Bombay H.C : Revenue has filed this application under Section 256 (2) of the Income Tax Act, 1961 for referring the questions of law stated in the memorandum of application for recording the opinion of the High Court on the same

High Court Of Bombay

CIT, Nagpur vs. Vidarbha Tobacco Products (P.) Ltd.

Section : 145

Smt. Vasanti A. Naik And V.M. Deshpande, JJ.

IT Application No. 46 Of 1997

February 23, 2017

JUDGMENT

Smt. Vasanti A. Naik, J. – The applicant – Revenue has filed this application under Section 256 (2) of the Income Tax Act, 1961 for referring the questions of law stated in the memorandum of application for recording the opinion of the High Court on the same.

2. The respondent – assessee is a private limited company, engaged in the manufacturing and sale of the Bidis. For the assessment year under consideration, the assessee had filed the return on 31.12.1990 and a revised return was filed on 30.12.1991 declaring some additional income. For conducting the business of manufacturing and sale of Bidis, the assessee had branches in Gondia, Tumsar, Tiroda, Parashioni and Chakradharpur. The Assessing Officer noted while considering the case of the assessee, that the assessee was showing the valuation of opening and closing stock of the raw material (Tendu leaves) at average cost. According to the Assessing Officer, the assessee could not have shown the valuation of the opening and closing stock at the average cost as the assessee was liable to apply the method, i.e., First-in First-out and first utilize the Tendu leaves that were secured by the assessee in the earlier point of time for manufacturing of the Bidis. The Assessing Officer issued a show-cause-notice to the assessee and after considering the reply of the assessee came to a conclusion that the pattern of consumption of the raw material showed that the opening stock was being consumed in the first few months from the earlier purchases. It was further observed that since Tendu Patta is a commodity, that is, perishable, it would be but natural for the assessee to consume Tendu Patta, that is, purchased earlier, first in point of time and then use the Tendu Patta purchased later. Since the Assessing Officer added the amount to the payable income of the assessee, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) allowed the appeal filed by the assessee and deleted the additions made by the Assessing Officer. The Revenue Department challenged the order of the Commissioner of Income Tax (Appeals) before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal, on an appreciation of the material on record, dismissed the appeal filed by the Revenue and upheld the order of the Commissioner of Income Tax (Appeals). An application was filed by the Revenue before the Tribunal to refer the questions of law “whether the Assessing Officer could have changed the method of valuation that was regularly followed by the assessee so as to determine the true profits for tax purposes” and also “whether the assessee could have applied the average price principle” to the High Court under Section 256(1) of the Act for decision. The Tribunal, however, rejected the application filed by the Revenue after holding that the findings recorded by the Tribunal were pure finding of facts and a substantial question of law did not arise for being referred to the High Court for a decision. After the application made by the assessee under Section 256(1) of the Act was rejected by the Tribunal, the Revenue has filed this application before the High Court under Section 256(2) of the Act.

3. Shri Bhattad, the learned Counsel for the Revenue submitted that the ‘average price principle’ could not have been applied to the case of the assessee only because the assessee was following the said method of valuation in the regular course of his business. It is submitted that if the method followed by the assessee would adversely affect the Revenue, it would be permissible for the Revenue to challenge the average price principle followed by the assessee. The learned Counsel relied on the judgment of the Hon’ble Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 to substantiate his submission. It is submitted that since Tendu leaves is a perishable commodity, it would be necessary for the assessee to first consume the Tendu leaves which were secured at the earlier point of time and then utilize the Tendu leaves that were procured subsequently. It is stated that the Tribunal was not justified in holding that a question of law would not arise for consideration from the order of the Tribunal, dismissing the appeal of the Revenue as the dismissal of the appeal is based on the finding of facts.

4. Shri Thakkar, the learned Counsel for the assessee has supported the order of the Tribunal holding that no substantial question of law arises for being referred to the High Court under Section 256 (1) of the Act. It is submitted that the assessee was following the method of valuation based on ‘average price principle’ during the past several years and the same was accepted by the Department. It is submitted that even in the next assessment year, the Revenue has accepted the method of valuation based on ‘average price principle’. It is submitted that the assessee was having several branches and sub-branches at various places and it was not possible for the assessee to precisely use the raw material purchased at the earlier point of time first in point of time for the purpose of manufacturing. It is submitted that the ‘average price principle’ is not a flawed principle and it is used not only by the assessee but by several others dealing in the business of manufacturing of Bidis. It is submitted that the Tribunal has rightly considered the aforesaid facts for deciding the matter in favour of the assessee. It is submitted that a similar question like the one involved in this case came up for consideration before the Madhya Pradesh High Court and it was held by the said High Court that the method of ‘last in and first out’ is also a recognized method of accountancy and if the value of the stock is computed on the basis of the average, no question of law arises for calling for the statement of the case from the Tribunal. It is submitted that the findings recorded by the Tribunal do not give rise to any substantial question of law and hence, the application is liable to be dismissed.

5. We do not find any force in the submissions made on behalf of the Revenue for referring the questions of law as stated in the application, under Section 256 (2) of the Act for a decision. The assessee is engaged in the manufacturing and sale of Bidis. It is not disputed that the assessee has branches and sub-branches at several places and the raw material, that is Tendu leaves is stored by the assessee in godowns in the places where the branches and the sub-branches of assessee are located. When the assessee is dealing in the manufacturing and sale of Bidis, it is likely that the assessee has to make the use of the raw material, i.e., Tendu leaves very frequently and from time to time. The raw material purchased by the assessee is liable to be stored in the places where the branches and sub-branches of the assessee are located. It is not always possible for the assessee to consume the stock of Tendu leaves secured by the assessee first in point of time for the purpose of manufacturing of Bidis. It is possible that some times the stock secured by the assessee at a later point of time could be consumed by the assessee, first in point of time and stock secured by the assessee at earlier part of the year could be consumed by the assessee a little later. In view of the aforesaid possibility, which arises out of the practical difficulty, the assessee was not in a position to scrupulously follow the First-in First-out method and some times, the method of last in and first out was followed by the assessee. In view of the said difficulty, the assessee showed the valuation of opening and closing stock at average cost. The assessee did not follow the said method of valuation only for the relevant assessment year but was following the said system of valuation from year to year and in the preceding years the said system of valuation was accepted. Even in the subsequent year the same method of accounting was accepted by the Revenue. The Tribunal recorded a finding of fact on the basis of the material on record that no fault could be found with the method of valuation, by applying the ‘average price principle’. The Tribunal found that in some years, by adopting the method of average price principle, even the assessee would have been adversely affected. The Tribunal found that during the last years where the said method of accounting had affected the assessee, the assessee did not change the method of valuation and even the Revenue did not point out the said fact to the assessee. The Tribunal rightly held that merely because the change of the method would help the Revenue in a particular year, the Assessing Officer is not at liberty to change the method of valuation that was followed by the assessee for a considerably long period. A somewhat similar issue came up for consideration before the Madhya Pradesh High Court in the case of Bidi manufacturer – assessee. In the said case, the Madhya Pradesh High Court held that there was nothing wrong with the method adopted by the assessee therein of ‘last in and first out’. In the instant case, the assessee has not claimed that he was adopting the method of ‘last in and first out’ and the assessee had stated that it was possible for some time, in view of the practical difficulty that the Tendu leaves purchased subsequently could be utilized first and vice versa. The finding of facts recorded by the Tribunal do not give rise to any substantial question of law. The Madhya Pradesh High Court has held in almost similar set of facts that no question of law arises for calling for the statement of the case from the Tribunal. The judgment, reported in British Paints India Ltd. (supra) and relied on by the learned Counsel for the Revenue has no application to the case in hand.

6. In the circumstances of the case, we dismiss the Income Tax Application filed by the Revenue under Section 256 (2) of the Income Tax Act.

7. Order accordingly. No costs.

[Citation : 393 ITR 218]

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