Decided on February 23,2017

M/S. Vidarbha Tobacco Products Pvt. Ltd. Respondents


VASANTI A.NAIK,J. - (1.) The applicant - Revenue has filed this application under Section 256 (2) of the Income Tax Act, 1961 for referring the questions of law stated in the memorandum of application for recording the opinion of the High Court on the same.
(2.) The respondent - assessee is a private limited company, engaged in the manufacturing and sale of the Bidis. For the assessment year under consideration, the assessee had filed the return on 31.12.1990 and a revised return was filed on 30.12.1991 declaring some additional income. For conducting the business of manufacturing and sale of Bidis, the assessee had branches in Gondia, Tumsar, Tiroda, Parashioni and Chakradharpur. The Assessing Officer noted while considering the case of the assessee, that the assessee was showing the valuation of opening and closing stock of the raw material (Tendu leaves) at average cost. According to the Assessing Officer, the assessee could not have shown the valuation of the opening and closing stock at the average cost as the assessee was liable to apply the method, i.e., First-in First-out and first utilize the Tendu leaves that were secured by the assessee in the earlier point of time for manufacturing of the Bidis. The Assessing Officer issued a show-cause-notice to the assessee and after considering the reply of the assessee came to a conclusion that the pattern of consumption of the raw material showed that the opening stock was being consumed in the first few months from the earlier purchases. It was further observed that since Tendu Patta is a commodity, that is, perishable, it would be but natural for the assessee to consume Tendu Patta, that is, purchased earlier, first in point of time and then use the Tendu Patta purchased later. Since the Assessing Officer added the amount to the payable income of the assessee, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) allowed the appeal filed by the assessee and deleted the additions made by the Assessing Officer. The Revenue Department challenged the order of the Commissioner of Income Tax (Appeals) before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal, on an appreciation of the material on record, dismissed the appeal filed by the Revenue and upheld the order of the Commissioner of Income Tax (Appeals). An application was filed by the Revenue before the Tribunal to refer the questions of law "whether the Assessing Officer could have changed the method of valuation that was regularly followed by the assessee so as to determine the true profits for tax purposes" and also "whether the assessee could have applied the average price principle" to the High Court under Section 256 (1) of the Act for decision. The Tribunal, however, rejected the application filed by the Revenue after holding that the findings recorded by the Tribunal were pure finding of facts and a substantial question of law did not arise for being referred to the High Court for a decision. After the application made by the assessee under Section 256 (1) of the Act was rejected by the Tribunal, the Revenue has filed this application before the High Court under Section 256 (2) of the Act.
(3.) Shri Bhattad, the learned Counsel for the Revenue submitted that the 'average price principle' could not have been applied to the case of the assessee only because the assessee was following the said method of valuation in the regular course of his business. It is submitted that if the method followed by the assessee would adversely affect the Revenue, it would be permissible for the Revenue to challenge the average price principle followed by the assessee. The learned Counsel relied on the judgment of the Hon'ble Supreme Court in the case of Commissioner of Income Tax v. British Paints India Ltd., reported in (1991) 188 Income Tax Reports, page 44 to substantiate his submission. It is submitted that since Tendu leaves is a perishable commodity, it would be necessary for the assessee to first consume the Tendu leaves which were secured at the earlier point of time and then utilize the Tendu leaves that were procured subsequently. It is stated that the Tribunal was not justified in holding that a question of law would not arise for consideration from the order of the Tribunal, dismissing the appeal of the Revenue as the dismissal of the appeal is based on the finding of facts.;

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