Closing stock of incentive sugar is to be valued at levy price and not at cost – SC
Profits of the business could only be ascertained by comparison of
assets and liabilities of the business at the opening and closing of the
accounting year. The method that an assessee adopts for closing is an
integral part of accounting, within the meaning of Section 145. There
are different methods of valuation of closing stock. The popular system
is Cost or Market, whichever is lower. However, adjustments may have to
be made in the principle having regard to the special character of
assets, the nature of the business, the appropriate allowances permitted
etc. to arrive at taxable profits. In the present case, it is the case
of the assessee, that following the judgment of this Court in Ponni
Sugars and Chemicals Ltd. (supra) the closing stock of
incentive sugar
should be allowed to be valued at levy price, which on facts, is found
to be less than the cost of manufacture of sugar (cost price). We find
merit in this contention. In Ponni Sugars and Chemicals Ltd. (supra),
this Court, on examination of the Scheme, held that, the excess
realization was a capital receipt, not liable to be taxed and in view of
the said judgment, we hold, that the assessee is right in valuing the
closing stock at levy price. As stated, in certain cases, adjustments
may have to be made having regard to the special character of assets,
the nature of the business, the appropriate allowances permitted etc. in
order to arrive at taxable profits. The position would have been
different, if as in the case of Sahney Steel and Press Works Ltd.
(supra) this Court on examination of the relevant scheme in question
held that such excess amount was a revenue receipt. This judgment,
therefore, is confined to the Sampat Committee Report which has provided
incentives in the form of price and duty differentials [see para 13 of
the judgment in Ponni Sugars and Chemicals Ltd. (supra)]. In the present
case, if the closing stock of incentive sugar was to be valued at any
figure, above the levy price, the direct consequence of such a valuation
would have been that the excess amount over the levy price would be
reflected as part of business income which would run counter to the
judgment of this Court in Ponni Sugars and Chemicals Ltd. (supra).
We must keep in mind that the stock valuation of incentive sugar has a
direct impact on the manufacturer's revenue or business profits. If we
were to accept the case of the Department that the excess amount
realized by the manufacturer(s) over the levy price was a revenue
receipt taxable under the Act then the very purpose of the Incentive
Scheme formulated by Sampat Committee would have been defeated. One
cannot have a stock valuation which converts a capital receipt into
revenue income.
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.7014 OF 2012 (Arising out of SLP(C) No. 9263 of 2009)
Commissioner of Income Tax, Coimbatore
Versus
M/s. Bannari Amman Sugars Ltd.
WITH Civil Appeal No.7015 of 2012 (Arising out of SLP(C) No.
18567/2009), Civil Appeal No.7016 of 2012 (Arising out of SLP(C) No.
19988/2012), Civil Appeal No.7017 of 2012 (Arising out of SLP(C) No.
19989/2012) and Civil Appeal No.7018 of 2012 (Arising out of SLP(C) No.
19990/20 12)
O R D E R
Leave granted.
This batch of civil appeals is filed by the Department. The said batch
concerns Assessment Years 1992-93, 1993-94, 1994-95, 1996-97 and
1997-98. The following question arises for determination in these civil
appeals :
"Whether on the facts and in the circumstances of the case, ITAT was
right in holding that closing stock of incentive sugar has to be valued
at levy price and not at cost price?"
For the sake of brevity, we have reproduced hereinbelow the facts of Civil Appeal arising out of SLP(C) No. 9263/2009.
Assessee is a company engaged in the business of manufacture and sale of
sugar. Assessee filed its return of income for assessment year 1997-98.
In its return of income, confined to its Karnataka unit, assessee
valued the closing stock of incentive sugar (free sugar) at levy price.
The Department valued the closing stock of incentive sugar at cost
whereas the assessee claimed that the said stock should be valued at
levy price which was less than the cost. This is the basic controversy
which arises for determination in these civil appeals.
To answer the above controversy, the following facts are required to be
noted. By virtue of the provisions of the Essential Commodities Act,
1955 and the Sugar Control Order read with the Notification issued
thereunder, a sugar manufacturer (assessee in this case) was required to
sell 40% of his sugar production at the notified levy price to the
Public Distribution System. At the relevant time, on an average, the
levy price came to be less than the manufacturers' cost of production.
Consequently, it was found by the manufacturers that under the above
price control regime, the establishment of new sugar manufacturing units
was not viable. It was found that even the existing sugar manufacturing
units had become unviable and uneconomical. Therefore, an Incentive
Scheme was framed, as suggested by the Sampat Committee, which committee
was set up to examine the economic viability of establishing new sugar
factories and expanding the existing factories. The Sampat Committee
gave its Report. Under the Report, an Incentive Scheme was evolved.
The said Incentive Scheme provided for an inducement for persons to set
up new sugar factories or to expand the existing one. Under the Scheme,
40% of the total sugar production was permitted to be sold at market
price ("Incentive Sugar" for short). However, the Scheme provided that
excess amount realized by the manufacturer over the levy price by sale
of incentive sugar would be utilized only for repayment of loans taken
from the banks/ financial institutions for establishing the new unit(s).
In regard to utilization of excess realization towards repayment of
loans, the sugar mills were directed to file certificate of chartered
accountant subject to which further release orders would be issued by
the Directorate of Sugar. This Scheme came up for consideration before
this Court in the case of C.I.T. vs. Ponni Sugars and Chemicals Ltd.
[306 ITR 392] in which this Court held that the excess amount realized
by the manufacturer over the levy price by sale of incentive sugar
should be treated as a capital receipt which was not taxable under the
Income Tax Act, 1961. In that case, one of the arguments advanced on
behalf of the Department, as in this case, was that the excess amount
realized by the manufacturer over the levy price should be treated as a
revenue receipt. However, that contention of the Department in Ponni
Sugars and Chemicals Ltd. (supra) was negatived although in the context
of another Scheme this Court after examining the Scheme in the case of
Sahney Steel and Press Works Ltd. vs. CIT [228 ITR 253] held that the
excess amount realized was a revenue receipt. The judgment in Sahney
Steel and Press Works Ltd. (supra) was considered in Ponni Sugars and
Chemicals Ltd. (supra). Applying the "purpose test" this Court held in
Ponni Sugars and Chemicals Ltd. (supra) that there is no straitjacket
principle for coming to the conclusion as to whether the excess amount
was a revenue receipt or a capital receipt. The Court held that it would
depend on the Scheme. The Court also held in Ponni Sugars and Chemicals
Ltd. (supra) that the purpose test should be applied on case to case
basis. The Court held that it would depend on the purpose of the
Incentive Scheme. As stated, the present case, relates to the valuation
of the respondent's closing stock of incentive sugar as on 31.3.1997,
corresponding to the assessment year 1997-98.
Valuation of opening and closing stock is a very important aspect of
ascertainment of true profits. An improper valuation could result in
rejection of books of account though all that is needed for rectifying
it, is to make an addition or necessary adjustment based on proper
valuation. Valuation of stock, whatever be the method, should be
consistently followed. Method of valuation is generally at cost or the
market value whichever of the two, is lower. However, it is open to the
AO to probe the accounts, so as to arrive at the real income [see :
Chainrup Sampatram vs. CIT, West Bengal (24 ITR 481)].
Profits of the business could only be ascertained by comparison of
assets and liabilities of the business at the opening and closing of the
accounting year. The method that an assessee adopts for closing is an
integral part of accounting, within the meaning of Section 145. There
are different methods of valuation of closing stock. The popular system
is Cost or Market, whichever is lower. However, adjustments may have to
be made in the principle having regard to the special character of
assets, the nature of the business, the appropriate allowances permitted
etc. to arrive at taxable profits. In the present case, it is the case
of the assessee, that following the judgment of this Court in Ponni
Sugars and Chemicals Ltd. (supra) the closing stock of incentive sugar
should be allowed to be valued at levy price, which on facts, is found
to be less than the cost of manufacture of sugar (cost price). We find
merit in this contention. In Ponni Sugars and Chemicals Ltd. (supra),
this Court, on examination of the Scheme, held that, the excess
realization was a capital receipt, not liable to be taxed and in view of
the said judgment, we hold, that the assessee is right in valuing the
closing stock at levy price. As stated, in certain cases, adjustments
may have to be made having regard to the special character of assets,
the nature of the business, the appropriate allowances permitted etc. in
order to arrive at taxable profits. The position would have been
different, if as in the case of Sahney Steel and Press Works Ltd.
(supra) this Court on examination of the relevant scheme in question
held that such excess amount was a revenue receipt. This judgment,
therefore, is confined to the Sampat Committee Report which has provided
incentives in the form of price and duty differentials [see para 13 of
the judgment in Ponni Sugars and Chemicals Ltd. (supra)]. In the present
case, if the closing stock of incentive sugar was to be valued at any
figure, above the levy price, the direct consequence of such a valuation
would have been that the excess amount over the levy price would be
reflected as part of business income which would run counter to the
judgment of this Court in Ponni Sugars and Chemicals Ltd. (supra).
We must keep in mind that the stock valuation of incentive sugar has a
direct impact on the manufacturer's revenue or business profits. If we
were to accept the case of the Department that the excess amount
realized by the manufacturer(s) over the levy price was a revenue
receipt taxable under the Act then the very purpose of the Incentive
Scheme formulated by Sampat Committee would have been defeated. One
cannot have a stock valuation which converts a capital receipt into
revenue income.
For the above reasons, the civil appeals filed by the Department are hereby dismissed with no order as to costs.