Income Tax Appellate Tribunal - Kolkata
J.H.V. Sugar Ltd., Kolkata vs Department Of Income Tax on 25 February, 2009
आयकर अपीलीय अधीकरण, Ûयायपीठ - "C", कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH- C , KOLKATA
[सम¢ ौी डȣ. ×यागी, Ûयायीक सदःय, एवं ौी सी.
डȣ. के. ×यागी, सी. डȣ.
डȣ. राव,
राव, लेखा सदःय ]
Before Shri D.K. Tyagi, Judicial Member & Sri C.D. Rao, Accountant Member
आयकर अपील संÉया / ITA No. 872 (Kol) of 2009
िनधॉरण वषॅ/Assessment Year 2005-06
Income-tax Officer, Ward-12(3), -वनाम- M/s. J.H.V. Sugar Ltd.
Kolkata. -Versus-. Kolkata.(PAN-AACFD0236D)
(अपीलाथȸ/APPELLANT) (ू×यथȸ/RESPONDENT)
अपीलाथȸ कȧ ओर से/ For the Appellant: ौी/Sri D.R.Sindhal
ू×यथȸ कȧ ओर से/For the Respondent: ौी/Sri Manoj Kataruka
आदे श/ORDER
सी.
सी.डȣ.
(सी डȣ.राव), राव लेखा सदःय (C.D. Rao), Accountant Member :
This appeal by the Revenue is directed against the order dated 25.02.2009 of ld. C.I.T.(A)-XXXII, Kolkata pertaining to assessment year 2005-06. Ground No.1 of this Revenue's appeal reads as under :-
"1. On the facts and in the circumstances of the case, Ld. CIT(A) was not justified in law in deleting the addition of Rs.4,86,38,100/- made on account of under-valuation of closing stock."
It is pertinent to mention here that in the above ground, the department has taken addition of Rs.4,86,38,100/-, whereas in the orders of the authorities below, the said figure is appearing as Rs.4,06,38,100/-. Therefore, we take the amount of addition of Rs.4,06,38,100/- for adjudication.
2. The facts of the case on the above issue are that the assessee disclosed the value of closing stock of finished goods in its audited accounts at Rs.71,31,00,305/- which, inter alia, included value of finished sugar, molasses, BISS Sugar. On verification of the Inventory filed by the assessee, the A.O. observed that the assessee valued the stock of finished sugar 'at cost' which was estimated at Rs.1,686/- per quintal. The A.O. required the assessee show cause as to why the total interest expenses of Rs.3.47 crores 1 should not be treated as inventory and be added in the closing stock of the company as on 31/3/2005. The reasons pointed out by the A.O. were that the assessee had not debited any expenditure towards the interest cost while valuing the closing stock. He further pointed out that the assessee debited an amount of Rs.3.47 crores as financial expenses in its P/L Account and as per cost sheet submitted by the assessee, the cost of interest expenditure on working capital was not added to the value of closing stock although this expenditure was one of the major items of expenditure in the P/L Account. The A.O. on perusal of balance sheet as at 31/3/2005 further observed that out of the total current assets of Rs.91.16 crores, an amount of Rs.72.73 crores was towards the inventory, which constituted about 80% of the current assets. According to the A.O., therefore, the interest paid on working capital was nothing but the cost of inventory being carried on by the assessee during the year and same is liable to be added to the cost of the closing stock for its valuation as on 31/3/2005. In reply, the assessee explained that as in the closing stock details filed earlier on 22.11.2007 there were some inadvertent mistakes, the same were substituted on 17/12/2007 by filing revised stock details and requested for overlooking the earlier stock details filed on 22/11/2007. The A.O., however, was not convinced with the explanation of the assessee and made an addition of Rs.4,06,38,100/- which, inter alia, included (i) Rs.58,86,525/- added @ Rs.15/- per quintal for 392435 quintals of finished sugar in stock and (ii) Rs.3,47,51,51,575/- on account of interest & finance charges relatable to stock of finished sugar. The relevant observation of the A.O., to quote, reads as under :-
"Regarding the assessee 's claim that it has filed a revised working of closing stock, the assessee itself has submitted the detailed working of closing stock vide its letter dated 22.11.2007. In this letter itself the valuation of closing stock has been worked out by the assessee at total cost per bag of Rs.1615/-. When. it was pointed out to the assessee, the assessee has given certain submissions but the same has not been substantiated despite being given several opportunities. The assessee was time and again requested to substantiate. its claim with documentary evidences but the assessee did not submit any documentary evidence in support of its claim. Since the assessee has failed to substantiate its claim, there is no force in the assessee's arguments and the same are rejected. Accordingly, the valuation of closing stock is being taken Rs.1701/- per quintal instead of Rs.1 686/- as has been shown by the assessee.
Regarding the claim that as per the guideline of stock valuation, interest cost is not added as part of the inventory is not correct because as per the guidelines, all costs 2 which have been incurred to bring the inventory in the present state has to be included in the valuation of the closing stock.
In other words, the carrying cost of the inventory has to be included in the valuation of the closing stock, which is lying as stock at the end of the year. On a perusal of the finance cost of the assessee it is found that interest of Rs. 2.62 crores has been given only for the working capital of the assessee company. On going through the balance sheet as has clearly been mentioned in the show cause notice as well, the major item of current assets of the assessee is inventory only. Hence, all the costs which have been incurred to bring the inventory at its present form including the finance cost f it has been paid for carrying the stocks, has to be added while valuing the closing stock of the assessee company. In view of this there is no force in the assessee company's argument and the same are rejected. Accordingly, the amount of Rs.347.51 lakhs is also added as the value of the closing stock as on 31.3.2005.
In view of the aforesaid discussion the total addition in the stock is worked out as under:
Total closing stock of sugar including Biss - 392435 quintals x Rs. 15 (addition Per quintal as discussed above) = Rs. 5886525/- + Rs. 34751575/-
(Finance cost as discussed above) = Rs. 40638100/-
The same is added in the total income of the assessee company in the valuation of the closing stock.
This is also evident from the gross profit ratio of the assessee company, which was 39.83% in the financial year 2003-04 which has come down to 26.45% during the financial year 2004-05 relevant to the assessment year 2005-06.
Regarding the assessee's argument without prejudice that the value of interest is included both in the closing stock as well as the opening stock and in the interest of justice, even f interest component is added in the value of the closing stock, the same should be first included, in the value of the opening stock and difference if any can only be taken. If the assessee company does not take into account the interest expenses in the valuation of closing stock at all. In fact, it has been submitted by the assessee that it will not form part of the stock at all. In the absence of the relevant details of the valuation of the opening stock as well as the interest cost, the undersigned is not in a position to accept the claim of the assessee. Hence, the same is not accepted,"
3. Before the ld. C.I.T.(A), the assessee filed a detailed written submission on the issue. The assessee also filed the revised statement of inventory valuation filed before the A.O. also, audited account and AS-2 prescribed by ICAI and contended that the addition made on account closing stock of finished sugar was unjustified. It was further submitted that if the adjustments made to valuation of closing stock was to be accepted, then by applying the same accounting principles the A.O. ought to have adjusted the value of opening stock as well and this would have resulted in reduction in the total 3 income for the year under consideration. The ld. C.I.T.(A) in his appellate order on pages 6 to 11 has incorporated the written submissions of the assessee and dealt with the addition in the following manner :-
"In the present case two important questions need to be answered and those are --
a) Whether the inventory valuation disclosed by the assessee in its audited accounts was fair, reasonable & correct or whether the A.O. was justified in rejecting the assessee's method of stock valuation and thereby he was correct in re-computing the value of closing stock by making addition of Rs.4,06,38,l00/-,
b) If it is held that A,O. was justified in re-determining value of closing stock then whether the A.O. should have made corresponding adjustment to the value of opening stock by following the same method of inventory valuation.
In order to decide the first question it is necessary to ascertain the method of valuation followed by the assessee. On reference to Schedule-14 of the Audited Balance Sheet it is noted that the assessee had valued closing stock of sugar (white crystals) at Rs.66,05,49,510/-; stock of sugar (BISS) at Rs.832520/-& stock of molasses was valued at Rs.5,24,18,275/-. The aggregate value of closing stock of finished goods was therefore, Rs.71 ,3 8,00,305/-.
In the first statement of stock valuation furnished before the Assessing Officer the assessee had worked out the cost of production of sugar at Rs.1615.58 per quintal, In the revised statement of stock valuation the assessee recomputed the average cost per quintal at Rs.1588.83. In both statements cost was rounded off to Rs.1600/- per quintal. Both the working statement of inventory valuation have been extracted herein above while discussing assessee's written submissions. The comparative analysis shows that in the first working statement the "net cost of production" was estimated at Rs.58,97,62,672/- giving average cost of Rs.1615.08 per qntl., which has been accepted by the A.O. for the purpose of making the addition of Rs.58,86,525/-. In the revised working statement the assessee however excluded Rs.95,86,747.69 being value of opening work in progress worked out average cost of production with reference to net cost of production of Rs.58,0l,75,924/-. The assessee has claimed that "cost of opening WIP" was not includible, in working of "cost of production". In principle I do not accept assessee's averment because production during the previous year could have been made out opening work in progress as well. However on deeper scrutiny of Schedule- 14 of he Balance Sheet I find that the value of work in progress of Rs.95,86,747.69 pertained to opening stock of F.Y. 2003-04 relevant to AY, 2004-05. In other words, the said opening WIP was held by the assessee on first April 2003 and not on 1st April 2004, which was the first day of previous year relevant to AY. 2005-06. All other facts & figures included in both statements of inventory valuation were identical & were extracted from the audited accounts of F.Y. 2004-05 & therefore, I am satisfied that assessee had taken into account all the facts & figures which were relevant for determining cost of production of sugar for A.Y. 2005-06. On the facts of the case therefore, I accept the revised working statement of cost of production of sugar. On the facts of the case I therefore, find that the A.O. was not justified in ignoring the revised working statement of inventory valuation & considering only the first inventory valuation statement which was admittedly incorrect as it took into a/c cost of WIP as on 4 1.4.2003. Taking into consideration the manufacturing costs incurred during F.Y. 2004- 05; determined with reference to Profit & Loss A/c of F.Y. 2004-05, I agree with the AIR that the cost of production of sugar for F.Y. 2004-05 was Rs.1588.83 per quintal & it was not Rs.16 15.08 per quintal as assumed, by the Assessing Officer. On the basis of facts which are borne out from the 'Audited Profit & Loss A/c., the addition of Rs.58,86,5251- made by the Assessing Officer is found to be unsustainable and the same is deleted.
The Assessing Officer made addition of Rs.3,47,51,575/- on account of inclusion of interest & finance charges in the value of inventory.' The A.O. has made out a case that for determining cost of inventory interest and finance charges should be included. 1 however, find that as per the consistent method of accounting and inventory valuation followed by the assessee, interest & finance charges were never considered as par t of cost of manufacture. In the past assessments the method of accounting & method of inventory valuation followed by the assessee was never disputed by the Department. In the preceding assessment year for the purpose of valuation of inventory; interest & finance charges were not included as part of "cost of production" and accordingly profits for the earlier ,years were determined on the basis of inventory value which was arrived at without considering the impact of interest & financing charges. By making addition of Rs 3,47,51,575/-only in A.Y. 2005-06 the A.0. artificially increased the business income of the appellant. In other words, the Assessing Officer treated the inventory valuation as a source of income. The Supreme Court in the case of Chainrup Sampatram Vs. CIT [24 ITR 481] has held that it is misconception to think that any profit arises out of the value of closing stock. In the same judgment the Supreme Court held that an entry relating to stock valuation is required to be made in trading account so as to exclude the charges relating to goods which have not been sold & it should necessarily represent cost of goods. In the light of the judgment of he Apex Court in the case of Chainrup Sampatram the A.O. was not justified in treating the valuation of inventory as assessee's source of income.
The assessee has consistently been valuing the inventory of sugar by following the principle of "at cost or market value whichever is lower". However, in valuing the stock "at cost" the assessee has consistently followed Accounting Stndard-2 prescribed by the Institute of Chartered Accountants of India which deals with valuation of inventories. As per Accounting Standard-2 in valuation of inventories only the cost of the material, depreciation of assets used in manufacture & other manufacturing overheads are to be taken into consideration. The interest and finance charges which are mainly "period costs" are not taken into consideration. According to A.O., as per guidelines for stock valuation, interest cost is also required to be included because in his opinion all costs incurred to bring the inventory in the present state had to be included in the valuation of closing stock. For this reason, he included finance costs in the cost of production & thereby made the addition of Rs.3,47,51,5751/-.
From perusal of the impugned order, I find that the A.O. has justified the inclusion of interest & finance charges in the cost of production with reference to "certain guideline"
However, the A.O. has not spelt out by whom or when these guidelines were issued nor spelt out the actual contents of these guidelines. The Supreme Court in the case of CIT Vs. British Paints Ltd., [188 ITR 44] has held that the valuation of inventory can be made by following the principle of "at cost or market value whichever is lower", but in valuing the inventory "at cost" an assessee is obliged to include not only the cost of 5 raw-materials but also the overhead charges. In this judgment the Supreme. Court however did not setout or prescribed the costs or heads of expenses which need to be included for determination of cost. The Supreme Court only held that in valuation, of inventory "at cost" the proportionate overheads are required to be added to the cost of raw-materials. In that judgment the Supreme Court observed that the method of accounting followed by the ssessee in question was neither direct cost method nor any other accepted method which took into account the actual or part of the cost involved in manufacture of the goods in process and finished products. The assessee in the decided ease only included value of raw-materials without taking into account any portion of the cost of manufacture. The Supreme Court therefore, held that the method of valuation followed by the assessee wherein only the raw-material costs were included was not a• correct method of stock valuation. The Supreme Court held that. in valuation of inventory; raw-material cost and the cost of manufacture were required to be included, The observations of Supreme Court however, indicate that the Supreme Court nowhere prescribed that all costs & expenses including selling, distribution & other post- manufacturing expenses as also finance cost are required to be included in valuation of closing stock. The Supreme Court further held that a proper method of accounting should be consistently followed by an assessee so that the determination of income is possible on a consistent basis and there is no distortion in the assessment of total income.
In the light of these judicial pronouncements, it is necessary to examine whether the method of valuation followed by the assessee was correct. As discussed in the foregoing, there was no disagreement between the assessee and the Assessing Officer with regard to figures of manufacturing costs, included in the statement of inventory valuation. According to A.O., for the purpose of valuation of inventory he interest and finance charges was also required to be taken into consideration whereas ässessee excluded interest & finance charges. Although the A.O. referred to some accounting guidelines he has not brought on record these guidelines under which inclusion of interest is permitted. On the other hand, the assessee has claimed that the inventory valuation was made by following AS-2 prescribed by ICAI. From the Accounting Standard-2 it appeared that in Para-5 thereof AS-2 has mandated that inventory should be valued by following the principle of lower of cost or realizable value.
Para-6 provides that the cost of inventories should comprise all costs of purchase, cost of conversions and other costs incurred in bringing inventories to their present location & condition.
Para-7 defines the "cost of purchase" and Para-8 to 10 define the "cost of conversion"
as these expressions are referred to in Para-6.
Paras-1 1 & 12 of AS-2 define "other costs" which are to be included in valuing cost of inventory as per Para-6.
Para -12 of AS-2. provides as follows:
"Interest and other borrowing costs are usually considered as not related to bring inventories to their present location & condition which are usually not included in the cost of inventories".6
Para-12 of AS-2 therefore, clearly indicates that in valuation of inventory "at cost" the interest and borrowing costs are usually not included.
The appellant is a public Limited Company. Section- 211 of the Companies Act requires all companies to prepare Profit & Loss A/c and Balance Sheet in accordance and in conformity with the accounting standards prescribed by ICAI. The Hon'ble Supreme Court in the case of CIT Vs. UP State Industrial Development Corporation [225 ITR 703] held that it is a well accepted proposition that "for the purpose of ascertaining profit & gains; the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of he relevant statutes". In the present case the assessee has consistently followed a particular method of accounting for inventory valuation which is in conformity with AS-2 prescribed by ICAI. The appellant being a company, the Accounting Standard was mandatory and required to be followed and therefore, there was no infirmity in the assessee's inventory valuation where it excluded interest & other borrowing costs. I also note that in the past as well as in the subsequent accounting periods the assessee followed the same principles of inventory valuation & therefore, if the A.O. was desirous of changing method of inventory valuation the onus was on him to prove that the method of valuation followed by the assessee was legally or factually wrong or inappropriate. However, except for making reference to an alleged guideline the. A.O. did not bring on record any scientific material to show that the interest and other borrowing costs were liable to be included in determining cost of production of finished goods. Even the Supreme Court's decision in the case of CIT Vs British Paints Ltd. (Supra) provides that in valuation of inventory cost of raw-materials and cost of manufacture is to be included. The said decision nowhere prescribed that post-manufacturing cost and interest & borrowing cost which admittedly do not relate to manufacturing; are to be included in valuation of inventory. Moreover, the Accounting Standard-2 issued by ICAI has clarified that interest & borrowing cost are usually not included in valuing the cost of inventories. The principles of inventory valuation set out in AS-2 are not found to be contrary to any express provision of the I.T. Act. The A.O. has not brought on record any statutory provision of the I.T. Act which required the assessee to value the inventory in the manner or mode other than one provided in AS-2. In the light of the judicial decisions; consistent method of accounting followed by the assessee in the past & subsequent years and in the light of provisions of AS-2, I do not find that the assessee's valuation of inventory suffered from any infirmity. In my opinion therefore, the A.O. was legally & factually incorrect in rejecting the valuation of inventory made by the assessee and thereby erred in making addition of Rs.3,47,51,575/- to the total income of the appellant in AY. 2005-06. The said addition is accordingly deleted.
In the light of my finding in relation to 1st question set out herein above, the 2nd question dealing with adjustment to be made to the valuation of opening stock has become academic & therefore, I do not deem it proper to adjudicate such academic question. In result Ground No. 2 is allowed."
4. At the time of hearing before us, the Ld. Departmental Representative heavily relied on the order of the A.O. He further submitted that the assessee substituted its earlier closing stock valuation sheet by a revised one subsequently and despite opportunity given, the assessee failed to substantiate its claim with documentary 7 evidences. Therefore, the A.O. has rightly taken the value of closing stock @ Rs.1701/- per quintal as against Rs.1686/- shown by the assessee in the revised valuation sheet. He further submitted that the A.O. has correctly disapproved the claim of the assessee that as per guideline of stock valuation, interest cost is not to be added as part of the inventory, because as per the guidelines, all costs which have been incurred to bring the inventory in the present state has to be included in the valuation of closing stock. Further as per balance sheet of the assessee, the major item of current assets was inventory only. Therefore, all the costs incurred to bring the inventory at its present form including the finance cost has to be added while valuing the closing stock and the A.O. has rightly done so. He further submitted that the assessee did not take into account the interest expenses in the valuation of closing stock at all. Therefore, the A.O. has rightly held that when interest component was not included in the closing stock, the claim of the assessee for inclusion of the same in the opening stock has no leg to stand. The ld. C.I.T.(A) without properly appreciating the points raised by the A.O. in support of his computation of value of closing stock has erred in allowing the claim of assessee and the same should be quashed and the A.O.'s order on this issue be upheld.
5. The learned A/R appearing on behalf of the assessee, on the other hand, heavily relied on the order of the ld. C.I.T.(A) and reiterated the submissions made before him. He further submitted that while finalizing the assessment order for the year under appeal, the A.O. has overlooked the revised stock valuation sheet with explanation thereof filed during course of assessment proceedings, although specific request was made to consider the revised sheet. Moreover, the A.O. has added finance cost into the valuation of stock, which was against the prescribed Accounting Standard of ICAI and should not be considered as part of stock valuation. He further submitted that the assessee has been following the same method of accounting while valuing the closing stock in earlier as well as subsequent years and there has been no deviation from the working of the valuation of the closing stock done earlier as well in subsequent years. He further submitted that if the A.O. wanted to disturb the closing stock valuation of one year, then he has to value the opening stock on the same principles as adopted by 8 him for valuing the closing stock, which he did not do in the present case. He placed reliance on the following decisions :-
CIT vs. Ahmedabad New Cotton Mill Co. Ltd. [4 ITC 245 (PC)] CIT vs. Bengal Jute Mills Co. Ltd. [107 CTR 34 (Cal)] Radhe Shuam Agarwal & Co. [119 CTR 263 (MP)] K.G. Khosla & Co. (P) Ltd. [99 ITR 574 (Del)] British Paints India Ltd. vs. CIT [188 ITR 44 (SC)] The ld. A/R of the assessee, therefore, submitted that the ld. C.I.T.(A) has passed a detailed and justified order admitting the value of closing stock returned by the assessee, which was backed by audited accounts and according to guidelines prescribed by ICAI, which has consistently been following by the assessee. He, therefore, requested for upholding the order of the ld. C.I.T.(A) on this issue.
6. We have heard the rival submissions of the parties and carefully perused the orders of the authorities below. The dispute is whether the inventory valuation of closing stock reflected in the assessee's audited account was correct or whether the A.O. was justified in rejecting the same. The assessee also raised another issue to the effect that if the A.O. disturbs the closing stock, then he should have made corresponding adjustment to the value of opening stock simultaneously by adopting the same method of inventory valuation taken for closing stock. The total addition worked out by the A.O. of Rs.4,06,38,100/- was on two accounts, viz. -
(i) Total closing stock of sugar including Bliss Rs. 58,86,525
(ii) Interest & Finance charges Rs.3,47,51,575 Rs.4,06,38,100 It is not in dispute that the assessee follows consistent of method of accounting and its accounts are duly audited. On perusal of Schedule-14 of audited balance sheet, it is found that the value of work-in-progress of Rs.95,86,747.69 pertained to opening stock of previous year relevant to A.Y. 2004-05. The ld. C.I.T.(A), therefore, has rightly held that the said opening work-in-progress was held by the assessee on 1/4/2003 and not on 1/4/2004, which was the first day of previous year relevant to assessment year under consideration. He further found that all other facts and figures included in the valuation sheet filed earlier and in the subsequent revised valuation sheet were identical duly 9 extracted from the audited balance sheet. In our opinion, therefore, the A.O. was not justified in ignoring the revised inventory valuation sheet filed by the assessee alleging non-filing of any evidence, more so as stated above, when the figures were taken from the audited accounts of the assessee and in the first inventory valuation sheet the assessee took cost of work-in-progress as on 1.4.2003, which was incorrect. Further, the A.O. could not specifically point out any irregularity in the cost of production of sugar shown by the assessee in the year under appeal. Therefore, in our considered opinion, we find no infirmity in the order of the ld. C.I.T.(A) in accepting the cost of production of sugar per quintal as shown by the assessee and thereby rejecting the figure taken by the A.O., which was resulted in addition of Rs.58,86,525/-. Addition deleted by the ld.
C.I.T.(A) is, therefore, upheld.
6.1. Now coming to the other addition of Rs.3,47,51,575/- on account of inclusion of interest & finance charges in the value of inventory, the A.O. was of the opinion that interest & finance charges should be included. It was the claim of the assessee that as per consistent method of accounting and inventory valuation followed by it, interest & finance charges were never included as part of cost of manufacture. We find that the department has not disputed this method while framing assessments for earlier assessment years. It is a settled law that closing stock of one year becomes the opening stock of next year. Moreover, the method adopted by the assessee for valuing its stock at cost was as per AS-2 prescribed by ICAI and has also been certified by the auditor to be correct. Therefore, if closing stock is considered, the opening stock must also be considered. In our opinion, therefore, the ld. C.I.T.(A) has rightly held that by making addition of Rs.3,47,51,575/- only in the assessment year under appeal, i.e. A.Y. 2005- 06, the A.O. artificially had increased the business income of the assessee treating the inventory valuation as a source of income, which was incorrect. The ld. C.I.T.(A) has elaborated several clauses of AS-2 prescribed by ICAI and held that the A.O. erred in making addition of Rs.3,47,51,575/- to the total income of the assessee. Further, we are of the opinion that interest & finance charges will not form part of the manufacturing activity and thus there is no need to include the same in the closing stock. Therefore, we are in agreement with the conclusion arrived at by the ld. C.I.T.(A) in this regard, which 10 is upheld. Therefore, the total addition made by the A.O. of Rs.4,06,38,100/- made on account of under-valuation of closing stock stands deleted.
7. Ground No.2 of the Revenue's appeal reads as under :-
"2. Under the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the addition of Rs.17 lakh though there has been a clear violation of s.40A(3) of the I.T. Act."
8. The A.O. observed that the assessee had made payments of Rs.20,000/- or more in cash to various transporters, which were totalling to Rs.20,77,086/-. He, therefore, held that provisions of Sec. 40A(3) are attracted for such cash payments. He, accordingly, disallowed 20% of such cash payments which came to Rs.4,15,417/-.
9. The assessee contested the matter before the ld. C.I.T.(A) and in support of its claim relied on several case laws. The assessee also contended that the cash payments exceeding Rs.20,000/- falls under the exception provided in Rule 6DD(g) of I.T.Rules, as it stood at the relevant time. The ld. C.I.T.(A) after perusal of the record found that the impugned payments were made to the transporters and not to the producers of any product produced without the aid of power. Therefore, the said clause (g) of Rule 6DD of I.T. Rules does not apply to the nature of cash payments made by the assessee. He further found that out of the total cash expenses of Rs.20,77,086/-, expenses to the tune of Rs.3,77,086/- were towards administrative charges etc. and these expenses were not payments made to any transporter, as mentioned by the A.O. in his assessment order. In regard to the balance cash payments of Rs.17 lakhs [Rs.20,77,086 - Rs.3,77,086], the ld. C.I.T.(A) found that the same were paid by way of cash payment of Rs.20,000/- each. Referring to Sec. 40A(3) at the relevant period, he held that cash payments upto Rs.20,000/- do not fall within the purview of this section. Further, as held by the Hon'ble Orissa High Court in the case of CIT vs. Aloo Supply Co. [121 ITR 680], the statutory limit of Rs.20,000/- applies to payment made to a party at one time and not to the aggregate of the payments made to party in the course of the day. He, therefore, held that the cash payments totalling to Rs.17 lakhs are not disallowable u/s.40A(3) of the Act. The department is in appeal against such finding of the ld. C.I.T.(A).
10. We have heard the parties and perused the record. It is not disputed by the A.O. that each bill of the transporter was not more than Rs.20,000/-. He, therefore, presumed that such type of cash payment to the transporters was made with the sole purpose of 11 avoiding the application of Sec.40A(3) of the Act. Sec. 40A(3), as it stood at the relevant assessment year, reads as under :-
"(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the official Gazette in a sum exceeding twenty thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, twenty per cent of such expenditure shall not be allowed as a deduction."
On reading of the aforesaid section we are in agreement with the inference drawn by the ld. C.I.T.(A) who has stated that "the statutory limit of Rs.20,000/- applies to payment made to a party at one time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book". In that view of the matter, we are of the considered opinion that the ld. C.I.T.(A) has rightly held that the sum of Rs.17 lakhs is not disallowable u/s. 40A(3) of the Act, more so when the A.O. himself admitted that each payment did not exceed Rs.20,000/- at one time. This ground of the Revenue is, therefore, dismissed.
11. The last ground in the Revenue's appeal reads as under :
"3. On the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the addition being prior period expenditure of Rs.10,90,87,000/- on the ground of unenforceable liability which was snot the expenditure of the relevant assessment year."
12. The facts of the case, in brief are that the Uttar Pradesh Govt. had issued an order to enhance the sugar cane procurement price (statutory minimum price) to be paid by the sugar mills situated in the State. The said order was challenged in a Writ by the sugar mills of the State before the Hon'ble Allahabad High Court. The High Court stayed the operation of the said order of the State Government. Subsequently, their Lordships of Hon'ble Supreme Court in certain other matters already pending before them, vide their order dated 05.05.2004, upheld the power of the State Government to administer and fix the statutory minimum price for sugar cane procurement to be paid by the sugar mills. In accordance with the said decisions of the Hon'ble Supreme Court, the Hon'ble Allahabad High Court vacated the stay granted in that context. Consequently, the State Government, vide their fresh letters dated 12.10.2004 and 15.10.2004, citing the decision of the Hon'ble Supreme Court, directed the sugar mills 12 to make payment of sugar cane dues at the enhanced rate. In accordance with the said directions, the assessee made payment of Rs.10,90,87,000/- towards sugar cane dues, for the sugar cane procured during the crushing seasons 2002-03 and 2003-04 relevant to A.Y.s 2003-04 and 2004-05. The assessee has claimed such payment as expenditure during the year of payment, i.e., A.Y. 2005-06 stating the reason that the liability had crystallized only during this year.
13. The A.O. observed that the unit of the assessee-company, which started operations from F.Y. 1999-2000, is entitled for deduction u/s. 80-IB of the Act and claimed 100% deduction accordingly till A.Y. 2004-05. The deduction claimed by the assessee for A.Y. 2004-05 at Rs.8.91 crores was allowed by the department. The assessee wanted to defer this enhancement in the payment of sugar cane dues in the assessment year under appeal, i.e. A.Y. 2005-06, wherein the assessee-company is entitled for a deduction @ 30% only instead of 100% till last year. During the year under appeal, the assessee-company declared income of Rs.10.97 crores and after claiming a deduction of Rs.3.29 crores u/s. 80-IB, it offered income of Rs.7.68 crores. According to the A.O., this clearly indicates the reasons why the enhanced sugar cane dues for A.Ys 2003-04 & 2004-05 were not claimed as deduction in those years. According to him further, had the assessee charged these expenses in those years, the profit would have reduced by this amount, thereby consequently reducing deduction u/s.80-IB. Therefore, the intention behind this non-claiming of deduction in the earlier two years was to claim higher deduction for those assessment years. This fact has not been mentioned by the assessee in the tax audit report. He further held that as these expenses pertained to earlier years and every assessment year is a separate assessment year, the expenses of prior period cannot be allowed as a deduction in the current year. He, therefore, held that amount of Rs.767.95 lakhs would be allowable in A.Y. 2004-05 and thus chargeable to the P/L Account accordingly. These expenses are not allowable in A.Y. 2005-06 as the same are not related to this year. In this way, the A.O. added total sum of Rs.1097.87 lakhs to the total income of the assessee for the year under appeal.
1314. Before the ld. C.I.T.(A), the assessee submitted that the A.O. has based his observation on surmises, imaginations and without taking into consideration the fact that the enhanced payment order of the Hon'ble High Court was dated 5/10/2004 and thus this enhanced amount payable to the U.P. Govt. as per the order of the High Court, though relating to F.Ys 2002-03 & 2003-04, could not have been accounted for in the said two financial years. It was further submitted that unless the liability is ascertained and crystallized, that cannot be said to have accrued and there existed any enforceable liability. Since the amount is a crystallized liability, it is allowable in A.Y. 2005-06 when it was actually paid. In support of the contention, the assessee relied on several case laws which are found mentioned on page-27 of the C.I.T.'s order. After considering the submissions of the assessee and perusing the assessment order, the ld. C.I.T.(A) directed the A.O. to delete the addition of Rs.10,90,87,000/- by observing as under :-
"10.3. I have carefully perused the assessment order and the submissions of the A/R. The A.O. disallowed the sugar cane dues holding that the same was prior period expenses, relating to A.Ys 2003-04 and 2004-05, therefore, not allowable in the year under consideration.
10.4. It appears what influenced the A.O. to take this view is the fact that assessee's only manufacturing unit is eligible for deduction u/s. 80IB of the Act. Till A.Y. 2004- 05 its 100% profits were eligible for deduction under that section, whereas, for the year under consideration only 30% of its profits were eligible. That was, in A.O's view, reason for the assessee to defer its liability on account of sugar cane dues from A.Y. 2003-04 and 1004-05 to the assessment year under consideration. As per assessee's submissions, though the expenditure relates to A.Y. 2003-04 and 2004-05 but the same crystallized during the period relevant to A.Y. 2005-06.
..................
.....................
10.5. It is an established position of law by now, that if a liability is unenforceable for a particular year and the same crystallizes during a subsequent year, the same would be deductible in the year in which it crystallizes and become enforceable.
10.6. In the present case, the assessee had challenged the very fixation of statutory minimum price for sugar cane procurement by way of writ before Hon'ble. High Court and the said decision of the state government was stayed by the Hon'ble Court. The payment of sugar procurement price is not a statutory liability rather it is a contractual liability, therefore, the same remained unascertained and inchoate when the assessee disputed the same before the Hon'ble Court. It was only when the Hon'ble Supreme Court decided the issue that the matter reached finality and liability became enforceable.14
10.7. The action of the state administration in issuing fresh orders for payment of the enhanced sugar cane procurement price after the decision of the Hon'ble Apex Court that too without any direction as to levy of any interest/penalty for the non-payment during the intervening period, shows that the liability to pay the enhanced sugar cane dues crystallized and became real and enforceable during the period relevant to the assessment year under consideration. Therefore, the same needs to be allowed as expenditure of the period under consideration. An assessee's otherwise legally allowable claim cannot be denied only because it was resulting in a collateral benefit to the assessee.
10.8. In the light of the above discussion the A.O. is directed to delete the addition of Rs.10,90,87,000/-."
15. At the time of hearing before us, the Ld. Departmental Representative relied on the order of the A.O. He further submitted that the assessee maintains books of account on mercantile system of accounting. Therefore, the assessee is entitled to deduct from the profits and gains its business liability which arose during the relevant previous year and that liability did not cease to be a liability because the assessee had taken proceedings before the Court for getting it reduced. He relied on the following decisions in support of the contention that the A.O. has rightly disallowed the expenses related to earlier years in the year under consideration :-
289 ITR 167 (Ker) - CIT vs. Southern Cables & Engineering Works. 312 ITR 254 (SC) - CIT vs. Woodward Governor India (P) Ltd.
216 ITR 602 (AP) - CIT vs. K.C.P. Ltd.
201 ITR 707 (SC) - U.P.State Agro Industrial Corpn. vs. Addl.CIT 221 ITR 797 (P&H)- CIT vs. Mangar Ram Hazarilal 244 ITR 764 (SC) - CIT vs. United Province Electric Supply Co.
16. The ld. A/R of the assessee, on the other hand, relied on the order of the ld. C.I.T.(A) and reiterated the submissions made before him. He placed reliance on the following decisions in support of the conclusion arrived at by the ld. C.I.T.(A) :-
239 ITR 393 (Bom) - CIT vs. Sharda Sugar Inds. Ltd.
53 ITR 134 (SC) - CIT vs. Swadeshi Cotton & Flour Mills Pvt. Ltd. 213 ITR 523 (Guj) - Saurashtra Cement & Chemical Inds. Ltd. vs. CIT 183 ITR 113 (Kar) - CIT vs. Mysore Sugar Co. Ltd.
17. We have heard the parties, perused the orders of the authorities below and carefully gone through the judicial pronouncements cited by either side. The assessee's profits & gains have been computed according to the mercantile system of accounting. The issue before us is - in what year did the liability of payment of sugar cane 15 procurement price arise according to the mercantile system of accounting, whether it was in A.Ys. 2003-04 & 2004-05 or in A.Y. 2005-06 ? The mercantile system of accounting was explained by the Hon'ble Supreme Court in the case of Keshav Mills Ltd. vs. CIT [23 ITR 230] as under :-
"That system brings into credit what is due, immediately it becomes legally due and before it is actually received, and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed."
In this context we may refer to the decision of Hon'ble Supreme Court in the case of Swadeshi Cotton & Flour Mills Pvt. Ltd. (supra), wherein the facts were that the assessee for A.Y. 1950-51 (accounting year calendar year 1949) claimed that u/s. 10(2)(x) of the Act it was entitled to an allowance in respect of Rs.1,08,325/- which it had paid as bonus for the year 1947 in the calendar year 1949, as a result of the award of the Industrial Tribunal dated 13.1.1949. The claim of the assessee was not accepted by the department. The Tribunal held that it was a liability relating to an earlier year and not the year 1949 and hence disallowed the assessee's claim. Reference was made to Hon'ble Madhya Pradesh High Court on the following question :-
"Whether on the facts and in the circumstances of the case the assessee is entitled to claim a deduction of bonus of Rs.1,08,325 relating to the calendar year 1947 in the asst. yr. 1950-51 ?"
The Hon'ble High Court answered the question in the affirmative. The matter came before the Hon'ble Supreme Court and their Lordships held as under :-
"In our opinion, it is only when the claim to profit bonus, if made, is settled amicably or by industrial adjudication that a liability is incurred by the employer, who follows the mercantile system of accounting, within s. 10(2)(x), r/w s. 10(5) of the Act. On the facts of this case, it is clear that it was only in 1949 that the claim to profit bonus was settled by an award of the industrial Tribunal. Therefore, the only year the liability can be properly attributed to is 1949, and hence we are of the opinion that the High Court was right in answering the question in favour of the assessee."
17.1. Further in the case of Saurashtra Cement & Chemical Inds. Ltd. vs. CIT (supra), the Hon'ble Gujarat High Court held as under :-
"Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of 16 maintaining accounts on the mercantile basis. In each case where the accounts are maintained on mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during the previous year so as to be required to be adjusted in the books of accounts of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years cannot be disallowed as deduction merely on the basis the accounts are maintained on mercantile basis and that it related to a transaction of the previous year."
18. The above decisions of Hon'ble Supreme Court and Gujarat High Court squarely apply to the case of the assessee. The ld. C.I.T.(A) has deleted the addition of Rs.10,90,87,000/- on account of prior period expenses. As rightly held by the ld. C.I.T.(A), it is established position of law that if a liability is unenforceable for a particular year and the same crystallizes during a subsequent year, the same would be deductible in the year in which it crystallizes and becomes enforceable. In this case, as stated above, the assessee challenged the very fixation of statutory minimum price for sugar cane procurement by the State Govt. before the High Court, which was stayed by the High Court. Therefore, due to such stay on operation of State Govt. order, the liability of the assessee remained unascertained and inchoate and it was only after the order of Hon'ble Supreme Court upholding the power of State Govt. to administer and fix the statutory minimum price for sugar cane procurement that the matter reached its finality and the liability of the assessee became enforceable. The actual liability was not ascertained and known to the assessee when the High Court stayed the operation of the Govt. order increasing the sugar cane procurement price. The State Govt. acting on such final order of Hon'ble Court issued fresh letters dated 12/10/2004 & 15/10/2004 directing the assessee to make payment of sugar cane dues at the enhanced rate and that too without levying any interest/penalty for such non-payment during the intervening period. In our considered opinion, therefore, the assessee's liability to pay sugar cane dues at enhanced rates crystallized and became enforceable during the assessment year under consideration when the State Govt. issued fresh letters directing the assessee to make payments in terms of order of Hon'ble Court and the same is allowable as expenditure relating to A.Y. 2005-06.
1719. The case laws relied upon by the Ld. Departmental Representative are distinguishable on facts and hence the same will not help the department. In the case of CIT vs. Southern Cables & Engineering Works (supra) it was held that the liability did not cease to be a liability because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped off. But in the case of the assessee, the Hon'ble Allahabad High Court stayed the operation of raising higher procurement price of sugar cane by the State Govt. and only after the order of Hon'ble Apex Court, the High Court vacated its earlier stay order and acting on such order, the Govt. issued fresh letters asking the assessee to pay the procurement price and the assessee honoured the said requirement of State Govt.
19.1. In the case of CIT vs. Woodward Governor India (P) Ltd. (supra), it was held that the loss suffered by the assessee in respect of a revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable u/s. 37(1) in the year of accrual. Therefore, the decision given in this case is on a different context than that of the case of the assessee.
19.2. In the case of CIT vs. K.C.P. Ltd. (supra), relied on by the ld. D.R., the assessee collected excess price of sugar over and above that fixed by the Govt. Litigation as regards price was pending before the Supreme Court. The Court allowed the excess price to be recoverable subject to furnishing of bank guarantee and held that such excess price is chargeable as income in the relevant year. Here also the assessee had already collected excess price over the price fixed by the Govt. there was no stay on collection of excess price of sugar although litigation was pending and there was no fresh order from the Govt. for recovery of the excess price collected by the assessee. Therefore, the facts before the Hon'ble Andhra Pradesh High Court were different than those of the present assessee. The other cases relied upon by the Ld. D.R. are also distinguishable on facts and hence the ratio of the said decisions are not applicable to the facts and circumstances of the case before us.
20. Considering the totality of the facts and circumstances of the case and respectfully following the aforesaid decisions in the cases of Swadeshi Cotton & Flour 18 Mills Pvt. Ltd. (supra) and Saurashtra Cement & Chemical Inds. Ltd. (supra), we hold that the ld. C.I.T.(A) has rightly deleted the addition of Rs.10,90,87,000/- being prior period expenditure, which is upheld. This ground of the Revenue, therefore, fails.
21. In the result, the appeal of the Revenue is dismissed.
यह आदे श खुले Ûयायालय मɅ सुनाया गया है This order is pronounced in open Court on 30.6.10.
Sd/- Sd/-
[D.K. Tyagi] [C.D. Rao]
JUDICIAL MEMBER ACCOUNTANT MEMBER
(तारȣख)
तारȣख) Date: 30-06-2010
आदे श कȧ ूितिलǒप अमेǒषतः-
Copy of the order forwarded to:
1. अपीलाथȸ / The Appellant : ITO, Ward-12(3), Kolkata.
2 ू×यथȸ / The Respondent : M/s. J.H.V. Sugar Ltd., Flat No.6, 33/1, S.N.Banerjee
Road, Kolkata-700 013.
3. आयकर किमशनर (अपील) : The CIT(A)-XII, Kolkata.
4. आयकर किमशनर/The CIT, Kol-
4. वभािगय ूितनीधी / DR, ITAT, Kolkata Benches, Kolkata
5. Guard file.
स×याǒपत ूित/True Copy, आदे शानुसार/ By order,
(dkp)
उप पंजीकार/Deputy Registrar.
19