Dipak Misra, J.
1. The questions in these references under Section 256(2) of the Income-tax Act, 1961 (for brevity 'the Act') and the appeals under Section 260A of the Act are taken up and heard analogously and are disposed of by this common order since learned Counsel for the Revenue and learned Counsel for the assessee fairly conceded that only a single question has to be dealt with and nothing else. The single question which is the subject-matter of references and also in the appeals as has been acceded to by learned Counsel for the parties is as follows:
Whether, on the facts and circumstances of the case, the Tribunal was justified in law in holding that the parental flock is not stock-in-trade and the expenditure incurred is revenue expenditure under the facts and circumstances of the case?
2. For the sake of clarity and convenience the facts narrated in M.A.I.T. No. 85 of 2000 are adumbrated herein. The respondent-assessee filed its return of income along with audit copies of profit and loss account and balance-sheet for the assessment year 1995-96 on November 30, 1995, declaring the total income of Rs. 18,226 before the Income-tax Officer, Jabalpur. Thereafter, the matter stood transferred to the Commissioner of Income-tax, Special Range, Jabalpur, where the revised return was filed by the assessee on June 28,1996, declaring a total loss of Rs. 26,93,100. During the assessment proceeding it was found by the Assessing Officer that the assessee had valued the closing stock of parental chick and hatched eggs at nil. The Assessing Officer after calculating the total number of birds as per the books of account and the average selling price of each parental bird valued the closing stock of parental flock at Rs. 39,44,880 and credited the same to profit and loss account. After making due adjustments calculated after allowing deductions and making additions to the extent it is permissible, the Assessing Officer determined the total income of the assessee at Rs. 51,22,520.
3. Being aggrieved by and dissatisfied with the aforesaid order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) who vide order dated October 8, 1998, directed the Assessing Officer to consider the matter afresh on the issue of valuation of closing stock, viz., parental flock and hatching eggs in the light of its earlier decision.
4. It is worth noting that the Commissioner of Income-tax (Appeals) followed his earlier decision.
5. Being aggrieved by the aforesaid order the assessee preferred appeal No. 64/JAB/1999 before the Income-tax Appellate Tribunal (in short 'the Tribunal'). The Tribunal relied on its earlier order directed the Assessing Officer to decide the matter afresh in the light of its earlier decision rendered in the case of sister concern of the assessee, V.N. Dubey, Proprietor, Phonix Poultry I.T.A. No. 12/JAB/1994 and M/s. Central Hatcheries P. Ltd. 17/JAB/1994. It is worth mentioning here that an assertion has been made in the memorandum of appeal that in respect of earlier orders at the instance of the Revenue references have been made to this court.
6. We have heard Mr. Rohit Arya, learned senior Counsel along with Mr. Sanjay Lai for the Revenue and Mr. L.L. Sharma, learned Counsel for the assessee.
7. Mr. Rohit Arya has raised the following contentions:
(a) The Tribunal in its earlier order as well as in the present order has not taken note of the modus operandi of the business, namely, there is purchase of one day old chick (known as parental flock), rearing them under the prescribed hygienic conditions for six months, collecting eggs laid by such parental flock,, the process through which the eggs undergo, namely, sorting, cleaning' and fumigating, placing them in refrigerator for three days and further how they are transferred to the incubator, an automatic machine, which keeps the eggs rotating and keeps for eighteen days at the temperature of 100 degrees F. with 86 degrees of humidity and after such completion of the process the eggs are transferred to keep in hatcheries for three days by maintaining the temperature at 97.5 F. and final production emerges as chicks known as commercial flock intended for sale.
(b) The Tribunal in all the appeals has fallen into error by expressing the opinion that parental flock was purchased for the purpose of laying eggs and therefrom products are chicks which are known as commercial flock and, therefore, parental flock cannot be treated as the stock-in-trade. The Tribunal has misdirected itself being persuaded by the method of accounting adopted by the assessee on the ground that the said method of accounting has been suggested by the Institute of Chartered Accountants of India because there is no other mode of accounting available for evaluation of parental flock on the last date of the accounting year.
8. Mr. L.L. Sharma, learned Counsel appearing for the assessee in all the cases submitted as under:
(a) Both, the Commissioner of Income-tax (Appeals) and the Tribunal, have specifically returned a finding by analysing the facts in issue that the parental flock is not the stock-in-trade.
(b) The purchase of parental flock is of one day old chicks which are reared under the prescribed hygienic conditions for six months and after collection of the eggs, a procedure has to be undergone to convert them to a commercial flock intended for sale and it cannot be regarded as stock-in-trade.
(c) The first appellate authority has categorically and unequivocally noted that the parental flocks merely produce the eggs from which chicks are further hatched in scientific manner and it is these chicks which form the basic source of income of the assessee and, therefore, the parental flock is only an instrumental functioning in promotion of particular result, a means to an end and, therefore, in no way, the same can constitute stock-in-trade.
(d) Quite apart form the above, a finding has come on record that it is well nigh impossible to evaluate these birds at the end of the accounting period since each bird is a living organism functioning in its independence although in a largely ordained sphere and its sole value lies in providing fertilized eggs for hatching and at the end they are practically discarded at the nominal value or destroyed and in view of such a finding the order passed by the forums below cannot be found fault with and the parental flock cannot be treated as the stock-in-trade.
(e) The Tribunal has taken note of the fact that a restriction has been imposed on the assessee by way of an agreement for disposal of the parental flocks and, therefore, the parental flock cannot constitute as stock-in-trade.
9. Before we enter into the factual matrix, that has been exposited in the case at hand, it is seemly to refer to certain citations and what is understood by the stock-in-trade.
10. In Chainrup Sampatram v. CIT : [1953]24ITR481(SC) , the Constitution Bench was dealing with a fact situation where the firm was carrying on the business at Calcutta as bullion merchants dealing mainly in silver and keeping its books of account on mercantile basis. In the course of year of account 1997 (Ramnavami) corresponding to 1941-42, 582 bars of silver (some from the old stock in hand at Calcutta and some purchased form elsewhere during the year) were sent to Bikaner where the partners resided, and their value at cost was credited in the books of the firm. In the assessment of the firm for the year 1942-43, it was alleged that the said silver bars had been sold to the partners for their domestic use but the Income-tax Officer held that the alleged sale was not a genuine one and that such silver bars still formed part of the stock-in-trade of the firm at the closing of the previous year 1997, and accordingly he included it into taxable profit. Eventually, the Tribunal took stock of the fact situation and held that the action of the Income-tax Officer in treating the stock of silver bars in Bikaner as a part of the stock-in-trade of the Calcutta business was amply justified and on that basis dismissed the appeal. The matter travelled to the High Court in reference and it was contended that the said bars remained there during the rest of accounting year, their value at the market rate at the closing of the year being an increment to the goods at Bikaner, the profit accrued at Bikaner, with the result that it was exempted. The High Court rejected the said contention on the ground that 'notional profit' represented by the appreciation in value of the stock-in-trade 'emerges out of the valuation and only when it so emerges it arises or accrues. The source of the profit is thus the valuation, and its situs is where the valuation is made and the firm's business at the site of the firm and all the stock-in-trade of the firm is necessarily drawn into the valuation wherever they may be physically situated. The High Court further held that the profit which is the result of the stock valuation of a business in the 'sui generis' a type by itself, to which the ordinary notions of a physical accrual will not apply. It comes into existence when the valuation is made and since it arises out of the valuation, it arises in respect of the whole stock-in-trade, at the site of the firm whose stock-in-trade is being valued irrespective of where the parts of stock-in-trade may be'. After reproducing the conclusion of the High Court their Lordships of the apex court though accept the conclusion that no part of the profits of the firm in the accounting year can be said to have accrued or arisen at Bikaner, did not accept the reasoning of the High Court. Their Lordships observed that the true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading. Their Lordships further observed that no question of charging the appreciated value of closing stock as 'notional profits' can really arise. Eventually, their Lordships held that it is a misconception to think that any profit arises out of the valuation of the closing stock and the situs of its arising or accrual where the valuation is made. The valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can, in no sense, be regarded as the source of such profits.
11. In the case of CIT v. A. Krishnaswami Mudaliar : [1964]53ITR122(SC) their Lordships held that whichever method of book-keeping is adopted, in the case of a trading venture, for computing of the true profits of the year the stock-in-trade must be taken into account. If the value of the stock-in-trade is not taken into account, in the ultimate result the profit or loss resulting from trading is bound to get absorbed or reflected in the stock-in-trade unless the value of the stock-in-trade remains unchanged at the commencement of the year and the end of the year.
12. In CIT v. British Paints India Ltd. : [1991]188ITR44(SC) , their Lordships opined that it is a well recognised principle of commercial accounting to enter in the profit and loss account the value of the stock-in-trade at the beginning and at the end of the accounting year at cost or market price whichever is lower. Eventually, their Lordships expressed the opinion as under (page 56):
Any system of accounting which excludes, for the valuation of the stock-in-trade, all costs other than the cost of raw materials for the goods-in-process and finished products, is 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 may 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, the system adopted by the assessee, as found by the Tribunal, is apt to diminish the assessment of the taxable profit of a year. The profit of one year is likely to be shifted to another year which is an incorrect method of computing profits and gains for the purpose of assessments. 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 assessee has been found to be such that income cannot properly be deduced therefrom. It is, therefore, not only the right but the duty of the Assessing Officer to act in exercise of his statutory power, as he has done in the instant case, for determining what, in his opinion, is the correct taxable income.
13. In United Commercial Bank v. CTT [1999] 240 ITR 355 their Lordships opined as under (page 360):
In the background of the aforesaid facts, we would state that it is an established rule of commercial practice and accountancy that closing stock can be valued at cost or market price, whichever is lower....
14. Their Lordships further opined that for valuing closing stock it is open to the assessee to value at the cost or market value whichever is lower as the said principle is culled out from many decisions.
15. A Division Bench of the Calcutta High Court in the case of CTT v. Bengal Jute Mills Co, Ltd. [1992] 107 CTR 34 opined as under (page 38):
5. The general rule of accountancy is that the value of the closing stock of a year becomes the value of the opening stock of the next year. But in a case like this where the Income-tax Officer has made an allegation of undervaluation and has valued the closing stock at the market rate rejecting the assessee's valuation, then to arrive at the correct figure of profit, the Income-tax Officer must also value the opening stock in a similar fashion. If the assessee's method of valuation of the opening stock is accepted and at the same time that method is rejected for valuation of the closing stock, then a highly distorted figure of profit will emerge. This will be beyond the scope of the charging section. This position was explained at length by Marten C.J. in the case of Ahmedabad New Cotton Mills Co. Ltd. v. CIT [1928] 3 ITC 91. This judgment was ultimately affirmed by the Privy Council.
16. We have referred to the aforesaid decisions only to show what have been constituted as stock-in-trade, assessment of closing stock and such other facets.
17. In the case of H. Mohmed and Co. v. CIT : [1977]107ITR637(Guj) , it has been held as under (page 643):
It appears to us that the question has to be considered from the point of view of general commercial practice of the market. To put it in a proper compass, a stock-in-trade is something in which a trader or a businessman deals; whereas his capital asset is something with which he deals. It is possible that one and the same commodity may in the case of one assessee be his stock-in-trade, whereas in the case of another assessee it may be his capital asset. For example, in the case of an assessee who carries on the business of buying and selling land, land may be his stock-in-trade but in the case of an assessee who has invested his savings in land and gets income from the land or the structures put up on the land, the land is his capital asset. Therefore, one of the indications for deciding as to what is stock-in-trade is whether a particular assessee is buying or selling the commodity or whether he has merely invested his amount with a view to earn further income or with a view to carry on his other business. It may be pointed out that 'trade' means that particular business activity where the person engaged in the profession buys or sells. All businesses may be carried on for the purpose of earning a profit but that particular kind of business where the businessman buys and sells a commodity can only be designated as 'trade'. This conclusion of ours is fortified by the decision of the Court of Appeal in England in Wheatley v. Smithers [1907] 2 KB 684.
18. It is submitted by Mr. Rohit Arya, learned senior Counsel for the Revenue that a hypothetical example can be taken. If an assessee makes huge purchases of the parental flock at the beginning of the year and does not show the same as closing stock for that year and also does not reflect it as the opening stock on the first day of the next year then naturally his accounts would not reflect the correct position of profit earned during the year. Pyramiding the same it is urged by him that even after the accounting year most of the parental chicks would continue to lay eggs and, therefore, they remain useful and produce raw material for the assessee for hatching the chicks and even after the chicks have stopped laying eggs, they still bear some value because they are still alive and useful for further consumption.
19. Learned senior Counsel would further submit that if the assessee does not account for the closing stock, the gross profit as well as the net profit are suppressed. Mr. Arya has further urged that the business expenses is allowable if it is expended wholly and exclusively for the purposes of the business. In the instant case, therefore, submits learned Counsel for the Revenue, that only those purchases shall be allowed as business expenses from which income has been derived during that particular year. The remaining purchase of stock (which is not used for earning income in that year) has to be accounted as closing stock of that year. The example cited is, if the assessee makes stock purchase of Rs. 100 during an accounting year and out of this Rs. 60 is attributable for the income of the accounting year, the remaining stock of Rs. 40 has to be taken as the closing account for that year and deduction can only be claimed in respect of Rs. 60, for claiming the entire purchase as expenditure without accounting for the closing stock is against the 'matching principle' of accountancy. It is urged by him that as per the matching principle the expenses incurred has to be matched with the revenue of that year to arrive at the income of that year.
20. At this juncture, we think it appropriate to refer to the factual scenario. The Commissioner of Income-tax (Appeals) in his order dated March 15, 1993, while dealing with the assessment year 1987-88 has taken note of the purchases, process through which the chicks bear eggs and in paragraphs 3, 4 and 5 opined that the chicks cannot be regarded as the stock-in-trade inasmuch as they are commercially exploited and at the end they are practically discarded at the nominal value or destroyed. The appellate authority has observed that each chick is a separate unit of production and the Assessing Officer cannot take the value collectively. Thereafter, the said authority has opined that the revenue expenses at best on each bird would be spent at the cost of not less than Rs. 5 though actually the cost is lawfully deduction in the year in which it has been spent and put to use. Being of this view the said authority directed deletion of the amount added by the Assessing Officer. The Tribunal referred to the decision rendered by the Gujarat High Court and analysed the essential characteristics of the stock-in-trade. The Tribunal opined that if there is any exploitation of the commodity from which the income is derived it cannot be termed as stock-in-trade. The Tribunal further expressed the view that what was purchased by the assessee is the parental flock which is one day old chick and that was not for sale but for rearing them by adopting a process for collecting eggs. In that backdrop the Tribunal held that the eggs that were laid by the parental flock and that the chicks which were for the purpose of sale alone can be termed as the stock-in-trade. The assessee has relied on the agreement entered into between him and Venkateshwara Hatcheries P. Ltd., the supplier of parental flock, to highlight that there was prohibition to sell parental flock. Mr. Arya has referred to agreement dated November 1, 1990, wherein 'no objection' was expressed by the supplier in respect of the load parental flock stating that the assessee is free to sell the old parental flock after expiry of the productive period as stipulated in the franchise agreement.
21. There can be no cavil that in common parlance the stock-in-trade includes raw material, work-in-progress and the finished goods. When the finished goods come into existence there is transformation of raw material in entirety. The work-in-progress is an intermediate stage between the raw material and the finished goods. Submission of Mr. Sharma is that the parental flock does not loose its identity and existence. The production of commercial chicks is the finished product of the assessee's business. The commercial chicks are produced out of hatching of eggs laid by the parental flocks and, therefore, such parental flocks cannot be termed as the raw material. It is urged by him that the parental flock is not a work-in-progress because it is not converted into the finished product, namely, commercial chicks which are sold in the market. In this activity, submits Mr. Sharma, the parental flocks cannot be regarded as the stock-in-trade because the stock-in-trade is something in which the person is dealing. As is manifest, the Tribunal has approved the finding of the Commissioner of Income-tax (Appeals) who has held that it is well nigh impossible to evaluate the birds at the end of the account period since each bird is a living organism functioning in its independence, although in a largely ordained sphere.
22. On a careful scrutiny of the orders passed by the Commissioner of Income-tax (Appeals) and the Tribunal it is patent that both the appellate authority and the Tribunal, have been guided by the concept that the stock-in-trade basically means what has been bought and sold. But in the case at hand, the chicks are purchased, they are commercially exploited and at the end they are practically discarded at the nominal value or destroyed. Four essential facts which have escaped from the notice of the Commissioner of Income-tax (Appeals) and the Tribunal are (i) that the chick is not an item but a living species which while growing and its growth being orderly done lays eggs, which in their turn, are hatched to become chicken, thus they really do grow in their own way; (ii) though their productivity in a particular accounting year may be zeroed but their sale value cannot be regarded to be nil unless it is so proven to that effect by adducing adequate evidence that they have been totally discarded or destroyed; (iii) the logic that it is discarded for nominal value by itself cannot change the perception of the conception of stock-in-trade inasmuch as the value still exists and a living species being utilised in a business cannot be compared to that of an item which is brought in stock to be sold ; and (iv) the chick which grows with time has the effect potentiality to be sold and some permission of the supplier has been brought on record to show that it has no-objection for the sale of the old parental flocks after expiry of the productive period stipulated in the franchise agreement. These aspects have been missed and thereby an erroneous conclusion has been arrived at. The singular facet which really has signification is that it is a raw material, if we permit ourselves to say so, has the potentiality to transform itself into a different category having a different market value when certain atmosphere like food and shelter are given. It cannot remain as it is, for it is a living species. Thus, the stock-in-trade cannot be narrowed down to mean what is bought is sold or some raw material, when transformed and finished, is sold. There is an intermediary stage which would include work-in-progress. Such a concept may not have strict analogy to produce one day old chick but the said chick which is purchased has the potentiality to be thereafter end of the year having the market value, unless proven contrary, to be sold in the market. In the absence of real rebuttal it has to be regarded as the stock-in-trade. True it is, by mere stock-in-trade its value is not determinable. It can be rebutted by showing that they were discarded, they were annihilated, they were destroyed, they were abandoned or they were not sold. But one cannot speak in a broader term that they cannot be regarded as the stock-in-trade.
23. While so holding we would have allowed the appeals and answered the references, but that would not solve the situation. The matters are to be remanded to the Assessing Officer. In this context, we may refer with profit to a two-judge Bench decision rendered in the case of Sarda Plywood-Industries Ltd. v. CIT : [1999]238ITR354(Cal) , wherein a Division Bench of the Calcutta High Court speaking through S.B. Sinha, J (as his Lordship then was) held that the High Court has the power to remit the matter of reference back. Similar view has been taken in the case of Ciba of India Ltd. v. CIT : [1993]202ITR1(Bom) wherein the Division Bench of the Bombay High Court has observed that where the Tribunal has failed to consider some aspects of the questions raised before it, the High Court on reference can remand the case to the Tribunal, though it may not be done in all cases.
24. In view of the aforesaid decisions we summarise our conclusions as under:
(a) In all the reference cases the question posed is answered in the negative in favour of the Revenue and against the assessee;
(b) The appeals preferred under Section 260A of the Income-tax Act by the Revenue are allowed to the extent that the parental flock is to be treated as stock-in-trade.
(c) All the matters are remitted to the Assessing Officer to assess afresh, keeping in view the citations referred hereinbefore and on the foundation that the value adopted as closing stock in a particular assessment year should be treated as the value of the opening stock-in-trade in the immediately next following year;
(d) It would be open to the assessee to adduce an evidence to show that there was nothing to be maintained as the stock-in-trade by the end of the year. The Assessing Officer shall be strictly guided by the principles which have been laid down to put the controversy to rest.
The appeals and the income-tax references are disposed of accordingly.