- (1.) THE Tribunal, Delhi, has referred the following questions of law under Section 256(2) of the IT Act, 1961 (hereinafter referred to as the Act) for opinion of this Court: 1. Whether the Tribunal was justified in deleting the addition of Rs. 1,52,565 on account of closing stock of Bagasses ?
(2.) WHETHER the Tribunal was legally justified in restricting the disallowance at 30 per cent out of guest house expenses of Rs. 55,629 ? Whether the Tribunal was legally justified in directing the AO to cancel the interest of Rs. 3,64,734 levied under Section 220(2) ? 2. The reference relates to the asst. yr. 1986 -87. Briefly stated, the facts giving rise to the present reference are as follows: The assessee company is engaged in manufacturing of sugar, country liquor as well as Indian made foreign liquor in its factory at Shamli. On scrutiny of accounts submitted by the assessee for the asst. yr. 1986 -87, for which previous year ended on 30th Sept., 1985, the AO noticed that the assessee did not disclose any value of 7,265 bales of Bagasses. On query, it was stated before him that Bagasse was meant for initial fuel and not for sale. It was further stated that for the purposes of valuation, there is no further cost of Bagasse in the hands of the assessee company except for cost of wire used for baling and labour charges, which have been duly accounted for. The assessee followed this practice consistently in earlier years which has been accepted. It was argued before the AO that he had no right to deviate from consistent practice accepted by the Department. The AO did not accept the assessee's contention. According to him, the Bagasses, which remained unconsumed, was closing stock available with the assessee as a by -product which has a market value. On the basis of purchases of Bagasses made by M/s Babri Paper Mills, he valued the closing stock of Bagasses @ Rs. 700 per m.t. and made the impugned addition. The assessee challenged this addition before the CIT(A) and reiterated the same arguments which were advanced before the learned AO. The CIT(A) observed that the principle of res judicata did not apply to income -tax proceedings. He did not agree with the view of the assessee that Bagasse was a waste. On the other hand, he noticed that the assessee himself utilized the Bagasse as fuel and occasionally purchased it from the market. He therefore, held that Bagasse had some value and had to be treated as an integral part of the closing stock. He, however, felt that it would be reasonable to value the closing stock @ Rs. 360 per m.t. being the prevailing price. He accordingly reduced the addition. Aggrieved by the learned CIT(A)'s decision, the assessee was in appeal before the Tribunal. The Tribunal after considering the rival submissions of the parties, held that the assessee does not normally sell the Bagasses but utilizes the same as fuel. The assessee had been consistently valuing the bales of Bagasses on direct cost method on its baling charges and cost of wires. This system of valuation has been followed in the year of accounting also and this was evident from the fact that the assessee had disclosed its value at Rs. 7,557 in its books under the head 'stores and spares'. It is now well -settled that closing stock has to be valued at cost or market price whichever is lower. According to the assessee it has been valuing its closing stock of Bagasses at cost. The assessee did not purchase any Bagasse in year of account. The Bagasses was assessee's by -product and except for cost of baling and cost of wires disclosed by the assessee at Rs. 7,557, no other expenditure was incurred. No material has been brought on record to prove that 7,265 bales which remained in the closing stock in the year of account, cost more than what has been disclosed by the assessee itself. The Tribunal accordingly held that cost to the assessee could not be substituted by cost to any other assessee for evaluation of closing stock. In above view of the matter, the Tribunal saw no justification for upholding impugned addition for undervaluation of closing stock of Bagasses. Accordingly the addition was deleted. 3. The facts relating to question No. 2 are that AO disallowed Rs. 62,291 as guest -house expenses. This disallowance was made out of guest house expenses, depreciation and repair and maintenance of the guest house. On appeal, learned CIT(A) confirmed the disallowance. This was done by him following the order of his predecessor for the asst. yr. 1985 -86. The assessee then brought the issue in appeal before the Tribunal and submitted that the Tribunal has consistently held that expenditure on account of providing food, etc. to the employees may be disallowed at 30 per cent of the claim. In support of above, Tribunal's order in ITA No. 6047/Del/1988 and CO. No. 288/Del/1989, dt. 18th Feb., 1991 read with M.A. No. 97/Del/1991, dt. 6th Nov., 1991 were cited. The Tribunal following earlier orders cited before it, held that 30 per cent of the claim may be disallowed out of guest house expenses on providing food, etc. to the employees of the company. The Tribunal directed accordingly.
(3.) THE facts relating to question No. 3 are that the assessee was allowed refund of Rs. 14,23,356 under Section 141A on 15th April, 1987 while on regular assessment, huge amount of tax demand was created and nothing was refundable to the assessee. Initially, the refund allowed was adjusted against demand for asst. yr. 1984 -85, but due to appeal effect, substantial amount was refundable on which interest of Rs. 7,77,991 was also allowed under Section 244(1 A) of the Act. The interest was also allowed on amount of Rs. 14,23,356 for the period from 15th April, 1987 to the date of actual refund. The AO, therefore, held that the assessee is liable to pay interest under Section 220 on the amount of refund which was not actually due to the assessee. He accordingly charged interest amount to Rs. 3,64,734 for the period 15th April, 1987 to 31st Jan., 1989 @ 15 per cent per month. The assessee challenged the levy of above interest in appeal before the CIT(A). The learned CIT(A) for the reasons given in paras 31 to 34 of his appellate order confirmed the order of the AO. The assessee then brought the issue in appeal before the Tribunal. The Tribunal after considering the submissions of both the parties and relevant provisions of Sections 220(2) and 144A of the Act held that the assessee would be in default only after service of notice under Section 156 and then only will be liable to pay interest under Section 220(2) of the Act. The Tribunal further held that it was a fact that the assessee had paid excess prepaid taxes to the tune of Rs. 14,40,561 which were refundable to it after making of provisional assessment under Section 141A of the Act. On completion of regular assessment, notice under Section 156 of the Act was served on the assessee on 18th Feb., 1989 demanding tax along with interest at Rs. 51,01,368. The AO would have been justified in charging interest under Section 220(2) of the Act if the assessee had defaulted in making the payment of above demand. However, there was no warrant for him to relate back the levy of interest under Section 220(2) of the Act from the date of refund issued as a result of provisional assessment under Section 141A of the Act. In above view of the matter, the Tribunal held that Revenue authorities were not justified in charging interest under Section 220(2) of the Act. The same was cancelled. We have heard Sri A.N. Mahajan, learned standing counsel appearing for the Revenue and Sri S.D. Singh, learned Counsel appearing for the respondent assessee.;