TMI Blog1992 (11) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... pared to sales. He further noticed that out of the closing stock of 9365.18.800, 8001.13.000 quintals were on consignment with Kerala Supari Centre and 200.20.000 quintals were with M/s Mohd. Ibrahim Co. on consignment. Copies of patial accounts of those two firms were examined and he found that M/s Kerala Supari Centre had already sold the major portion of the goods sent on consignments well before the close of the accounting year ended 31st March, 1987. He then called for the sale patials bearing Nos. S-30 to S-83 and noticed that these sale patials were drawn on different dates indicating therein the date of sales which were all before the close of the accounting year. The sale patials of M/s Ibrahim Co. showed that the goods on consignment with it were all sold by 31st March, 1987. The AO then found that the appellant had not accounted for all the sales effected by the consignees during the accounting year ending on 31st March, 1987. Similarly, the expenses relatable to those sales were also not accounted for by the appellant. Incidentally, it must be mentioned that such sales effected during the previous year and such expenses incurred by the consignee during the previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 86-87." He further noticed that the appellant had received huge amounts from M/s Kerala Supari Centre and that its explanation that it had received the sale patials through lorry drivers after the expiry of the accounting year is "not according to law; nor according to the primary principles of accountancy". Thus, he rejected the explanation of the assessee and recast the trading account by deleting from the closing stock the quantity and value in respect of the arecanut sold during the year by the consignees and in turn including in the sales the quantity and value of the arecanut sold during the year. He then computed the addition to be made as follows: Gross profit as per recast trading account. Rs. 54,82,001 Less : Gross profit as per assessee's books. Rs. 18,05,942 Rs. 36,76,059 Less : Expenses on consignment sales Rs. 6,35,418 Rs. 30,40,641 The learned Asstt. CIT was of the view that the driage claimed at 669.01 quintals on a total purchase of 12579.67.400 quintals was high. He scrutinised the stock account and noticed that on 1st April, 1986 itself a driage of 85 quintals has been recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or sales on the basis of receipt of the sale patials and even though such system has been accepted in the earlier assessment years, he was not bound to follow the same system if true profit cannot be ascertained in the ratio of the decision of the Supreme Court in the case of CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC). The learned CIT(A) upheld the contention of the learned AO in view of the decision of the Supreme Court cited supra. Further, he held that the method adopted by the appellant appeared to him to be a colourable device to evade tax. The affidavits filed by T.P. Pocker and D. Abbuty to the effect that the sale patials were sent only after the close of the accounting year cannot be accepted as they are only interest parties. There was no evidence to show that the patials were received after the close of the accounting year. Therefore, the ratio laid down in the case of McDowell and Co. Ltd. vs. CTO (1985) 49 CTR (SC) 126 : (1985) 154 ITR 148 (SC) would be applicable to the facts of the appellant's case. Thus, he upheld the addition of Rs. 30,40,641. 4. As for the addition of Rs. 1,15,453 on account of disallowance of driage, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e where the assessee valued its work-in-progress in terms of raw material cost and such system of stock valuation does not have the sanction of the text books in that it did not lead to ascertainment of true profit. It was, therefore, that the Supreme Court came down heavily on that system of stock valuation and in the facts of the case held that merely because such a system of stock valuation had been accepted in the past by the Revenue it cannot be said that one should not have a second look at the stock valuation in the relevant assessment year. In the case of the assessee before the Tribunal, the system of accounting besides being accepted in the past by the Revenue has met with the approval in the accounting text books. This is a material difference from the case of the appellant with that of the case of British Paints India Ltd. This aspect was not considered by the first appellate authority who had simply applied the ratio decidendi of the Supreme Court in British Paints India Ltd., to the facts of the assessee's case. 8. Sri Rajappan further submitted that the assessee had not received the sale patials from M/s Kerala Supari Centre in respect of the sales effected by it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the figures furnished in the paper book at page 5 (loose sheets). 9. The learned counsel for the assessee contended vehemently that it is not correct to say that the assessee has received the entire value of the consignments in advance. The real position was that whenever consignments are sent through approved transporters the bills are discounted with the bank and temporarily the accounts of the appellant-consignor is credited with the amount discounted in the bank. That does not mean that the consignee has made the payment for the consignment. It is only a discounting facility with the bank though the account of the consignee was credited for the proceeds of the bills discounted. It is the appellant who is liable to the bank in case of dishonour of the bill on the part of the consignee. Then he referred to the details of the bills discounted with the bank in respect of the consignments to M/s Iritty Trading Co. He also referred to the practice of getting telegraphic transfers from the consignees now and then. This latter amount is again adjustable in case the goods with the consignee were not sold of. Therefore, by merely looking at the circumstances in the account of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 1st March, 1990 was wholly unwarranted. The AO had only enquired in his letter to M/s Kerala Supari Centre about the sales effected during the previous year ending on 31st March, 1987 and with reference to certain sale patials bearing Nos. S-30 to S-83 and S-94 to S-109. In response to that letter, M/s Kerala Supari Centre had stated that they have effected sales covered by the relevant sale patials on various dates during the financial year. Such a reply cannot lead to the conclusion or the inference that the sale patials themselves were despatched to the appellant on various dates during the financial year. Unfortunately, without having regard to the terms of reference found in the AO's letter to M/s Kerala Supari Centre, an adverse inference had been drawn against the appellant merely on the basis of the reply given by the latter. Thus, there is no evidence in the hands of the Department that the sale patials were received by the appellant during the year of account. On the part of the appellant it is its case from the inception that it did not receive the sale patials through post but used to get them through the lorry drivers who take their own time in delivering the same t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in order to compute the true profits of the appellant in terms of s. 145(1) of the IT Act. The appellant's plea that its books should be rejected at least and estimate should be made under s. 145(2) should not be entertained because the AO has not stumbled upon any further defects as to warrant rejection of accounts. 13. To the appellant's argument that in the succeeding assessment years, as against the income declared by it, the assessing authority has computed the loss, Sri Abraham contended that the AO was fair enough to eliminate the sales reported by the appellant in the succeeding assessment years as he had already taken such sales for the computation of income in the impugned assessment year and such step was only a logical consequence of the treatment accorded to the same by the assessing authority in the impugned assessment year. By this process the true income of the appellant was ascertained not only for the assessment year under appeal but also for the succeeding assessment years and if the computation had resulted in a loss in the succeeding assessment years, the appellant cannot have any grievance against the Revenue. 14. To the contention of the appellant that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO to M/s Kerala Supari Centre and submitted that the letter r/w its reply would amply demonstrate that the latter had despactched the sale patials within the accounting year itself. 17. Sri Abraham further contended that some of the partners of the appellant firm are partners in the firm of M/s Kerala Supari Centre and, therefore, it cannot be said that the appellant was totally ignorant of the sale effected by the other party and in these days of fast communication and in the context of huge balances lying with the appellant from the other party, it can be safely inferred that the appellant was aware of the sales affected during the year, but it did not choose to account for the same in order to defer the payment of tax. As for the sales effected by M/s Mohd. Ibrahim Co. on the last day of the accounting period, Sri Abraham submitted that it might be that the appellant had received the patials after the close of the accounting year, but that does not mean that it should not account for the same in the relevant accounting year as the sales were, in fact, made during the accounting period relevant to the asst. yr. 1987-88. Hence, he submitted that there was no need to int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Abraham's contention is that the accounting practice adverted to by the learned author should be understood in the normal circumstances of the consignee rendering account sales or sale patials as soon as the sales are effected and the learned author did not envisage extraordinary delay in the despatch of sale patials. We are unable to accept this contention because the liability to render account sales or sale patials arises to the consignee only when the consignment is realised and the expenses incurred by him on the consignment are reckoned within the account sales. A reading of the procedure of accounting mentioned in para 5, Chapter VI, extracted by us above, would lend support to this view. Further, whatever be the point of time at which the account sales are rendered by the consignee it is only on receipt of such account sales entries are contemplated in the books of accounts of the consigner. Therefore, if the consignee had not rendered the account sales or renders them belatedly, the consignor is under no obligation to account for the sales effected by the consignee till the account sales are received by him. 20. Sri Abraham contends that the appellant had, in fact, rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has nowhere enquired about the dates on which the sale patials were actually sent to the appellant. Therefore, the reply given by M/s Kerala Supari Centre in its letter dt. 1st March, 1990 can be only with reference to the dates on which the sales were effected by it in respect of the sale patials mentioned in the letter of the AO. The reply cannot be interpreted as indicative of the dates on which the sale patials were despatched (or sent) to the appellant by M/s Kerala Supari Centre. Shri Abraham's contention is that even if there is ambiguity in the reply of M/s Kerala Supari Centre, atleast M/s Kerala Supari Centre has understood the letter of the AO as calling for the dates on which the sale patials were sent to the appellant as will be evident from para 10 of the affidavit of D. Abutty and, therefore, a construction favourable to the Revenue should be adopted. In our opinion, the two letters read together do not point to any ambiguity and even in case of ambiguity it is settled law that it should be interpreted in favour of the assessee. Para 10 of the affidavit of Abutty on which Revenue relies, is as follows: "The firm had issued a letter dt. 1st March, 1990 on the ITO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... close of the accounting year and sent to the consignor. When an affidavit is filed by a third party substantiating the stand of the appellant and such stand is supported by entries in the books of accounts, unless the contents of the affidavit are proved to be false, such an affidavit cannot be dismissed as of no consequence Mehta Parikh Co. vs. CIT (1956) 30 ITR 181 (SC). The CIT(A) erred in not considering the affidavit by testing the same with other materials on record. 22. The assessee does not have any direct evidence that the sale patials were received only after 31st March, 1987 except the affidavits filed by Mr. Pocker, the managing partner of the appellant and Mr. D. Abutty, partner of the consignee firm and the entries in the books of accounts for the year ending 31st March, 1988 relevant to the asst. yr. 1988-89. At the same time the Department does not have any evidence to show that the sale patials were received during the year ending on 31st March, 1987. In such circumstances an estimate is called for having regard to the attendant circumstances of the case. On an examination of the sale patials on record, we notice that the sale patials contained information about ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s affected by M/s Kerala Supari Centre for the period after 5th March, 1987 and such instances are to be found from pages 247 to 279. Shri Abraham could not seriously object to the exclusion of such transactions as are covered by the sale patials dt. 5th March, 1987 beginning from pages 247 to 259. Furthers at page 231 of paper book III, the sale patial dt. 5th March, 1987 contains the details of remittances dt. 2nd Feb., 1987, 20th March, 1987 and 27th March, 1987 which dates are posterior to the date of the sale patials themselves, though such dates of remittances have been scored of subsequently. 25. From the above, it would be evident that the sale patials were not made out at regular intervels. Nor the sale patials were prepared as and when the sales were effected. The patials were prepared in a whimsical manner, that is as and when chosen by the consignee. Many of them would appear to have been set up at a stretch. In this context the affidavit of D. Abutty, partner of Kerala Supari Centre would acquire some significance. He had stated that there was difficulty in finalising their accounts and as a result the patials were delayed. Further, reasonable margin of time is nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nover and rising prices, such a system was apt to diminish the assessment of taxable profit of a year. The profit of one year was likely to be shifted to another year which would be an incorrect method of computing profits. Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the respondent was found to be such that income could not properly be deduced therefrom. It was, therefore, not only right but the duty of the ITO to act in exercise of his statutory power for determining what, in his opinion, would be the correct income." In the case before us, the assessee is not Mowing the mercantile system of accounting. His is a hybrid system of accounting, in that he used to record the consignment sales only on receipt of the sale patials from the consignee. Such a system of accounting is an approved system of accounting and is usually followed by businessmen in the context of consignment sales. Therefore, there is nothing erroneous or incorrect unconscionable in such method of accounting. Only if it is found that the method is incorrect or erroneous or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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