Income Tax Appellate Tribunal - Jabalpur
V.N. Dubey vs Deputy Commissioner Of Income-Tax. ... on 22 October, 1996
ORDER
P. Mohanarajan, J.M.
1. ITA No. 357/Jab/1991 is by the assessee against order of the learned CIT dt. 28th March, 1991, passed under s. 263 of the IT Act, 1961.
2. In the meantime during the pendency of the above appeal, the AO had referred the assessment as directed by the learned CIT by the order under s. 263 of the IT Act. Aggrieved by the same, the assessee moved the first appellate authority, where he was successful. Hence, the Revenue is in appeal before us in ITA No. 10/Jab/1994 against order of the learned CIT(A), dt. 8th October, 1993. The cross-objection is by the assessee in this appeal filed by the Revenue.
3. It is seen from the records of these appeals that the issues involved are one and the same. We have heard the learned Departmental Representative and the authorised representative of the assessee. Let us first consider the appeal filed by the Revenue in ITA No. 10/Jab/1994.
4. The facts of the case are as follows :
The assessee is carrying on trade in the name and style of Phoenix Poultry in which he is producing chicks for the purpose of sale. For hatching chick, the assessee does the following :
I. (1) Purchase in one day old chick (known as parental flock).
(2) Rearing them under the prescribed hygienic conditions for six months. (3) Collecting eggs laid by such parental flock. Thereafter, the eggs lay undergo the following process :
II. (1) Eggs are sorted, cleaned and fumigated.
(2) Such eggs are placed in refrigerator for three days.
(3) Thereafter, the eggs are transferred to incubator, an automatic machine, which keeps the eggs rotating and keeps for 18 days at the temperature of 100 degree F with 86 degree of humidity.
(4) After the successful compilation of the aforesaid process the eggs are transferred to keep in hatches for three days by maintaining the temperature at 97.5F.
(5) Thereafter, the final production emerges as chicks, known as commercial flock intended for sale. The assessee purchased the parental flock @ Rs. 47 each in case of 'layer chick' and at Rs. 40 each in case of broiler chicks. Further, the commercial flock produced in the hatchery is sold @ Rs. 6.20 each of the layer chick, Rs. 4.40 each of the broiler chick and at 0.15 each of cockerel chick (sale of layers).
5. The AO at the time of assessment proceedings, added the valuation of parental flock, the eggs kept in incubator and hatcher and the eggs laid by the parental flocks in the valuation of closing stock as stock-in-trade. He had also included and added the contribution to PIPC paid by the assessee. The AO did not accept the contention of the assessee and completed the assessment.
6. The assessee carried the matter before the learned CIT(A), Jabalpur, who had accepted the contention of the assessee and deleted the amounts as claimed by the assessee in this issue. Against this order, the Revenue is in appeal before us.
7. The learned Departmental Representative relied on the assessment order and submitted that the parental flocks are stock-in-trade and, therefore, the valuation should be considered to work out the profits. It was further argued that the Institute of Chartered Accountants of India has suggested two methods for accounting for the value of parental flock as on the last day of the accounting year. According to the learned Departmental Representative these methods are defective. Regarding the hatching of eggs in the incubator, hatcher and in cold storage, it was submitted that though they may not have market value as on the last day of accounting year but their cost should be considered to work out the profit. The learned Departmental Representative relied on the decision of the Supreme Court in the case of Chainrup Sampatram vs. CIT (1953) 24 ITR 281 (SC) and CIT vs. British Paints (I) Ltd. (1991) 188 ITR 44 (SC).
8. On the other hand, the learned counsel for the assessee relied on the order of the learned CIT(A) and submitted that the parental flocks are not purchased for the purpose of sale, but for obtaining eggs from them which are subsequently processed for producing chicks, which are sold in market. It was submitted that the stock-in-trade is a commodity which is bought and sold. Whereas, the parental flock purchased by the assessee is not a stock-in-trade. It was also shown by him that the restriction imposed on the assessee for the disposal of the parental flock in the agreement with the seller of the parental flock. He relied on the decision of Gujarat High Court in the case of H. Mohd. & Co. vs. CIT (1977) 107 ITR 637 (Guj). It was also further argued by the learned counsel for the assessee that the parental flocks are purchased as a part of working expenses incurred in the process of earning of profit and, therefore, the purchase of parental flock is a routine revenue expenses of the assessee and relied on the following decisions of the apex Court :
(1) Bombay Steamship Navigation Co. (P) Ltd. vs. CIT (1965) 56 ITR 52 (SC);
(2) Empire Jute Co. vs. CIT (1980) 124 ITR 1 (SC);
(3) CIT vs. Associated Cement Co. Ltd. (1988) 172 ITR 257 (SC); and (4) Alembic Chemicals Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC).
It was further submitted that in the IT Act, no guidelines have been prescribed for accounting for the value of the parental flock. Therefore, the methods suggested by the Institute of Chartered Accountants of India have to be applied. Accordingly, the second method suggested in the monograph has been followed.
9. Regarding the valuation of hatching eggs in incubator, hatcher and in cold storage, it is submitted that the stock-in-trade is to be valued at cost or market value (as on last day of accounting year) whichever is less. The moment the eggs are placed in processing, it has no market value and, accordingly, the valuation shown by the assessee as on the last day of the accounting year at nil value has to be accepted. He also further submitted that the provisions of s. 145 of IT Act has no application in the case of the assessee for including the value of parental flock and the eggs at the process as the account followed is a well-recognised method.
10. We have considered the arguments of both sides and perused the records of the case. The assessee had filed compilation of documents and the relevant decisions which are certified as 'produced before the authorities below'. From the above, the following issues emerge :
(1) Is the parental flock purchased and roared by the assessee as stock-in-trade ?
(2) Whether the expenses incurred for procuring parental flock are revenue expenditure ?
(3) Whether the application of the accounting methods suggested by the Institute of Chartered Accountants of India in the case of the assessee is sustainable ?
(4) Whether the application of s. 145 of the IT Act is sustainable for estimating the value of hatching eggs in incubator, hatcher and cold storage ?
11. The learned CIT(A), while analysing the issue relating to the parental flock, considered all the material facts. Para 3 of the learned CIT(A)'s order reads as follows :
"3. I have carefully considered the facts of the case. It is abundantly clear that the parental stock of birds under reference in noway constitutes stock as understood in the normal parlance of trade. The chicks when purchased are one day old. They are then scientifically reared and when they start laying eggs after a period of 6 months, they merely produce eggs from which chicks are further hatched in a scientized manner and it is these chicks which form the basic source of income from this business of the appellant. The parental stock is thus only instrumental, functioning in the promotion of a particular result, and it only serves as a means to an end. It cannot in anyway constitute stock-in-trade. The AO is wrong in presuming that parental flocks are stock-in-trade and that their value has to be taken as the end of the year. It would be well-nigh impossible to evaluate these birds at the end of the accounting period since each bird at the end of the accounting period since each bird is a living organism functioning in its independence although in a largely ordained sphere. The appellant is merely exploiting these living organisms commercially. A bird whose sole value lies in providing fertilised eggs for hatching cannot be equated to an iron ingot. The learned counsel has rightly placed reliance on the Gujarat High Court decision wherein stock-in-trade has been defined as a commodity which is bought and sold. The parental chicks here are bought, then they are commercially exploited and at the end they are practically discarded at nominal value or destroyed. How can this situation be equated with the stock-in-trade which is available at the beginning of the year and at the end of the year, and can be clearly and definitely priced because there is market value index available for that commodity."
12. The learned CIT(A), while finding in favour of the assessee, placed reliance on the Gujarat High Court decision, supra. In this case, the essential characteristics of stock-in-trade, namely, that it must be a commodity in which there is a dealing, i.e., which is bought and sold as distinguished from a commodity with which the business is carried on, namely, from the exploitation of which the income is derived. The distinction is between selling outright in the course of the business activity as distinguished from deriving income from exploitation of one's assets. This ratio laid down by the Gujarat High Court clearly shows that the particular commodity can be said to be stock-in-trade when the same is kept for sale. On the other hand, if there is any exploitation from that commodity, from which the income is derived cannot be termed as stock-in-trade. The facts in the case before us clearly show that what was purchased by the assessee as parental flock as one day old chick were not for the purpose of sale but after rearing them, the assessee collected eggs laid by the chick after a period of six months and again processed the eggs for production of chicks for the purpose of sale. The eggs that were laid by the parental flock and the chicks that were produced for the purpose of sale alone can be termed as stock-in-trade. The facts relating to the purchase of parental flock, rearing the chicks and processing of the eggs into hatchery and incubator were not at all denied by the Revenue at any stage of the proceedings. We, therefore, applying the principles laid down in the decision of the Gujarat High Court cited, supra, held that the parental flock is not stock-in-trade of the assessee and cannot be treated as such.
13. In this context, we would like to mention that, the decision relied on by the Revenue is not applicable to the facts of the case wherein the Supreme Court was pleased to provide guidelines in the matter relating to the valuation of stock-in-trade. Therefore, as we hold that the parental flocks are not stock-in-trade, the decision of the Hon'ble Supreme Court is not applicable to the facts of this case.
14. Let us now analyse the issue whether the expenses incurred by the assessee for procuring the parental flocks as a part of working expenses incurred in the process of earning profit. The assessee relied on as many as four decisions of the apex Court as stated, supra. In the case of Bombay Steam Navigation Co. vs. CIT (supra), it has been held as follows :
"The expenditure made under a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business, may be regarded as revenue expenditure laid out wholly and exclusively for the purposes of the business ......... in considering whether expenditure is revenue expenditure, the Court has to consider the nature and the ordinary course of business and the objects for which the expenditure is incurred. The question whether a particular expenditure is revenue expenditure incurred for the purpose of the business must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure."
In all the other three apex Court decisions (1980) 124 ITR 1 (SC), (1988) 172 ITR 257 (SC) and (1989) 177 ITR 377 (SC) cited supra by the assessee, the ratio laid down in the aforesaid apex Court decision has been approved and followed. The facts of this case show that the expenses incurred by the assessee in procuring the parental flock for the purpose of producing eggs and chick are nothing but a routine revenue expenditure incurred by the assessee in the process of earning of profit. The nature of business of the assessee and the object of procuring the parental flock, make it crystal clear that the expenses incurred by the assessee for procuring the parental flock is revenue in nature. In that view of the matter, we have no hesitation in holding that the expenditure under this head is a revenue expenditure, as concluded by the learned CIT(A).
15. It is seen from the records that the assessee has been following the method of accounting suggested by the Institute of Chartered Accountants of India, because there was no other method of accounting available for the value of parental flock as on the last day of the accounting year. The learned CIT(A) impliedly approved the method suggested by the Institute of Chartered Accountants of India by accepting the assessee's case after considering the materials and other records placed. The learned Departmental Representative though contended that the method of accounting is defective. The AOs at para 9 of his order had observed as follows :
"So far as the assessee's submission regarding valuation of closing stock is concerned, it is not disputed and the assessee is free to adopt one of the two methods of valuation of closing stock ....."
It is a case of the assessee that the monograph suggested two methods and the assessee accepted the second method. But, however, the AO in the subsequent paragraph of his order changed his opinion and observed that the method suggested by the Institute of Chartered Accountants of India for the valuation of closing stock of poultry farm is incorrect and improper. According to the AO, the reason was that the second method speaks about the expenses incurred to rear up the chicks to be treated as revenue expenditure and to be written off during the year itself. Further, according to him, the second method was silent about the purchase of parental flock. We are unable to concur with the finding of the AO in this regard. It is an admitted fact in this case that the parental flock was purchased for the purpose of producing eggs and therefrom producing chicks, which are known as commercial flock. Therefore, we have held that the parental flock is not stock-in-trade and the expenditure incurred is revenue expenditure under the facts and circumstances of this case. Therefore, the contention of the Revenue that the accounting method suggested by the Institute of Chartered Accountants of India is defective, do not survive and consequently the procedure followed by the assessee adopting the accounting method is sustainable.
16. The next issue relates to the valuation of hatching eggs in incubator, hatcher and in cold storage. It is an accepted principle of IT Act that the stock-in-trade is to be valued at cost (or market value) as on the last day, whichever is less. The assessee has submitted that when the eggs laid once put into the process will lose its marketability. The reason being that the eggs at that stage are neither fit for human consumption, nor developing into chicks, if they are taken out of the process for any purpose. The assessee had been maintaining the same stand ever since inception of the assessment proceedings. The Revenue is not in a position to controvert this factual position throughout. In fact, these facts were not denied by the Revenue. Further, as we have already held that the method of accounting adopted by the assessee is valid, the application of s. 145 for valuing the hatching eggs is not sustainable.
CO No. 11/Jab/199417. In the cross-objection, the assessee has raised as many as 7 grounds. At the time of hearing, ground No. 7 was not pressed and hence dismissed. Ground Nos. 1 to 5 are supportive of the CIT(A)'s order. As we have held in favour of the assessee, these grounds have become infructuous and hence dismissed.
18. Ground No. 6 relates to a disallowance of car depreciation at Rs. 4,080. The learned CIT(A), after considering the argument of the assessee, granted a relief considering the facts and material placed before him. We do not find any infirmity with the finding of the learned CIT(A) and, hence this ground is rejected.
19. In the result, the cross-objection filed by the assessee is dismissed.
ITA No. 357/Jab/199120. The issue involved in this appeal though related to an order under s. 263 of the IT Act, it is mostly pertaining to the valuation of closing stock, accounting procedure adopted by the assessee and estimation under s. 145. All these issues have been decided in ITA No. 10/Jab/1994, as such, this appeal has become infructuous and, hence dismissed.
21. In the result, the appeals filed by the assessee and the Revenue and the cross-objection filed by the assessee are all dismissed.