DCIT, New Delhi V. M/s. Mahesh Edible Oil Industries Ltd, New Delhi

ITA 1265/DEL/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3922 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 27-04-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 02-04-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G S SAHOTA
• Assessee Lawyers: RAKESH JAIN
• Keywords: Rule of consistency
• Section: 143(3); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E: NEW DELHI SHRI G.E. VEERABHADRAPPA, HONBLE VICE-PRESIDENT AND SHRI C.L. SETHI, JUDICIAL MEMBER ITA NO. 1265/DEL/2009 ASSESSMENT YEAR: 2004-05 DCIT, CIRCLE 6(1), NEW DELHI VS. MAHESH EDIBLE OIL INDUSTRIES LTD. 3/14A, JUNPURA B, NEW DELHI PAN: AACCM 7102 J APPELLANT RESPONDENT APPELLANT BY : SHRI G.S. SAHOTA , SR. DR RESPONDENT BY : SHRI RAKESH JAIN, CA O R D E R PER: C.L. SETHI, J.M. THIS IS THE APPEAL, FILED BY THE REVENUE AGAINST T HE ORDER DATED 06.01.2009 PASSED BY THE LD. CIT(A) IN THE MATTER O F AN ASSESSMENT MADE U/S. 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) FOR THE A.Y. 2004-05. 2. THE GROUNDS RAISED BY THE REVENUE REVOLVE AROUND THE ISSUE REGARDING ADDITION OF RS. 32,12,980/- MADE BY THE AO ON ACCOU NT OF VALUATION OF CLOSING STOCK, BUT DELETED BY THE LD. CIT(A). THE ONLY EFFECTIVE GROUND RAISED BY THE REVENUE IS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(APPEALS) HAS ERRED IN DELEING ADDITION OF RS. 32,13,980/- ON ACCOUNT OF WRONG VALUATION OF CLOSIN G STOCK IGNORING. A) THE MERITS OF THE CASE AND DEFECTS POINTED OUT B Y THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. ITA NO. 1265/DEL/2009 PAGE 2 OF 16 B) THAT IN THE CASE OF CIT VS. REALEST BUILDERS & SERVICES LTD. 307 ITR 202 THE HONBLE SUPREME COURT HAS OPINED THAT THE APPLICATION OF RULE OF CONSISTENCY BY THE HIGH COURT CANNOT BE FOLLOWED IF THE METHOD OF ACCO UNTING FOLLOWED BY THE ASSESSEE RESULTS IN UNDER ESTIMATIO N OF THE PROFITS/NET INCOME. 3. THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 01.11.2004 DECLARING TOTAL INCOME AT RS. 1,53,39,650/-. THE R ETURN WAS ACCOMPANIED BY THE AUDITED BALANCE SHEETS AND TAX AUDIT REPORT. D URING THE RELEVANT PERIOD, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF PRODUCT ION OF MUSTARD OIL AND MUSTARD CAKE FROM MUSTARD SEEDS IN ITS FACTORY LOCA TED AT AGRA. THE GOODS PRODUCED WERE SOLD THROUGH ITS NETWORK OF DISTRIBUT ORS AND DEALERS. DURING THE YEAR, THE ASSESSEE DECLARED TURNOVER OF RS. 94, 55,40,725/- AS AGAINST TURNOVER OF RS. 72,01,53,875/- SHOWN IN THE IMMEDIA TE PRECEDING ASSESSMENT YEAR. THE ASSESSEE HAD SHOWN THE NET PROFIT OF RS. 1,66,19,610/- IN THE CURRENT YEAR AS AGAINST THE NET PROFIT OF RS. 104,4 5,088/- IN THE IMMEDIATE PRECEDING YEAR. THE ASSESSEE HAD DECLARED CLOSING STOCK OF RS. 6,29,50,140/- FOR ITS FINISHED GOODS I.E. MUSTARD O IL AND MUSTARD CAKE. THE OPENING STOCKS FOR THE FINISHED GOODS WAS RS. 4,41, 74,307/-. THE ASSESSEES CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143( 2) WAS ISSUED BY THE AO, WHICH WAS SERVED UPON THE ASSESSEE. DURING THE COU RSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO FILE INVENTO RY OF OPENING STOCK AND CLOSING STOCK, WHICH WAS DULY FILED BY THE ASSESSEE . THE SYSTEM OF ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE WAS M ERCANTILE SYSTEM OF ACCOUNTING AS CERTIFIED IN THE AUDIT REPORT OBTAINE D U/S. 44AB OF THE ACT. ITA NO. 1265/DEL/2009 PAGE 3 OF 16 THE ASSESSEE WAS ALSO ASKED TO FILE DETAILS REGARDI NG VALUATION OF VARIOUS ITEMS SHOWN IN THE CLOSING STOCK. THE ASSESSEE SUB MITTED BEFORE THE AO THAT THE ASSESSEE WAS FOLLOWING FIFO METHOD FOR VALUING THE STOCK. IT WAS NOTICED BY THE AO THAT THE ASSESSEE WAS VALUING ITS STOCK OF OIL BY INCLUDING COST OF MUSTARD SEEDS AND MANUFACTURING EXPENSES, A ND REDUCING FROM THE RESULTANT AMOUNT THE SELLING PRICE OF MUSTARD CAKE, AND IN THAT MANNER, THE COST OF MUSTARD OILS PRODUCED BY THE ASSESSEE REMAI NING IN THE CLOSING STOCK WAS ARRIVED AT. THE CLOSING STOCK OF MUSTARD CAKE WAS VALUED AT SELLING PRICE I.E. NET REALIZABLE PRICE. THE ASSESSEE SUBM ITTED DETAILED COMPUTATION OF VALUATION OF STOCK, WHICH IS AS UNDER:- LOOSE OIL RATE ITEM PERCENTAGE (%) RATE PER KG. AMOUNT PER QTL. SEED 100 18.77 1876.56 A MANF. EXP. 100 0.75 73.04 B CAKE RATE 66.71% 6.93* 462.50 C OIL % 33.22% 1487.10 OIL RATE PER QTL. 4476.16 OIL RATE A+B-C 1876.56+73.04-462.50 =1487.10 COST OF ONE QTL. = 1487.10 33.22 = 4476.10 PER QTL. *CAKE RATE = LAST 10 LOT SELLING PRICE OF CAKE 4. THE AO WAS NOT SATISFIED WITH THE ABOVE METHOD O F VALUATION OF CLOSING STOCK AS HE WAS OF THE VIEW THAT THE PROPER METHOD TO VALUE THE STOCK ITA NO. 1265/DEL/2009 PAGE 4 OF 16 WAS TO ALLOCATE ITS COST OF PRODUCTION TOWARDS TWO PRODUCTS I.E., MUSTARD OIL AND MUSTARD CAKE. THE AO, THEREFORE, ASKED THE ASS ESSEE TO EXPLAIN AS TO WHY THE ASSESSMENT SHOULD NOT BE MADE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 145(3) OF THE ACT. IN REPLY T HERE TO, THE ASSESSEE SUBMITTED THAT THE SYSTEM OF VALUING THE CLOSING ST OCK IS RECOGNIZED AND SYSTEMATIC ONE IN ACCORDANCE WITH THE ACCOUNTING ST ANDARD 2 NOTIFIED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. I N THIS REPLY, THE ASSESSEE INVITED THE ATTENTION OF THE AO TO PARA 10 OF THE ACCOUNTING STANDARD 2. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS AND PA RA 10 OF ACCOUNTING STANDARD 2, THE AO VALUED THE CLOSING STOCK OF MU STARD OIL AND MUSTARD SEEDS BY ALLOCATING, THE COST OF RAW MATERIAL AND M ANUFACTURING TOWARDS BOTH THE PRODUCTS I.E. MUSTARD OIL AND MUSTARD CAKE, AND ARRIVED AT A DIFFERENCE OF RS. 32,13,980/- IN THE OPENING STOCK AND AS WELL IN CLOSING STOCK OF THE RELEVANT YEAR, WHICH WAS ADDED TO THE NET PROFIT DE CLARED BY THE ASSESSEE. THE VARIOUS PROPOSITION AND DISCUSSION WITH REGARD TO THE SYSTEM OF ACCOUNTING AND VALUATION OF STOCK HAS BEEN REFERRED TO BY THE AO IN THE ASSESSMENT ORDER. 5. BEING AGGRIEVED, THE ASSESSEE PREFERRED AN APPEA L BEFORE THE CIT(A) 6. BEFORE THE LD. CIT(A), THE ASSESSEE REITERATED T HE SUBMISSIONS AND CONTENTIONS THAT WERE MADE BEFORE THE AO TO CONTEND THAT THE SAME METHOD OF VALUING THE CLOSING STOCK HAVE BEEN REGULARLY FO LLOWED BY THE ASSESSEE FOR LAST SO MANY EARLIER YEARS, WHICH IS IN ACCORDANCE WITH THE ACCOUNTING ITA NO. 1265/DEL/2009 PAGE 5 OF 16 STANDARD 2. THE LD. COUNSEL FOR THE ASSESSEE FUR THER STATED BEFORE THE CIT(A) THAT THE VALUE OF MUSTARD CAKE HAS ALREADY B EEN TAKEN INTO ACCOUNT BY REDUCING THE VALUE THERE OF FROM THE COST OF MUS TARD SEEDS AND MANUFACTURING EXPENSES WHILE DETERMINING THE COST O F MUSTARD OIL. HE FURTHER SUBMITTED THAT THIS IS NOT A CASE WHERE VA LUE OF MUSTARD CAKE HAS NOT BEEN TAKEN INTO ACCOUNT. HE FURTHER SUBMITTED THAT WHATEVER HAS BEEN WORKED OUT BY THE AO IS SOMEWHAT ARITHMETICAL CALCU LATIONS WITHOUT POINTING OUT ANY MATERIAL DEFECT OR DISCREPANCIES I N THE METHOD OF VALUATION OF CLOSING STOCK ADOPTED BY THE ASSESSEE. 7. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS AND AOS ORDER AND THE MATERIAL AVAILABLE ON RECORD, THE LD. CIT(A) DECIDE D ISSUE IN FAVOUR OF THE ASSESSEE BY HOLDING AND OBSERVING AS UNDER:- 3.7 I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE LD. AR AND THE BASIS ON WHICH THE AO HAS WORKED OUT THE FIGURE OF RS. 32,13,980/-. THE APPELLANT COMPA NY HAS FILED ITS RETURN OF INCOME WHICH HAVE BEEN DULY AUD ITED BY CHARTERED ACCOUNTANT AND ACCOMPANIED BY AUDITED BALANCE SHEET/P&L ACCOUNT, FORM 3CD AND TAX AUDIT REPORT. NO WHERE IN THESE REPORTS, THE CHARTERED ACCOUNTANT HAS MENTIONED ANY INACCURACY AS FAR AS WORKING OUT OF PENDING STOCK AND CLOSING STOCK IS CONCERNED. THERE IS NO DOUBT THAT THE APPELLANT IS FOLLOWING A PARTICULAR METHOD FOR ARRIVING AT OPENING/CLOSING STOCK CONSISTENTLY OVER THE YEARS A ND IN MY CONSIDERED OPINION, THE AO SHOULD NOT HAVE DISTURBE D THE WORKING OF OPENING/CLOSING STOCK IN SUCH LIKE CONDI TIONS. AFTER GOING THROUGH THE COMPARATIVE FIGURES OF SEED S CRUSHED AND MUSTARD OIL AND CAKES PRODUCED FOR FOUR YEARS, IT CAN BE NOTICED THAT THE YIELD FOR MUSTARD OIL RANGES FROM 33.28% TO 34.18% AND FOR MUSTARD CAKES, THE YIELD RANGES FROM 62.34% TO 66.71%. THERE IS NO DO UBT ITA NO. 1265/DEL/2009 PAGE 6 OF 16 THAT MUSTARD CAKE IS A SECONDARY PRODUCT AND MAINLY USED AS FEED FOR CATTLE. IT IS NOT CORRECT ON THE PART OF THE AO TO ASSUME THAT 18.79% I.E. THE AMOUNT OF MUSTARD CAKES DERIVED FROM THE PROCESS IS A SIGNIFICANT AMOUNT. THE MANUFACTURING PROCESS IS TO CONSIDERED CAREFULLY AN D IN THE INSTANT CASE THERE REMAINS NO DOUBT THAT THE MU STARD CAKE IS A PRODUCT WHICH DEFINITELY CAN BE TERMED AS SECONDARY PRODUCT AND THERE IS NO REQUIREMENT TO CH ANGE THE METHOD OF VALUATION OF THE CLOSING AND THE OPEN ING STOCK OF THE PRODUCTS. IN THE CASE OF INVESTMENT L TD. VS. CIT (1970) 77 ITR 533 (SC), IT WAS HELD THAT THE ME THOD ADOPTED BY THE ASSESSEE CANNOT BE REJECTED ON THE V IEW THAT ASSESSEE SHOULD HAVE ADOPTED A DIFFERENT METHOD OF KEEPING ACCOUNTS. A TAX PAYER IS FREE TO EMPLOY HI S OWN METHOD OF KEEPING ACCOUNTS FOR THE PURPOSE OF HIS T RADE. FOR THIS PURPOSE, HE MAY VALUE THE STOCK IN TRADE E ITHER AT COST OR MARKED PRICE. IN THE CASE OF VIJAYA TRADER S VS. CIT (1969) 74 ITR 271 (MYSORE), IT WAS HELD THAT RE JECTION OF ACCOUNTS MERELY ON THE GROUND THAT THE METHOD OF VALUATION OF STOCK WAS NOT CORRECT IN THE ABSENCE O F A FINDING THAT THE MANNER IN WHICH THE ACCOUNTS WERE KEPT DID NOT ALLOW A PROPER DETERMINATION OF INCOME, PRO FITS OR GAINS OF BUSINESS OF THE ASSESSEE. NEEDLESS TO MEN TION HERE THAT IN ACCOUNTING PRINCIPLES, RULE OF CONSIST ENCY IS VERY IMPORTANT AS HELD BY SPECIAL BENCH, AMRITSAR I N THE CASE OF SHANKER RICE CO. VS. ITO (2001) 249 ITR 44 (ASR.) (SB). DELHI HIGH COURT TOO HELD THE SAME IN THE CA SE OF CIT VS. NEO POLYPACK P. LTD. AS REPORTED IN (2002) 112 TAXMAN 363. FROM THE FACTS OF THE CASE, IT IS QUIT E CLEAR THAT THE APPELLANT HAS NOT CHANGED ITS METHOD OF ACCOUNTING ESPECIALLY OF VALUATION OF OPENING/CLOSI NG STOCK AND CONSISTENTLY FOLLOWED A PARTICULAR SYSTEM OF ACCOUNTING. THERE IS NO REASON FOR THE AO TO REJEC T THE BOOKS OF ACCOUNTS ON THE BASIS OF VALUATION OF THE STOCK-IN- TRADE AND HENCE, I DO NOT AGREE WITH THE AO FOR HIS REJECTING THE BOOKS OF ACCOUNTS OF THE APPELLANT AN D MAKING ADDITION OF RS. 32,13,980/-. IN THE CASE OF CIT VS. MOON MILLS LTD. (1966) 59 ITR 574 (SC) IT WAS HELD THAT SECTION 145 DEALS WITH ASCERTAINMENT OF PROFITS ACC ORDING TO THE COMMERCIAL AND BUSINESS SENSE. UNDER THIS S ECTION, PROFITS HAVE TO BE DETERMINED IN ACCORDANCE WITH TH E SYSTEM REGULARLY FOLLOWED AND MAINTAINED BY THE ASS ESSEE. SUPREME COURT IN THE CASE OF RADHA SOAMI SATSANG VS . CIT (1992) 193 ITR 321 (SC) HAD HELD THAT THOUGH RU LE OF ITA NO. 1265/DEL/2009 PAGE 7 OF 16 RES JUDICATA OR ESTOPPEL IS NOT APPLICABLE TO I NCOME TAX PROCEEDINGS BUT RULE OF CONSISTENCY DOES APPLY TO S UCH PROCEEDINGS. IN THE CASE OF CIT VS. ARJ SECURITY P RINTERS (2003) 264 ITR 276 (DEL) IT WAS HELD THAT WHERE FUNDAMENTAL ASPECT PREVAILING THROUGH THE DIFFERENT ASSESSMENT YEARS HAS BEEN FOUND AS A FACTS ONE WAY OR THE OTHER AND THE PARTIES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NOT CHALLENGING THE ORDER, IT WOULD NO T BE AT ALL APPROPRIATE TO ALLOW THE POSITION TO BE CHANGED IN SUBSEQUENT YEARS. ALTHOUGH EACH ASSESSMENT YEAR, B EING INDEPENDENT OF THE OTHER, THE PRINCIPLE OF RES JUD ICATA WHICH APPLIES TO CIVIL COURT, DOES NOT APPLY TO INC OME TAX PROCEEDINGS YET FOR SAKE OF CONSISTENCY AND FOR THE PURPOSE OF FINALITY IN ALL LITIGATIONS, EARLIER DECISIONS O N THE SAME QUESTION SHOULD NOT BE REOPENED UNLESS SOME FRESH F ACTS ARE FOUND IN THE SUBSEQUENT ASSESSMENT YEARS. CASE LAW OF CIT VS. LAGAN KALA UPVAN (2003) 259 ITR 489 (DEL) A LSO DWELT ON THE SAME ISSUE. IN A RECENT CASE OF I.G.E . (INDIA) LTD. VS. JCIT, SPECIAL RANGE 1, MUMBAI (2008) 26 SOT 367 (MUM.), THE HEAD NOTES STATE AS FOLLOWS:- 2. SECTION 145 OF THE INCOME TAX ACT, 1961 METHOD OF ACCOUNTING VALUATION OF STOCK ASSTT. YEAR 1996-97 ASSESSEE-COMPANY VALUED ITS WORK-IN-PROGRESS AND MANUFACTURED GOODS BY CONSIDERING RAW MATERIAL COST ASSESSING OFFICER TOOK VIEW THAT PROPORTIONATE PART OF EMPLOYEES COS T AND OTHER EXPENSES SHOULD BE ADDED TO CLOSING STOCK AND, ACCORDINGLY, MADE AN ADDITION TO ITS CLOSING STOCK WHETHER SINCE THE ASSESSEE HAD BEEN FOLLOWI NG METHOD OF VALUATION BY ADOPTING ONLY RAW MATERIAL COST SINCE 1994-95 AND SAME HAD NOT BEEN DISTURBED BY THE REVENUE THERE IS NO REASON TO DISTURB VALUAT ION ADOPTED BY THE ASSESSEE HELD, YES. IN VIEW OF THE ABOVE JUDICIAL PRONOUNCEMENTS AND TH E FACTS THE RATIOS OF THE CASE LAWS ON WHICH THE AO R ELIED ARE NOT APPLICABLE TO THE FACTS OF THE INSTANT CASE, I DIRECT THE AO TO DELETE THE ADDITION. 8. HENCE, THE DEPARTMENT IS IN APPEAL BEFORE US. ITA NO. 1265/DEL/2009 PAGE 8 OF 16 9. THE LD. DR HAS RELIED UPON THE AOS ORDER TO CON TEND THAT HAVING REGARD TO THE CORRECT METHOD POINT OUT BY AO IN HIS ORDER, THE AO WAS JUSTIFIED IN HOLDING THAT THE ASSESSEE HAD UNDER ST ATED THE VALUE OF CLOSING STOCK AS WELL AS THE OPENING STOCK BY RS. 32,13,980 /-, WHICH WAS RIGHTLY ADDED BY THE AO TO THE VALUE OF CLOSING STOCK AND M ADE THE ADDITION TO THE TOTAL INCOME ACCORDINGLY. 10. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, REITERATED THE CONTENTIONS THAT WERE MADE BEFORE THE CIT(A) AND FU RTHER SUBMITTED THAT THE ASSESSEE HAS CONSISTENTLY AND REGULARLY FOLLOWING T HE METHOD OF VALUATION OF CLOSING STOCK, WHEREUNDER THE REALIZABLE VALUE OF M USTARD CAKE REMAINING IN STOCK AT THE END OF THE YEAR IS REDUCED FROM THE CO ST OF MUSTARD SEEDS AND OTHER DIRECT MANUFACTURING EXPENSES TO ARRIVE AT TH E COST OF MUSTARD OIL PRODUCED BY THE ASSESSEE. HE FURTHER SUBMITTED THA T THE ASSESSEE WAS FOLLOWING THE METHOD OF VALUING THE CLOSING STOCK A T COST OR MARKET PRICE, WHICHEVER IS LOWER. HE FURTHER SUBMITTED THAT THE METHOD ADOPTED BY THE ASSESSEE IS ACCEPTED SYSTEMS APPROVED UNDER THE ACC OUNTING STANDARD 2, AND THAT HAS ALSO BEEN ACCEPTED BY THE DEPARTMENT I N EARLIER YEARS. 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS OF BOT H THE PARTIES AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. IN TH E PRESENT CASE, THE ASSESSEE HAS CLAIMED THAT IT HAS VALUED THE CLOSING STOCK AS PER THE GUIDELINES GIVEN IN AS 2. HOWEVER, ON THE OTHER HAND, THE AO HAS STA TED THAT WHILE FOLLOWING THE GUIDELINES GIVEN UNDER AS 2, THE ASSESSEE HAS NOT UNDERSTOOD THE REAL ITA NO. 1265/DEL/2009 PAGE 9 OF 16 INTEND AND MEANING OF AS 2, BUT HAS OMITTED TO TA KE NOTE OF CERTAIN IMPORTANT ASPECTS OF VALUATION PROVIDED IN PARA 1 0 OF AS 2. THE AO, IN THIS RESPECT, HAS STATED THAT IN THE ACCOUNTING STA NDARD, IT IS PROVIDED THAT WHEN JOINT PRODUCTS ARE PRODUCED OR WHEN THERE IS A MAIN PRODUCT OR A BY- PRODUCT, AND WHEN THE COST OF CONVERSION OF EACH PR ODUCT ARE NOT SEPARATELY IDENTIFIABLE, THEY ARE ALLOCATED BETWEEN THE PRODUC TS ON A RATIONAL AND CONSISTENT BASIS. THE LD. AO ALSO POINT OUT THAT I N AS 2, PARA 10, IT IS FURTHER PROVIDED THAT THE ALLOCATION MAY BE BASED, FOR EXAMPLE, ON THE RELATIVE SALES VALUES OF EACH PRODUCT EITHER AT THE STAGE IN THE PRODUCTION PROCESS WHEN THE PRODUCTS BECOME SEPARATELY IDENTIF IABLE, OR AT THE COMPLETION OF PRODUCTION. THE AO, THEREFORE, HAD T AKEN A VIEW THAT THE COST OF MUSTARD CAKE AND OTHER MANUFACTURING EXPENSES AR E TO BE ALLOCATED BETWEEN TWO PRODUCTS, VIZ., MUSTARD OIL AND MUSTARD CAKES, AND THE ALLOCATION OF EXPENSES IS TO BE MADE WITH REFERENCE TO SELLING VALUE OF THE TWO OUTPUTS MANUFACTURED OUT OF MUSTARD SEEDS. THE AO, THEREFORE, WORKED THE PROPORTIONATE SELLING VALUE OF BOTH THE OUTPUTS , AND IN THAT PROPORTION, THE AO ALLOCATED THE COST OF MUSTARD SEEDS AND OTHE R MANUFACTURING EXPENSES BETWEEN MUSTARD OIL AND MUSTARD CAKE, AND THEN DETERMINED THE VALUE OF CLOSING STOCK OF BOTH THE ITEMS, AND DIFFE RENCE SO WORKED OUT BY THE AO IN OPENING STOCK AS WELL AS CLOSING STOCK WAS AD DED BY THE AO TO THE ASSESSEES TOTAL INCOME. WE ARE, THUS, CONCERNED, IN THE PRESENT CASE, AS TO WHETHER THE AO CAN DISTURB THE METHOD OF VALUATION OF CLOSING STOCK ITA NO. 1265/DEL/2009 PAGE 10 OF 16 REGULARLY OR CONSISTENTLY FOLLOWED BY THE ASSESSEE SINCE MANY YEARS, AND THAT WAS ALSO ACCEPTED BY THE DEPARTMENT. 12. AT THIS STAGE, WE PROCEED TO FIRST DETERMINE AS TO WHETHER THE METHOD OF VALUATION ADOPTED BY THE ASSESSEE IS IN ACCORDAN CE WITH THE GUIDELINES PROVIDED UNDER AS 2. IN AS 2, THE NET REALIZAB LE VALUE IS DEFINED TO BE THE ESTIMATED SELLING PRICE IN THE ORDINARY COURSE OF BUSINESS LESS THE ESTIMATED COSTS OF COMPLETION AND THE ESTIMATES COS T NECESSARY TO MAKE THE SALE. IT IS FURTHER PROVIDED THEREIN THAT THE INVE NTORY SHOULD BE VALUED AT THE OF LOWER COST AND THE NET REALIZABLE VALUE. THE CO ST OF INVENTORY SHOULD COMPRISED OF COSTS OF PURCHASE, COSTS OF CONVERSION , AND OTHER COSTS INCURRED IN THE BRINGING THE INVENTORY TO THEIR PRESENT LOCA TION AND CONDITION. IN PARA 16 OF AS 2, IT IS PROVIDED THAT THE COST OF INV ENTORY OTHER THAN THOSE DEALT WITH IN PARAGRAPH 14, SHOULD BE ASSIGNED BY USING F IRST-IN-FIRST-OUT (FIFO), WEIGHTED AVERAGE COST FORMULA. FURTHER, PARA 10 OF AS 2 STATES AS UNDER:- 10. A PRODUCTION PROCESS MAY RESULT IN MORE THAN ONE PRODUCT BEING PRODUCED SIMULTANEOUSLY. THIS IS THE CASE, FOR EXAMPLE, WHEN JOINT PRODUCTS ARE PRODUCED OR WH EN THERE IS A MAIN PRODUCT AND A BY-PRODUCT. WHEN THE COSTS OF CONVERSION OF EACH PRODUCT ARE NOT SEPARATELY IDENTIFIABLE, THEY ARE ALLOCATED BETWEEN THE PRODUC TS ON RATIONAL AND CONSISTENT BASIS. THE ALLOCATION MAY BE BASED, FOR EXAMPLE, ON THE RELATIVE SALES VALUES OF EACH PRODUCT EITHER AT THE STAGE IN THE PRODUCTION PROCE SS WHEN THE PRODUCTS BECOME SEPARATELY IDENTIFIABLE, OR AT THE COMPLETION OF PRODUCTION. MOST BY-PRODUCTS AS WELL AS SCRAP OR WASTE MATERIALS, BY THEIR NATURE, ARE IMMA TERIAL. WHEN THIS IS THE CASE, THEY ARE OFTEN MEASURED AT N ET ITA NO. 1265/DEL/2009 PAGE 11 OF 16 REALIZABLE VALUE AND THIS VALUE IS DEDUCTED FROM TH E COST OF THE MAIN PRODUCT. AS A RESULT, THE CARRYING AMOUNT OF THE MAIN PRODUCT IS NOT MATERIALLY DIFFERENT FROM ITS C OST. 13. ON READING THE AFORESAID PARA 10, IT IS CLEAR THAT WHEN THE JOINT PRODUCT ARE PRODUCED OR WHEN THERE IS A MAIN PRODUC T AND A BY PRODUCT, AND WHEN THE COSTS OF CONVERSION OF EACH PRODUCT ARE NO T SEPARATELY IDENTIFIABLE, THEY ARE ALLOCATED BETWEEN THE PRODUCTS ON RATIONAL AND CONSISTENT BASIS, AND THIS ALLOCATION MAY BE BASED, FOR EXAMPLE, ON THE R ELATIVE SALES VALUE OF EACH PRODUCT EITHER AT THE STAGE IN THE PRODUCTION PROCE SS WHEN THE PRODUCTS BECOMES SEPARATELY IDENTIFIABLE, OR AT THE COMPLETI ON OF PRODUCTION. IT IS FURTHER STATED THERE IN THAT MOST BY-PRODUCTS AS WE LL AS SCRAP OR WASTE MATERIAL, BY THEIR NATURE, ARE IMMATERIAL. WHEN TH IS IS A CASE, THEY ARE OFTEN MEASURED AT NET REALIZABLE VALUE AND THIS VALUE IS DEDUCTED FROM THE COST OF THE MAIN PRODUCT. AS A RESULT, THE CARRYING AMOUNT OF THE MAIN PRODUCT IS NOT MATERIALLY DIFFERENT FROM ITS COST. IN THE PRE SENT CASE, THE AO HAS RELIED UPON THE EARLIER PART OF THE PARA 10, WHERE IT IS PROVIDED THAT WHEN THE COST OF CONVERSION OF EACH PRODUCT ARE NOT SEPARATELY ID ENTIFIABLE, THEY ARE ALLOCATED BETWEEN THE PRODUCTS ON RATIONAL AND CONS ISTENT BASIS, AND THE ALLOCATION MAY BE BASED ON THE RELATIVE SALES VALUE OF EACH PRODUCT, EITHER AT THE STAGE OF PRODUCTION PROCESS WHEN THE PRODUCTS B ECOMES SEPARATELY IDENTIFIABLE OR AT THE COMPLETION OF THE PRODUCTION . ON THE OTHER HAND, THE ASSESSEE HAS FOLLOWED THE LATER PART OF THE PARA 10 OF AS 2, WHERE IT IS PROVIDED THAT WHERE THERE IS A CASE WHERE MOST BY-P RODUCTS AS WELL AS SCRAP OR WASTE MATERIALS, BY THEIR NATURE, ARE IMMATERIAL , THEY ARE OFTEN MEASURED ITA NO. 1265/DEL/2009 PAGE 12 OF 16 AT NET REALIZABLE VALUE AND THIS VALUE IS DEDUCTED FROM THE COST OF THE MAIN PRODUCT. IN THE PRESENT CASE, THE ASSESSEE IS ENGA GED IN THE BUSINESS OF MANUFACTURING MUSTARD OIL. THE MAIN AND DOMINANT P URPOSE OF RUNNING OIL MILL IS TO PRODUCE MUSTARD OIL FROM THE MUSTARD SEE DS. IT IS NOT IN DISPUTE THAT THE MUSTARD CAKE ARE ALSO SIMULTANEOUSLY OBTAI NED FROM THE MANUFACTURING PROCESS OF MANUFACTURING MUSTARD OIL FROM THE MUSTARD SEEDS. WHETHER THE MUSTARD SEEDS IS A BY PRODUCT OR IT IS ANOTHER MAIN PRODUCT BEING PRODUCED SIMULTANEOUSLY WITH THE MUSTARD OIL IS TO BE CONSIDERED FROM THE POINT OF VIEW OF COMMERCIAL VALUE IN THE MARKET , AND NOT WITH REFERENCE TO THE QUANTITY OF YIELD OF EACH PRODUCT. THOUGH Y IELD OF MUSTARD CAKE RANGES FROM 62 % TO 66%, AND AS COMPARED TO YIELD O F MUSTARD OIL RANGES FROM 33% TO 34%, IT CANNOT BE A CRITERIA TO HOLD TH AT THE MUSTARD CAKE IS ANOTHER MAIN PRODUCT PRODUCED SIMULTANEOUSLY ALONGW ITH PRODUCTION OF MUSTARD OIL. IN THE PRESENT CASE, THE PRODUCTION P ROCESS RESULT IN ONLY ONE MAIN PRODUCT, THAT IS, MUSTARD OIL, AND THE MUSTARD CAKE IS A BY-PRODUCT. THE SELLING VALUE OF THE TWO OUTPUTS, OUT OF ONE QUINTA L OF MUSTARD SEEDS CRUSHED, HAS BEEN COMPUTED BY THE AO IN PROPORTION OF RS. 16 18.01 OF MUSTARD OIL TO RS. 381.99 OF MUSTARD CAKE. IN OTHER WORDS, THE TO TAL SALE REALIZED BY THE ASSESSEE FROM TWO PRODUCTS OUT OF ONE QUINTAL OF MU STARD SEEDS IS IN THE RATIO OF RS. 1618.01 :: 381.99, THUS, THE RATIO OF SALE O F VALUES OF MUSTARD CAKES IS ABOUT 20% OF THE TOTAL SALE VALUE REALIZED BY THE A SSESSEE. FROM THIS POINT OF VIEW, IT CANNOT BE SAID THAT THE MUSTARD CAKE IS AN OTHER MAIN PRODUCT ITA NO. 1265/DEL/2009 PAGE 13 OF 16 PRODUCED SIMULTANEOUSLY FROM THE MUSTARD SEEDS. IT HAS BEEN CONSIDERED TO BE A BY-PRODUCT WHILE VALUING THE CLOSING STOCK SIN CE LAST SO MANY YEARS, AND THAT HAS ALSO BEEN ACCEPTED BY THE DEPARTMENT. EVE N IF THE MATTER IS CONSIDERED FROM THE POINT OF VIEW OF ITS COMMERCIAL VALUE IN THE MARKET AND ITS UTILITY FROM THE POINT OF VIEW OF A COMMON CONS UMER, THE MUSTARD CAKE WOULD, UNDOUBTEDLY, BE CONSIDERED TO BE A BY-PRODUC T IN THE PROCESS OF MANUFACTURING OF MUSTARD OIL FROM THE MUSTARD SEEDS . IN THE AS 2, IT IS CLEARLY STATED THAT MOST BY-PRODUCTS BY THEIR NATUR E ARE IMMATERIAL, AND WHEN THIS IS A CASE, BY PRODUCTS ARE OFTEN MEASURED AT N ET REALIZABLE VALUE AND THIS VALUE IS DEDUCTED FROM THE COST OF THE MAIN PRODUCT , AND AS A RESULT, CARRYING AMOUNT OF THE MAIN PRODUCT IS NOT MATERIALLY DIFFER ENT FROM ITS COST. IN THE PRESENT CASE, THIS IS THE METHOD WHICH HAS BEEN FOL LOWED BY THE ASSESSEE, WHERE THE ASSESSEE HAS VALUED THE MUSTARD CAKE AT T HEIR NET REALIZABLE VALUE, WHICH HAS BEEN DEDUCTED FROM THE COST OF MUSTARD SE EDS AND OTHER MANUFACTURING EXPENSES TO DETERMINE THE COST OF MUS TARD OIL. THIS SYSTEM HAS BEEN REGULARLY AND CONSISTENTLY FOLLOWED BY THE ASSESSEE IN SO MANY EARLIER YEARS, AND THIS SYSTEM WAS ALSO ACCEPTED BY THE DEPARTMENT IN THE PAST. HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN THE LIGHT OF AS 2, WE ARE OF THE CONSIDERED VIEW THAT THE METHOD OF VALUING THE CLOSING STOCK AS ADOPTED BY THE ASSESSEE CANNOT BE SAID TO BE UNREASONABLE AND DEFECTIVE SO THAT THE PROPER DETERMINATION OF P ROFIT CANNOT BE MADE. IN OTHER WORDS, THE METHOD ADOPTED BY THE ASSESSEE IS JUST AND PROPER TO ITA NO. 1265/DEL/2009 PAGE 14 OF 16 DETERMINE THE PROFIT OR GAINS OF BUSINESS OF PRODUC ING MUSTARD OIL FROM THE MUSTARD SEEDS BY THE ASSESSEE. IT IS NOT THE CASE OF THE DEPARTMENT THAT THE ASSESSEE HAS CHANGED ITS METHOD OF VALUING THE CLOS ING STOCK IN THE CURRENT YEAR AS AGAINST THE METHOD REGULARLY AND CONSISTENT LY FOLLOWED IN EARLIER YEARS. MERE BECAUSE THE AO IS OF THE OPINION THAT SOME OTHER METHOD IS TO BE FOLLOWED, THAT BY ITSELF CANNOT BE A REASON OR B ASIS FOR THE AO TO REJECT AND IGNORE THE ASSESSEES BASIS OF VALUATION OF STO CK-IN-TRADE CONSISTENTLY AND REGULARLY BEING FOLLOWED BY THE ASSESSEE SINCE SO MANY YEARS AS PER GUIDELINES GIVEN IN LATER-PART OF PARA 10 OF AS - 2. IN THE PRESENT CASE, IT IS NO WHERE DISPUTED THAT THE NET REALIZABLE VAL UE BASED ON LAST TEN LOT SELLING PRICES OF MUSTARD CAKE ADOPTED BY THE ASSES SEE WAS NOT CORRECT. IT IS ALSO NOT THE CASE, WHERE THE VALUE OF CLOSING STOCK OF MUSTARD CAKE HAS NOT BEEN TAKEN INTO ACCOUNT WHILE VALUING THE CLOSING S TOCK. IN THE PRESENT CASE, INSTEAD OF TAKING THE NET REALIZABLE VALUE OF MUSTA RD CAKE IN THE VALUE OF CLOSING STOCK SHOWN IN THE TRADING ACCOUNT, THE ASS ESSEE HAS DEDUCTED THE SAME FROM THE COST OF MUSTARD SEEDS AND OTHER MANUF ACTURING EXPENSES, WHICH MAKES NO DIFFERENCE IN THE ULTIMATE RESULT SH OWN IN THE TRADING ACCOUNT. 14. CONSIDERING THE TOTALITY OF THE FACTS AND CIRCU MSTANCES OF THE CASE, WE ARE IN FULL AGREEMENT WITH THE CIT(A) IN HOLDING AS UNDER:- 1. THE METHOD OF VALUATION OF CLOSING STOCK CONSIST ENTLY AND REGULARLY ADOPTED BY THE ASSESSEE SINCE LAST SO MAN Y YEARS CANNOT ITA NO. 1265/DEL/2009 PAGE 15 OF 16 BE REJECTED MERELY ON THE VIEW OF THE AO THAT THE A SSESSEE SHOULD HAVE ADOPTED A DIFFERENT METHOD UNLESS THE METHOD F OLLOWED BY THE ASSESSEE IS FOUND TO BE INCORRECT AND UNSUSTAIN ABLE ONE.. 2. REJECTION OF ACCOUNT, MERELY ON THE GROUND THAT THE METHOD OF VALUATION OF STOCK WAS NOT CORRECT, IN THE ABSENCE OF THE FINDING THAT THE MANNER IN WHICH THE ACCOUNTS WERE KEPT, DI D NOT ALLOW THE PROPER DETERMINATION OF INCOME OR PROFITS, OR G AINS OF BUSINESS OF THE ASSESSEE, IS UNJUSTIFIED. 3. IN THE ACCOUNTING PRINCIPLES, RULE OF CONSISTENC Y IS VERY IMPORTANT, AND, THUS, THERE WOULD NO REASON FOR THE AO TO REJECT THE BOOKS OF ACCOUNT ON THE BASIS OF APPLYING DIFFE RENT METHOD OF VALUATION OF STOCK, UNLESS IT IS ESTABLISHED THAT T HE METHOD OF VALUATION OF STOCK IN TRADE FOLLOWED BY THE ASSESSE E WAS NOT AT ALL PERMISSIBLE AND IT DID NOT GIVE A TRUE AND CORRECT PICTURE OF INCOME, PROFITS, OR GAINS DERIVED BY THE ASSESSEE F ROM THE BUSINESS. 4. THOUGH, RULE OF RES JUDICATA OR ESTOPPEL IS NOT APPLICABLE TO THE INCOME TAX PROCEEDINGS, BUT RULE OF CONSISTENCY PAR TICULARLY IN THE MATTER OF SYSTEM OF ACCOUNTING, APPLY TO SUCH P ROCEEDINGS. 15. FOR THE REASONS GIVEN ABOVE, WE, THEREFORE, UPH OLD THE ORDER OF THE LD. CIT(A) IN DELETING THE ADDITION OF RS. 32,13,980/- MADE BY THE AO. ITA NO. 1265/DEL/2009 PAGE 16 OF 16 16. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 17. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 14 TH MAY, 2010. SD/- (G.E. VEERABHADRAPPA) ACCOUNTANT MEMBER SD/- (C.L. SETHI) JUDICIAL MEMBER DATED: 14 TH MAY, 2010 *NITASHA COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. BY ORDER DEPUTY REGISTRAR