(a) Income-tax---

----Appellate Tribunal---Powers---Appeal---Fresh grounds and evidence not raised or adduced before lower authorities---Discretion of tribunal to permit---Indian Income Tax Act, 1961, S.254---Indian Income-tax (Appellate Tribunal) Rules, 1963, Rr.1l & 29.

For the assessment year 1965-66, the assessee had claimed a certain amount as loss before the Income-tax authorities on the basis that it represented loss in value of closing stock of sugar earmarked for export at prices lower than the local market price. But, in appeal before the Appellate Tribunal, the assessee claimed the loss on the basis that, out of the sugar earmarked for export, Government had subsequently permitted the assessee to sell a portion locally and as a result the assessee had suffered a loss of Rs. 3,96,874. The Department contended that this was a new ground and the matter should be remanded to the Appellate Assistant Commissioner. The Tribunal rejected the Department's contention, entertained the assessee s claim and itself considered the evidence filed on record by the assessee and held that the claim for deduction was allowable. The two reasons given by the Tribunal were: (i) that, in respect of an earlier order passed by the Tribunal for the assessment years 1963-64 and 1964-65 remanding the case, more than four years had elapsed and the Income-tax Officer had not passed any order, and (ii) that the assessee had placed before the Tribunal all the relevant data which could enable it to come to a conclusion itself. On a reference:

Held, affirming the decision of the Tribunal, (i) that the Appellate Tribunal had discretion to allow additional grounds to be raised before it. Under rule 11 of the Appellate Tribunal Rules, 1963, a new ground of appeal could be raised by the appellant with the leave of the Tribunal and rule 29 gave power to the Tribunal to admit additional evidence. There was no illegality committed by the Tribunal and the discretion to allow the assessee to raise a fresh ground and adduce evidence could not be said to be unjustified.

(ii) That, on the facts, since the finding of fact that there was actual loss of Rs. 3,96,874 had not been challenged by the Department, the assessee was entitled to deduction of the sum as loss incidental to its business.

(b) Income-tax---

----Stock-in-trade---Valuation---Closing stock---System of valuing with reference to price subsequent to last day of accounting period---Consistently followed-- -Permissible.

From the year 1959, the assessee had regularly adopted a system of valuing its closing stock with reference to the selling price subsequent to the last date of the accounting period. In respect of the assessment years prior to the assessment year 1965-66, the Appellate Assistant Commissioner had held that the method adopted was in fact nearer to the reality and as such could be treated as a correct and perfect method of valuation. The Appellate Tribunal accepted the system of valuation for the assessment year 1965-66. On a reference.

Held, affirming the decision of the Tribunal, that the positive finding was that the correct and true profits could be ascertained from the method of accounting which was being followed by the assessee and no addition could be made to the assessee's valuation of the closing stock on the basis of under valuation.

CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC) ref.

Mr. Rajendra and R.K. Chaufla for the Commissioner.

S.N. Kumar, Senior Advocate with K.B. Soni for the Assessee.

JUDGMENT

B.N. KIRPAL. J.---In respect of the assessment year 1965-66, pursuant to a direction issued by this Court under section 256(2) of the Income Tax Act, 1961, the Income-tax Appellate Tribunal has stated the case and referred the following three questions to this Court:

"(1)Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in allowing the assessee a deduction of Rs. 3,96,874 as loss incidental to the business by admitting fresh grounds/evidence which were never raised before the lower authorities?

(2)Whether, on the facts and in the circumstances of the case, the assessee is entitled to a deduction of Rs. 3,96,874 as loss incidental to the business in the computation of the taxable income?

(3)Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in deleting the addition of Rs. 60,085 made by the Income-tax Officer in respect of under valuation of the closing stock?"

Briefly stated, the facts as found by the Tribunal are that the previous year of the assessee ended en June 30, 1964, relevant to the assessment year 1965-66. The main dispute relates to the assessee's case for the loss of Rs. 3,96,874, which was allowed by the Tribunal. On this point, the Income-tax Officer found that the assessee-company had a closing stock of 1,24,435 bags of sugar of the value of Rs. 1,20,36,811 as on June 30, 1964. The assessee-company reduced the closing stock aforesaid by Rs.4,70,577 in respect of the stock earmarked for export on the ground that, since it was constrained to earmark for export the above sugar at prices lower than the market rate, the value of such closing stock was really less by the aforesaid amount. The Income-tax Officer did not accept this contention of the assessee as the sugar had not, in fact, been exported, and so he added back Rs. 4,07,707 to the adjusted value of the closing stock shown by the assessee.

The Income-tax Officer further found that, in the earlier year, a similar deduction from closing stock amounting to Rs. 2,35,562 had been disallowed and the closing stock of the last year had increased to that extent. However, for the assessment year under reference, the Income-tax Officer held that the assessee was entitled to enhance the value of the opening stock and he set off the aforesaid claim of Rs.2,35,562 against the addition of Rs.4,07,707. In conclusion, the Income-tax Officer held that, to the extent of the difference, the assessee-company had understated its income and added the amount of Rs.1,72,145.

The assessee filed an appeal to the Appellate Assistant Commissioner but without any success. The Appellate Assistant Commissioner held that the aforesaid loss had not been worked out on any consistent method either in respect of the period when the loss had arisen or the amount of loss was computed. He further observed that since the provision for the loss of Rs.4,07,707 was not being allowed, the adjustment in the opening stock of Rs.2,35,562.,was required to be upheld. Accordingly, the addition of Rs.1,72,145 was confirmed by the Appellate Assistant Commissioner.

The assessee then filed an appeal before the Tribunal and contended that, due to certain mistakes, its earlier stand before the Income-tax Officer and the Appellate Assistant Commissioner required modification. It was submitted that, out of 35,776 bags of sugar earmarked for export, the Government had subsequently permitted the sale internally of 32,312 bags and these had also been sold by the assessee and, as a result thereof, it had suffered an actual loss of Rs.3,96,874. It was also contended by the assessee that it was maintaining its accounts on a regular and systematic basis.

The Income-tax Appellate Tribunal allowed the assessee to raise the aforesaid contention with regard to the claim of loss of Rs. 3,96,874. It did not accept the contention of the Departmental representative that the matter should be remanded to the Appellate Assistant Commissioner. The Tribunal itself considered all the evidence which had been filed on record by the assessee and it came to the conclusion that the aforesaid loss was, in 'fact, incurred and the same was allowable as a deduction. It also concluded that the method of valuation of the closing stock which was being adopted by the assessee was that it would not take the value of the closing stock as on the last date of the accounting year but it took the estimated realisable market value by adopting the price of sugar subsequently realised or realisable before the balance-sheet for the year in question was adopted. The Tribunal observed that this method of valuing the closing stock had been regularly employed and it could not be said to be unscientific. With regard to the claim of Rs. 60,085, the Tribunal came to the conclusion that the method of valuation adopted by the assessee was consistent and scientific and, therefore, it deleted the addition of Rs.60,085.

It is after the aforesaid decision that a reference application under section 256(1) was filed but without success. Thereafter, the Department filed an application under section 256(2) and the aforesaid three questions were directed to be referred.

As regards question No.1, it cannot be denied that the Income-tax Appellate Tribunal has discretion to allow additional grounds to be urged before it. This is evident from the provisions of rule 11 and rule 29 of the Income-tax (Appellate Tribunal) Rules. According to rule 11, a new ground of appeal could be raised by an appellant with leave of the Tribunal and rule 29 gives the power to the Tribunal to admit additional evidence. The Tribunal has given two reasons for the exercise of this discretion contained in rule 11 and rule 29. The Tribunal rejected the submission of the Department that the case should be remanded because it observed that, in respect of an earlier order passed by the Tribunal for the assessment years 1963-64 and 1964-65 remanding the case, more than four years had elapsed, but the Income-tax Officer had not passed any order. The second reason given by the Tribunal was that the assessee had placed all the relevant data before it and, while the figures may have needed some verification, there was enough data which could enable the Tribunal to come to a conclusion itself. In our opinion, there was no illegality committed by the Tribunal and the discretion to allow the assessee to raise fresh ground and evidence could not be said to have been unjustified. In admitting fresh ground and evidence, the. Tribunal exercised its jurisdiction, as already stated, under rule 11 and rule 29 of the Income-tax (Appellate Tribunal) Rules. This question has, therefore, to be answered in favour of the assessee.

Coming to the second question, it was not disputed before the Tribunal that, on the basis of the method of valuation which was being regularly followed by the assessee, it had actually suffered a loss of Rs.3,96,874 in the sale of sugar in the local market. The business of the assessee is that of manufacture and sale of sugar. Therefore, any loss which is suffered in connection therewith has necessarily to be regarded as loss which is incidental to the business. The finding of fad by the Tribunal that there was actual loss of Rs.3,96,874 has not been challenged by way of a reference. This being so, the second question also has to be answered in favour of the assessee.

As regards question No.3, the finding of fact arrived at by the Tribunal is that the assessee was following a regular method of accounting. While referring to the Supreme Court decision in the case of CIT v. British Paints India Ltd. (1991) 188 ITR 44), it has been stated by Mr. Rajendra that the principle of valuation of stock was that it should be valuation at cost or market value whichever is lower on the closing date. He further submitted that any different principle like the one which was being followed by the assessee in this case cannot be regarded as the correct method of valuing the closing stock. In our opinion, the aforesaid decision can be of little assistance to the Department. In British Paints case (1991) 188 ITR 44), the Supreme Court has, no doubt, held that the Income-tax Officer is not bound to accept a system of accounting merely because it is regularly employed by the assessee. The Court, however, observed that the system which was adopted by the assessee must disclose the true state of affairs for the determination of tax. If correct profits and gains could be deduced from the accounts as maintained by the assessee, then the income-tax Officer was to accept the same if the said system was being regularly employed. It was held that what was the profit of a trade or business is a question of fact and it must be ascertained, as all facts must be ascertained, with reference to the relevant evidence, and not on doctrines or

In the present case, a system `of valuing the closing stock, with reference to selling price, subsequent to the last date of accounting year has been consistently followed by the assessee and it has not been held by the income-tax authorities that correct profits and gains could not be deduced from the accounts so maintained. In respect of the two immediately preceding i years, this method had been challenged by the Department but the Income-tax i Appellate Tribunal had accepted the method of accounting of the assessee. This was a method which was regularly employed since the year 1959, and, in respect of the earlier assessment years, the Appellate Assistant Commissioner had held that:

"The spirit behind the method of valuation has been to limit the probability of normal fluctuation in the estimated price of stock which could have been taken on the last date of the accounting period. The method adopted by the appellant is, in fact, nearer to the reality of the fact and as such could be treated as a correct and perfect method of valuation."

The aforesaid observations of the Appellate Assistant Commissioner were accepted by the Tribunal and, therefore, the positive finding of fact was that the correct and true profit could be ascertained from the method of accounting which was being followed by the assessee. This question also has, therefore, to be answered in favour of the assessee.

For the aforesaid reasons, we conclude that our answer to all the three questions is in the affirmative and against the Department. There will be no order as to costs.

M.BA./2381/TOrder accordingly.