COMMISSIONER OF INCOME TAX Vs. SANJEEV WOOLLEN MILLS

JUDGEMENT

(1.) BOTH the above appeals under Section 260a of the IT Act, 1961, are taken up together as they deal with common questions of law and facts. Appeal No. 9 of 2001 concerns asst. yr. 1992-93 whereas, Appeal No. 10 of 2001 concerns asst. yr. 1993-94. For the asst. yr. 1992-93, the assessee valued the opening stock at the market rate of Rs. 90 per kg. and they valued the closing stock at a higher market rate of Rs. 130 per kg. and, accordingly, for the asst. yr. 1993-94, the assessee valued the opening stock at Rs. 130 per kg. There was no closing stock for the asst. yr. 1993-94. Therefore, the main point which arises for determination is whether valuing the closing stock at higher market price was done by the assessee to avail excess deduction under Section 80hhc for asst. yr. 1992-93 and to suppress the profits of the subsequent asst. yr. 1993-94.

(2.) ACCORDINGLY, the following questions of law arise for determination :

(3.) THE respondent-assessee is a firm engaged in the manufacture and export of blankets. For the asst, yr. 1992-93, the gross sale including exports were shown in the returns filed by the assessee at Rs. 34,70,405. 90. The closing stock was calculated at Rs. 130 per kg. amounting to Rs, 8,69,13,158. On the other hand, the opening stock was shown at Rs. 90 per kg: amounting to Rs. 1,13,36,831 and, consequently, the gross profit was shown as Rs. 7,13,03,219. 99. (see p. 11 of the paper book in IT Appeal No. 9 of 2001 ). The net profit was shown by the assessee accordingly, at Rs. 6,40,11,915 (see p. 21 of the paper book in IT Appeal No. 9 of 2001 ). The AO found, on the basis of the above calculations, that the assessee had valued the opening stock at Rs. 90 per kg and the closing stock at Rs. 130 per kg. whereas, in fact, the goods were sold at Rs. 136 per kg. The AO further found, on the above calculation, the gross profit ratio of 2054. 60 per cent. Under the circumstances, the AO concluded that the method followed by the assessee in valuing the closing stock at market rate gave a distorted picture in the sense that the assessee had artificially inflated the profits in order to get the benefit of deduction under Section 80hhc. He further found that in the subsequent asst. yr. 1993-94, the assessee had valued the opening stock at Rs. 130 per kg. and consequently, the assessee has filed a return of loss of Rs. 54,420. Therefore, the AO concluded that the entire exercise was a device to avail excess deduction in the first year and to suppress the profits in the second year. In the circumstances, the AO computed the total income by applying the principle of "lower of cost or market value". Consequently, the AO reduced the gross profits from Rs. 7,13,03,219. 99 to Rs. 4,45,64,939 by valuing the opening stock at Rs. 90 per kg. for asst. yr. 1992-93 and by valuing the closing stock also at Rs. 90 per kg. Accordingly, the value of the closing stock was reduced by the AO from Rs. 8,69,13,158 to Rs. 6,01,71,130 and, consequently, the net profit was reduced by the AO from Rs. 6,40,11,915 to Rs. 3,72,73,634 and profits from business at Rs. 3,78,01,032. For the sake of brevity we hereinafter refer the asst. yr. 1992-93 as the "first Year" and asst. yr. 1993-94 as the "second Year". Consequently, the AO restricted the deduction under Section 80hhc to Rs. 3,78,01,032 instead of Rs. 6,45,39,313 which the assessee would have got if the gross profits was taken at Rs. 7,13,03,219. 99. Being aggrieved, the assessee carried the matter in appeal to the CIT (A ). The appeal was dismissed. Being aggrieved, the assessee carried the matter in appeal to the Tribunal which took the view that as per the usual practice followed by the assessee for the last several years the closing stock was valued at market price. The Tribunal further found that the AO was wrong in applying the principle of "lower of cost or market value" particularly when there was no change in the method followed by the assessee. That, there was no need to interfere with the system of accounting followed by the assessee for last several years. That, in fact, the assessee had shown more than the cost. That, if the assessee had consistently adopted a recognized method of accounting which results into higher income and consequently into higher deduction, the AO cannot accuse the assessee of defrauding the Revenue because the assessee has been valuing the finished goods at market price since 1986-87 which has been accepted by the Department throughout. Therefore, the Tribunal allowed the appeals by holding that the AO was not justified in changing the valuation adopted by the assessee. Facts for the asst yr. 1993-94