R.K.Agrawal, J. - (1.) The income Tax Appellate Tribunal Allahabad has referred the following question of law under Section 256(1) of the Income tax Act 1961, hereinafter referred to as the Act, for opinion to this Court. "Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal Was correct in law in Holding that the revaluation of the material and tanning charges on the 17408 hides of the closing stock is to be made after giving a set of of a similar revaluation of the 17238 hides as appearing the opening stock and, accordingly, in effect, revaluing only 170 hides ( 17408-17238) in process?"
(2.) Briefly stated the facts giving rise to the present Reference are as follows:- The present reference relates to the Assessment Year 1982-83. The respondent is a Private Limited Company and deals in tanning of raw hides. It use to purchase raw hides, process them and then sell them, after converting it into leather. Its accounting year ends on 30th September of each year. The respondent had 17408 hides lying in the tanning yard. They were in the process of tanning and certain materials had also been spent on their tanning. The respondent had valued this material which amounted to work in progress at Rs. 3/- per hide only he At Rs. 52,224/-. This method had been followed by the respondent since long. The Inspecting Assistant Commissioner found that the respondent was employing vegetable tanning method as against crome tanning method. The former took a longer time of 4 to 5 months of the tanning. He also found that the tanning charges of the finished hide amounted to Rs. 100/- per hide in the year under referemce. On this basis, he was of the opinion that according to the respondent all the above hides could be deemed to have been tanned only to the extent of 3%. On enquiry this was found to be incorrect. He found that 3751 finished hides were sold in October, 1981, 3890 finished hides were sold in November and so on. Taking into account the fact that 4 to 6 months were required fop completion of the entire tanning he held that most of the hides included in 17408 were at the finishing stages and therefore the value of the tanning material used on them was much higher than that estimated by the respondent. After applying an average method taking into account the period of tanning, he had held that the value of the material used on 17408 hides could be estimated at Rs. 9,66,935. He substituted this amount for Rs. 52,224/- resulting in an addition of Rs. 9,14,711/-. In appeal, however, the Commissioner of Income Tax (Appeals) took the valuation of the material used in the tanning of hides which were in process stage at Rs. 15 per piece i.e. At Rs. 2,61,120/- as against Rs. 52,224/- adopted by the respondent assessee. The Revenue as well as the respondent assessee preferred separate appeals before the Tribunal. The Tribunal has held that the method adopted by the respondent is an arbitrary one and, therefore, requires revaluation of the closing stock but at the same time the opening stock will also have to be adjusted in order to avoid the taxing of an which could not, otherwise, have been brought to tax. The Tribunal had found that there was opening stock of 17238 hides which were in the process 6f tanning. The tanning charges were valued at Rs. 3/- per hide at Rs. 51,714/- and, therefore, these hides will also have to be revalued. If there is ho extra income to be added for 17238 hides there will remain only 170 hides in process and the value of tanning charges used on these hides will, therefore, alone require to be increased in the year under reference. The tribunal adopted the value of tanning charges at the rate of Rs. 50/- per hide giving an addition of Rs. 8000/- in round figure.
(3.) We have heard Sri Shambhoo Chopra, learned standing counsel for the Revenue and Sri R.S. Agarwal, learned counsel for the respondent.;