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Cit v. M/S Sir Shadi Lal Int. - INCOME TAX REFERENCE No. 58 of 1996  RD-AH 6505 (10 April 2007)
Court No. 2
Income Tax Reference No. 58 of 1996
Commisisoner of Income Tax, Meerut
M/s Sir Shadi Lal Enterprises Ltd. Shamli (U.P.)
Hon'ble R.K.Agrawal, J.
Hon'ble Bharati Sapru, J.
The Income Tax Appellate Tribunal, Delhi has referred the following question of law under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as the Act) for opinion of this Court.
"1.Whether the I.T.A.T. was justified in deleting the addition of Rs. 1,52,565 on account of closing stock of Bagasses?
2. Whether the I.T.A.T. was legally justified in restricting the disallowance at 30% out of guest house expenses of Rs. 55,629?
3. Whether the I.T.A.T. was legally justified in directing the assessing officer to cancel the interest of Rs. 3,64,734 levied under Section 220(2)?"
The reference relates to the assessment year 1986-87.
Briefly stated the facts giving rise of the present reference are as follows:
The assessee company is engaged in manufacturing of sugar, country liquor as well as Indian made foreign liquor in its factory at Shamli. On scrutiny of accounts submitted by the assessee for the assessment year 1986-87, for which previous year ended on 30th September, 1985, the Assessing Officer noticed that the assessee did not disclose any value of 7265 bales of Bagasses. On query it was stated before him that bagasse was meant for initial fuel and not for sale. It was further stated that for the purposes of valuation, there is no further cost of bagasse in the hands of the assessee company except for cost of wire used for baling and labour charges, which have been duly accounted for. The assessee followed this practice consistently in earlier years which have been accepted. It was argued before the Assessing Officer that he had no right to deviate from consistent practice accepted by the Department. The Assessing Officer did not accept the assessee's contention. According to him, the bagasses, which remained unconsumed, was closing stock available with the assessee as a byproduct which has a market value. On the basis of purchases of bagasses made by M/s Babri Paper Mills, he valued the closing stock of bagasses at the rate of 700 per m. t. and made the impugned addition. The assessee challenged this addition before the Commissioner of Income Tax (Appeals) and reiterated the same arguments which were advanced before the learned Assessing Officer, the Commissioner of Income Tax (Appeals) observed that the principle of res judicata did not aply to income tax proceedings. He did not agree with the view of the assessee that bagasse was a waste. On the other hand, he noticed that the assessee himself utilized the bagasse as fuel and occasionally purchased it from the market. He therefore, held that bagasse had some value and had to be treated as an integral part of the closing stock. He, however, felt that it would be reasonable to value the closing stock at the rate of Rs. 360 per m.t. being the prevailing price. He accordingly reduced the addition. Aggrieved by the learned Commissioner of Income Tax (Appeals') decision, the assessee was in appeal before the Appellate Tribunal. The Tribunal after considering the rival submissions of the parties, held that the assessee does not normally sell the bagasses but utilize the same as fuel. The assessee had been consistently valuing the bales of bagasses on direct cost method on its baling charges and cost of wires. This system of valuation has been following in the year of accounting also and this was evident from the fact that the assessee had disclosed its value at Rs. 7,557/- in its books under the head "stores and spares". It is now well settled that closing stock has to be valued at cost of market price whichever is lower. According to the assessee it has been valuing its closing stock of bagasses at cost. The assessee did not purchase any bagasse in year of account. The bagasses was assessee's byproduct and except for cost of baling and cost of wires disclosed by the assessee at Rs. 7557/-, no other expenditure was incurred. No material has been brought on record to prove that 7265 bales which remained in the closing stock in the year of account, cost more than what has been disclosed by the assessee itself. The Tribunal accordingly held that cost to the assessee could not be substituted by cost to any other assessee for evaluation of closing stock. In above view of the matter, the Tribunal saw no justification for upholding impugned addition for under valuation of closing stock of bagasses. Accordingly the addition was deleted.
The facts relating to question no.2 are that Assessing Officer disallowed Rs. 62,291/- was guest house expenses. This disallowance was made out of guest house expenses, depreciation and repair and maintenance of the guest house. On appeal, learned Commissioner of Income Tax (Appeal) confirmed the disallowance. This was done by him following the order of his predecessor for the assessment year 1985-86. The assessee then brought the issue in appeal before the Appellate Tribunal and submitted that the Tribunal has consistently held that expenditure on account of providing food etc. to the employees may be disallowed at 30% of the claim. In support of above, Tribunal's order in ITA No. 6047/Del/88 and C.O. No. 288/Del/89 dated 18.2.1991 read with M.A. No. 97/Del/91 dated 6.11.1991 were cited. The Appellate Tribunal following earlier orders cited before it, held that 30% of the claim may be disallowed out of guest house expenses on providing food etc. to the employees of the company. The Tribunal directed accordingly.
The facts relating to question no.3 are that the assessee was allowed refund of Rs. 14,23,356/- under section 141A on 15.4.1987 while on regular assessment, huge amount of tax demand was created and nothing was refundable to the assessee. Initially the refund allowed was adjusted against demand for assessment year 1984-85 but due to appeal effect, substantial amount was refundable on which interest of Rs. 7,77,991/- was also allowed under section 244(1A) of the Act. The interest was also allowed on amount of Rs. 14,23,356/- for the period from 15.4.1987 to the date of actual refund. The Assessing Officer, therefore, held that the assessee is liable to pay interest under section 220 on the amount of refund which was not actually due to the assessee. He accordingly charged interest amount to Rs. 3,64,734/- for the period 15.4.1987 to 31.1.1989 at the rate of 15% per month. The assessee challenged the levy of above interest in appeal before the Commissioner of Income Tax (Appeals). The learned Commissioner of Income Tax (Appeals) for the reasons given in paragraphs 31 to 34 of his appellate order confirmed the order of the Assessing Officer. The assessee then brought the issue in appeal before the Appellate Tribunal. The Tribunal after considering the submissions of both the parties and relevant provisions of Sections 220(2) and 144A of the Act held that the assessee would be in default only after service of notice under section 156 and then only will be liable to pay interest under section 220(2) of the Act. The Tribunal further held that it was a fact that the assessee had paid excess prepaid taxes to the tune of Rs. 14,40,561 which was refundable to it after making of provisional assessment under section 141A of the Act. On completion of regular assessment, notice under Section 156 of the Act was served on the assessee on 18.2.1989 demanding tax along with interest at Rs. 51,01,368/-. The Assessing Officer would have been justified in charging interest under Section 220(2) of the Act if the assessee had defaulted in making the payment of above demand. However, there was no warrant for him to relate back the levy of interest under Section 220(2) of the Act from the date of refund issued as a result of provisional assessment under Section 141A of the Act. In above view of the matter, the Tribunal held that revenue authorities were not justified in charging interest under Section 220(2) of the Act. The same was cancelled.
We have heard Sri A.N.Mahajan, learned standing counsel appearing for the Revenue and Sri S.D. Singh, learned counsel appearing for the respondent assessee.
Sri A.N.Mahajan, learned standing counsel submitted that admittedly the assessee has not shown closing stock of Bagasse which is a byproduct and according to him Bagasse has some value which ought to have been shown in the closing stock. The Tribunal has erred in deleting the addition made on account of closing stock of Bagasse. He further submitted that in view of the specific provisions of sub-sections (3), (4) and (5) of Section 37 of the Act, the Tribunal was justified in restricting the disallowance at 30% out of guest house expenses of Rs. 55,629/-. In support of his aforesaid submissions he relied upon a decision of the Apex Court in the case of Britannia Industries Ltd. v. Commissioner of Income Tax and another, (2005) 278 ITR 546. He further submitted that as the assessee had deposited the tax less than what was ultimately assessed by the Assessing Authority, the interest under Section 220 of the Act has rightly been levied.
Sri S.D.Singh, learned counsel appearing for the respondent assessee, however, submitted that admittedly the assessee has not sold the Bagasse and it has been using the same as fuel. According to him as there is no sale of Bagasse at the hands of the assessee the valuation of closing stock of the assessee company cannot be made especially when in the year of account the assessee did not make any sale of bagasse in the market. It did not make any difference whether the valuation of closing stock of Bagasse has been given by the assessee or not as it has been used as fuel and the corresponding value of closing stock of Bagasse is taken into consideration. So far as the guest house expenses is concerned, he submitted that the assessee had been maintaining guest house for lodging and boarding of its employees. The expenses towards lodging and boarding has not been incurred towards maintenance of the guest house and, therefore, the Tribunal was justified in restricting the disallowance at 30% out of guest house expenses of Rs. 55,629/-. In support of his aforesaid submissions he relied upon a decision of the Madras High Court in the case of Commissioner of Income Tax vs. South India Viscose Ltd. (2003) 259 ITR 107. So far as levy of interest under Section 220(2) of the Act is concerned he submitted that notice of tax under Section 156 of the Act was served upon the assessee on 18th February, 1989 and only after expiry of the period provided in the notice under Section 156 of the Act the interest would start running and in the present case the period prior to the service of notice under Section 156 of the Act cannot be taken into consideration for levy of interest. He relied upon an order of this Court in Income Tax Application No. 259 of 1995 decided on 15th September, 1999 which is inter parties in which this Court has declined to call for a similar question in respect of the assessment year 1987-88.
We have given our anxious consideration to the various pleas raised by the learned counsel for the parties and we find that in respect of the valuation of the closing stock of Bagasse the assessee has all alone been valuing it at the cost or market price which ever is lower. The assessee had not disclosed the closing stock of Bagasse as it was not being sold by it in open market and it is only used as fuel. The valuation of the closing stock of Bagasse would not have made any difference for the simple reason that the assessee was using it as fuel. If the valuation of closing stock of Bagasse was taken into consideration the corresponding deductions for it would be available to the assessee while determining the cost of fuel used by it. Thus, in any event, the Tribunal was justified in coming to conclusion that the valuation of the closing stock shown at the cost price was correct. So far as the question of disallowance of guest house expenses is concerned, we find that the assessee had not given a detailed break up and it had only claimed guest house expenses at Rs. 50,289/- and repairs at Rs. 5,000/- apart from claiming depreciation including worker welfare expenses. Under sub-sections (4) and (5) of the Section 37 of the Act expenditure on the maintenance of any residential accommodation in the nature of guest house has to be disallowed. Providing of lodging or boarding and lodging to any person including any employee on tour or visit to the place at which such accommodation is situated is also treated as accommodation in the nature of a guest house. It is not in dispute that the guest house which the assessee is maintaining is in the nature of guest house as the assessee has its units at Shamli and Pilkhani. Any expenditure incurred even on employees in the guest house in the form of lodging or boarding on tour or visit to a place at which such accommodation is situated, is also liable to be disallowed as if treated as an accommodation in the nature of guest house in view of sub-section (5) of Section 37 of the Act. Thus the entire expenses has to be treated as an expenditure on guest house which is not allowable in view of sub-section (4) of Section 37 of the Act. The reliance placed by the learned counsel on the decisions of South India Viscose Ltd. (supra) is wholly misplaced. It was dealing with a case of maintenance of a guest house and as to whether the rent paid for guest house would be admissible for deduction or not. The Madras High Court has held that the rent paid for the guest house cannot be regarded as part of the maintenance. The word "maintenance" refers to upkeep of the house and it has also been taken into consideration that any amount, which is paid, is for its existence. Thus, the Tribunal was not justified in restricting the disallowance at 30% in respect of guest house expenses. So far as the levy of interest under Section 220(2) of the Act is concerned, we find that admittedly in the present case notice under Section 156 of the Act was served upon the assessee on 18th February, 1989. Interest under sub-section (2) of Section 220 starts running after the amount remains unpaid. As the notice was served upon the assessee on 18th February, 1989 there is no liability for payment of interest prior to that date. The Tribunal has rightly cancelled the levy of interest under Section 220(2) of the Act.
In view of the foregoing discussions we answer the question nos. 1 and 3 referred to us in the affirmative i.e. in favour of the assessee and against the Revenue. So far as the second question is concerned, that is answered in the negative, i.e. in favour of the Revenue and against the assessee. There will be no order as to costs.
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