PEARL POLYMERS (P) LTD v. INCOME TAX OFFICER
[Citation -1986-LL-0321-1]

Citation 1986-LL-0321-1
Appellant Name PEARL POLYMERS (P) LTD
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 21/03/1986
Assessment Year 1981-82
Judgment View Judgment
Keyword Tags mercantile system of accounting • cash system of accounting • excise duty drawback • method of accounting • business of export • imported material • export promotion • central excise • closing stock • non-resident • raw material • customs act • gunny bag
Bot Summary: From the first year of assessment till the assessment year 1980-81 the assessee has been maintaining books of account on mercantile system of accounting The assessee follows financial year as the previous year Though the assessee follows mercantile system of accounting yet in respect of the containers or drums in which the raw material is purchased the assessee adopted a method which had however, been consistently fol lowed from the year of inception. These amounts were taxed as income of the assessee as they had entered into the drawing up of profit and loss account, the assessee as they had entered into the drawing up of profit and loss account, from which the total income of the assessee was computed by the ITO. 11. The assessee did not account for these two amounts in its books of account on the basis of mercantile system of accounting because it decided to account for the amounts on the cash system of accounting due to the fact that the assessee on attaining eligibility for CCS and duty drawbacks was subsequently required to approach the concerned authorities for legally enforceable entitlement and the quantum of such entitlement by the said authorities. The learned counsel for the assessee relied upon the principles of accountancy that an assessee is entitled to maintain a hybird system of accounts, namely, maintaining books on bulk of the commercial transactions on the mercantile system and accounting for some other transactions on cash system of accounting. The learned counsel for the assessee further submitted that the Dehli Bench 'D' of Tribunal in the case of Indian Aluminuium Cables Ltd. v. IAC 1985 13 ITD 907 has held that the assessee is entitled to change the method of accounting with regard to CCS and duty drawbacks from mercantile to cash system and that on the date of making the claim for these incentives the amount claimed was neither due nor payable to the assessee and as such, the change of system made by the assessee was bona fide. Embedded in these judgment is the assumption that if the assessee was accounting for the amounts of CCS and duty drawbaks on due basis depending upon the date of transatction of export the assessee had a right to account for the amounts of cash system of accounting i. e., as and when the assessee become entitled to quoted claims to approval by the concerned authorities. On the entirety of the facts and circumstances of the case and for the reasons that we have recorded supra, we hold that the assessee was entitled to account for these amounts on the basis of cash system of accounting and the authorities below erred in bringing to tax these amounts, as if these were receivable by the assessee and as such, accountable on the date of transaction of export.


Commissioner (Appeals) dated 31-10-1985 relating to assessment year 1981-82. There are diverse grounds, which we, after hearing parties and on perusal of orders of authorities below decide as under. 2. first ground relates to addition of Rs. 1, 05,600 made by ITO to total income declared by assessee on account of value of drums. In order to appreciate contentions of rival parties, factual background relevant t this issue has to be kept in focus and that background is as under. 3. assessee is company and manufactures plasticiser which is supplied to Bata Shoe Co. assessee also manufactures garments for exports raw material for manufacture of platiciser comes in tincontainers or in gunny bags. From first year of assessment till assessment year 1980-81 assessee has been maintaining books of account on mercantile system of accounting assessee follows financial year as previous year Though assessee follows mercantile system of accounting yet in respect of containers or drums in which raw material is purchased assessee adopted method which had however, been consistently fol lowed from year of inception. This methde is that assessee debits purchases with cost of plasticiser as purchased. As stated earlier it is purchased in drums of or in gunny bags. After debiting cost to accounts in this manner assessee had been keeping containers in separate stock. There is no dispute that proper details for verification of quantity of such containers or gunny bags age available. assessee however did not value such empty containers or gunny bags for purpose of inclusion of their value in profit and loss account. However, whenever assesse sold such cotainers or gunny bags, sale proceeds were credited in accounts and accounted for in total sales appearing in final acconts. 4. assessee had this sold and accounted for, for example, in financial year relevant to assessment year 1980-81 empty drums wroth Rs. 39,285 and empty bags worth Rs. 8,908.75. There is no dispute about fact that in total sales for assessment year 1980-81 accounted for at Rs. 2,24,62,322.96 assessee had accounted for amounts of Rs. 39,285 and Rs. 8,908.75. There is also no dispute that similar sales in assessment years prior to assessment year 1980-81 have been accounted for. 5. revenue took action under section 132 of Income-tax Act, 1961 ('the Act') in case of assessee on 11-5-1982. As pointed earlier, assessee maintains books of account and follows financial year for this purpose. return for assessment year 1981-82 had been filed by assessee on 27-2-1982. In final accounts, total sales were shown at Rs. 4,18,78,851.42. In these sales, assessee had included after incorporation in books of account, which were closed on 31-3-1981 amounts of Rs. 99,185.80 and Rs. 13,286.25 respectively, as sale proceeds of empty drums and empty bags. return was revised by assessee on 15-2-1983 and ITO during process of assessment examined issue of sale of drums by assessee. 6. ITO was of opinion that assessee had hot shown value of drums in closing stock and by debiting cost of materials, which included cost of containers to purchase account, assessee had got undue benefit from this method adopted for showing amounts only on basis of dates of sale proceeds of durms and gunny bags. Therefore after reasons recorded in his impugned order, he, after obtaining approval of IAC, came to conclusion that value of 1,056 drums should be added to total income of assessee. Similarly, he added Rs. 20,000 for empty bags. ITO valued empty drums at rate of Rs. 100 per drum. He however estimated value of empty bags. 7. When these additions were challenged in appeal before Commissioner (Appeals) learned Commissioner supported ITO for action taken by him and for reasons given in support of such action. He, however, held that value of each drum for purpose of addition should be taken at Rs. 80 per drum. He nevertheless, confirmed addition made on estiamte basis for gunny bags. 8. On such background learned counsel for assessee has submitted that assessee has been accounting for empty drums by keeping seperate stock account for same and sale proceeds of drums have been credited as and when they were sold. Since, assessee had regularly adopted this method and there was no change, authorities below had in earlier years accepted this system after due consideration. He submitted this system of assessee which was basically mercantile system of accountiing except that for sale of drums and gunny bags. assessee accounted for their sale and did not value them from very begining for purpose of including in closing stock on estimate basis. Commissionera was therefore in error in supporting ITO on this issue, as he did. 9. revenue on other hand, suhmitted that assessee has paid for not only material in drums but also for durms when pruchases were made. Therefore, by debiting entire cost to profit and loss account and not valuing empty drums for purpose of inclusion in profit and loss account of relevant assessment year assessee has not disclosed true and correct particluars of its income. It was submitted that empty containers had value and, therefore, in each year, assessee should have not only maintained separate closing stock for such containers but should have also taken their value to profit and loss account to determine true and correct income of that year. Since it was not done, ITO was right in adding value of such durms and gunny bags in year under appeal. 10. We have given careful consideration to rival submissions and we finds that there is no dispute that, insofar as this issue is concerned, assesse had adopted hybrid system. assessee was having its commercial and manufacturing transactions recorded in books of account on basis of mercantile system of accounting. However, from very beginning as projected earlier for empty drums and gunny bags, assessee maintained separate accounts and on sale of such empty cotainers accounted for those sale, in year in which such sales took place. In other words, ordinarily these sales were accounted for in year of sale. This method was considered and accepted in all assessment years preceding assessment year under appeal. We have given above figures relating to assessment year 1980-81 included in total sales no account of drums gunny bags. These amounts were taxed as income of assessee as they had entered into drawing up of profit and loss account, assessee as they had entered into drawing up of profit and loss account, from which total income of assessee was computed by ITO. 11. In fact, it is apparent that even for year under appeal, when books of account were closed on 31-3-1981, assessee had accounted for in books of account, amounts of Rs. 90,185 and Rs. 13,286 respectively, representing sale proceeds of empty drums and empty bags. It is pertinent to note that action under section 132 took place subsequent to closure of accounts and it cannot be even argued that assessee had even inkling of what was going to happen subsequently. Therefore, there is lot of substance in eh contention of learned counsel for assessee that systematic regular account was kept of empty drums and gunny bag and such system was accepted by ITO. We, therefore, find that ITO was merely, without there being any material change in facts and circumstances of case, trying to add to total income of assessee by way of valuation of empty durms and gunny bags by treating them as part of closing stock, which was not done in any of earlier assessment years. Therefore, reasoning given by authorities below that assesse had tried to furnish inaccurate particulars of income in this manner is without substance. It is very clear that assessee had consistently adopted this regular method and department had accepted it. There is no justification shown to us for making departure of this accepted system and, therefore, addition resulting from departure, which is without justitification is in itself without justification. It is deleted. Therefore ground Nos. 1 and 2 of assesseee are allowed. 12. [This para is not reproduced here as it involves minor issue.] 13. only other grounds that surviive for our consideration are numbered 4 and 5. These grounds relate to cash incentives and duty drawbacks. In order to appreciate greivance of assessee, factual backdrop of case relevant to this issue has to be kept in focus, which is as under. 14. As mentioned earlier, assessee, in addition to manufacturing plasticiser, makes garments for exports. It actually exports these garments made by it. Government of India has adopted various measures for promotion of exports. These measures can be categorised as under: (i) Material inputs facilities, such as, replenishment licensing, etc.; (ii) Fiscal incentives, such as, cash compansatory support (CCS), duty drawbacks, concessions in direct taxes and establishment of free trade zones, etc.; (iii) Export credit by charging lower rate of interest: and (iv) Institutional support by way of setting up inistitutions like export promotion councils, etc. It would be seen from above that CCS and duty drawbacks are fiscal incentives intended for promotion of exports. When exports are made, assessee becomes eligible for making claim to concerned authorities within specified period and concerned authorities would determine claim and its quantum depending upon elgibility criteria. In other words, at time of making exports, assessee earns eligibility for entitlement to claim of CCS before concerned authorities. 15. duty drawbacks are, on other hand, allowed under Customs and Central Excise Duty Drawback Rules, 1971, framed under Customs Act, 1961 and Central Excise and Salt Act, 1944. While fixing rate of drawbacks, Goverment, inter alia, takes into consideration various types of duties and levies paid on thei imported material of excisabel material used in process of manufacturing of items exported. procedure laid down for claiming drawbacks on exports other than by post requires that exporter shall at time of export of goods state on shipping bill or bill of export, descirption quantity and other prticulars as are necessary for deducting whether goods are eligible to drawbacks and if so at what rate or rates. claim so made is determined by concerned authorities subsequently. 16. During year under appeal, assessee exported garments to West Germany and Holland, etc., valued at Rs. 14,18,040. It becameeligible for claim of CCS to tune of Rs. 2,12,706. Similarly assessee became eligible claim of CCS to tune of Rs. 2,12,706. Similarly assessee became eligible f o r duty drawback to tune of Rs. 1,20,939. assessee is following mercantile system of accounting and its previous year is financial year. However, assessee did not account for these two amounts in its books of account on basis of mercantile system of accounting because it decided to account for amounts on cash system of accounting due to fact that assessee on attaining eligibility for CCS and duty drawbacks was subsequently required to approach concerned authorities for legally enforceable entitlement and quantum of such entitlement by said authorities. It decided to account for these amounts on receipt of quantified entitlement from concerned authorities. 17. ITO, however, held that assessee's accounting system was purely mercantile and CCS and duty drawbacks, in fact, directly relate to business of export of garments. These were, in fact, part of same transaction n d should have been accuonted for by assessee when export transactions were accouinted for in books of account from which said CCS duty drawbacks arose as iincidental receipt of such transactions. These amounts were, therefore, added to total income which was determied at Rs. 9,41,228 as per order dated 25-8-1984 made under section 143(3) , read with section 144B , of Act, namely, after forwarding draft to IAC and on receipt of his directions. This assessment was challenged in before Commissioner (Appeals). 18. learned Commissioner had to decide two facets of this problem. first fact was whether CCS adn duty drawbacks were at all exigible to tax. In other words, he had to determine character of such amount qua' character of taxable income under Act. On this issue, learned Commissioner made very well reasoned order to hold that these amount were in nature of income and as such, exigible to tax under Act. other fact of problem was whether amounts were taxable on date export bills were made or on actual receipt Appeal from Judgment and Order dated e r adjudication of claim of assessee by concerned authorities. learned Commissioner held no this aspect of matter that these amounts were in fact part of transactions of export and constiituted integral part of turnover of assessee and as such, exigible on basis of date of bill incorporated in books of account on mercantile system of accounting. Now, insofar as decision of learned Commissioner on first facet of this probleim is concerned, it is not is agitation in appeal before us. assessee is in APPLICANTeal only about second facet of problem, that is, basis of exgibility of these amounts. 19. We have heard parties at lenght on this issue. learned counsel for assessee relied upon principles of accountancy that assessee is entitled to maintain hybird system of accounts, namely, maintaining books on bulk of commercial transactions on mercantile system and accounting for some other transactions on cash system of accounting. It was contented by him that it is accepted both in accountancy and by judicial authorities and as such, assessee is entitled to do what it has done. learned counsel for assessee further submitted that Dehli Bench 'D' of Tribunal in case of Indian Aluminuium Cables Ltd. v. IAC [1985] 13 ITD 907 has held that assessee is entitled to change method of accounting with regard to CCS and duty drawbacks from mercantile to cash system and that on date of making claim for these incentives amount claimed was neither due nor payable to assessee and as such, change of system made by assessee was bona fide. learned counsel also relied upon judgment of Dehli Bench 'A' in case of East West Liners (P.) Ltd., [IT Appeal No. 4335 (Dehli) of 1977- 78 and C. O. No. 337 of 1977-78 dated 12-9-1979] for sssessmet year 1975- 7 6 appearing at pages 217 to 226 of assessee's paper book. learned departmental representative on other handi, relying upon judgment of Dehli High Court in case of Dalmia Dadri Cement Ltd. v. CIT [1980] 126 ITR 851, CIT v. Martin & Harris (P.) Ltd. [1985] 154 ITR 460 (Cal.) and Dehli High Court judgment in case of N. K. Textile Mills v. CIT [1985] 152 ITR 594 conteneded that assessee has not made out case for interference in order of learned Commissioner which should be confirmed. 20. We have given careful cosideration to rival submissions. On perusal of authorities cited on behalf of revenue are clearly distinguishable on facts. These are, therefore not applicable for determination of issue before us. On other hand, judgment of Tribunal cited by the issue before us. On other hand, judgment of Tribunal cited by assessee are directly on issue in sense that in these two judgments, Hon'ble Tribunal upheld claim of assessee that assessee was entitled t o change method of accounting regarding CCS and duty drawbacks from mercantile to cash. Embedded in these judgment is assumption that if assessee was accounting for amounts of CCS and duty drawbaks on due basis depending upon date of transatction of export assessee had right to account for amounts of cash system of accounting i. e., as and when assessee become entitled to quoted claims to approval by concerned authorities. So in way, it can be said that this aspect of issue is covered by judgement of Tribunal. 21. However, we would like to examine this issue independently whether t h e claim made by assesse is acceptable or view adopted by authorities below is supportable. After consideration of entire issue we are of t h e opinion that when thh assessee makes bill for exports assessee obtains of acquires eligibility to make claim for CCS and duty drawbacks. At that stage assessee is only having inchoate entitlement. assessee actually acquires legally enforcable right or entitlement only when application made by tha assessee is examined by concerned authorities of claim either as made or with variation as approved for payment. This is stage, when assessee in law acquires enforceable right. Before that eligibility that assessee acquires gives him right to make claim before concerned authorities to issue him entitlement or certificate that he is entitled to of particular amount on basid of such eligibility. 22. argument of lower authorities therefreo that at time when experts took place and bill for exported amount is made transaction involves two ingredients, one payment to be made by non-resident for export and other component being CCS and duty drabacks availabe from t h e Government is not even syllogistically sound. This is so, because transaction no doubt gives assesses incidental eligibility from transaction, yet entitlement legally enforceable becomes property of assessee only on concerned authorities making certificate or o rder in favour of assessee after verification of claim made. reasoning given by learned Commissioner on this aspect of matter is, therefore, enthymem, because practical aspect of matter has been ignored. 23. On entirety of facts and circumstances of case and for reasons that we have recorded supra, we hold that assessee was entitled to account for these amounts on basis of cash system of accounting and authorities below erred in bringing to tax these amounts, as if these were receivable by assessee and as such, accountable on date of transaction of export. It is very clear that these were to be determined both on legally enforceable claim and on quantum by concerned authorities taking into consideration elgiblity criteria. These amounts were, therefore, wrongly included into total income of assessee for year under appeal. orders of authorities below on this issue are set aside and ITO is directed to delete these amounts from total income for year under appeal. These grounds are allowed. 24. Appeal partly allowed. *** PEARL POLYMERS (P) LTD v. INCOME TAX OFFICER
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