9911796707
TMI Blog1991 (9) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 which, according to it, was the value of 9,000 empty tins borrowed from M/s. Zodiac Cashews Pvt. Ltd. The ITO took the line that if the said 9,000 empty tins had indeed been borrowed by the assessee from M/s. Zodiac Cashews Pvt. Ltd. as alleged, then there was no question of the assessee debiting the sum of Rs. 96,840 to the Profit & Loss A/c, because only when a purchase is made, the cost of purchase can be debited to the materials account. He, therefore, treated the said sum of Rs. 96,840 as the cost of 9,000 empty tins purchased by the assessee. 3. Then he directed his attention to the closing stock of tins disclosed by the assessee. He found that only 800 tins had been accounted for ; whereas including the said purchase of 9,000 tins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt quantity of empty tins but may not have the requisite quantity of kernel to be exported. Such exigencies are not uncommon in the trade. One method by which the said exigencies are met is to borrow tins or kernels as the case may be from other exporters. 8. In the case before us, the assessee and the sister concerns, it is common ground, used to lend/borrow tins/kernels, the frequency or periodicity of such inter-concern transactions naturally depending upon the need of the hour. Again, in the case before us, the intention of the parties was not to treat such transactions as inter-concern purchase/sale. 9. Now, how are such transactions to be accounted for ? This question has three facets, namely, (i) keeping an account of the quantity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t both as respects the quantity exported and the value of the goods exported necessarily arises. Thus, when, say 1000 tins of kernels are exported, the sale value of the 1000 tins of kernel will have to be credited to the sales account. Had the exporter purchased 1000 empty tins he would certainly have debited the trading account with the cost of the 1000 tins purchased. When, on the contrary, the tins are obtained on loan, they cannot be treated as purchases. Yet, the sale consideration relating to the 1000 tins includes the cost of the tins. Therefore, unless the exporter deducts from the sale consideration the cost of empty tins borrowed by him, his profits will get artificially inflated. The position will be the same, even when there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee are being deduced. It goes without saying that in respect of each batch of borrowed tins, the cost (which is really a notional cost) adopted must be maintained throughout. 14. But the matter does not rest here. In the year in which tins are purchased by the assessee, and the whole or a part of the tins purchased are returned to the lender, it is necessary to pass suitable reversal entries in consonance with the entries passed earlier when the borrowed tins were used for exporting cashew. Under the method which we are considering now, it may be recalled, the cost of the borrowed tins are kept out of revenue accounting. Therefore, when the assessee purchases tins which are returned to the lender, care should be taken to ensure that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od also, care must be taken to ensure that the cost attributed to the tins (which is a notional cost) is maintained throughout ; otherwise the true profits of the assessee would get distorted. 17. In the case before us, the assessee has followed a modified version of the first method. Instead of deducting the cost of the borrowed tins from sales turnover and/or the value of closing stock, the assessee has consistently deducted the cost of borrowed tins in its entirety from the aggregate value of the closing stock, without making any distinction between borrowed tins used for packing and exporting kernels and those remaining in the closing stock. The CIT(Appeals) has also verified the loan transactions right from the year ending on 31-5-197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... second method referred to in para 16 supra. At our instance, the trading account of the assessee for the year of account ending on 14-5-1976, 15-5-1977, 15-5-1978 and 15-5-1979 were recast on the lines indicated above. The accounts thus recast revealed that as far as the gross profit was concerned there was no variation at all. And this is not surprising. 20. As we see it, the ITO misdirected himself when he thought that the debit of Rs. 96,840 to the P & L A/c represented the cost of 9000 tins actually purchased by the assessee during that year of account. The factual position, however, is different, and that is that the assessee was carrying out final adjustment that was required to be made. We are satisfied that as respects the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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