ORDER
G. SANTHANAM, A. M. :
This is an appeal by the assessee.
2. The appellant is a firm of four partners dealing in the business of supari and such other products like pepper, rubber seeds, copra, etc. The major trading activity is in arecanut. The previous year of the assessee ended on 31st March, 1987, relevant to the asst. yr. 1987-88. The Asstt. CIT examined the trading account in respect of arecanut which is as follows :
Quantity
Amount
Quantity
Amount
To opening stock
2168.69.800
25,78,849.60
By sales
2545.47.600
44,02,378.63
To purchases
104,16.97.600
1,27,38,119.76
Driage
669.01.000
Gross profit
18,05,942.47
Closing stock
9365.18.800
127,20,533.20
12579.67.400
1,71,22,911.83
12579.67.400
1,71,22,911.83
He noticed that the driage claimed was rather high and the closing stock was on a large scale as compared to sales. He further noticed that out of the closing stock of 9365.18.800, 8001.13.000 quintals were on consignment with Kerala Supari Centre and 200.20.000 quintals were with M/s. Mohd. Ibrahim & Co. on consignment. Copies of patial accounts of those two firms were examined and he found that M/s. Kerala Supari Centre had already sold the major portion of the goods sent on consignments well before the close of the accounting year ended 31st March, 1987. He then called for the sale patials bearing Nos. S-30 to S-83 and noticed that these sale patials were drawn on different dates indicating therein the data of sales which were all before the close of the accounting year. The sale patials of M/s. Ibrahim & Co. showed that the goods on consignment with it were all sold by 31st March, 1987. The Assessing Officer then found that the appellant had not accounted for all the sales effected by the consignees during the accounting year ending on 31st March, 1987. Similarly, the expenses relatable to those sales were also not accounted for by the appellant. Incidentially, it must be mentioned that such sales effected during the previous year and such expenses incurred by the consignee during the previous year were accounted for in the books of the appellant only in the subsequent years.
3. The Asstt. CIT called upon the appellant to explain the omission of sales and expenses as noticed by him and the appellant explained as follows by its letter dt. 9th March, 1990 :
“The sale pattikas having Nos. S-30 to S-83 and S-94 to S-109 was received by us only during the accounting year 1987-88. Hence, they were entered in our accounts for the accounting year 1987-88. For the purpose of sales-tax all pattikas received during 1987-88 is entered on the last date of the year i.e., 31st March, 1988. This does not mean that the said pattikas are entered after one year as it involves only journal entry. The said sale pattikas are dated from 15th Feb., 1987 to 5th March, 1987, i.e., at the fag end of the year. The sale pattikas are sent through lorry drivers who take their own time to deliver the same to us. In the instant case, the sale pattikas are delivered to us by the lorry drivers after March, 1987. The sale pattikas are not sent to us by Regd. Post or other such means as soon as they are prepared. It is not correct to assume that they were handed over to us by their office at Calicut as we emphatically deny that they had any such office at Calicut during that period. The goods are sent by us on consignment to their office at Maskasath, Itwari, Nagpur and the sale pattikas are sent to us from the said office. The goods are sent by Lorry and the Lorry receipt No. is available with us. The way bills are also available. This will show that the goods are sent to Nagpur by lorry and not to any place in Calicut. Hence, it is requested that your proposal may be dropped.”
The Asstt. CIT noticed that the appellant was following mercantile system of accounting and, therefore, there was no valid reason for the appellant for not recording the transactions effected by the consignee during the accounting period. He had also enquired from M/s. Kerala Supari Centre the consignee, certain details about the sale patials bearing Nos. S-30 to S-83 and S-94 to S-109 and M/s. Kerala Supari Centre in its letter dt. 1st March, 1990 informed as follows :
“We would like to submit that we had sent sale patties bearing Nos. S-30 to S-83 and S-94 to S-109 to M/s. Iritty Trading Co., Calicut in respect of consignment sales made by us on their behalf on various dates during the financial year 1986-87.”
He further noticed that the appellant had received huge amounts from M/s. Kerala Supari Centre and that its explanation that it had received the sale patials through lorry drivers after the expiry of the accounting year is “not according to law; nor according to the primary principles of accountancy”. Thus, he rejected the explanation of the assessee and recast the trading account by deleting from the closing stock the quantity and value in respect of the arecanut sold during the year by the consignees and in turn including in the sales the quantity and value of the arecanut sold during the year. He then computed the addition to be made as follows :
Gross profit as per recast trading account.
Rs. 54,82,001
Less : Gross profit as per assessees books.
Rs. 18,05,942
Rs. 36,76,059
Less : Expenses on consignment sales
Rs. 6,35,418
Rs. 30,40,641
The learned Asstt. CIT was of the view that the driage claimed at 669.01 quintals on a total purchase of 12579.67.400 quintals was high. He scrutinised the stock account and noticed that on 1st April, 1986 itself a driage of 85 quintals has been recorded in the stock register on a purchase of 311.30 quintals. This according to him was unreasonable and, therefore, he made a further addition of Rs. 1,15,453 in respect of 85 quintals at the rate of Rs. 1,358.28 per quintal. Thus, as against the declared income of Rs. 1,04,644, the learned Asstt. CIT arrived at an income of Rs. 32,59,740 for the asst. yr. 1987-88. On appeal, it was contended before the CIT(A) that the appellant was accounting for the consignment sales on the basis of the patials received during the previous year from the consignees and that has been the practice in all the preceding years as well as in this year and such practice has been accepted by the Revenue in the earlier assessments. Therefore, there was no warrant for taking a different view in the impugned assessment year. For the proposition that all the sale patials were not received during the previous year relevant to the asst. yr. 1987-88, the appellant relied on an affidavit filed by TP Poker, partner of the appellant firm and also an affidavit from D. Abutty, partner of M/s. Kerala Supari Centre who had stated that there was enormous delay in finalising the accounts of M/s. Kerala Supari Centre and consequently there was delay in the despatch of sale patials. It was also contended that sale patials bearing Nos. S-100 to S-109 dt. 5th March, 1987 included even sales effected from 10th March, 1987 to 31st March, 1987 and, therefore, much reliance cannot be based on the date of the sale patials, nor on the reply dt. 1st March, 1990 of M/s. Kerala Supari Centre. It was further contended that sale patials were prepared by M/s. Kerala Supari Centre long after the sales and they were, in fact, not despatched by them on day-to-day basis. Sri K. P. Karunakaran, the learned Assessing Officer, on the other hand, contended that the sale patials made out on 15th Feb., 1987 showed the sales made in April, 1986 and even such sales have not been accounted for by the appellant in the year ending 31st March, 1987. Further, Sri Karunakaran contended that M/s. Kerala Supari Centre did not hold goods for long and sales were made by them almost on day-to-day basis and, therefore, they should have sent the patials at regular intervals. He relied on the letter dt. 1st March, 1990 from M/s. Kerala Supari Centre in support of his contention. Further, even though the appellant has been regularly following the system of accounting for sales on the basis of receipt of the sale patials and even though such system has been accepted in the earlier assessment years, he was not bound to follow the same system if true profit cannot be ascertained in the ratio of the decision of the Supreme Court in the case of CIT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC). The learned CIT(A) upheld the contention of the learned Assessing Officer in view of the decision of the Supreme Court cited supra. Further, he held that the method adopted by the appellant appeared to him to be a colourable device to evade tax. The affidavits filed by T. P. Pocker and D. Abbuty to the effect that the sale patials were sent only after the close of the accounting year cannot be accepted as they are only interest parties. There was no evidence to show that the patials were received after the close of the accounting year. Therefore, the ratio laid down in the case of McDowell and Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) would be applicable to the facts of the appellants case. Thus, he upheld the addition of Rs. 30,40,641.
4. As for the addition of Rs. 1,15,453 on account of disallowance of driage, the CIT(A) did not accept the contention of the appellant that there was a clerical mistake in recording the shortage of 85 quintals in the month of April, 1986 itself instead of in the month of May, 1986 and thus confirmed the addition. There were also certain miscellaneous points before the CIT(A) regarding the adjustment to be given in respect of enhanced value of the closing stock of the preceding year. There was also a request for enhancement of the value of the closing stock of the impugned assessment year to which the appellants representative did not object before the CIT(A). On these matters, the CIT(A) had given certain directions which are not in appeal before us.
5. The assessee is on second appeal against the addition of Rs. 30,40,641 on the ground of omission to record the consignment sales effected during the previous year relevant to the asst. yr. 1987-88 and also against the addition of Rs. 1,15,453 on ground of excessive driage.
6. Sri M. P. Rajappan, the learned counsel for the appellant submitted that the appellant was following consistently the practice of recording the consignment sales and the expenses relating thereto only when the sale patials were received. This system of accounting had been accepted in the past by the Revenue and assessments were made on that basis. Such a system of accounting is approved by text books. In this connection, he referred to Batliboi on Accounting, Chapter VI – Consignments and Joint Ventures in support of his contention that accounting of sales effected by the consignee and the expenses incurred by the consignee would be done by the consignor in its books of account only on receipt of the sale patials of what is technically known as “Account sales” rendered by the consignee. Thus, the system of accounting followed by the appellant is in accord with approved text books. This system cannot be described as mercantile system of accounting as has been wrongly held by the authorities below. A system that has been accepted by the Revenue and has been approved in the text books should not be given a go by merely because by adopting a different system more revenue could be netted. This aspect of the matter has not been appreciated in the proper perspective by the authorities.
7. Reliance placed on the Supreme Court decision in the case of CIT vs. British Paints India Ltd. (supra) is rather misplaced. That was a case where the assessee valued its work-in-progress in terms of raw material cost and such system of stock valuation does not have the sanction of the text books in that it did not lead to ascertainment of true profit. It was, therefore, that the Supreme Court came down heavily on that system of stock valuation and in the facts of the case held that merely because such a system of stock valuation had been accepted in the past by the Revenue it cannot be said that one should not have a second look at the stock valuation in the relevant assessment year. In the case of the assessee before the Tribunal, the system of accounting besides being accepted in the past by the Revenue has met with the approval in the accounting text books. This is a material difference from the case of the appellant with that of the case of British Paints India Ltd. (supra). This aspect was not considered by the first appellate authority who had simply applied the ratio decidendi of the Supreme Court in British Paints India Ltd., to the facts of the assessees case.
8. Sri Rajappan further submitted that the assessee had not received the sale patials from M/s. Kerala Supari Centre in respect of the sales effected by it during the year. The sale patials were received only long after the close of the accounting year and in keeping with its practice the same had been accounted for in the succeeding assessment year. As far as the consignment with M/s. Mohd. Ibrahim & Co. is concerned, it had effected the sales only on the last working day and even in the succeeding year it had not chosen to sent the sale patials with the resale such sales were accounted for only in the asst. yr. 1989-90. It is not uncommon that sale patials are despatched to the consignors after a protracted delay on the part of the consignees. In support of this proposition he relied on the assessment order dt. 25th March, 1985 passed by the IAC (Asst.), Range II, Coimbatore, in the case of M/s. Umashanker Traders, Erode, wherein estimate of income was made on the value of total despatch of goods accepting the contention of the assessee before him that it has not been getting any sales accounts in respect of goods sent on consignment even after six or seven years. He also relied on the assessment order dt. 16th March, 1988 passed by the learned IAC (Asst.), Range II, Coimbatore, in the case of the above assessee for the asst. yr. 1985-86 – assessment being made on the basis of an estimate on the total despatch of goods on consignment. Further, he relied on the decision of the Tribunal in the case of Sri P. Ali in ITA Nos. 371 and 372/Coch/1985 for the asst. yr. 1979-80 and 1980-81, wherein the Tribunal upheld the order of the CIT(A) in holding that the assessee had consistently followed a method of accounting in regard to consignment sales in its books by recording the same only as and when the sale patials received. On the basis of these decisions, Sri Rajappan contended that in case the Revenue did not accept the system of accounting followed by the assessee in recording the consignment sales only on receipt of the sale patials, the only course open to the Revenue would be to reject the books of accounts and resort to an estimate on the basis of the despatch turnover of the goods on consignment. His grievance was that the Revenue had recast the trading account after discarding the method of accounting adopted by the appellant. This has resulted in an abnormal assessments for the impugned assessment year leading to subnormal assessments in the succeeding assessment years and in this connection he referred to the figures furnished in the paper book at page 5 (loose sheets).
9. The learned counsel for the assessee contended vehemently that it is not correct to say that the assessee has received the entire value of the consignments in advance. The real position was that whenever consignments are sent through approved transporters the bills are discounted with the bank and temporarily the accounts of the appellant-consignor is credited with the amount discounted in the bank. That does not mean that the consignee has made the payment for the consignment. It is only a discounting facility with the bank though the account of the consignee was credited for the proceeds of the bills discounted. It is the appellant who is liable to the bank in case of dishonour of the bill on the part of the consignee. Then he referred to the details of the bills discounted with the bank in respect of the consignments to M/s. Iritty Trading Co. He also referred to the practice of getting telegraphic transfers from the consignees now and then. This latter amount is again adjustable in case the goods with the consignee were not sold of. Therefore, by merely looking at the circumstances in the account of the consignee, no adverse inference can be drawn against the appellant. Further, till the account sales or sale patials are rendered by the consignee the squaring up of the accounts of the consignee cannot take place. If regard is had to these factors it will be evident that more money was due from the consignee rather than any amount is due from the appellant to the consignee. Therefore, he submitted that on the basis of the transitory credit balances in the account of the consignee the inference that has been drawn against the assessee in the manner in which it has been done is not correct.
10. The learned counsel further contended that the system of accounting followed by the appellant cannot strictly answer the ingredients of mercantile system of accounting nor can it be called a cash system of accounting. It is a mixed system. There was no finding by the Assessing Officer that the system adopted by the appellant was otherwise correct, but only true profit cannot be ascertained. In the absence of such a finding only the provisions of S. 145(2) of the IT Act, 1961 can come into operation and not the provisions of S. 145(1). This he submitted is his alternative argument. He also referred to paper book III consisting of the sale patials and submitted that the dates mentioned in the sale patials cannot be taken as correct. Countering the argument of the Assessing Officer that the sale patials dt. 15th Feb., 1987 (S. No. 30 to S. 33) showed the sales made in April, 1986, he referred to sale patials in S. Nos. 99 to S. 109 (pages 247 to 249 of the paper book III) wherein sales made after the dates of the sales patials have been mentioned. Therefore, he submitted that one should not take the sale patials rendered by the consignee as gospel truth. They also suffered from defects and deficiencies and would appear to have been made at a stretch. In this context, he referred to the affidavit of the partner of M/s. Kerala Supari Centre filed before the CIT(A) and submitted that the partner of the above firm, viz., the consignee has frankly admitted that finalisation of the accounts were delayed and sale patials were written up only after the close of the accounting period. This aspect of the matter has not been appreciated in the proper perspective.
11. The learned counsel for the assessee further submitted that the inference drawn by the authorities against the appellant from the reply given by M/s. Kerala Supari Centre in its letter dt. 1st March, 1990 was wholly unwarranted. The Assessing Officer had only enquired in his letter to M/s. Kerala Supari Centre about the sales effected during the previous year ending on 31st March, 1987 and with reference to certain sale patials bearing Nos. S-30 to S-83 and S-94 to S-109. In response to that letter, M/s. Kerala Supari Centre had stated that they have effected sales covered by the relevant sale patials on various dates during the financial year. Such a reply cannot lead to the conclusion or the inference that the sale patials themselves were despatched to the appellant on various dates during the financial year. Unfortunately, without having regard to the terms of reference found in the Assessing Officers letter to M/s. Kerala Supari Centre, an adverse inference had been drawn against the appellant merely on the basis of the reply given by the latter. Thus, there is no evidence in the hands of the Department that the sale patials were received by the appellant during the year of account. On the part of the appellant it is its case from the inception that it did not receive the sale patials though post but used to get them through the lorry drivers who take their own time in delivering the same to the appellant. In view of this system of despatch of the sale patials through lorry drivers, unfortunately no evidence lies with the appellant regarding the exact dates on which the sale patials were received. However, it is a fact that the patials received during the year are accounted for in its accounts. Patials not received are not accounted. The appellant has in fact accounted for the sales effected in the previous year ending on 31st March, 1987 in the succeeding previous year as the same were received only during that period. In the circumstances, the addition in a hefty sum of Rs. 30 lakhs and add is uncalled for.
12. Sri C. Abraham, the learned senior Departmental Representative, submitted that merely because the Department has accepted the system of accounting followed by the appellant in the preceding years, it does not follow that the Revenue should accept the same method in the succeeding assessment years. The doctrine of res judicata is not applicable to income-tax proceedings. It might be that the Department was not well advised in accepting the method of accounting adopted by the appellant in the past. On realising the mistake or the error it can certainly opt for a different system or a different method of arriving at the income. In the ratio of the decision of the Supreme Court in the case of CIT vs. British Paints India Ltd. (supra) all the case laws relied on by the learned counsel for the appellant viz., CIT vs. A. Krishnaswamy Mudaliar (1964) 53 ITR 122 (SC) or the comments of Chaturvedi and Pithisaria at page 3472, Volume 3, Fourth Edition or the decision of the Bombay High Court in CIT vs. Tata Iron and Steel Co. Ltd. (1977) 106 ITR 383 (Bom) should be relegated to the background as they do not represent the correct statement of law. By not bringing on record the sales effected by the consignee during the year as evidenced by the patials prepared by the consignee (also) during the year, the appellant was deliberately postponing the incidence of taxation to the succeeding years. The Assessing Officer had no grievance against the appellant in respect of the entries in the books of accounts except to the extent it did not take into account the consignment sales effected during the accounting period and, therefore, there was nothing wrong in his taking into account the sales made during the year in the book results by recasting the trading account in order to compute the true profits of the appellant in terms of S. 145(1) of the IT Act. The appellants plea that its books should be rejected at least and estimate should be made under S. 145(2) should not be entertained because the Assessing Officer has not stumbled upon any further defects as to warrant rejection of accounts.
13. To the appellants argument that in the succeeding assessment years, as against the income declared by it, the assessing authority has computed the loss, Sri Abraham contended that the Assessing Officer was fair enough to eliminate the sales reported by the appellant in the succeeding assessment years as he had already taken such sales for the computation of income in the impugned assessment year and such step was only a logical consequence of the treatment accorded to the same by the assessing authority in the impugned assessment year. By this process the true income of the appellant was ascertained not only for the assessment year under appeal but also for the succeeding assessment years and if the computation had resulted in a loss in the succeeding assessment years, the appellant cannot have any grievance against the Revenue.
14. To the contention of the appellant that the Revenue does not have any evidence to show that the patials had been received during the year of account, Sri Abraham submitted that it is for the appellant to show that it had not received the patials during the year of account. He also submitted that the patials do not disclose the dates on which they have been received. On the other hand, by its reply dt. 1st March, 1990, M/s. Kerala Supari Centre, namely, the consignee has admitted that it had effected the sales during the year and the perusal of the patials would show that they have been made within the accounting year itself. Therefore, there is no substance in the argument of the appellants counsel that the patials were not received during the accounting year. Even if they have received after the end of the accounting year, inasmuch as, the sales were all effected during the relevant previous year, the appellant ought to have accounted for the same in its books of accounts in the impugned assessment year. Batlibois commentary on the System of According for consignment sales should be understood in the normal circumstance of the consignee rendering account sales to the consignor as and when the sales were effected by him or as immediately thereto as circumstance would permit. Therefore, it cannot be assumed that the account sales would be received only after extraordinary delay, nor can it be assumed that it is permissible for the consignor not to treat the patial sales effected by the consignee as its sales but to look upon the same as stock on consignment. It is exactly what has happened in this case and the Assessing Officer was perfectly justified in roping in the transactions.
15. Sri Abraham referring to the grievance of the appellant that the sale patials prepared by the consignee on certain dates contained sales effected by it after the dates of the sale patials and, therefore, much reliance cannot be placed on the dates of sale patials, submitted that in respect of such sale patials some relief can be granted to the assessee, but not to the extent of excluding entirely all the sales made during the year by the consignee.
16. Referring to the contention of the learned counsel for the appellant that the Assessing Officer had not enquired from M/s. Kerala Supari Centre about the dates of the sale patials or about the despatch of the sale patials to the appellant, Sri Abraham adverted to the letter addressed by the Assessing Officer to M/s. Kerala Supari Centre and submitted that the letter read with its reply would amply demonstrate that the latter had despatched the sale patials within the accounting year itself.
17. Sri Abraham further contended that some of the partners for the appellant firm are partners in the firm of M/s. Kerala Supari Centre and, therefore, it cannot be said that the appellant was totally ignorant of the sale effected by the other party and in these days of fast communication and in the context of huge balances lying with the appellant from the other party, it can be safely inferred that the appellant was aware of the sales affected during the year, but it did not choose to account for the same in order to defer the payment of tax. As for the sales effected by M/s. Mohd. Ibrahim & Co. on the last day of the accounting period, Sri Abraham submitted that it might be that the appellant had received the patials after the close of the accounting year, but that does not mean that it should not account for the same in the relevant accounting year as the sales were, in fact, made during the accounting period relevant to the asst. yr. 1987-88. Hence, he submitted that there was no need to interfere with the order of the CIT(A).
18. We have thus heard rival submissions and perused the records. The facts of the case have been narrated in paras 2 and 3 of this order. It is not in dispute that the appellant has been accounting for the consignment sales only in the year in which the sale patials were received from the consignees. It is also not in dispute that in the preceding assessment years assessments were made on such basis. Batliboi, a renowned author on Accounting in his book on Advanced According Chapter VI Consignments and Joint Ventures at para 5 records as follows :
“5. When the consignment is realised, the agent forwards an account sales to the consignor, showing the gross proceeds realised and the net proceeds after deducting his commission and the expenses he may have incurred thereon. On receipt of such account sales, the consignees account is debited with the amount of the gross proceeds and the consignment account is credited. At the same time, the consignment account is debited, and the consignees account is credited with the amount of the expenses and commission deducted by the consignee.”
Thus, it is that the accounting for consignment sales and expenses thereon on receipt of “account sales” (or sale patials) from the consignees is an approved accounting practice. Such a practice may not strictly answer the description of mercantile system of accounting for the reason that even though the sales have taken place in a particular period, its accounting takes place only in the period when the sale patials are received. Till then no income is recognised. Therefore, it cannot be said that the appellant was following strictly the mercantile system of accounting in the past. Consignment sales constitute a major source of income for the appellant as seen from the records. When such a major source of income is accounted for in the aforesaid manner, it cannot be said that the books are maintained on mercantile system. In our considered opinion, the appellant must be said to be maintaining its books of accounts on mixed system of accounting. Therefore, it cannot be said that as soon as sales were effected by the consignees income had in law accrued to the appellant. But the learned Assessing Officer and the learned CIT(A) fell in the same error of not ascertaining the true system of accounting that is being followed by the appellant.
19. Sri Abrahams contention is that the accounting practice adverted to by the learned author should be understood in the normal circumstances of the consignee rendering account sales or sale patials as soon as the sales are effected and the learned author did not envisage extraordinary delay in the despatch of sale patials. We are unable to accept this contention because the liability to render account sales or sale patials arises to the consignee only when the consignment is realised and the expenses incurred by him on the consignment are reckoned within the account sales. A reading of the procedure of accounting mentioned in para 5, Chapter VI, extracted by us above, would lend support to this view. Further, whatever be the point of time at which the account sales are rendered by the consignee it is only on receipt of such account sales entries are contemplated in the books of accounts of the consignor. Therefore, if the consignee had not rendered the account sales or renders them belatedly, the consignor is under no obligation to account for the sales effected by the consignee till the account sales are received by him.
20. Sri Abraham contends that the appellant had, in fact, received the account sales or the sale patials during the previous year relevant to the asst. yr. 1987-88. He relies on the letter dt. 1st March, 1990 of M/s. Kerala Supari Centre to the Asstt. CIT, Circle I, Calicut. The appellants counsel, on the other hand, contends that the letter should be read along with the letter issued by the Asstt. Commissioner on 20th Feb., 1990 and correct inference should be drawn. These letters are found in pages 35 and 36 of Paper Book I. The letter dt. 20th Feb., 1990 (page 35) issued by the Asstt. Commissioner to M/s. Kerala Supari Centre, is as follows :
“Sub : Income-tax assessment in the case of M/s. Iritty Trading Co., Cherootty Road, Calicut – Regarding
During the course of examination of the books of accounts and other details filed by the aforestated assessee of mine, it is seen that you have sent sale patties bearing Nos. S-30 to S-83 and S-94 to S-109 in respect of the consignment sales during the month of February, 1987, to the aforestated party. In this connection, you are requested to explain whether the said sales as per the sale patties have been actually effected and also to furnish the details of the quantity of the consignment sales as shown in these sale patties. The dates on which the sale were actually effected may be intimated immediately on receipt of this letter.”
The reply of M/s. Kerala Supari Centre dt. 1st March, 1990 (page 36) is as follows :
“Sub : Income-tax assessment in the case of M/s. Iritty Trading Company, Cherootty Road, Calicut – Regarding.
Ref : Your letter No. 46-013-FZ-7111/AC-1 dated 20th Feb., 1990.
We are in receipt of your letter noted above. In this connection we would like to submit that we had sent sale pattials bearing Nos. S-30 to S-83 and S-94 to S-109 to M/s. Tritty Trading Company, Cherooty Road, Calicut in respect of consignment sales made by us on their behalf on various dates during the financial year 1986-87. The total quantity of arecanut sold on their behalf during the above period was 9596 bags, each bag containing approximately 75 kgs. of arecanuts.
We hope that the above details are sufficient for your requirements.”
These letters are to be read together. It is clear that the Assessing Officer was only concerned with the dates on which the sales were actually effected in respect of the sale patials bearing Nos. S-30 to S-83 and S-94 to S-109 and the details of quantity of consignment sales as shown in those sale patials. He has nowhere enquired about the dates on which the sale patials were actually sect to the appellant. Therefore, the reply given by M/s. Kerala Supari Centre in its letter dt. 1st March, 1990 can be only with reference to the dates on which the sales were effected by it in respect of the sale patials mentioned in the letter of the Assessing Officer. The reply cannot be interpreted as indicative of the dates on which the sale patials were despatched (or sent) to the appellant by M/s. Kerala Supari Centre. Shri Abrahams contention is that even if there is ambiguity in the reply of M/s. Kerala Supari Centre, atleast M/s. Kerala Supari Centre has understood the letter of the Assessing Officer as calling for the dates on which the sale patials were sent to the appellant as will be evident from para 10 of the affidavit of D. Abutty (page 25 of the paper book I) and, therefore, a construction favourable to the Revenue should be adopted. In our opinion, the two letters read together do not point to any ambiguity and even in case of ambiguity it is settled law that it should be interpreted in favour of the assessee. Para 10 of the affidavit of Abutty on which Revenue relies, is as follows :
“The firm had issued a letter dt. 1st March, 1990 on the ITO wrongly stating that the sale pattials were sent on various dates during the same financial year itself. This letter has been filed by mistake filed by mistake without verifying the facts properly.”
Though Shri Abutty had understood that letter written by some other partner of M/s. Kerala Supari Centre in the manner in which Shri Abraham has understood it, yet in the said affidavit Shri Abutty had rebutted the statement that the sale patials had been sent on various dates within the accounting period itself. Thus, there is no substance in the contention of the Revenue that the sale patials have, in fact, been sent to or received by the appellant during the previous year relevant to the asst. yr. 1987-88.
21. The affidavits filed by Shri T. P. Pocker and Shri D. Abutty before the CIT(A) were dismissed as of no consequence as coming from interested parties. Shri Pocker is a partner of the appellant firm as well as M/s. Kerala Supari Centre. As per cl. 8 of the partnership deed dt. 15th May, 1985, of M/s. Kerala Supari Centre, it is only S/Shri D. Abutty, K. K. Mohammed and K. M. Abdul Salam who are incharge of the management of M/s. Kerala Supari Centre. Shri T. P. Pocker was only a sleeping partner of the above firm. Shri D. Abutty is not a partner of the appellant firm and he was incharge of the affairs of M/s. Kerala Supari Centre. Though three of the partners of the appellant firm are partners in M/s. Kerala Supari Centre along with four others, they do not have any power of management in the other firm. They are only entitled to 15% profits each. It is also not the case of the Revenue that both the appellant firm and M/s. Kerala Supari Centre are one and the same. Therefore, it cannot be said that the appellant firm was in a position to bend the will of M/s. Kerala Supari Centre or to have the transactions in the manner in which it liked. At least there is no material before us to draw such a conclusion as contended by Shri Abraham. In such circumstances, the affidavit of Shri Abutty, one of the managing partners of M/s. Kerala Supari Centre cannot be dismissed as of no consequence. In the affidavit filed before the CIT(A) he had explained that in the year ended 31st March, 1987, there was abnormal delay in finalising the accounts which has delayed very much the sending of sale patials, to the consignor and sale patials Nos. S. 30 to S. 109 were prepared only after the close of the accounting year and sent to the consignor. When an affidavit is filed by a third party substantiating the stand of the appellant and such stand is supported by entries in the books of accounts, unless the contents of the affidavit are proved to be false, such an affidavit cannot be dismissed as of no consequence Mehta Parikh & Co. vs. CIT (1956) 30 ITR 181 (SC). The CIT(A) erred in not considering the affidavit by testing the same with other materials on record.
22. The assessee does not have any direct evidence that the sale patials were received only after 31st March, 1987 except the affidavits filed by Mr. Pocker, the managing partner of the appellant and Mr. D. Abutty, partner of the consignee firm and the entries in the books of accounts for the year ending 31st March, 1988 relevant to the asst. yr. 1988-89. At the same time the Department does not have any evidence to show that the sale patials were received during the year ending on 31st March, 1987. In such circumstances an estimate is called for having regard to the attendant circumstances of the case. On an examination of the sale patials on record, we notice that the sale patials contained information about the date of arrival of goods, mode of transportation with reference to lorry No., date of sale, Bill Number, quantity in bags and net weight, rate at which and the consideration for which the sales are made. Packing charges and incidental charges are added to the sales amount in order to arrive at the total sales amount. As against the sales noted in the sale patial the consignee details, the expenditure incurred by him such as commission, brokerage, labour charges, insurance, godown charges, interest, discount, agent commission, freight and octroi, fumigation, extra charges, cartage, roasting charges, post, telegrams and trunk calls charges. The patial also contains the remittances to the consignor by hundi, T. T. or cash with the relevant particulars. The amount due to the consignor or due from the consignor is ascertained after adjusting the expenses and the remittances against the total sales amount. Copies of all the sale patials have been furnished before us in paper book No. III prefaced by a summary of the same. As some of the copies of the sale patials furnished before us were not legible, the Tribunal directed the appellant to file the originals of the sale patials and the appellant had accordingly furnished the same also for perusal and return. Copies of the sale patials found in paper book No. III were compared with their originals and the following points and inferences are made out therefrom.
23. Pages 1 to 71 contain sale patials dt. 15th Feb., 1987 covering the invoices from 30 to 45 and they deal with sales made from 1st April, 1986 to 12th July, 1986. Pages 73 to 131 contain sale patials dt. 20th Feb., 1987 covering the invoices from 56 to 61 and they deal with sales made sales made from 12th July, 1986 to 25th Sept., 1986. Pages 133 to 195 contain sale patials dt. 25 Feb., 1987 covering the invoices from 62 to 75 and they deal with sales made from 25th Sept., 1986 to 26th Dec., 1986. Pages 197 to 227 contain sale patials dt. 28th Feb., 1987 covering the invoices from 76 to 83 and they deal with sales made from 26th Dec., 1986 to 31st Jan., 1987. Pages 229 to 279 contain sale patials dt. 5th March, 1987 covering the invoices from 94 to 109 and they deal with sales made from 31st Jan., 1987 to 31st March, 1987. This is as far as M/s. Kerala Supari Centre is concerned.
24. We notice that many of the sale patials dt. 5th March, 1987 cover the sales affected by M/s. Kerala Supari Centre for the period after 5th March, 1987 and such instances are to be found from pages 247 to 279. Shri Abraham could not seriously object to the exclusion of such transactions as are covered by the sale patials dt. 5th March, 1987 beginning from pages 247 to 259. Furthers at page 231 of paper book III, the sale patial dt. 5th March, 1987 contains the details of remittances dt. 2nd Feb., 1987, 20th March, 1987 and 27th March, 1987 which dates are posterior to the date of the sale patials themselves, though such dates of remittances have been scored of subsequently.
25. From the above, it would be evident that the sale patials were not made out at regular intervals. Nor the sale patials were prepared as and when the sales were effected. The patials were prepared in a whimsical manner, that is as and when chosen by the consignee. Many of them would appear to have been set up at a stretch. In this context the affidavit of D. Abutty, partner of Kerala Supari Centre would acquire some significance. He had stated that there was difficulty in finalising their accounts and as a result the patials were delayed. Further, reasonable margin of time is necessary for the patials to reach the appellant. Having regard to the above facts and circumstances of the case and also the fact that the assessee was only following the hybrid system of accounting, we hold that instead of including all the sales less expenditure thereon as the net sales of the assessee during the year, we feel that a margin of 50% can be allowed for any delay in the receipt of the sale patials from the consignee and the balance alone is taken for the purpose of computing the income. The correct figure of sales whether 1,26,32,677 or 1,28,09,834 should be verified. The ITO is directed to recast the trading account on the above lines after making proper adjustments in the closing stock of goods on consignment and thus compute the income.
26. As far as the sales effected by Mohamed Ibrahim & Co., is concerned it is not in dispute that the patial was made only on 31st March, 1987 and the same would have been received by the appellant only after 31st March, 1987 from Cuttack. As the assessee is used to take into account the sales only in the year in which the patials are received, the sales effected by Mohammed Ibrahim & Co. should stand excluded for the year ending on 31st March, 1987 relevant to the asst. yr. 1987-88. Appropriate stock adjustment is called for. We order accordingly.
27. Reliance was placed by the Revenue in the decision of the Supreme Court in British Paints case (supra) and it was vehemently contended that the sales effected by the consignee as evidenced by the patials should enter the sales stream of the assessee, notwithstanding the fact that the method of accounting followed by the assessee had been accepted in the past.
28. There can be no quarrel over the proposition laid down by their Lordships of the Supreme Court, as it is the law of the land. The Apex Court was concerned with the valuation of closing stock and found :
“That any system of accounting which excluded, for the valuation of stock-in-trade, all costs other than the cost of raw materials for the goods-in-process and finished products, was likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system might produce a comparatively lower valuation of the opening stock and the closing stock, thus showing a comparatively low difference between the two. In a period of rising turnover and rising prices, such a system was apt to diminish the assessment of taxable profit of a year. The profit of one year was likely to be shifted to another year which would be an incorrect method of computing profits. Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the respondent was found to be such that income could not properly be deduced therefrom. It was, therefore, not only right but the duty of the ITO to act in exercise of his statutory power for determining what, in his opinion, would be the correct income.”
In the case before us, assessee is not following the mercantile system of accounting. His is a hybrid system of accounting, in that he used to record the consignment sales only on receipt of the sale patials from the consignee. Such a system of accounting is an approved system of accounting and is usually followed by businessmen in the context of consignment sales. Therefore, there is nothing erroneous or incorrect unconscionable in such method of accounting. Only if it is found that the method is incorrect or erroenous or unreasonable, then and then only, the ratio laid down in British Paints case would be attracted but, not in a case like this.
29. In the case of consignment sales, it is not as if the income arose to the assessee, the moment the sales are effected by the consignee. It is only when the consignee takes stock of the expenses incurred by him and the commission due to him on the sales effected by him and renders an account sales showing the amount “due to” or “due by” him, can it be said that any income arose on consignment. Such a position will be known only when the account sales or sale patials are received by the consignor. This is the reason why consignors wait for the receipt of the sale patial from the consignee before entering the transactions in the books of account. This is how consignment transaction are understood, carried on, and treated in the books of accounts. In the case before us, we have recorded a finding that it can not be said that the assessee had received the sale patial in respect of all the sales effected by the consignee. Therefore, an estimate was resorted to in the absence of evidence on both sides.
30. The next point at dispute is about the disallowance of Rs. 1,15,453 on account of excessive driage. It was contended before the CIT(A) that there was a clerical mistake in recording the shortage of 85 qtls. in the month of April, 1986 instead of May, 1986. This contention was not accepted and the addition was confirmed.
31. We have gone through the arecanut stock register produced before us. On first April, apart from the opening stock of 515 qtls. the assessee had purchased 311.300 qtls. as against which he has noted 85 qtls. as driage. The ITO disallowed the driage on the ground that it was disproportionate. The assessees contention that the overall driage percentage was within reasonable limits and that the assessee should not be penalised for clerical mistake, was negatived by the authorities. The same arguments were reiterated before us. Even if the stock position in the month of May 1986 is taken into account shortage of 85 qtls. appears to be rather high. However, considering the fact that the overall driage percentage is within reasonable limits, we estimate the driage at 40% of 85 qtls. for purpose of allowance. To this extent, the assessee gets relief.
32. In the result, the appeal is partly allowed.