ITA No. 135 of 2005 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 135 of 2005 Date of Decision: 15.10.2010 Bhiwani Rice Mills ....Appellant. Versus Commissioner of Income Tax ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Pankaj Jain, Advocate for the appellant. Mr. Tajender K. Joshi, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1. By way of instant appeal under Section 260A of the Income Tax Act, 1961 (in short “the Act”) arising out of the order dated 30.7.2004 passed by the Income Tax Appellate Tribunal, Chandigarh Bench “B”, Chandigarh (hereinafter referred to as “the Tribunal”) in ITA No. 885/CHD/2001, for the assessment year 1998-99, the assessee has claimed the following substantial questions of law:- “i) Whether under the facts and circumstances of the case the Tribunal was justified in upholding the addition of Rs.50,000/- on account of alleged low yield of rice without considering the necessary explanation and the evidence given by the appellant and hence the finding being perverse and without considering material on record need to be deleted. ITA No. 135 of 2005 -2- ii) Whether under the facts and circumstances of the case the Tribunal was justified in upholding the application of the provisions of section 145(3) as per conditions laid down for its application? iii) That under the facts and circumstances of the case the Tribunal is not justified in upholding the addition of Rs.2,49,621/- on the basis of alleged under valuation of stock taking average sale price of some other assessee's and ignoring various other assessee's sale price as given by the appellant and also not considering the product of the appellant being of different qualities and method being followed consistently by the appellant and hence findings are perverse?” 2. Briefly stated, the facts as narrated in the appeal are that the assessee is a partnership firm carrying on the business of shelling the paddy and manufacturing the rice. The assessee filed return on 31.10.1998 for the assessment year 1998-99 declaring loss of Rs.1,25,440/-. The case was taken up for scrutiny. The Assessing Officer found defects that the yield shown by the assessee was 93.03% out of 100% and there were different percentage of yields in different months and accordingly, made an addition of Rs.1,00,001/- on account of low yield of rice. Besides this, an addition of Rs.2,49,621/- was also made for difference in valuation of closing stock of rice, rice bran, phuck and paddy husk. Against the said additions, the assessee approached the Commissioner of Income Tax (Appeals) [in short “the CIT (A)”] who vide order dated 28.1.2001 upheld the view of the Assessing Officer. On further appeal by the assessee, the Tribunal vide order dated 30.7.2004 restricted the addition on account of low yield of rice to Rs.50,000/- and upheld the addition of discrepancy of closing stock of ITA No. 135 of 2005 -3- Rs.2,49,621/-. This gave rise to the assessee to approach this Court by way of instant appeal. 3. We have heard learned counsel for the parties. 4. The point for determination in this appeal relates to addition of Rs.50,000/- on account of low yield of rice and Rs.2,49,621/- regarding under valuation of closing stock. 5. Learned counsel for the assessee submitted that the addition on account of low yield of rice was totally uncalled for as there was no justification for taking recourse to Section 145(3) of the Act. Arguing question No. (iii), he on the strength of the decision of the Calcutta High Court in Commissioner of Income Tax v. Bengal Jute Mills Co. Ltd., [1992] 107 CTR (Cal) 34 submitted that where the Assessing Officer revalues the closing stock of earlier years, the value of the opening stock of next year has to be in similar manner and no addition on that account can be made. 6. On the other hand, learned counsel for the revenue supported the order passed by the Tribunal. 7. We have considered the rival submissions of learned counsel for the respective parties and do not find any merit in the appeal. Taking up questions No.1 and 2 together being interconnected, it is noticed that the Tribunal while concurring with the finding recorded by the CIT (A) had observed as under:- “We have heard the rival submissions, perused the orders of the tax authorities and gone through the material available on record. We find that the CIT (A) sustained the action of the AO in rejecting the books ITA No. 135 of 2005 -4- of account u/s 145(3) mainly relying on the observations of the AO regarding low yield of rice and for non-maintenance of stock register of yield of rice, rice bran and paddy husk and also considering the fact that the assessee could not produce gate pass book bearing Nos. 501-550 and the other gate passes used during the year under appeal were in haphazard manner. In our opinion, so far as action of the CIT(A) in sustaining the action of the AO while rejecting the books of account is concerned, the same is not justified on the basis of finding of the CIT (A) regarding haphazard use of gate passes and non-production of gate pass book bearing Nos. 501- 550, particularly observing that the assessee had used the above gate passes in the preceding previous year. However, the ld. CIT (A) was justified in sustaining the action of the AO in rejecting the books of account as the assessee had shown low yield of rice and was not maintaining proper stock register pertaining of yield of rice, rice bran and paddy husk. We are, therefore, of the opinion that the CIT(A) rightly confirmed the action of the AO in rejecting the books of account. However, the addition of Rs.100001/- made by the AO and sustained by the CIT (A) on account of low yield of rice is excessive, since the AO has taken the yield of ITA No. 135 of 2005 -5- rice at 66% as against 65.27 declared by the assessee. In our view, a reasonable addition, i.e. Rs.50,000/- will meet the ends of justice on account of low yield of rice. We accordingly direct the AO to restrict such addition on account of low yield of rice at Rs.50,000/- as against Rs.100001/- and accept the ground of the assessee in part.” 8. The aforesaid findings have not been shown to be perverse in any manner. Accordingly, questions No.1 and 2 are answered against the assessee. 9. Adverting to question No.(iii), the finding recorded by the Tribunal reads thus:- “3. Vide ground No.2 the assessee has challenged the order of the CIT(A) in upholding the addition of Rs.249621/- on account of revaluation of closing stock of rice, rice bran, phak and husk. During assessment proceedings, the assessee was asked to show cause as to why valuation of closing stock of rice, rice bran, phak and husk should not be taken at prevailing market rate, as it had valued the closing stock of these goods even at lesser rate than average sale price. The assessee contended that valuation of closing stock had been calculated at the market rate as on 31.03.98 and the assessee requested to compare its rate with other rice shellers of Amloh. The AO acting on request of the assessee ITA No. 135 of 2005 -6- observed that three rice shellers of the same locality had valued the closing stock of rice at Rs.793.33 against Rs.725 per qtl. shown by the assessee, Rs.261.33 in case of rice bran against Rs.260/- per qtl., Rs.168.33 in case of phak against Rs.168 per qtl. shown, Rs.49.33 in case of husk against Rs.49 shown by the assessee. The AO accordingly calculated the difference based on comparable cases of three rice shellers and made an addition of Rs.249621 in the hands of the assessee. 3.1 In appeal, the assessee strongly rebutted the action of the AO and pleaded that the method adopted by the AO was absolutely illegal, as he neither confronted to the assessee the books of account of these three firms nor explained in his order any result of their yield of rice shown by them in their respective books. It was submitted that they might have shown their yield of rice @ 64% or even low. The assessee also submitted the rate adopted by the three different rice shellers (other than those considered by the AO) for valuing their closing stock in support of its contention and pleaded that it was showing much higher rate. However, the CIT(A) was not satisfied with the plea as the assessee itself had sold rice on 7.3.98 @ Rs.805 against the rate applied by the AO as on 31.03.98 at Rs.790 per qtl. It was also ITA No. 135 of 2005 -7- observed that the last sale of phak by the assessee was at Rs.180 against Rs.168 per qtl. adopted by the AO while calculating valuation of stock. The CIT(A) based on above observations, sustained the addition made by the AO. 3.2. Before us, ld. AR reiterated the submissions made before the first appellate authority and pleaded that the CIT(A) while sustaining the addition has taken the sale transaction of 7.3.98, whereas the valuation of the closing stock was made on 31.03.98, i.e. after a gap of 25 days. It was further submitted that the assessee was left with lower quality of goods in stock at the end of the year, which resulted in adopting the closing stock at lower price. He urged that the AO while making the addition could not bring any material evidence on record to suggest that the assessee was valuing its closing stock at lower rate than prevailing market rate. It was, therefore, pleaded that the order of the CIT (A) be quashed. On the other hand, ld. DR relied on the order of the CIT(A). 3.3 After hearing both the parties, we find that the plea of the assessee that the AO while making the impugned addition could not bring any material evidence on record is not tenable, since the same was based on three comparable cases of the same locality and that ITA No. 135 of 2005 -8- is also on the request of the assessee to verify the market rate. It is also observed that the assessee was changing its stance as before the AO it was claimed that it was maintaining proper books and the market value adopted for valuing its closing stock was proper and accurate, whereas ld. AR before us pleaded that lower quality of rice was left in the closing stock resulting in lower market price than prevailing market rate. We find that such contention of the assessee to have lower quality of rice and allied items in closing stock as on 31.3.98 is not supported by any material evidence on record, whereas the AO while making the addition has duly taken assistance/help of three comparable cases of the same locality proceeding on request of the assessee. We are , therefore, of the opinion that the CIT (A) while sustaining the addition made by the AO has passed a well reasoned and speaking order which does not need any interference from our side. We uphold the same and reject the ground of the assessee.” 10. In all fairness to learned counsel for the assessee, reference is made to the judgment Bengal Jute Mills (supra) relied upon by him. In that case, the Court while considering the escapement of income due to undervaluation of stock of earlier year held that where the closing stock is inflated for a particular year the opening stock ITA No. 135 of 2005 -9- should also be determined on the same basis. The said pronouncement does not help the assessee as fact situation is different in present case and the valuation of closing stock of this year would be opening stock in the next year and would fall for consideration in that year. 11. No illegality or perversity was pointed out in the finding recorded by the Tribunal. Question No. (iii) is also answered against the assessee. 12. In view of the above, there is no merit in this appeal. 13. Consequently, the appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE October 15, 2010 (ADARSH KUMAR GOEL) gbs JUDGE