Commissioner Of Income Tax (Central), Ludhiana v. M/S Highway Cycle Industries Ltd., Ludhiana

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. Date of Decision: 30.01.2015 LT.A.No.68 of 2001 Commissioner of Income Tax (Central), Ludhiana ...Appellant Versus M/s Highway Cycle Industries Ltd., Ludhiana ...Respondent CORAM: HON'BLE MR. JUSTICK HEMANT GUPTA ©HON'BLE MR. JUSTICE HARI PAL VERMA 1. Whether Reporters of local papers may be allowed to see the judgment? |2. To be referred to the Reporters or not? 3. Whether the judgment should be reported in the Digest? Present :Ms. Savita Saxena, Advocate, for the appellant. Mr. Aalok Mittal, Advocate, for the respondent. HEMANT GUPTA, J. (QRAL) The Revenue 1s in appeal under Section 260 A of the Income Tax|Act, 1961 (for short “the Act’) aggrieved against the order passed by the IncomeTax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short ‘the|Tribunal’) on 30.06.2000 relating to the assessment year 1989-90. The Revenue- appellant has raised the following substantial questions of law: (1)Whether on facts and circumstances of the case, the Income TaxAppellate Tribunal was right in law in allowing deduction under|Section 80M on gross amount of dividend received by the)Assessee ignoring express provisions of Section 8OAA of the)Income Tax Act, 1961?Appellate Tribunal was right in law in allowing deduction under|Section 80M on gross amount of dividend received by the)Assessee ignoring express provisions of Section 8OAA of the)Income Tax Act, 1961? (11)Whether on facts and circumstances of the case, the Income Tax|Appellate Tribunal was right in law in confirming the order of the)Commissioner of Income Tax (Appeals) 1n deleting the addition|of Rs.18,88,759/- made on account of Closing Stock of stores,|spare parts and tools etc.?Appellate Tribunal was right in law in confirming the order of the)Commissioner of Income Tax (Appeals) 1n deleting the addition|of Rs.18,88,759/- made on account of Closing Stock of stores,|spare parts and tools etc.? The respondent — assessee filed its return declaring an income of|Rs.1,06,98,540/- for the assessment year 1989-90. The Assessing Officer|disallowed the deduction of Rs.10,19,200/- under Section 80M of the Act|claimed by the assessee and also estimated the Closing Stock as Rs.20,00,000/-after giving a benefit of Closing Stock of Rs.1,11,741/- 1n the assessment year|1983-84, made an addition of Rs.18,88,259/-. Agegrieved against the order of the Assessing Officer, the assesseefiled an appeal. The Commissioner of Income Tax (Appeals) partly allowed theappeal setting aside the addition made by the Assessing Officer under Section|80-M of the Act as well as the addition made by the Assessing Officer in respectof the Closing Stock. The Commissioner of Income Tax (Appeals) found that|the Assessing Officer while completing assessment for the assessment year|1983-84 accepted the assessee’s method of accounting holding that the valuationof the closing stock on petty items used in the manufacturing process would be|nearly equal to the opening stock. An amount equivalent to the opening stock|was added back in the assessment year 1983-84 without any adjustment in the|succeeding assessment year. The assessment for the assessment years 1985-86,1986-87, 1987-88 & 1988-89 were also finalized on the basis of such method.The Commissioner of Income Tax (Appeals) found that rule of judicial|precedents 1s a very salutary and 1s aimed at achieving finality and homogeneity|ofjudgments. In further appeal before the Tribunal, the findings recorded by the|Commissioner of Income Tax (Appeals) were maintained setting aside the|addition made by the Assessing Officer under Section 80M of the Act and in|respect of opening and closing stock. It was observed as under: | “11.3 We have carefully considered the rival submissions and haveperused order of tax authorities. We have also seen the case law reliedupon by learned counsel. We feel that the issue 1s covered in favour of In further appeal before the Tribunal, the findings recorded by the|Commissioner of Income Tax (Appeals) were maintained setting aside the|addition made by the Assessing Officer under Section 80M of the Act and in|respect of opening and closing stock. It was observed as under: | “11.3 We have carefully considered the rival submissions and haveperused order of tax authorities. We have also seen the case law reliedupon by learned counsel. We feel that the issue 1s covered in favour of the Assessee by the decision reported in 55 ITD 465 (supra). It 1s alsoobserved that Id. CIT (A) has also relied on order of the Tribunal. Ld.DR has not controverted the said decisions either on facts or on law. Inthe circumstances, we see no reason to interfere with order of CIT (A).” Before this Court, 1n respect of first substantial question of law,|learned counsel for the Revenue has referred to the judgment of the Hon’ble|Supreme Court in)Distributors (Baroda) P. Ltd. Vs. Union of India & others(1985) 155 ITR 120, wherein it has been held that the deduction under Section80M of the Act is with reference to the net income rather than the gross dividendincome. In view of the said law, in respect of the first substantial question oflaw, it 1s held that the decision of the Tribunal in allowing the deduction under|Section 80M is contrary to.Distributors (Baroda) P. Ltd.?Ss case (Supra. Thus,the order of the Tribunal is set aside and that of the Assessing Officer 1s restored. However, 1n respect of second substantial question of law, it has|been found, as a matter of fact, that the assessee 1s manufacturer of 25000 piecesof free-wheels of different sizes and different design every day. The aluminum|castings were also manutactured for automobile factories. The Assessing Officer|has taken the opening and closing stock in the assessment year 1983-84 as the|same for the reason that the list of all the 1tems other than petty items runs intoabout 50 full-scape typed pages. Therefore, in respect of petty items, the|Assessing Officer has given benefit of not maintaining the accounts and to treat|the opening and closing stocks almost the same. Learned counsel for the Revenue relies upon the Hon’ble Supreme Court judgment 1n)Commissioner of Income Tax Vs. British Paints India Ltd.1991 (188) ITR 44to contend that the accounting method required to be adopted absence of such method, the Assessing Officer is entitled to adopt appropriate|computation to determine true income. We find that the rule of thumb applied by the assessee to disclose|the opening and closing stocks without any co-relation with the production or turnover cannot be sustained. The Justification sought to be given by the|assessee that the accounts are voluminous 1n respect of all other items, therefore,petty items have been ignored cannot be accepted. One can understand that ifthe assessee has taken a stand to have certain percentage of production as|opening and closing stocks of the petty items, but to assume that the opening|and closing stock would be same 1s without any correlation to the turnover or theproduction. It gives flexibility to the assessee to manage stocks affecting the|income. Such method of accounting runs counter to the judgment of the|Hon’ble Supreme Court inBritish Paints India Ltd.?S case (Supra) At this stage, Mr. Mittal argued that the finding of the Assessing|Officer to take the closing stock of the assessment year 1983-84 and made|addition on the basis of such stock 1s not sustainable. At best, even if the|addition is to be made, it could be on the basis of closing stock of the previous|year 1.e. 1988-89. Such argument seems to be attractive, but cannot be accepted|at this stage. It has come on record from the assessment year 1983-84 till the|assessment year 1988-89, the assessee made to believe that stocks purchased by him stands consumed by the end of the year. Such accounting method even in|respect of petty items cannot be said to be an accepted accounting procedure, thenotice of such method could be taken by the Assessing Officer while making|assessment. We find that the finding of the Commissioner of Income Tax|(Appeals) as well as of the Tribunal is not based upon sound reasoning. The|reason given 1s on the basis of the finality of the assessment proceedings 1n the| cannot be left to the rule of thumb, as adopted by the assessee in the present|Case, Mr. Mittal has also relied upon a judgment of this Court in ITA| No.162 of 2OO8 titled ‘Commissioner of Income Tax, LudhianaAII Vs. M/s)Rockman Cycle Ind. Ltd., Ludhiana> decided on 19.09.2008, wherein the appealof the Revenue in respect of deleting the addition on account of consumable|stores and sundry repair unutilized during the financial year was dismissed for|the reason that the Revenue is unable to show any reason for deviating from thepast assessment years. We find that this Court has only dismissed the Revenue’sappeal holding that there 1s no reason for deviating from the past assessment|years, but the method of accounting, which 1s unable to give true and correct|picture of the accounts, was not examined or raised as held by the Hon’ble|Supreme Court inBritish Paints India Ltd.?S case (Supra) Thus, the findings of the Tribunal and of the Commissioner of|Income Tax (Appeals) in respect of setting aside the addition relating to the|closing stock are set aside and that of the Assessing Officer are restored. © Consequently, while answering both the substantial questions of|law in favour of the appellant — Revenue, the present appeal is allowed. (HEMANT GUPTA)JUDGE. 30.01.2015 |Vimal (HARI PAL VERMA)JUDGE