- (1.) This appeal is directed against the revisional order passed by the CIT under s. 263 of the IT Act, 1961.
(2.) For the asst. yr. 1993-94, assessee filed return of income on 30th March, 1994. Along with the return, copies of tax audit report, manufacturing and trading account and balance sheet were also filed. In the balance sheet, vide Notes on accounts, the assessee clarified as under : ;Purchase of plastic powder include 555.90 M.T. received from outsiders for processing on job basis, which have been used in home consumption during the year. Accordingly, there is a liability of Rs. 2,08,46,250 for uncompleted contracts.; The Note was meant to explain the liability shown in the balancesheet and also the purchase shown in the manufacturing and trading account. However, when the time for completion of assessment was due to expire, AO proceeded to verify the correctness of the statement made in the Note annexed to the return and in this regard on 15th March, 1996, he then issued a notice under s. 133(6) of the IT Act, 1961, to RSI Ltd. and ESTC India Ltd. who have supplied the total quantity of 555.90 M.T. of plastic powder to the assessee. On 20th March, 1996, the assessee received replies from the aforesaid parties which were broadly in conformity with the Note provided in the balance sheet of the assessee. In the replies given by the aforesaid two parties, they have confirmed having supplied the specified quantity of HDPE powder to Plastic Concern for processing on their behalf and further stated that since the material was given for processing, it was not treated as sale. Upon receiving the replies from the aforesaid parties, AO issued a show-cause notice dt. 20th March, 1996 to the assessee calling for the following information : (1) Original bill showing purchase of materials of 555.90 M.T. (2) Original sale bill showing sale of finished products processed but of that raw materials. (3) Processing charges received from the above-named two creditors, and (4) To produce the production register. Assessee promptly replied by letter dt. 22nd March, 1996, furnishing the information as desired by the AO. Sub-para (1) of para 1 to the aforesaid letter is reproduced here for the sake of clarity : ;1. As already explained in the course of the assessment proceedings under s. 143(3), vide our earlier submissions, we have received plastic powder weighing 501.90 M.T. from RSI Ltd. and 54 M.T. from ESTC Ltd. for processing on their behalf. It may kindly be noted that we have not purchased the above-mentioned goods from the said parties. However, since the said goods were used by us, in our own consumption and finished product thereof were sold by us, it was necessary to provide for the value of such goods consumed by us as our cost of production for the above quantity of plastic powder used in the manufacturing of the goods sold by us.; It was explained in sub-para (c) thereof as under : ;And that according to mercantile system of accounting, as followed by the assessee firm, it was necessary to provide for the value of goods consumed by it to arrive at the true profit and loss since the sale proceeds of the production out of the said consumption has already been credited and accounted for in the books of account of the assessee firm and as such we beg to submit that there has been no irregularity in determining and providing for the value of such goods in the books of the assessee in the year of consumption.; Thus, it could be seen that the information given by the assessee in the balance sheet annexed to the return and subsequent explanation and the replies given by the two parties are not contradictory to each other, inasmuch as, it is the claim of the assessee that the goods supplied to the assessee for processing were utilised by it and so though the goods were received by the assessee otherwise that by the mode of purchase, the liability towards the materials supplied had to be shown by the assessee and the suppliers have rightly not treated the transactions as sale as their initial intention was only to get them processed on their behalf. With the information available on record, AO would not have made an addition by treating the liability as not genuine and thus he was left with no other alternative except to accept the version of the assessee and complete the assessment accordingly.
(3.) As the matter stood thus, on 24th July, 1996, the CIT, WB-VIII, Calcutta issued a notice under s. 263 of the Act directing the assessee to show cause as to why the assessment order should not be treated as erroneous in so far as it is prejudicial to the interests of the Revenue on the ground that the AO failed to make further investigation with regard to the claim of liability for purchases amounting to Rs. 2,08,46,250. Assessee replied on 17th August, 1996, wherein it is stated that the aforesaid aspect was fully investigated by the AO in the course of hearing which is evident from the information obtained by the AO from the two parties by issuing notice under s. 133(6) of the Act and also by the reply given by the assessee. It was further submitted that the evidence gathered by the AO could be considered as sufficient enquiry before framing an assessment order and there is no error in the order of the AO. A letter dt. 30th March, 1993 addressed by the assessee to RSI Ltd. was also enclosed to the reply which contains the facts that the assessee informed RSI Ltd. of the consumption of the materials supplied by them. It was also stated that when compared to the price of the goods purchased from the Department of Customs, Govt. of India, the liability actually provided by the assessee against the raw materials supplied by the aforesaid two parties is much less and, therefore, from no angle, the order of assessment could be considered as prejudicial to the interest of Revenue as there was no discrepancy in the purchase price noted. Reply to the revisional authority is also on the issue that the assessee having followed mercantile system of accounting, raw materials consumed by the assessee should be shown as purchase and the liability against the purchase price has to be necessarily shown in order to arrive at the correct profit as otherwise, the sale value of finished products emerging out of the impugned raw materials consumed would show a distorted profit figure and the correct picture of the profit will not emerge without showing the corresponding liability for the said purchase.;