Income-tax ---

----Reference---Question of law ---Assessee engaged in manufacturing different kinds of sugar---Different method adopted for valuing each variety of closing stock of sugar---Return filed disclosing loss---Assessment completed after making addition on account of under valuation of closing stock of sugar ---C.I.T. (Appeals) upholding addition only to a certain extent---Tribunal deleting addition on ground that assessee followed regular and accepted method of valuation of closing stock over a number of years-- Tribunal not giving cogent reasons for accepting method of valuation-- Question of law arises for reference---Indian Income Tax Act, 1961. S.256(2).

The assessee, a sugar mill, manufactured three types of sugar (i) crystal sugar, (ii) raw brown sugar and (iii) sugar in process, and for each variety of sugar different method was adopted for valuing the same on the last day of the accounting year. In its return filed for the relevant assessment year the assessee declared a loss of Rs.91,77,270. The assessment was completed by the Inspecting Assistant Commissioner of Income-tax on a net loss of Rs.50,73,792 after making an addition of Rs.14,91,430 on account of under valuation of closing stock of sugar. On appeal, the Commissioner of Income-tax (Appeals) upheld the addition to the extent of Rs.12,31,658. The Commissioner of Income-tax (Appeals) further held that the assessee was entitled to the benefit of carry forward of losses of the earlier years. On further appeals, the Tribunal deleted the addition of Rs.12,31,658 on the ground that the assessee had followed a regular and accepted method of valuation of closing stock over a number of years. The Tribunal rejected the application of the Revenue under section 256(1) of the Income Tax Act, 1961, for referring a question of law. On an application filed under section 256(2) to the High Court for directing the Tribunal to refer a question of law, the Revenue contended that an arbitrary method had been adopted by the Tribunal in valuing the two types of sugar, i.e., raw brown sugar and sugar in process:

Held, that the Tribunal had not given any cogent reasons for accepting the method of valuation in regard to the closing stock of the assessee and it based its findings only on the practice in this regard followed by the assessee during the earlier years. Therefore, the question of law, whether the Tribunal , was right in law in deleting the addition of Rs.12,31,658 made by the Assessing Officer and upheld by the Commissioner (Appeals) on account of valuation of closing stock, arose for reference.

B.S. Gupta, Senior Advocate with Sanjay Bansal for the Commissioner.

M.L. Sharma for the Assessee.

JUDGMENT

IQBAL SINGH, J.---The Commissioner of Income-tax,' Jalandhar, made reference application under section 256(1) of the Income Tax Act, 1961. (hereinafter referred to as "the Act"), to the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar, requesting it to draw up a statement of the case and to refer to this Court for its opinion the following question of law in the case of Janta Cooperative Sugar Mills Ltd. v. IAC of I. T. (Assts.) R-I, Jalandhar, arising out of the Tribunal's order dated October 22,1992, in I.T.A. No.413 ASR of 1988 (assessment year 1983-84):

"Whether, on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal is right in law in deleting the addition of 8.12,31,658 made by the Assessing Officer and upheld by the Commissioner of Income-tax (Appeals), on account of valuation of closing stock of sugar?"

Janta Cooperative Sugar Mills Ltd., Bhogour, manufacture three different varieties of sugar, i.e., crystal sugar, raw brown sugar and sugar in process, and for each variety of sugar a different method was adopted for valuing the same on the last day of the accounting year. For crystal sugar, it put the value, of production at Rs.379.96 per bag; for raw brown sugar it valued the stock at Rs.150 per bag and for sugar in process it valued the stock at Rs.90 per bag. In its return filed on March 3, 1984, the assessee firm declared a loss of Rs.91,77,270. The assessment was completed at a net loss of Rs.50,73,792 vide order dated December 18, 1985, passed by the Inspecting Assistant Commissioner of Income-tax (Assessment) Range, I, Jalandhar, after making an addition of Rs.14,91,430 on account of under valuation of closing stock of sugar. Aggrieved by this order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), who vide his order,,, dated February 24, 1988, upheld the addition to the extent of Rs.12,31,658. He further held that the assessee may be allowed the benefit of carry forward of losses of the earlier years in accordance with the relevant provisions of law. Aggrieved by this order of the Commissioner of Income-tax (Appeals), dated February 24, 1988, the assessee filed an appeal before the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar. The Tribunal vide its order, dated October 22, 1992, deleted the addition of Rs.12,31,658 sustained by the Commissioner of Income-tax (Appeals), holding that the assessee followed the regular and accepted method of valuation of closing stock over a number of years. The Commissioner of Income-tax, Jalandhar, thereafter made reference application under section 256(1) of the Act before the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar, to refer the abovementioned question allegedly arising out of the order of the Tribunal, dated October 22, 1992, to this Court for opinion, which was rejected by the Tribunal vide order, dated August 6, 1993. Accordingly, the Revenue has come to this Court by way of petition under section 256(2) of the Act seeking a direction to the Tribunal to state the case and refer the aforesaid question of law to this Court for its opinion.

We have heard learned counsel for the parties.

The assessee-firm was asked to explain the basis for valuation of sugar manufactured by it. As per the statement submitted before the Inspecting Assistant Commissioner of Income-tax (Asstt.) Range I, Jalandhar, the assessee had declared 45.909 bags of free sale sugar and the value was calculated at Rs.383 per bag.

The Inspecting Assistant Commissioner of Income-tax (Asstt.) Range I, Jalandhar, worked out the cost of production, as regards crystal sugar, at Rs.383 per bag as against Rs.379.96 adopted by the assessee and accordingly he made an addition of Rs.1,37,727 in respect of this variety of sugar. Similarly, as regards the other two varieties of sugar, i.e., raw brown sugar and sugar in process, additions of Rs.7,63,308 and Rs.5,90,385, respectively, were made by the Inspecting Assistant Commissioner of Income-tax (Asstt.) He had worked out the cost of production in respect of raw brown sugar at Rs.383 per bag as against Rs.150 per bag adopted by the assessee and in respect of sugar in process at Rs.383 per bag as against Rs.90 per bag adopted by the assessee.

The Commissioner of Income-tax (Appeals) II, Jalandhar, on appeal, held that there was no justification for tampering with the valuation of crystal sugar as adopted. by the assessee and, accordingly, he deleted the addition of Rs.1,37,727. As regards raw brown sugar and sugar in process, he held the value of raw brown sugar should be taken at 10 percent. less and the value of sugar in process should be taken at 20 percent. less than the cost of crystalsugar and accordingly he worked out the estimated cost of raw brown sugar at Rs.342 per bag and that of sugar in process at Rs.304 per bag. Additional 564 bags of sugar in process were also added in it. The total addition made by the Commissioner of Income-tax (Appeals) is as under:

When the matter went before the Income-tax Appellate Tribunal, it accepted the appeal and deleted the addition so made.

The contention of learned counsel for the Revenue is that an arbitrary method has been adopted by the Tribunal in valuing the two types of sugar, i.e., raw brown sugar and sugar in process, after holding that the assessee had followed a regular and accepted method of valuing its closing stock over a number of years, which was being accepted in the earlier years as also in the later years. We would not like to give our opinion as regards the method adopted by the authorities below for arriving at a particular value for manufacturing three types of sugar in stock with the assessee-firm at this stage. We find that the Tribunal has not given any cogent reasons for accepting the method of valuation in regard to the closing stock of the assessee-firm and it based its findings only o the practice in this regard followed by the assessee-firm during the earlier years. Therefore, we are of the opinion that a question of law does arise in this case. We, accordingly, direct the Tribunal to draw up a statement of the case and refer the abovementioned question alongwith the statement of case to this Court for its opinion. This petition stands disposed of accordingly.

M.B.A./3291/FCOrder accordingly.