TMI Blog2002 (3) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... proceeded to inventorise the stock of the three concerns which the assessees dispute. According to the Assessing Officer there was huge discrepancy in the stock as per the books of account and as inventorised by the searching party. 3. For block assessments, ITAT being the first appellate authority, the assessees preferred appeals, being aggrieved by the assessment orders. before the ITAT. The appeals were fixed for hearing a number of times and the parties were heard. During the course of hearing of these appeals, the learned AR of the assessee submitted that the search was conducted in the premises of the above-mentioned assessees from 2-11-1995 to 4-11-1995 and the searching party took inventory of the stock found of materials and finished products. The basis of inventories of the stock found was made on the basis of estimations and on certain hypothetical calculations. No physical inventory or quantification of the stock has been done. The learned AR submitted that the assessee purchased raw materials like scrap, rejects etc. from Rourkela Steel Plant on actual weighment basis, but the authorities have not physically weighed either the raw materials or the finished products. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said statement of Shri Mathuram Agrawal was an afterthought as the search was continuing and the search was concluded only on 4-11-1995 after the deposition was taken. The learned AR of the assessee also stated that the stock available in the premises of the concerns are as per the books of account and stock book. In this connection he stated that "steel" comes under the Central Excise control and the Central Excise staff regularly visits the premises for checking the stock and put their signature on the stock register after verification. Therefore, the rejection of the stock as per the stock book without specific defects noticed in the account is not in order. The rejection of the said stock registers which have been regularly inspected by the Central Excise authorities is purely on surmises and conjectures and the adoption of high estimation is incorrect. As regards the submissions of authorised officer during the course of hearing of the appeals, calculations which have been done on rough sheets, is not also correct and unscientific. It is also stated that physical inventory taken by the searching party in the course of search is not correct as the materials were neither co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even to the nearer to accurate weight. 5. The learned DR, on the other hand, relied on the assessment orders in respect of the assessees mentioned above and submitted that the search in the premises of the assessees started on 2-11-1995. During the course of search, the searching party found discrepancy in the stock of materials as well as finished products. It is also submitted that the searching party did not find any valuable assets. Therefore, there is no seizure of assets or cash. The three concerns had only the stock both of raw materials and finished products. Therefore, the searching party straightaway took up the preparation of inventories of the goods when they did not find anything worth seizing. The learned DR also submitted that the estimation and quantification of the inventory is not an 'eye estimate' as stated by the learned AR of the assessee but on scientific basis which is nearer to the accurate. According to the DR detailed inventory was prepared which is Annexure-3 of Panchnama drawn by the conclusion of search. A copy of the said inventory has also been filed before as and the learned DR took us through the inventory and explained how the inventory was prep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the search substantial discrepancy was noted in the stocks of raw materials as well as finished products. From the order it appears that the above statement has been made only after the searching party valued the same according to their own method which the assessee styled as 'eye estimation'. In this connection we may also observe that the accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The authorities have to prove satisfactorily that the account books are unreliable, incorrect or incomplete before it can reject the accounts which may be done by showing that important purchases were omitted therefrom or proper particulars or vouchers are not forthcoming for the accounts do not include entries relating to particular class of business. The rejection of the accounts should not be done light-heartedly as has been held by Kerala High Court in the case of St. Teresa's Oil Mills v. State of Kerala. Similarly, in the case of Tolaram Daga v. CIT(59 ITR 632) the Assam High Court held same view. The basic principle is the same in law relating to income-tax as well as in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inventory (MT) ----------------------------------------------------------------------------- 1. M.S. Slabs 307.880 326.396 + 18.516 2. Pencil Ingots 211.785 477.570 + 265,785 3. M.S. Flats 48.025 128.000 + 79.975 4. M.S. Sections 171.695 343.000 + 171.305 (Angles) 5. M.S. Rods 61.355 136.300 +74.945 (Rounds) ----------------------------------------------------------------------------- 1 The Assessing Officer claims that the method of valuation adopted is most scientific but, according to us, the same is not so. The physical inventory taken in the course of search is not correct as materials were neither identified, classified nor physically weighed. In the language of the assessee the inventory has been taken on 'eye estimation'. In this connection it may be mentioned that if the materials having specific size i.e., length, breadth and thickness that can be calculated on the basis of sectional weight, but in case of the assessee most of the raw materials ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be calculated accurately which is possible only in prime and tested materials where dimensions are uniform throughout. In case of defective materials and rejects, as that of the assessee, all the three dimensions -- length, width and thickness, are not uniform throughout due to which it is not possible to ascertain the correct volume and thereby the correct weight by density weight. Therefore, the adoption of this method by the Revenue authorities is not correct and not even nearer to the accuracy. 9. As regards 'pencil ingots' it is trapezoidal in shape i.e., cross-section at both ends of each piece is varying due to which it is not possible to write in correct volume and, therefore, the correct weight is by measuring the cross-section at one end only i.e., 4" X 3". In order to ascertain correct density weight cross-section at both ends has to be measured correctly along with length of each piece and then the correct formula for calculation of volume has to be applied. From the records it appears that the authorities have not done correct as is evident from page 10 of Paper Book Vol. 2. Hence the method used by the Revenue authorities for ascertaining density weight just by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .S. Rod (Rounds) is also same like M.S. Angles and M.S. Flats. The assessee-company manufactures 8mm to 32mm diameters in various lengths. The inventory of these products by sectional weight can be determined only after having recorded the total running meters in each of the diameters. The total weight by applying sectional weight on total running meters of various diameters will be nearer to actual physical weighment. Non-adoption of correct method of weighment has resulted in discrepancy of 74.945 MT. 13. The Assessing Officer has observed in the case of M/s. Utkal Alloys P. Ltd. that the assessee-company has indulged in both unaccounted sales as well as unaccounted purchases. The excess stocks are treated as unaccounted purchases whereas the deficit stocks are treated as unaccounted sales. This statement of the Assessing Officer is purely on assumption, surmises and guess work without any evidence. He has not pointed out any unaccounted purchases or unaccounted sales to substantiate his statement. This observation of ours is equally applicable to the facts of other two assessees also. 14. Finally, to sum up, we may state the undisputed facts in the present appeals are that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 is an afterthought. In view of above stated facts and considering the totality of facts and circumstances of the case, we direct the Assessing Officer to accept the stocks disclosed by the assessee as per the stock registers maintained which are regularly checked by Central Excise authorities and also reflected in respective assessment orders of the assessees. 15. In the result, the appeals are allowed. Per Mitra, J.M. -- I have gone through the order drafted by learned Accountant Member, I most respectfully disagree with his findings on the following point. 2. The only point of dispute in these group of cases is whether the method of valuation of stock adopted by the Department is appropriate or proper. 3. The learned AR's contention that the search parties did not at all make any actual weighment of the goods is wholly not correct. During the course of hearing, it was brought to our notice that the stock inventory has been made in the presence of Shri Nathlal Agrawal and two witnesses. Xerox copies of notings made in different rough calculation sheets during stock-inventory were placed before the Bench at the time of hearing. Weighment of some of the goods were ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orted by the learned counsel for the assessee that there were huge quantity of materials scattered in different places inside the factory and all the cranes were not in working condition to assist the Income-tax officials to arrive at the actual or nearer accurate weighment. 6. The points of difference of opinion between the two Members are as follows: "(1) Whether the method of valuation of stock adopted by the income-tax department can be considered as proper? (2) If the assessee is not maintaining day to day record while issuing the inputs (raw materials) on the basis of actual weighment then how there could be any reason for the assessee to agitate the stock estimated by the department not on actual weighment but by adopting near scientific method on approximation?" Hon'ble President, Re: 1. IT(SS) A. No. 4/CTK/1996 (Block years 1986-87 to 1996-97) Utkal Steels Ltd. v. Dv. CIT, SR, Sambalpur. 2. IT(SS) A. No. 1/CTK/1996 (Block years 1986-87 to 1996-97) Utkal Alloys P. Ltd. v. Dy. CIT, SR, Sambalpur. 3. IT(SS) A. No. 5/CTK/1996 (Block years 1986-87 to 1996-97) S.L. Agarwal Co. v. Dy. CIT, SR, Sambalpur. In the abovementioned appeals, on a difference of opini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals based on the valuation by the department says that it was based on eye estimation and some hypothetical calculations, whereas the Judicial Member states that it was nearing actual basis, i.e., the next best method of sampling. The result is the addition in income based on such difference. 3. The Assessing Officer stated on the method of valuation as under -- In course of the physical inspection of the stock lying in the factory premises it was noticed that in the case of the heavy items like M.S. Slabs and Slab Cuttings etc. The measurement of sizes were engraved by the markings of Steel Authority of India Limited from whom these materials were purchased. Taking the same as the basis the volume of these materials have been arrived at a Cubic Feet. This volume has been converted into weights by taking a sample weight of one item. As per example one M.S. Slab of the size of 8 Ft. X 2 Ft. X 8 Inches = 10.66 Cft. Weighed 2.315 M.T. Taking this as the volumes of all the heavy materials have been converted into weights. The stock inventory prepared in course of the search gives the details of all these items. Therefore, the method adopted for taking the physical inventory of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... glaring; that similar was the position of samples produced for M.S. Rod (Round) and M.S. flat produced during the course of the year; that similarly there was discrepancy of weight of 171.305 M.T. in M.S. Section (Angles); that M.S. Flat (Angles) causing a discrepancy of 74.945 M.T. that M.S. Rod (Rounds) produced by the assessee were of 8mmn to 32mm diameter and their weight by applying sectional weight on total running meters would be nearing physical weight but resulted in discrepancy of 74.945 M.T. He, therefore, held that the method of valuation by the Department was not scientific and book weight should be accepted, because no defects were found in maintaining the books of account and its stocks were subject to control of Excise Authority. He, therefore, held that no addition should be made on the alleged difference of valuation. 5. The Judicial Member, on the other hand, held that weighment of some of the goods were made and rest were calculated on sample basis; that the I.T. officials allowed opportunity to the assessee's representative to decide that if the actual weighment might take several months and stockyard and factory remained under lock and key until then, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India for paddy. Two revenue officials on two different dates verified the stock held bv the assessee by a sampling method and not physically and found a huge shortage though their findings were different regarding quantity. The Assessing Officer taking notice of the practice of the assessee to pay purchase tax on paddy by calculating backwards on the basis of the sale of rice raised a demand by treating the deficit as the turnover of purchase of paddy without payment of tax. But the principal of the assessee, namely, the Food Corporation of India, through its officer made a physical verification and found the shortfall in the stock of the assessee as 61 quintals only. On reference: Held, that a sampling method of verification might be useful for certain purposes but could not be utilised as the basis for imposition of tax. In the facts and circumstances of the case, the principal's physical measurement on the basis of which payment should have been made should be given greater importance, and, therefore, the assessee was liable to pay purchase tax on 61 quintals of paddy only." This being a binding decision of the jurisdictional. High Court, I hold that no addition can be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities, but determination of that issue might not have any impact in deciding this appeals, because the addition is based on the difference in the stock and the valuation thereof. If the difference is there actually, addition can be made. On the other hand, if difference is estimated by sampling method or there is no difference, no addition can be made. It is, therefore, not necessary to express any opinion on the correctness or otherwise of the maintenance of accounts by the assessee. 10. The case now shall be fixed before the Division Bench for final disposing of the appeals. Per Sri K.K. Gupta, A.M. -- On a difference of opinion between the members constituting this Bench when these appeals originally came up for hearing, the following question was referred for the opinion of Third Member under section 255(4) of the Income-tax Act, 1961: "Whether on the facts and the circumstances of the case, the view of the Accountant Member is correct in holding that the authorities are not justified in straightaway estimating the value of stock without physically weighing them during operation under section 132 of the I.T. Act particularly when the assessee maintains regular b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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