A.C.I.T.-4(1), Agra V. M/S Das Cold Storage PVT.Ltd., Agra

ITA 280/AGR/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2112 (ITAT-AGRA)
• Duration Of Justice: 1 year(s) 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-05-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 22-04-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 15-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RAKESH GUPTA
• Keywords: Unexplained cash credit; Unexplained investment; Unexplained expenditure; Business income; Loose papers; Share purchase agreement; Question of law; Accommodation entries; Assessment record; Revenue expenditure
• Section: 69C; 133(6); 145; 56; 132; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AGRA BENCH, AGRA BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI A.L. GEHLOT, ACCOUNTANT MEMBER ITA NO. 280/AGRA/ 2011 ASSESSMENT YEAR: 2003-04 ACIT 4(1), AGRA. VS. M/S. DAS COLD STORAGE P VT. LTD., D-15, KAMLA NAGAR, AGRA, (PAN AAACD5670N) C.O. NO. 55/AGRA/2011 (IN ITA NO. 280/AGRA/2011) ASSESSMENT YEAR: 2003-04 M/S. DAS COLD STORAGE PVT. LTD., VS. ACIT 4(1), AGR A D-15, KAMLA NAGAR, AGRA, (PAN AAACD5670N) (APPELLANTS) (RESPONDENTS) REVENUE BY : SHRI WASEEM ARSHAD, SR. D.R. ASSESSEE BY : SHRI RAKESH GUPTA, ADVOCATE DATE OF HEARING : 22.04.2013 DATE OF PRONOUNCEMENT : 10.05.2013 ORDER PER A.L. GEHLOT,ACCOUNTANT MEMBER: ITA NO.280/AGRA/2011 BY THE REVENUE AND C.O. NO.55 /AGRA/2011 BY THE ASSESSEE HAVE BEEN FILED AGAINST THE ORDER DATED 28 .02.2011 PASSED BY THE LEARNED CIT(A)-I, AGRA FOR THE A.Y. 2003-04. ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 2 2. THE GROUNDS RAISED IN THE APPEAL AND C.O. ARE R EPRODUCED AS BELOW:- ITA NO. 280/AGRA/2011 BY THE REVENUE:- 1. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEAL S) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.5,70,09 0/- MADE BY THE AO BY TAKING THE GROSS RENT RECEIPT RS.87,61,916/- AS AGA INST THE RETURNED GROSS RECEIPT OF RS.93,32,817/- IGNORING THE FACT THAT TH E STATUS OF THE ASSESSEE IS COMPANY, THEREFORE, IT HAS TO FOLLOW COMPULSORILY THE MERCAN TILE SYSTEM OF ACCOUNTING IN VIEW OF THE PROVISION OF SECTION 209 OF COMPANIES ACT AND CANNOT ADOPT ANY OTHER SYSTEM OF ACCOUNTING. 2. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED IN LAW AND ON FACTS IN RESTRICTING THE DISALLOWANCES TO RS .1,70,764/- MADE BY THE AO OUT OF VARIOUS EXPENSES DEBITED TO THE PROFIT & LOSS ACCOUNT IGNORING THE FACTS THAT THERE WAS TREMENDOUS INCREASE IN THE EXPENSES IN COMPARISON TO GROSS RECEIPTS AND ASSESSEE COULD NOT FURNISH A SPECIFIC REPLY FOR SUCH INCREASE. 3. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.12,74,5 89 MADE BY THE AO ON ACCOUNT OF UNDISCLOSED PROFIT FROM TRADING OF POTAT OES IGNORING THE FACT THAT ASSESSEE COULD NOT SATISFACTORILY REPLY THE QUERIES RAISED DURING THE COURSE OF ASSESSMENT PROCEEDINGS WHICH PROVES THAT THE ASS ESSEE IS ENGAGED IN THE TRADING OF POTATOES. 4. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED IN LAW AND ON FACTS IN DELETING THE UNEXPLAINED CASH CREDI TS OF RS.16,10,690/- ADDED BY THE AO TO THE INCOME OF THE ASSESSEE IGNOR ING THE FACT THAT THE ASSESSEE COULD NOT PROVE THE GENUINENESS OF THESE C ASH CREDITS DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 5. THAT THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AGRA BEING ERRONEOUS IN LAW AND ON FACTS DESERVES T O BE QUASHED AND THAT OF THE ASSESSING OFFICER DESERVES TO BE RESTORED. 6. THAT THE APPELLANT CRAVES LEAVE TO ADD OR ALTER ANY OR MORE GROUND OF GROUNDS OF APPEAL MAY BE DEEMED FIT AT THE TIME OF HEARING OF APPEAL. C.O. NO. 55/AGRA/2011 BY THE ASSESSEE :- (1)(A) BECAUSE, ON DUE CONSIDERATION OF FACTS AND IN CIRCUMSTANCES OF THE CASE AUTHORITIES BELOW ERRED I N MAKING AND ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 3 CONFIRMING ADDITION OF RS.25,93,455/- BEING LOSS AR ISING ON SALE OF SHARES SUPPORTED BY RELEVANT EVIDENCES, AS ALSO CON FIRMED BY THE BROKER IN AN ENQUIRY INSTITUTED BY THE AO UNDER SECTION 133(6) OF THE ACT WHICH FACT HAS BEEN WRONGLY DISCLOSED IN THE AS SESSMENT ORDER. (B) BECAUSE, THE LD. CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT NO EVIDENCE WAS FILED ESTABLISHING SALE OF SHARES AND ALSO ESTABLISHING RATES AT WHICH SALES WERE, SOLD IGNORING THAT CREDI BLE AND AUTHENTIC EVIDENCES AS WERE BROUGHT ON RECORDS BY THE APPELLA NT PROVING AFORESAID TRANSACTION WHICH HAVE BEEN LIGHT HEARTED LY IGNORED BY THE CIT(A). (C) BECAUSE, THE CIT(A) WAS NOT JUSTIFIED IN IGNORING MATERIAL EVIDENCES PROVING THE TRANSACTION PREFERRING TO PLA CE RELIANCE TO THE STRICT/RULES OF INDIAN EVIDENCE ACT WITHOUT ANY NOT ICE TO THE APPELLANT. (D) BECAUSE, THE APPELLANT HAS SATISFACTORILY DISCHARGED THE BUR DEN WHICH LAY UPON IT IN PROVING THE TRANSACTION, EVIDE NCES BROUGHT ON RECORDS REMAINED UNCONTROVERSIAL AND THUS ADMITTED AGAINST THE RESPONDENT. (E) BECAUSE, THE VIEW OF THE AUTHORITIES BELOW IS BASED ON NO EV IDENCE AVAILABLE OR BROUGHT ON RECORDS, EXCEPT ON CONSIDER ATION OF PRESUMPTION AND SURMISES. (2)(A) BECAUSE, ON DUE CONSIDERATION OF FACTS AND IN THE CIRCUMSTAN CES OF THE CASE AUTHORITIES BELOW WERE HIGHLY UNJUSTIFIED IN MAKING ADDITION OF RS.5,33,120/- RECEIVED AGAINST SALE PROCEEDS OF SHARES AS ASSESSEES OWN MONEY IGNORING THE MATERIAL EVIDENCE S AS BROUGHT ON RECORDS BY THE APPELLANT. (B) BECAUSE, THE VIEW OF THE AUTHORITIES BELOW IS BASED ON NO EV IDENCE BROUGHT ON RECORDS, EXCEPT ON CONSIDERATION OF UNFO UNDED PRESUMPTION AND SURMISES. (3) BECAUSE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, ADDITION OF RS.10,1662/- @ 2% ON RS.5,33,120/- IS B ASED ON NO PURELY ON PRESUMPTIONS AND SURMISES. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S ENGAGED IN THE BUSINESS OF COLD STORAGE. IN THE ASSESSEES GROUP, SEARCH UNDER SECTION 132 OF THE ACT WAS CONDUCTED ON 16.02.2000. DURING THE ASSESSMENT PRO CEEDINGS, THE A.O. NOTICED ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 4 THAT THE ASSESSEE HAS DECLARED THE RECEIPTS OF HIRE CHARGES ON POTATOES, STORAGE IN FEB/MARCH 2002, WHICH WAS TAKEN OUT FROM THE COLD S TORAGE DURING MAY 2002 TO NOV. 2002. THE AO FURTHER NOTICED THAT THE ASSESSEE WAS MAINTAINING ITS BOOKS OF ACCOUNT ON MERCANTILE BASIS, BUT THE ASSESSEE HAS S HOWN GROSS RECEIPT OF RENT ON CASH BASIS. THE ASSESSEE WAS ASKED TO EXPLAIN THE B ASIS OF GROSS RECEIPT SHOWN BEFORE THE A.O. NO SATISFACTORY EXPLANATION HAS BEE N FURNISHED BY THE ASSESSEE. THE A.O. FURTHER NOTICED THAT IN THE A.Y. 2000-01, 2001-02 AND A.Y. 2002-03 GROSS RECEIPT OF RENT WERE TAKEN ON MERCANTILE BASI S BY THE A.O. BUT IN THE APPEAL THE CIT(A) DIRECTED THE A.O. TO ACCEPT THE GROSS RE CEIPT OF RENT AS DECLARED BY THE ASSESSEE AND IT WAS HELD THAT AS THE ASSESSEE HAS B EEN FOLLOWING THE CASH SYSTEM FOR DECLARING GROSS RECEIPTS/HIRE CHARGES CONSISTENTLY HENCE A.O. CANNOT CHANGE ACCOUNTING SYSTEM FOLLOWED BY THE ASSESSEE. THE A.O . FURTHER NOTICED THAT REVENUE DID NOT ACCEPT THE FINDINGS OF CIT(A) AND F ILED APPEAL BEFORE THE ITAT WHICH WAS PENDING FOR ADJUDICATION. THE A.O. WAS OF THE VIEW THAT SINCE THE MATTER IS SUB-JUDICE BEFORE THE TRIBUNAL HENCE IN T HE ASSESSMENT YEAR, GROSS RECEIPT OF RENT ARE TAKEN ON MERCANTILE BASIS AS AGAINST SH OWN BY THE ASSESSEE ON CASH BASIS BUT ON EXAMINATION OF THE BOOKS A.O. NOTICED THAT T HE GROSS RECEIPT AS PER MERCANTILE SYSTEM COMES TO RS.87,61,916/- AGAINST W HICH ASSESSEE HAS SHOWN RS.93,32,817/-. THE A.O. HAS TAKEN GROSS RECEIPT OF RS.87,61,916/- AGAINST THE GROSS RECEIPT OF RS.93,32,817/- SHOWN BY THE ASSESS EE. THE A.O. MADE ADDITION OF ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 5 RS.5,70,090/- ON PROTECTIVE BASIS AS THE ASSESSEE I TSELF HAS SHOWN THESE RECEIPTS AS INCOME. 4. THE CIT(A) DELETED THE ADDITION IN PARA 5.2 OF H IS ORDER AS UNDER :- 5.2 I HAVE CONSIDERED THE ABOVE SUBMISSION OF THE LD. AR AND ALSO PERUSED THE ASSESSMENT ORDER. THE ORDER OF HON BLE TRIBUNAL DATED 26.04.2007 PRODUCED BEFORE ME IN RESPECT OF T HE APPELLANT FOR AY 2000-01 HAS ALSO BEEN EXAMINED AND I FIND AFTER CONSIDERING THE ARGUMENT OF LD. AR THAT NOT ONLY THE METHOD OF ACCO UNTING FOLLOWED BY THE ASSESSEE IS CONSISTENTLY AND REGULARLY BEING FOLLOWED RIGHT FROM ITS INCEPTION BUT THE FACTS REMAINS THAT IT IS CONSISTENT WITH THE METHOD FOLLOWED BY OTHER IDENTICAL BUSINESS. THE HO NBLE TRIBUNAL ALSO CONSIDERED THAT MERELY BECAUSE ON BEHALF OF TH E ASSESSEE BEFORE THE AO, THE METHOD HAS BEEN WRONGLY NAMED TO BE MER CANTILE SYSTEM BY THE LD. AR, THIS FACT BY THE ITSELF ALONE IS NOT SUFFICIENT MATERIAL TO DISREGARD THE FACT THAT ALL ALONG THE ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING CASH/RECEIPT BASIS OF THE ACCOUNTING WITH REGARD TO RENTAL INCOME FROM THE COLD STORAGE. THE HONBLE TRIBUNAL HELD AFTER CONSIDERING THESE ARGUMENT OF THE LD. AR THAT ON A CAREFUL CONSIDERATION OF THE SAME, THEY WERE OF THE VIEW TH AT IN THESE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE, NO IN TERFERENCE IS CALLED FOR IN THE ORDER OF THE CIT(A). IT IS FURTHE R HELD THAT BEING SATISFIED BY THE FINDINGS ARRIVED AT BY THE LD. CIT (A), THE GROUND RAISED BY REVENUE DISPUTING THE DECISION OF CIT(A) HOLDING THAT THE AO WAS NOT CORRECT IN CHANGING THE SYSTEM OF ACCOUN TING ADOPTED BY THE ASSESSEE IGNORED THE FACTS THAT AS PER AMENDED PROVISION OF SECTION 145 W.E.F. 01.04.97, IT IS MANDATORY ON TH E PART OF THE ASSESSEE TO FOLLOW EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING. WITH THIS ORDER OF THE HONBLE ITAT, AGRA, IT IS VE RY MUCH CLEAR THAT SYSTEM OF ACCOUNTING FOLLOWED BY THE APPELLANT FOR RECORDING RENT RECEIVED BY IT FROM COLD STORAGE BUSINESS HAS BEEN UPHELD BY THE HONBLE ITAT, AGRA IN CASE OF THE APPELLANT ITSELF IN EARLIER YEAR I.E. 2000-01, AND THEREFORE, I ALSO HOLD THAT SYSTEM OF ACCOUNTING BEING FOLLOWED CONSISTENTLY BY THE APPELLANT COMPANY FOR RECORDING RENT FROM COLD STORAGE BUSINESS SINCE ITS INCEPTION IS C ORRECT AND, THEREFORE, ITS GROSS RECEIPTS SHOULD BE TAKEN AT RS .93,32,817/- INSTEAD OF RS.87,61,916/- AS COMPUTED BY THE AO IN ASSESSMENT ORDER. HOWEVER, THIS DECISION WILL NOT CHANGE ANYTH ING IN THE ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 6 COMPUTATION OF TAXABLE INCOME OF THE APPELLANT DURI NG THE YEAR UNDER CONSIDERATION BECAUSE DESPITE REDUCING GROSS RECEIPTS, THE AO DID NOT REDUCE INCOME OF THE APPELLANT BECAUSE THE RESULTANT DIFFERENCE OF RS.5,70,090/- WAS ADDED ON PROTECTIVE BASIS. ACCORDINGLY, GROUND NO.2 IS ALLOWED BUT THE APPELLA NT WOULD NOT GET ANY RELIEF IN COMPUTATION OF ITS INCOME. 5. THE LEARNED D.R. SUBMITTED THAT THE ASSESSEE DID NOT MAINTAIN BOOKS OF ACCOUNT ON MERCANTILE METHOD OF ACCOUNTING. THE LE ARNED D.R. SUBMITTED THAT THE ASSESSEE HAS DECLARED THE RECEIPT OF HIRE CHARGES O N POTATOES STORAGE IN FEBRUARY/MARCH 2002 WHICH WAS TAKEN OUT FROM COLD S TORAGE DURING MAY 2002 TO NOVEMBER, 2002. THE ASSESSEE HAS SHOWN HIRE CHARGES WHEN THE POTATOES ARE TAKEN OUT FROM THE COLD STORAGE TO SO CALLED METHOD OF AC COUNTING FOLLOWED BY THE ASSESSEE SAYING THAT THE ASSESSEE HAS FOLLOWED THE CASH SYSTEM OF ACCOUNTING. THE ASSESSEE DID NOT FURNISH THE SATISFACTORY EXPLANATI ON. THE LEARNED D.R. SUBMITTED THAT THE ASSESSEE RELIED UPON THE ORDER OF THE ITAT IN ITA NOS.151 & 165/AGRA/2004 FOR A.Y. 2000-2001 DATED 18.04.2007 I N ASSESSEES OWN CASE. THE LEARNED D.R. SUBMITTED THAT IN A.Y. 2000-01 A SPECI FIC GROUND HAS BEEN RAISED BY THE REVENUE WHICH READS AS UNDER:- GROUND NO.1 (1) (A) THAT AS PER PROVISIONS OF SECT ION 145 W.E.F. 01.04.1997, IT IS MANDATORY ON THE PART OF T HE ASSESSEE TO FOLLOW EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING. T HE A.O. WAS NOT CORRECT IN CHANGING THE SYSTEM OF ACCOUNTING ADOPTE D BY THE ASSESSEE. ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 7 6. THE LEARNED D.R. SUBMITTED THAT THE ITAT WITHOUT CONSIDERING THE AMENDMENT AND SECTION 145 HAS CONFIRMED THE ORDER O F THE CIT(A). THE LEARNED D.R. SUBMITTED THAT IN FACT THE ITAT HAS NOT GIVEN ANY FINDING IN A.Y. 2000-01 ABOUT THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSE SSEE. THE LEARNED D.R. SUBMITTED THAT IN THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS NEITHER FOLLOWED CASH NOR MERCANTILE SYSTEM OF ACCOUNTING. THE LEARN ED D.R. SUBMITTED THAT CIT(A) HAS WRONGLY ALLOWED THE GROUND OF THE ASSESSEE REGA RDING THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. THE LEARNED D .R. RELIED UPON THE ORDER OF THE A.O. 7. THE LEARNED AUTHORIZED REPRESENTATIVE, ON THE OT HER HAND, RELIED UPON THE ORDER OF CIT(A) AND SUBMITTED THAT THE ASSESSEE HAS FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING. THE COLD STORAGE HIRE CHARGES ACCRUED TO THE ASSESSEE AT THE POINT WHEN GOODS DELIVERED TO THE FARMERS. THE LEARNED AU THORIZED REPRESENTATIVE HAS SUBMITTED THAT THE ASSESSEE HAS FOLLOWED THIS SYSTE M OF ACCOUNTING CONSISTENTLY IN THE PAST. HE SUBMITTED THAT IN 2000-01 THE METHOD O F ACCOUNTING FOLLOWED BY THE ASSESSEE HAS BEEN ACCEPTED BY THE ITAT IN THE ASSES SEES OWN CASE. 8. WE HAVE HEARD LEARNED REPRESENTATIVES OF THE PAR TIES AND RECORDS PERUSED. TO EXAMINE THE ISSUE, WE WOULD LIKE TO REFER RELEVA NT PROVISIONS OF SECTION 145 OF THE ACT WHICH READS AS UNDER:- ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 8 145. (1) INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' OR 'INCOME FROM OTHER SOURC ES' SHALL, SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), BE COMPUTED I N ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGU LARLY EMPLOYED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICI AL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED AB OUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECTION (1) OR ACCOUN TING STANDARDS AS NOTIFIED UNDER SUB-SECTION (2), HAVE NOT BEEN REGUL ARLY FOLLOWED BY THE ASSESSEE, THE ASSESSING OFFICER MAY MAKE AN ASSESSM ENT IN THE MANNER PROVIDED IN SECTION 144 .] 9. IT IS TO NOTE THAT UNDER SECTION 145(1), THE INC OME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR I NCOME FROM OTHER SOURCES HAS TO BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUN TING REGULARLY EMPLOYED BY THE ASSESSEE, UNLESS IN THE OPINION OF THE INCOME-T AX OFFICER, THE INCOME, PROFITS AND GAINS CANNOT PROPERLY BE DEDUCED THEREFROM OR T HE INCOME-TAX OFFICER IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE. UNDER THE SUB-SECTION (3) OF SECTION 145 IN ANY CAS E WHERE THE ACCOUNTS ARE CORRECT AND COMPLETE TO THE SATISFACTION OF THE INCOME-TAX OFFICER BUT THE METHOD EMPLOYED IS SUCH THAT, IN THE OPINION OF THE INCOME -TAX OFFICER, THE INCOME CANNOT PROPERLY BE DEDUCED THEREFROM, THEN THE COMPUTATION HAS TO BE MADE UPON SUCH BASIS AND IN SUCH MANNER AS THE INCOME-TAX OFFICER MAY DETERMINE. HOWEVER, IF ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 9 THE INCOME-TAX OFFICER IS NOT SATISFIED ABOUT THE C ORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE OR WHERE NO METHOD OF ACCO UNTING HAS BEEN REGULARLY EMPLOYED BY THE ASSESSEE, THE INCOME-TAX OFFICER MA Y MAKE THE ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144. SECTION 145 IS MAND ATORY AND THE REVENUE IS BOUND BY THE ASSESSEE'S CHOICE OF A METHOD REGULARL Y EMPLOYED UNLESS BY THAT METHOD THE TRUE INCOME, PROFITS AND GAINS CANNOT BE ARRIVED AT. IN OTHER WORDS, SECTION 145 ENACTS THAT FOR THE PURPOSE OF SECTION 28 (PROFITS AND GAINS OF BUSINESS, PROFESSION OR VOCATION) AND SECTION 56 (INCOME FROM OTHER SOURCES), INCOME, PROFIT AND GAINS MUST BE COMPUTED IN ACCORDANCE WITH THE M ETHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. THEREFORE, IF T HE ASSESSEE REGULARLY EMPLOYS A PARTICULAR METHOD OF ACCOUNTING AND IF NO DEFECTS A RE FOUND IN THE METHOD OR MAINTENANCE OF ACCOUNTS, THE TAXING AUTHORITY IS BO UND TO COMPUTE THE PROFITS AND GAINS OF BUSINESS OR PROFESSION OR VOCATION IN ACCO RDANCE WITH THE METHOD EMPLOYED BY THE ASSESSEE. THEREFORE, IN CASE WHERE THE INCOME-TAX OFFICER OR THE TAXING AUTHORITY FINDS THAT IN MAINTAINING ACCOUNTS , THE ASSESSEE HAS REGULARLY EMPLOYED A PARTICULAR METHOD AND DOES NOT MAKE ANY INVESTIGATION TO FIND OR DOES NOT FIND ANY DEFECT IN THE ACCOUNTS AND ACCEPT THE ACCOUNTS AS THEY ARE, HE IS BOUND TO COMPUTE THE INCOME IN ACCORDANCE WITH THE ACCOUN TS MAINTAINED BY THE ASSESSEE. THEREFORE, WHEN THE ASSESSEE REPRESENTS TO THE TAXI NG AUTHORITY THAT ITS ACCOUNTS ARE MAINTAINED BY A METHOD OF ACCOUNTING REGULARLY EMPL OYED, HE EXPECTS THE INCOME- TAX OFFICER TO ACT UPON SUCH METHOD AND COMPUTE THE INCOME ACCORDINGLY. ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 10 10. IN THIS REGARDS THE HONBLE APEX COURT IN THE C ASE OF COMMISSIONER OF INCOME-TAX VS. BRITISH PAINTS INDIA LTD. [1991] 188 ITR 0044[SC] HAS CONSIDERED THE PROVISIONS AND THE SCHEME OF THE ACT IN DETAIL, THEREFORE, WE WOULD LIKE TO REFER THE RELEVANT FACTS OF THE CASE AND FI NDING THEREON WHICH ARE AS UNDER :- 10.1 THE BRIEF FACTS OF THE CASE OF CIT VS. BRITISH PAINTS INDIA LTD. (SUPRA) ARE THAT THE ASSESSEE, A COMPANY ENGAGED IN THE MANUFACTURE AND SALE OF PAINTS, HAD, AS A CONSISTENT PRACTICE, VALUED ITS GOODS-IN-PROCE SS AND FINISHED PRODUCTS EXCLUSIVELY AT COST OF RAW MATERIALS TOTALLY EXCLUD ING OVERHEAD EXPENDITURE. THE JUSTIFICATION FOR THE PRACTICE, ACCORDING TO TH E RESPONDENT, WAS THAT THE GOODS BEING PAINTS HAD LIMITED STORAGE LIFE AND, IF NOT QUICKLY DISPOSED OF, WERE LIABLE TO LOSE THEIR MARKET VALUE. FOR THE ASS ESSMENT YEARS 1963-64 AND 1964-65, THE INCOME-TAX OFFICER HELD THAT THERE WAS NO JUSTIFICATION TO RECOGNISE A PRACTICE OF VALUING STOCK OTHERWISE THA N IN ACCORDANCE WITH THE WELL-RECOGNISED PRINCIPLE OF ACCOUNTING WHICH REQUI RED THE STOCK TO BE VALUED AT COST (VIZ., RAW MATERIAL PLUS EXPENDITURE ) OR MARKET PRICE, WHICHEVER WAS LOWER. HE, THEREFORE, CALCULATED THE VALUE OF THE OPENING AND CLOSING STOCKS BY ADDING THE OVERHEAD EXPENDITURE. THE APPELLATE ASSISTANT COMMISSIONER CONFIRMED THAT ORDER. ON APPEAL, THE A PPELLATE TRIBUNAL HELD THAT THERE WAS NO EVIDENCE TO SHOW THAT THE GOODS I N STOCK DETERIORATED IN VALUE AND THAT THERE WAS NO JUSTIFICATION FOR EXCLU DING THE OVERHEAD ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 11 EXPENDITURE IN VALUING THE STOCK; AND, IF IT WAS IN THE INTEREST OF THE BUSINESS TO VALUE STOCK SOLELY WITH REFERENCE TO COST OF RAW MATERIALS AND WITHOUT INCLUDING OVERHEAD EXPENDITURE, SUCH VALUATION WAS NOT APPROPRIATE TO THE COMPUTATION OF INCOME CHARGEABLE UNDER THE INCOME-T AX ACT. THE HIGH COURT, ON A REFERENCE, REVERSED THE DECISION OF THE TRIBUNAL HOLDING THAT, HAVING REGARD TO THE CONSISTENT PRACTICE OF THE RES PONDENT, THE TRIBUNAL WAS NOT JUSTIFIED IN REJECTING THE RESPONDENT'S METHOD OF VALUATION OF ITS STOCK-I N- TRADE. THE COURT HELD AS UNDER:- THE QUESTION TO BE DETERMINED BY THE ASSESSING OFF ICER IN EXERCISE OF HIS POWER UNDER THIS PROVISION IS WHETHER OR NOT IN COME CAN PROPERLY BE DEDUCED FROM THE ACCOUNTS MAINTAINED BY THE ASSESSE E, EVEN IF THE ACCOUNTS ARE CORRECT AND COMPLETE TO THE SATISFACTION OF THE OFFICER AND THE INCOME HAS BEEN COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCO UNTING REGULARLY EMPLOYED BY THE ASSESSEE. WHAT IS TO BE DETERMINED BY THE OFFICER IN EXERCISE OF HIS POWER IS A QUESTION OF FACT, I.E., WHETHER O R NOT INCOME CHARGEABLE UNDER THE ACT CAN PROPERLY BE DEDUCED FROM THE BOOK S OF ACCOUNT, AND HE MUST DECIDE THE QUESTION WITH REFERENCE TO THE RELE VANT MATERIAL AND IN ACCORDANCE WITH THE CORRECT PRINCIPLES. IN THE WORD S OF VISCOUNT HALDANE, 'IT IS PLAIN THAT THE QUESTION OF WHAT IS OR IS NOT PROFIT OR GAIN MUST PRIMARILY BE ONE OF FACT, AND OF FACT TO BE ASCERTAINED BY TH E TESTS APPLIED IN ORDINARY BUSINESS' (SUN INSURANCE OFFICE V. CLARK 19121 AC 4 43, 455 (HL). REFERRING TO SECTION 13 OF THE INDIAN INCOME-TAX AC T, 1922, WHICH CORRESPONDS TO SECTION 145 OF THE INCOME-TAX ACT, 1 961, THIS COURT HAD STATED IN CHHABILDAS TRIBHUVANDAS SHAH V. CIT [1966]59 ITR 733, 731) WE MAY POINT OUT THAT WE ARE NOT CONCERNED WITH TH E CORRECTNESS OF THE CONCLUSION AND WE ARE ONLY CONCERNED WITH THE Q UESTION WHETHER THERE IS ANY MATERIAL IN SUPPORT OF THE FINDING OF THE APPEL LATE TRIBUNAL. IN CASES INVOLVING THE APPLICABILITY OF THE PROVISO TO SECTI ON 13, THE QUESTION TO BE DETERMINED BY THE INCOME-TAX OFFICER IS A QUESTION OF FACT, NAMELY, WHETHER THE INCOME, PROFITS AND GAINS CAN OR CANNOT BE PROP ERLY DEDUCED FROM THE METHOD OF ACCOUNTING REGULARLY ADOPTED BY THE ASSES SEE. THERE IS NOTHING ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 12 SPECIAL ABOUT THIS QUESTION OF FACT, AND GENERALLY THE ONLY QUESTION OF LAW THAT CAN POSSIBLY ARISE IS WHETHER THERE IS ANY MAT ERIAL FOR THE FINDING. THE FACTS ARE NOT IN DISPUTE. IT IS THE ASSESSEE'S CASE THAT THE STOCK-IN- TRADE HAS BEEN VALUED AT 84.49 PER CENT. REPRESENTI NG THE ACTUAL COST OF THE RAW MATERIALS. THE OVERHEAD CHARGES REPRESENTING 15 .51 PER CENT. OF THE TOTAL COST HAVE BEEN ADMITTEDLY EXCLUDED FROM THE A SSESSEE'S VALUATION OF THE STOCK. BUT, BY THE VERY METHOD OF ACCOUNTING WHICH THE ASSESSEE HAS ADOPTED, IT IS POSSIBLE FOR THE INCOME-TAX OFFICER TO MAKE T HE NECESSARY ADDITIONS OR DEDUCTIONS SO AS TO ARRIVE AT THE CORRECT VALUE OF THE STOCK FOR THE PURPOSE OF DETERMINING THE CHARGEABLE INCOME. THE CORRECTNESS OF THE ACCOUNTS MAINTAINED BY THE ASSESSEE IS NOT IN QUESTION ; NOR IS THE SYSTEM ADOPTED BY THE ASSESSEE, I EXCEPT IN SO FAR AS THE STOCK IS VA LUED WITHOUT TAK- ING INTO ACCOUNT THE PRODUCTION EXPENDITURE. THE QUESTION, T HEREFORE, IS WHETHER OR NOT THE ASSESSING OFFICER IS JUSTIFIED IN HOLDING T HAT THE STOCK- IN-TRADE OF THE, ASSESSEE HAS NECESSARILY TO BE VALUED, FOR THE PURP OSE OF COMPUTING THE INCOME, AT 100 PER CENT. OF THE COST, AND NOT AT 84 .49 PER CENT. AS THE ASSESSEE HAS ADMITTEDLY DONE. IT IS CONTENDED ON BEHALF OF THE ASSESSEE THAT, FOR A NUMBER OF YEARS, THE REVENUE DID NOT QUESTION THE METHOD OF ACCOUNTI NG REGULARLY EMPLOYED BY THE ASSESSEE. IT WAS DURING THE ASSESSMENT YEARS IN QUESTION THAT AN OBJECTION WAS RAISED FOR THE FIRST TIME ON THE GROU ND THAT OVERHEAD EXPENDI- TURE WAS NOT INCLUDED IN THE VALUE OF THE STOCK. TH E REVENUE HAS, HOW- EVER, NOT QUESTIONED THE CORRECTNESS OF THE ACCOUNTS. THE ASSESSING OFFICER, ACCORDING TO COUNSEL, HAS EXCEEDED HIS JURISDICTION BY ADDING THE OVERHEAD EXPENDITURE TO THE COST OF RAW MATERIAL, ESPECIALLY BECAUSE OF THE SHORT DURABILITY OF PAINT. THE OFFICER HAS NOT APPRECIATE D THAT THE METHOD ADOPTED BY THE ASSESSEE IS A WELL-RECOGNISED METHOD AMONG A CCOUNTANTS OF REPUTE. THE ASSESSEE'S COUNSEL PLACES MUCH RELIANCE UPON TH E DECISION OF THE HOUSE OF LORDS IN DUPLE MOTOR BODIES LTD. V. IRC [1961] 1 WLR 739 (HL). THAT WAS A CASE WHERE THE ASSESSEE CARRIED ON THE BUSINE SS OF BUILDING BODIES FOR MOTOR-COACHES. AT THE END OF EACH ACCOUNTING PERIOD , THE ASSESSEE HAD ON HAND A NUMBER OF UNFINISHED BODIES. IN COMPUTING TH E VALUE OF WORK-IN- PROGRESS FOR INCOME-TAX PURPOSES, THE ASSESSEE ADOP TED WHAT IS CALLED THE 'DIRECT COST' METHOD, ON THE BASIS OF WHICH ONLY TH E DIRECT COST OF RAW MATERIALS AND LABOUR EXPENDED ON THE WORK WAS TAKEN INTO ACCOUNT. THE REVENUE SOUGHT TO VALUE THE WORK-IN-PROGRESS ON AN 'ON-COST' BASIS. THE DIRECT COST METHOD, AS ADOPTED BY THE ASSESSEE IN T HAT CASE, TAKES INTO ACCOUNT MONIES SPENT SOLELY FOR THE PURPOSE OF THE MANUFACTURE OF THE PARTICULAR GOODS, WHILST THE ON-COST METHOD TREATS, AS AN ADDITIONAL ITEM OF ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 13 COST, PROPORTIONS OF VARIOUS ITEMS OF EXPENDITURE I NCURRED IN CON- NECTION WITH THE MANUFACTURE OF THOSE GOODS AS WELL AS OF O THER GOODS. THE TWO PRINCIPAL ELEMENTS IN 'DIRECT COST', AS ADOPTED BY THE ASSESSEE IN THAT CASE, ARE LABOUR AND RAW MATERIALS AND THAT METHOD IS FAR MORE ACCURATE IN RESPECT OF THE GOODS-IN-PROGRESS WHICH, BY THEIR VE RY NATURE, HAVE INSIGNIFI- CANT MARKET VALUE. ON THE OTHER HAND, THERE IS MUCH UNCERTAINTY IN THE 'ON- COST' METHOD. THE HOUSE OF LORDS HELD THAT, PARTICU LARLY IN VIEW OF THE FACT THAT THE DIRECT COST METHOD HAD BEEN APPLIED CONSIS TENTLY IN THE PAST AND BEING MORE ACCURATE AS A METHOD OF COMPUTATION, THE ASSESSING AUTHORITY WAS NOT JUSTIFIED IN DISCARDING THAT METHOD AND ADO PTING THE ' ON COST' METHOD, ESPECIALLY WHEN GREAT UNCERTAINTY WAS ATTAC HED TO IT. THE DECISION IN THAT CASE TURNED ON THE PECULIAR FACTS CONCERNIN G GOODS-IN- PROGRESS WHICH, BY THEIR VERY NATURE, BEING UNFINISHED GOODS , HAD A LIMITED MARKET VALUE AND TO VALUE THEM OTHERWISE THAN BY THE DIREC T COST METHOD WAS UNCERTAIN AND INACCURATE AND DID NOT GIVE A TRUE VA LUE OF THE GOODS FOR THE PURPOSE OF COMPUTING THE CORRECT INCOME. IN THE RES ENT CASE, WHAT THE ASSESSEE CONTENDS FOR IS NEITHER THE 'DIRECT COST' METHOD NOR ANY OTHER METHOD WHICH TAKES INTO ACCOUNT THE ACTUAL OR EVEN PART OF THE COST INVOLVED IN THE MANUFACTURE OF THE GOODS-IN- PROCESS AND FIN ISHED PRODUCTS. WHAT IT CONTENDS FOR IS VALUATION OF THE RAW MATERIAL WITHO UT TAKING INTO ACCOUNT ANY PORTION OF THE COST OF MANUFACTURE. NO DECISION HAS BEEN BROUGHT TO OUR NOTICE IN SUPPORT OF SUCH A CONTENTION. THE QUESTIO N OF FACT WHICH THE ASSESSING OFFICER MUST NECESSARILY DECIDE IS WHETHE R OR NOT THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSES- SEE DISCLOSES THE TRUE INCOME. IT IS A WELL RECOGNISED PRINCIPLE OF COMMERCIAL ACCOUNTING TO EN TER IN THE PROFIT AND LOSS ACCOUNT THE VALUE OF THE STOCK-IN-TRADE AT THE BEGI NNING AND AT THE END OF THE ACCOUNTING YEAR AT COST OR MARKET PRICE, WHICHEVER IS THE LOWER. AS STATED BY THE LORD PRESIDENT IN WHIMSTER AND CO. V. CIR [1925 ] 12 TC 813, 823 (C.SESS.) '... IN COMPUTING THE BALANCE OF PROFITS AND GAINS FOR THE PURPOSES OF INCOME-TAX. . . . TWO GENERAL AND FUNDAMENTAL COMMO N PLACES HAVE ALWAYS TO BE KEPT IN MIND. IN THE FIRST PLACE, THE PROFITS OF ANY PARTICULAR YEAR OR ACCOUNTING PERIOD MUST BE TAKEN TO CONSIST OF THE D IFFERENCE BETWEEN THE RECEIPTS FROM THE TRADE OR BUSINESS DURING SUCH YEA R OR ACCOUNTING PERIOD AND THE EXPENDITURE LAID OUT TO EARN THOSE RECEIPTS . IN THE SECOND PLACE, THE ACCOUNT OF PROFIT AND LOSS TO BE MADE UP FOR THE PU RPOSE OF ASCERTAINING THAT DIFFERENCE MUST BE FRAMED CONSISTENTLY WITH THE ORD INARY PRINCIPLES OF COMMERCIAL ACCOUNTING, SO FAR AS APPLICABLE, AND IN CONFORMITY WITH THE RULES OF THE INCOME-TAX ACT, OR OF THAT ACT AS MODI FIED BY THE PROVISIONS AND SCHEDULES OF THE ACTS REGULATING EXCESS PROFITS DUT Y, AS THE CASE MAY BE. FOR ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 14 EXAMPLE, THE ORDINARY PRINCIPLES OF COM- MERCIAL AC COUNTING REQUIRE THAT IN THE PROFIT AND LOSS ACCOUNT OF A MERCHANT'S OR MANU FACTURER'S BUSINESS THE VALUES OF THE STOCK-IN-TRADE AT THE BEGINNING AND A T THE END OF THE PERIOD COVERED BY THE ACCOUNT SHOULD BE ENTERED AT COST OR MARKET PRICE, WHICHEVER IS THE LOWER, ALTHOUGH THERE IS NOTHING ABOUT THIS IN THE TAXING STATUTES . . .' WHERE THE MARKET VALUE HAS FALLEN BEFORE THE DATE OF VALUATION AND, ON THAT DATE, THE MARKET VALUE OF THE ARTICLE IS LESS THAN ITS ACTUAL COST, THE ASSESSEE IS ENTITLED TO VALUE THE ARTICLES AT MARKE T VALUE AND THUS ANTICIPATE THE LOSS WHICH HE WILL PROBABLY INCUR AT THE TIME O F THE SALE OF THE GOODS. VALUATION OF THE STOCK-IN-TRADE AT COST OR MARKET V ALUE, WHICHEVER IS THE LOWER, IS A MATTER ENTIRELY WITHIN THE DISCRETION O F THE ASSESSEE. BUT WHICHEVER METHOD HE ADOPTS, IT SHOULD DISCLOSE A TR UE PICTURE OF HIS PROFITS AND GAINS. IF, ON THE OTHER HAND, HE ADOPTS A SYSTE M WHICH DOES NOT DISCLOSE THE TRUE STATE OF AFFAIRS FOR THE DETERMINATION OF TAX, EVEN IF IT IS IDEALLY SUITED FOR OTHER PURPOSES OF HIS BUSINESS, SUCH AS THE CRE ATION OF A RESERVE, DECLARATION OF DIVIDENDS, PLANNING AND THE LIKE, IT IS THE DUTY OF THE ASSESSING OFFICER TO ADOPT ANY SUCH COMPUTATION AS HE DEEMS A PPROPRIATE FOR THE PROPER DETERMINATION OF THE TRUE INCOME OF THE ASSE SSEE. THIS IS NOT ONLY A RIGHT BUT A DUTY THAT IS PLACED ON THE OFFICER, IN TERMS OF THE FIRST PROVISO TO SECTION 145, WHICH CONCERNS A CORRECT AND COMPLETE ACCOUNT BUT WHICH, IN THE OPINION OF THE OFFICER, DOES NOT DISCLOSE THE T RUE AND PROPER INCOME. THE CORRECT PRINCIPLE OF ACCOUNTING IS TO ENTER TH E STOCK IN THE BOOKS OF ACCOUNT AT COST UNLESS THE VALUE IS REQUIRED TO BE REDUCED BY REASON OF THE FALL IN THE MARKET VALUE OF THOSE GOODS BELOW THEIR ORIGINAL COST. ORDINARILY, THEREFORE, THE GOODS SHOULD RIOT BE WRITTEN DOWN BE LOW THE COST PRICE EXCEPT WHERE THERE IS AN ACTUAL OR ANTICIPATED LOSS. ON TH E OTHER HAND, IF THE FALL IN THE PRICE IS ONLY SUCH AS IT WOULD REDUCE MERELY TH E PROSPECTIVE PROFIT, THERE WOULD BE NO JUSTIFICATION TO DISCARD THE INITIAL VA LUATION AT COST. IN B. S. C. FOOTWEAR LTD. V. RIDGWAY (INSPECTOR OF TAXES) [1972 ] 83 ITR 269, 294 ; [1971] 2 WLR 1313, 1332 (HL), LORD PEARSON, CRITICI ZING THE SYSTEM ADOPTED IN THE VALUATION OF A RETAILER'S STOCK, OB SERVED : 'THEN IS THE INCORRECTNESS OF THE STOCK VALUATIONS SUCH AS TO BE LIKELY TO DISTORT THE ASSESSMENT OF THE PROFITS AND GAINS FOR THE YEAR? THE SYSTEM PRODUCES A COMPARATIVELY LOW VALUATION OF THE OPENING STOCK AT THE BEGINNING OF THE YEAR AND A COMPARATIVELY LOW VALUATION OF THE CLOSI NG STOCK AT THE END OF THE YEAR AND THEREFORE A COMPARATIVELY LOW DIFFERENCE B ETWEEN THEM ... THEN IN A PERIOD OF RISING TURNOVER AND RISING PRICES THE DIF FERENCE IS AN ELEMENT OF PROFIT, AND BY KEEPING DOWN THAT DIFFERENCE THE SYS TEM DIMINISHES THE ASSESSMENT OF, TAXABLE PROFIT FOR THE YEAR. OVER A SERIES OF YEARS THERE IS A ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 15 CONTINUING DEFERMENT OF TAX LIABILITY. IN MY OPINIO N, THEREFORE, THE SYSTEM DOES PRODUCE SOME DISTORTION OF THE ASSESSMENT OF T AXABLE PROFITS FOR ANY PARTICULAR YEAR.' IN THAT CASE, THE HOUSE OF LORDS ACCEPTED THE CONTE NTION OF THE INLAND REVENUE THAT, ALTHOUGH THE ASSESSEE'S SYSTEM OF STO CK VALUATION HAS BEEN ACCEPTED FOR TAX PURPOSES FOR MANY YEARS UP TO 1959 , IT WAS LIABLE TO BE REJECTED FOR THE RELEVANT AND SUBSEQUENT YEARS AS T HE SYSTEM ADOPTED, BY THE ASSESSEE WAS LIKELY TO PRODUCE STOCK VALUATIONS WHI CH WERE SERIOUSLY AND SUBSTANTIALLY INCORRECT, THEREBY CAUSING DISTORTION OF THE ASSESSMENT OF THE PROFITS AND GAINS FOR THE YEAR. IT IS NOT ONLY THE RIGHT BUT THE DUTY OF THE ASSESSING OFFICER TO CONSIDER WHETHER OR NOT THE BO OKS DISCLOSE THE TRUE STATE OF ACCOUNTS AND THE CORRECT INCOME CAN BE DEDUCED T HERE FROM. IT IS INCORRECT TO SAY, AS CONTENDED ON BEHALF OF THE ASS ESSEE, THAT THE OFFICER IS BOUND TO ACCEPT THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE THE CORRECTNESS OF WHICH HAD NOT BEEN QUESTIONED IN THE PAST. THERE IS NO ESTOPPEL IN THESE MATTERS AND THE OFFICER IS NOT BO UND BY THE METHOD FOLLOWED IN THE EARLIER YEARS. IN CIT V. SARANGPUR COTTON MFG. CO. LTD. [1938] 6 I TR 36 (PC), LORD THANKERTON STATED THAT SECTION 13 OF THE INDIAN INC OME-TAX ACT, 1922, RELATED TO A METHOD OF ACCOUNTING REGULARLY EMPLOYE D BY THE ASSES- SEE. THE SECTION, POSTULATED THAT SUCH A METHOD OF ACCOUNTIN G WAS THE NECESSARY BASIS OF COMPUTATION, UNLESS, IN THE OPINION OF THE INCOM E-TAX OFFICER, THE INCOME, PROFITS AND GAINS COULD NOT PROPERLY BE DEDUCED FRO M SUCH METHOD. BUT IT COULD VERY WELL BE THAT, 'THOUGH THE PROFIT BROUGHT OUT IN THE ACCOUNTS IS NOT THE TRUE FIGURE FOR INCOME-TAX PURPOSES THE TRUE FI GURE CAN BE ACCURATELY DEDUCED THERE FROM .......' BUT IT WAS NOT A CORREC T VIEW THAT THE INCOME-TAX OFFICER WAS 'PRIMA FACIE ENTITLED' TO ACCEPT THE PR OFITS MENTIONED IN THE ACCOUNTS WHERE THERE WAS A METHOD OF ACCOUNTING REG ULARLY EMPLOYED BY, THE ASSESSEE. 'IT IS THE DUTY OF THE INCOME-TAX OFF ICER, WHERE THERE IS SUCH A METHOD OF ACCOUNTING TO CONSIDER WHETHER INCOME, PR OFITS AND GAINS CAN PROPERLY BE DEDUCED THERE- FROM AND TO PROCEED, ACC ORDING TO HIS JUDGMENT ON THIS QUESTION. (P. 43).IN CIT V. A. KRISHNASWAMI MUDALIAR [1964] 53 ITR 122,128, THIS COURT, REFERRING TO THE EARLIER DECISIONS ON THE PO INT, OBSERVED PAGE 54 AGAIN AS OBSERVED BY THIS COURT IN CIT V. MCMILLAN AND CO.[1958] 33 ITR 182, THE EXPRESSION 'IN THE OPINION OF THE INCOME-T AX OFFICER' IN THE PROVISO ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 16 TO SECTION 13 OF THE INDIAN INCOME-TAX ACT, 1922, D OES NOT CONFER A MERE DISCRETIONARY POWER ; IN THE CONTEXT IT IMPOSES A S TATUTORY DUTY ON THE INCOME-TAX OFFICER TO EXAMINE IN EVERY CASE THE MET HOD OF ACCOUNTING EMPLOYED BY THE ASSESSEE AND TO SEE WHETHER OR NOT IT HAS BEEN REGULARLY EMPLOYED AND TO DETERMINE WHETHER THE INCOME, PRO- FITS AND GAINS OF THE ASSESSEE COULD PROPERLY BE DEDUCED THERE FROM. THE OFFICER HAS TO CONSIDER THE MATERIAL PLACED BEF ORE HIM AND, IF, UPON SUCH CONSIDERATION, HE IS OF THE OPINION THAT CORRECT PR OFITS AND GAINS COULD NOT BE DEDUCED FROM THE ACCOUNTS, HE WOULD THEN BE OBLIGED TO HAVE RECOURSE TO THE PROVISO TO SECTION 145. [THE PRINCIPLE STATED IN S. N. NAMASIVAYAM CHETTIAR V. CIT [1960] 38 ITR 579, 588]. FOR COMPUTATION OF THE TRUE PROFITS OF THE YEAR IN THE CASE OF A TRADE OR ADVENTURE, EACH YEAR BEING A SELF-CONTAINED UNIT, THE VALUE OF THE STOCK- IN-TRADE AT THE BEGIN NING AND AT THE, END OF THE ACCOUNTING YEAR HAS TO BE TAKEN INTO ACCOUNT. IN CI R V. COCK, RUSSELL AND CO. LTD. [1949] 29 TC 387, 392 (KB), CROOM-JOHNSON J. STATED: . . . THERE IS NO WORD IN THE STATUTES OR RULES WH ICH DEALS WITH THIS QUESTION OF VALUING STOCK-IN-TRADE. THERE IS NOTHING IN THE RELEVANT LEGISLATION WHICH INDICATES THAT IN COMPUTING THE PROFITS AND GAINS O F A COMMERCIAL CONCERN THE STOCK-IN-TRADE AT THE START OF THE ACCOUNTING P ERIOD SHOULD BE TAKEN IN AND THAT THE AMOUNT OF THE STOCK-IN-TRADE AT THE EN D OF THE PERIOD SHOULD ALSO BE TAKEN IN. IT WOULD BE FANTASTIC NOT TO DO IT: IT WOULD BE UTTERLY IMPOSSIBLE ACCURATELY TO ASSESS PROFITS AND GAINS MERELY ON A STATEMENT OF RECEIPTS AND PAYMENTS OR ON THE BASIS OF TURNOVER. IT HAS LONG B EEN RECOGNISED THAT THE RIGHT METHOD OF ASSESSING PROFITS AND GAINS IS TO T AKE INTO ACCOUNT THE VALUE OF THE STOCK-IN-TRADE AT THE BEGINNING AND THE VALU E OF THE STOCK-IN-TRADE AT THE END AS TWO OF THE ITEMS IN THE COMPUTATION. I N EED NOT CITE AUTHORITY FOR THE GENERAL PROPOSITION, WHICH IS ADMIT- TED AT THE BAR, THAT FOR THE PURPOSES OF ASCERTAINING PROFITS AND GAINS THE ORDINARY PRIN CIPLES OF COMMERCIAL ACCOUNTING SHOULD BE APPLIED, SO LONG AS THEY DO NO T CONFLICT WITH ANY EXPRESS PROVISION OF THE RELEVANT STATUTES. REFERRING TO THOSE OBSERVATIONS, SHAH J., AS HE TH EN WAS, IN CIT V. A. KRISHNASWAMI MUDALIAR [1964] 53 ITR 122, 132 (SC) S AYS: WE HAVE ALREADY, SAID THAT IN ENGLAND THERE IS NO PROVISION WHICH COMPELS THE TAX OFFICER TO ADOPT IN THE COMPUTATION OF INCOME THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. BUT WHATEVER MAY BE THE SYSTEM, WHETHER IT IS CASH OR MERCANTILE, AS OBSERV ED BY CROOM-JOHNSON J. IN A TRADING VENTURE IT WOULD BE IMPOSSIBLE ACCURAT ELY TO ASSESS THE TRUE ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 17 PROFITS WITHOUT TAKING INTO ACCOUNT THE VALUE OF TH E STOCK-IN-TRADE AT THE BEGINNING AND AT THE END OF THE YEAR . . . .' THE INCOME-TAX ACT DOES NOT CONTAIN ANY SPECIFIC PR OVISION FOR THE VALUATION OF STOCK. INCOME, PROFITS AND GAINS MUST, HOWEVER, BE COMPUTED IN THE MANNER PROVIDED BY THE ACT, IT IS THE DUTY OF T HE OFFICER TO DETER- MINE THE PROFITS AND GAINS OF A COMMERCIAL ADVENTURE ACCORDI NG TO THE CORRECT PRINCIPLE OF ACCOUNTING. IN DOING SO, HE MIGHT, DEP ENDENT ON THE NATURE OF THE BUSINESS AND ITS SPECIAL CHARACTER, ALLOW CERTA IN ADJUSTMENTS BUT HIS PRIMARY PURPOSE AND DUTY IS TO DEDUCE THE CORRECT I NCOME, PROFITS AND GAINS, AND THIS HE CANNOT DO WITHOUT TAKING INTO ACCOUNT T HE VALUE OF THE STOCK-IN- TRADE AT THE BEGINNING AND AT THE END OF THE YEAR A ND BY ASCERTAINING THE DIFFERENCE BETWEEN THEM: SEE P. M. MOHAMMED MEERAKH AN V. CIT [1969] 73 ITR 735 (SC). THE OBJECT OF STOCK VALUATION IS T HE CORRECT DETERMINATION OF THE PRO- FITS AND LOSS RESULTING FROM A YEAR'S T RADING. IT IS THE TRUE RESULT OF THE TRADING ACTIVITY OF THAT YEAR THAT MUST BE DISC LOSED BY THE BOOKS. '.....THE PROFITS ARE THE PROFITS REALISED IN THE C OURSE OF THE YEAR. WHAT SEEMS AN EXCEPTION IS RECOGNISED WHERE A TRADER PUR CHASED AND STILL HOLDS GOODS OR STOCKS WHICH HAVE FALLEN IN VALUE. NO LOSS HAS BEEN REALISED. LOSS MAY NOT OCCUR. NEVERTHELESS, AT THE CLOSE OF THE YE AR HE IS PERMITTED TO TREAT THESE GOODS OR STOCKS AS OF THEIR MARKET VALUE.' [W HIMSTER AND CO. V. CIR [1925] 12 TC 813, 827 (C. SESS.) ]. AS STATED BY PA TANJALI SASTRI C. J. IN CHAINRUP SAMPATRAM V. CIT 1953] 24 ITR 481, 485 (SC ) : 'IT IS WRONG TO ASSUME THAT THE VALUATION OF THE CL OSING STOCK AT MARKET RATE HAS, FOR ITS OBJECT, THE BRINGING INTO CHARGE ANY APPRECIATION IN THE VALUE OF SUCH STOCK. THE TRUE PURPOSE OF CREDITING THE VALUE OF UNSOLD STOCK IS TO BALANCE THE COST OF THOSE GOODS ENTERED ON THE O THER SIDE OF THE ACCOUNT AT THE TIME OF THEIR PURCHASE, SO THAT THE CANCELLING OUT OF THE ENTRIES RELATING TO THE SAME STOCK FROM BOTH SIDES OF THE ACCOUNT WOULD LEAVE ONLY THE TRANSACTIONS ON WHICH THERE HAVE BEEN ACTUAL SALES IN THE COURSE OF THE YEAR SHOWING THE PROFIT OR LOSS ACTUALLY REALISED ON THE YEAR'S TRADING....' IN THE WORDS OF SINGLETON L. J. IN PATRICK (INSPECT OR OF TAXES) V. BROADSTONE MILLS LTD. [1954] 25 ITR 377, 395 (CA): '(1) ONE CANNOT ARRIVE AT THE PROFITS OF THE YEAR W ITHOUT TAKING INTO ACCOUNT THE VALUE OF THE STOCK ONE HAS AT THE BEGINNING OF, AND AT THE END OF, THE ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 18 ACCOUNTING YEAR. (2) THE FIGURES FOR STOCK ARE JUST AS IMPORTANT AS ANY OTHER FIGURES. VALUES MAY HAVE TO BE ESTIMATED WHEN MARKE T PRICE IS TAKEN, BUT ANY DEPARTURE FROM ACCURACY IS REFLECTED IN THE TRADING ACCOUNT (3) STOCK SHOULD BE TAKEN EITHER AT COST PRICE OR AT MARKET PRICE, W HICH- EVER IS THE LOWER......' LORD HERSCHELL IN RUSSELL V. TOWN AND COUNTY BANK L TD. [1888] 13 AC 418, 424 ; 4 TLR, 500 (HL) OBSERVES: THE PROFIT OF A TRADE OR BUSINESS IS THE SURPLUS B Y WHICH THE RECEIPTS FROM THE TRADE OR BUSINESS EXCEED THE EXPENDITURE NECESS ARY FOR THE PURPOSE OF EARNING THOSE RECEIPTS . . .'WHAT IS THE PROFIT OF A TRADE OR BUSINESS IS A QUESTION OF FACT AND IT MUST BE ASCERTAINED, AS ALL FACTS MUST BE ASCERTAINED, WITH REFERENCE TO THE RELEVANT EVIDENCE, AND NOT ON DOCTRINES OR THEORIES : 'NO ASSUMPTION NEED BE MADE UNLESS THE FACTS CANNOT BE ASCERTAINED, AND THEN ONLY TO THE EXTENT TO WHICH THEY CANNOT BE ASC ERTAINED. THERE IS NO ROOM FOR THEORIES AS TO FLOW OF COSTS . MINISTER OF NATI ONAL REVENUE V. ANACONDA AMERICAN BRASS LTD. [1956] AC 85 ; [1956] 30 ITR 84 ,99 (PC). SECTION 145 OF THE INCOME-TAX ACT, 1961, CONFERS SUFFICIENT POW ER UPON THE OFFICER-NAY IT IMPOSES A DUTY UPON HIM-TO MAKE SUCH COMPUTATION IN SUCH MANNER AS HE DETERMINES FOR DEDUCING THE CORRECT PROFITS AND GAI NS. THIS MEANS THAT WHERE, ACCOUNTS ARE PREPARED WITHOUT DISCLOSING THE REAL COST OF THE STOCK- IN-TRADE, ALBEIT ON SOUND EXPERT ADVICE IN THE INTE REST OF EFFICIENT ADMINISTRATION OF THE COMPANY, IT IS THE DUTY OF TH E INCOME-TAX OFFICER TO DETERMINE THE TAXABLE INCOME BY MAKING SUCH COMPUTA TION AS HE THINKS FIT. ANY SYSTEM OF ACCOUNTING WHICH EXCLUDES, FOR THE VA LUATION OF THE STOCK-IN- TRADE, ALL COSTS OTHER THAN THE COST OF RAW MATERIA LS FOR THE GOODS-IN-PROCESS AND FINISHED PRODUCTS, IS LIKELY TO RESULT IN A DIS TORTED PICTURE OF THE TRUE STATE OF THE BUSINESS FOR THE PURPOSE OF COMPUTING THE CHARGEABLE INCOME. SUCH A SYSTEM MAY PRODUCE A COMPARATIVELY LOWER VAL UATION OF THE OPENING STOCK AND THE CLOSING STOCK, THUS SHOWING A COMPARA TIVELY LOW DIFFERENCE BETWEEN THE TWO. IN A PERIOD OF RISING TURNOVER AND RISING PRICES, THE SYSTEM ADOPTED BY THE ASSESSEE, AS FOUND BY THE TRIBUNAL, IS APT TO DIMINISH THE ASSESSMENT OF THE TAXABLE PROFIT OF A YEAR. THE PRO FIT OF ONE YEAR IS LIKELY TO BE SHIFTED TO ANOTHER YEAR WHICH IS AN INCORRECT ME THOD OF COMPUTING PROFITS AND GAINS FOR THE PURPOSE OF ASSESSMENTS EACH YEAR BEING A SELF-CONTAINED UNIT, AND THE TAXES OF A PARTICULAR YEAR BEING PAYA BLE WITH REFERENCE TO THE INCOME OF THAT YEAR, AS COMPUTED IN TERMS OF THE AC T, THE METHOD ADOPTED BY THE ASSESSEE HAS BEEN FOUND TO BE SUCH THAT INCOME CANNOT PROPERLY BE DEDUCED THERE FROM. IT IS THEREFORE, NOT ONLY THE R IGHT BUT THE DUTY OF THE ASSESSING OFFICER TO ACT IN EXERCISE OF HIS STATUTO RY POWER, AS HE HAS DONE IN ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 19 THE INSTANT CASE, FOR DETERMINING WHAT, IN HIS OPIN ION, IS THE CORRECT TAXABLE INCOME. THE TRIBUNAL'S ORDER, AFFIRMING THAT OF THE ASSESSI NG OFFICER, WAS BASED ON FINDINGS OF FACT MADE ON COGENT EVIDENCE A ND IN ACCORDANCE WITH CORRECT PRINCIPLES. THE HIGH COURT WAS CLEARLY WRON G IN INTERFERING WITH THOSE FINDINGS. ACCORDINGLY, WE SET ASIDE THE JUDGMENT OF THE HIGH COURT AND ALLOW THE APPEALS OF THE REVENUE 10.2 J.C.T LTD. VS. ACIT, 56 ITD 169 (CALCUTTA) IN THIS CASE THE MAIN PLANK OF THE ALIGNMENT OF THE LD. COUNSEL OF THE AS SESSEE, I.E., WHETHER THE ASSESSEE IS ENTITLED TO CLAIM IN HIS INCOME-TAX ASS ESSMENT DEDUCTION OF THESE AMOUNTS AS REVENUE EXPENDITURE IN SPITE OF THE FACT THAT THE AMOUNTS IN QUESTION HAVE BEEN CORRECTLY TREATED AS CAPITAL EXP ENDITURE IN THE BOOKS OF ACCOUNT MAINTAINED AND ANNUAL ACCOUNTS PUBLISHED BY THE ASSESSEE-COMPANY. THE COURT OBSERVED THAT THE QUESTION GOES TO THE RO OT OF THE INCOME-TAX ASSESSMENT PROCEEDINGS. AS PER SECTION 4 WHICH IS T HE CHARGING SECTION LEVY OF INCOME-TAX HAS BEEN ENVISAGED AS AN ANNUAL TAX 'IN RESPECT OF THE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON'. 'TOTA L INCOME' HAS BEEN DEFINED UNDER SECTION 2(45) TO MEAN THE AMOUNT OF I NCOME COMPUTED IN THE MANNER LAID DOWN IN THE ACT. SECTION 145 LAYS DOWN THE MANNER OF COMPUTATION OF INCOME CHARGEABLE UNDER THE HEADS 'P ROFITS AND GAINS OF BUSINESS OR PROFESSION' AND 'INCOME FROM OTHER SOUR CES' TO BE IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. THE ONLY ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 20 EXCEPTION TO THIS GENERAL PRINCIPLE IS THE CASES WH ERE THE METHOD EMPLOYED IS SUCH THAT THE INCOME CANNOT PROPERLY BE DEDUCED THERE FROM OR WHERE THE ASSESSING OFFICER IS NOT SATISFIED ABOUT THE CORREC TNESS OR THE COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE. THERE ARE ANY NUMB ER OF COURT PRONOUNCEMENTS WHERE IT HAS BEEN HELD THAT PROVISIO NS OF SECTION 145 ARE MANDATORY AND THE PROPER METHOD OF ACCOUNTING REGUL ARLY FOLLOWED BY AN ASSESSEE IS BINDING ON THE ASSESSING AUTHORITIES. A S EARLY AS IN THE CASE OF CIT V. SARANGPUR COTTON MFG. CO. LTD. [1938] 6 ITR 36 (PC), THE JUDICIAL COMMITTEE OF THE PRIVY COUNCIL NOTED THAT EVEN IF T HE PROFIT BROUGHT OUT IN THE ACCOUNTS IS NOT THE TRUE FIGURE FOR INCOME-TAX PURPOSE, THE SAME WOULD BE COMPULSORY BASIS OF COMPUTATION OF INCOME IF THE TRUE FIGURE CAN BE ACCURATELY DEDUCED THERE FROM. 10.3 IN KESHAV MILLS LTD. VS. CIT [1953] 23 ITR 230 , THE HON'BLE SUPREME COURT HELD THAT THE PROVISIONS OF SECTION 13 OF 192 2 ACT (CORRESPONDING TO SECTION 145 OF 1961 ACT) WAS COMPULSORY ON THE INCO ME-TAX AUTHORITIES AND IMPOSED UPON THEM AN OBLIGATION TO ACCEPT THE MODE OF ACCOUNTING REGULARLY ADOPTED BY THE ASSESSEE EXCEPT IN CASES WHEN THE PR OVISO TO THAT SECTION CAME INTO OPERATION. THE PROFITS EARNED AND CREDITE D IN THE BOOKS OF ACCOUNT WERE TO BE TAKEN AS THE BASIS FOR COMPUTATION OF IN COME. ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 21 10.4 IN CIT VS. A. KRISHNASWAMY MUDALIAR [1964 ] 53 ITR 122 , THE SUPREME COURT REITERATED THAT THE INCOME-TAX OFFICER IS BOU ND TO COMPUTE THE PROFITS BY APPROPRIATE ADJUSTMENTS FROM THE ACCOUNTS MAINTA INED BY AN ASSESSEE WHERE A SYSTEM OF ACCOUNT IS REGULARLY EMPLOYED. TH E COURT HELD AS UNDER:- 'THE ONLY DEPARTURE MADE BY SECTION 13 OF THE INDIA N INCOME-TAX ACT FROM THE LEGISLATION IN ENGLAND IS THAT WHEREAS UND ER THE ENGLISH LEGISLATION, THE COMMISSIONER IS NOT OBLIGED TO DET ERMINE THE PROFITS OF A BUSINESS VENTURE, ACCORDING TO THE METHOD OF ACCOUN TING ADOPTED BY THE ASSESSEE, UNDER THE INDIAN INCOME-TAX ACT, PRIMA FA CIE, THE INCOME-TAX OFFICER HAS FOR THE PURPOSE OF SECTIONS 10 AND 12 T O COMPUTE THE INCOME, PROFITS AND GAINS IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. IF, THEREFORE, THERE IS A SYSTEM OF ACCOUNTING REGULARLY EMPLOYED AND BY APPROPRIATE ADJUSTMENTS F ROM THE ACCOUNTS MAINTAINED TAXABLE PROFIT MAY PROPERLY BE DEDUCED, THE INCOME-TAX OFFICER IS BOUND TO COMPUTE THE PROFITS IN ACCORDANCE WITH THE METHOD OF ACCOUNTING. BUT WHERE IN THE OPINION OF THE INCOME- TAX OFFICER, THE PROFITS CANNOT PROPERLY BE DEDUCED FROM THE SYSTEM OF ACCOU NTING ADOPTED BY THE ASSESSEE IT IS OPEN TO HIM TO ADOPT A MORE SUITABLE BASIS FOR COMPUTATION OF THE TRUE PROFITS.' 10.5 IN THE CASE OF MD. UMER VS. CIT [1997] 101 ITR 525 (PAT) , THE HON'BLE PATNA HIGH COURT HAVE CATEGORICALLY STATED AT PAGE 530, ONCE, THEREFORE, THE METHOD OF ACCOUNTING EMPLOYED BY THE ASSESSEE HAS B EEN REGULARLY EMPLOYED AND INCOME, PROFITS AND GAINS CAN PROPERLY BE DEDUCED FROM SUCH REGULARLY EMPLOYED METHOD OF ACCOUNTING, THAT IS TH E END OF THE MATTER FOR THE PURPOSE OF PROVISO TO SUB-SECTION (1) OF SECTIO N 145. 10.6 SIGNIFICANTLY, THE PROVISION OF SECTION 145(1) PRESUPPOSES THAT THERE CAN BE MORE THAN ONE METHOD OF ACCOUNTING THE INCOME FROM WHICH MAY BE ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 22 PROPERLY DEDUCIBLE. THESE PROVISIONS WOULD MAKE NO SENSE IF ALWAYS THERE IS ONE METHOD OF ACCOUNTING THE INCOME FROM WHICH ALON E MAY BE PROPERLY DEDUCIBLE. IN THE CASE OF ON-GOING BUSINESS, THE PR OFIT OR LOSS MADE BY THE BUSINESSMAN FROM THAT BUSINESS, AS APTLY DESCRIBED IN THE CASE OF SUNIL SIDDHARTHBHAI V. CIT [1985] 156 ITR 509 /23 TAXMAN 14W (SC) AT PAGE 521 REMAINS IN THE 'WOMB OF FUTURE'. THE MEASUREMENT OF PERIODIC INCOME IS, TO THAT EXTENT, A MATTER OF ESTIMATION ON THE BASIS OF CERTAIN ACCEPTABLE PRINCIPLE OF ACCOUNTING. FOR THIS REASON, ON THE SAME FACTS A ND CIRCUMSTANCES, THE COMPUTATION OF BUSINESS INCOME MAY DIFFER DEPENDING UPON THE METHOD OF ACCOUNTING EMPLOYED. IN OTHER WORDS, IT IS NOT THE LEGAL POSITION THAT ON IDENTICAL FACTS, THE SAME AMOUNT OF INCOME SHOULD B E ASSESSABLE IN THE CASES OF ALL THE ASSESSEES. THIS POSITION HAS BEEN CLEARL Y RECOGNISED BY THE HON'BLE SUPREME COURT IN THE CASE OF A. KRISHNASWAMY MUDALI AR THAT THE QUANTUM OF ALLOWANCE PERMITTED TO BE DEDUCTED FROM THE PROF ITS AND GAINS OF BUSINESS WOULD DIFFER ACCORDING TO THE SYSTEM OF ACCOUNTING. IN THE CASE OF CIT V. S.M. CHITNAVIS [1932] 2 COMP. CAS. 464 (PC), LORD R USSEL HELD THAT IF A METHOD OF ACCOUNTING IS REGULARLY EMPLOYED THEN THE ASSESSEE OUGHT TO GET THE ADVANTAGE AND SUFFER DISADVANTAGE OF THAT SYSTE M OF ACCOUNTING, AND EVEN THOUGH IT MAY HAPPEN THAT IN A PARTICULAR YEAR THE REVENUE MAY GAIN IN ANOTHER YEAR THE ASSESSEE MAY GAIN. THE HON'BLE BOM BAY HIGH COURT HELD IN THE CASE OF CIT V. TATA IRON & STEEL CO. LTD. [1977 ] 106 ITR 363 THAT IF THE ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 23 METHOD OF ACCOUNTING FOLLOWED BY AN ASSESSEE CANNOT BE SAID UNREASONABLE, THE SAME HAS TO BE GIVEN EFFECT TO EVEN IF A BETTER METHOD CAN BE VISUALIZED. THERE ARE ALSO CLEAR AUTHORITIES TO THE EFFECT THAT IT IS NOT OPEN TO AN ASSESSEE TO SET UP IN HIS INCOME-TAX RETURN A CLAIM ALTOGETH ER AT VARIANCE TO THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. AS A MATTER OF FACT, THIS ISSUE HAS BEEN DECIDED AS EARLY AS IN THE CASE OF CIT V. SARA NGPUR COTTON MFG. CO. LTD. [1938] 6 ITR 36 (PC), AT PAGE 40 THE JUDGMENT RECORDS :---- 'THEIR LORDSHIPS ARE CLEARLY OF OPINION THAT THE SE CTION RELATES TO A METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSE SSEE FOR HIS OWN PURPOSES ---- IN THIS CASE FOR THE PURPOSE OF THE C OMPANY'S BUSINESS AND DOES NOT RELATE TO A METHOD OF MAKING UP THE STATUT ORY RETURN FOR ASSESSMENT TO INCOME-TAX. SECONDLY, THE SECTION CLEARLY MAKES SUCH A METHOD OF ACCOUNTING A COMPULSORY BASIS OF COMPUTATION UNLESS IN THE OPINION OF THE INCOME-TAX OFFICER, THE INCOME, PROFITS AND GAINS C ANNOT PROPERLY BE DEDUCED THEREFROM. IT MAY WELL BE THAT, THOUGH THE PROFIT BROUGHT OUT IN THE ACCOUNTS IS NOT THE TRUE FIGURE FOR INCOME-TAX PURP OSE THE TRUE FIGURE CAN BE ACCURATELY DEDUCED THEREFROM.' THUS, THE HON'BLE JUDICIAL COMMITTEE DECIDED WAY BA CK IN 1937 THAT AN ASSESSEE CANNOT ASK FOR TWO DIFFERENT METHODS ON E FOR WRITING BOOKS OF ACCOUNT FOR THE PURPOSE OF HIS BUSINESS AND ANOTHER FOR HAVING HIS TAX LIABILITY DETERMINED UNDER THE INCOME-TAX ACT. ALON G THE SAME LINES, DECISIONS WERE GIVEN BY ALLAHABAD HIGH COURT IN THE CASE OF CIT V. SMT. SINGARIBAI [1945] 13 ITR 224 AND MADRAS HIGH COURT IN THE CASE OF BANGALORE WOOLLEN COTTON & SILK MILLS CO. LTD. [1950] 18 ITR 423 , THOUGH THE QUESTION BEFORE THEM WAS AS TO WHETHER AN ASSESSEE WRITING B OOKS OF ACCOUNT UNDER ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 24 MERCANTILE SYSTEM OF ACCOUNTING CAN ASK FOR CASH SY STEM FOR THE PURPOSE OF HIS INCOME-TAX ASSESSMENT. THIS ISSUE HAS RECENTLY BEEN CATEGORICALLY DETERMINED IN THE JUDGMENT OF HON'BLE CALCUTTA HIGH COURT IN THE CASE OF CIT V. UCO BANK [1993] 200 ITR 68 . IN THAT CASE UCO BANK AFTER HAVING FOLLOWED A PARTICULAR METHOD OF VALUATION OF SHARES AND SECURITIES IN HIS BOOKS OF ACCOUNT INSISTED UPON VALUATION OF THE SAM E IN THE INCOME-TAX RETURN UNDER THE METHOD 'COST OR MARKET PRICE, WHIC HEVER IS LOWER'. THE BASIS ON WHICH THESE ASSETS WERE VALUED IN THE BOOKS OF ACCOUNT AND ANOTHER BASIS WHICH WAS FOLLOWED IN THE RETURN OF INCOME WERE BOTH CONSISTENT WITH THE MERCANTILE SYSTEM OF ACCOUNTING . IN FACT IN THE CASE OF CHAINRUP SAMPATRAM V. CIT [1953] 24 ITR 481 (SC) THE LATER METHOD HAS BEEN UPHELD AND THAT DECISION WAS HEAVILY RELIED UP ON BY THE UCO BANK'S CASE BEFORE CALCUTTA HIGH COURT. AFTER CONSIDERATIO N OF THE MATTER, THE HON'BLE CALCUTTA HIGH COURT HELD : 'THE ASSESSEE IN THIS CASE, HAS NOT VALUED STOCK OF SHARES AND SECURITIES IN ITS BOOKS OF ACCOUNT IN ACCORDANCE WI TH THE METHOD 'COST OR MARKET PRICE, WHICHEVER IS LOWER'. THIS IS AN ADMIT TED POSITION. IF THIS METHOD IS NOT FOLLOWED IN WRITING AND PREPARING ACC OUNTS CONSISTENTLY, THE ASSESSEE CANNOT CLAIM A NOTIONAL METHOD OF STOCK VA LUATION ONLY FOR COMPUTATION OF INCOME BY THE TAX AUTHORITIES WITHOU T FOLLOWING THE SAME METHOD IN WRITING AND PREPARING ACCOUNTS. SECTION 1 45(1) OF THE ACT, 1961, CLEARLY GOES AGAINST THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE. AS WE HAVE INDICATED, THE ASSESSEE'S METHOD OF ACCO UNTING AS WELL AS THE SYSTEM OF STOCK VALUATION ADOPTED BY HIM CONSIS TENTLY FOR THE PURPOSES OF ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 25 PREPARING HIS ACCOUNTS HAS TO BE ACCEPTED BY THE TA X AUTHORITIES. THE BOOK RESULTS CAN BE REJECTED BY THE TAX AUTHORITIES ONLY IF THE METHOD ADOPTED BY THE ASSESSEE IS EITHER DEFECTIVE OR IF THE SYSTEM A DOPTED DOES NOT DISCLOSE A PROPER AND TRUE INCOME.' 11. FROM THE ABOVE DECIDED CASES, IT IS CLEAR THAT AN ASSESSEE AFTER HAVING MADE ENTRIES IN THE BOOKS OF ACCOUNT CONSISTENT WITH THE METHOD OF ACCOUNTING FOLLOWED BY HIM CANNOT BE PERMITTED TO SEEK ASSESSMENT OF HI S INCOME FOR INCOME-TAX PURPOSES ON A DIFFERENT BASIS ON THE GROUND THAT AN OTHER BASIS MAY ALSO BE PERMISSIBLE UNDER THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE OR HAS BEEN UPHELD IN CERTAIN JUDGMENTS OF A HIGH COURT OR SUPR EME COURT. TO THIS EXTENT, THE ENTRIES MADE IN HIS BOOKS OF ACCOUNT ARE AS MUCH BI NDING AS THE METHOD OF ACCOUNTING ITSELF. IT IS ONLY WHEN THE ENTRIES MADE IN THE BOOKS OF ACCOUNT ARE ERRONEOUS OR CONTRARY TO THE CORRECT LEGAL POSITION , THE SAME ARE NOT CONCLUSIVE OR DECISIVE OF THE MATTER, AS HELD BY THE HON'BLE SUPR EME COURT IN THE CASE OF KEDARNATH JUTE MFG. CO. LTD. V. CIT [1971] 82 ITR 363 AND SEVERAL OTHER JUDGMENTS. THIS POSITION IS ALSO IN BUILT IN THE PR OVISIONS OF SECTION 145(1) ITSELF THAT WHERE THE METHOD OF ACCOUNTING IS FOLLOWED IS SUCH THAT INCOME CANNOT BE PROPERLY DEDUCED THERE FROM, THE ASSESSING OFFICER MAY COMPUTE INCOME UPON SUCH BASIS AND IN SUCH MANNER AS THE ASSESSING OFFI CER MAY DETERMINE. IN SHORT, FOR OBTAINING A TREATMENT IN THE ASSESSMENT PROCEED INGS AT VARIANCE WITH THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE, IT HAS TO BE NECESSARILY SHOWN THAT THE ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 26 TREATMENT AS GIVEN OR ENTRIES AS MADE IN THE BOOKS OF ACCOUNT ARE EITHER ERRONEOUS OR CONTRARY TO THE CORRECT LEGAL POSITION. 12. IN THE LIGHT OF LAW LAID DOWN BY THE APEX COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. BRITISH PAINTS INDIA LTD. [1991] 188 ITR 0044[SC], BEFORE COMING TO THE FACTS OF THE CASE, WE WOULD LIKE TO E XAMINE WHAT IS MERCANTILE METHOD OF ACCOUNTING THE MERCANTILE SYSTEM OF ACCO UNTING IS WELL-KNOWN AND THIS METHOD HAS BEEN EXPLAINED IN A JUDGMENT OF THI S COURT IN KESHAV MILLS LTD. V. COMMISSIONER OF INCOME-TAX 23 ITR 230 (SC) : 'THAT SYSTEM BRINGS INTO CREDIT WHAT IS DUE, IMMEDI ATELY IT BECOMES LEGALLY DUE AND BEFORE IT IS ACTUALLY RECEIVED AND IT BRINGS INTO DEBIT EXPENDITURE THE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED.' 13. SIMON IN HIS INCOME TAX, SECOND EDITION, VOLUME II, AT PAGE 204, UNDER THE CAPTION 'ACCRUED LIABILITY' OBSERVES AS UNDER:- IN CASES, HOWEVER, WHERE AN ACTUAL LIABILITY EXIST S, AS IS THE CASE WITH ACCRUED EXPENSES, A DEDUCTION IS ALLOWABLE ; AND TH IS IS NOT AFFECTED BY THE FACT THAT THE AMOUNT OF THE LIABILITY AND THE DEDUC TION WILL SUBSEQUENTLY HAVE TO BE VARIED. A LIABILITY, THE AMOUNT OF WHICH IS D EDUCTIBLE FOR INCOME-TAX PURPOSES, IS ONE WHICH IS ACTUALLY EXISTING AT THE TIME OF MAKING THE DEDUCTION, AND IS DISTINCT FROM THE TYPE OF LIABILI TY ACCRUING IN PETER MERCHANT LTD. V. STEDEFORD (INSPECTOR OF TAXES) WHI CH ALTHOUGH ALLOWABLE ON ACCOUNTANCY PRINCIPLES, IS NOT DEDUCTIBLE FOR TH E PURPOSES OF INCOME-TAX. ' 14. IN THE LIGHT OF ABOVE DISCUSSION IN RESPECT OF SECTION 145 OF THE ACT AND THE SCHEME OF THE ACT, WE FIND THAT SECTION 145 HAS BEE N AMENDED W.E.F. 01.04.1997 ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 27 AND ACCORDINGLY ONLY TWO METHODS OF ACCOUNTING EITH ER CASH OR MERCANTILE SYSTEM OF ACCOUNTING IS TO BE FOLLOWED BY THE ASSESSEE AND INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES IS TO BE COMPUTED ACCORDINGLY. IN MERCANTILE SYSTEM OF AC COUNTING, THE ENTRY IS TO BE PASSED IN THE BOOKS OF ACCOUNT WHEN CREDITED WHAT I S DUE, IMMEDIATELY IT BECOMES LEGALLY DUE AND BEFORE IT IS ACTUALLY RECEIVED AND IT BRINGS INTO DEBIT EXPENDITURE THE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INC URRED BEFORE IT IS ACTUALLY DISBURSED. THE HONBLE APEX COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. BRITISH PAINTS INDIA LTD. [1991] 188 ITR 0044[SC] H ELD THAT THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE SHOULD DISCLOSE PICTURE OF PROFITS AND GAINS. IF SYSTEM ADOPTED DOES NOT DISCLOSE TRUE AND PROPER IN COME, THE A.O. IS ENTITLED AND IS DUTY BOUND TO ADOPT APPROPRIATE COMPUTATION TO D ETERMINE TRUE INCOME. 15. IN THE CASE UNDER CONSIDERATION IT CANNOT BE SA ID THAT THE A.O. WAS NOT SATISFIED ABOUT THE CORRECTNESS OF COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE. BECAUSE THE ASSESSEE HAS DISCLOSED GROSS RECEIPT RS .93,32,817/- WHEREAS ACCORDING TO THE A.O. GROSS RECEIPT WAS RS.87,61,916/-. THE F INDING OF THE A.O. IS CONTRARY TO THE PROVISION OF SECTION 145 OF THE ACT. EVEN OTHER WISE ALSO IF THE A.O. FOUND THAT THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE A CCOUNTING THE HIRE CHARGERS AT THE TIME OF DELIVERY OF POTATOES TO FARMERS, HE IS EMPOWERED TO CORRECT THE METHOD ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 28 OF ACCOUNTING IN ACCORDANCE WITH SECTION 145 OF THE ACT. CASH OR MERCANTILE AND ACCORDINGLY CONSEQUENTIAL EFFECTS ARE REQUIRED TO B E GIVEN IN THE YEAR UNDER CONSIDERATION AS WELL AS IN SUBSEQUENT YEARS. 16. WE NOTICED THAT THE A.O. HAS COMPLETELY FAILED IN THIS REGARD. THEREFORE, MAKING ADDITION MERELY ON THE BASIS OF THE PROPOSED METHOD BY THE A.O. AND FOLLOWED BY THE ASSESSEE IS NOT SUSTAINABLE. THE A. O. HIMSELF DID NOT ADDED ADDITION OF RS. 5,70,090/- WHILE FINALLY COMPUTING THE TOTAL INCOME AS EVIDENT FROM FOLLOWING COMPUTATION OF THE A.O. WHICH IS REPRODUC ED FROM A.O. ORDER, PAGE NOS. 12 & 13 AS UNDER :- 1. NET PROFIT AS PR P&L A/C 9,50,571/- 2. SHORT TERM CAPITAL GAIN 39,94,438/- + 1,62,000/- ------------------ 41,56,438/- LESS: BROUGHT FORWARD SHORT TERM CAPITAL LOSS FOR A.Y. 2002-03 2,45,438/- (SHORT TERM CAPITAL LOSS OF RS.25,93,455/- ------ ----------- NOT ALLOWED 39,11,000/- 3 UNDISCLOSED PROFIT FROM TRADING OF POTATO AS DISCUSSED ABOVE 12,74,589/- 4.EXPENSES DISALLOWED AS DISCUSSED ABOVE 9,50,0 00/- ---------------------- 70,86,160/- ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 29 17. ON THE BASIS OF ABOVE DISCUSSION, WITHOUT CONSI DERING THE ASPECT WHETHER ASSESSEE HAS FOLLOWED CORRECT METHOD OF ACCOUNTING IN ACCORDANCE WITH SECTION 145 OF THE ACT OR NOT BUT CERTAINLY THE ADDITION PR OPOSED BY THE A.O. IS NOT SUSTAINABLE IN LAW AND FACT. IN THE LIGHT OF THE F ACT, THE ORDER OF THE CIT(A) IS CONFIRMED. 18. THE SECOND GROUND IS IN RESPECT OF RESTRICTING THE DISALLOWANCE TO RS.1,70,764/- MADE BY THE A.O. DURING THE ASSESSMEN T PROCEEDINGS THE A.O. NOTICED THAT DURING THE YEAR THERE IS TREMENDOUS IN CREASE MADE IN EXPENSES IN COMPARISON TO GROSS RECEIPT MAINLY ON LOADING AND U NLOADING, DIESEL AND FUEL, LABOUR AND PALTAI, MACHINE REPAIR AND MAINTENANCE, ELECTRIC REPAIR AND MAINTENANCE AND GENERATOR REPAIR. THE A.O. NOTICED THAT THE ASS ESSEE DID NOT SATISFACTORILY EXPLAIN THE REASON, THEREFORE, THE A.O. MADE THE AD DITION OF RS.9,50,000/- BY DISALLOWING THE FOLLOWING EXPENSES :- (A.O. PAGE NO S.6&7) DESCRIPTION AMOUNT DISALLOWED LOADING AND UNLOADING 1,50,000/- DIESEL AND FUEL 1,80,000/- LABOUR AND PALTAI 1,50,000/- MACHINE REPAIR AND MAINTENANCE 3,00,000/- ELECTRIC REPAIR AND MAINTENANCE 70,000/- GENERATOR REPAIR AND MAINTENANCE 1,00,000/- TOTAL 9,50,000/- ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 30 19. THE CIT(A) RESTRICTED THE ADDITION TO THE EXTENT OF RS.1,70,764/- IN PARA 6.2 OF THIS ORDER AS UNDER :- 6.2 DURING HEARING HELD ON 14.02.2011, BOOKS OF ACCOUNT ALONG WITH VOUCHERS WERE PRODUCED FOR MY EXAMINATIO N. I HAVE GONE THROUGH BOOKS OF ACCOUNT AS WELL AS BILLS AND VOUCH ERS PRODUCED BY THE APPELLANT. IN RESPECT OF DIESEL AND FUEL EXPENS ES, I FIND THAT ALL THE BILLS ARE AVAILABLE BUT FOR OTHER EXPENSES COMPLETE BILLS ARE NOT AVAILABLE AND THEY ARE MOSTLY SUPPORTED BY SELF MAD E VOUCHERS. I HAVE ALSO GONE THROUGH THE CASE RECORD OF THE APPELLANT AND FIND THAT SUCH DISALLOWANCES ARE BEING MADE IN THE ASSESSMENT ORDE RS THAT ARE BEING PASSED IN CASE OF THE APPELLANT SINCE A.Y. 98-99 ON WARDS AND THEY ARE BEING CONFIRMED EVEN UP TO THE LEVEL OF HONBLE ITA T, THROUGH, THEY ARE BEING REDUCED BY THE APPELLATE AUTHORITY. SUCH DISALLOWANCE SUSTAINED TILL THE STAGE OF HONBLE ITAT HAS BEEN F OUND TO BE RS.33,000/- IN ASSESSMENT YEAR 98-9 AND 4,30,000/- IN A.Y. 2000-01. IN ASSESSMENT 2001-02 AND 2002-03 TOTAL DISALLOWANC E OF RS.50,000/- HAVE BEEN MADE BUT NO APPEAL WAS FILED BY THE APPEL LANT FOR THOSE YEARS. SUCH STATISTICS CLEARLY SHOWS THAT THESE NAT URES OF EXPENSES BEING CLAIMED BY THE APPELLANT ARE EXCESSIVE AND TH EY ARE NOT FULLY SUPPORTED BY PROPER BILLS AND VOUCHERS. WHILE EXAMI NING THE BILLS AND VOUCHERS FOR THIS YEAR, I HAVE FOUND THAT FOR MACHI NERY REPAIR AND MAINTENANCE, ELECTRIC REPAIR AND MAINTENANCE AND GE NERATOR REPAIR AND MAINTENANCE, ALL EXPENSES ARE NOT FULLY SUPPORT ED BY BILLS AND CERTAIN SELF MADE VOUCHERS ARE ALSO MAINTAINED TO S HOW INCURRING OF THESE EXPENSES AND HENCE BECAUSE OF NOT BEING SUPPO RTED COMPLETELY BY BILLS, DURING THE COURSE OF DISCUSSION IN APPEAL , THE LD. AR AND THE DIRECTOR OF THE COMPANY AGREED FOR 5% DISALLOWANCE OUT OF THESE EXPENSES. FOR LOADING AND UNLOADING AND PALTAI, ONL Y SELF MADE VOUCHERS BUT ALL ARE NOT SIGNED BY THE RECIPIENTS. IT HAS BEEN ARGUED BY THE DIRECTOR OF THE COMPANY THAT SUCH EXPENSES A RE ESSENTIAL IN THIS TYPE OF BUSINESS. HOWEVER, DUE TO DEFECT IN VOUCHER S, HE AGREED THAT 10% OF SUCH EXPENSES COULD BE DISALLOWED. IN VIEW O F THESE FACTS AND CIRCUMSTANCES, I HOLD THAT 5% OF EXPENSES OUT OF MA CHINERY REPAIR AND MAINTENANCE WOULD BE DISALLOWED AND 10% OF LOAD ING AND UNLOADING AND LABOUR PALTAI IS TO BE DISALLOWED. SI NCE FOR DIESEL AND FUEL EXPENSES, ALL THE BILLS WERE FOUND, NO DISALLO WANCE IS CALLED FOR OUT OF THESE EXPENSES. THEREFORE, THE AO IS DIRECTE D TO MAKING ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 31 FOLLOWING DISALLOWANCES AS AGAINST THE TOTAL DISALL OWANCES OF RS.9,50,000/- MADE BY HIM IN THE ASSESSMENT ORDER : - NATURE OF EXPENSES TOTAL AMOUNT CLAIMED BY THE APPELLANT (RS.) AMOUNT DISALLOWED BY THE AO (RS.) AMOUNT SUSTAINED IN APPEAL (RS.) LOADING AND UNLOADING 11,01,361/- 1,50,000/- 1,10,136/- DIESEL AND FUEL 11,68,968/- 1,80,000/- NIL LABOUR AND PALTAI 2,58,860/- 1,50,000/- 25,886/- MACHINE REPAIR AND MAINTENANCE 4,13,212/- 3,00,000/- 20,660/- ELECTRIC REPAIR AND MAINTENANCE 1,22,750/- 70,000/- 6,137/- GENERATOR REPAIR AND MAINTENANCE 1,58,912/- 100,000/- 7,945/- TOTAL 32,24,063/- 9,50,000/- 1,70,764/- 20. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND RECORDS PERUSED. WE NOTICE THAT THE CIT(A) AFTER CONSIDERI NG ASSESSEES SUBMISSION, A.OS. ORDER AND AFTER EXAMINING BOOKS OF ACCOUNT F OUND THAT IN RESPECT OF DIESEL EXPENSES, COMPLETE VOUCHERS WERE FOUND. HOWEVER, FO R OTHER EXPENSES, COMPLETE BILLS WERE NOT AVAILABLE AND MOST OF THE SUPPORTING BILLS WERE SELF MADE. THE CIT(A) FURTHER EXAMINED THE PAST HISTORY OF ASSESSE E AND NOTICED THAT ON THIS ACCOUNT CERTAIN DISALLOWANCE OF CERTAIN EXPENSES WE RE CONFIRMED IN EARLIER YEAR EVEN BY THE ITAT. BEFORE THE CIT(A), THE LEARNED AU THORIZED REPRESENTATIVE OF ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 32 THE ASSESSEE AGREED FOR 5% DISALLOWANCE OUT OF THE MACHINE REPAIRS AND MAINTENANCE, ELECTRIC REPAIRS AND MAINTENANCE. THUS WE NOTICE THAT THE CIT(A) AFTER DETAILED EXAMINATION OF EACH OF THE EXPENSES SOME OF THE EXPENSES HAS BEEN DISALLOWED TO THE EXTENT OF 10% AND SOME OF THEM AR E TAKEN UP TO 10% AS PER THE ABOVE TABLE. THE REVENUE HAS FAILED TO POINT OUT AN Y CONTRARY MATERIAL TO THE FINDING OF THE CIT(A). WE, THEREFORE, CONFIRM THE ORDER OF THE CIT(A) ON THE ISSUE. 21. THE THIRD GROUND OF REVENUES APPEAL IS IN RESPECT OF DELETION ON ADDITION OF RS.12,74,589/-. THE BRIEF FACTS OF THIS GROUND OF T HE APPEAL ARE THAT THE A.O. MADE THE ADDITION AFTER COMPUTING ESTIMATED PROFIT ON AL LEGED SALE OF POTATOES. THE ADDITION MADE BY THE A.O. IS DELETED BY THE CIT(A) IN PARAS NOS.8.4, 8.5, 8.6 & 8.7 AS UNDER :- 8.4 I HAVE CONSIDERED THE ISSUE RELATING TO ADDITIO N OF RS.12,74,589/- ADDED BY THE AO ON ESTIMATE BASIS HOLDING IT AS PRO FIT EARNED BY THE APPELLANT ON SALE OF POTATOES CONSIDERING THAT IT D EPOSITED SALE PROCEED OF POTATOES RECEIVED BY WAY OF DRAFT IN ITS BANK AC COUNT AND ALSO ARGUMENT PUT FORWARD BY THE LD. AR IN ITS WRITTEN S UBMISSION ALONG WITH THE DECISION OF HONBLE ITAT, AGRA IN CASE OF RAVI ICE & COLD STORAGE (SUPRA). I FIND FROM THE DISCUSSION IN THE ASSESSMENT ORDER AS WELL AS FROM THE ASSESSMENT RECORD THAT THE AO HAS ONLY BROUGHT OUT ONE EVIDENCE TO SUPPORT ITS CONTENTION THAT THE APP ELLANT IS SELLING POTATOES, BY OBSERVING THAT DRAFTS RECEIVED BY THE APPELLANT ON SALE OF POTATOES ARE UNDER THE NAME OF THE APPELLANT COMPAN Y AND THE SAME WERE DEPOSITED IN ITS BANK ACCOUNT. HOWEVER, NO OTH ER DOCUMENTARY EVIDENCE OR ANY OTHER EVIDENCE IN FORM OF INFORMATI ON COILLECTED FROM FARMERS OR FROM THE PERSONS TO WHOM POTATOES WERE S OLD WERE COLLECTED TO ESTABLISH THAT THE APPELLANT WAS PURCHASING POTA TOES FROM FARMERS ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 33 AND THEN SELLING THEM IN THE MARKET. ON THE BASIS O F THE DRAFT DEPOSITED IN THE BANK ACCOUNT, THE AO HAS JUST PRESUMED THAT THE APPELLANT WAS PURCHASING POTATOES FROM THE FARMERS AT THE TIME OF STORAGE OR JUST AFTER STORAGE OR AT THE TIME OF NIKASI OF POTATOES. IN OR DER TO PROVE THE PURCHASE OF POTATOES FROM THE FARMERS, THE AO HAS N OT MADE ANY EFFORTS TO COLLECT ANY EVIDENCE FROM THE FARMER WHETHER THE Y SOLD POTATOES TO THE APPELLANT OR NOT. WHAT IS AVAILABLE IN THE REC ORD AS PER THE BOOKS OF ACCOUNT MAINTAINED BY THE APPELLANT COMPANY IS THAT THE APPELLANT COMPANY WAS RECEIVING RENT BY WAY OF STORAGE OF POT ATOES IN ITS COLD STORAGE. THERE IS NO EVIDENCE ON RECORD TO SHOW THA T ANY PURCHASE WAS MADE BY THE APPELLANT COMPANY FROM THE FARMERS FOR SALE OF POTATOES IN THE MARKET. IN ABSENCE OF ANY EVIDENCE FOR PURCHASE OF POTATOES, IT CANNOT BE PRESUMED THAT THE APPELLANT COMPANY WAS T RADING IN POTATOES JUST ON THE BASIS OF DRAFTS DEPOSITED IN THE BANK A CCOUNT UNLESS EXPLANATION OF THE APPELLANT THAT DRAFTS CREDITED I N ASSESEES (APPELLANT) BANK ACCOUNT REPRESENTED SALE PROCEEDS OF POTATOES SOLD BY/FOR THE FORMERS IS PROVED TO BE WRONG AND I FIND THAT THE A O COULD NOT BRING ANY SUCH EVIDENCE ON RECORD TO PROVE THIS EXPLANATI ON OF THE APPELLANT AS WRONG. 8.5 I AGREE WITH THE LD AR THAT EVERY RECEIPT IN B OOKS OF ACCOUNT DO NOT CONSTITUTE INCOME. IT IS FOR THE AO TO ESTABLIS H THAT THE PARTICULAR CREDIT IN THE BANK ACCOUNT IS ON ACCOUNT OF EARNING OF INCOME BY THE ASSESSEE. FOR A PARTICULAR CREDIT AMOUNT IN ITS BOO KS OF ACCOUNT, IF NO EXPLANATION IS OFFERED BY THE ASSESSEE THE REQUISIT E ADDITION CAN BE MADE AS UNEXPLAINED CASH CREDIT U/S 68. IF AN EXPLA NATION IS FILED BY THE APPELLANT WHICH IS REASONABLE AND IT HAS BEEN SHOWN THAT IT IS AS PER BUSINESS PRACTICE PREVALENT IN THIS TYPE OF BUSINES S BEING CARRIED OUT BY THE ASSESSEE. IT IS FOR THE AO TO ESTABLISH THAT TH E EXPLANATION FILED BY THE ASSESSEE (APPELLANT) WAS WRONG AND THEN ADDITIO N OF THAT PARTICULAR CREDIT AMOUNT SHOULD BE MADE AS UNEXPLAINED CASH CR EDIT U/S 68A. IF ON THE BASIS OF CERTAIN CREDIT AMOUNT IN THE BOOKS OF ACCOUNT, THE AO CONCLUDED THAT THESE CREDIT WERE APPEARING IN BOOKS OF ACCOUNT ON ACCOUNT OF CERTAIN TYPES OF BUSINESS BEING CARRIED OUT BY THE ASSESSEE, THE DETAILS WITH REGARD TO THAT TYPE OF BUSINESS SH OULD HAVE BEEN COLLECTED BY THE AO AND AFTER THAT IT HAD TO BE EST ABLISHED THAT THE PARTICULAR TYPE OF BUSINESS WAS BEING CARRIED OUT B Y THE ASSESSEE AND THEN REQUISITE ADDITION FOR THE PROFIT EARNED FROM THAT BUSINESS SHOULD HAVE BEEN MADE IN THE ASSESSED INCOME OF THE APPELL ANT (ASSESSEE). IN THE PRESENT CASE, THE AO HAS FAILED TO ESTABLISH TH AT THE APPELLANT COMPANY WAS CARRYING OUT TRADING BUSINESS OF POTATO ES BECAUSE HE DID ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 34 NOT COLLECT ANY EVIDENCE SHOWING THAT THE APPELLANT COMPANY WAS MAKING PURCHASES FROM FARMERS AND THEN SAME WERE BE ING SOLD BY IT IN THE MARKET. THE ADDITION OF THE AO IN THIS PARTICUL AR YEAR IS ALSO FOUND TO BE QUITE ARBITRARY BECAUSE THE SAME AO HAS NOT M ADE ANY ADDITION IN THE YEAR 2001-02 AND 2002-03 AND IN SUBSEQUENT AY 0 4-05 ON ACCOUNT OF TRADING OF POTATOES. WHEN IN THE ASSESSMENT YEAR 03-04, THE AO WHO PASSED THIS ORDER HAS GIVEN FINDING THAT THE APPELL ANT COMPANY IS DOING TRADING OF POTATOES THEN WHY THE ADDITION ON ACCOUN T OF TRADING OF POTATOES WAS NOT MADE IN AY 04-05 IS NOT CLEAR. THE REFORE, I FIND THE ADDITION MADE BY THE AO ONLY IN ONE ASSESSMENT YEAR ON ACCOUNT OF TRADING OF POTATOES I.E. YEAR UNDER APPEAL (AY 2003 -04) IS QUITE ARBITRARY. 8.6 I HAVE ALSO GONE THROUGH THE DECISION OF HONB LE ITAT, AGRA IN THE CASE OF RAVI ICE AND STORAGE (SUPRA) REFERRED B Y LD. AR. IN THIS ORDER, THE HONBLE TRIBUNAL HAS ACCEPTED THE BUSINE SS PRACTICE ON SALE OF POTATOES ON BEHALF OF THE FARMERS AS REFERRED BY LD. AR. IN THIS ORDER, IT IS OBSERVED BY THE HONBLE ITAT THAT IN CASE ENTIRE POTATOES BELONGED TO ASSESSEE, THE LD. AO WAS REQUIRED TO MA KE ADDITION ON ACCOUNT OF UNEXPLAINED INVESTMENT AND THEREAFTER HE SHOULD HAVE ESTIMATED PROFIT THEREON BUT HE HAS RESTRAINED HIMS ELF FROM DOING THE SAME OSTENSIBLY BECAUSE HE WAS CONVINCED THAT THESE POTATOES REALLY BELONGED TO OTHERS AND NOT TO THE ASSESSEE COMPANY. THE ASSESSEE DOES NOT DEAL IN PURCHASE AND SALE OF POTATOES AS IT IS NOT ITS REGULAR BUSINESS. THEREFORE, THE ENTIRE EXERCISE DONE BY LD . AO SEEMS TO BE FUTILE ONE. THE ADDITION SO MADE ON ACCOUNT OF PROF IT BY ESTIMATING NP IS NOT AT ALL JUSTIFIED AND IS AN ACTION WHICH IS A GAINST ALL LOGIC AND CANONS OF LAW. IN THE ABOVE CITED CASE FACTS OF TH E CASE ARE SIMILAR TO THE PRESENT CASE AS FAR AS SELLING OF POTATOES IS C ONCERNED. IN CASE OF M/S RAVI ICE AND COLD STORAGE, EVIDENCE FOR SALE OF THESE POTATOES WAS FOUND IN THE FORM OF VARIOUS PAPERS AND BILLS RECOV ERED DURING SURVEY. HOWEVER, DURING THE COURSE OF ASSESSMENT PROCEEDING , IT WAS EXPLAINED BY THE COMPANY THAT THE SALE WAS MADE ON BEHALF OF FARMERS AND AMOUNT WAS PAID TO THEM AFTER ADJUSTING THEIR RENT BUT THE SAME WAS NOT ACCEPTED BY THE AO AND THE ADDITION WAS MADE AFTER COMPUTING PROFIT AT THE RATE OF 10% ON ESTIMATED SALES COMPUTED FROM THE LOOSE PAPERS. HOWEVER, THE DECISION OF THE DEPARTMENT WAS NOT ACC EPTED BY THE TRIBUNAL AFTER HEARING THE ARGUMENT OF THE COUNSEL OF THE COMPANY (M/S RAVI) ICE & COLD STORAGE) THAT THIS IS A NORMAL BUS INESS PRACTICE OF COLD STORAGE SELLING POTATOES ON BEHALF OF THE FARM ERS FOR ENSURING PAYMENTS OF RENT BECAUSE THE ASSESSEE WOULD TAKE TH E RENT BEFORE ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 35 MAKING PAYMENT TO FARMERS AND THIS ARGUMENT OF THE COUNSEL OF M/S RAVI ICE & COLD STORAGE WAS ACCEPTED BY THE HONBLE TRIBUNAL AND ADDITION MADE ON ACCOUNT OF SUCH SALE WAS DELETED. 8.7 CONSIDERING THE FACTS THAT THIS ADDITION IS MA DE BY THE AO ONLY IN ONE ASSESSMENT YEAR AND IN OTHER ASSESSMENT YEARS B USINESS PRACTICE OF THE APPELLANT COMPANY OF SELLING POTATOES ON BEHALF OF THE FARMERS HAS BEEN ACCEPTED, HOWEVER, IN THIS ASSESSMENT YEAR THO UGH ADDITION IS MADE, NO EVIDENCE HAS BEEN BROUGHT BY THE AO ON REC ORD TO SHOW THAT THE APPELLANT COMPANY HAS MADE PURCHASES OF POTATOE S FROM FARMERS AND FOLLOWING THE DECISION OF HONBLE ITAT, AGRA IN THE CASE OF RAVI ICE AND COLD STORAGE PVT. LTD. (SUPRA), I AM OF THE CONSIDERED OPINION, THAT NO SUCH TRADING OF POTATOES HAS BEEN CARRIED O UT BY THE APPELLANT COMPANY AS HELD BY THE AO JUST ON PRESUMPTION AND, THEREFORE, ADDITION OF RS.12,74,589/- MADE IN THE ASSESSMENT O RDER ON ACCOUNT OF PROFIT EARNED ON SUCH ALLEGED POTATOES TRADING IS H EREBY DELETED. 22. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND RECORDS PERUSED. THE CIT(A) NOTICED THAT A.O. HAS ONLY BROU GHT OUT ONE EVIDENCE WHICH SUPPORTS HIS CASE THAT THE ASSESSEE WAS SELLING POT ATOES BY OBSERVING THAT DRAFT RECEIVED BY THE ASSESSEE ON SALE OF POTATOES ARE IN THE NAME OF THE ASSESSEES COMPANY AND SAME WAS DEPOSITED IN ITS BANK ACCOUNT. THE CIT(A) FURTHER NOTICED THAT NO OTHER DOCUMENTARY EVIDENCE OR ANY OTHER EVI DENCE IN THE FORM OF INFORMATION WAS COLLECTED FROM FARMERS OR FROM THE PERSON TO WHOM POTATOES WERE SOLD TO ESTABLISH THAT THE ASSESSEE WAS PURCHASING FROM FARMERS AND SELLING THEM IN THE MARKET. THE CIT(A) FURTHER NOTICED THAT THE A.O . MADE ADDITION ON PRESUMPTION BASIS WITHOUT ANY SUFFICIENT EVIDENCES. THE CIT NOTED THAT THE ADDITION IN THIS PARTICULAR YEAR WAS FOUND ARBITRAR Y BECAUSE THE SAME A.O. DID NOT ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 36 MAKE ANY ADDITION IN A.Y. 2001-02, AND 2002-03 AND SUBSEQUENT YEAR 2004-05, IN SPITE OF THE FACT THAT THE SAME PRACTICE HAS BEEN F OLLOWED BY THE ASSESSEE BEFORE DELETING THE ADDITION. THE CIT(A) ALSO CONSIDERED O NE DECISION OF THE AGRA BENCH IN THE CASE OF RAVI ICE AND COLD STORAGE LTD. (SUPR A) AND OBSERVED THAT THE ITAT HAS ACCEPTED THE NATURE OF TRANSACTION THAT THIS IS CLEARLY BUSINESS PRACTICE OF COLD STORAGE SELLING POTATOES ON BEHALF OF FARMERS ON EN SURING PAYMENT OF RENT BECAUSE ASSESSEE WOULD TAKE THE RENT BEFORE MAKING PAYMENT TO FARMER. AFTER CONSIDERING THE MATERIAL AVAILABLE ON RECORD, AND THE ORDER OF THE A.O. AND ORDER OF CIT(A),WE FIND THAT THE A.O. HAS FAILED TO PUT ON RECORD COMP LETE FACTS AFTER NECESSARY EXAMINATION OF RELEVANT PARTIES AND THEIR BOOKS OF ACCOUNT THAT IN FACT ASSESSEE HAS SOLD THE POTATOES. IN ABSENCE OF SUCH ENQUIRY THE P RACTICE OF ASSESSEE SELLING THE FARMERS POTATOES TO SECURE THEIR COLD STORAGE HIRE CHARGES IS A DECISION OF BUSINESSMAN IN ACCORDANCE WITH COMMERCIAL EXPEDIENC Y FOR THE PURPOSE OF BUSINESS. THE REVENUE HAS NOT POINTED OUT ANY CONTR ARY MATERIAL OF THIS POLICY OF THE ASSESSEE. WE, THEREFORE, DO NOT FIND ANY INFIRM ITY IN THE ORDER OF THE CIT(A). THE ORDER OF THE CIT(A) IS CONFIRMED. 23. THE FOURTH GROUND IS IN RESPECT OF DELETION OF RS.16,10,690/- ON ACCOUNT OF UNEXPLAINED CASH CREDIT. DURING THE ASSESSMENT PRO CEEDINGS, THE A.O. NOTICED THAT THE ASSESSEE ACCEPTED THE ADVANCES FROM FARMERS. TH E ADDITION MADE BY THE A.O. ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 37 HAS BEEN DELETED BY THE CIT(A) IN PARA NO.9.3 OF TH IS ORDER WHICH IS REPRODUCED AS UNDER :- 9.3 I HAVE CONSIDERED THE FINDINGS DISCUSSED BY T HE AO IN THE ASSESSMENT ORDER WITH REGARD TO THIS ADDITION AND A LSO SUBMISSION MADE BY THE LD. AR AS DISCUSSED ABOVE ALONG WITH TH E JUDICIAL PRONOUNCEMENTS AS REFERRED BY HIM. I FIND THAT AO H AS HELD THE ADVANCE OF RS.16,10,690/- AS UNEXPLAINED CASH CREDIT LIABLE TO BE ADDED UNDER SECTION 68 OF THE I.T. ACT, 1961 BECAUSE CONFIRMATI ONS OF ALL THE FARMERS IN WHOSE NAME THESE ADVANCE WERE SHOWN COULD NOT BE FILED. HOWEVER, THE AO HAS FAILED TO TAKE NOTE OF THE FACT THAT THE SE ADVANCES WERE ADJUSTED IN THE ACCOUNT OF FARMERS FROM WHOM RENT W AS SHOWN BY THE APPELLANT TO HAVE BEEN RECEIVED. I HAVE ALSO VERIFI ED THE ACCOUNTS OF FARMERS AND FOUND THAT IN THE SUBSEQUENT ASSESSMENT YEARS, THESE ADVANCES WERE ADJUSTED AGAINST RENT DUE FROM THE FA RMERS. THEREFORE, THE ADVANCES SHOWN IN THE NAME OF THE FARMER DOES N OT REMAIN IN THE BOOKS OF ACCOUNT OF THE APPELLANT AS CASH BEING AVA ILABLE WITHOUT EXPLAINING THE SOURCE. WHATEVER CASH ADVANCE WERE R ECEIVED FROM THE FARMERS HAVE BEEN SHOWN TO BE ADJUSTMENT AGAINST TH E RENT WHICH HAVE BEEN DECLARED BY THE APPELLANT AS INCOME IN SUBSEQU ENT YEARS. THEREFORE, THESE ADVANCES CANNOT BE SAID TO BE UNEX PLAINED CASH CREDIT AS IT HAS BEEN HELD BY THE JURISDICTIONAL ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. BHITAL DAS MODI (SUPRA) AND ITAT AL LAHABAD IN CSE OF ALLAWALPUR COLD STORAGE & ICE INDUSTRY (SUPRA). CON SIDERING THESE FACTS AND CIRCUMSTANCES OF THE CSE AND TAKING INTO ACCOUNT THE JUDICIAL PRONOUNCEMENTS AS REFERRED BY LD. AR, I FIND THAT D ECISION OF THE AO HOLDING THE ADVANCE OF RS.16,10,690/- FROM FARMERS AS UNEXPLAINED CASH CREDIT IS NOT JUSTIFIED AND HENCE LIABLE TO BE DELETED. HOWEVER, SINCE NO ADDITION HAS BEEN MADE BY THE AO IN THE AS SESSMENT ORDER ON ACCOUNT OF THIS EVIDENCE BECAUSE IT HAS BEEN PRESUM ED BY HIM THAT ASSESSEE HAS SHOWN THIS ADVANCE OUT OF SURPLUS PROF IT OF RS.12,74,589/- EARNED FROM UNDISCLOSED TRADING OF POTATOES, APPELL ANT CANNOT GET ANY RELIEF FROM ASSESSED INCOME BECAUSE OF DELETION OF ADDITION OF RS.16,10,690/- ON ACCOUNT OF UNEXPLAINED CASH CREDI T. ACCORDINGLY, GROUND NO.7 IS ALLOWED BUT NO RELIEF OUT OF ASSESSE D INCOME. ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 38 24. WE HAVE HEARD LEARNED REPRESENTATIVES OF THE PA RTIES AND RECORDS PERUSED. THE IMPORTANT FACTS OF THIS ISSUE ARE THAT THE A.O. DID NOT MAKE SEPARATE ADDITION OF THIS AMOUNT OF RS.16,10,690/-. THE A.O. PRESUMED TH AT THE ASSESSEE HAS SHOWN THIS AMOUNT OUT OF SURPLUS PROFIT OF RS.12,74,589/- EARN ED FROM UNDISCLOSED TRADING BUSINESS OF POTATOES AND OUT OF INFLATED EXPENSES O F RS.9,50,000/-. IN THE LIGHT OF THE DETAILED DISCUSSIONS MADE WHILE DECIDING GROUND NO.3 IN PARA IN THIS ORDER, WE NOTICE THAT THIS ADVANCE TAKEN FROM THE FARMERS WAS ALSO DECISION OF BUSINESSMAN IN ACCORDANCE WITH COMMERCIAL EXPEDIENC Y AND THE A.O. HAS FAILED TO POINT OUT ALL THE RELEVANT OTHER FACTS AFTER NECESS ARY EXAMINATION. IN THE LIGHT OF DETAILED DISCUSSION MADE WHILE DECIDING GROUND NO.3 ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A). THE ORDER OF THE CIT(A) IS ACCORDINGLY CONFIRMED. C.O. NO.55/AGRA/2011 - BY THE ASSESSEE 25. T HE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CL AIMED SHORT-TERM CAPITAL LOSS OF RS.25,93,455/-, ARISEN ON SALE OF 12500 AND 17500 (TOTAL 30,000) SHARES OF M/S. G.K. CONSULTANTS LTD. WHICH WERE PURCHASED ON 18.02.2003 AND 28.02.2003 FOR RS. 13,75,658.25 AND RS.17,50,918/- RESPECTIVEL Y THROUGH AAYUSHI STOCK BROKERS PVT. LTD. THE SAID 30,000 SHARES WERE SOLD ON 28.03.2003 THROUGH THE SHARE BROKER, MOTLEY SECURITIES PVT. LTD. NEW DELHI ON 28.03.2003 FOR ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 39 RS.5,33,120/- RESULTING INTO SHORT-TERM CAPITAL LOS S OF RS.25,93,455/-, IN SUPPORT OF WHICH THE ASSESSEE FURNISHED DISTINCTIVE NUMBERS OF SHARES SOLD. THE AO DISALLOWED THE CLAIM OF ASSESSEE FOR THE REASON THA T THE NOTICES SENT U/S 133(6) TO THE COMPANY AND THE SHARE BROKER M/S. MOTLEY SECURI TIES PVT. LTD. REQUIRING THEM TO FURNISH SOME DETAILS OF SHARES AS MENTIONED AT P AGE 8 & 9 OF THE ASSESSMENT ORDER, STOOD NOT RESPONDED; THAT THE ASSESSEE FAILE D TO FURNISH COMPLETE DETAILS OF SHARES AND TO EXPLAIN THE GENUINE SALE THEREOF; THA T THE ASSESSEE FAILED TO PRODUCE THE DIRECTOR OF THE COMPANY WHOSE SHARES WERE TRANS ACTED AND THE SHARE BROKER FOR EXAMINATION; THAT WHEREABOUTS OF THE COMPANY AND TH E ALLEGED PURCHASER OF SHARES ARE ALSO NOT KNOWN AND THEREFORE, THE ASSESSEE FAIL ED TO DISCHARGE ITS ONUS THAT LAY UPON HIM TO PROVE THE GENUINENESS OF SALE OF SHARES . THIS LED THE AO TO HOLD THAT THE ALLEGED SALE PROCEEDS OF RS.5,33,120/- OF SHARE S IS NOT GENUINE, WHICH RESULTED INTO DISALLOWANCE OF SHORT TERM-CAPITAL LOSS OF RS. 25,93,455/- AS CLAIMED BY THE ASSESSEE AND THE SAME WAS ADDED TO HIS TOTAL INCOME . THE AO FURTHER OBSERVED THAT THE ASSESSEE HAS TAKEN ACCOMMODATION ENTRIES OF RS. 5,33,120/- IN THE GARB OF SALE OF SHARES AND FOR MANAGING THE SAME, HE MIGHT HAVE INCURRED UNEXPLAINED EXPENSES @ 2% AMOUNTING TO RS.10662/-. HENCE, THE AMOUNT OF RS.5,43,742/- (5,33,120 + 10,662) WAS ALSO TREATED AS INCOME OF ASSESSEE FROM UNDISCLOSED SOURCES, BUT NO SEPARATE ADDITION THEREOF WAS MADE ON THE PRESUMPTI ON THAT THE ASSESSEE WOULD HAVE INVESTED THIS AMOUNT OUT OF INFLATED EXPENSES OF RS.9,50,000/- FOR WHICH SEPARATE ADDITION HAD ALREADY BEEN MADE BY AO. ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 40 26. WHILE ASSAILING THE ASSESSMENT ORDER BEFORE THE LD. CIT(A), IT WAS SUBMITTED BY THE ASSESSEE THAT DURING THE COURSE OF ASSESSMEN T PROCEEDINGS, THE ASSESSEE FURNISHED SUBSTANTIAL EVIDENCES IN THE SHAPE OF CON TRACT NOTES AND BILLS RAISED BY THE BROKERS AGAINST PURCHASE AND SALE OF SHARES AND IN RESPONSE TO THE NOTICE U/S. 133(6) THE BROKER, M/S. AAYUSHI STOCK BROKERS PVT. LTD. FURNISHED A DETAILED REPLY, COPY ENDORSED TO ASSESSEE, GIVING COMPLETE DETAILS OF SHARES, HOWEVER, THE AO HAS NOT MENTIONED THESE FACTS IN THE ASSESSMENT ORDER. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE TRANSFERRED THE SHARE CERTIFICATES IN PHYS ICAL FORM THROUGH THE SHARE BROKER MOTLEY SECURITIES LTD. BY SIGNING THE DEED OF TRANS FER AND GIVING DELIVERY THEREOF IN ORIGINAL TO THE SHARE BROKER. THEREFORE, THE SHA RES STOOD TRANSFERRED ON THE DATE WHEN DELIVERY OF SHARE CERTIFICATES ALONG WITH TRAN SFER DEEDS DULY SIGNED IS HANDED OVER BY THE TRANSFEROR TO THE TRANSFEREE. ELABORATI NG THE MODUS OPERANDI OF TRANSFER OF SHARES, THEIR REGISTRATION IN THE RECORDS OF COM PANY IN THE NAME OF TRANSFEREE, THE ASSESSEE RELIED UPON THE DECISION OF HONBLE RAJAST HAN HIGH COURT IN THE CASE OF CIT VS. SMT. SURAJ BAI 84 ITR 774, WHEREIN IT WAS H ELD THAT THE TRANSFER OF SHARES MUST BE REGARDED AS EFFECTIVE AND COMPLETE FOR THE PURPOSE OF TAXATION ON THE DATE ON WHICH THE DELIVERY OF SHARE CERTIFICATE ALONG WI TH THE TRANSFER DEEDS DULY SIGNED IS HANDED OVER BY THE TRANSFEROR TO THE TRANSFEREE. THE ASSESSEE ALSO RELIED UPON THE DECISIONS OF HONBLE SUPREME COURT IN THE CASE OF H OWRAH TRADING CO. LTD. VS. CIT, 36 ITR 215 AND ORDER OF ITAT AGRA BENCH IN THE CASE OF ITO VS. NITIN GUPTA. ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 41 27. THE LD. CIT(A) WHILE DEALING WITH THE MATTER, C ATEGORICALLY OBSERVED THAT IN VIEW OF THE REPLY OF AAYSHI STOCK BROKER PVT. LTD., PRIMA FACIE, THE PURCHASE OF SHARES CANNOT BE DISPUTED AND THEREFORE, HE DID NOT DOUBT THE PURCHASE TRANSACTION OF SHARES OF M/S. G.K. CONSULTANTS LTD. THE LD. CIT (A), HOWEVER, OBSERVED THE DURING THE SURVEY CONDUCTED BY INVESTIGATION WING I N THE CASE OF AAYUSHI STOCK BROKER PVT. LTD., THIS BROKER WAS FOUND INVOLVED IN GIVING ENTRIES FOR BOGUS SHARE TRANSACTIONS. HE, HOWEVER, DID NOT ACCEPT THE CONTE NTION OF ASSESSEE REGARDING SALE OF SHARES OBSERVING THAT THE ASSESSEE COULD NOT PRO DUCE ANY EVIDENCE EXCEPT PHOTOCOPY OF SALE BILL AND CONTRACT NOTE ISSUED BY SHARE BROKER M/S. MOTLEY SECURITIES PVT. LTD. HE ALSO OBSERVED THAT THE ASSE SSEE FAILED TO DISCHARGE ITS ONUS TO PRODUCE THE SHARE BROKER. THE COPY OF ECONOMIC T IMES NEWSPAPER SHOWING THE SELLING RATE OF SHARES AT RS.18 & RS.17.50 PER SHAR E ON THE DATE OF SALE WAS NOT LEGIBLE AND THE SELLING RATE OF SHARES WAS NOT GOT CONFIRMED BY THE ASSESSEE FROM THE CONCERNED STOCK EXCHANGE. THEREFORE, THE LD. CI T(A) CONSIDERING THE DEFINITION OF PRIMARY EVIDENCES UNDER THE EVIDENCE ACT, CONFIR MED THE DISALLOWANCE OF SHORT- TERM CAPITAL LOSS OF RS.25,93,455/- CLAIMED BY ASSE SSEE. THE LD CIT(A) HOWEVER, DID NOT AGREE WITH THE FINDINGS OF THE AO THAT THE AMOUNT OF RS.5,33,120 SHOWN TO HAVE BEEN RECEIVED AS A RESULT OF ALLEGED SALE OF S HARES WAS INVESTED OUT OF INFLATED EXPENSES, FOR WHICH NO SEPARATE ADDITION OF RS.9,50 ,000/- WAS MADE ON ACCOUNT OF INFLATED EXPENSES. THE LD. CIT(A), HOWEVER, OBSERVE D THAT THE SAID AMOUNT BEING CREDITED IN THE BOOKS OF ASSESSEE, SHOULD BE SEPARA TELY ADDED U/S. 68 AND THEREFORE, ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 42 HE REDUCED THE ADDITION ON ACCOUNT OF INFLATED EXPE NSES FROM RS.9,50,000/- TO RS.1,70,764/- HE ALSO DIRECTED THE AO TO MAKE SEPAR ATE ADDITION OF EXPENSES OF RS.10,662/- AS UNEXPLAINED EXPENDITURE U/S. 69C OF THE IT ACT. THE ASSESSEE BY MEANS OF VARIOUS GROUNDS HAS ASSAILED THE IMPUGNED ORDER IN HIS CROSS-OBJECTION. 28. REITERATING THE SUBMISSIONS MADE BEFORE THE LD. CIT(A), THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT SUBSTANTIAL EVIDENCES W ERE FURNISHED BEFORE THE AUTHORITIES BELOW TO PROVE THE GENUINENESS OF PURCH ASE AND SALE OF SHARES, WHICH HAVE NOT BEEN CONSIDERED BY THEM IN RIGHT PERSPECTI VE. IT WAS SUBMITTED THAT THE COMPANY WHOSE SHARES WERE TRANSACTED AND THE BROKER S THROUGH WHOM THE PURCHASE AND SALE TRANSACTIONS TOOK PLACE WERE GENU INE AND NO EVIDENCE IS BROUGHT ON RECORD TO BELIE THE GENUINENESS OF THE SHARE TRA NSACTIONS. IT IS ALSO CONTENDED THAT ITAT, AGRA BENCH IN SEVERAL DECISIONS HAS DECI DED THE IDENTICAL ISSUE IN SIMILAR FACTS AND CIRCUMSTANCES IN FAVOUR OF THE AS SESSEE AND AGAINST THE REVENUE. ON THE OTHER HAND, THE LD. D.R. RELIED UPON THE ORD ER OF THE LD. CIT(A). 29. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND TH E MATERIAL AVAILABLE ON RECORD AND WE FIND THAT THE ORDER OF THE LD. CIT(A) ON THIS ISSUE IS NOT SUSTAINABLE. IT IS WORTHWHILE TO POINT OUT THAT THIS BENCH OF TR IBUNAL IN IDENTICAL FACTS AND CIRCUMSTANCES OF THE CASE HAS DECIDED THE SIMILAR I SSUE AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE IN THE CASE OF ITO VS. M/S. AJAY PRAKASH, HUF IN ITA NO. ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 43 74/AGRA/2010 (BY REVENUE) AND C.O. NO. 04/AGRA/2011 (BY ASSESSEE) VIDE ORDER DATED 07.03.2012. IN THIS CASE, THE COMPANY WHOSE S HARES WERE TRANSACTED AND THE SHARE BROKERS THROUGH WHOM THE PURCHASE AND SALE OF SHARES WAS MADE, WERE ALL SAME. THE FACTS AND CIRCUMSTANCES INVOLVED THEREIN ARE ALSO IDENTICAL. THE FINDINGS OF THE TRIBUNAL IN PARA 5 OF THIS ORDER ARE REPRODU CED AS UNDER : 5. ON CONSIDERATION OF THE FACTS OF THE CASE IN TH E LIGHT OF THE FINDINGS OF THE LD. CIT(A) AND THE MATERIAL ON RECO RD, WE DO NOT FIND ANY JUSTIFICATION TO INTERFERE WITH THE ORDER OF LD . CIT(A). THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE HAVE BEEN EXPLAINED THROUGH MATERIAL ON RECORD AND THE ASSESSEE ENTERED INTO TH E TRANSACTIONS OF PURCHASE AND SALE OF SHARES GENUINELY. SALE CONSIDE RATION IS RECEIVED THROUGH BROKER WHO IS ALSO EXISTING ASSESSEE WITH T HE REVENUE DEPARTMENT. THEREFORE, THERE IS NO REASON TO TREAT THE AFORESAID TRANSACTION AS NON-GENUINE FOR THE PURPOSE OF MAKIN G ADDITION. SINCE THE SOURCE OF THE RECEIPT OF THE AMOUNT IN QUESTION IS EXPLAINED AND THE TRANSACTION ENTERED INTO BY THE ASSESSEE WITH T HE BROKER CLEARLY SUGGESTS A CASE OF SHORT-TERM CAPITAL GAINS, THEREF ORE, THE LD. CIT(A) RIGHTLY DIRECTED THE AO TO COMPUTE THE INCOME AS PE R RETURN OF INCOME AND FOR CAPITAL GAINS. THE DEPARTMENTAL APPEAL HAS NO MERIT AND IS, ACCORDINGLY DISMISSED. 30. SIMILAR VIEW HAS BEEN TAKEN BY ITAT, AGRA BENCH IN THE CASE OF ITO VS. SMT. RAJ DULARI FARSAIYA VIDE ORDER 17.09.2010, AND ITO VS. SHRI AJAY BANSAL AGRA IN ITA NO. 87/AGRA/2010 VIDE ORDER DATED 15.06 .2011 WHEREIN ALSO IN THE SIMILAR SET OF FACTS AND CIRCUMSTANCES, THE ISSUE H AS BEEN DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 44 31. ITAT, AGRA BENCH IN THE CASE OF ACIT VS. RAM PR AKASH GARG IN ITA NO. 237/AGRA/2011 ON THE SIMILAR ISSUE DISMISSED THE DE PARTMENTAL APPEAL VIDE ORDER DATED 18.01.2013, WHEREIN FOLLOWING FINDINGS WERE R ECORDED IN PARA NOS.5 & 6 OF THE ORDER : 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND TH E MATERIAL ON RECORD AND DO NOT FIND ANY JUSTIFICATION TO INTERFE RE WITH THE ORDER OF THE LD. CIT(A) IN DELETING THE ADDITION. THE AO, ON THE FACTS OF THE CASE FOUND THAT SIMILAR ISSUE HAVE BEEN CONSIDERED IN THE CASE OF HUF OF ASSESSEE AND OTHER FAMILY MEMBERS SHRI RAJESH KU MAR GARG AND SMT. SEEMA GARG WHO HAVE ALSO SHOWN LONG-TERM CAPIT AL GAINS OF THE SIMILAR NATURE OF THE SAME BROKER AND OF THE SAME S CRIP IN THE ASSESSMENT YEAR UNDER APPEAL, WHICH WERE FOUND TO B E BOGUS BY THE AO AND ADDITIONS HAVE BEEN CONFIRMED BY THE LD. CIT (A) AS WELL. HOWEVER, THE LD. COUNSEL FOR THE ASSESSEE FILED COP Y OF THE TRIBUNAL ORDER IN THEIR CASES DATED 31.03.2009 IN WHICH THE ITAT, AGRA BENCH DELETED THE SIMILAR ADDITIONS AND NO RELIANCE WAS P LACED ON THE STATEMENT OF SHRI MUKESH GUPTA AND HIS WIFE. THE OR DER OF THE TRIBUNAL HAS BEEN CONFIRMED BY THE HONBLE ALLAHABA D HIGH COURT VIDE ORDER DATED 15.02.2011. IN THE AFORESAID DECIS ION, IT WAS FOUND THAT THOSE ASSESSEES HAD OBTAINED SHARES IN PREFERE NTIAL ALLOTMENT DIRECTLY FROM THE COMPANIES AND THE PURCHASES DECLA RED IN THE BALANCE SHEET OF EARLIER YEARS, WHICH WERE ACCEPTED BY THE DEPARTMENT. SHARES WERE SOLD TO THE REGISTERED STOC K BROKERS AND STOCK EXCHANGE. BROKERS HAVE CONFIRMED THAT MONEY W AS GIVEN THROUGH DRAFT. HONBLE ALLAHABAD HIGH COURT, THEREF ORE, ON CONSIDERATION OF THESE RELEVANT CONSIDERATIONS, CON FIRMED THE FINDINGS OF THE TRIBUNAL THAT THE SALES ARE NOT SHAM TRANSAC TIONS. ACCORDING TO THE AO, THE FACTS OF THESE CASES ARE IDENTICAL TO T HE CASE OF THE ASSESSEE, THEREFORE, WHEN IN THE IDENTICAL CASES OF THE FAMILY MEMBERS OF THE ASSESSEE, ADDITIONS HAVE BEEN DELETED BY THE TRIBUNAL AND THE ORDER OF THE TRIBUNAL HAVE BEEN CONFIRMED BY ALLAHA BAD HIGH COURT, THEREFORE, ON SUCH REASON ITSELF, THE DEPARTMENTAL APPEAL IS LIABLE TO BE DISMISSED. FURTHER, THE ASSESSEE HAS FILED PROPE R EVIDENCES BEFORE THE AUTHORITIES BELOW TO SHOW THAT SHARES OF M/S. B .T. TECHNET LTD. WERE ALLOTTED DIRECTLY BY THIS COMPANY @ 10/- PER S HARE AND CONSIDERATION WAS TRANSFERRED THROUGH BANKING CHANN EL. ALL THE ALLOTMENT LETTERS, DRAFTS, CERTIFICATES OF THE COMP ANY ARE FILED IN THE ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 45 PAPER BOO;. THE PROFILE OF M/S. B.T. TECHNET IS ALS O FILED IN THE PAPER BOOK TO SHOW THAT IT WAS A GENUINE COMPANY. THE SAM E WERE SHOWN IN THE BOOKS OF EARLIER YEARS. THEREFORE, THE PURCHASE OF SHARES AND SOURCE OF PURCHASE COULD NOT HAVE BEEN DISPUTED. SA ME SHARES WERE SOLD TO THE BROKER, M/S. CMS SECURITIES LTD. DELHI AND ALL THE CONTRACT NOTES, SALE CONSIDERATION THROUGH DRAFTS HAVE BEEN FILED IN THE PAPER BOOK TO SUPPORT THE CONTENTION OF THE ASSESSEE. THE SALE RATE OF RS.114/- PER SHARE IS ALSO SUPPORTED BY THE INFORMA TION RECEIVED FROM M.P. STOCK EXCHANGE. WHATEVER STATEMENTS OF CMS SEC URITIES LTD. THROUGH THEIR DIRECTORS WERE RECORDED WERE NEVER CO NFRONTED TO THE ASSESSEE. THEREFORE, THE SAME CANNOT BE READ IN EVI DENCE, WHICH IS ALSO SUBSTANTIATED BY THE DECISION OF HONBLE SUPRE ME COURT IN THE CASE OF KISHAN CHAND CHELARAM VS. CIT, 125 ITR 713. CONSIDERING THE TOTALITY OF FACTS AND CIRCUMSTANCES, IN THE LIG HT OF THE DECISION OF THE JURISDICTIONAL ALLAHABAD HIGH COURT IN THE GROU P CASES ABOVE, WE DO NOT FIND ANY JUSTIFICATION TO INTERFERE WITH THE ORDER OF THE LD. CIT(A) IN DELETING THE ADDITION. THE ASSESSEE ON TH E BASIS OF EVIDENCE AND MATERIAL ON RECORD HAS BEEN ABLE TO PROVE THAT HE HAS RECEIVED ENTIRE SALE CONSIDERATION OF SHARES THROUGH KNOWN S OURCES. THEREFORE, NO ADDITION U/S. 68 COULD BE MADE AGAINST THE ASSES SEE. AS A RESULT, THE DEPARTMENTAL APPEAL FAILS AND IS DISMISSED. 6. IN THE RESULT, THE DEPARTMENTAL APPEAL IS DISMIS SED. 32. THEREFORE, FOLLOWING THE EARLIER ORDER OF THIS BENCH IN THE CASE OF ITO VS. M/S. AJAY PRAKASH, HUF (SUPRA) AND OTHER DECISIONS OF ITAT, AGRA BENCH, THE ORDER OF THE CIT(A) IS NOT FOUND TO BE SUSTAINABLE ON THIS COUNT AND THE ADDITIONS SUSTAINED BY THE CIT(A) ARE LIABLE TO BE DELETED. W E, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A). ACCORDINGLY, THE CROSS OBJECTION OF THE ASSESSEE DESERVES TO BE ALLOWED. WE ACCORDINGLY ALLOW THE CROSS OBJECTION FILED BY THE ASSESSEE. ITA NO.280/AGRA/2011 & C.O.55/AGRA/2011 A.Y. 2003-04 46 33. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED AND THE CROSS OBJECTION OF THE ASSESSEE IS ALLOWED. (ORDER PRONOUNCED IN THE OPEN COURT) SD/- SD/- (BHAVNESH SAINI) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTA NT MEMBER AMIT/ COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT (APPEALS) CONCERNED 4. CIT CONCERNED 5. D.R., ITAT, AGRA BENCH, AGRA 6. GUARD FILE. BY ORDER SR. PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL, AGRA TRUE COPY