1989-VIL-84-ITAT-

Equivalent Citation: TTJ 035, 259,

Income Tax Appellate Tribunal BOMBAY

Date: 14.08.1989

ZENITH RUBBER & PLASTIC WORKS.

Vs

INCOME TAX OFFICER.

BENCH

Member(s)  : J. P. BENGRA., R. N. SINGHAL.

JUDGMENT

This is an appeal by the assessee against an order of CIT(A)-XII, Bombay, pertaining to the asst. yr. 1986-87.

2. The first grievance of the assessee in this appeal is that the CIT(A) erred in confirming the addition of Rs. 5,73,975 made by the ITO on account of cash compensatory allowance.

3. The assessee claimed cash assistance of Rs. 5,73,973 as exempt from income-tax. The ITO disallowed the claim of the assessee and held that the cash assistance received by the assessee is taxable because it is a trade receipt on revenue account. On appeal, the CIT(A) also confirmed the order of the ITO on the ground that the cash assistance, import entitlement and sale price are part of the same transaction and have to be treated alike for the purpose of taxation. In support of this, he placed reliance on the decision of the Bombay High Court in the case of Metal Rolling works (P) Ltd. vs. CIT (1982) 31 CTR (Bom) 116 : (1983) 142 ITR 170 (Bom) and Kamani Engineering Corporation Ltd. vs. CIT (1982) 37 CTR (Bom) 204 : (1984) 150 ITR 586 (Bom). The assessee is aggrieved.

4. Learned assessed counsel placing reliance on the decision of the Special Bench of Tribunal in the case of Gedore Tools (India) Ltd. vs. IAC (1988) 70 CTR (Trib) (Del) (SB) 69 : (1988) 25 ITD 193 (Del)(SB) and the decision of the Tribunal in the case of Karimjee (P) Ltd. vs. IAC, Range IV-D, Bombay in ITA NO. 3892/Bom/1987 for the asst. yr. 1985-86, in which one of us was party to the order of the Tribunal, and submitted that the cash compensatory support received by the assessee cannot be treated as trade receipt.

5. As against this, learned Departmental Representative, Shri Sridharan, submitted that cash compensatory support received by the assessee is in the nature of trading receipt on revenue account and, therefore, the same is taxable. He placed reliance on the decisions of Calcutta High Court in the case of Jeewanlal (1929) Ltd. vs. CIT (1982) 26 CTR (Cal) 60 : (1983) 142 ITR 448 (Cal); of Allahabad High Court in the case of CIT vs. Swadeshi Cotton Mills Co. Ltd. (1980) 15 CTR (All) 81 : (1980) 121 ITR 747 (All); and of the Supreme Court in the case of Combay Electric Supply Industrial Co. Ltd. vs. CIT (1978) CTR (SC) 50 : (1978) 113 ITR 84 (SC).

6, We have considered the rival submissions. In the case of Gadore Tools (India) (P) Ltd., there was a particular scheme. On the basis of that scheme, the Tribunal has come to the conclusion that cash compensatory support received by the assessee-company is to be held non-taxable. In that case, the CIT(A) has treated only 45 per cent of the received of Cash Compensatory Support on capital account and the Department was in appeal. The facts in the present case are different. The Revenue Authorities in this case, have not gone into the details of cash compensatory scheme vis-a-vis whether it is in para materia with the scheme involved in the case of Gedore Tools India P. Ltd.; whether the cash assistance remained uncharged all along or not etc. Therefore, we are of the opinion that the matter should be set back to the ITO to re-examine the matter after finding out the details of the scheme of cash compensatory scheme involved in the present case and redecide the same after giving the assessee an opportunity of being heard. We decided this issue accordingly and remit the matter back to the file of ITO.

7. The next grievance in the appeal of assessee is that the CIT(A) erred in rejecting the method of valuation of closing stock of finished goods adopted by the assessee and in making the addition of Rs. 1,54,675. The assessee has been valuing the closing stock at cost or market price, which ever is low. During the year, assessee has reduced its closing stock by margin of 35 per cent in respect of finished goods as against a bill of 21.92 per cent of the year. The ITO however, confined this reduction to the percentage of gross profit which will eventually mean valuing it at cost. This resulted in an addition of Rs. 1,54,675. Before the CIT(A), it was argued that the assessee had been following the system of reducing the sale price by 33.63 per cent for working out the value of stock an there was no variation in the valuation of the year's stock. It was also pointed out that if the authorities wanted to increase the stock on the basis followed by him, he should also have, increased this years's opening stock on this ground. However, the CIT(A) upheld the decision of the ITO, observing that the assessee has clearly been following the system of valuing his stock at cost or market price whichever is low and, therefore, there was no cash of reducing it further below the lower of the two by 35 per cent or 33.67 per cent. Assessee is aggrieved.

8. The learned assessee counsel, Shri Patil, pointed out that in previous years, the method of accounting followed by the assessee was never rejected by the Department and, therefore, the same cannot be rejected for the present year. In any case, it was pointed out that when the valuation of closing stock is changed, there has to be corresponding change in the valuation of opening stock as well, as the method of valuation adopted by the assessee has been some even in the preceding years. In this connection reliance was placed on the decision of Privy Council in the case of CIT, Bombay Presidency vs. Ahmedabad New Cotton Mills Co. Ltd. AIR 1930 PC 56.

9. As against this, learned Departmental Representative supported the action of the CIT(A).

10. We have considered the rival submissions. The assessee has been following the method of valuing the closing stock at cost or market price whichever is low. Therefore, there was no question of reducing it further below the lower of the two by reducing it by 33.63 per cent or 33 per cent. However, we find force in the submission of the learned assessee counsel to the effect that if the valuation of the closing stock is changed, there has to be a corresponding change in the valuation of the opening stock as well, as per the accounting principle. Therefore, we modify the order of the CIT(A) to this extent and direct the ITO to make corresponding adjustment in the opening stock but not exceeding Rs. 1,54,675. In the result, this ground of the assessee is partly allowed.

11. The next grievance in assessee's appeal is that the CIT(A) erred in confirming the addition of Rs. 2,78,072 on the ground that the closing stock of raw materials was undervalued. The assessee had shown R.M.A. Rubber closing stock of 97,569 Kg. which was valued by the assessee at Rs. 800 per Kg. on the basis of a letter dt. 16th March, 1988. It was mentioned in the said letter that this stock of 97519 kg. of National Rubber was imported and was in balance as on 31st March, 1986, and prior to Bombay Port Trust clearance, the goods were damaged due to unseasonal rains. The ITO requested the assessee to adduce the evidence of the damage, which the assessee could not do. The ITO, therefore, made addition of Rs. 2,78,072 on the basis that the assessee valued the closing stock of raw material less by Rs. 2.85 per kg.

12. On appeal, the CIT(A) observed that the goods in question are stated to have been imported from abroad which are supposed to have been packed to safety against any damage by nature. Even if they were damaged despite rain proof packing, they are supposed to be covered by insurance till the point of delivery at the assessee's factory. Even if they were covered under insurance only till the delivery from the port, the assessee is supposed to point out any damage to the insurance as well as Port authorities at the time of taking delivery. Since the assessee did not making any such complaint either with the port or insurance authorities and since the claim of the assessee is not supported by any evidence, the CIT(A) confirmed the addition made by the ITO. Assessee is aggrieved and has come in appeal before us.

13. Learned assessee counsel produced before us copy of a letter from International Clearing Agency dt. 28th May, 1989 and submitted that according to this certificate, the goods were damaged due to unseasonable rains. However, it is admitted by the learned assessee counsel that this evidence was not produced before the ITO or the CIT(A) and, for the first time, it was produced before the Tribunal. He, however, requested that this letter should be taken on record considering the facts and circumstances of the case.

14. As against this, learned Departmental Representative submitted that from the pages 13 and to 14 of the paper-book filed by the assessee, it is clear that the letters dt. 27th Feb., 1986 and 4th March, 1986 were in possession of the assessee and these could have been produced by the assessee before the ITO and the CIT(A). Since the assessee failed to produce these letters at that stage, the same should not be entertained at this stage and the claim of the assessee should not be allowed on the basis of these letters.

15. We have considered the rival submissions. We find that the assessee has not been able to produce any evidence before the ITO or the CIT(A) about the damage to the goods. From the letter now produced which is dt. 28th May, 1989, it appears that there were two other earlier letters dt. 27th Feb., 1986 and 4th March, 1986, which were also produced before us in the paper book. The order of the CIT(A) was passed on 27th Dec., 1988. In our view, therefore, at least the letters dt. 27th Feb., 1986 and 4th March, 1986 could have been produced by the assessee before the CIT(A). Since the assessee failed to produce these letters at that stage, the same cannot be admitted as evidence at this stage. Leaving aside this evidence, we do not find any evidence on record to support the claim of the assessee. Therefore, we do not find any reason to interfere with the order of the CIT(A). We, therefore, confirm the order of the CIT(A) and reject this ground of the assessee.

16. The next grievance of the assessee in its appeal is that the CIT(A) erred in upholding the disallowance of Rs. 1,00,450 paid as foreign commission to Dr. Rajendra. The assessee debited the commission of Rs. 13,55,412 made as under:

This commission was paid to Dr. Rajendra as per agreement dt. 5th Oct., 1984, wherein it was mentioned that "on such order, so procured, accepted and executed by us, you will be eligible for a commission @ 5 per cent (five percent) on F.O.B. value of goods supplied, payable after receipt of payment for each consignment."

During the accounting year for asst. yr. 1985-86, assessee made export of Rs. 20,09,000 and received payment of Rs. 8,72,875. The assessee following cash system of accounting in respect of payment of commission upon the last year and according to the assessee, it has changed to mercantile system of accounting. The assessee argued before the ITO that last year they have followed cash system of accounts in respect of payment of commission and hence did not claim Rs. 1,00,450 as commission payable to Dr. Rajendra and this year the assessee followed a mercantile system of accounting and claimed the commission payable to Dr. Rajendra inclusive of commission for asst. yr. 1985-86. It was submitted before the ITO that the assessee switched over to the mercantile system after they found that the regular trade has developed with USSR in the asst. yr. 1986-87 and therefore the treatment of this expenditure in both the years was in order. The ITO rejected the claim of the assessee on the ground that the assessee has not claimed the expenses on due basis either at the time of execution of order or at the time of receipt of payment, though the terms of agreement speak of mercantile system of account. On appeal, the CIT(A) confirmed the order of the ITO on the following reasoning:

"The appellant's source of income in this case is profits out of exports to USSR. The accounts are maintained for this source on mercantile basis. The appellant cannot further have different systems of accounts for different heads of expenditure made for earning the export income from USSR. The appellant has claimed that the expenditure was not claimed in the asst. yr. 1985-86 because he followed cash system of accountancy for the expenditure relating to commission paid on export order to USSR on cash basis and he is claiming the same on mercantile basis this year. This separate treatment of the export commission in two years on two different basis cannot be allowed. The appellant's system of accountancy in respect of this source of income was mercantile and therefore he should have claimed the commission of Rs. 1,00,450 which arose in the asst. yrs. 1985-86 in that year only on mercantile basis."

Aggrieved by the order of the CIT(A), assessee has come in appeal before us.

17. Learned assessee counsel pointed out that the foreign commission was paid to Dr. Rajendra under an agreement, for procuring export orders to the assessee in asst. yrs. 1985-86 and 1986-87. This commission was not paid to Dr. Rajendra, but this is being claimed on accrual basis. The assessee has changed the system of accounting from cash to mercantile system and, therefore, it should be allowed. As against this, learned Departmental Representative supported the action of the Revenue Authorities.

18. We have considered the rival submissions. From the order of the ITO, it is clear that during the asst. yr. 1985-86, the assessee made export of Rs. 20,09,000 and received payment of Rs. 8,72,875. At that time the assessee was following cash system of accounting. In our view, even if there is change to mercantile system of accounting, the amount received by the assessee shall not be allowed, and therefore, the commission payment to Dr Rajendra shall be allowed to the assessee in this assessment year. We, therefore, direct the ITO to allow commission payable to Dr. Rajendra, and also allow this ground of the assessee.

19. The next grievance of the assessee in this appeal is that the CIT(A) erred in confirming the addition of Rs. 3,07,202 being additions of Rs. 2,51,970 under s. 69C and Rs. 55,232 as gross profit on the same goods. In the statement filed by the assessee, the consumption of rubber was shown at 1,51,920 kg., as against 1,28,697 kg. as per Annexure 'B' to Audit Report attached with the return of income. The ITO was of the view that the excess of consumption of 23,220 kgs. of rubber represents assessee's unexplained expenditure. He therefore, made addition to Rs. 2,51,970 being the cost of 23,223 kgs. of rubber at the rate of Rs. 10.85 per kg. It was held by the ITO that since the consumption of the said Rubber has not been reflected as closing stock of the assessee, it should be deemed that the entire production is sold and not recorded in the books of accounts. Thus, taking a G.P. rate @ 21.92 per cent on cost, he added a further sum of Rs. 55,232 on account of suppressed profit.

20. On appeal before the CIT(A), it was pointed out that the quantity of consumption of rubber shown in the statement furnished to the Rubber Board is on estimate basis as the assessee does not maintain any records for the same. It was further submitted that at the end of the year rubber was found in stock o the extent of 97.569 Kg. and taking that figure into account, the balancing figure was shown as consumption. It was also submitted that since the ITO did not find any discrepancy in the books of accounts he should not have rejected them just on the basis of figures supplied to the Rubber Board. However, the CIT(A) confirmed the order of the ITO on the following reasoning;

"I have heard the learned counsel. I do not agree with the appellant's contention that there was no defect in its books of accounts on the basis of which they could be rejected. The appellant has himself stated at more than one places before me that he did not maintain a record of the consumption of the raw material. That itself makes its manufacturing results worthy of rejection and therefore there was sufficient ground for the rejection of accounts. Secondly, it is not a case where the ITO has rejected its books of accounts but he has worked out a specific figure warranting addition under s. 69C as unexplained expenditure and since it was not shown as a part of the closing stock, it was natural to presume that it has been sold out of the books of accounts and therefore he estimated gross profit on the same.  It cannot be accepted that the figures were being supplied to Rubber Board just on estimate basis because Rubber Board is the controlling authority for the rubber manufacturers. I do not find any reason to believe that figures fed by the appellant to the Rubber Board were false and there is no strength in the contentions of the appellant. The addition of Rs. 3,07,202 is accordingly confirmed and the objection is rejected."

Aggrieved by the order of the CIT(A) assessee has come in appeal.

21. The learned assessee counsel invited our attention to the details of the quantity of rubber purchased or otherwise acquired for use in manufacture between April, 1985 to March, 1986 given at pages 17 and 18 of the paper book. He also produced details of consumption of raw material for the year ended on 31st March, 1986 at Annexure-B. He submitted that the particulars furnished to Rubber Board were drawn on estimate basis. In fact, monthly statement was being prepared by assessee, which tallies with the stock register. Therefore, he submitted that there is no discrepancy arising at the end of the year. He submitted that purchases are same whether consumption shown to Rubber Board is more or not. The difference on account of consumption is only due to the fact that the details furnished to the Rubber Board are drawn on estimate basis. Alternatively, it is submitted that provisions of s. 69C are not at all attracted, because there is no evidence that the assessee consumed more than what is accounted for in the books of accounts. As against this, learned Departmental Representative supported in action of CIT(A) and placed reliance on decision of Calcutta High Court in the case of Seth Chemical Works vs. CIT (1981) 21 CTR (Cal) 274 : (1982) 140 ITR 507 (Cal).

22. We have considered the rival submission. The assessee has produced the details of rubber purchased or acquired for use in manufacture at pages 17 and 18 as furnished to the Rubber Board, and the consumption of raw materials for the year ended on 31st March, 1986, wherein opening stock, purchases, consumption and closing stock are shown. On going through these details, we find that the closing stock remains the same even if the details furnished to Rubber Board by assessee on estimate basis is more. Therefore, in our view, there cannot be any ground for making addition on that account.

23. Further, no evidence has been produced by the Department to show that the assessee has incurred any expenditure and failed to offer any explanation as to the source of such expenditure, so as to attract the provisions of s. 69C. We, therefore, set aside the order of the CIT(A) on this point and delete the addition made by the ITO. This ground of assessee is hereby allowed.

24. The next ground in assessee's appeal is that the CIT(A) erred in limiting the deduction under s. 80HHC to Rs. 8,50,000. The assessee claimed that deduction under s. 80HHC should be allowed on total income as determined under the Act. However, the ITO has confined the deduction to 50 per cent of revenue at Rs. 9,42,278 created for the purpose. Before the CIT(A), on appeal, it was pointed out that the ITO was wrong in calculating the profit for the purpose of deduction at Rs. 20,44,542 instead of Rs. 27,84,621 and restricting deduction only with reference to the export reserve created instead of allowing deduction on full amount. It was also submitted that once it was established that the assessee credited reserve as per deduction claimed and thus fulfilled the condition under s. 80HHC, there was no further requirement in law that if such reserve amount fell short because of higher deduction allowed, the claim might also be reduced accordingly. The CIT(A) noted that as per s. 80HHC(1), the claim is confined to the profit derived by assessee from export of such goods or merchandise and since there is nothing on record to show that goods worth Rs. 7,39,949 were exported, the ITO was justified in restricting the allowance with respect of the income of Rs. 20,44,542 only which alone represented assessee's income from exports. He further noted that there is no indication in s. 80HHC that once the reserve has been created, the restriction with reference to the allowance of 50 per cent of the reserve will automatically be lifted in case of higher revision of total income. The CIT(A), thus, confirmed the addition made by the ITO. Assessee is aggrieved.

25. Learned assessee counsel pointed out that the CIT(A) has failed to appreciate that under the provisions of s. 80HHC, total income as determined under the provisions of the Act has to be considered. He further submitted that since additions of Rs. 7,39,949 were on account of trading results as such, the same have to be taken into account for the purposes of calculating the deduction allowable under s. 80HHC. As against this, learned Departmental Representative supported the action of the Revenue Authorities.

26. We have considered the rival submissions. From the order of the ITO, we find that the calculated the deduction under s. 80HHC as under:

After going through the above calculation and the provisions of s. 80HHC, we are of the opinion that the assessee would be entitled to deduction under s. 80HHC on Rs. 20,44,542, as also on addition upheld corresponding to the figure Rs. 7,39,949 which was added to the income of the assessee. This ground is, therefore, allowed and the ITO is directed to give necessary relief accordingly.

27. The next ground in assessee's appeal is that the CIT(A) erred in upholding the disallowance made by the ITO on account of duty draw back and the last ground in assessee's appeal is that the CIT(A) erred in confirming the addition of Rs. 3,250 made by the ITO under s. 37(2A). At the time of hearing, these grounds were not pressed and, therefore, they are hereby rejected.

28. In the result, assessee's appeal is hereby partly allowed.

 

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