9911796707
TMI Blog1985 (1) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... ver disclosed in the books of account of the assessee was Rs. 1,49,358 and the net profit as per the profit and loss account was Rs. 26,32,406. However, in its return, the assessee disclosed a loss. The reasons for filing the return for loss were mentioned by the assessee in its letter dated 19-6-1976 to the ITO. It was stated in the said letter that an amount of Rs. 27,70,943 included in the total sales shown in the books of account represented disputed claims against the ITC Ltd. The details of the said amount were as under : Rs. 1. Difference in exchange rates in respect of frog legs shipments from 21-9-1973 to 29-3-1974. 7,45,379.92 2. Sales of marine products duly certified by the Export Inspection Agency at FOB value 9,85,952.04 3. Sale of marine products awaiting the Export Inspection Agency certificate of FOB value 10,39,610.70 -------------------------- 27,70,942.66 -------------------------- The assessee further stated in that letter that the ITC Ltd. had filed a civil suit in the Bombay High Court claiming refund of the advances and repudiating the assertion of the assessee about the sale of Rs. 27,70,943. Consequently, according to the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the sale had in fact taken place and income from those sales had in fact accrued. 5. The learned Commissioner (Appeals) examined the account books of the assessee and afforded a reasonable opportunity of being heard to the ITO. The ITO contended before the Commissioner (Appeals) that the assessee had not explained either to the ITO at the time of assessment or to the IAC Ltd. at the time of making objections under section 144B of the Income-tax Act, 1961 (' the Act '), as to how the entries dated 31-5-1974 regarding the amount could not have been made if the regular method regarding making of entries against sale which had been followed prior to 31-5-1974 had been adopted and as such the assessee should not be allowed to raise such point. The Commissioner (Appeals) rejected the said contention of the ITO. He examined the books of account and he was satisfied that the assessee had been making entries against sale after the products had been shipped and intimation had been received from the ITC Ltd. and that there had been departure from this practice while making entries dated 31-5-1974 regarding the above amount. 6. Before the Commissioner (Appeals), an affidavit dated 20- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary to refer to the agreement between the assessee and the ITC Ltd., which took place on 1-12-1971. The copy of the said agreement has been filed by the assessee. In clause 2 of the agreement, it is mentioned that the ITC Ltd. was an exporter of marine products and had agreed to purchase from the assessee marine products for the purpose of export only and the assessee had agreed to sell the marine products for the said purpose and to ship such marine products to the ITC Ltd.'s customers in foreign countries on the ITC Ltd.'s behalf only. Under clause 3 of the agreement, the assessee had to ensure that the marine products to be supplied were of the first class quality fit for export to countries abroad to the ITC Ltd.'s satisfaction. Under clause 4 of the agreement, the assessee was required on the ITC Ltd.'s behalf to ship the marine products purchased by the ITC Ltd. under the agreement to the ITC Ltd.'s customers abroad and in that connection to comply with all the necessary formalities relating to export of marine products by the ITC Ltd. including actual shipping of the marine products and other letters of credit from the foreign customers in the ITC Ltd.'s favour. Under clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.74) represented the sale made by the assessee to the ITC Ltd., and, as such, the said sale had to be taken into account in computing the profits. According to the learned departmental representative, the assessee could claim deduction as bad debt if the assessee was unable to recover the amount due to the assessee from the ITC Ltd. on account of those sales and if the assessee was required to refund the advances received by the assessee from the ITC Ltd. 11. We are unable to accept this contention. The entries in the books of account are not decisive in determining the rights and liabilities of the parties in particular transactions. The rights and liabilities of the parties are to be determined on the basis of the agreement prevailing between the parties, Consequently, the crucial document would be the agreement, dated 1-12-1971. We have already reproduced the main conditions agreed upon by the parties. As already indicated, the condition in clause 6 clinches the issue. It is specifically mentioned therein as under : " It is expressly agreed and understood that from the time the advance of 90 per cent of the price is made and until the sale is completed by the supplier placi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material. On the basis of the said conduct of the assessee, no finding that the sale was completed could be recorded particularly when under the terms of the agreement, the sale could not have been completed before the products had been shipped and the documents had been handed over to the ITC Ltd. Considering all the circumstances, and after paying due regard to the submissions made on behalf of the department, we confirm the finding of the Commissioner (Appeals) to the effect that the above amount (of Rs. 20,25,562.74) did not represent the complete sale in favour of the ITC Ltd. Consequently, the entry dated 31-5-1974 regarding this amount consisting of two items was erroneous and the assessee was entitled to deduct this amount from the total sale shown in the books of account. 13. Before parting with this topic, we may mention that the learned departmental representative had argued that the learned Commissioner (Appeals) should not have allowed the assessee to explain the past methods of making entries regarding the sale when the assessee had not taken that stand before the ITO and before the IAC. It is not necessary for us to consider this contention. We have relied on the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording to the method of accounting regularly followed by the assessee. The value to be included would be either the cost or market value as on 30-6-1974, whichever is lower. For determining the market value as on 30-6-1974, the ITO cannot ignore the fact that on 31-5-1974, the assessee had made an entry about the sale of those products thereby indicating that on that date those products were in excellent condition. The assessee had also obtained a certificate from the Government agency about these products being in good condition. The ITO also cannot ignore the fact that under the agreement, the assessee was required to store those products in the cold storage and to insure those products against the loss, damage or destruction. The ITO may take into account the subsequent events also, namely, about the handing over of the products to the receiver. However, the ITO would not be bound to determine the value of the closing stock solely on the basis of what had happened subsequently. He has to take into account all the surrounding circumstances and to determine the value to be included in the closing stock as on 30-6-1974. We, therefore, modify the direction of the Commissioner (App ..... X X X X Extracts X X X X X X X X Extracts X X X X
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