as urged by the assessee, was accepted in principle but while giving effect to the said principle, the Tribunal had committed an error with reference to the valuation of the free sale sugar. The Tribunal, after hearing the parties came to the conclusion that there was a patent mistake in the order of the Tribunal as it had accepted the argument of the assessee that the amount realised upto 30th November, 1978 should be taken into consideration for valuing the closing stock of the assessee. The assessee did not dispute the value of levy sugar by the Tribunal. The only case of the assessee was that out of free sale sugar, 42,704 quintals were sold which should be taken at the amount realised by the assessee till 30th November, 1978. The assessee's contention that the valuation of the balance quantity of 28,789 quintals should be valued at Rs. 180/- per quintal which was the prevailing rate as on 30th November. 1978, was not accepted to be correct. Consequently, the order of the Tribunal was rectified to the extent that the value of the closing stock of free sale sugar should be valued @ realised price upto 30th November, 1978 for 42,704 quintals and @ Rs. 207.86, the cost price of the balance 28,789 quintals of free sale sugar.
8. We have heard Sri R.K. Upadhyay, learned Standing Counsel for the Revenue. Nobody has appeared on behalf of the respondent-assessee.
9. Sri Upadhyay, learned Standing Counsel, submitted that even though in the order dated 15th May, 19S7, the Tribunal had held that the principle of applying the net realisable value for the purposes of valuing the closing stock could not be said to be an incorrect method yet later on it had come to the conclusion that from the Assessment Year 1974-75 till the Assessment Year 1977-78 the assessee was valuing the closing stock by applying the method of cost or market price whichever is lower and the principle adopted by the assessee in the previous year is to be followed in the assessment year in question also. The same method has been applied. According to him, the application seeking rectification of the Tribunal's order was based on a wrong assumption that the Tribunal had committed an error apparent on the face of the record while applying the same principle for valuing the closing stock as was adopted by the assessee in the previous assessment years, when the fact of the matter is that the Tribunal after detailed discussions had applied the principle of valuation of the closing stock at cost price or market price, whichever is lower. The Tribunal has no power to review its earlier order in the garb of exercising the powers under Section 254(2) of the Act. He, thus, submitted that the order dated 14.12.1989 is wholly without jurisdiction. In support of his aforesaid plea, he has relied upon the following two decisions:
1. T.S. Balaram, Income-tax Officer, Company Circle IV, Bombay v. Volkart Brothers and Ors.
2. Biswanath Prasad and Sons v. Commissioner of Income-tax
10. On merits he submitted that right from the Assessment Year 1974-75 till the Assessment Year 1977-78 i.e. the immediately preceding assessment year, the assessee had been valuing its closing stock on the basis of cost price or market price, whichever is lower. In the Assessment year 1977-78, the assessee had valued its closing stock on the same principle which became opening stock for the Assessment Year 1978-79 and if the assessee is permitted to change the basis of valuation of the closing stock from cost or market price, whichever is lower to that of net realisable value, it would not reflect a true and correct picture of the profit and loss earned by the assessee inasmuch as in respect of part of the closing stock principle of net realisable value shall be adopted and for the remaining part the principle of cost or market price, whichever is lower shall be adopted. Two principles for valuing the closing stock of the assessee cannot be adopted in a previous year and in any event the concept of net realisable value is based on estimate only as on the last date of the previous year when the books of accounts are to be closed, the stocks remained with the assessee and only on estimate it can be valued. The value of the stocks which have been sold subsequently, cannot be taken into account while preparing profit and loss accounts of a previous year which has ended much earlier. He, thus, submitted that the Tribunal was not justified in permitting the assessee to adopt two methods of valuation of closing stock of the same year; one net realisable value and other cost or market price, whichever is lower.
11. We have given our anxious consideration to the various pleas raised by the learned Standing Counsel.
12. We find that the Tribunal in paragraphs 18 to 22 of its order dated 15th May, 1987 had dealt with the issue in the following words:
18. It is correct that if the various materials placed by the assessee in the paper at pages 9 to 18 are taken into consideration, it is clear that the principle of applying the net realisable value for the purpose of valuing the closing stock could not be said as incorrect method. The method of supplying the net realisable value is scientific as well as recognized method 'and it is in consonance with the guidelines issued by the Institute of Chartered Accounts of India as well as English and Wales. Various Authors as indicated in the paper book has also agreed to adopt the principle. Therefore, the principle adopted by the assessee could not be said to be incorrect.
19. The other point raised by the Standing counsel was that the market rate means market rate on the last date of the previous year for the purpose of the closing stock and the first day of the previous year for the opening stock. This may not be correct when the closing stock is valued on the basis of the net realisable value. The balance sheet in the present case was drawn on 30.11.78. The assessee took the sales made upto this date into consideration for the value of the stock which was lying with it and further estimated the value of unsold stock. The principle adopted by the assessee was correct. When the stock is valued by applying the net realisable value, the theory advanced by the Standing Counsel that the market rate on the last day of the previous year could not be applied.
20. The assessee argument relying on the various authors mentioned above is correct that while valuing the closing stock for the purpose of showing the true and fair state of balance sheet as well as computation income, the concept of real income could not be ignored. The Balance Sheet of the company should not be inflated. The Balance Sheet must show the true and fair value on the date of the Balance Sheet incorporating the facts on the date when the balance sheet is being signed. This principle is supported by the guidelines issued by the Institute of Chartered Accountant of India for contingencies and events occurring after the Balance Sheet date. The net realisable value will definitely show the correct figure because the sale has already been effected and the amount has been realised and that is the value for the closing stock. The Standing Counsel while arguing the case, cited the examples that if the principle adopted by the assessee is followed, it would create different anomalies for different assessees. Those assessee dealing in free and levy sugar having different previous year will value the closing stock at different rates which will defeat the interest of the Revenue. On the other hand, Dr. Vaish in course of the argument cited an example. It was stated that a particular garment designed for a country outside India is being exported by a trader. Subsequently, export was banned. The assessee could not export the goods and a huge stock was lying with him. The price available to the assessee from importing country was fairly high. As there was a ban and the goods were not to be lifted by the importing country and it was not saleable within the country, the stock cannot be valued at the rate at which it was exported to the importing countries. The said example was cited only for the purpose of advancing the theory that the concept of real income cannot be ignored. Without discussing much on these hypothetical cases, it could be said that the closing stock must be valued at the price either at cost or market or at the price which the closing stock would fetch if sold of will be sold in the open market.
21. Though it has been discussed earlier about the principle of net realisable value and the concept of real income but the said two points are not going to solve the valuation of losing stock. The assessee from the assessment year 1974-75 till the assessment year 1977-78 was valuing the closing stock by applying the method of cost or market whichever is lower. The assessee honestly has given those facts on pages 1 & 2 of its paper book. If the same method is applied during the year under appeal, the assessee was having 95,264 quintals of levy sugar. The control of price and distribution for levy sugar was in force upto 30th June, 1979 i.e. the last date of the previous year of the assessee. Therefore, 95,144 quintals should be valued @ Rs. 186.60 per qtls. The assessee was having free sugar of 71,483 qtls. The assessee cost according to its books of account was Rs. 207.86 per qtls. The market rate was Rs. 260 per qtls. Therefore, if the principle adopted by the assessee in the previous year is adopted, the assessee was required to value 71,495 quintals of free sugar @ Rs. 207.86 per quintal. The cost determined by the Cost Auditor either at Rs. 212.60 per quintal or Rs. 193.10 per quintal which was amended subsequently could not be taken into consideration because the assessee in past was always taking the cost into consideration as cost worked out on the basis of its books of account.
22. Therefore, after considering the argument ,paper book & case laws, the Income Tax Officer is directed to value the closing stock as follows:
Levy Sugar 95,144 Qtls. @ Rs. 186.60 Free Sugar 71,493 Qtls. @ Rs. 207.86 The Income-tax Officer, therefore, will determine the amount which can be substituted for the addition. As the addition has been sustained, the assessee's appeal is also decided with reference to the above fact.
13. From a reading of the aforesaid order, we find that the Tribunal had held the net realisable value for the purpose of valuing the closing stock to be not an incorrect method. However, it had not applied the said principle on the ground that the assessee from the Assessment year 1974-75 till the Assessment Year 1977-78 was valuing the closing stock by applying the method of cost or market price, whichever is lower. The Tribunal has applied the same method during the year under appeal. Thus, the Tribunal on the basis of the fact and material on record after a detailed discussion had not applied the principle of net realisable value for valuing the closing stock and instead applied the principle of cost price and market price whichever is lower. In the order dated 14th December, 1989 passed under Section 254(2) of the Act, the Tribunal in paragraph 7 has held that the mistake pointed out by the assessee is partly apparent from the record regarding valuation of free sugar in paragraph 22 of the order and therefore the quantity and the rate should be substituted accordingly. As mentioned hereinbefore, the Tribunal had not applied the principle of net realisable value for the valuation of the entire closing stock of free sale sugar held by the assessee. After accepting it to be correct principle, it had not applied to the facts of the case, therefore, it cannot-be said that there was any error apparent in the order of the Tribunal dated 15.5.1987, which requires rectification
14. In the case of Volkart Brothers (supra), the Apex Court has held that a mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record.
15. In the case Biswanath Prasad and Sons (supra), this Court has held that in the absence of any specific power conferred by the statute and/or inferred by implication the Tribunal which has been constituted under the Act cannot exercise any power of review and no such power can be inferred by implication nor there is any specific provision under the Act providing for review.
16. Applying the aforesaid principles to the facts of the present case, we are of the considered opinion that the Tribunal was not justified in reviewing its order in the garb of rectification proceedings as there was no error apparent on the record and it could be discovered only after a process of debate. We accordingly, answer the first question referred to us in favour of the Revenue and against the assessee.
17. So far as the second question is concerned we find that in the case of Ram Swarup Bengalimal v. Commissoner of Income Tax (1954) 25 ITR 17 this Court has held that two principles have now become well settled: (1) that that the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower and (2) that the value of closing stock must be the value of opening stock in the succeeding year, that is, an assessee cannot close his accounts and value his stock at a particular figure and the next morning on the first day of the next year he cannot value it at a different figure. This principle was also recognized by the supreme Court in Chainrup Sampatram v. Commissioner of Income Tax wherein the Apex Court had held that this is the theory underlying the rule that the closing stock is to be valued at cost or market price, whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy.
18. In the case of Commissioner of Income Tax v. British Paints India Ltd. the Apex Court has held that for computation of the true profits of the year in the case of a trade or adventure, each year being a self contained unit, the value of the stock in trade at the beginning and at the end of the accounting year and by ascertaining the difference between them has to be taken into account. It has further held that it is a well recognized principle of commercial accounting to enter in the profit and loss account the value of the stock in trade at the beginning and at the end of the accounting year at cost or market price, whichever is lower.
19. In the case of United Commercial Bank v. Commissioner of Income Tax (1999) 240 ITR 355 the Apex Court has held that for valuing the closing stock, it is open to the assessee to value it at the cost or the market value whichever is lower.
20. The two different methods of valuation of closing stock are not permissible under law. The principle of net realisable value cannot be adopted for a part of the closing stock. If that is permitted it would not reflect the correct profit/loss of the assessee and would lead to anomalous results. The Tribunal was, therefore, not justified in holding that the closing stock of free sugar as on 30th August, 1979 should be valued at two different rates i.e. 42704 quintals should be valued at Rs. 85,58,293/- being the amount realised on sale upto 30th November, 1978 which is after the closing of the previous ear and the balance from sugar of 28,789 quintals should be valued at Rs. 207.86 per quintal, which was the cost price on 30th June, 1978. We accordingly, answer the second question referred to us also in favour of the Revenue and against the assessee.
21. However, there shall be no order as to costs.
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Title

Commissioner Of Income Tax vs Sherwani Sugar Syndicate Ltd.

Court

High Court Of Judicature at Allahabad

JudgmentDate
30 October, 2006
Judges
  • R Agrawal
  • V Nath