Income Tax Appellate Tribunal - Pune
Shankar Ssk Ltd. vs Deputy Commissioner Of Income Tax on 28 July, 1998
ORDER
B.L. Chhibber, A.M.
1. The assessee in appeal before us is a co-operative society and is engaged in the manufacture of sugar. The ground No. 1 raised by the assessee reads as under:
"In view of the facts and circumstances of the case, the AO has erred in disallowing the following expenses :
Rs.
(1) Cane development expenses 2,29,768 (2) Agriculture development expenses 1,01,040 (3) Lift irrigation expenses 95,648 (4) Plantation expenses 35,319
2. It is the common contention of both the sides that the issue regarding cane development expenses came up for consideration before this Tribunal in the case of Dy. CIT vs. Spl. Range, Nashik vs. Madhukar Sahakari Sakhar Karkhana Ltd. Faizpur, Yawal in ITA No. 241/Pn/1990, 333/Pn/1992, 83/Pn/1993 and this Tribunal, vide para 6 of its order, restored the issue to the file of the AO. We find that the nature of other expenses like, agricultural development expenses, lift irrigation expenses and plantation expenses is the same as that of cane development expenses and the reasons given by the AO for disallowance and the CIT(A) for confirmation of the same are the same as in the case of cane development expenses. Accordingly, following the aforesaid order of the Tribunal, we set aside this part of the learned CIT(A)'s order and send the issue back to the AO with the direction to make full investigation/enquiry in the matter and pass fresh order on the issue in accordance with law as per the directions given by this Tribunal in para 6 of its order in the case of Madhukar SSK Ltd. (supra).
3. The ground No. 2 raised by the assessee reads as under:
"In view of the facts and circumstances of the case, the AO has erred in disallowing Rs. 3,64,567 contribution to DSI on the ground that the same was not paid during the year."
It is the common contention of both the sides that the issue stands covered in favour of the assessee and against the Revenue by the order of this Tribunal in the case of Shri Panchganga S.S.K. Ltd., Ganganagar in ITA Nos. 491 & 1365/Pn/91. Following the aforesaid order of the Tribunal, we delete the addition of Rs. 3,64,567. The ground raised by the assessee accordingly succeeds.
4. The ground No. 3 raised by the assessee reads as under:
"In view of the facts and circumstances of the case, the AO has erred in disallowing 50 per cent of the Sabha Samarambha expenses, annual general reduced to 20 per cent in the case of vehicle hire expenses by the CIT(A)."
During the course of assessment proceedings, the AO noted that the assessee society had incurred the following expenditure :
Rs.
(1) Sabha Samarambha expenses 92,449
(2) Annual general meeting 1,21,590
(3) Vehicle hire charges 1,45,441
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3,59,480
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The AO disallowed 50 per cent of the above expenditure, observing as under :
"It is contended that the expenditure is incurred for business purposes. The explanation is not fully convincing. However considering the submissions made, I disallow a sum of 50 per cent i.e., Rs. 1,79,740 being excessive and not for business. The same is, therefore, added back to the total income of the assessee".
5. The assessee appealed before the CIT(A) and submitted that the expenditure was incurred for the purpose of business and was, therefore, allowable in full. The CIT(A) upheld the disallowance of 50 per cent of the Sabha Samarambha expenses and annual general meeting expenses on the grounds that these were incurred both on providing food, snacks, etc., to the members who attended the ceremonies and the annual general meeting and also on certain expenditure which were on other items.
He, however, held that the disallowance of 50 per cent of vehicle expenses was excessive and directed the AO to restrict it to 20 per cent.
6. Shri S. N. Doshi, the learned counsel for the assessee submitted that details of Sabha Samarambha expenses and annual general meeting expenses were furnished before the AO and these were incurred for the purpose of business and no part of the same ought to have been disallowed. He alternatively argued that the disallowance made by the AO at 50 per cent and confirmed by the CIT(A) is excessive. He further submitted that the disallowance of vehicle expenses at 20 per cent was also excessive. The learned Departmental Representative shri Hari Krishan, relied upon the orders of the authorities below.
7. We have considered the rival submissions and perused the facts on record. We agree with the AO that the expenses incurred on Sabha Samarambha and annual general meeting expenses were not for business purpose in toto, but in our opinion, the disallowance made by him at 50 per cent is rather excessive. After taking into consideration the facts and circumstances of the case, we direct the AO to restrict the disallowance to 25 per cent. As regards the disallowance out of vehicle expenses, in our opinion, the direction of the CIT(A) to restrict the same to 20 per cent is fair and reasonable and no further interference is called for. This ground accordingly succeeds in part.
8. The ground No. 4 raised by the assessee reads as under:
"In view of the facts and circumstances of the case, the AO has erred in adding an amount of Rs. 24,33,760 on account of estimated closing stock of bagasse."
During the course of assessment proceedings, on verification of the manufacturing account, the AO noted that the assessee society had not shown any stock of bagasse. The AO required the assessee to explain this discrepancy. It was explained that the bagasse was used as fuel and had to be disposed of by making sales and by burning it. It was sold only when somebody was interested in purchasing the same. For Karkhana, it was worthless and had practically no value. For these reasons, no stock was shown as on the last day of the year. The AO was not satisfied with the explanation furnished, as the assessee had shown sale of bagasse worth Rs. 50,727 during the year. He accordingly held that bagasse was not a useless commodity as explained by the assessee. The AO also compared other cases of sugar factories wherein substantial amount of bagasse was sold and was also shown as closing stock. The AO accordingly proceeded to work out the production of bagasse at 30 per cent of the sugarcane crushed. This was calculated at 60,844 MT. While working this production, the AO took into consideration the bagasse production of Pravara SSK Ltd. The AO also took into consideration the consumption of bagasse and loss due to driage, etc. and after allowing 1/5th of the total bagasse production, he held that the balance bagasse was "sold out of books". He worked out the value of such bagasse sold at the rate of Rs. 200 per MT and made an addition of Rs. 24,33,760.
9. The assessee appealed to the CIT(A). It was contended that there was closing stock of bagasse but it did not have any value unless sold. After considering the submissions made before him, the learned CIT(A) held that the assessee had not denied the existence of closing stock of bagasse. He also noted that the assessee also had not given any submission with reference to the comparable cases of other sugar factories quoted by the AO in the assessment order. He accordingly held that the bagasse produced was in stock. He, however, allowed deduction of the amount of Rs. 50,723 which represents sale of bagasse during the year and confirmed the balance addition of Rs. 23,83,033. Thus, the learned CIT(A) allowed partial relief.
10. S. N. Doshi, the learned counsel for the assessee, submitted that there is no justification for the impugned addition of Rs. 23,82,033. He submitted that as per the regular method of accounting adopted and accepted, the assessee does not value the stock of bagasse.
Only on effecting the sale, the sale proceeds he credited to the P&L a/c. Though bagasse has realisable or sale value, as far as the assessee is concerned, bagasse has no cost and hence it is valued at cost or market price whichever is less. According to the learned counsel, it is a matter entirely within the discretion of the assessee. He further submitted that the entire expenditure incurred on producing sugar has gone into the cost of production of sugar. In other words, any cost attributable to bagasse has been borne by the finished product, namely, the sugar and, therefore, again to value the bagasse would mean duplication. According to the learned counsel, the fact that other sugar factories value the closing stock of bagasse is irrelevant as long as the assessee's method of accounting with respect to valuation of bagasse is regular, consistent and not false. In support of his contentions he drew our attention to the method of accounting of scrap (i.e., bagasse) given in the book "Cost Accounting" by Mr. M. L. Agarwal. He also relied upon the decision in CIT vs. Chari & Ram (1949) 17 ITR 1 (Mad), CIT vs. A. Krishnaswami Mudaliar & Ors. (1964) 53 ITR 122 (SC) and A. L. A. Firm vs. CIT (1991) 189 ITR 285 (SC).
11. Hari Krishan, the learned Departmental Representative strongly supported the orders of the authorities below. He submitted that the assessee has itself sold during the accounting period some quantity of bagasse which shows that the bagasse has a certain sale value. The assessee itself is also utilising bagasse as fuel. This also shows that bagasse has some value at-least in the form of fuel. The learned Departmental Representative further submitted that the assessee is maintaining day-to-day stock of bagasse which shows that in the assessee's own perception bagasse has value, otherwise it would not take the trouble to maintain day-to-day stock register. The learned Departmental Representative further submitted that the assessee has not denied the existence of closing stock of bagasse. Bagassee is a by-product obtained by the assessee in the process of crushing the sugarcane and manufacturing of sugar and the assessee has not been able to show any principle of accountancy which says that the by-product has no value or no cost to it. According to the learned Departmental Representative, by not disclosing the value of closing stock of bagasse the assessee had not shown the correct position of profit and accordingly, the ratio laid down by the Supreme Court in the case of CIT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC) applied to the facts of the present case. According to him, the assessee's contention that bagasse has no cost to it is wrong, as the cost of by-product is debited in the original raw materials purchased. A part of the raw material has gone into production of sugar and the other part of raw material has gone into production of by-product known as bagasse which has various uses as fuel and raw material for manufacturing paper, etc. The assessee has not denied the fact that other sugar factories are taking into consideration in their stock-in-trade value of closing stock of bagasse. According to the learned Departmental Representative, the ratio laid down by the Madras High Court in the case of Chari & Ram (supra) is not applicable to the facts of the present case and the other two judgments relied upon by the learned counsel of the assessee support the case of the Revenue rather that the case of the assessee.
12. We have considered the rival submissions and perused the facts on record. It is well-recognised principle of commercial accounting to enter in the P&L a/c the value of stock-in-trade at the beginning and at the end of the accounting year at cost or market price, whichever is lower. For the purpose of ascertaining the 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. It is an admitted fact that bagasse is a by-product anything of minor importance and a thing not directly aimed at. The Concise Oxford Dictionary, 9th Edn. edited by Della Thompson at p. 179 defines a "by-product" as under :-
"An incidental or secondary product in the manufacture of something else.
A secondary result."
The learned author K.C. Parikh in the Dictionary of Business & Management edited by him defines a "byproduct" at p. 39 as follows:
"The less valuable product emerged in the process of producing the main product e.g. sulpher, bitumen etc., emerged in the process of producing refined oil as the main product from crude oil."
It is also an admitted fact that the assessee has been consistently and regularly valuing the closing stock of its products at cost or sale price, whichever, is lower. There is no denial of the fact that bagasse has realisable value and it is precisely for this purpose that the assessee maintains day-to-day stock register so as to have adequate control over the stock of bagasse. However, it does not mean that bagasse has any cost and if at all there is any cost attributable to bagasse, the same has gone into the cost of production of finished product namely, sugar. If the said cost of bagasse is to be taken into consideration, obviously to the extent cost of sugar will have to be reduced and it will not in anyway affect the gross profit/net profit. The fact that other sugar factories value the closing stock of bagasse is irrelevant as long as the assessee's method of accounting with respect to valuation of bagasse is regular, consistent and not false. In the book "Cost Accounting" by Me M. L. Agarwal one of the methods of accounting of scrap (i.e., bagasse) is suggested as under:
(i) Sale value credited to P&L a/c :
Whatever amount is realised from the sale of scrap, is credited to P&L a/c as miscellaneous revenue item. In this case, the cost of production remains unaffected and is not reduced by the sale value of the scrap. Thus the cost of production includes the cost of the scrap also, and is borne by the units produced. This method is good where :
(a) the net value realised after meeting the selling disposal costs, is small,
(b) the prices fluctuate much for the scrap in the market,
(c) the market is uncertain."
In our considered opinion, by taking the value of closing stock of bagasse at "Nil" the assessee has followed the well-recognised principle of commercial accounting. In CIT vs. Chari & Ram (supra), the Hon'ble Madras High Court has held that under s. 13 of the Indian IT Act an assessee is entitled to compute the income, profits and gains in accordance with the method of accounting regularly employed by him, and accordingly this method must be accepted by the Department in the absence of anything to suggest that it is improper or patently false. In CIT vs. A. Krishnaswami Mudaliar (supra), the Hon'ble Supreme Court has observed that it was left to the option of the assessee to adopt any system of accounting and oblige the ITO to compute the income, profits and gains in accordance with such method of accounting regularly employed, if profits of the business can properly be deducted therefrom. In A. L. A. Firm vs. CIT (supra), the Hon'ble Supreme Court has held "that the proper practice is to value the closing stock at cost. That will eliminate entries relating to the same stock from both sides of the account. To this rule, custom recognises only one exception and that is to value the stock at market value if that is lower. On no principle can one justify the valuation of the closing stock at a market value higher than cost as that will result in the taxation of notional profits the assessee has not realised".
13. The reliance placed by the learned Departmental Representative on the judgment of the Hon'ble Supreme Court in the case of British Paints India Ltd. (supra) is misplaced, because the ratio laid down by the Hon'ble Supreme Court in that case will not apply to the facts of the present case because in that case the system of accounting adopted was such which excluded, for the valuation of stock-in-trade, all costs other than cost of raw materials for the goods-in-progress and finished products and such system resulted in a distorted picture of the true state of business for the purpose of computing the chargeable income. In the case before us, as stated in the preceding paragraphs, the assessee has been consistently and regularly valuing the bagasse which is a by-product at 'Nil' as per the accepted principles of commercial accounting and as and when bagasse is sold its sale price is duly credited to the P&L a/c. The method of accounting thus adopted by the assessee does not result in a distorted picture of the true state of business for the purpose of computing the chargeable income.
14. In the light of the above discussion, we see no justification for the impugned addition of Rs. 23,83,033. This ground accordingly succeeds and the addition of Rs. 23,83,033 is deleted.
15. In the result, the appeal is partly allowed.