Calcutta H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 11,49,000 made by the ITO on account of undervaluation of closing stock of tea?

High Court Of Calcutta

CIT vs. Hoolungooree Tea Co.

Section 145

Asst. Year 1978-79

Suhas Chandra Sen & Bhagabati Prasad Banerjee, JJ.

IT Ref. No. 52 of 1985

21st February, 1990

Counsel Appeared

Miss M. Seal, for the Assessee : A.N. Bhattacharjee, for the Revenue

SUHAS CHANDRA SEN, J.:

The Tribunal has referred the following question of law under s. 256(1) of the IT Act, 1961, to this Court :

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 11,49,000 made by the ITO on account of undervaluation of closing stock of tea?”

In this case, the assessment year involved is 1978-79 for which the relevant year of account is the calendar year 1977.

The facts found by the Tribunal, as stated in the statement of case, are as under : “The assessee is a company and the assessment year involved is 1978-79 for which the relevant previous year is the calendar year 1977. The dispute centred round the ITO’s addition of Rs. 11,49,000 being the undervaluation of closing stock of tea consequent to the change effected in the method of valuation as recorded by the auditors of the assessee-company, vide Schedule 11. The report of the auditors was as follows : ‘Stock of tea has been valued at garden cost or estimated realisable value whichever is lower as against the previous practice of valuing such stock at an estimated realisable value. Had the previous basis of valuation been followed the value of stock of tea would have been more by Rs. 11,49,000 approximately. Consequent to this change in the basis, credit has been taken in profit and loss account in respect of selling expenses allocable to the stock (which expenses used to be charged off up to 1976 on a seasonal basis) to be debited to expenses in the following year’s accounts.’

According to the ITO, the change in the method of accounting effected during the calendar year 1977 was not bona fide as the same was done arbitrarily only with a view to suppress profits.

The CIT(A) deleted the addition by observing, inter alia, that ‘by changing over to this method of valuation, the assessee-company appears to have adopted the proper method of valuation of closing stock. The ITO has not brought any relevant material to prove that the change in the method of accounting was not bona fide’.

The Tribunal found that he change in the method of accounting effected during the asst. yr. 1978-79 was bona fide and that the assessee consistently followed the same system of valuation of closing stock in the subsequent years.

The Tribunal found that the facts in the assessee’s case were more or less identical with the facts found by the Tribunal in the case of Rajgarh Tea Co. Ltd. for the asst. yr. 1978-79 and, following the Tribunal’s order in the said case, (ITA No. 621/Cal/1983) upheld the CIT (A)’s order deleting the addition of Rs. 11,49,000 on account of undervaluation of closing stock of tea. There is no merit in this reference. According to the ITO, the change in the method of accounting effected during the calender year 1977 was not bona fide and was done arbitrarily only with a view to suppress profits. The CIT (A) held that the assessee-company had adopted the proper method of valuation of closing stock. The ITO has not brought any relevant materials to prove that the change in the method of accounting was not bona fide. The question whether the change in the method of accounting was bona fide or not is a question of fact.

The Tribunal, on further appeal, found that the change effected during the asst. yr. 1978-79 was bona fide and that the assessee had consistently followed the same system of valuation of closing stock in the subsequent years.

The findings of fact are not under challenge. The question of law, therefore, is answered in the affirmative and in favour of the assessee.

There will be no order as to costs.

Bhagabati Prasad Banerjee, J.:

I agree.

[Citation:192 ITR 126]

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