Ita/100145/2015 Of M/S Sri. Prabhulingeshwar Sugars And Chemicals Ltd v. The Asst. Commissioner Of Income-Tax

IN THE HIGH COURT OF KARNATAKADHARWAD BENCH DATED THIS THE 7 DAY OF OCTOBER, 2015 PRESENT THE HONOURABLE MR.JUSTICE ANAND BYRAREDDY AND THE HONOURABLE MRS.JUSTICE S.SUJATHA INCOME TAX APPEAL No.100145/2015 Between: M/s Shri Prabhulingeshwar Sugars & Chemicals Limited,Registered Office:1st Floor, Sukrut Building,Opposite to K.C. Park Main Gate,Dharwad,Represented by its Executive Vice President,Sri V.Subburathinam,PAN: . … Appellant (By Shri.M.V.Sheshachala, Senior Advocate for Shri J.M.Gangadhar, Advocate) Shri J.M.Gangadhar, Advocate) And: 1.The Assistant Commissioner of Income-Tax,Central Circle-2,Sharadha Building,Saraf Colony, Khanapur Road,Tilakwadi,Belagavi-590 006. 2.The Commissioner of Income-Tax,Central Circle, C.R.Building,Queens Road, Bengaluru.Central Circle, C.R.Building,Queens Road, Bengaluru. … Respondents (By Shri.Y.V.Raviraj, Advocate) This appeal is filed under Section 260A of the Income TaxAct 1961, praying to allow the appeal and set aside the orderspassed by the Income Tax Appellate Tribunal, Panaji Bench,Panaji, in ITA No.182/PNJ/2014, dated 07.07.2015 produced asAnnexure-A, order of the Appellate Commissioner of IncomeTax, Central Circle-2, Belagavi, dated 24.12.2012 produced asAnnexure-C and confirmed the order passed by the Commissionerof Income Tax, (Appeals) No. ITA No.32/ACIT, CC-2,Belgaum/CIT(A)VI/B’lore/2012-13 dated 28.02.2014 produced asAnnexure-B and etc., This appeal coming on for admission, this day, AnandByrareddy J., delivered the following: JUDGMENT Heard the learned Senior Advocate Shri M.V.Sheshachala,appearing for the learned counsel for the appellant and ShriY.V.Raviraj, appearing for the Revenue. 2.The present appeal is filed under Section 260-A of theIncome Tax Act, 1961 (hereinafter referred to as ‘the Act’ forbrevity), being aggrieved by the order of the Income TaxAppellate Tribunal, Panaji Bench, Panaji, in ITANo.182/PNJ/2014 dated 07.07.2015 whereby the order passed by the Commissioner of Income Tax (Appeals)-VI, Bengaluru, dated28.02.2014 was set aside and the order passed by the AssistantCommissioner of Income Tax Central Circle-2, dated 24.12.2012was confirmed. 3.The matter pertains to the assessment year 2010-2011. Thefacts of the case are the assessee is said to be carrying on businessin the manufacture of sugar and co-generation of electricity. Theassessee has filed returns of income tax on 27.09.2010. Thecontroversy relates to the following: a)Valuation of closing stock of molasses, b)Valuation of closing stock of bagasse, c)Fall in the yield of molasses production during theyear.year. 4.The assessee in the course of manufacture of sugar extractssugar from crushing sugar cane and the by-produces are molassesand bagasse. The assessee had declared 12119.550 metric tonnesof molasses valued at Rs.4,01,78,529/- as the closing stock,whereas, the closing stock of bagasse was declared as 19065.426metric tonnes valued at Rs.3,05,04,682/-. It was the contention of the assessee that the legal position regarding valuation of closingstock was that same can be valued at the cost price or at themarket price, whichever is lower. In view of the fact that bagasseand molasses are by-products of sugar extracted from sugar cane,the cost price of these two products can be ascertained onlythrough the net realisable value. Hence, the cost price wasascertained by adopting the net realisable value and the same wasworked out for the purpose of computation of closing stock. the assessee that the legal position regarding valuation of closingstock was that same can be valued at the cost price or at themarket price, whichever is lower. In view of the fact that bagasseand molasses are by-products of sugar extracted from sugar cane,the cost price of these two products can be ascertained onlythrough the net realisable value. Hence, the cost price wasascertained by adopting the net realisable value and the same wasworked out for the purpose of computation of closing stock. 5.The Assessing Officer, however, held that the assessee hadsold bagasse and molasses during the current assessment year at ahigher rate than that declared in the closing stock. It is contendedthat the Assessing Officer had failed to notice that the legalposition is that the option of the assessee to declare the closingstock at either the ‘cost value’ which is in the case of the assessee‘net realisable value’ or ‘market value’,whichever is less. As theassessee had adopted the cost value, that is, the net realisablevalue, the same cannot be questioned by the Assessing Officer, asit is in consonance with the law. However, the Assessing officerhaving held that the assessee should have adopted the market value for the purpose of computation of closing stock of bothmolasses and bagasse, the order has resulted in being prejudicialto the appellant. 6.The Assessing Officer had further held that the yield ofmolasses during the current assessment year should be 0.19%higher than that declared by the assessee. This would haveamounted to 930306.629 metric tonnes at the rate of Rs.5,121/-per metric ton. The Assessing Officer proceeded to adopt theproduction of molasses, immediately, during the preceding yearand arrived at the said figure. Though, the assessee attempted tohighlight that at least, the previous 10 years’ yield should be takeninto account, it was ignored. 7.It is contended that the Assessing Officer had failed toconsider several circumstances, namely, the irrigation that thesugar cane crop would have received, the time of crushing of thesugar cane and weather conditions and several other factors,which are, such as the demand for the product and the rate atwhich the products could be sold. However, the Assessing Officer had not taken this into consideration and estimated a higherproduction of molasses. 8.Therefore, the assessment order was challenged by way ofappeal before the Appellate Commissioner, who took a view thatthe findings recorded by the Assessing Officer regardingcomputation of closing stock was contrary to law and in the factsof the case and further, it was held that the valuation regardingproduction of molasses, was also not in consonance with the lawand the findings of the Assessing Officer were set aside. 9.The Revenue, being aggrieved, had preferred an appealbefore the Income tax Appellate Tribunal and the Tribunal havingreversed the finding of the Appellate Commissioner, havingconfirmed the order of the Assessing Officer, the present appeal isfiled. 10.One other issue is regarding the sale of molasses to a sisterconcern of the appellant. It was the case of the Assessing Officerthat a uniform sale price was not adopted. The sale price variedbetween Rs.6,000/- and Rs.3,500/-. The Assessing Officer invoked Section 40A(2))b) of the Act, to hold that the sale priceshould be uniform and adopted Rs.6,000/- as being the uniformprice throughout the year. It was the contention of the assessee tothe effect that the price of molasses varied throughout the year andthe market value was fixed, based on the actual rate prevailing inthe market, that is, the sale price during the season. TheAssessing Officer had negated the same and proceeded to make anaddition of Rs.4,92,00,000/-. 10.One other issue is regarding the sale of molasses to a sisterconcern of the appellant. It was the case of the Assessing Officerthat a uniform sale price was not adopted. The sale price variedbetween Rs.6,000/- and Rs.3,500/-. The Assessing Officer invoked Section 40A(2))b) of the Act, to hold that the sale priceshould be uniform and adopted Rs.6,000/- as being the uniformprice throughout the year. It was the contention of the assessee tothe effect that the price of molasses varied throughout the year andthe market value was fixed, based on the actual rate prevailing inthe market, that is, the sale price during the season. TheAssessing Officer had negated the same and proceeded to make anaddition of Rs.4,92,00,000/-. 11.The assessee, being aggrieved, had preferred an appealbefore the Appellate Commissioner who had reversed the findingof the Assessing Officer and who accepted that the correspondingrate adopted by the assessee as being commensurate with theprevailing market rate, during the season of the year and the yearof sale. The order of the Assessing Authority was set aside.However, the Income Tax Appellate Tribunal, had reversed thatfinding. It is these findings, which are under challenge in thepresent appeal. 12.The learned Senior Advocate Shri Sheshachala, would pointout that the Tribunal has proceeded on certain factual errors,insofar as, the closing stock of bagasse taken at Rs.1600 permetric ton considering the market value prevailing at the year endwas concerned and also having due regard to the quality of thebagasse, the Tribunal has proceeded to hold that there was nodocumentary evidence to show that the net realisable value ofbagasse as at the year end was Rs.1,600/- per metric ton andbecause the assessee has failed to prove the method of valuationunder the net realisable method nor had produced any bills forcomparison to show the valuation of bagasse, had reversed thefinding of the Commissioner of Income Tax Appeals. 13.In this regard he would draw the attention of the Court tothe order of the Commissioner of Income Tax Appeals where hehas specifically referred to the material produced, insofar as, thevaluation of the closing stock of the bagasse is concerned. TheCommissioner, in his order at paragraph 7, has specifically dealtwith the valuation of closing stock of bagasse and has referred tothe evidence produced by the appellant and the explanation offered that the closing stock of bagasse as on 31.03.2010 was atRs.1600 per metric ton, considering the prevailing market value atthe year end which is the practice followed by all sugar factories.The quality of bagasse also determines the rate and in loose form,long staple form, wet form and also bagasse containing moreforeign material etc., the value could not be taken at Rs.2,821/- aswas done by the Assessing Officer. The value would include thecost of transportation of bagasse, as well. The net realisable valueof Rs.1600 per metric tone was therefore reasonable and theCommissioner of Income Tax (Appeals) has referred toAnnexure-6 and Annexure-7, produced along with the appealmemo before him, to indicate that the company had sold bagasseat a particular rate during the financial year 2008-2009 and thesale details along with the quantity and rate as at Annexure-6 andthe average selling price was Rs.900/- during the year 2009-2010and in this regard, sale invoices were produced by the appellant’sfactory at Annexure-7 and further the closing stock having beensold at Rs.1600 per metric ton, the Commissioner has accepted thematerial produced to adopt Rs.1600 per metric ton, as the value of the closing stock of bagasse. This, the Tribunal having overlooked and ignored, the learned Senior Advocate would submitthat there is a miscarriage of justice and the material on record hasbeen over looked by the Tribunal, which would warrant the matterbeing remanded for a fresh consideration by the Tribunal. the closing stock of bagasse. This, the Tribunal having overlooked and ignored, the learned Senior Advocate would submitthat there is a miscarriage of justice and the material on record hasbeen over looked by the Tribunal, which would warrant the matterbeing remanded for a fresh consideration by the Tribunal. 14.Insofar as the valuation of the molasses is concerned, againthe Tribunal has appreciated the method adopted by the AssessingOfficer in having proceeded on the basis of comparison of themolasses valued by a similarly placed company as the appellantand that the assessee had failed to dislodge the comparison made.This, the leaned Senior Advocate would point out is whollyinconsistent and not in consonance with the law and would drawattention to the reason adopted by the Commissioner of IncomeTax Appeals, which is appropriate and a correct view of thevaluation of closing stock of molasses, at paragraph 6 of the orderof the Commissioner of Income Tax (Appeals). 15.The explanation offered by the assessee was that the sellingrate of by-products such as press mud, molasses and steam is determined at a meeting called a Special Committee meeting,consisting of independent Directors. At the said meeting, the saleprice of by-products was fixed after giving due consideration tothe fair market price of by-products. The Minutes of the saidmeeting was produced as Annexure-5 to the appeal memo, toestablish that Section 40A(2)(b) of the Act, has not been violatedand that the price of the molasses varies with respect to quality,demand and supply condition, prevailing in the market and themolasses is limited, when compared to molasses price during theseasonal period, as there is a glut in the market. The closing stockhas been valued at the net realisable value prevailing as on31.03.2010 based on the quality of molasses and the market ratefor the same. There has been a fair valuation of molasses of allgrades at Rs.3,315/- per metric ton and that the assessee has notadopted the average realisation rate for valuation of molasses andthere was no attempt to conceal the value of the closing stock ofmolasses. 16.The Assessing Officer, however, having proceeded on acomparative method of valuation, was therefore not appropriate and the Commissioner of Income Tax (Appeals) has accordinglyaccepted the explanation offered by the assessee. The Tribunal,however, has noticed that the prevailing price of molasses hasbeen shown in respect of three different sugar factories rangingfrom Rs.6,000/- to Rs.5,600/- and therefore, has held that whenRs.6,000/- was the prevailing market rate, the assessee must havesold the molasses at Rs.6,000 per metric ton and that there was noreason why the said rate should not be applied. 17.The learned Senior Advocate would point out that the ratesmentioned are rates that were prevailing at various times of theentire year and not at the end of the season. The relevant value ofthe closing stock of molasses, was as on 31.03.2010 and not therate, which it may have touched during the rest of the year and thiserror committed by the Tribunal, has resulted in the confirmationof the assessment order. The Tribunal has taken exception tocertain documents being produced which indicated misleadingdates as noted at paragraph 36 of its judgment. However, theadoption of the higher price during the year would not be relevant,insofar as, arriving at the valuation of the closing stock to molasses. Therefore, the Tribunal would have to take a re-look atits assessment of the same, in confirming the order of theAssessing Officer. Insofar as, the misleading documents that wereproduced by the appellant, it would be for the appellant to offer aproper explanation as to any inadvertent mistake in producingsuch documents, which could be done on a remand of this matterfor re-consideration of the above issue. molasses. Therefore, the Tribunal would have to take a re-look atits assessment of the same, in confirming the order of theAssessing Officer. Insofar as, the misleading documents that wereproduced by the appellant, it would be for the appellant to offer aproper explanation as to any inadvertent mistake in producingsuch documents, which could be done on a remand of this matterfor re-consideration of the above issue. 18.The other issue pertaining to the sale of molasses to itssister concern is concerned, the rates had varied betweenRs.6,000/- to Rs.3,500/-. This was in consonance with the actualfluctuation of the rates over time. In that, when there is a glut inthe market, the prices go down and when there is no such supply,the price goes up and it is for this reason, that the assessee hadclaimed the sale of molasses at rates varying between Rs.6,000/-to Rs.3,500/- per metric ton, insofar as, the sales made to its sisterconcern by the appellant. The Assessing Officer having adopted auniform market rate for the sale of molasses, has been confirmedby the Tribunal. This is apparently erroneous, as it is a matter offact, that the price of molasses would certainly vary during the year and this is a patent error committed by the Tribunal inarriving at such a finding. The Tribunal having taken exception tosales having been effected earlier and rates having been indicatedlater, is explained by the learned Senior Advocate by referring tothe approval that was essential to be obtained in respect of suchsales from the Sales Committee that is formed to fix the rate and itis only upon the rate being fixed by the Committee, it could beindicated. This would not give rise to any presumption that therehas been a fudging of accounts or an attempt to conceal the actualrate of the molasses that was sold. The Tribunal has committed aserious error which requires to be set aside. 19.Insofar as the valuation of the prevailing stock of molassesand the prevailing stock of bagasse is concerned, in our opinion,the Tribunal has overlooked the material which was availablebefore it and the explanation offered by the appellant, whichwould require the Tribunal to reconsider the matter afresh. 20.Yet another issue pertains to the deletion of the addition onaccount of the fall in yield of molasses. It was the assessee’s contention that there was a drop in the yield of molasses by 0.42%and that during the relevant assessment year, the yield of molasseswas at 3.87%, whereas, for the immediately preceding yearnamely the assessment year 2009-2010, the yield was at 4.29%.The Assessing Officer had made an addition representing ashortfall in the yield of molasses and the Commissioner of IncomeTax (Appeals) had deleted the addition as there was no specificevidence of any discrepancy in production. The Tribunal has heldthat with the drop in yield of molasses, there must be a substantialincrease in the yield of sugar and vice versa, but, the Tribunal hasnoticed that the consumption of the sugar cane had increasedsubstantially more than the preceding assessment year. However,the yield of sugar has increased marginally, but, the yield ofmolasses has dropped by nearly 10% compared to the immediatelypreceding year and admittedly, the Tribunal has held, that theassessee was unable to justify that the shortfall of the percentageof yield of molasses as compared to the immediately precedingassessment year and that the assessee had not produced any detailsto substantiate its claim that the average yield of molasses during the last 10 years was only in the range of 3.6%. However, thisfinding of the Tribunal to the effect that the assessee had notproduced any material to substantiate its claim that the averageyield of molasses during the last 10 years was only in the range of3.6%, is erroneous and contrary to the material on record. Theappellant had indeed produced the figures relevant to the previous10 years, which would have substantiated their case. The Tribunalhas therefore committed a palpable error in overlooking thematerial available on record. Hence, on these above grounds, theappeal is allowed and the matter is remanded. The judgment ofthe Tribunal is set aside and the matter is remanded for a freshconsideration on the above issues. Sd/-JUDGE Sd/-JUDGE Jm/-