TMI Blog2002 (2) TMI 1281X X X X Extracts X X X X X X X X Extracts X X X X ..... of the three concerns which the assessees dispute. According to the Assessing Officer there was a huge discrepancy in the stock as per the books of account and as inventorised by the searching party. For block assessments, the Income-tax Appellate Tribunal being the first appellate authority, the assessees preferred appeals, being aggrieved by the assessment orders, before the Income-tax appellate Tribunal. 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 Authorised Representative of the assessee submitted that the search was conducted in the premises of the abovementioned assessees from November 2, 1995, to November 4, 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 Authorised Representative submitted that the assessee purchased raw materials like scrap, rejects, etc., from Rourkela Steel Plant on actual weighment basis, but the authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty for physical weighment of the stock. The suggestion of Sri Mathuram Agrawal was not accepted by the searching party for physical weighment only on the ground that the said statement of Shri Mathuram Agrawal was an afterthought as the search was continuing and the search was concluded only on November 4, 1995, after the deposition was taken. The learned Authorised Representative 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 the authorised officer during the course of hearing of the appeals, calculations which have been do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of the assessee, of three dimensions, i.e., length, breadth and thickness are not uniform throughout due to which it is not possible to ascertain the correct volume and thereby the correct weight, density weight method. Therefore, adoption of this method by the Revenue authorities is not at all reliable and can never even be to the nearer to accurate weight. The learned Departmental Representative, 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 November 2, 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 Departmental Representative also submitted that the estimation and quantification of the inventory is not an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... They have not found any omission or commission as there is no comment by those authorities in those registers. They have also not commented anything adversely regarding maintenance of stock registers, etc. Therefore, the Revenue authorities are not justified in resorting to estimation of stock without rejecting the books of account. There is not even a whisper whether the account books as regards the stock disclosed which is written on day-to-day basis and why the same is not acceptable to them. The Assessing Officer has observed in page 2 of his order that in the course of 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 incomplet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as the finished products is unscientific and not correct at all. While preparing inventory the authorities have assumed and surmised certain things. That is why the variation is glaring between the stock disclosed as per stock registers and as estimated by the searching party which has been clearly brought out by the Assessing Officer in the form of a chart in page two of the assessment order. The chart is as follows : Items Stock as per books (mt.) Stock as per physical inventory (mt.) Discrepancy 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 (angles) 171.695 343.000 + 171.305 5. M. S. rods (rounds) 61.355 136.300 +74.945 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, cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reas the size of each piece in various lengths has been taken as uniform in most cases at 4 3 and, in pages 7 to 9 serial Nos. 25 to 93 all sizes are different. The various dimensions as recorded were not uniform throughout. Therefore, in this case it can be concluded that total weight near to actual weight can be determined by applying density weight, i.e., 7.85 kg. per cubic metre only when the volume can be calculated accurately which is possible only in prime and tested materials where dimensions are uniform throughout. In case of defective material 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 accuracy. As regards pencil ingots (page 10 of the Paper Book, Volume II), 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufactures M. S. flats of various sizes and thickness and 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 sizes. The total weight by applying sectional weight on total running meters of various sizes will be nearer to the actual physical weight, but the authorities have not adopted this method and hence the huge discrepancy. The position regarding M. S. rod (rounds) is also same like M. S. angles and M. S. flats. The assessee-company manufactures 8 mm. to 32 mm. 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. Nonadoption of correct method of weighment has resulted in discrepancy of 74.945 mt. 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 unaccounte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hment as offered by Sri Agrawal would have lasted for 4-5 days and is practicable, but the searching authorities have short-circuited the entire procedure of valuation. But, according to us, there is no short-cuts to physical weighment. Lastly we may observe that the Assessing Officer has stated that the offer of Sri Mathuram Agrawal for physical weighment was an afterthought, but we fail to understand how the offer made during deposition under section 132(4) of the Act on November 4, 1995, is an afterthought. In view of the 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 the Central Excise authorities and also reflected in respective assessment orders of the assessees. In the result, the appeals are allowed. B. K. Mitra (Judicial Member).-I have gone through the order drafted by learned Accountant Member, I most respectfully disagree with his findings on the following point. The only point of dispute in these group of cases is whether the method of valuation of stock adopted by the Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted at the time of hearing that some of the items were actually weighed and others were estimated with the assistance of the assessee's representative at the factory premises. What the income-tax officials have done may not be wholly scientific, but the calculation which have been made cannot be ruled as without any logic or statistical sampling. In view of the complexity of the issue there is nothing wrong on the part of the income-tax officials in adopting the next best possible valuation method. It was also reported 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 incometax officials to arrive at the actual or nearer accurate weighment. 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 estima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ? The three assessees-two limited companies and one partnership firm, are dealing in iron and steel. In a search action under section 132, the Revenue authorities found certain stock lying at the premises and valued the stock of raw material and finished goods at some particular figures and finding the valuation at a higher amount than the book value, the difference was added to the assessees' income. The dispute in these 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. 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 case of the heavy items like M. S. slabs and slab cuttings, etc., the measurement of sizes were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earching party took the size of each piece at 4 3 at serial Nos. 1 to 24, whereas at serial Nos. 25 to 93 all sizes are different ; that various dimensions as recorded, were not uniform throughout ; that in case of defective and rejects, all the dimensions-length, width and thickness not being uniform they cannot be weighed by density, that as regards pencil ingots they were of trapezoidal in shape, i.e., cross-section at both ends but not measured by standard cross-section nor running length ; that two samples produced by the assessee were though of same length but their size and shape was not uniform ; that the difference in their weight was 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 8mm. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r agree on the point that the correct method of valuation is physical weighment and the assumption by sampling does not result in actual valuation in the opinion of the Accountant Member and is the next best method as per the Judicial Member can, therefore, be in such a situation any addition be made in assessment ? I find a decision of the Orissa High Court in the case of Haribhagat Agarwalla v. State of Orissa [1982] 51 STC 355, a case under the Sales Tax Act, stating that no addition can be made on the basis of difference of the stock arrived at by sampling method. It observed as under (headnote) : In 1969-70 the assessee, a rice miller, was the purchasing agent of the Food Corporation of India for paddy. Two revenue officials on two different dates verified the stock held by the assessee by a sampling method and not physically and found a huge shortage though their find ings 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 pay ment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estimation were started. I did not agree to calculation of weight by high estimation. I was told to seize the factory then I said you may verify the weighment as per your choice. That, in my opinion, does not amount to acceptance of the method as correct one but leaving the choice to the Department. Be that as it may, it does not carry the matter any further because if the method of weighment is wrong it is wrong or if right it is right. As pointed out above by the jurisdictional High Court, the sampling method cannot be utilised for imposition of tax on the difference in valuation on that basis. Various arguments were raised about the correctness of the accounts maintained under the checks and supervision of excise and other authorities, but determination of that issue might not have any impact in deciding these 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
