Income Tax Appellate Tribunal - Jabalpur
Pearl Polymers (P.) Ltd. vs Income-Tax Officer on 21 March, 1986
Equivalent citations: [1986]16ITD599(JAB)
ORDER
S.K. Chander, Accountant Member
1. This appeal by the assessee is directed against the order of the Commissioner (Appeals) dated 31-10-1985 relating to the assessment year 1981-82. There are diverse grounds, which we, after hearing the parties, and on perusal of the orders of the authorities below decide as under.
2. The first ground relates to the addition of Rs. 1,05,600 made by the ITO to the total income declared by the assessee on account of value of drums. In order to appreciate the contentions of the rival parties, a factual background relevant to this issue has to be kept in focus and that background is as under.
3. The assessee is a company and manufactures plasticiser, which is supplied to Bata Shoe Co. The assessee also manufactures garments for exports. The raw material for the manufacture of platiciser comes in tin containers or in gunny bags. From the first year of assessment, till the assessment year 1980-81, the assessee has been maintaining books of account on mercantile system of accounting. The assessee follows financial year as the previous year. Though the assessee follows mercantile system of accounting, yet in respect of the containers or drums in which the raw material is purchased, the assessee adopted a method, which has, however, been consistently and regularly followed from the year of inception. This method is that the assessee debits the purchases with the cost of plasticiser as purchased. As stated earlier, it is purchased in drums or in gunny bags. After debiting the cost to the accounts in this manner, the assessee has been keeping the containers in separate stock. There is no dispute that proper details for verification of the quantity of such containers or gunny bags are available. The assessee, however, did not value such empty containers or gunny bags for the purpose of inclusion of their value in the profit and loss account. However, whenever the assessee sold such containers or gunny bags, the sale proceeds were credited in the accounts and accounted for in the total sales appearing in the final accounts.
4. The assessee had, thus, sold and accounted for, for example, in the financial year relevant to the assessment year 1980-81 empty drums worth Rs. 39,285 and empty bags worth Rs. 8,908.75. There is no dispute about the fact that in the total sales for the assessment year 1980-81 accounted for at Rs. 2,24,62,322.96, the assessee had accounted for the amounts of Rs. 39,285 and Rs. 8,908.75. There is also no dispute that similar sales in the assessment years prior to the assessment year 1980-81 have been accounted for.
5. The revenue took action under Section 132 of the Income-tax Act, 1961 ('the Act') in the case of the assessee on 11-5-1982. As pointed earlier, the assessee maintains books of account and follows financial year for this purpose. The return for the assessment year 1981-82 had been filed by the assessee on 27-2-1982. In the final accounts, total sales were shown at Rs. 4,18,78,851.42. In these sales, the assessee had included after incorporation in the books of account, which were closed on 31-3-1981 amounts of Rs. 99,185.80 and Rs. 13,286.25, respectively, as sale proceeds of empty drums and empty bags. The return was revised by the assessee on 15-2-1983 and the ITO during the process of assessment examined the issue of the sale of drums by the assessee.
6. The ITO was of the opinion that the assessee had not shown the value of the drums in the closing stock and by debiting the cost of the materials, which included the cost of the containers to the purchase account, the assessee had got undue benefit from this method adopted for showing the amounts only on the basis of the dates of sale proceeds of the drums and the gunny bags. Therefore, after the reasons recorded in his impugned order, he, after obtaining the approval of the IAC, came to the conclusion that the value of 1,056 drums should be added to the total income of the assessee. Similarly, he added Rs. 20,000 for the empty bags. The ITO valued the empty drums at the rate of Rs. 100 per drum. He, however, estimated the value of the empty bags.
7. When these additions were challenged in appeal before the Commissioner (Appeals) the learned Commissioner supported the ITO for the action taken by him and for the reasons given in support of such action. He, however, held that the value of each drum for the purpose of the addition should be taken at Rs. 80 per drum. He, nevertheless, confirmed the addition made on estimate basis for the gunny bags.
8. On such background, the learned counsel for the assessee has submitted that the assessee has been accounting for the empty drums by keeping a separate stock account for the same and the sale proceeds of the drums have been credited as and when they were sold. Since, the assessee had regularly adopted this method and there was no change, the authorities below had in the earlier years accepted this system after due consideration. He submitted this system of the assessee which was basically a mercantile system of accounting except that for the sale of drums and gunny bags. The asseesee accounted for their sales and did not value them from the very beginning for the purpose of including in the closing stock on estimate basis. The Commissioner was, therefore, in error in supporting the ITO on this issue, as he did.
9. The revenue, on the other hand, submitted that the assessee has paid for not only the material in the drums but also for the drums when the purchases were made. Therefore, by debiting the entire cost to the profit and loss account and not valuing the empty drums for purpose of inclusion in the profit and loss account of the relevant assessment year, the assessee has not disclosed true and correct particulars of its income. It was submitted that the empty containers had value and, therefore, in each year, the assessee should have not only maintained separate closing stock for such containers but should have also taken their value to the profit and loss account to determine the true and correct income of that year. Since it was not done, the ITO was right in adding the value of such drums and gunny bags in the year under appeal.
10. We have given careful consideration to the rival submissions and we find that there is no dispute that, insofar as this issue is concerned, the assessee had adopted a hybrid system. The assessee was having its commercial and manufacturing transactions recorded in the books of account on the basis of mercantile system of accounting. However, from the very beginning as projected earlier for the empty drums and gunny bags, the assessee maintained separate accounts and on sale of such empty containers accounted for those sales, in the year in which such sales took place. In other words, ordinarily these sales were accounted for in the year of sale. This method was considered and accepted in all the assessment years preceding the assessment year under appeal. We have given above figures relating to the assessment year 1980-81 included in the total sales on account of drums and gunny bags. These amounts were taxed as income of the assessee, as they had entered into the drawing up of profit and loss account, from which the total income of the assessee was computed by the ITO.
11. In fact, it is apparent that even for the year under appeal, when the books of account were closed on 31-3-1981, the assessee had accounted for in the books of account, the amounts of Rs. 90,185 and Rs. 13,286 respectively, representing sale proceeds of empty drums and empty bags. It is pertinent to note that the action under Section 132 took place subsequent to the closure of the accounts and it cannot be even argued that the assessee had even an inkling of what was going to happen subsequently. Therefore, there is a lot of substance in the contention of the learned counsel for the assessee that a systematic regular account was kept of the empty drums and gunny bags and such a system was accepted by the ITO. We, therefore, find that the ITO was merely, without there being any material change in the facts and circumstances of the case, trying to add to the total income of the assessee by way of valuation of empty drums and gunny bags by treating them as part of the closing stock, which was not done in any of the earlier assessment years. Therefore, the reasoning given by the authorities below that the assessee had tried to furnish inaccurate particulars of income in this manner is without substance. It is very clear that the assessee had consistently adopted this regular method and the department had accepted it. There is no justification shown to us for making a departure of this accepted system and, therefore, the addition resulting from the departure, which is without justification is in itself without justification. It is deleted. Therefore, the ground Nos. 1 and 2 of the assessee are allowed.
12. [This para is not reproduced here as it involves a minor issue.]
13. The only other grounds that survive for our consideration are numbered 4 and 5. These grounds relate to the cash incentives and duty drawbacks. In order to appreciate the grievance of the assessee, the factual backdrop of the case relevant to this issue has to be kept in focus, which is as under.
14. As mentioned earlier, the assessee, in addition to manufacturing plasti-ciser, makes garments for exports. It actually exports these garments made by it. The Government of India has adopted various measures for promotion of exports. These measures can be categorised as under :
(i) Material inputs facilities, such as, replenishment licensing scheme, etc. ;
(ii) Fiscal incentives, such as, cash compensatory support (CCS), duty drawbacks, concessions in direct taxes and establishment of free trade zones, etc. ;
(iii) Export credit by charging lower rate of interest ;and
(iv) Institutional support by way of setting up institutions like export promotion councils, etc. It would be seen from above that CCS and duty drawbacks are fiscal incentives intended for promotion of exports. When the exports are made, the assessee becomes eligible for making a claim to the concerned authorities within a specified period and the concerned authorities would determine the claim and its quantum depending upon eligibility criteria. In other words, at the time of making the exports, the assessee earns eligibility for entitlement to a claim of CCS before the concerned authorities.
15. The duty drawbacks are, on the other hand, allowed under the Customs and Central Excise Duty Drawback Rules, 1971, framed under the Customs Act, 1961 and the Central Excise and Salt Act, 1944. While fixing the rate of drawbacks, the Government, inter alia, takes into consideration various types of duties and levies paid on the imported material or excisable material used in the process of manufacturing of items exported. The procedure laid down for claiming drawbacks on exports, other than by post, requires that the exporter shall at the time of export of goods state on the shipping bill or the bill of export, the description, quantity and other particulars as are necessary for deciding whether the goods are eligible to drawbacks and if so, at what rate or rates. The claim so made is determined by the concerned authorities subsequently.
16. During the year under appeal, the assessee exported garments to West Germany and Holland, etc., valued at Rs. 14,18,040. It became eligible for claim of CCS to the tune of Rs. 2,12,706. Similarly, the assessee became eligible for duty drawbacks to the tune of Rs. 1,20,939. The assessee is following mercantile system of accounting and its previous year is the financial year. However, the assessee did not account for these two amounts in its books of account on the basis of mercantile system of accounting because it decided to account for the amounts on the cash system of accounting due to the fact that the assessee on attaining eligibility for CCS and duty drawbacks was subsequently required to approach the concerned authorities for legally enforceable entitlement and the quantum of such entitlement by the said authorities. It decided to account for these amounts on receipt of quantified entitlement from the concerned authorities.
17. The ITO, however, held that the assessee's accounting system was purely mercantile and CCS and duty drawbacks, in fact, directly relate to the business of export of garments. These were, in fact, part of the same transaction and should have been accounted for by the assessee when the export transactions were accounted for in the books of account from which the said CCS and duty drawbacks arose as incidental receipt of such transactions. These amounts were, therefore, added to the total income which was determined at Rs. 9,41,228 as per order dated 25-8-1984 made under Section 143(3), read with Section 144B, of the Act, namely, after forwarding a draft to the I AC and on receipt of his directions. This assessment was challenged in appeal before the Commissioner (Appeals).
18. The learned Commissioner had to decide two facets of this problem. The first facet was whether the CCS and duty drawbacks were at all exigible to tax. In other words, he had to determine the character of such amount qua the character of taxable income under the Act. On this issue, the learned Commissioner made a very well reasoned order to hold that these amounts were in the nature of income and as such, exigible to tax under the Act. The other facet of the problem was whether the amounts were taxable on the date the export bills were made or on actual receipt after adjudication of the claim of the assessee by the concerned authorities. The learned Commissioner held on this aspect of the matter that these amounts were in fact part of the transactions of export and constituted an integral part of the turnover of the assessee and as such, exigible on the basis of the date of the bill incorporated in the books of account on mercantile system of accounting. Now, insofar as the decision of the learned Commissioner on the first facet of this problem is concerned, it is not is agitation in appeal before us. The assessee is in appeal only about the Second facet of the problem, that is, the basis of exigibility of these amounts.
19. We have heard the parties at length on this issue. The learned counsel for the assessee relied upon the principles of accountancy that an assessee is entitled to maintain a hybrid system of accounts, namely, maintaining books on bulk of the commercial transactions on the mercantile system and accounting for some other transactions on cash system of accounting. It was contended by him that it is accepted both in accountancy and by the judicial authorities and as such, the assessee is entitled to do what it has done. The learned counsel for the assessee further submitted that the Delhi Bench 'D' of the Tribunal in the case of Indian Aluminium Cables Ltd. v. I AC [1985] 13 ITD 907 has held that the assessee is entitled to change the method of accounting with regard to CCS and duty drawbacks from mercantile to cash system and that on the date of making the claim for these incentives the amount claimed was neither due nor payable to the assessee and as such, the change of system made by the assessee was bona fide. The learned counsel also relied upon the judgment of the Delhi Bench 'A' in the case of East West Linkers (P.) Ltd. [IT Appeal No. 4335 (Delhi) of 1977-78 and C.O. No. 337 of 1977-78 dated 12-9-1979] for the assessment year 1975-76 appearing at pages 217 to 226 of the assessee's paper book. The learned departmental representative, on the other hand, relying upon the judgments of the Delhi High Court in the case of Dalmia Dadri Cement Ltd. v. CIT[1980] 126 ITR 851, CIT v. Martin & Harris (P.) Ltd, [1985] 154 ITR 460 (Cal.) and the Delhi High Court judgment in the case of N.K. Textile Mills v. CIT [1985] 152 ITR 594 contended that the assessee has not made out a case for an interference in the order of the learned Commissioner, which should be confirmed.
20. We have given careful consideration to the rival submissions. On a perusal of the authorities cited from both the sides, we find that the authorities cited on behalf of the revenue are clearly distinguishable on facts. These are, therefore, not applicable for determination of the issue before us. On the other hand, the judgments of the Tribunal cited by the assessee are directly on the issue in the sense that in these two judgments, the Hon'ble Tribunal upheld the claim of the assessee that the assessee was entitled to change the method of accounting regarding CCS and duty drawbacks from mercantile to cash. Embedded in these judgments is the assumption that if the assessee was accounting for the amounts of CCS and duty drawbacks on due basis depending upon the date of transaction of export, the assessee has a right to account for the amounts on cash system of accounting, i.e., as and when the assessee becomes entitled to quantified claims on approval by the concerned authorities. So, in a way, it can be said that this aspect of the issue is covered by the judgment of the Tribunal.
21. However, we would like to examine this issue independently whether the claim made by the assessee is acceptable or the view adopted by the authorities below is supportable. After consideration of the entire issue, we are of the opinion that when the assessee makes a bill for exports, the assessee obtains or acquires eligibility to make a claim for CCS and duty drawbacks. At that stage the assessee is only having an inchoate entitlement. The assessee actually acquires a legally enforceable right or entitlement only when the application made by the assessee is examined by the concerned authorities of the claim either as made or with variation as approved for payment. This is the stage, when the assessee in law acquires an enforceable right. Before that the eligibility that the assessee acquires gives him a right to make a claim before the concerned authorities to issue him an entitlement or a certificate that he is entitled to of a particular amount on the basis of such eligibility.
22. The argument of the lower authorities, therefore, that at the time when the exports took place and a bill for the exported amount is made, the transaction involves two ingredients, one the payment to be made by the non-resident for the exports and the other component being CCS and duty drawbacks available from the Government is not even syllogistically sound. This is so, because the transaction no doubt gives the assessee an incidental eligibility from the transaction, yet the entitlement legally enforceable becomes the property of the assessee only on the concerned authorities making a certificate or order in favour of the assessee after verification of the claim made. The reasoning given by the learned Commissioner on this aspect of the matter is, therefore, an enthymeme, because the practical aspect of the matter has been ignored.
23. On the entirety of the facts and circumstances of the case and for the reasons that we have recorded supra, we hold that the assessee was entitled to account for these amounts on the basis of cash system of accounting and the authorities below erred in bringing to tax these amounts, as if these were receivable by the assessee and as such, accountable on the date of transaction of export. It is very clear that these were to be determined both on legally enforceable claim and on quantum by the concerned authorities taking into consideration the eligibility criteria. These amounts were, therefore, wrongly included into the total income of the assessee for the year under appeal. The orders of the authorities below on this issue are set aside and the ITO is directed to delete these amounts from the total income for the year under appeal. These grounds are allowed.
24. Appeal partly allowed.