Income Tax Appellate Tribunal - Pune
Nasik Breeding & Research Farm Ltd. vs Deputy Commissioner Of Income-Tax on 28 February, 2000
Equivalent citations: [2001]77ITD581(PUNE)
ORDER
Chhibber, Accountant Member
1. The assessees are companies engaged in the business of poultry farming, both being hatcheries. Nasik Breeding and Research Farm Ltd. imports grand parents in the form of one-day old chicks, rears them, later on from these grand parents, they produce the parents which are sold in the form of one-day old chicks to Nicholas Breeders Ltd. which, in turn, rears these birds and from them the broilers are produced which are sold in the market by Nicholas Breeders Ltd. as one-day old chicks. Thus, both the companies purchase "one day old chicks" which on reaching a specific age lay eggs. These eggs are hatched to obtain "one day old chicks" which are sold. When the "Grand parent/Parent birds" become unproductive, they are sold away as culls in both the cases.
2. The common dispute raised in these four appeals is that the learned authorities below are not justified in rejecting the method of accounting followed by the assessees.
3. The entire activity of the Companies has been summarised by the assessees as follows :
(a) "One day old" birds are purchased.
(b) These birds are housed in specially designed poultry houses.
(c) Appropriate quantity and quality of feed and water is given to them.
(d) Medicines and vaccines are given for maintenance of their general health.
(e) When the birds grow upto around 25 weeks, they start 'laying' at which time they are shifted to different 'growing house'.
(f) The laying period' is generally a period of around 43 to 45 weeks which is their productive life when they lay eggs.
(g) These eggs are hatched to produce "one day old chicks" which are sold by the company.
(h) Once the productive life of the birds is over, they become useless from the angle of production and are sold as "Culled" birds.
(i) The average production life of a bird is about 72 weeks roughly.
4. The accounting practice followed by the assessee companies since the assessment year 1991-92 onwards is as under :
A) The Grand Parent/Parent birds are treated as a part of "Stock in trade" i.e., a part of current assets.
(B) The purchase cost of such Birds is charged to profit and loss account alongwith the cost on feed, medicines etc. incurred on such birds during their growing stage as well as post growing stage.
(C) These birds in stock on the last date of accounting year are treated as a part of "closing stock" under the head "Current assets".
(D) These birds start laying eggs around 25th week. The day on which they start laying eggs is called the point of lay and all the expenses on these birds in the form of feed, medicine and portion of overheads are apportioned to their cost.
Birds in Laying Stage : These birds in the closing stock are valued at depleted cost. Depleted cost means the total growing cost (i.e., cost upto age of 25 weeks) as proportionately reduced by productive life. This is because after the point of lay as the bird grows older and older, its value in the market goes down and accordingly such birds in the closing stock are valued at a depleted price as compared to their market price at the point of lay (POL). The depletion in the price starts from the day of POL and it is naturally maximum around 70-72 weeks when its productivity stops. This is the reason why the birds in laying stage are valued as per this method. In this method, the productive life of the birds is taken at 72 weeks. The cost of the birds including the feed, medicines, overheads etc. which is capitalised upto the point of lay as reduced by the average market price of a culled bird is depleted/depreciated over the productive life span of a bird starting from the POL i.e., around 25th week and ending on 72nd week. Thus, the above cost if amortised on a weekly basis. Page Nos. 293-297 is the stock valuation made in the case of Nasik Breeding & Research Farm Ltd. and page Nos. 298-304 is the stock valuation for Nicholas Ltd. with a few sample examples.
Non-productive Grand Parent birds : The same are valued at market price.
5. The Assessing Officer rejected the method of accounting followed by the assessee and treated the birds as a part of 'Fixed asset' and as against the closing stock/inventory as treated by the assessees. The above method of valuing the stock was accepted by the Assessing Officer for the assessment years 1991-92, 1992-93 and 1993-94. For the assessment years 1994-95 and 1995-96 under appeal, the Assessing Officer held that the valuation by taking the birds as stock-in-trade was not correct. As a result of this finding, following adjustments were made by the Assessing Officer :
(a) The value of opening stock of grand parent breeders debited to profit and loss account was disallowed i.e., added to income.
(b) The purchase price of grand parent/parent breeders debited to profit and loss account was also disallowed i.e., added to income.
(c) The feed cost during growing stage alongwith estimated overhead cost during growing stage was disallowed.
(d) The corresponding relief was reduction of value of closing stock of breeders from profit alongwith reduction of profit by amount of sale of parent breeders which was initially credited to profit and loss account alongwith granting deduction under section 36(1)(vi) was granted by the Assessing Officer.
6. Dr. Pathak, the learned counsel for the assessees, submitted that the assessees' method was accepted in the past years by the Assessing Officer. In this connection, he drew our attention to pages 308 & 309 of the paper book. He further submitted that even in the other cases of this group the same method as followed by the assessees has been accepted.
The learned counsel further submitted that as regards poultry/hatchery, it is to be noted that the life of a bird (which has been wrongly treated as an animal by the Assessing Officer) is very small, i.e., 75 weeks roughly one and half years and out of which the productive life is about 40-45 weeks only and, therefore, the assessees are justified in treating it as stock-in-trade and not capital asset. According to the learned counsel, unlike animals in other businesses, the assessees keep on selling the birds every year in a very large number. In this connection, he drew our attention to pages 310 and 311 of the paper book and submitted that the statistics on these pages indicate that the assessees have sold the birds in thousands and lakhs in the present two cases. The sale figures are higher in the case of Nicholas Breeders (I) Ltd. because the birds in productivity stage are also sold and it is not a case of sale of only culled birds. In the case of Nasik Breeding & Research Farm Ltd. also the sale is of thousands of birds because the assessce is not allowed to sell the birds in the productive stage by the foreign company from which they are imported. This volume of sale itself is an indicator of the fact that these birds are held as stock-in-trade and not as capital assets.
7. The learned counsel drew our attention to BCA Society publication on livestock accounting in poultry industry (pages 268 to 290 of the paper book). In this publication, at a number of places it has been observed that although animals in general should be treated as capital assets, in poultry industry, since the productive life is very short, the birds are considered as stock-in-trade. He particularly drew our attention to para 3.3 of the Accounting Principles at page 286 of the paper book which reads as under :
"3.3 : However, one of the peculiarities of poultry is its short productive life of 52 weeks. Since this productive life is so short, there is no benefit enduring for a substantial period. On account of this factor, it is also permissible to treat poultry held for the purpose of breeding purposes as inventory. In practice also, as a matter of practical convenience, most hatcheries treat poultry held for breeding purposes as stock-in-trade."
He also drew our attention to page 291 of paper book which contains extracts from statement of position accounting standard of the American Institute of Certified Public Accountants and submitted that it is clearly stated in para 58 that the direct and indirect cost of raising live-stock needs to be capitalised until it reaches maturity and thereafter it should be depreciated on the basis of their expected productive life. Secondly, it is further stated that the stock should be valued at cost or market value, whichever is less (para 62 on page 292 of the paper book). Accordingly, the learned counsel submitted that the method followed by the assessees in treating the birds as stock-in-trade and also the method of valuation of stock are confirmed by the accountancy principles. The learned counsel relied upon the decision of this Bench in the case of Sandvik Asia Ltd. v. Dy. CIT[ 1999] 69 ITD 59 where it was observed that LIFO method is a valid method of valuation of stock and if the assessee had followed this method, the ITO cannot compel the assessee to follow FIFO method. Thus, according to the learned counsel, the principle is that if the assessee had followed a valid method of accounting, the ITO cannot thrust upon the assessee some other method. In the cases of the assessees, the assessees had followed a valid method as per the principle of accountancy and the Assessing Officer cannot thrust upon a different method. In support of his contentions, he further relied upon the following decisions :
(1) HA. Shah & Co. v. CIT [1956] 30 ITR 618 (Bom.) (2) Radhasoami Satsang v. CIF [1992] 193 ITR 321 (SC) (3) United Commercial Bank v. CIT [1999] 240 ITR 355 (SC) (4) CITv. Maharashtra Electrosmetl Ltd [1995] 214 ITR 489 (Bora.).
8. Alternatively, the learned counsel argued that if the Assessing Officer's action of treating the birds as capital assets is upheld, in that case, the correct legal consequences must follow and in that connection, the Assessing Officer should be directed to compute the income as per the Note on pages 312 and 313 of the paper book. One major impact would be that the entire expenses on feed and medicine would be allowed to the assessees as a deduction and only the purchase price will be taken to be the cost.
9. Shri Naresh Kumar, the learned senior D.R. strongly supported the orders of the authorities below. According to him, in these cases, the intention of the assessees was not to sell the birds, but the one-day old chicks and hence, the birds cannot be treated as stock-in-trade. He relied on the dictionary meaning of the word 'stock-in-trade' as given in Webster's Dictionary as follows :
"Stock in trade: 1. the equipment necessary to or used in the conduct of a trade or business; as a: the goods kept for sale by a shopkeeper b: the fittings and appliances of a workman c: the aggregate of things necessary to carry on a business 2 : something held to resemble the standard equipment of a tradesman or business (the light and frivolous charm which was her stage stock-in-trade - S.H. Adams) (its civic beauty, its stock-in-trade is being ruined by parked cars - Janet Planner) (this motive had been a stock-in-trade of medieval art - Verena Trade)".
The learned senior D.R. further stated that the life of a bird may be one of the criteria for deciding this issue, but primarily the assessee keeps the birds not for sale, but for the purpose of hatching and it is the one-day old chicks which are sold, which constitute the stock-in-trade and not the parent birds. As the assessee does not purchase the birds with a view to sell, they cannot be considered as the stock-in-trade. According to the learned senior D.R. the purpose for which the assessees buy the birds has to be given an importance for deciding this issue. In support of his contentions, he relied upon the following decisions :
(1) H. Mohmed & Co. v. CIT[1977] 107 ITR 637 at 644/645 (Guj.), (2) Tripty Drinks (P.) Ltd. v. C/r[1978] 112 ITR 721 (Ori.).
10. Lastly, the learned senior D.R. submitted that pages 268 to 290 of the assessees' paper book (accounting principles as referred supra) are only guidelines for the accounting system and they are not the accounting principles and cannot override the provisions of law. In support of this contention, he relied upon the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172.
11. In rejoinder to the argument of the learned senior D.R., Dr. Pathak submitted that the assessees did purchase the birds for sale only. This is clear from the number of birds sold during the year. It is only that the assessees by getting the eggs have ensured that the maximum advantage has been taken out of such birds by realising the gains out of hatched eggs and the culled birds. Otherwise, the sale of birds in both the cases would not have been in such large numbers. He drew a similarity vis-a-vis the crop of sugarcane or Jowar. A farmer is having a business of selling sugarcane or jowar, but that does not mean that a customer will insist on selling the sugarcane even though it has not grown full size. A farmer will sell the same only when it has grown fully and he realises the best price out of it. Similarly, a jowar crop will be sold only after the 'Jowar bhutta' is grown properly in size. In this case also, the farmer raises the crop for getting this 'Bhutta' which is the primary intention but sale of Jowar plant after the bhutta' is taken out, still constitutes the sale of stock-in-trade. This is because this plant is short-lived and it does not give crops for years. In these cases also, on similar lines, the birds will have to be considered as stock-in-trade. It is the frequency of sale and the intention of sale which are relevant factors to be considered in this regard.
12. Secondly, on this issue, the learned counsel submitted that any businessman will always try to take advantage by realising maximum price in his business. For example, a land dealer may hold the plots for sometime if he is expecting development around that area and sell the same after sometime, but just because he is postponing the same of the plots, it does not imply that it is not his business. Such postponement is because he wants to realise maximum price out of the stock. Similarly, in these cases also, the assessees held the birds as stock-in-trade but sold them only when they realised maximum price out of such stock. The learned counsel further tried to distinguish the cases relied upon by the learned senior D.R. and submitted that the facts in those cases were distinguishable from the facts of the cases of these assessees.
13. We have considered the rival submissions and perused the facts on record. It is a well accepted principle that it is open to an assessee to decide/adopt a regular method of accounting. If such a method is an acceptable method of accounting, it will follow that the profits can be properly ascertained therefrom. In the cases before us, the assessees have followed consistently since assessment year 1991-92 upto the years under appeal and also for the subsequent years a method, which is one of the accepted accounting principles and practices sanctified by usage and in line with BCA Society Publication on livestock accounting in poultry industiy. In this publication, at a number of places it is observed that although animals in general should be treated as capital assets in poultry industry, since the productive life is very short, the birds are considered as stock-in-trade. This method has been accepted by the Assessing Officer for the past three assessment years, i.e., assessment years 1991-92, 1992-93 and 1993-94. It is noted that on the same set of facts, the authorities below have tried to disturb the method of accounting regularly being followed by the assessees in the past. We find no justification for the same. In H.A. Shah & Co. 'scase (supra), the Hon'ble Supreme Court has held as under :
"As a general rule the principle of res judicata is not applicable to decisions of Income-tax Authorities. An assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the department in a subsequent year. But this rule is subject to limitations, for there should be finality and certainty in all litigations including litigation arising out of the I.T. Act and an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision, and if the Tribunal giving the earlier decision has taken into consideration all material evidence. A Tribunal like the Appellate Tribunal, should be extremely slow to depart from a finding given by an earlier Tribunal.
There is also a further limitation, namely, that the effect of revising a decision in a subsequent year should not lead to injustice and the court must always be anxious to avoid injustice to the assessee. For instance, if the court is satisfied that by depriving the assessee of his rights under the later decision, in an earlier year, the assessee lost an important advantage or loss some benefit which he could have got under the I.T. Act, then the Court may take the view that departing from the earlier decisions leads to injustice or denial of justice and the Court may prevent an Income-tax Authority from doing something which would be unjust and inequitable."
14. In the case of CIT v. U.P. State Industrial Development Corpn. [1997] 225 ITR 703, the Hon'ble Supreme Court has held as under :
"In order to determine the question of taxability, well settled legal principles as \vell as principles of accountancy have to be taken into account. It is a well accepted proposition that for the purpose of ascertaining profits and gains, the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes."
In the case of Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802, the Hon'ble Supreme Court has reiterated the same principle as enunciated in the case of U.P. State Industrial Development Corpn. (supra).
15. In the case of United Commercial Batik (supra), the Hon'ble Supreme Court has held that "A taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts, and for that purpose, to value stock-in-trade either at cost or market price." The Hon'ble Supreme Court further held that "A method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation" [Emphasis supplied]. The Hon'ble Supreme Court concluded that the method of accounting being followed by the said Bank consistently and regularly for the past so many years could not be disturbed by the Assessing Officer.
16. In view of the above discussion, we hold that the authorities below are not justified in disturbing the method of accounting, i.e., treating the birds as stock-in-trade which the assessees have been consistently following and which in the three earlier assessment years the Assessing Officer had approved/accepted this regular method of accounting.
17. One of the star arguments of the learned senior D.R. was that the method of accounting should not violate the provisions of charging section and for this purpose, he relied upon the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). This decision of the Hon'ble Apex Court in nowhere falls foul of the accounting principles which have found acceptance in several cases. Here in this case, the business was not started, yet the company earned income by way of interest from the available surplus fund. Accounting practice is such that when the project is in construction stage, interest should be set off against the capital cost of the project. However, the Institute's guidelines of pre-construction accounting clearly state that even that incqme earned during the construction period is to be set off against the project cost yet in the profit and loss account tax provision is required to be made. Further, there is a specific provision which charges such income under section 56. Obviously, therefore, here the accounting principle fractures specific provision of section 56 and, therefore, the Court ruled that such interest income is liable to be taxed in this context. Here, it is noteworthy that the Hon'ble Supreme Court refers to the observations of their Lordships in B.S. C. Footwear Ltd v. Ridgway (Inspector of Taxes)[l970] 77 ITR 857 (CA) as follows :
"In the case of B.S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes) [1970] 77 ITR 857, 860 (CA), Russell, L.J. white rejecting an argument based on well-settled accountancy practice, pointed out that the income-tax law does not march step by step in the divergent footprints of the accountancy profession."
Thus, the reliance placed on the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) by the learned senior D.R. is mis-placed because in that case there was a conflict between accountancy principles and the taxation provisions and, therefore, the Hon'ble Supreme Court held that accountancy principles cannot override the taxation principles. But in the cases of the assessees before us, the Revenue has not proved that under the taxation principles the system followed by the assessees was wrong. On the contrary, as pointed out above, in the past three years and in the cases of other group concerns of the assessees, the department has accepted the assessees' method.
18. The other cases relied upon by the learned senior D.R. are also distinguishable on facts. In the case of H. Mohmed & Co. (supra), the assessee was running the business of giving cars on hire and the Hon'ble Gujarat High Court held that the cars did not constitute stock-in-trade. Obviously that decision is not applicable, because cars were used for hire for a large period of years while in the cases before us the birds were sold within about 75 weeks which is about one and half years and hence the frequency of such sales and also the duration for which a bird is being made use of for hatching (which period is only of 40 to 45 weeks) clearly indicates that they constitute the stock-in-trade and the above case law is not applicable on the facts of the cases. Similarly in the case of Tripty Drinks (P.) Ltd (supra), the assessee was selling soft drinks and the bottles were used as plant, ie., for bottling the drinks, so the intention was to sell the drinks and not the bottles and, therefore, they were held as plant. In the cases before us, it has been shown that the assessees had sold enough number of birds (i.e., in thousands or lakhs) which factor itself indicates that the intention was to sell the birds also. Accordingly, the analogy of a soft drink bottle is not applicable to the cases of the assessees.
19. In the light of the above discussion, we hold that the authorities below are not justified in disturbing the method of accounting, i.e., treating the birds as stock-in-trade by the assessees. The Assessing Officer is directed to accept the accounting principles followed by the assessees and consequently, the additions made on these accounts will stand deleted.
20. The second common ground is that the learned authorities below are not justified in holding that provisions of section 36(1)(vi) are applicable to thecases of the assessees. This ground is anaturalcorollary to the above ground, because the Assessing" Officer has treated the birds as animals and has applied the provisions of section 36(1)(vi). The provisions of section 36(1)(vi) are applicable to 'animals' held as 'capital assets' which we have held above is not the position in these cases. Accordingly, we hold that provisions of section 36(1)(vi) are not applicable to these cases and that the entire method of accounting is acceptable as correct method of accounting. This ground accordingly succeeds.
21. The next common ground raised in all these appeals relates to disallowance of deduction under section 80-I. It is common contention of both the sides that the issue stands covered against the assessees and in favour of the Revenue by the judgment of the Hon'ble Supreme Court in the case of CIT v. Venkateswara Hatcheries (P.) Ltd. [1999] 237 ITR 174. Respectfully following the aforesaid judgment of the Hon'ble Supreme Court, we decline to interfere and dismiss this common ground in all the four appeals.
22. In IT Appeal No. 1203/Pune of 1997 relating to assessment year 1994-95 -Nasik Breeding & Research Farm Ltd, the appeal was decided by the CIT(A) ex parts and the first ground raised by the assessee reads as under :
"The appellant submits that the ld. CIT(A) has erred in passing the order ex parte by sustaining the disallowances and additions made by the Assessing Officer. The appellant therefore prays that the said order should be set aside and case should be heard afresh."
At the time of hearing, this ground was not pressed by the learned counsel. Accordingly, the same is dismissed.
23. In the case of Nicholas Breeders (India) Ltd. [IT Appeal No. 398 (Pune) of 1998] relating to assessment year 1994-95, ground No. 5 reads as under :
'The appellant submits that the Hon'ble CIT(A) has erred in sustaining the ad hoc disallowance of Rs. 15,000 and Rs. 25,000 out of telephones and vehicles expenses respectively."
It has been submitted that the said expenditure was incurred wholly and exclusively for the purposes of business and ought to have been allowed in full.
24. After hearing both the parties, we hold that there is no justification for the impugned disallowances, because this is the case of a public limited company and no disallowance can be made in view of the decision of the Madras Bench of the Tribunal in ITO v. Ashoka Betelnut Co. (P.) Ltd. [1984] 10 ITD 788 (TM), decision of the Delhi Bench 'E' of the Tribunal in Perfect Pac Ltd v. IAC [1993] 46 TTJ (Delhi) 438 and the decision of Pune Bench in the case of Eagle Flask (P.) Ltd [IT Appeal No. 173 (Pune) of 1990] relating to assessment year 1987-88. This ground accordingly succeeds and the disallowances of Rs. 15,000 and Rs. 25,000 are deleted.
Additional ground :
25. In the case of Nicholas Breeders (India) Ltd (supra) ITAs No. 398/PN/ 98 and 853/PN/98 relating to assessment years 1994-95 and 1995-96, following additional ground has been raised :
"On the facts and in the law, the ld. CIT(A), Nashik erred in confirming the ad hoc disallowance of Rs. 86,850 (Assessment year 1994-95), Rs. 87,835 (Assessment year 1995-96) on account of earlier year expenses and Rs. 89,922 (Assessment year 1994-95), Rs. 60,717 (Assessment year 1995-96) on account of entertainment expenses."
26. As regards the disallowance of earlier year expenses, it is noted that no such ground was raised before the CIT(A) and accordingly this ground does not arise out of the order of the CIT(A). No legal issue is involved and the addition is based on the facts of the case. Accordingly, to this extent, the additional ground is not admitted.
27. As regards the disallowance on account of entertainment expenses, it was submitted by the learned counsel that a direction may be given to the Assessing Officer to recompute the disallowances on account of entertainment expenses consequent upon our finding given on the main ground. We accept this contention of the learned counsel and direct the Assessing Officer to recompute the disallowance on account of entertainment expenditure and give consequential relief which may become due to the assessee.
28. In the result, the appeals are allowed in part.