Income Tax Appellate Tribunal - Delhi
Sis Ram Sharma And Co. vs Income-Tax Officer on 15 March, 1988
Equivalent citations: [1988]25ITD410(DELHI)
ORDER
M.C. Agarwal, Judicial Member
1. This is an assessee's second appeal arising out of its assessment for asstt. year 1978-79. We have heard the learned counsel for the assessee and the learned Departmental Representative and have perused the material placed before us. The assessee runs brick kilns and for the year ending 30-9-1977 which was the accounting year relevant to asstt. year 1978-79 it had shown sales of Rs. 10,60,921 and a gross profit of Rs. 1,68,357 giving a rate of 17 per cent as against GP rate of 22 per cent on sales of Rs. 7,92,000 in the immediately preceding year. The learned ITO considered the gross profit very low. The assessee's explanation was that the fall was due to increase in turnover and competition in the market and the rise in the cost of inputs. The ITO also noticed that the difference between the kuchcha bricks moulded and the bricks loaded in the brick kilns was of the order of 6.5 per cent which he considered to be excessive. According to the assesses, damage of bricks between the period of moulding and loading was normal and that this year there were excessive rains causing more damage than the usual. The ITO considered the shortage on this account at 4 per cent to be reasonable and he held that 2 per cent of the bricks amounting to Rs. 2,95,000 was sold outside the books and he made a trading addition of Rs. 51,675 as the value of those bricks calculated @ Rs. 175 per thousand. The ITO also noted that a sum of Rs. 2,000 was debited as expenditure on account of lease rent. The account showed that the lease money was being credited in the account of the landlord from year to year and stood accumulated to Rs. 14,000. He took the view that the expenditure was not genuine and, therefore, made an addition.
2. The ITO also noted that the assessee had debited to the trading account a sum of Rs. 47,164 as the value of the land. This was in respect of earth taken out for preparation of bricks from land belonging to the assessee itself. According to the assessee, the Delhi Development Authority was charging Rs. 4 per 1,000 of bricks prepared in respect of land belonging to the DDA and it was at that rate that the aforesaid amount was debited to the trading account. It was also contended that the land was the assessee's stock-in-trade. The ITO did not accept this contention and added back the amount. On appeal, it was contended before the learned CIT(A) that this year damage of kuchcha bricks was more because of excessive rains about which it was stated that the bricks kiln owners association had informed the Commissioner of the said damage. It was also contended that the Tribunal in the ease of one Manohar Lal Atri had accepted shortage of 10.5 per cent. The learned CIT(A) observed that in that case that assessee had shown a gross profit of 19.97 per cent while the g.p. shown by the assessee was only 17 per cent. Without entering into the controversy whether there was extra damage this year due to heavy rains, the learned CIT(A) took the view that the gross profit shown by the assessee was lower and that it would be reasonable to determine the assessee's income by applying a gross profit rate of 20 per cent. At this rate the addition came to Rs. 43,827 and the addition of Rs. 51,675 made by the ITO was, therefore, reduced to that amount. The addition of Rs. 2,000 on account of lease rent was also confirmed by the learned CIT(A) agreeing with the view taken by the ITO.
3. With regard to the addition of Rs. 47,164, it was contended before him that the Tribunal had deleted a similar addition in the earlier year taking the view that the cost of earth had to be taken into account in the manufacture of bricks. The Tribunal observed that since the land belonged to the assessee there must be a way by which the cost of the earth utilised in the manufacture of bricks must be ascertained. The Tribunal held that the rate fixed by the DDA was a proper guide for determining the cost of earth. The learned CIT(A) observed that the Tribunal did not take into account another aspect of the matter, i.e., the amount of Rs. 47,164 debited to the trading account would amount to assessee's income from land and was to be treated as such. He, therefore, took the view that while the sum of Rs. 47,641 was rightly debited to the trading account, this amount could be said to be received on account of sale price of earth and was to be taxed as assessee's income after adjusting expenses incurred on digging, levelling, etc.
4. In the grounds of appeal, ground nos. 1 to 10 relate to the first addition of Rs. 51,675 which, on appeal, has been reduced to Rs. 43,827 by the learned CIT(A). The learned counsel for the assessee contended that in the relevant accounting year there were excessive rains causing extensive damage to the Kuchcha bricks and that reports to this effect had been made by the Brick Kiln Owners Association to the Commissioner of Income-tax. The assessee has placed in the paper book copies of letters addressed by the association to the Commissioner complaining of rains from 29th April, 1977 to 5th May, 1977 and then again on the 10th May, 1977. The receipt of these intimations by the Commissioner is not denied. The assessee has also filed a chart of daily rainfall in New Delhi showing that there were quite heavy rains on some dates in April and May. That is not the rainy season. Everyone knows that in brick kiln business, manufacturing processes are carried on during the non-rainy season. Pathai, i.e., preparation of Kuchcha Bricks starts somewhere in November and continues up to the end of May or the beginning of June. During the non-rainy season no one can anticipate a rain so well in advance as to stop pathai and load the bricks already moulded into the brick kilns before the rain actually starts. Therefore, when the assessee was complaining of heavy rains in April and May with evidence showing the rainfall chart of New Delhi and the complaints to the Commissioner, the contention could not be brushed aside by a perfunctory observation that there was no evidence that there was rainfall also in the area where the assessee's brick kilns were situate. In our view, the burden had shifted to the revenue to show that there was no extra damage in the assessee's brick fields. The CIT(A) has himself mentioned that in the case of Manohar Lal Atri, shortage of the order of 10.5 per cent had been accepted. We are, therefore, of the view that no addition deserves to be made in this case on account of the alleged extra shortage of bricks,
5. Now we deal with "the question of the addition made by the CIT(A) on the ground that the gross profit shown by the assessee was low. The learned CIT(A) compared the case of Manohar Lal Atri who had shown a gross profit of 19.97 per cent with the case of the assessee who had shown a g.p. of 17 per cent. It is also admitted that in the immediately preceding year the assessee had shown a gross profit rate of 22 per cent. The fall in the gross profit rate of the assessee is thus significant and it could not entirely be explained with unsubstantiated allegations that there was rise in the cost of labour, etc. However, we are of the view that the assessee had debited an imaginary expenditure of Rs. 47.164 to the trading account in respect of the cost of earth. We would give our reasons shortly as to why this imaginary expenditure would not be allowed. If this expenditure is excluded from the trading account, the gross profit shown by the assessee would be slightly above 20 per cent the rate applied by the learned CIT(A). The learned CIT(A) has not mentioned whether in the case of Manohar Lal Atri also any such imaginary or actual expenditure was also debited. In the absence of that evidence, we are of the view that no further addition in the trading account would be necessary.
6. As regards the sum of Rs, 47,164 patently this is an imaginary expenditure. The land belongs to the assessee and no amount has been paid to anyone for taking out earth for the preparation of bricks. The cost of digging, if any, is already debited to the trading account. In the case of Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC), it has been observed that an expenditure is what is paid out or away and is something which is gone irretrievably. In this case no payment, whatsoever, has been made to anyone and, therefore, this notional debit of an amount that would have been payable by the assessee if it had taken out the same earth from the land belonging to the DDA, is not an expenditure which can be allowed as a deduction for determining its income.
7. Admittedly, no depreciation is allowable on land, though in some cases its value may suffer a set back beca,use of use in a particular manner or because of the extraction of certain materials out of it. The assessee's contention before the authorities below had also been that, the land was the assessee's stock-in-trade and any diminution in its value has to be accounted for. This contention may have been correct if the land had actually been treated as the assessee's stock-in-trade and was shown as such in the trading and profit and loss account. It was not shown to us that the value of the land has ever been shown in the trading account either as opening stock or closing stock. If the land was treated as stock-in-trade, then it has to be valued according to the principles of valuation of closing stock. The assessee could have valued the closing stock at cost or at market value. The cost would remain constant and if the assessee wanted to contend that the value of the land had gone down the cost for which it was acquired, it had to show that it was in fact so. In the present case, the land is not shown to have ever been accounted for in the trading account as stock-in-trade, nor it is shown that its market value at the close of the year was lesser than the cost. It is true that for asst. year 1975-76 such a notional expenditure was allowed by the Tribunal, but that cannot be a reason for allowing the same in the year under consideration as well. The reasons for which we are unable to follow the Tribunal order for asstt. year 1975-76 have been discussed above which we find were not placed before our Hon'ble Brothers at that time.
8. The learned CIT(A) has directed that the amount, in question, be treated as the assessee's income and the net income on that account be determined. This direction, in our view, is erroneous because there is actually no passing of money and will have to be vacated. We may mention that it is because of this disallowance that we have not thought it fit to sustain the other addition made by the CIT(A) on account of lower gross profit.
9. The last contention raised in this appeal is about a sum of Rs. 2,000 claimed as payment of lease rent. The land belonged to Late Shri Budh Ram, who was the father of Shri Sis Ram, a partner in the assessee-firm. It is for this reason that Sis Ram has not chosen to take the money out of the firm and the same has been credited regularly in an account. This expenditure has been allowed in the past. The existence of the lease is not disputed. We are, therefore, of the view that there was no justification for disallowing the sum of Rs. 2.000.
10. No other point was pressed before us in this appeal.
11. In the result, the assessee's appeal is partly allowed.
The addition of Rs. 2,000 on account of lease rent is deleted. The addition of Rs. 51,675 made by the ITO is also deleted. The addition of Rs. 47,164 made by the ITO is confirmed and the directions of the CIT(A) pertaining to the same are hereby cancelled.
S.K. Chander, Accountant Member
1. I have gone through the proposed order by my learned brother, Judicial Member. I agree with him on the conclusions drawn by him with regard to the issues in appeal except with regard to the sum of Rs. 47,164 which was claimed by the assessee as expenditure by debiting it to the trading account on account of the use of earth dug from the land owned by the assessee for the manufacture of bricks, because the assessee is a brick kiln owner.
2. The assessee had debited to the trading account this sum of Rs. 47,164 as the value of the earth taken from the land owned by the assessee for making bricks to be manufactured and sold in its business. The amount was determined on the basis of Rs. 4 per thousand bricks. This was so because DDA was charging Rs. 4 per thousand bricks for such digging out of the earth from their land. Before the ITO, the assessee's claim was that the earth used in making the bricks became stock-in-trade. The ITO and the 1d. CIT(A) rejected this claim. My learned brother has also proposed to uphold their action. But in my humble opinion, the action of the authorities below is not justified either on facts of this case or the law applicable thereto. The assessee is carrying on this business and has been following this practice in debiting to the profit and loss the value of the earth taken out of the land possessed by it as capital assets. In the assessment year 1975-76, this specific issue had come up before the Tribunal and the Tribunal in its order bearing ITA No. 3713/DEL of 1982 and CO. No. 234/DEL/83 dated 28th January, 1985 held that, "without the cost of basic raw material, namely, the earth, no manufacture of bricks can take place. Since the land belonged to the assessee, there must be a way by which the cost of the earth utilized in the manufacture of bricks must be ascertained. The assessee adopted the value at Rs. 4 per thousand bricks on the view that that was the value charged by DDA. It was, therefore, not a case where there was no basis or a rationale view behind the charging of Rs. 4, but it is fully supported by the authentic way on which the DDA was charging for earth utilised for the manufacture of bricks. The allowance of a similar sum in the past and also in the subsequent years demonstrates how reasonable is the claim made by the assessee and how unreasonable is the view taken by the Department in allowing a grossly meagre amount towards the cost of earth." These observations of the Tribunal are in the case of the assessee and, in my opinion, judicial discipline requires that in the absence of any change in the facts and circumstances of the case, this decision should be followed. I am even otherwise convinced on independent reasoning that the earlier decision of the Tribunal is more reasonable than the reasons proposed for not following the same.
3. In a matter almost akin to the facts of this case, the Hon'ble Supreme Court of India in the case of CIT v. Groz-Beckert Saboo Ltd. [1979] 116 ITR 125 had held that it is now well settled that where an assesses converts his capital assets into stock-in-trade and starts dealing in them, the taxable profits on the sale must be determined by deducting from the sale proceeding's, the market value on the date of their conversion into stock-in-trade. In this case, considered by the Hon'ble Supreme Court, the assessee had received from its collaborators-West German concern-material of the value of Rs. 44,448 and semi-finished needles of the value of Rs. 30,000 free of cost. Thus, the goods worth Rs. 74,448 were received free of cost. The assessee put them into the manufacturing process and debited that amount to the trading account, which was allowed by the Supreme Court with the above observations. In my opinion, the ratio of this judgment also supports the earlier view taken by the Tribunal and is against the proposed view of my learned brother. I, therefore, find it difficult to bring myself about in line with his thought. I hold that the amount of Rs. 47,164 is deductible from the total income of the assessee in the manner claimed by the assessee.
ORDER UNDER Section 255(4) OF THE INCOME-TAX ACT, 1961 There is a difference of opinion on the following point between the Members of the Bench. We, therefore, refer the same to the Hon'ble President under Section 255(4) for reference of the same to a Third Member. The difference is as under :
Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of the amount of Rs. 47,164 as value of the earth used in the business of manufacture of bricks carried on by it ? THIRD MEMBER ORDER K.C. Srivastava, Accountant Member
1. The two Members having differed, the point of difference has been referred to me as Third Member by the President of the Income- tax Appellate Tribunal. The point of difference is as under :
Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of the amount of Rs. 47,164 as value of the earth used in the business of manufacture of bricks carried on by it ?
2. The only point of difference is regarding the deduction of Rs. 47,164 which had been claimed by the assessee as expenditure by debiting it to the trading account on account of use of earth dug from the land owned by the assessee for the manufacture of bricks. The assessee is the owner of a brick kiln and he also owns certain lands and he also purchased land in the accounting period. The assessee had debited in the trading account a sum of Rs. 47,164 as the value of the earth taken from the land for the purpose of manufacturing the bricks. This amount was worked out on a basis followed in the case of the assessee in the earlier years also and the basis was the rate fixed by the Delhi Development Authority for charging for the earth taken out from the land leased to various brick kiln owners. According to the assessee, this was the cost of stock-in-trade and there being a reasonable basis for working out the cost he should be allowed a deduction. This has, however, been disallowed by the Income-tax Officer and the CIT (Appeals). The matter having come before the Tribunal the two Members have taken differing views. While the learned Judicial Member has proposed to disallow the claim, the learned Accountant Member has held that this was an allowable deduction.
3. I have heard the representatives of both the sides. This business is being carried on for several years. In the assessment year 1975-76 when the assessee had made similar claim which had been declined by the revenue the matter had come up before the Tribunal and the Tribunal in ITA No. 3713/Del./1982 had held that without the cost of basic raw material, namely, the earth, no manufacture of bricks can take place. The Bench had upheld the manner of evaluating the cost of earth and held that the basis was reasonable. The Bench had also noted that similar deduction had been allowed in the other years. While the learned Accountant Member was of the view that the same view should be followed in this year, the learned Judicial Member had taken a different view though he had noted the order of the Tribunal in the earlier year.
4. The learned Judicial Member pointed out that the land belongs to the assessee and the cost of digging was allowable to the assessee. The assessee was not incurring any expenditure as anything was not going out of the assessee's funds and no depreciation was allowable on land. The assessee's contention before the authorities was that the land was diminishing in value and the assessee must be compensated for that. The Judicial Member was of the view that the land was not being treated as stock-in-trade in the profit and loss account. It is not a case where the land was being shown in the opening stock at one value and the closing stock at another value. As this had not been done and it has not been shown that the value of the land was lower at the end of the year, the deduction could not be allowed to the assessee.
5. I have considered the facts of the case. I have noted that in the earlier years the assessee has been claiming this deduction and the same has been allowed to the assessee from the assessment year 1975-76. When the matter had been considered by the Tribunal in that year the basis of this claim had been upheld and the reasoning given by the Income-tax Officer was disapproved. It was also observed that the quantum of the debit was also reasonable. The Bench had also noted that in some years like 1977-78 as against a claim of Rs. 38,960 the Income-tax Officer himself had allowed a deduction of Rs. 8,000 but had disallowed the balance of Rs. 30,960. Thus even according to the Income-tax Officer, some cost had to be attributed to the use of earth. In the yea,r 1975-76 the first appellate authority himself had allowed the assessee's claim. It has been brought to our notice that in all the years including the year following the current year, i.e., the assessment year 1979-80, the claim based on similar calculation has been allowed. Against that no appeal was filed by the Department. Thus, we have a case where the claim of the assessee has been allowed in all the years except the year under consideration.
6. Earth is a necessary raw material for the manufacture of bricks. If the assessee had purchased it, he would have to pay for it. As it is dug out from his own land, he is not paying anything for the earth but is suffering a diminution in the value of the land. After digging it for several years, the assessee will have to incur substantial expenditure for filling the pit and then only the land, in question, can be used for sale. The assessee has to keep in mind the diminution in the value of the land as well as the expenditure which has to be incurred for bringing back the land in the original condition. It was in view of this, that in the earlier year the claim of the assessee has been allowed. There has been no difference on the question of the quantum of deduction to be allowed. It has already been held by the earlier Bench that the basis was reasonable. When a particular Bench after considering the facts in detail, had decided this question, which was basically of fact, the subsequent Benches should normally follow it. I am, therefore, inclined to agree with the learned Accountant Member that the claim of the assessee was to be allowed.
7. The matter will now go back to the original Bench so as to enable it to pass an order in conformity with the majority view.