TaxTMI 
TaxTMI 
2012 (4) TMI 281
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.... by the respondent-assessee during the assessment year 1993-94 is perverse?" (ii) In case the answer to question No.1 above is in the negative whether the change in the method of valuation was bonafide?" 3. In ITA No.794/2006 the following substantial question of law was framed vide order dated 26.5.2006: "Whether Income Tax Appellate Tribunal was correct in law in deleting the addition of Rs.3,64,584/- made by the Assessing Officer to the income of assessee on account of under valuation of closing stock by rejecting the change made by the assessee in the method of valuation of closing stock?" 4. In ITA Nos. 71/2011, 1166/2011 and 1168/2011 we frame the following substantial questions of law: "1. Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was correct in law and on facts in deleting the addition made by Assessing Officer on account of rejection of method of valuation of closing stock as followed by the assessee ? 2. In case the answer to question No.1 above is in the negative whether the change in the method of valuation was bonafide?" 5. After hearing the counsel for the parties, we are also inclined to formulate another question of l....
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.... through reimbursement. The assessee has consistently been showing the said reimbursement as an item of income over the years. Since the losses are to be fully reimbursement by the mills. There is no question of justification for the revaluation of the stocks since losses are to be reimbursed by the sugar mills. Hence the very basis or justification of the claim of change in method of valuation of closing stocks is absent is its case. 2. Secondly the assessee's contention that the stock for F.Y. 90-91 & 91-92 were valued at cost since on the closing date the domestic prices were higher than the cost price is apparently wrong statement. The assessee has in the past been valuing its stocks at cost method which is clear from the note 3 of schedule I notes containing significant accounting polices in the annual report for A.Y. 92-93 which reads as under:- "The inventories are valued at cost" In the note no. 4 of schedule I notes contains significant accounting polices annexed at page 27 of Annual report for the A.Y.93-94 it has mentioned as under. "The inventories are valued from this year at cost or net realizable value whichever is lower" This clearly goes to show that the assessee....
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....ee or not. Where such orders were received, the assessee has taken higher NRV. Where no orders were received, the assessee has taken the NRV at the cost itself. In my view the picture given by the assessee, therefore, is unclear. As regards the third item relating to the valuation of the damaged stock of sugar, I am of the opinion that even assuming that this stock was valued at NRV which is lower than the cost, still it does not follow that assessee was following the system of cost, still it does not follow that assessee was following the system of cost or NRV which ever is more. This is for the reason that the damaged stock cannot be valued a cost because that will result in distortion. According to the mercantile systems of accounting the assessee had to book the loss whenever it became ascertained. In other words, the valuation of damaged stocks even at NRV is not inconsistent with the method of valuation of stock followed by the assessee at cost. I accordingly reject the contention of the assessee." 10. For the other assessment years, the CIT(A) confirmed the additions for some assessment years, while deleting the additions in the other years. Subsequently, the assessee/Reven....
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....ts, the Tribunal recorded the aforesaid findings in the impugned order and observed: "We have considered the rival submissions and also perused the relevant material on record. Before us the learned counsel for the assessee has filed a statement giving details of closing stock for the immediately preceding year i.e. assessment year 1992-93 and has demonstrated satisfactorily from the values given therein that the stock was valued by the assessee in that year on the basis of cost of NRV whichever is lower. He has pointed out that value of first two items was taken at cost since the same was lower than NRV at the relevant time whereas value of third item was taken at NRV since the same was lower than its cost. It is observed from the impugned order of learned CIT (A) that this aspect was explained on behalf of the assessee before him as well and even was accepted by him, but still he declined to accept that the method adopted by the assessee in the earlier year was cost or NRV whichever is lower and not cost. It appears that the reasons given by the learned CIT (A) to draw such inference were quite filmsy and irrelevant because having accepted that the valuation of stock items was d....
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.... two more certificates dated 20.01.1996, the Chartered Accountant had stated that as on 31.03.1991 and 31.03.1994, the value of closing stock of sugar was done at the cost or realization value, whichever was lower. Whether or not this letter was an afterthought can be debatable. The contention of the respondent assessee is that the aforesaid notes on the Auditor's report are not universal affirmative or universal negative but they state the position in the said years. They do not indicate that till the last year, the respondent assessee was valuing the closing stock at cost price alone and not on any other basis. 15. The tribunal has examined the aforesaid aspect and considered the notes and the auditor's report, the auditor's explanation and the accounts for the years in question. The CIT (A) has given a categorical finding that for the assessment year 1992-93, the assessee had valued the closing stock in respect of subject matter of export orders on Net Realizable Value and not on the cost basis with regard to the balance stock, the order of the CIT (Appeals) is vague and hazy. Similarly it has been accepted that there was no document or material to contradict that prior to 1989....
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....attaching to the holding of Trading Stocks, 1919, " As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure . . . . . . From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less, than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question " (extracted in paragraph 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April 1951). While anticipated loss is thus taken into account, anticipated profit in the shape of a....
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....cordingly answered in affirmative and in favour of the respondent-assessee and against the Revenue. 19. The third common question raises a separate issue. The question is whether the reimbursement payable by the manufactures should be included in the Net Realizable Value. This is a different aspect and relates to computation of Net Realizable Value. We have quoted the reasoning given by the Assessing Officer in the assessment order in the assessment year 1993-94. He has stated that the international price of sugar was lower than the domestic price and therefore when the respondent/assessee had incurred losses on exports. The Assessing Officer has not disputed or stated that the international price cannot be the criteria to compute or calculate the market value. International price is not disputed. This is not the contention of the Revenue. The Assessing Officer in his reasoning has mentioned that the respondent assessee was receiving reimbursement of the loss on export from the sugar manufacturers and losses were reimbursed. Therefore, the respondent/assessee should compute the closing stock on cost basis i.e. Net realizable Value plus reimbursement, which is nothing but the cost ....
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....act to initiate recovery proceedings. It is, therefore contended that the loss recoverable from the factories is booked under receipt basis." 23. The aforesaid explanation was accepted by the CIT (A) in the appeal for the assessment year 1993-94 elucidating and holding as under:- "In the appeal proceedings, it is submitted that is wrong to way that loss is actually a refund of advance. The amount represents compensation received by the assessee from the sugar mill for not honoring the export quote obligation as no advance was given. It is further stated that the amount is not recoverable as per any legal or contractual obligation but only to avoid penalty from Excise Deptt. For not honoring the export quota and as such it is not certain whether entire loss would be reimbursed or only part of it. On the factual position it is informed that loss of Rs. 19.33 crores had occurred in assessment year 1992-93 only which was for the quota year May 1991 to April 1992 extended to June 1992. Out of this, Rs. 11.40 crores was shown in assessment year 1992-93 on receipt basis, Rs.7.21 crores in assessment year 1993-94 again on receipt basis and Rs. 19.83 lakhs in assessment year 1995-96 and t....