Madhya Pradesh High Court
Central Hatcheries Private Ltd. And ... vs Commissioner Of Income-Tax on 17 September, 2007
Author: Dipak Misra
Bench: Dipak Misra, R.K. Gupta
ORDER Dipak Misra, J.
1. This is an application under Section 261 of the Income Tax Act, 1961 (for brevity 'the Act') for grant of certificate to prefer an appeal before the Supreme Court. To appreciate the relief sought in this application it is apposite to refer to the judgment rendered by this Court in ITR No. 112/1997 [(Commissioner Income-tax Jabalpur v. V.N. Dubey, Proprietor, Phoenix Poultry) and other connected matters]. In the aforesaid batch of appeals a singular question was dealt with which reads as under:
Whether on the facts and circumstances of the case, the tribunal was justified in law in holding that the parental flock is not stock in trade and the expenditure incurred is revenue expenditure under the facts and circumstances of the case?
2. This Court while dealing with the said question after referring to the decisions rendered in the cases of Chainrup Sampatram v. Commissioner of Income Tax, West Bengal (1953) 24 ITR 481; Commissioner of Income- tax, Madras v. A.Krihnaswami Mudaliar and Ors. (1964) 53 ITR 122 (SC); Commissioner of Income-tax v. British Paints India Ltd. (1991) 188 ITR 44; United Commercial Bank v. Commissioner of Income Tax (1999) 240 ITR 355; Commissioner of Income Tax v. Bengal Jute Mills Co. Ltd. (1992) 107 CTR (Cal) 34; and H.Mohmed & Company v. C.I.T. (Guj.) (1977) 107 ITR 637 in paragraphs 20,21,22 and 23 expressed the opinion as under:
20. At this juncture, we think it appropriate to refer to the factual scenario. The CIT (Appeals) in his order dated 15.3.1993 while dealing with the assessment year 1987-88 has taken note of the purchases, process through which the chicks bear eggs and in paragraphs 3, 4 and 5 opined that the chicks cannot be regarded as the stock-in-trade inasmuch they are commercially exploited and at the end they are practically discarded at the nominal value or destroyed. The appellate authority has observed that each chick is a separate unit of production and the assessing officer cannot take the value collectively. Thereafter, the said authority has opined that revenue expenses at best on each bird would be spent at the cost of not less than Rs. 5 though actually the cost is lawfully deduction in the year in which it has been spent and put to use. Being of this view the said authority directed deletion of the amount added by the assessing officer. The Tribunal referred to the decision rendered by the Gujarat High Court and analyzed the essential characteristics of the stock-in-trade. The Tribunal opined that if there is any exploitation of the commodity from which the income is derived it cannot be termed as stock-in-trade. The Tribunal further expressed the view that what was purchased by the assessee is the parental flock which is one day old chick and that was not for sale but for rearing them by adopting a process for collecting eggs. In that backdrop the Tribunal held that the eggs that were laid by the parental flock and that the chicks which were for the purpose of sale alone can be termed as the stock-in-trade. The assessee has relied on the agreement entered into between him and Venkateshwara Hatcheries Pvt. Ltd., the supplier of parental flock, to highlight that there was prohibition to sell parental flock. Mr.Arya has referred to agreement dated 01.11.1990 wherein 'no objection' was expressed by the supplier in respect of the old parental flock stating that the assessee is free to sell the old parental flock after expiry of the productive period as stipulated in the franchise agreement.
21. There can be no cavil that in common paralance the stock-in-trade includes raw material, work in progress and the finished goods. When the finished goods come into existence there is transformation of raw material in entirety. The work in progress is an intermediate stage between the raw material and the finished goods. Submission of Mr.Sharma is that the parental flock does not loose its identity and existence. The production of commercial chicks is the finished product of the assessee's business. The commercial chikcs are produced out of hatching of eggs laid by the parental flocks and, therefore, such parental flocks cannot be termed as the raw material. It is urged by him that the parental flock is not a work-in-progress because it is not converted into the finished product, namely, commercial chicks which are sold in the market. In this activity, submits Mr.Sharma, the parental flocks cannot be regarded as the stock-in-trade because the stock-in-trade is something in which the person is dealing. As is manifest, the Tribunal has approved the finding of the CIT(Appeals) who has held that it is well nigh impossible to evaluate the birds at the end of the account period since each bird is a living organism functioning in its independence, although in a largely ordained sphere.
22. On a careful scrutiny of the orders passed by the CIT(Appeals) and the Tribunal it is patent that both, the appellate authority and the Tribunal, have been guided by the concept that the stock-in-trade basically means what has been bought and sold. But in the case at hand, the chicks are purchased, they are commercially exploited and at the end they are practically discarded at the nominal value or destroyed. Four essential facts which have been escaped from the notice of the CIT(A) and the Tribunal are (i) that the chick is not an item but a living species which while growing and its growth being orderly done lays eggs, which in their turn, are hatched to become chicken, thus they really do grow in their own way; (ii) though their productivity in a particular accounting year may be zeored but their sale value cannot be regarded to be nill unless it is so proven to that effect by adducing adequate evidence that they have been totally discarded or destroyed; (iii) the logic that it is discarded for nominal value by itself cannot change the perception of the conception of stock-in-trade inasmuch as the value still exists and a living species being utilized in a business cannot be compared to that of an item which is brought in stock to be sold; and (iv) the chick which grows with time has the effect potentiality to be sold and some permission of the supplier has been brought on record to show that it has no objection for the sell of the old parental flocks after expiry of the productive period stipulated in the franchise agreement. These aspects have been missed and thereby an erroneous conclusion has been arrived at. The singular facet which really has signification is that it is a raw material, if we permit ourselves to say so, has the potentiality to transform itself into a different category having a different market value when certain atmosphere like food and shelter are given. It cannot remain as it is, for its a living species. Thus, stock-in-trade cannot be narrowed down to mean what is brought is sold or the some raw material, when transformed and finished, is sold. There is an intermediary stage which would include work-inprogress. Such a concept may not have strict analogy to produce one day old chick but the said chick which is purchased has the potentiality to be there after the end of the year having the market value, unless proven contrary, to be sold in the market. In the absence of real rebuttal it has to be regarded as the stock-in-trade. True it is, by mere stock-in-trade its value is not determinable. It can be rebutted by showing that they were discarded, they were annihilated, they were destroyed, they were abandoned or they were not sold. But one cannot speak in broader term that they cannot be regarded as the stock-in-trade.
23. While so holding we would have allowed the appeals and answered the references, but that would not solve the situation. The matters are to be remanded to the Assessing Officer. In this context, we may refer with profit to a two Judge Bench decision rendered in the case of Sarda Plywood Industries Ltd. v. Commissioner of Income-tax (1999) 238 ITR 354 wherein a Division Bench of the Calcutta High Court speaking through S.B.Sinha, J (as his Lordship then was) held that the High Court has the power to remit the matter of reference back. Similar view has been taken in the case of Ciba of India Ltd. v. Commissioner of Income-tax (1993) 202 ITR 1 wherein the Division Bench of Bombay High Court has observed that where the Tribunal has failed to consider some aspects of the questions raised before it the High Court on reference can remand the case to the Tribunal, though it may not be done in all cases.
24. In view of the aforesaid decisions we summarize our conclusions as under:
(a) In all the reference cases the question posed is answered in the negative in favour of the revenue and against the assesse;
(b) The appeals preferred under Section 260A of the Income Tax Act by the Revenue are allowed to the extent that the parental flock is to be treated as stock-intrade;
(c) All the matters are remitted to the Assessing Officer to assess afresh, keeping in view the citations referred hereinbefore and on the foundation that the value adopted as closing stock in a particular assessment year should be treated as the value of the opening stock-in-trade in the immediately next following year;
(d) It would be open to the assessee to adduce an evidence to show that there was nothing to be maintained as the stock-intrade by the end of the year. The Assessing Officer shall be strictly guided by the principles which have been laid down to put the controversy to rest.
3. It is submitted by Mr. G.N. Purohit, learned Senior Counsel along with Mr.L.L. Sharma for the applicant that there is no judgment of the Apex Court in the field and, therefore, the jurisdiction under Section 261 of the Act should be invoked and certificate of fitness should be granted to the assessee to prefer an appeal before the Apex Court. It is also proponed by them that the composite order passed in the ITRs and ITAs preferred under Section 260A of the Act deals with a different category of cases in which it has been held that a parental flock in a broader term can be regarded as the stock- in-trade.
4. The learned Senior Counsel has commended us to the decisions rendered in controller of Estate Duty, Gujarat v. Kantilal Trikamlal [1976] 105 ITR 92; Commissioner of Income-tax, Madras v. R.M. Chidambaram Pillai, etc. [1977] 106 ITR 292; The Trustees of Port of Bombay v. The Premier Automobiles Ltd. and Anr. AIR 1974 SC 923; and Berger Paints India Ltd. v. Commissioner of Income-tax AIR 2004 SC 1743.
5. To appreciate the submissions raised by the learned Senior Counsel for the assessee-petitioner it is seemly to refer to Section 261 of the Act. It reads as under:
261. An appeal shall lie to the Supreme Court from any judgment of the High Court delivered before the establishment of the National Tax Tribunal on a reference made under Section 256 against an order made under Section 254 before the 1st day of October, 1998 or an appeal made to High Court in respect of an order passed under Section 254 on or after that date in any case which the High Court certifies to be a fit one for appeal to the Supreme Court.
It is pertinent to mention here that Section 261 of the Act is similar to Section 66A(2) of the Income-tax Act, 1922. The earlier provision was introduced to provide for appeals against the judgment of High Courts to the Privi Council. If the anatomy of the present provision is studied with keen scrutiny it is luminescent that if the High Court arrives at the conclusion that the case is a fit one for appeal to the Supreme Court then it shall issue the fitness certificate.
6. The decisions rendered in R.M. Chidambaram Pillai, etc.(supra), Kantilal Trikamlal (supra) and the Premier Automobiles Ltd. and Anr. (supra) if we permit ourselves to say so, are not on the point and hence, we do not intend to analyse the ratio laid therein.
7. In India Machinery Stores (P) Ltd. v. CIT AIR 1970 SC 1563 it was held as under:
12. Mr. Chagla contended that the rules laid down by the Judicial Committee applicable to a certificate issued under Section 109(c) of the Code of Civil Procedure, 1908, and under Section 596 of the Code of 1882, in regard to appeals in civil matters have no bearing in determining the meaning of Section 66A(2), for the High Court exercises advisory jurisdiction on a reference on questions of law and on that account even if the question of law which in the view of the High Court arises is not stated in the certificate, it may be presumed when the High Court has certified a case to be fit for appeal, that a substantial question of law is involved, and the technical defect in the certificate may be ignored. We are unable to accept that argument. It is true that under Section 66 (1) and (2) of the Indian Income-tax Act, 1922, only a question of law may be referred to the High Court for opinion, but the right to obtain a certificate under Section 66A(2) arises only when in the proposed appeal a question of great public or private importance arises. It cannot be held that because a question of law alone may be referred to the High Court under Section 66 of the Indian Income-tax Act, in the proposed appeal a question of law of great public or private importance necessarily arises. Any other view, would make every opinion of the High Court in a reference under Section 66 appealable to this Court. In our view, the certificate granted by High Court was defective.
13. It was also urged that a practice is fairly common in some of the High Courts to certify a case under Section 66A(2) without recording any reasons or the grounds for certifying the case, and we may not penalise the Company when we are enunciating the true rule for the first time. But the practice, in our judgment, was laid down many years ago by the decisions of the Judicial Committee that a certificate under Section 66A(2) which does not set out precisely the grounds or raise a question of great public or private importance does not comply with the requirements of the Act. The jurisdiction of this Court to entertain an appeal from the opinion recorded under the Indian Income-tax Act arises only when a certificate is properly issued by the High Court or when this Court grants special leave under Art. 136 of the Constitution.
8. In Berger Paints India Ltd. (supra) the Apex Court while dealing with Section 261 of the Act expressed the opinion as under:
16. In view of the fact that other High Court had taken a particular view, if the Calcutta High Court desired to depart from the uniform view taken by them, in fairness to the assessee, a certificate to appeal under Section 261 of the Act ought to have been granted.
9. Submission of Mr. Purohit, learned Senior Counsel is that as this Court has departed from the view taken by the Gujarat High Court in H.Mohmed & Company (supra) and when there is no judgment of the Supreme Court this Court should accept the prayer of the assessee to issue a certificate of fitness of appeal to the Apex Court. This Court while disposing of the appeal actually had not departed from the decision of the Gujarat High Court but had distinguished the same, if paragraphs 20 and 21 of the decision of this Court are properly understood. What is to be seen while dealing with an application under Section 261A of the Act is that the case must involve a question of great public importance affecting the assessee generally and dependent upon the general principles and further it must involve a substantial question of law.
10. What has been held in Berger Paint India Ltd. (supra) is that when the Calcutta High Court desired to depart from the uniform view taken by them, in fairness to the assessee, a certificate to appeal under Section 261 of the Act ought to have been granted.
11. As far as the factual scenario of the present case is concerned, on the basis of facts a finding has been recorded that parental flock is stock-in-trade. The said conclusion has been arrived at after analysing the facts available on record and the agreement entered into between the assessee and the supplier of parental flock and the prohibition enumerated therein. Quite apart from the above, this Court had referred to the law relating to accountancy and the conception of stock-intrade and the closing stock. When a finding has been recorded on the basis of certain facts brought on record only because the stock-in-trade in the case at hand relates to living birds, it will not give rise to law of general public importance or substantial question of law. Therefore, in our considered opinion, it is not a fit case where jurisdiction of this Court under Section 261 of the Act should be involved and accordingly we so hold.
12. In the result, the application for issue of certificate of fitness to prefer an appeal to the Supreme Court stands rejected.