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TMI Blog1992 (11) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------- He noticed that the driage claimed was rather high and the closing stock was on a large scale as compared to sales. He further noticed that out of the closing stock of 9365.18.800, 8031.13.800 quintals were on consignments with Kerala Supari Centre and 200.20.000 quintals were with M/s Mohd. Ibrahim Co. on consignment. Copies of patial accounts of those two firms were examined and he found that M/s Kerala Supari Centre had already sold the major portion of the goods sent on consignments well before the close of the accounting year ended 31-3-87. He then called for the sale patials bearing Nos. S-30 to S-83 and noticed that these sale patials were drawn on different dates indicating therein the date of sales which were all before the close of the accounting year. The sale patials of M/s. Ibrahim Co. showed that the goods on consignment with it were all sold by 31-3-1987. The Assessing Officer then found that the appellant had not accounted for all the sales effected by the consignees during the accounting year ending on 31-3-1987. Similarly, the expenses relatable to those sales were also not accounted for by the appellant. Incidentially it must be mentioned th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... signment sales made by us on their behalf on various dates during the financial year 1986-87. " He further noticed that the appellant had received huge amounts from M/s. Kerala Supari Centre and that its explanation that it had received the sale patials through lorry drivers after the expiry of the accounting year is " not according to law ; nor according to the primary principles of accountancy ". Thus, he rejected the explanation of the assessee and recast the trading account by deleting from the closing stock the quantity and value in respect of the arecanut sold during the year by the consignees and in turn including in the sales the quantity and value of the arecanut sold during the year. He then computed the addition to be made as follows : Gross profit as per re-cast trading account Rs. 54,82,001 Less : Gross profit as per assessee's books Rs. 18,05,942 --------------------- Rs. 36,76,059 Less : Expenses on consignment sales Rs. 6,35,418 ----------------------- Rs. 30,40,641 ----------------------- The learned Asstt. C.I.T. was of the view that the driage claimed at 669.01 quintals on a total purchase of 12579.67.400 quintals was high. He scrutinised the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. Further, even though the appellant has been regularly following the system of accounting for sales on the basis of receipt of the sale patials and even though such system has been accepted in the earlier assessment years, he was not bound to follow the same system if true profit cannot be ascertained in the ratio of the decision of the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44. The learned CIT(Appeals) upheld the contention of the learned Assessing Officer in view of the decision of the Supreme Court cited supra. Further, he held that the method adopted by the appellant appeared to him to be a colourable device to evade tax. The affidavits filed by T. P. Pocker and D. Abutty to the effect that the sale patials were sent only after the close of the accounting year cannot be accepted as they are only interested parties. There was no evidence to show that the patials were received after the close of the accounting year. Therefore, the ratio laid down in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) would be applicable to the facts of the appellant's case. Thus, he upheld the addition of Rs. 30,40,641. 4. As for the additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties. 7. Reliance placed on the Supreme Court decision in the case of British Paints India Ltd. is rather misplaced. That was a case where the assessee valued its work-in-progress in terms of raw-material cost and such system of stock valuation does not have the sanction of the text books in that it did not lead to ascertainment of true profit. It was therefore that the Supreme Court came down heavily on that system of stock valuation and in the facts of the case held that merely because such a system of stock valuation had been accepted in the past by the revenue it cannot be said that one should not have a second look at the stock valuation in the relevant assessment year. In the case of the assessee before the Tribunal, the system of accounting besides being accepted in the past by the revenue has met with the approval in the accounting text books. This is a material difference from the case of the appellant with that of the case of Britsh Paints India Ltd. This aspect was not considered by the first appellate authority who had simply applied the ratio decidendi of the Supreme Court in British Paints India Ltd's. case to the facts of the assessee's case. 8. Sri Rajappan furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the method of accounting adopted by the appellant. This has resulted in an abnormal assessment for the impugned assessment year leading to subnormal assessments in the succeeding assessment years and in this connection he referred to the figures furnished in the paper book at page 5 (loose sheets). 9. The learned counsel for the assessee contended vehemently that it is not correct to say that the assessee has received the entire value of the consignments in advance. The real position was that whenever consignments are sent through approved transporters, the bills are discounted with the bank and temporarily the accounts of the appellant-consignor is credited with the amount discounted in the bank. That does not mean that the consignee has made the payment for the consignment. It is only a discounting facility with the bank though the account of the consignee was credited for the proceeds of the bills discounted. It is the appellant who is liable to the bank in case of dishonor of the bill on the part of the consignee. Then he referred to the details of the bills discounted with the bank in respect of the consignments to M/s. Iritty Trading Co. He also referred to the practice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only after the close of the accounting period. This aspect of the matter has not been appreciated in the proper perspective. 11. The learned counsel for the assessee further submitted that the inference drawn by the authorities against the appellant from the reply given by M/s. Kerala Supari Centre in its letter dated 1-3-1990 was wholly unwarranted. The Assessing Officer had only enquired in his letter to M/s. Kerala Supari Centre about the sales effected during the previous year ending on 31-3-1987 and with reference to certain sale patials bearing Nos. S-30 to S-83 and S-94 to S-109. In response to that letter, M/s. Kerala Supari Centre had stated that they have effected sales covered by the relevant sale patials on various dates during the financial year. Such a reply cannot lead to the conclusion or the inference that the sale patials themselves were despatched to the appellant on various dates during the financial year. Unfortunately, without having regard to the terms of reference found in the Assessing Officer's letter to M/s. Kerala Supari Centre, an adverse inference had been drawn against the appellant merely on the basis of the reply given by the latter. Thus, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant in respect of the entries in the books of accounts except to the extent it did not take into account the consignment sales effected during the accounting period and, therefore, there was nothing wrong in his taking into account the sales made during the year in the book results by recasting the trading account in order to compute the true profits of the appellant in terms of section 145(1) of the I.T. Act. The appellant's plea that its books should be rejected at least and estimate should be made under section 145(2) should not be entertained because the Assessing Officer has not stumbled upon any further defects as to warrant rejection of accounts. 13. To the appellant's argument that in the succeeding assessment years, as against the income declared by it, the assessing authority has computed the loss, Sri Abraham contended that the Assessing Officer was fair enough to eliminate the sales reported by the appellant in the succeeding assessment years as he had already taken such sales for the computation of income in the impugned assessment year and such step was only a logical consequence of the treatment accorded to the same by the assessing authority in the impugned asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent of excluding entirely all the sales made during the year by the consignee. 16. Referring to the contention of the learned counsel for the appellant that the Assessing Officer had not enquired from M/s. Kerala Supari Centre about the dates of the sale patials or about the despatch of the sale patials to the appellant, Sri Abraham adverted to the letter addressed by the Assessing Officer to M/s. Kerala Supari Centre and submitted that the letter read with its reply would amply demonstrate that the latter had despatched the sale patials within the accounting year itself. 17. Sri Abraham further contended that some of the partners of the appellant firm are partners in the firm of M/s. Kerala Supari Centre and, therefore, it cannot be said that the appellant was totally ignorant of the sales effected by the other party and in these days of fast communication and in the context of huge balances lying with the appellant from the other party, it can be safely inferred that the appellant was aware of the sales effected during the year, but it did not choose to account for the same in order to defer the payment of tax. As for the sales effected by M/s. Mohd. Ibrahim Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em. In our considered opinion, the appellant must be said to be maintaining its books of accounts on mixed system of accounting. Therefore, it cannot be said that as soon as sales were effected by the consignees income had in law accrued to the appellant. Both the learned Assessing Officer and the learned CIT(Appeals) fell in the same error of not ascertaining the true system of accounting that is being followed by the appellant. 19. Sri Abraham's contention is that the accounting practice adverted to by the learned author should be understood in the normal circumstance of the consignee rendering account sales or sale patials as soon as the sales are effected and the learned author did not envisage extra-ordinary delay in the despatch of sale patials. We are unable to accept this contention because the liability to render account sales or sale patials arises to the consignee only when the consignment is realised and the expenses incurred by him on the consignment are reckoned with in the account sales. A reading of the procedure of accounting mentioned in para 5. Chapter VI, extracted by us above, would lend support to this view. Further, whatever be the point of time at which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87. The total Quantity of arecanut sold on their behalf during the above period was 9596 bags, each bag containing approxmately 75 kgs. of arecanuts. We hope that the above details are sufficient for your requirements. " These letters are to be read together. It is clear that the Assessing Officer was only concerned with the dates on which the sales were actually effected in respect of the sale patials bearing Nos. S-30 to S-83 and S-94 to S-109 and the details of quantity of consignment sales as shown in those sale patials. He has nowhere enquired about the dates on which the sale patials were actually sent to the appellant. Therefore, the reply given by M/s. Kerala Supari Centre in its letter dated 1-3-1990 can be only with reference to the dates on which the sales were effected by it in respect of the sale patials mentioned in the letter of the Assessing Officer. The reply cannot be interpreted as indicative of the dates on which the sale patials were despatched (or sent) to the appellant by M/s. Kerala Supari Centre. Shri Abraham's contention is that even if there is ambiguity in the reply of M/s. Kerala Supari Centre, at least M/s. Kerala Supari Centre has understood the let ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pari Centre or to have the transactions in the manner in which it liked. At least there in no material before us to draw such a conclusion as contended by Shri Abraham. In such circumstances, the affidavit of Shri Abutty, one of the managing partners of M/s. Kerala Supari Centre cannot be dismissed as of no consequence. In the affidavit filed before the Commissioner of Income-tax(Appeals) he had explained that in the year ended 31-3-1987, there was abnormal delay in finalising the accounts which has delayed very much the sending of sale patials, to the consignor and the sale patials Nos. S-30 to S-109 were prepared only after the close of the accounting year and sent to the consignor. When an affidavit is filed by a third party substantiating the stand of the appellant and such stand is supported by entries in the books of accounts, unless the contents of the affidavit are proved to be false, such an affidavit cannot be dismissed as of no consequence--Mehta Parikh Co. v. CIT [1956] 30 ITR 181 (SC). The CIT(Appeals) erred in not considering the affidavit by testing the same with other materials on record. 22. The assessee does not have any direct evidence that the sale patials w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-2-1987 covering the invoices from 62 to 75 and they deal with sales made from 25-9-1986 to 26-12-1986. Pages 197 to 227 contain sale patials dated 28-2-1987 covering the invoices from 76 to 83 and they deal with sales made from 26-12-1986 to 31-1-1987. Pages 229 to 279 contain sale patials dated 5-3-1987 covering the invoices from 94 to 109 and they deal with sales made from 31-1-1987 to 31-3-1987. This is as far as M/s. Kerala Supari Centre is concerned. 24. We notice that many of the sale patials dated 5-3-1987 cover the sales effected by M/s. Kerala Supari Centre for the period after 5-3-1987 and such instances are to be found from pages 247 to 279. Shri Abraham could not seriously object to the exclusion of such transactions as are covered by the sale patials dated 5-3-1987 beginning from page 247 to 259. Further at page 231 of paper book III, the sale patial dated 5-3-1987 contains the details of remittances dated 2-2-1987, 20-3-1987 and 27-3-1987 which dates are posterior to the date of the sale patials themselves, though such dates of remittances have been scored of subsequently. 25. From the above, it would be evident that the sale patials were not made out at regular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound :-- " That any system of accounting which excluded, for the valuation of stock-in-trade, all costs other than the cost of raw materials for the goods-in-process and finished products, was likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system might produce a comparatively lower valuation of the opening stock and the closing stock, thus showing a comparatively low difference between the two. In a period of rising turnover and rising prices, such a system was apt to diminish the assessment of taxable profit of a year. The profit of one year was likely to be shifted to another year which would be an incorrect method of computing profits. Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the respondent was found to be such that income could not properly be deduced therefrom. It was, therefore, not only the right but the duty of the Income-tax Officer to act in exercise of his statutory power for determining what, in his opinion would be the correct income. " I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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