1986 (3) TMI 142 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 1,05,600 for the value of drums.
2. Taxability and accounting method for cash incentives and duty drawbacks.

Detailed Analysis:

1. Addition of Rs. 1,05,600 for the Value of Drums:

The first ground of appeal concerns the addition of Rs. 1,05,600 by the Income Tax Officer (ITO) to the assessee's total income for the value of drums. The assessee, a company manufacturing plasticiser and garments for export, has been maintaining books of account on a mercantile system, except for the containers or drums used for raw materials. The assessee has consistently debited the purchase cost, including the cost of drums, to the accounts but did not value the empty containers in the profit and loss account. Instead, the sale proceeds of these containers were credited when sold.

The ITO, during the assessment, added the value of the drums and bags to the total income, arguing that the assessee had not shown the value of the drums in the closing stock, thus gaining undue benefit. The Commissioner (Appeals) supported the ITO but adjusted the value per drum to Rs. 80.

The Tribunal found that the assessee had consistently followed this method, which was accepted in previous years. The Tribunal held that the ITO's addition was unjustified as there was no material change in the facts and circumstances. The systematic regular account kept by the assessee for empty drums and gunny bags was accepted by the department in earlier years. Therefore, the addition made by the ITO was deleted, and the assessee's grounds were allowed.

2. Taxability and Accounting Method for Cash Incentives and Duty Drawbacks:

The remaining grounds relate to the cash incentives (CCS) and duty drawbacks. The assessee, exporting garments, became eligible for CCS and duty drawbacks but did not account for these amounts on a mercantile basis, opting instead for a cash system due to the nature of the entitlement process.

The ITO added these amounts to the total income, asserting that they should be accounted for when the export transactions were recorded. The Commissioner (Appeals) agreed, considering these amounts as part of the export transaction and exigible on the date of the bill.

The Tribunal examined whether the assessee could account for CCS and duty drawbacks on a cash basis. It found that the assessee's eligibility for these incentives did not translate into a legally enforceable right until approved by the concerned authorities. The Tribunal noted that the authorities cited by the revenue were distinguishable and upheld the assessee's right to account for these amounts on a cash basis as supported by previous Tribunal judgments.

The Tribunal concluded that the assessee was entitled to account for CCS and duty drawbacks on a cash basis, and the authorities below erred in including these amounts in the total income for the year under appeal. The orders of the lower authorities were set aside, and the ITO was directed to delete these amounts from the total income. The assessee's grounds were allowed.

Conclusion:

The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on both major issues: the addition of the value of drums and the accounting method for cash incentives and duty drawbacks.