ITO, Ward - 12(3), Kolkata V. M/s. J.H.V. Sugar Ltd., Kolkata

ITA 872/KOL/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 2525 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 1 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2010
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 12-05-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 22-05-2009
• Court: TRIBUNAL
• Department Lawyers: D R SINDHAL
• Assessee Lawyers: MANOJ KATARUKA
• Keywords: Business income; Depreciation
• Section: 40A(3); 80IB; 37(1)

Judgement Text

1 , C , , IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH- C , KO LKATA [ . . . . . . . . , , , , , . .. . . .. . , , , , ! ] BEFORE SHRI D.K. TYAGI, JUDICIAL MEMBER & SRI C.D. RAO, ACCOUNTANT MEMBER ' ' ' ' / ITA NO. 872 (KOL) OF 2009 #$% &' / ASSESSMENT YEAR 2005-06 INCOME-TAX OFFICER, WARD-12(3), KOLKATA. M/S. J.H.V. SUGAR LTD. KOLKATA. (PAN-AACFD0236D) (*+ / APPELLANT ) - $ - - VERSUS -. (.*+/ RESPONDENT ) *+ / 0 / FOR THE APPELLANT: / SRI D.R.SINDHAL .*+ / 0 / FOR THE RESPONDENT: / SRI MANOJ KATARUKA 1 / ORDER ( . .. . . .. . ), ! (C.D. RAO), ACCOUNTANT MEMBER : THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST TH E ORDER DATED 25.02.2009 OF LD. C.I.T.(A)-XXXII, KOLKATA PERTAINING TO ASSESSMENT Y EAR 2005-06. GROUND NO.1 OF THIS REVENUES APPEAL READS AS UNDER :- 1. ON THE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE, LD. CIT(A) WAS NOT JUSTIFIED IN LAW IN DELETING THE ADDITION OF RS.4,86,38,100/- MADE O N ACCOUNT OF UNDER-VALUATION OF CLOSING STOCK. IT IS PERTINENT TO MENTION HERE THAT IN THE ABOVE G ROUND, THE DEPARTMENT HAS TAKEN ADDITION OF RS.4,86,38,100/-, WHEREAS IN THE ORDERS OF THE AUTHORITIES BELOW, THE SAID FIGURE IS APPEARING AS RS.4,06,38,100/-. THEREFORE, WE TAKE THE AMOUNT OF ADDITION OF RS.4,06,38,100/- FOR ADJUDICATION. 2. THE FACTS OF THE CASE ON THE ABOVE ISSUE ARE TH AT THE ASSESSEE DISCLOSED THE VALUE OF CLOSING STOCK OF FINISHED GOODS IN ITS AUDITED A CCOUNTS AT RS.71,31,00,305/- WHICH, INTER ALIA, INCLUDED VALUE OF FINISHED SUGAR, MOLAS SES, BISS SUGAR. ON VERIFICATION OF THE INVENTORY FILED BY THE ASSESSEE, THE A.O. OBSER VED THAT THE ASSESSEE VALUED THE STOCK OF FINISHED SUGAR AT COST WHICH WAS ESTIMATED AT RS.1,686/- PER QUINTAL. THE A.O. REQUIRED THE ASSESSEE SHOW CAUSE AS TO WHY THE TOTA L INTEREST EXPENSES OF RS.3.47 CRORES 2 SHOULD NOT BE TREATED AS INVENTORY AND BE ADDED IN THE CLOSING STOCK OF THE COMPANY AS ON 31/3/2005. THE REASONS POINTED OUT BY THE A.O. WERE THAT THE ASSESSEE HAD NOT DEBITED ANY EXPENDITURE TOWARDS THE INTEREST COST W HILE VALUING THE CLOSING STOCK. HE FURTHER POINTED OUT THAT THE ASSESSEE DEBITED AN AM OUNT OF RS.3.47 CRORES AS FINANCIAL EXPENSES IN ITS P/L ACCOUNT AND AS PER COST SHEET S UBMITTED BY THE ASSESSEE, THE COST OF INTEREST EXPENDITURE ON WORKING CAPITAL WAS NOT ADD ED TO THE VALUE OF CLOSING STOCK ALTHOUGH THIS EXPENDITURE WAS ONE OF THE MAJOR ITEM S OF EXPENDITURE IN THE P/L ACCOUNT. THE A.O. ON PERUSAL OF BALANCE SHEET AS AT 31/3/200 5 FURTHER OBSERVED THAT OUT OF THE TOTAL CURRENT ASSETS OF RS.91.16 CRORES, AN AMOUNT OF RS.72.73 CRORES WAS TOWARDS THE INVENTORY, WHICH CONSTITUTED ABOUT 80% OF THE CURRE NT ASSETS. ACCORDING TO THE A.O., THEREFORE, THE INTEREST PAID ON WORKING CAPITAL WAS NOTHING BUT THE COST OF INVENTORY BEING CARRIED ON BY THE ASSESSEE DURING THE YEAR AN D SAME IS LIABLE TO BE ADDED TO THE COST OF THE CLOSING STOCK FOR ITS VALUATION AS ON 3 1/3/2005. IN REPLY, THE ASSESSEE EXPLAINED THAT AS IN THE CLOSING STOCK DETAILS FILE D EARLIER ON 22.11.2007 THERE WERE SOME INADVERTENT MISTAKES, THE SAME WERE SUBSTITUTED ON 17/12/2007 BY FILING REVISED STOCK DETAILS AND REQUESTED FOR OVERLOOKING THE EARLIER S TOCK DETAILS FILED ON 22/11/2007. THE A.O., HOWEVER, WAS NOT CONVINCED WITH THE EXPLANATI ON OF THE ASSESSEE AND MADE AN ADDITION OF RS.4,06,38,100/- WHICH, INTER ALIA, INC LUDED (I) RS.58,86,525/- ADDED @ RS.15/- PER QUINTAL FOR 392435 QUINTALS OF FINISHED SUGAR IN STOCK AND (II) RS.3,47,51,51,575/- ON ACCOUNT OF INTEREST & FINANC E CHARGES RELATABLE TO STOCK OF FINISHED SUGAR. THE RELEVANT OBSERVATION OF THE A. O., TO QUOTE, READS AS UNDER :- REGARDING THE ASSESSEE S CLAIM THAT IT HAS FILED A REVISED WORKING OF CLOSING STOCK, THE ASSESSEE ITSELF HAS SUBMITTED THE DETAILED WORKING OF CLOSING STOCK VIDE ITS LETTER DATED 22.11.2007. IN THIS LETTER ITSELF THE VALUATION OF CLOSING STOCK HAS BEEN WORKED OUT BY THE ASSESSEE AT TOTAL COST PER BAG OF RS.1615/-. WHEN. IT WAS POINTED OUT TO THE ASSESSEE, THE ASSESSEE HAS GIVEN CERTAIN SUBMISSIONS BUT THE SAME HAS NOT BEEN SUBSTANTIATED DESPITE BEING GIVEN SEVERAL OPPORTUNITIES. THE ASSESSEE WAS TIME AND AGAIN REQUESTED TO SUBSTANTIATE. ITS CLAIM WITH DOCUMENTARY EVIDENCES BUT THE ASSESSEE DID NOT SUBMIT ANY DOCUMENTARY EVIDENCE IN SUPPORT OF ITS CLAIM. SINCE THE ASSESSEE HAS FAILED TO SUBSTANTIATE ITS CLAIM, THERE IS NO FORCE IN THE AS SESSEES ARGUMENTS AND THE SAME ARE REJECTED. ACCORDINGLY, THE VALUATION OF CLOSING STO CK IS BEING TAKEN RS.1701/- PER QUINTAL INSTEAD OF RS.1 686/- AS HAS BEEN SHOWN BY THE ASSESSEE. REGARDING THE CLAIM THAT AS PER THE GUIDELINE OF ST OCK VALUATION, INTEREST COST IS NOT ADDED AS PART OF THE INVENTORY IS NOT CORRECT BECAU SE AS PER THE GUIDELINES, ALL COSTS 3 WHICH HAVE BEEN INCURRED TO BRING THE INVENTORY IN THE PRESENT STATE HAS TO BE INCLUDED IN THE VALUATION OF THE CLOSING STOCK. IN OTHER WORDS, THE CARRYING COST OF THE INVENTORY HAS TO BE INCLUDED IN THE VALUATION OF THE CLOSING STOCK, WHICH IS LYING AS STOCK AT THE E ND OF THE YEAR. ON A PERUSAL OF THE FINANCE COST OF THE ASSESSEE IT IS FOUND THAT INTER EST OF RS. 2.62 CRORES HAS BEEN GIVEN ONLY FOR THE WORKING CAPITAL OF THE ASSESSEE COMPAN Y. ON GOING THROUGH THE BALANCE SHEET AS HAS CLEARLY BEEN MENTIONED IN THE SHOW CAU SE NOTICE AS WELL, THE MAJOR ITEM OF CURRENT ASSETS OF THE ASSESSEE IS INVENTORY ONLY. H ENCE, ALL THE COSTS WHICH HAVE BEEN INCURRED TO BRING THE INVENTORY AT ITS PRESENT FORM INCLUDING THE FINANCE COST F IT HAS BEEN PAID FOR CARRYING THE STOCKS, HAS TO BE ADDED WHILE VALUING THE CLOSING STOCK OF THE ASSESSEE COMPANY. IN VIEW OF THIS THERE IS NO FORCE IN THE ASSESSEE COMPANYS ARGUMENT AND THE SAME ARE REJECTED. ACCORDINGLY, THE AMOUNT OF RS.347.51 LAKHS IS ALSO ADDED AS THE VALUE OF THE CLOSING STOCK AS ON 31.3.2005. IN VIEW OF THE AFORESAID DISCUSSION THE TOTAL ADDIT ION IN THE STOCK IS WORKED OUT AS UNDER: TOTAL CLOSING STOCK OF SUGAR INCLUDING BISS - 39243 5 QUINTALS X RS. 15 (ADDITION PER QUINTAL AS DISCUSSED ABOVE) = RS. 5886525/- + RS. 34751575/- (FINANCE COST AS DISCUSSED ABOVE) = RS. 40 638100/- THE SAME IS ADDED IN THE TOTAL INCOME OF THE ASSESS EE COMPANY IN THE VALUATION OF THE CLOSING STOCK. THIS IS ALSO EVIDENT FROM THE GROSS PROFIT RATIO OF THE ASSESSEE COMPANY, WHICH WAS 39.83% IN THE FINANCIAL YEAR 2003-04 WHICH HAS COME DOWN TO 26.45% DURING THE FINANCIAL YEAR 2004-05 RELEVANT TO THE ASSESSMENT Y EAR 2005-06. REGARDING THE ASSESSEES ARGUMENT WITHOUT PREJUDICE THAT THE VALUE OF INTEREST IS INCLUDED BOTH IN THE CLOSING STOCK AS WELL AS THE O PENING STOCK AND IN THE INTEREST OF JUSTICE, EVEN F INTEREST COMPONENT IS ADDED IN THE VALUE OF THE CLOSING STOCK, THE SAME SHOULD BE FIRST INCLUDED, IN THE VALUE OF THE OPENI NG STOCK AND DIFFERENCE IF ANY CAN ONLY BE TAKEN. IF THE ASSESSEE COMPANY DOES NOT TAKE INT O ACCOUNT THE INTEREST EXPENSES IN THE VALUATION OF CLOSING STOCK AT ALL. IN FACT, IT HAS BEEN SUBMITTED BY THE ASSESSEE THAT IT WILL NOT FORM PART OF THE STOCK AT ALL. IN THE ABSENCE O F THE RELEVANT DETAILS OF THE VALUATION OF THE OPENING STOCK AS WELL AS THE INTEREST COST, THE UNDERSIGNED IS NOT IN A POSITION TO ACCEPT THE CLAIM OF THE ASSESSEE. HENCE, THE SAME I S NOT ACCEPTED, 3. BEFORE THE LD. C.I.T.(A), THE ASSESSEE FILED A DETAILED WRITTEN SUBMISSION ON THE ISSUE. THE ASSESSEE ALSO FILED THE REVISED STATEME NT OF INVENTORY VALUATION FILED BEFORE THE A.O. ALSO, AUDITED ACCOUNT AND AS-2 PRESCRIBED BY ICAI AND CONTENDED THAT THE ADDITION MADE ON ACCOUNT CLOSING STOCK OF FINISHED SUGAR WAS UNJUSTIFIED. IT WAS FURTHER SUBMITTED THAT IF THE ADJUSTMENTS MADE TO VALUATION OF CLOSING STOCK WAS TO BE ACCEPTED, THEN BY APPLYING THE SAME ACCOUNTING PRINCIPLES THE A.O. OUGHT TO HAVE ADJUSTED THE VALUE OF OPENING STOCK AS WELL AND THIS WOULD HAVE RESULTED IN REDUCTION IN THE TOTAL 4 INCOME FOR THE YEAR UNDER CONSIDERATION. THE LD. C .I.T.(A) IN HIS APPELLATE ORDER ON PAGES 6 TO 11 HAS INCORPORATED THE WRITTEN SUBMISSI ONS OF THE ASSESSEE AND DEALT WITH THE ADDITION IN THE FOLLOWING MANNER :- IN THE PRESENT CASE TWO IMPORTANT QUESTIONS NEED T O BE ANSWERED AND THOSE ARE A) WHETHER THE INVENTORY VALUATION DISCLOSED BY THE ASSESSEE IN ITS AUDITED ACCOUNTS WAS FAIR, REASONABLE & CORRECT OR WHETHER THE A.O. WAS JUSTIFIED IN REJECTING THE ASSESSEES METHOD OF STOCK VALUATION AND THEREBY HE WAS CORREC T IN RE-COMPUTING THE VALUE OF CLOSING STOCK BY MAKING ADDITION OF RS.4,06,38,L00/ -, B) IF IT IS HELD THAT A,O. WAS JUSTIFIED IN RE-DETE RMINING VALUE OF CLOSING STOCK THEN WHETHER THE A.O. SHOULD HAVE MADE CORRESPONDING ADJ USTMENT TO THE VALUE OF OPENING STOCK BY FOLLOWING THE SAME METHOD OF INVENTORY VAL UATION. IN ORDER TO DECIDE THE FIRST QUESTION IT IS NECESSA RY TO ASCERTAIN THE METHOD OF VALUATION FOLLOWED BY THE ASSESSEE. ON REFERENCE TO SCHEDULE- 14 OF THE AUDITED BALANCE SHEET IT IS NOTED THAT THE ASSESSEE HAD VALUED CLOSING STOCK OF SUGAR (WHITE CRYSTALS) AT RS.66,05,49,510/-; STOCK OF SUGAR (BISS) AT RS.8325 20/-& STOCK OF MOLASSES WAS VALUED AT RS.5,24,18,275/-. THE AGGREGATE VALUE OF CLOSING STOCK OF FINISHED GOODS WAS THEREFORE, RS.71 ,3 8,00,305/-. IN THE FIRST STATEMENT OF STOCK VALUATION FURNISHED BEFORE THE ASSESSING OFFICER THE ASSESSEE HAD WORKED OUT THE COST OF PRODUCTION OF S UGAR AT RS.1615.58 PER QUINTAL, IN THE REVISED STATEMENT OF STOCK VALUATION THE ASSESS EE RECOMPUTED THE AVERAGE COST PER QUINTAL AT RS.1588.83. IN BOTH STATEMENTS COST WAS ROUNDED OFF TO RS.1600/- PER QUINTAL. BOTH THE WORKING STATEMENT OF INVENTORY VALUATION H AVE BEEN EXTRACTED HEREIN ABOVE WHILE DISCUSSING ASSESSEES WRITTEN SUBMISSIONS. TH E COMPARATIVE ANALYSIS SHOWS THAT IN THE FIRST WORKING STATEMENT THE NET COST OF PRO DUCTION WAS ESTIMATED AT RS.58,97,62,672/- GIVING AVERAGE COST OF RS.1615.08 PER QNTL., WHICH HAS BEEN ACCEPTED BY THE A.O. FOR THE PURPOSE OF MAKING THE ADDITION OF RS.58,86,525/-. IN THE REVISED WORKING STATEMENT THE ASSESSEE HOWEVER EXCLUDED RS. 95,86,747.69 BEING VALUE OF OPENING WORK IN PROGRESS WORKED OUT AVERAGE COST OF PRODUCTION WITH REFERENCE TO NET COST OF PRODUCTION OF RS.58,0L,75,924/-. THE ASSESS EE HAS CLAIMED THAT COST OF OPENING WIP WAS NOT INCLUDIBLE, IN WORKING OF COST OF PRO DUCTION. IN PRINCIPLE I DO NOT ACCEPT ASSESSEES AVERMENT BECAUSE PRODUCTION DURIN G THE PREVIOUS YEAR COULD HAVE BEEN MADE OUT OPENING WORK IN PROGRESS AS WELL. HOW EVER ON DEEPER SCRUTINY OF SCHEDULE- 14 OF HE BALANCE SHEET I FIND THAT THE VA LUE OF WORK IN PROGRESS OF RS.95,86,747.69 PERTAINED TO OPENING STOCK OF F.Y. 2003-04 RELEVANT TO AY, 2004-05. IN OTHER WORDS, THE SAID OPENING WIP WAS HELD BY TH E ASSESSEE ON FIRST APRIL 2003 AND NOT ON 1ST APRIL 2004, WHICH WAS THE FIRST DAY OF P REVIOUS YEAR RELEVANT TO AY. 2005-06. ALL OTHER FACTS & FIGURES INCLUDED IN BOTH STATEMEN TS OF INVENTORY VALUATION WERE IDENTICAL & WERE EXTRACTED FROM THE AUDITED ACCOUNT S OF F.Y. 2004-05 & THEREFORE, I AM SATISFIED THAT ASSESSEE HAD TAKEN INTO ACCOUNT ALL THE FACTS & FIGURES WHICH WERE RELEVANT FOR DETERMINING COST OF PRODUCTION OF SUGAR FOR A.Y . 2005-06. ON THE FACTS OF THE CASE THEREFORE, I ACCEPT THE REVISED WORKING STATEMENT O F COST OF PRODUCTION OF SUGAR. ON THE FACTS OF THE CASE I THEREFORE, FIND THAT THE A.O. W AS NOT JUSTIFIED IN IGNORING THE REVISED WORKING STATEMENT OF INVENTORY VALUATION & CONSIDER ING ONLY THE FIRST INVENTORY VALUATION STATEMENT WHICH WAS ADMITTEDLY INCORRECT AS IT TOOK INTO A/C COST OF WIP AS ON 5 1.4.2003. TAKING INTO CONSIDERATION THE MANUFACTURI NG COSTS INCURRED DURING F.Y. 2004- 05; DETERMINED WITH REFERENCE TO PROFIT & LOSS A/C OF F.Y. 2004-05, I AGREE WITH THE AIR THAT THE COST OF PRODUCTION OF SUGAR FOR F.Y. 2 004-05 WAS RS.1588.83 PER QUINTAL & IT WAS NOT RS.16 15.08 PER QUINTAL AS ASSUMED, BY T HE ASSESSING OFFICER. ON THE BASIS OF FACTS WHICH ARE BORNE OUT FROM THE AUDITED PROFIT & LOSS A/C., THE ADDITION OF RS.58,86,5251- MADE BY THE ASSESSING OFFICER IS FOU ND TO BE UNSUSTAINABLE AND THE SAME IS DELETED. THE ASSESSING OFFICER MADE ADDITION OF RS.3,47,51,5 75/- ON ACCOUNT OF INCLUSION OF INTEREST & FINANCE CHARGES IN THE VALUE OF INVENTOR Y. THE A.O. HAS MADE OUT A CASE THAT FOR DETERMINING COST OF INVENTORY INTEREST AND FINA NCE CHARGES SHOULD BE INCLUDED. 1 HOWEVER, FIND THAT AS PER THE CONSISTENT METHOD OF ACCOUNTING AND INVENTORY VALUATION FOLLOWED BY THE ASSESSEE, INTEREST & FINANCE CHARGE S WERE NEVER CONSIDERED AS PAR T OF COST OF MANUFACTURE. IN THE PAST ASSESSMENTS THE ME THOD OF ACCOUNTING & METHOD OF INVENTORY VALUATION FOLLOWED BY THE ASSESSEE WAS NE VER DISPUTED BY THE DEPARTMENT. IN THE PRECEDING ASSESSMENT YEAR FOR THE PURPOSE OF VA LUATION OF INVENTORY; INTEREST & FINANCE CHARGES WERE NOT INCLUDED AS PART OF COST OF PRODUCTION AND ACCORDINGLY PROFITS FOR THE EARLIER ,YEARS WERE DETERMINED ON T HE BASIS OF INVENTORY VALUE WHICH WAS ARRIVED AT WITHOUT CONSIDERING THE IMPACT OF INTERE ST & FINANCING CHARGES. BY MAKING ADDITION OF RS 3,47,51,575/-ONLY IN A.Y. 2005-06 TH E A.0. ARTIFICIALLY INCREASED THE BUSINESS INCOME OF THE APPELLANT. IN OTHER WORDS, T HE ASSESSING OFFICER TREATED THE INVENTORY VALUATION AS A SOURCE OF INCOME. THE SUPR EME COURT IN THE CASE OF CHAINRUP SAMPATRAM VS. CIT [24 ITR 481] HAS HELD THAT IT IS MISCONCEPTION TO THINK THAT ANY PROFIT ARISES OUT OF THE VALUE OF CLOSING STOCK. IN THE SAME JUDGMENT THE SUPREME COURT HELD THAT AN ENTRY RELATING TO STOCK VALUATION IS R EQUIRED TO BE MADE IN TRADING ACCOUNT SO AS TO EXCLUDE THE CHARGES RELATING TO GOODS WHICH H AVE NOT BEEN SOLD & IT SHOULD NECESSARILY REPRESENT COST OF GOODS. IN THE LIGHT O F THE JUDGMENT OF HE APEX COURT IN THE CASE OF CHAINRUP SAMPATRAM THE A.O. WAS NOT JUSTIFI ED IN TREATING THE VALUATION OF INVENTORY AS ASSESSEES SOURCE OF INCOME. THE ASSESSEE HAS CONSISTENTLY BEEN VALUING THE INVE NTORY OF SUGAR BY FOLLOWING THE PRINCIPLE OF AT COST OR MARKET VALUE WHICHEVER IS LOWER. HOWEVER, IN VALUING THE STOCK AT COST THE ASSESSEE HAS CONSISTENTLY FOLLOWED AC COUNTING STNDARD-2 PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA WHICH D EALS WITH VALUATION OF INVENTORIES. AS PER ACCOUNTING STANDARD-2 IN VALUATION OF INVENT ORIES ONLY THE COST OF THE MATERIAL, DEPRECIATION OF ASSETS USED IN MANUFACTURE & OTHER MANUFACTURING OVERHEADS ARE TO BE TAKEN INTO CONSIDERATION. THE INTEREST AND FINANCE CHARGES WHICH ARE MAINLY PERIOD COSTS ARE NOT TAKEN INTO CONSIDERATION. ACCORDING TO A.O., AS PER GUIDELINES FOR STOCK VALUATION, INTEREST COST IS ALSO REQUIRED TO BE INC LUDED BECAUSE IN HIS OPINION ALL COSTS INCURRED TO BRING THE INVENTORY IN THE PRESENT STAT E HAD TO BE INCLUDED IN THE VALUATION OF CLOSING STOCK. FOR THIS REASON, HE INCLUDED FINANCE COSTS IN THE COST OF PRODUCTION & THEREBY MADE THE ADDITION OF RS.3,47,51,5751/-. FROM PERUSAL OF THE IMPUGNED ORDER, I FIND THAT THE A.O. HAS JUSTIFIED THE INCLUSION OF INTEREST & FINANCE CHARGES IN THE COST OF PRODUCTIO N WITH REFERENCE TO CERTAIN GUIDELINE HOWEVER, THE A.O. HAS NOT SPELT OUT BY WHOM OR WHEN THESE GUIDELINES WERE ISSUED NOR SPELT OUT THE ACTUAL CONTENTS OF THESE GUIDELINES. THE SUPREME COURT IN THE CASE OF CIT VS. BRITISH PAINTS LTD., [188 ITR 44] HAS HELD THAT THE VALUATION OF INVENTORY CAN BE MADE BY FOLLOWING THE PRINCIPLE OF AT COST OR MARK ET VALUE WHICHEVER IS LOWER, BUT IN VALUING THE INVENTORY AT COST AN ASSESSEE IS OBLI GED TO INCLUDE NOT ONLY THE COST OF 6 RAW-MATERIALS BUT ALSO THE OVERHEAD CHARGES. IN THI S JUDGMENT THE SUPREME. COURT HOWEVER DID NOT SETOUT OR PRESCRIBED THE COSTS OR H EADS OF EXPENSES WHICH NEED TO BE INCLUDED FOR DETERMINATION OF COST. THE SUPREME COU RT ONLY HELD THAT IN VALUATION, OF INVENTORY AT COST THE PROPORTIONATE OVERHEADS ARE REQUIRED TO BE ADDED TO THE COST OF RAW-MATERIALS. IN THAT JUDGMENT THE SUPREME COURT O BSERVED THAT THE METHOD OF ACCOUNTING FOLLOWED BY THE SSESSEE IN QUESTION WAS NEITHER DIRECT COST METHOD NOR ANY OTHER ACCEPTED METHOD WHICH TOOK INTO ACCOUNT THE A CTUAL OR PART OF THE COST INVOLVED IN MANUFACTURE OF THE GOODS IN PROCESS AND FINISHED PR ODUCTS. THE ASSESSEE IN THE DECIDED EASE ONLY INCLUDED VALUE OF RAW-MATERIALS WITHOUT T AKING INTO ACCOUNT ANY PORTION OF THE COST OF MANUFACTURE. THE SUPREME COURT THEREFORE, H ELD THAT THE METHOD OF VALUATION FOLLOWED BY THE ASSESSEE WHEREIN ONLY THE RAW-MATER IAL COSTS WERE INCLUDED WAS NOT A CORRECT METHOD OF STOCK VALUATION. THE SUPREME COUR T HELD THAT. IN VALUATION OF INVENTORY; RAW-MATERIAL COST AND THE COST OF MANUFA CTURE WERE REQUIRED TO BE INCLUDED, THE OBSERVATIONS OF SUPREME COURT HOWEVER, INDICATE THAT THE SUPREME COURT NOWHERE PRESCRIBED THAT ALL COSTS & EXPENSES INCLUDING SELL ING, DISTRIBUTION & OTHER POST- MANUFACTURING EXPENSES AS ALSO FINANCE COST ARE REQ UIRED TO BE INCLUDED IN VALUATION OF CLOSING STOCK. THE SUPREME COURT FURTHER HELD THAT A PROPER METHOD OF ACCOUNTING SHOULD BE CONSISTENTLY FOLLOWED BY AN ASSESSEE SO T HAT THE DETERMINATION OF INCOME IS POSSIBLE ON A CONSISTENT BASIS AND THERE IS NO DIST ORTION IN THE ASSESSMENT OF TOTAL INCOME. IN THE LIGHT OF THESE JUDICIAL PRONOUNCEMENTS, IT I S NECESSARY TO EXAMINE WHETHER THE METHOD OF VALUATION FOLLOWED BY THE ASSESSEE WAS CO RRECT. AS DISCUSSED IN THE FOREGOING, THERE WAS NO DISAGREEMENT BETWEEN THE AS SESSEE AND THE ASSESSING OFFICER WITH REGARD TO FIGURES OF MANUFACTURING COSTS, INCL UDED IN THE STATEMENT OF INVENTORY VALUATION. ACCORDING TO A.O., FOR THE PURPOSE OF VA LUATION OF INVENTORY HE INTEREST AND FINANCE CHARGES WAS ALSO REQUIRED TO BE TAKEN INTO CONSIDERATION WHEREAS SSESSEE EXCLUDED INTEREST & FINANCE CHARGES. ALTHOUGH THE A .O. REFERRED TO SOME ACCOUNTING GUIDELINES HE HAS NOT BROUGHT ON RECORD THESE GUIDE LINES UNDER WHICH INCLUSION OF INTEREST IS PERMITTED. ON THE OTHER HAND, THE ASSES SEE HAS CLAIMED THAT THE INVENTORY VALUATION WAS MADE BY FOLLOWING AS-2 PRESCRIBED BY ICAI. FROM THE ACCOUNTING STANDARD-2 IT APPEARED THAT IN PARA-5 THEREOF AS-2 HAS MANDATED THAT INVENTORY SHOULD BE VALUED BY FOLLOWING THE PRINCIPLE OF LOWER OF CO ST OR REALIZABLE VALUE. PARA-6 PROVIDES THAT THE COST OF INVENTORIES SHOULD COMPRISE ALL COSTS OF PURCHASE, COST OF CONVERSIONS AND OTHER COSTS INCURRED IN BRINGING INVENTORIES TO THEIR PRESENT LOCATION & CONDITION. PARA-7 DEFINES THE COST OF PURCHASE AND PARA-8 TO 10 DEFINE THE COST OF CONVERSION AS THESE EXPRESSIONS ARE REFERRED TO IN PARA-6. PARAS-1 1 & 12 OF AS-2 DEFINE OTHER COSTS WHICH A RE TO BE INCLUDED IN VALUING COST OF INVENTORY AS PER PARA-6. PARA -12 OF AS-2. PROVIDES AS FOLLOWS: INTEREST AND OTHER BORROWING COSTS ARE USUALLY CON SIDERED AS NOT RELATED TO BRING INVENTORIES TO THEIR PRESENT LOCATION & CONDITION W HICH ARE USUALLY NOT INCLUDED IN THE COST OF INVENTORIES. 7 PARA-12 OF AS-2 THEREFORE, CLEARLY INDICATES THAT I N VALUATION OF INVENTORY AT COST THE INTEREST AND BORROWING COSTS ARE USUALLY NOT INCLUD ED. THE APPELLANT IS A PUBLIC LIMITED COMPANY. SECTION- 211 OF THE COMPANIES ACT REQUIRES ALL COMPANIES TO PREPARE PROFIT & LOSS A/C AND BALANCE SHEET IN ACCORDANCE AND IN CONFORMITY WITH THE ACCOUNTING STANDARDS PRE SCRIBED BY ICAI. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. UP STATE INDUS TRIAL DEVELOPMENT CORPORATION [225 ITR 703] HELD THAT IT IS A WELL ACCEPTED PROPO SITION THAT FOR THE PURPOSE OF ASCERTAINING PROFIT & GAINS; THE ORDINARY PRINCIPLE S OF COMMERCIAL ACCOUNTING SHOULD BE APPLIED, SO LONG AS THEY DO NOT CONFLICT WITH ANY E XPRESS PROVISION OF HE RELEVANT STATUTES. IN THE PRESENT CASE THE ASSESSEE HAS CON SISTENTLY FOLLOWED A PARTICULAR METHOD OF ACCOUNTING FOR INVENTORY VALUATION WHICH IS IN C ONFORMITY WITH AS-2 PRESCRIBED BY ICAI. THE APPELLANT BEING A COMPANY, THE ACCOUNTING STANDARD WAS MANDATORY AND REQUIRED TO BE FOLLOWED AND THEREFORE, THERE WAS NO INFIRMITY IN THE ASSESSEES INVENTORY VALUATION WHERE IT EXCLUDED INTEREST & OTHER BORROW ING COSTS. I ALSO NOTE THAT IN THE PAST AS WELL AS IN THE SUBSEQUENT ACCOUNTING PERIODS THE ASSESSEE FOLLOWED THE SAME PRINCIPLES OF INVENTORY VALUATION & THEREFORE, IF T HE A.O. WAS DESIROUS OF CHANGING METHOD OF INVENTORY VALUATION THE ONUS WAS ON HIM T O PROVE THAT THE METHOD OF VALUATION FOLLOWED BY THE ASSESSEE WAS LEGALLY OR F ACTUALLY WRONG OR INAPPROPRIATE. HOWEVER, EXCEPT FOR MAKING REFERENCE TO AN ALLEGED GUIDELINE THE. A.O. DID NOT BRING ON RECORD ANY SCIENTIFIC MATERIAL TO SHOW THAT THE INT EREST AND OTHER BORROWING COSTS WERE LIABLE TO BE INCLUDED IN DETERMINING COST OF PRODUC TION OF FINISHED GOODS. EVEN THE SUPREME COURTS DECISION IN THE CASE OF CIT VS BRIT ISH PAINTS LTD. (SUPRA) PROVIDES THAT IN VALUATION OF INVENTORY COST OF RAW-MATERIAL S AND COST OF MANUFACTURE IS TO BE INCLUDED. THE SAID DECISION NOWHERE PRESCRIBED THAT POST-MANUFACTURING COST AND INTEREST & BORROWING COST WHICH ADMITTEDLY DO NOT R ELATE TO MANUFACTURING; ARE TO BE INCLUDED IN VALUATION OF INVENTORY. MOREOVER, THE A CCOUNTING STANDARD-2 ISSUED BY ICAI HAS CLARIFIED THAT INTEREST & BORROWING COST A RE USUALLY NOT INCLUDED IN VALUING THE COST OF INVENTORIES. THE PRINCIPLES OF INVENTORY VA LUATION SET OUT IN AS-2 ARE NOT FOUND TO BE CONTRARY TO ANY EXPRESS PROVISION OF THE I.T. ACT. THE A.O. HAS NOT BROUGHT ON RECORD ANY STATUTORY PROVISION OF THE I.T. ACT WHIC H REQUIRED THE ASSESSEE TO VALUE THE INVENTORY IN THE MANNER OR MODE OTHER THAN ONE PROV IDED IN AS-2. IN THE LIGHT OF THE JUDICIAL DECISIONS; CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE IN THE PAST & SUBSEQUENT YEARS AND IN THE LIGHT OF PROVISIONS O F AS-2, I DO NOT FIND THAT THE ASSESSEES VALUATION OF INVENTORY SUFFERED FROM ANY INFIRMITY. IN MY OPINION THEREFORE, THE A.O. WAS LEGALLY & FACTUALLY INCORRECT IN REJEC TING THE VALUATION OF INVENTORY MADE BY THE ASSESSEE AND THEREBY ERRED IN MAKING ADDITIO N OF RS.3,47,51,575/- TO THE TOTAL INCOME OF THE APPELLANT IN AY. 2005-06. THE SAID AD DITION IS ACCORDINGLY DELETED. IN THE LIGHT OF MY FINDING IN RELATION TO 1 ST QUESTION SET OUT HEREIN ABOVE, THE 2 ND QUESTION DEALING WITH ADJUSTMENT TO BE MADE TO THE VALUATION OF OPENING STOCK HAS BECOME ACADEMIC & THEREFORE, I DO NOT DEEM IT PROPER TO AD JUDICATE SUCH ACADEMIC QUESTION. IN RESULT GROUND NO. 2 IS ALLOWED. 4. AT THE TIME OF HEARING BEFORE US, THE LD. DEPAR TMENTAL REPRESENTATIVE HEAVILY RELIED ON THE ORDER OF THE A.O. HE FURTHER SUBMITT ED THAT THE ASSESSEE SUBSTITUTED ITS EARLIER CLOSING STOCK VALUATION SHEET BY A REVISED ONE SUBSEQUENTLY AND DESPITE OPPORTUNITY GIVEN, THE ASSESSEE FAILED TO SUBSTANTI ATE ITS CLAIM WITH DOCUMENTARY 8 EVIDENCES. THEREFORE, THE A.O. HAS RIGHTLY TAKEN TH E VALUE OF CLOSING STOCK @ RS.1701/- PER QUINTAL AS AGAINST RS.1686/- SHOWN BY THE ASSES SEE IN THE REVISED VALUATION SHEET. HE FURTHER SUBMITTED THAT THE A.O. HAS CORRECTLY DISAP PROVED THE CLAIM OF THE ASSESSEE THAT AS PER GUIDELINE OF STOCK VALUATION, INTEREST COST IS NOT TO BE ADDED AS PART OF THE INVENTORY, BECAUSE AS PER THE GUIDELINES, ALL COSTS WHICH HAVE BEEN INCURRED TO BRING THE INVENTORY IN THE PRESENT STATE HAS TO BE INCLUDED I N THE VALUATION OF CLOSING STOCK. FURTHER AS PER BALANCE SHEET OF THE ASSESSEE, THE M AJOR ITEM OF CURRENT ASSETS WAS INVENTORY ONLY. THEREFORE, ALL THE COSTS INCURRED TO BRING THE INVENTORY AT ITS PRESENT FORM INCLUDING THE FINANCE COST HAS TO BE ADDED WHI LE VALUING THE CLOSING STOCK AND THE A.O. HAS RIGHTLY DONE SO. HE FURTHER SUBMITTED THAT THE ASSESSEE DID NOT TAKE INTO ACCOUNT THE INTEREST EXPENSES IN THE VALUATION OF C LOSING STOCK AT ALL. THEREFORE, THE A.O. HAS RIGHTLY HELD THAT WHEN INTEREST COMPONENT WAS NOT INCLUDED IN THE CLOSING STOCK, THE CLAIM OF THE ASSESSEE FOR INCLUSION OF T HE SAME IN THE OPENING STOCK HAS NO LEG TO STAND. THE LD. C.I.T.(A) WITHOUT PROPERLY APPREC IATING THE POINTS RAISED BY THE A.O. IN SUPPORT OF HIS COMPUTATION OF VALUE OF CLOSING STOC K HAS ERRED IN ALLOWING THE CLAIM OF ASSESSEE AND THE SAME SHOULD BE QUASHED AND THE A.O .S ORDER ON THIS ISSUE BE UPHELD. 5. THE LEARNED A/R APPEARING ON BEHALF OF THE ASSE SSEE, ON THE OTHER HAND, HEAVILY RELIED ON THE ORDER OF THE LD. C.I.T.(A) AND REITER ATED THE SUBMISSIONS MADE BEFORE HIM. HE FURTHER SUBMITTED THAT WHILE FINALIZING THE ASSE SSMENT ORDER FOR THE YEAR UNDER APPEAL, THE A.O. HAS OVERLOOKED THE REVISED STOCK V ALUATION SHEET WITH EXPLANATION THEREOF FILED DURING COURSE OF ASSESSMENT PROCEEDIN GS, ALTHOUGH SPECIFIC REQUEST WAS MADE TO CONSIDER THE REVISED SHEET. MOREOVER, THE A .O. HAS ADDED FINANCE COST INTO THE VALUATION OF STOCK, WHICH WAS AGAINST THE PRESCRIBE D ACCOUNTING STANDARD OF ICAI AND SHOULD NOT BE CONSIDERED AS PART OF STOCK VALUATION . HE FURTHER SUBMITTED THAT THE ASSESSEE HAS BEEN FOLLOWING THE SAME METHOD OF ACCO UNTING WHILE VALUING THE CLOSING STOCK IN EARLIER AS WELL AS SUBSEQUENT YEARS AND TH ERE HAS BEEN NO DEVIATION FROM THE WORKING OF THE VALUATION OF THE CLOSING STOCK DONE EARLIER AS WELL IN SUBSEQUENT YEARS. HE FURTHER SUBMITTED THAT IF THE A.O. WANTED TO DIS TURB THE CLOSING STOCK VALUATION OF ONE YEAR, THEN HE HAS TO VALUE THE OPENING STOCK ON THE SAME PRINCIPLES AS ADOPTED BY 9 HIM FOR VALUING THE CLOSING STOCK, WHICH HE DID NOT DO IN THE PRESENT CASE. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS :- CIT VS. AHMEDABAD NEW COTTON MILL CO. LTD. [4 ITC 245 (PC)] CIT VS. BENGAL JUTE MILLS CO. LTD. [107 CTR 34 (C AL)] RADHE SHUAM AGARWAL & CO. [119 CTR 263 (MP)] K.G. KHOSLA & CO. (P) LTD. [99 ITR 574 (DEL)] BRITISH PAINTS INDIA LTD. VS. CIT [188 ITR 44 (SC )] THE LD. A/R OF THE ASSESSEE, THEREFORE, SUBMITTED T HAT THE LD. C.I.T.(A) HAS PASSED A DETAILED AND JUSTIFIED ORDER ADMITTING THE VALUE OF CLOSING STOCK RETURNED BY THE ASSESSEE, WHICH WAS BACKED BY AUDITED ACCOUNTS AND ACCORDING TO GUIDELINES PRESCRIBED BY ICAI, WHICH HAS CONSISTENTLY BEEN FOLLOWING BY THE ASSESS EE. HE, THEREFORE, REQUESTED FOR UPHOLDING THE ORDER OF THE LD. C.I.T.(A) ON THIS IS SUE. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PART IES AND CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW. THE DISPUTE IS WHE THER THE INVENTORY VALUATION OF CLOSING STOCK REFLECTED IN THE ASSESSEES AUDITED A CCOUNT WAS CORRECT OR WHETHER THE A.O. WAS JUSTIFIED IN REJECTING THE SAME. THE ASSESSEE ALSO RAISED ANOTHER ISSUE TO THE EFFECT THAT IF THE A.O. DISTURBS THE CLOSING STOCK, THEN H E SHOULD HAVE MADE CORRESPONDING ADJUSTMENT TO THE VALUE OF OPENING STOCK SIMULTANEO USLY BY ADOPTING THE SAME METHOD OF INVENTORY VALUATION TAKEN FOR CLOSING STOCK. THE TOTAL ADDITION WORKED OUT BY THE A.O. OF RS.4,06,38,100/- WAS ON TWO ACCOUNTS, VIZ. - (I) TOTAL CLOSING STOCK OF SUGAR INCLUDING BLIS S RS. 58,86,525 (II) INTEREST & FINANCE CHARGES RS.3,47,51, 575 RS.4,06,38,100 IT IS NOT IN DISPUTE THAT THE ASSESSEE FOLLOWS CONS ISTENT OF METHOD OF ACCOUNTING AND ITS ACCOUNTS ARE DULY AUDITED. ON PERUSAL OF SCHEDULE- 14 OF AUDITED BALANCE SHEET, IT IS FOUND THAT THE VALUE OF WORK-IN-PROGRESS OF RS.95,8 6,747.69 PERTAINED TO OPENING STOCK OF PREVIOUS YEAR RELEVANT TO A.Y. 2004-05. THE LD. C.I.T.(A), THEREFORE, HAS RIGHTLY HELD THAT THE SAID OPENING WORK-IN-PROGRESS WAS HELD BY THE ASSESSEE ON 1/4/2003 AND NOT ON 1/4/2004, WHICH WAS THE FIRST DAY OF PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION. HE FURTHER FOUND THAT ALL OTHER FACT S AND FIGURES INCLUDED IN THE VALUATION SHEET FILED EARLIER AND IN THE SUBSEQUENT REVISED V ALUATION SHEET WERE IDENTICAL DULY 10 EXTRACTED FROM THE AUDITED BALANCE SHEET. IN OUR O PINION, THEREFORE, THE A.O. WAS NOT JUSTIFIED IN IGNORING THE REVISED INVENTORY VALUATI ON SHEET FILED BY THE ASSESSEE ALLEGING NON-FILING OF ANY EVIDENCE, MORE SO AS STATED ABOVE , WHEN THE FIGURES WERE TAKEN FROM THE AUDITED ACCOUNTS OF THE ASSESSEE AND IN THE FIR ST INVENTORY VALUATION SHEET THE ASSESSEE TOOK COST OF WORK-IN-PROGRESS AS ON 1.4.20 03, WHICH WAS INCORRECT. FURTHER, THE A.O. COULD NOT SPECIFICALLY POINT OUT ANY IRREGULAR ITY IN THE COST OF PRODUCTION OF SUGAR SHOWN BY THE ASSESSEE IN THE YEAR UNDER APPEAL. TH EREFORE, IN OUR CONSIDERED OPINION, WE FIND NO INFIRMITY IN THE ORDER OF THE LD. C.I.T. (A) IN ACCEPTING THE COST OF PRODUCTION OF SUGAR PER QUINTAL AS SHOWN BY THE ASSESSEE AND T HEREBY REJECTING THE FIGURE TAKEN BY THE A.O., WHICH WAS RESULTED IN ADDITION OF RS.58,8 6,525/-. ADDITION DELETED BY THE LD. C.I.T.(A) IS, THEREFORE, UPHELD. 6.1. NOW COMING TO THE OTHER ADDITION OF RS.3,47,5 1,575/- ON ACCOUNT OF INCLUSION OF INTEREST & FINANCE CHARGES IN THE VALUE OF INVENTOR Y, THE A.O. WAS OF THE OPINION THAT INTEREST & FINANCE CHARGES SHOULD BE INCLUDED. IT W AS THE CLAIM OF THE ASSESSEE THAT AS PER CONSISTENT METHOD OF ACCOUNTING AND INVENTORY V ALUATION FOLLOWED BY IT, INTEREST & FINANCE CHARGES WERE NEVER INCLUDED AS PART OF COST OF MANUFACTURE. WE FIND THAT THE DEPARTMENT HAS NOT DISPUTED THIS METHOD WHILE FRAMI NG ASSESSMENTS FOR EARLIER ASSESSMENT YEARS. IT IS A SETTLED LAW THAT CLOSING STOCK OF ONE YEAR BECOMES THE OPENING STOCK OF NEXT YEAR. MOREOVER, THE METHOD ADOPTED BY THE ASSESSEE FOR VALUING ITS STOCK AT COST WAS AS PER AS-2 PRESCRIBED BY ICAI AND HAS ALS O BEEN CERTIFIED BY THE AUDITOR TO BE CORRECT. THEREFORE, IF CLOSING STOCK IS CONSIDERED, THE OPEN ING STOCK MUST ALSO BE CONSIDERED. IN OUR OPINION, THEREFORE, THE LD. C.I.T.(A) HAS RI GHTLY HELD THAT BY MAKING ADDITION OF RS.3,47,51,575/- ONLY IN THE ASSESSMENT YEAR UNDER APPEAL, I.E. A.Y. 2005- 06, THE A.O. ARTIFICIALLY HAD INCREASED THE BUSINES S INCOME OF THE ASSESSEE TREATING THE INVENTORY VALUATION AS A SOURCE OF INCOME, WHICH WA S INCORRECT. THE LD. C.I.T.(A) HAS ELABORATED SEVERAL CLAUSES OF AS-2 PRESCRIBED BY IC AI AND HELD THAT THE A.O. ERRED IN MAKING ADDITION OF RS.3,47,51,575/- TO THE TOTAL IN COME OF THE ASSESSEE. FURTHER, WE ARE OF THE OPINION THAT INTEREST & FINANCE CHARGES WILL NOT FORM PART OF THE MANUFACTURING ACTIVITY AND THUS THERE IS NO NEED TO INCLUDE THE S AME IN THE CLOSING STOCK. THEREFORE, WE ARE IN AGREEMENT WITH THE CONCLUSION ARRIVED AT BY THE LD. C.I.T.(A) IN THIS REGARD, WHICH 11 IS UPHELD. THEREFORE, THE TOTAL ADDITION MADE BY T HE A.O. OF RS.4,06,38,100/- MADE ON ACCOUNT OF UNDER-VALUATION OF CLOSING STOCK STANDS DELETED. 7. GROUND NO.2 OF THE REVENUES APPEAL READS AS UN DER :- 2. UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.17 LAKH THOUGH THERE HAS BEEN A CLEA R VIOLATION OF S.40A(3) OF THE I.T. ACT. 8. THE A.O. OBSERVED THAT THE ASSESSEE HAD MADE PA YMENTS OF RS.20,000/- OR MORE IN CASH TO VARIOUS TRANSPORTERS, WHICH WERE TOTALLI NG TO RS.20,77,086/-. HE, THEREFORE, HELD THAT PROVISIONS OF SEC. 40A(3) ARE ATTRACTED F OR SUCH CASH PAYMENTS. HE, ACCORDINGLY, DISALLOWED 20% OF SUCH CASH PAYMENTS W HICH CAME TO RS.4,15,417/-. 9. THE ASSESSEE CONTESTED THE MATTER BEFORE THE L D. C.I.T.(A) AND IN SUPPORT OF ITS CLAIM RELIED ON SEVERAL CASE LAWS. THE ASSESSEE AL SO CONTENDED THAT THE CASH PAYMENTS EXCEEDING RS.20,000/- FALLS UNDER THE EXCEPTION PRO VIDED IN RULE 6DD(G) OF I.T.RULES, AS IT STOOD AT THE RELEVANT TIME. THE LD. C.I.T.(A) AFTER PERUSAL OF THE RECORD FOUND THAT THE IMPUGNED PAYMENTS WERE MADE TO THE TRANSPORTERS AND NOT TO THE PRODUCERS OF ANY PRODUCT PRODUCED WITHOUT THE AID OF POWER. THEREFO RE, THE SAID CLAUSE (G) OF RULE 6DD OF I.T. RULES DOES NOT APPLY TO THE NATURE OF CASH PAYMENTS MADE BY THE ASSESSEE. HE FURTHER FOUND THAT OUT OF THE TOTAL CASH EXPENSES O F RS.20,77,086/-, EXPENSES TO THE TUNE OF RS.3,77,086/- WERE TOWARDS ADMINISTRATIVE CHARGE S ETC. AND THESE EXPENSES WERE NOT PAYMENTS MADE TO ANY TRANSPORTER, AS MENTIONED BY T HE A.O. IN HIS ASSESSMENT ORDER. IN REGARD TO THE BALANCE CASH PAYMENTS OF RS.17 LAKHS [RS.20,77,086 RS.3,77,086], THE LD. C.I.T.(A) FOUND THAT THE SAME WERE PAID BY WAY OF CASH PAYMENT OF RS.20,000/- EACH. REFERRING TO SEC. 40A(3) AT THE RELEVANT PER IOD, HE HELD THAT CASH PAYMENTS UPTO RS.20,000/- DO NOT FALL WITHIN THE PURVIEW OF THIS SECTION. FURTHER, AS HELD BY THE HONBLE ORISSA HIGH COURT IN THE CASE OF CIT VS. AL OO SUPPLY CO. [121 ITR 680], THE STATUTORY LIMIT OF RS.20,000/- APPLIES TO PAYMENT M ADE TO A PARTY AT ONE TIME AND NOT TO THE AGGREGATE OF THE PAYMENTS MADE TO PARTY IN THE COURSE OF THE DAY. HE, THEREFORE, HELD THAT THE CASH PAYMENTS TOTALLING TO RS.17 LAKH S ARE NOT DISALLOWABLE U/S.40A(3) OF THE ACT. THE DEPARTMENT IS IN APPEAL AGAINST SUCH FINDING OF THE LD. C.I.T.(A). 10. WE HAVE HEARD THE PARTIES AND PERUSED THE RECO RD. IT IS NOT DISPUTED BY THE A.O. THAT EACH BILL OF THE TRANSPORTER WAS NOT MORE THAN RS.20,000/-. HE, THEREFORE, PRESUMED THAT SUCH TYPE OF CASH PAYMENT TO THE TRANSPORTERS WAS MADE WITH THE SOLE PURPOSE OF 12 AVOIDING THE APPLICATION OF SEC.40A(3) OF THE ACT. SEC. 40A(3), AS IT STOOD AT THE RELEVANT ASSESSMENT YEAR, READS AS UNDER :- (3) WHERE THE ASSESSEE INCURS ANY EXPENDITURE I N RESPECT OF WHICH PAYMENT IS MADE, AFTER SUCH DATE (NOT BEING LATER THAN THE 31 ST DAY OF MARCH, 1969) AS MAY BE SPECIFIED IN THIS BEHALF BY THE CENTRAL GOVERNMENT BY NOTIFICATION IN THE OFFICIAL GAZETTE IN A SUM EXCEEDING TWENTY THOUSAND RUPEES O THERWISE THAN BY A CROSSED CHEQUE DRAWN ON A BANK OR BY A CROSSED BANK DRAFT, TWENTY PER CENT OF SUCH EXPENDITURE SHALL NOT BE ALLOWED AS A DEDUCTION. ON READING OF THE AFORESAID SECTION WE ARE IN AGREE MENT WITH THE INFERENCE DRAWN BY THE LD. C.I.T.(A) WHO HAS STATED THAT THE STATUTORY LI MIT OF RS.20,000/- APPLIES TO PAYMENT MADE TO A PARTY AT ONE TIME AND NOT TO THE AGGREGAT E OF THE PAYMENTS MADE TO A PARTY IN THE COURSE OF THE DAY AS RECORDED IN THE CASH BOOK . IN THAT VIEW OF THE MATTER, WE ARE OF THE CONSIDERED OPINION THAT THE LD. C.I.T.(A) HAS R IGHTLY HELD THAT THE SUM OF RS.17 LAKHS IS NOT DISALLOWABLE U/S. 40A(3) OF THE ACT, MORE SO WHEN THE A.O. HIMSELF ADMITTED THAT EACH PAYMENT DID NOT EXCEED RS.20,000/- AT ONE TIME . THIS GROUND OF THE REVENUE IS, THEREFORE, DISMISSED. 11. THE LAST GROUND IN THE REVENUES APPEAL READS AS UNDER : 3. ON THE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE, LD. CIT(A) ERRED IN DELETING THE ADDITION BEING PRIOR PERIOD EXPENDITURE OF RS.10,90 ,87,000/- ON THE GROUND OF UNENFORCEABLE LIABILITY WHICH WAS SNOT THE EXPENDIT URE OF THE RELEVANT ASSESSMENT YEAR. 12. THE FACTS OF THE CASE, IN BRIEF ARE THAT THE U TTAR PRADESH GOVT. HAD ISSUED AN ORDER TO ENHANCE THE SUGAR CANE PROCUREMENT PRICE (STATUT ORY MINIMUM PRICE) TO BE PAID BY THE SUGAR MILLS SITUATED IN THE STATE. THE SAID ORD ER WAS CHALLENGED IN A WRIT BY THE SUGAR MILLS OF THE STATE BEFORE THE HONBLE ALLAHAB AD HIGH COURT. THE HIGH COURT STAYED THE OPERATION OF THE SAID ORDER OF THE STATE GOVERNMENT. SUBSEQUENTLY, THEIR LORDSHIPS OF HONBLE SUPREME COURT IN CERTAIN OTHER MATTERS ALREADY PENDING BEFORE THEM, VIDE THEIR ORDER DATED 05.05.2004, UPHELD THE POWER OF THE STATE GOVERNMENT TO ADMINISTER AND FIX THE STATUTORY MINIMUM PRICE FOR SUGAR CANE PROCUREMENT TO BE PAID BY THE SUGAR MILLS. IN ACCORDANCE WITH THE SAID DEC ISIONS OF THE HONBLE SUPREME COURT, THE HONBLE ALLAHABAD HIGH COURT VACATED THE STAY G RANTED IN THAT CONTEXT. CONSEQUENTLY, THE STATE GOVERNMENT, VIDE THEIR FRES H LETTERS DATED 12.10.2004 AND 15.10.2004, CITING THE DECISION OF THE HONBLE SUPR EME COURT, DIRECTED THE SUGAR MILLS 13 TO MAKE PAYMENT OF SUGAR CANE DUES AT THE ENHANCED RATE. IN ACCORDANCE WITH THE SAID DIRECTIONS, THE ASSESSEE MADE PAYMENT OF RS.10,90,8 7,000/- TOWARDS SUGAR CANE DUES, FOR THE SUGAR CANE PROCURED DURING THE CRUSHING SEA SONS 2002-03 AND 2003-04 RELEVANT TO A.Y.S 2003-04 AND 2004-05. THE ASSESSEE HAS CLAI MED SUCH PAYMENT AS EXPENDITURE DURING THE YEAR OF PAYMENT, I.E., A.Y. 2005-06 STAT ING THE REASON THAT THE LIABILITY HAD CRYSTALLIZED ONLY DURING THIS YEAR. 13. THE A.O. OBSERVED THAT THE UNIT OF THE ASSESSE E-COMPANY, WHICH STARTED OPERATIONS FROM F.Y. 1999-2000, IS ENTITLED FOR DED UCTION U/S. 80-IB OF THE ACT AND CLAIMED 100% DEDUCTION ACCORDINGLY TILL A.Y. 2004-0 5. THE DEDUCTION CLAIMED BY THE ASSESSEE FOR A.Y. 2004-05 AT RS.8.91 CRORES WAS ALL OWED BY THE DEPARTMENT. THE ASSESSEE WANTED TO DEFER THIS ENHANCEMENT IN THE PA YMENT OF SUGAR CANE DUES IN THE ASSESSMENT YEAR UNDER APPEAL, I.E. A.Y. 2005-06, WH EREIN THE ASSESSEE-COMPANY IS ENTITLED FOR A DEDUCTION @ 30% ONLY INSTEAD OF 100% TILL LAST YEAR. DURING THE YEAR UNDER APPEAL, THE ASSESSEE-COMPANY DECLARED INCOME OF RS.10.97 CRORES AND AFTER CLAIMING A DEDUCTION OF RS.3.29 CRORES U/S. 80-IB, IT OFFERED INCOME OF RS.7.68 CRORES. ACCORDING TO THE A.O., THIS CLEARLY INDICATES THE R EASONS WHY THE ENHANCED SUGAR CANE DUES FOR A.YS 2003-04 & 2004-05 WERE NOT CLAIMED AS DEDUCTION IN THOSE YEARS. ACCORDING TO HIM FURTHER, HAD THE ASSESSEE CHARGED THESE EXPENSES IN THOSE YEARS, THE PROFIT WOULD HAVE REDUCED BY THIS AMOUNT, THEREBY C ONSEQUENTLY REDUCING DEDUCTION U/S.80-IB. THEREFORE, THE INTENTION BEHIND THIS NON -CLAIMING OF DEDUCTION IN THE EARLIER TWO YEARS WAS TO CLAIM HIGHER DEDUCTION FOR THOSE A SSESSMENT YEARS. THIS FACT HAS NOT BEEN MENTIONED BY THE ASSESSEE IN THE TAX AUDIT REP ORT. HE FURTHER HELD THAT AS THESE EXPENSES PERTAINED TO EARLIER YEARS AND EVERY ASSES SMENT YEAR IS A SEPARATE ASSESSMENT YEAR, THE EXPENSES OF PRIOR PERIOD CANNOT BE ALLOWE D AS A DEDUCTION IN THE CURRENT YEAR. HE, THEREFORE, HELD THAT AMOUNT OF RS.767.95 LAKHS WOULD BE ALLOWABLE IN A.Y. 2004-05 AND THUS CHARGEABLE TO THE P/L ACCOUNT ACCORDINGLY. THESE EXPENSES ARE NOT ALLOWABLE IN A.Y. 2005-06 AS THE SAME ARE NOT RELATED TO THIS YEAR. IN THIS WAY, THE A.O. ADDED TOTAL SUM OF RS.1097.87 LAKHS TO THE TOTAL INCOME O F THE ASSESSEE FOR THE YEAR UNDER APPEAL. 14 14. BEFORE THE LD. C.I.T.(A), THE ASSESSEE SUBMITT ED THAT THE A.O. HAS BASED HIS OBSERVATION ON SURMISES, IMAGINATIONS AND WITHOUT T AKING INTO CONSIDERATION THE FACT THAT THE ENHANCED PAYMENT ORDER OF THE HONBLE HIGH COURT WAS DATED 5/10/2004 AND THUS THIS ENHANCED AMOUNT PAYABLE TO THE U.P. GOVT. AS PER THE ORDER OF THE HIGH COURT, THOUGH RELATING TO F.YS 2002-03 & 2003-04, COULD NO T HAVE BEEN ACCOUNTED FOR IN THE SAID TWO FINANCIAL YEARS. IT WAS FURTHER SUBMITTED THAT UNLESS THE LIABILITY IS ASCERTAINED AND CRYSTALLIZED, THAT CANNOT BE SAID TO HAVE ACCRU ED AND THERE EXISTED ANY ENFORCEABLE LIABILITY. SINCE THE AMOUNT IS A CRYSTALLIZED LIAB ILITY, IT IS ALLOWABLE IN A.Y. 2005-06 WHEN IT WAS ACTUALLY PAID. IN SUPPORT OF THE CONTEN TION, THE ASSESSEE RELIED ON SEVERAL CASE LAWS WHICH ARE FOUND MENTIONED ON PAGE-27 OF T HE C.I.T.S ORDER. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND PER USING THE ASSESSMENT ORDER, THE LD. C.I.T.(A) DIRECTED THE A.O. TO DELETE THE ADDITION OF RS.10,90,87,000/- BY OBSERVING AS UNDER :- 10.3. I HAVE CAREFULLY PERUSED THE ASSESSMENT ORDER AND T HE SUBMISSIONS OF THE A/R. THE A.O. DISALLOWED THE SUGAR CANE DUES HOLDING THA T THE SAME WAS PRIOR PERIOD EXPENSES, RELATING TO A.YS 2003-04 AND 2004-05, THE REFORE, NOT ALLOWABLE IN THE YEAR UNDER CONSIDERATION. 10.4. IT APPEARS WHAT INFLUENCED THE A.O. TO T AKE THIS VIEW IS THE FACT THAT ASSESSEES ONLY MANUFACTURING UNIT IS ELIGIBLE FOR DEDUCTION U /S. 80IB OF THE ACT. TILL A.Y. 2004- 05 ITS 100% PROFITS WERE ELIGIBLE FOR DEDUCTION UND ER THAT SECTION, WHEREAS, FOR THE YEAR UNDER CONSIDERATION ONLY 30% OF ITS PROFITS WERE EL IGIBLE. THAT WAS, IN A.OS VIEW, REASON FOR THE ASSESSEE TO DEFER ITS LIABILITY ON A CCOUNT OF SUGAR CANE DUES FROM A.Y. 2003-04 AND 1004-05 TO THE ASSESSMENT YEAR UNDER CO NSIDERATION. AS PER ASSESSEES SUBMISSIONS, THOUGH THE EXPENDITURE RELATES TO A.Y. 2003-04 AND 2004-05 BUT THE SAME CRYSTALLIZED DURING THE PERIOD RELEVANT TO A.Y. 200 5-06. ... 10.5. IT IS AN ESTABLISHED POSITION OF LAW BY NOW , THAT IF A LIABILITY IS UNENFORCEABLE FOR A PARTICULAR YEAR AND THE SAME CRYSTALLIZES DURING A SUBSEQUENT YEAR, THE SAME WOULD BE DEDUCTIBLE IN THE YEAR IN WHICH IT CRYSTALLIZES AND BECOME ENFORCEABLE. 10.6. IN THE PRESENT CASE, THE ASSESSEE HAD CHAL LENGED THE VERY FIXATION OF STATUTORY MINIMUM PRICE FOR SUGAR CANE PROCUREMENT BY WAY OF WRIT BEFORE HONBLE. HIGH COURT AND THE SAID DECISION OF THE STATE GOVERNMENT WAS S TAYED BY THE HONBLE COURT. THE PAYMENT OF SUGAR PROCUREMENT PRICE IS NOT A STATUTO RY LIABILITY RATHER IT IS A CONTRACTUAL LIABILITY, THEREFORE, THE SAME REMAINED UNASCERTAIN ED AND INCHOATE WHEN THE ASSESSEE DISPUTED THE SAME BEFORE THE HONBLE COURT. IT WAS ONLY WHEN THE HONBLE SUPREME COURT DECIDED THE ISSUE THAT THE MATTER REACHED FIN ALITY AND LIABILITY BECAME ENFORCEABLE. 15 10.7. THE ACTION OF THE STATE ADMINISTRATION IN I SSUING FRESH ORDERS FOR PAYMENT OF THE ENHANCED SUGAR CANE PROCUREMENT PRICE AFTER THE DEC ISION OF THE HONBLE APEX COURT THAT TOO WITHOUT ANY DIRECTION AS TO LEVY OF ANY IN TEREST/PENALTY FOR THE NON-PAYMENT DURING THE INTERVENING PERIOD, SHOWS THAT THE LIABI LITY TO PAY THE ENHANCED SUGAR CANE DUES CRYSTALLIZED AND BECAME REAL AND ENFORCEABLE D URING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. THEREFORE, THE SAME NEEDS TO BE ALLOWED AS EXPENDITURE OF THE PERIOD UNDER CONSIDERATION. AN A SSESSEES OTHERWISE LEGALLY ALLOWABLE CLAIM CANNOT BE DENIED ONLY BECAUSE IT WA S RESULTING IN A COLLATERAL BENEFIT TO THE ASSESSEE. 10.8. IN THE LIGHT OF THE ABOVE DISCUSSION THE A.O. IS DIRECTED TO DELETE THE ADDITION OF RS.10,90,87,000/-. 15. AT THE TIME OF HEARING BEFORE US, THE LD. DEPA RTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF THE A.O. HE FURTHER SUBMITTED THAT TH E ASSESSEE MAINTAINS BOOKS OF ACCOUNT ON MERCANTILE SYSTEM OF ACCOUNTING. THEREFORE, THE ASSESSEE IS ENTITLED TO DEDUCT FROM THE PROFITS AND GAINS ITS BUSINESS LIABILITY WHICH AROSE DURING THE RELEVANT PREVIOUS YEAR AND THAT LIABILITY DID NOT CEASE TO BE A LIABILITY BECAUSE THE ASSESSEE HAD TAKEN PROCEEDINGS BEFORE THE COURT FOR GETTING IT REDUCED . HE RELIED ON THE FOLLOWING DECISIONS IN SUPPORT OF THE CONTENTION THAT THE A.O . HAS RIGHTLY DISALLOWED THE EXPENSES RELATED TO EARLIER YEARS IN THE YEAR UNDER CONSIDER ATION :- 289 ITR 167 (KER) - CIT VS. SOUTHERN CABLES & E NGINEERING WORKS. 312 ITR 254 (SC) - CIT VS. WOODWARD GOVERNOR I NDIA (P) LTD. 216 ITR 602 (AP) - CIT VS. K.C.P. LTD. 201 ITR 707 (SC) - U.P.STATE AGRO INDUSTRIAL CORPN. VS. ADDL.CIT 221 ITR 797 (P&H)- CIT VS. MANGAR RAM HAZARILAL 244 ITR 764 (SC) - CIT VS. UNITED PROVINCE ELE CTRIC SUPPLY CO. 16. THE LD. A/R OF THE ASSESSEE, ON THE OTHER HAN D, RELIED ON THE ORDER OF THE LD. C.I.T.(A) AND REITERATED THE SUBMISSIONS MADE BEFOR E HIM. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS IN SUPPORT OF THE CONCLUSION AR RIVED AT BY THE LD. C.I.T.(A) :- 239 ITR 393 (BOM) - CIT VS. SHARDA SUGAR INDS . LTD. 53 ITR 134 (SC) - CIT VS. SWADESHI COTTO N & FLOUR MILLS PVT. LTD. 213 ITR 523 (GUJ) - SAURASHTRA CEMENT & CHE MICAL INDS. LTD. VS. CIT 183 ITR 113 (KAR) - CIT VS. MYSORE SUGAR CO . LTD. 17. WE HAVE HEARD THE PARTIES, PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND CAREFULLY GONE THROUGH THE JUDICIAL PRONOUNCEMENTS CITED BY EITHER SIDE. THE ASSESSEES PROFITS & GAINS HAVE BEEN COMPUTED ACCORDING TO THE MERCANTILE SYSTEM OF ACCOUNTING. THE ISSUE BEFORE US IS IN WHAT YEAR DID THE LIABI LITY OF PAYMENT OF SUGAR CANE 16 PROCUREMENT PRICE ARISE ACCORDING TO THE MERCANTILE SYSTEM OF ACCOUNTING, WHETHER IT WAS IN A.YS. 2003-04 & 2004-05 OR IN A.Y. 2005-06 ? THE MERCANTILE SYSTEM OF ACCOUNTING WAS EXPLAINED BY THE HONBLE SUPREME COU RT IN THE CASE OF KESHAV MILLS LTD. VS. CIT [23 ITR 230] AS UNDER :- THAT SYSTEM BRINGS INTO CREDIT WHAT IS DUE, IMMEDIA TELY IT BECOMES LEGALLY DUE AND BEFORE IT IS ACTUALLY RECEIVED, AND IT BRINGS I NTO DEBIT EXPENDITURE THE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFOR E IT IS ACTUALLY DISBURSED. IN THIS CONTEXT WE MAY REFER TO THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF SWADESHI COTTON & FLOUR MILLS PVT. LTD. (SUPRA), WH EREIN THE FACTS WERE THAT THE ASSESSEE FOR A.Y. 1950-51 (ACCOUNTING YEAR CALENDAR YEAR 1949) CLAIMED THAT U/S. 10(2)(X) OF THE ACT IT WAS ENTITLED TO AN ALLOWANCE IN RESPECT OF RS.1,08,325/- WHICH IT HAD PAID AS BONUS FOR THE YEAR 1947 IN THE CALENDAR YEAR 1949, AS A RESULT OF THE AWARD OF THE INDUSTRIAL TRIBUNAL DATED 13.1.1949. THE CLAIM OF THE ASSESSEE WAS NOT ACCEPTED BY THE DEPARTMENT. THE TRIBUNAL HELD THAT IT WAS A LI ABILITY RELATING TO AN EARLIER YEAR AND NOT THE YEAR 1949 AND HENCE DISALLOWED THE ASSESSEE S CLAIM. REFERENCE WAS MADE TO HONBLE MADHYA PRADESH HIGH COURT ON THE FOLLOWING QUESTION :- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE ASSESSEE IS ENTITLED TO CLAIM A DEDUCTION OF BONUS OF RS.1,08,3 25 RELATING TO THE CALENDAR YEAR 1947 IN THE ASST. YR. 1950-51 ? THE HONBLE HIGH COURT ANSWERED THE QUESTION IN THE AFFIRMATIVE. THE MATTER CAME BEFORE THE HONBLE SUPREME COURT AND THEIR LORDSHIP S HELD AS UNDER :- IN OUR OPINION, IT IS ONLY WHEN THE CLAIM TO PROFI T BONUS, IF MADE, IS SETTLED AMICABLY OR BY INDUSTRIAL ADJUDICATION THAT A LIABI LITY IS INCURRED BY THE EMPLOYER, WHO FOLLOWS THE MERCANTILE SYSTEM OF ACCO UNTING, WITHIN S. 10(2)(X), R/W S. 10(5) OF THE ACT. ON THE FACTS OF THIS CASE , IT IS CLEAR THAT IT WAS ONLY IN 1949 THAT THE CLAIM TO PROFIT BONUS WAS SETTLED BY AN AWARD OF THE INDUSTRIAL TRIBUNAL. THEREFORE, THE ONLY YEAR THE LIABILITY C AN BE PROPERLY ATTRIBUTED TO IS 1949, AND HENCE WE ARE OF THE OPINION THAT THE HIGH COURT WAS RIGHT IN ANSWERING THE QUESTION IN FAVOUR OF THE ASSESSEE. 17.1. FURTHER IN THE CASE OF SAURASHTRA CEMENT & C HEMICAL INDS. LTD. VS. CIT (SUPRA), THE HONBLE GUJARAT HIGH COURT HELD AS UNDER :- MERELY BECAUSE AN EXPENSE RELATES TO A TRANSACTION OF AN EARLIER YEAR IT DOES NOT BECOME A LIABILITY PAYABLE IN THE EARLIER YEAR UNLE SS IT CAN BE SAID THAT THE LIABILITY WAS DETERMINED AND CRYSTALLIZED IN THE YE AR IN QUESTION ON THE BASIS OF 17 MAINTAINING ACCOUNTS ON THE MERCANTILE BASIS. IN E ACH CASE WHERE THE ACCOUNTS ARE MAINTAINED ON MERCANTILE BASIS IT HAS TO BE FOU ND IN RESPECT OF ANY CLAIM, WHETHER SUCH LIABILITY WAS CRYSTALLIZED AND QUANTIF IED DURING THE PREVIOUS YEAR SO AS TO BE REQUIRED TO BE ADJUSTED IN THE BOOKS OF AC COUNTS OF THAT PREVIOUS YEAR. IF ANY LIABILITY, THOUGH RELATING TO THE EARLIER YEAR, DEPENDS UPON MAKING A DEMAND AND ITS ACCEPTANCE BY THE ASSESSEE AND SUCH LIABILI TY HAS BEEN ACTUALLY CLAIMED AND PAID IN THE LATER PREVIOUS YEARS CANNOT BE DISA LLOWED AS DEDUCTION MERELY ON THE BASIS THE ACCOUNTS ARE MAINTAINED ON MERCANTILE BASIS AND THAT IT RELATED TO A TRANSACTION OF THE PREVIOUS YEAR. 18. THE ABOVE DECISIONS OF HONBLE SUPREME COURT AND GUJARAT HIGH COURT SQUARELY APPLY TO THE CASE OF THE ASSESSEE. THE LD. C.I.T.(A) HAS DELETED THE ADDITION OF RS.10,90,87,000/- ON ACCOUNT OF PRIOR PERIOD EXPENS ES. AS RIGHTLY HELD BY THE LD. C.I.T.(A), IT IS ESTABLISHED POSITION OF LAW THAT I F A LIABILITY IS UNENFORCEABLE FOR A PARTICULAR YEAR AND THE SAME CRYSTALLIZES DURING A SUBSEQUENT YEAR, THE SAME WOULD BE DEDUCTIBLE IN THE YEAR IN WHICH IT CRYSTALLIZES AND BECOMES ENFORCEABLE. IN THIS CASE, AS STATED ABOVE, THE ASSESSEE CHALLENGED THE VERY FIXA TION OF STATUTORY MINIMUM PRICE FOR SUGAR CANE PROCUREMENT BY THE STATE GOVT. BEFORE TH E HIGH COURT, WHICH WAS STAYED BY THE HIGH COURT. THEREFORE, DUE TO SUCH STAY ON OPER ATION OF STATE GOVT. ORDER, THE LIABILITY OF THE ASSESSEE REMAINED UNASCERTAINED AN D INCHOATE AND IT WAS ONLY AFTER THE ORDER OF HONBLE SUPREME COURT UPHOLDING THE POWER OF STATE GOVT. TO ADMINISTER AND FIX THE STATUTORY MINIMUM PRICE FOR SUGAR CANE PROC UREMENT THAT THE MATTER REACHED ITS FINALITY AND THE LIABILITY OF THE ASSESSEE BECAME E NFORCEABLE. THE ACTUAL LIABILITY WAS NOT ASCERTAINED AND KNOWN TO THE ASSESSEE WHEN THE HIGH COURT STAYED THE OPERATION OF THE GOVT. ORDER INCREASING THE SUGAR CANE PROCUREMENT P RICE. THE STATE GOVT. ACTING ON SUCH FINAL ORDER OF HONBLE COURT ISSUED FRESH LETT ERS DATED 12/10/2004 & 15/10/2004 DIRECTING THE ASSESSEE TO MAKE PAYMENT OF SUGAR CAN E DUES AT THE ENHANCED RATE AND THAT TOO WITHOUT LEVYING ANY INTEREST/PENALTY FOR SUCH N ON-PAYMENT DURING THE INTERVENING PERIOD. IN OUR CONSIDERED OPINION, THEREFORE, THE ASSESSEES LIABILITY TO PAY SUGAR CANE DUES AT ENHANCED RATES CRYSTALLIZED AND BECAME ENFO RCEABLE DURING THE ASSESSMENT YEAR UNDER CONSIDERATION WHEN THE STATE GOVT. ISSUED FRE SH LETTERS DIRECTING THE ASSESSEE TO MAKE PAYMENTS IN TERMS OF ORDER OF HONBLE COURT AN D THE SAME IS ALLOWABLE AS EXPENDITURE RELATING TO A.Y. 2005-06. 18 19. THE CASE LAWS RELIED UPON BY THE LD. DEPARTMEN TAL REPRESENTATIVE ARE DISTINGUISHABLE ON FACTS AND HENCE THE SAME WILL NO T HELP THE DEPARTMENT. IN THE CASE OF CIT VS. SOUTHERN CABLES & ENGINEERING WORKS (SUPRA) IT WAS HELD THAT THE LIABILITY DID NOT CEASE TO BE A LIABILITY BECAUSE THE ASSESSEE HA D TAKEN PROCEEDINGS BEFORE THE HIGHER AUTHORITIES FOR GETTING IT REDUCED OR WIPED OFF. B UT IN THE CASE OF THE ASSESSEE, THE HONBLE ALLAHABAD HIGH COURT STAYED THE OPERATION O F RAISING HIGHER PROCUREMENT PRICE OF SUGAR CANE BY THE STATE GOVT. AND ONLY AFTER THE ORDER OF HONBLE APEX COURT, THE HIGH COURT VACATED ITS EARLIER STAY ORDER AND ACTIN G ON SUCH ORDER, THE GOVT. ISSUED FRESH LETTERS ASKING THE ASSESSEE TO PAY THE PROCUREMENT PRICE AND THE ASSESSEE HONOURED THE SAID REQUIREMENT OF STATE GOVT. 19.1. IN THE CASE OF CIT VS. WOODWARD GOVERNOR IND IA (P) LTD. (SUPRA), IT WAS HELD THAT THE LOSS SUFFERED BY THE ASSESSEE IN RESPECT O F A REVENUE LIABILITY ON ACCOUNT OF EXCHANGE DIFFERENCE AS ON THE DATE OF THE BALANCE S HEET IS AN ITEM OF EXPENDITURE ALLOWABLE U/S. 37(1) IN THE YEAR OF ACCRUAL. THERE FORE, THE DECISION GIVEN IN THIS CASE IS ON A DIFFERENT CONTEXT THAN THAT OF THE CASE OF THE ASSESSEE. 19.2. IN THE CASE OF CIT VS. K.C.P. LTD. (SUPRA), RELIED ON BY THE LD. D.R., THE ASSESSEE COLLECTED EXCESS PRICE OF SUGAR OVER AND ABOVE THAT FIXED BY THE GOVT. LITIGATION AS REGARDS PRICE WAS PENDING BEFORE THE SUPREME COURT. THE COURT ALLOWED THE EXCESS PRICE TO BE RECOVERABLE SUBJECT TO FURNISHING OF BA NK GUARANTEE AND HELD THAT SUCH EXCESS PRICE IS CHARGEABLE AS INCOME IN THE RELEVANT YEAR. HERE ALSO THE ASSESSEE HAD ALREADY COLLECTED EXCESS PRICE OVER THE PRICE FIXED BY THE GOVT. THERE WAS NO STAY ON COLLECTION OF EXCESS PRICE OF SUGAR ALTHOUGH LITIGATION WAS PE NDING AND THERE WAS NO FRESH ORDER FROM THE GOVT. FOR RECOVERY OF THE EXCESS PRICE COL LECTED BY THE ASSESSEE. THEREFORE, THE FACTS BEFORE THE HONBLE ANDHRA PRADESH HIGH COURT WERE DIFFERENT THAN THOSE OF THE PRESENT ASSESSEE. THE OTHER CASES RELIED UPON BY T HE LD. D.R. ARE ALSO DISTINGUISHABLE ON FACTS AND HENCE THE RATIO OF THE SAID DECISIONS ARE NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE CASE BEFORE US. 20. CONSIDERING THE TOTALITY OF THE FACTS AND CIRC UMSTANCES OF THE CASE AND RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS IN T HE CASES OF SWADESHI COTTON & FLOUR 19 MILLS PVT. LTD. (SUPRA) AND SAURASHTRA CEMENT & CHE MICAL INDS. LTD. (SUPRA), WE HOLD THAT THE LD. C.I.T.(A) HAS RIGHTLY DELETED THE ADDI TION OF RS.10,90,87,000/- BEING PRIOR PERIOD EXPENDITURE, WHICH IS UPHELD. THIS GROUND OF THE REVENUE, THEREFORE, FAILS. 21. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. 2 1 !3 4 3$ 25 THIS ORDER IS PRONOUNCED IN OPEN COURT ON 30.6.10. SD/- SD/- [D.K. TYAGI] [C.D. RAO] JUDICIAL MEMBER ACCOUNTANT MEMBE R ( (( (! ! ! !) )) ) DATE: 30-06-2010 1 / .##6 76&8- COPY OF THE ORDER FORWARDED TO : 1. *+ / THE APPELLANT : ITO, WARD-12(3), KOLKATA. 2 .*+ / THE RESPONDENT : M/S. J.H.V. SUGAR LTD., FLAT NO.6, 33/1, S.N.BANERJEE ROAD, KOLKATA-700 013. 3. #1$ () : THE CIT(A)-XII, KOLKATA. 4. #1$/ THE CIT, KOL- 4. =# .#$ / DR, ITAT, KOLKATA BENCHES, KOLKATA 5. GUARD FILE . 6 .#/ TRUE COPY, 1$3/ BY ORDER, (DKP) ? @ / DEPUTY REGISTRAR .