9911796707
TMI Blog1989 (9) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... l for the assessee pointed out that the same is covered by several earlier decisions of the Tribunal, which the learned Departmental Representative could not controvert. The other two disputes are regarding deletion of addition in coal account and in account of under report of closing stock of paper cuttings. Though this appeal was argued at length on20th June, 1989and after being marked 'part heard', on11th July, 1989, we for the sake of convenience first take up Revenue's appeal in which the first ground raised reads as under: "On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs. 1,05,59,160 being the ALV of multi-storeyed buildings known as Akash Deep, Surya Kiran and Ansal Bhawan." 3.1. The ITO as in the past had made an addition on account of ALV in the said sum of Rs. 1,05,59,160 as property income in the hands of the appellant on the basis that it was the appellant company, which legally continued to be the owner of the flats made by it in the multi-storeyed buildings constructed by the assessee-company. The very same reasons in making this addition came to be adopted by the ITO which are detailed in earlier year's ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... register on the other hand. In course of assessment proceedings the ITO found that after taking into consideration the opening and closing stock, the total consumption of the coal was that of 5367 M. Tons against actual consumption, as per raw material stock register based on the issuance of coal worked out to 4805 M. Tons. The ITO in course of assessment proceedings observed that the assessee failed to explain the discrepancy in consumption figures as per financial records on one hand and raw material indicated in stock register on the other hand and accordingly the ITO added the price value of difference in the above two items, viz., 562 M. Tons at Rs. 2,24,800. 4.2. The contention of the assessee before, the CIT(A), was that coal was purchased from Coal India Limited, which is a Government Department. It was also submitted before the CIT(A) that coal comes in open wagons right from Dhanbad to the assessee appellant's factory, which is situated in Sikundrabad. It was also pointed out before the CIT(A) that the coal as such is never weighed and whatever was recorded in the financial records is based on bills as issued by the coal mines. It was also pointed out by the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel for the assessee on the other hand relied on the order of the CIT(A). Our attention was also drawn on pages 39 to 41 of assessee's compilation contained in paper book No. 1. He reiterated the very same submissions made before the CIT(A) pointing out that 5367 M. Tons represent gross expense of coal which included the quantities physically used in actual manufacturing and also the weight loss, shortage in transit and shortage in handling and storage and weeding out the useless elements as well. He submitted that nowhere in the past or in subsequent years any addition on this account has been made. He submitted that shortage to the extent of 10 per cent has been found to be reasonable because of all these natural reasons, and the shortage shown by the assessee is only 8-9 per cent. 6. After taking into consideration the rival submissions and looking to the facts available on record on this issue, we are unable to interfere in the finding of the CIT(A). There is no controversy about the facts that coal as such is purchased from Government Coal Department and it is transported in open wagons and open trucks and as a consequence pilferage of coal and wastage in transit canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A) in his order, we find that he has rightly accepted the assessee's contention and his action, as such, is confirmed. The Revenue, therefor, also fails on ground No. 2 of its appeal. 7. The third ground raised by the Revenue in its appeal reads as under: "On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs. 6,59,648 made on account of under reporting of the closing stock of paper cuttings." 7.1. The ITO in course of assessment proceedings had made an addition of Rs. 6,59,648 on account of valuation of wastage in the finishing room, which he discussed in the assessment order. The contention of the learned counsel for the assessee before the CIT(A) was that method of accounting followed consistently by the assessee company is normally the method which is followed in any manufacturing concern of papers. It was pointed out by the learned counsel for the assessee before the CIT(A) that the ITO had worked out the above discrepancy on the ground that the cuttings of paper, after manufacturing is complete, is being used by the assessee company again for the purpose of manufacture of paper, and this as such was not shown by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drums turned out and their quantities are recorded in the pulp mill log register. It could not be controverted by the learned Departmental Representative that according to the pulp mill log register, the total raw materials of waste paper (including white paper cuttings) used for consumption weighed 1129.703 M. Tons. We are convinced from the process explained by the learned counsel for the assessee of finishing paper, which results into paper cuttings. The process which was explained was that after the pulp is made through raw material which is in liquid form, the same is poured into machine chest after treatment. It is after undergoing certain process in the manufacturing section that it assumes the shape of paper in rolled sheets. According to the finishing house daily reports 2800.360 M. Tons of unfinished paper had been manufactured and transferred to the finishing house for sorting, cutting and sizing and after sorting, cutting and sizing etc., 2596.599 M. Tons of paper was packed and sent to the excise godown. In other words, the production rejections, cuttings amounted to about 204 M. Tons. It is this amount which is not taken to the waste paper shed but is refered into the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchases of babhar grass from U.P. Forest Department and other parties, while the second register was showing raw material consumed. The contention of the assessee was that entries in the first register were on the basis of purchase vouchers of babhar grass and payments made therefore, whereas the second register had actually shown the actual consumption of babhar grass. The contention of the assessee was that due to driage, taking out the dust and also a portion of it flying away in air, as the period between purchase and consumption was always months, the difference was natural. In course of inquiries made by the CIT(A), whether there was any actual weighment of babhar grass when the same was consumed for production of paper, it was submitted that figure of consumption was purely on estimate basis, deducting the percentage of driage or shortage in way from the figure purchases. However, the assessee pointed out that there was arithmetical error in the figure of excess consumption arrived at by the ITO, and when it was pointed out that there was double addition of 189.336 M. tons valued at Rs. 79,015, it was clarified that there was supplementary purchase order Nos. 426,427 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and check. There are continuous surprise checkings of production by the Excise authorities and at no stage the assessee has been penalised or any thing has been found wrong. He submitted that difference in the two figures, as pointed out to the learned CIT(A) is in conformity with the difference shown in earlier and subsequent years, which has been accepted by the Revenue. According to him it was for the first time that this addition came to be made. The learned Departmental Representative, on the other hand, relied on the order of the CIT(A). He was fair enough to say that whatever reduction was granted by the CIT(A) was that due to arithmetical mistake. According to him no further reduction is called for. 11. After taking into consideration the rival submissions we are unable to confirm even the addition sustained by the learned CIT(A). Babhar grass is said to be one of the items which are used as raw material for manufacture of paper. Other items being white paper cuttings, wheat straw, rice straw and old and used discarded copies. Most of this grass is purchased from U.P. Forest Department and in whatever form the grass comes, wet, moist or full of dust, no element of moisture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur perusal. Besides the element of estimate, the element of moisture, dust, grass being flown with wind and rough and unuseful grass in form of wastage taken out, cannot be ignored. It is impracticable for any one to weigh the grass at four stages when it is bought, when it is brought to the factory, when it is sorted out and when it is actually consumed. The total shortage comes to 7.7 per cent which we think to be quite reasonable sonable, because for the very next assessment year when records were maintained on the same basis, difference of 76.825 M. Tons against purchase of 927.78 M. Tons of Babhar grass was accepted. It was stated at bar that neither in the past nor in subsequent years any addition on this account has been made, which was not controverted by the learned Departmental Representative. We may also observe that the assessee has furnished certain statements but we are intentionally avoiding for making them a part of this order, because we have dealt with figure aspect of it as the inclusion of the said statement would have made this order cumbersome. The addition in our view even at Rs. 93.956 cannot be sustained and the same is hereby ordered to be deleted. 12. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wrappers, white records, coated cuttings, etc., found therein, are recorded. 10 per cent standard wrapping is separately recorded in the wrapper recording account and so also the cuttings. In the financial statement the gross weight of white cuttings as per purchase invoices are taken as per receipts. 12.2. In the financial statements, on the other hand, only the quantities of extra wrapper paid for are treated as purchases of wrapper. This difference was, therefore, attributed to the different methods of record. It was also further submitted that according to the method of valuation adopted by the assessee, stock for unused wrappers, which is received with the white cuttings, is valued at nil as the same constitutes only the packing into white cutting so received. It was emphatically argued before us, as before, the lower authorities, by the learned counsel for the assessee that this wrapper was not sold as such but was used internally for wrapping the finished goods or for manufacture of craft paper, which again was not meant for sale but meant for internal use for packing of the finished goods by the assessee company. Similarly white record was also not used for manufacturing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udes 10 per cent of wrapper and rassi. He submitted that it is not doubted even by the ITO, as he drew our attention to his letter dt.2nd March, 1985written to ITO which finds place in assessment order. In the said letter the appellant has also pleaded that the fact that supplier did not allow any credit for wrapper packing upto 10 per cent of the weight of white cuttings consignment, could also be verified by the ITO from the supplier at the cost of the assessee. The learned counsel for the assessee had placed before us the samples of wrapper and rassi in which white cuttings are received. It was also reiterated that wrapper was not being purchased separately by the assessee as an item of raw material but was received or to say salvaged out of packing in which the white cutting were received. At the cost of repetition he submitted that salvage wrapper was partly used as packing material for supplies of finished goods to the customers free of charge and smaller pieces which could not be used for packing were used for making craft paper which again was not meant for sale, but for use for further packing. It was on this basis that, according to the learned counsel, the assessee had n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Rs. 87,220. This alternative calculation was given by the learned counsel for the assessee at our asking, but he submitted that in case this addition is made to the closing stock, a finding may be given that opening stock of next financial year would stand correspondingly increased. He, however, submitted that no addition on this account has ever been made in the past or in future. 14. We have carefully considered the submissions of both the parties and gone through the written notes and voluminous paper book and orders of the two lower authorities. On the basis of evidence on record there is no room for doubt that wrapper at 10 per cent of the gross weight of white cuttings purchased was not paid for separately. To this fact the assessee's counsel has placed a certificate from the Association of Waste Paper Merchants & R.M. Suppliers, which is placed on page 19 of assessee's compilation, to the effect that quantities of white cuttings billed to the buyers include packing wrappers to the extent of 10 per cent of the quantities billed and no credit is allowed to the buyers for such wrappers, and if packing wrappers are found to be in excess of the norm of 10 per cent credit is al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e correct and complete to the satisfaction of the ITO but the method employed is such that, in the opinion of the ITO, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the ITO may determine. (2) where the ITO is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the ITO may make an assessment in the manner provided in s. 144." 15.1 A perusal of this section would show that the ITO is under an obligation to compute the income of the assessee from business in accordance with the method of accounting regularly employed by the assessee. At the same time, the ITO was also empowered even though the accounts are correct and complete but the method employed was such that the income cannot properly be deduced therefrom, to compute income on such basis and in such manner as he may determine. In other words this section empowers the ITO to ascertain from the method of accounting employed regularly by the assessee whether such method of accounting was such as to enable the ITO to properly deduce the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rming what in truth are profit of the business into capital by book keeping entries. Thus in order to arrive at the profit, the stock-in trade must be taken into account and this principle applies to whatever may be the method of accounting. This principle was also recognised by the House of Lords in the case of B.S.C. Footwear Ltd. vs. Ridgeway Inspector of Taxes (1972) 83 ITR 269(HL). The following quotation is very appropriate and, therefore, reproduced below: "It has long been recognised that a fair result cannot be achieved without taking into account the trader's stock in hand at the beginning and at the end of the year. In the long run, it might not much matter how this stick is valued because of the wrong figure for the stock at the end of the year one causes the profit for that year to be too low, the same figure on the other side of the account at the beginning of the year two will cause the profit for year two to be to the same extent too high. But for obvious reasons it is desirable that in each separate year, the profit should be determined as accurately as possible." 15.3. The same principle was reiterated by the Calcutta High Court in British Paints India P. Ltd. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t production as per the Finished House report amounted to Rs. 2,596.599 M. Tons while the production as per production register was only 2,574.606 M. Tons. As such the ITO came to the conclusion that there was understatement of production and consequently short accounting of 29,993 M. Tons in the closing stock. He, therefore, added Rs. 1,83,652. It was contended before the CIT(A), as well as before us, by the learned counsel for the assessee that paper was an excisable item and entire production of paper in the plant was under strict control and supervision of the Excise authorities who have the Excise men permanently posted in factory premises. According to the submissions of the learned counsel for the assessee, each and every ounce of paper produced was accounted for in the Excise record and could not be removed out of the factory premises except the gate pass. He submitted that stocks in the factory are periodically surprise checked by the Excise authorities. It was submitted that 2574.606 M. Tons was the actual production as evidenced by the production register, maintained under Excise laws and continuously checked by the Excise authorities. It was stated that the ITO was wron ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of paper is totally under Excise Department the record maintained under law for excise test should have been relied upon by the CIT(A). Simply because there was mention of certain jobs by certain workers. That could not be the production. The addition made under this head by the ITO and sustained by the CIT(A) is, therefore, ordered to be deleted. 18. Ground No. 4 is in respect of issue, in case any addition on account of closing stock of raw material or finished goods is made, the same should be ordered that effect in the next following year and should also be granted. Since we have sustained on the basis of alternative submissions of the learned counsel for the assessee, certain additions in respect of wrappers, white cuttings and white records, we have already directed the ITO in earlier part of this order to verify the arithmetical aspect of the same as per figures submitted by the learned counsel for the assessee before us and give consequential effect in the following year. 19. The next ground which is ground No. 5, is directed against the disallowance sustained at Rs. 42,979 out of interest paid by the appellant. The ITO disallowed an amount of Rs. 4,28,594 out of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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