1. The abovementioned three appeals belong to one group and are dealing in iron and steel. There was a search in the premises of the abovementioned assessees on 2nd, 3rd and 4th of November, 1995. Block assessments have been made under Chapter XIV-B in respect of the three assessees. Hence, they were heard together and disposed of by this consolidated order for the sake of convenience as the issue involved is one and identical in respect of all appeals. The assessment orders in all cases are more or less identical. Therefore, we take M/s. Utkal Steels Ltd. as the main case and proceed to dispose of other two appeals also on the same lines.
2. The only dispute in all the appeals is regarding preparation of inventory and quantification of stocks and valuation of the same.
During the course of search, the Revenue authorities did not find any valuable asset or papers. Therefore, they straightaway proceeded to inventorise the stock of the three concerns which the assessees dispute. According to the Assessing Officer there was a huge discrepancy in the stock as per the books of account and as inventorised by the searching party.
3. For block assessments, the Income-tax Appellate Tribunal being the first appellate authority, the assessees preferred appeals, being aggrieved by the assessment orders, before the Income-tax appellate Tribunal. The appeals were fixed for hearing a number of times and the parties were heard. During the course of hearing of these appeals, the learned Authorised Representative of the assessee submitted that the search was conducted in the premises of the abovementioned assessees from November 2, 1995, to November 4, 1995, and the searching party took inventory of the stock found of materials and finished products.
The basis of inventories of the stock found was made on the basis of estimations and on certain hypothetical calculations. No physical inventory or quantification of the stock has been done. The learned Authorised Representative submitted that the assessee purchased raw materials like scrap, rejects, etc., from Rourkela Steel Plant on actual weighment basis, but the authorities have not physically weighed either the raw materials or the finished products. Therefore, the discrepancy is so huge in the instant case that will be evident from the chart given by the Assessing Officer in page 2 of his assessment order. It is further stated that iron and steel is a heavy material and is spread in the factory and godown yard in an area of 12 acres of group concerns, i.e., M/s. Utkal Steels Ltd., M/s. S. L. Agarwal and Co. and Utkal Alloys Ltd. the Assessing Officer mentioned in his order that the searching party has physically inventorised the goods but the learned Authorised Representative of the assessee stated that physical verification or weighment has never been done by the searching party.
The searching party, on not finding any documents or any other valuable, have straightaway started stock valuation without examining the books of account for the stocks maintained by the assessee.
Further, the learned Authorised Representative stated that the factory manager, Sri Nathmal Agrawal, has stated that he did not know about the difference in the stock and the same can be explained by Sri Mathuram Agrawal, and as per the request of Sri Nathmal Agrawal, Sri Mathuram Agrawal was examined under section 131 of the Act on November 4, 1995, and statements were recorded in which he clarified to the searching party regarding valuation of the stock and preparation of the inventory. Sri Mathuram Agrawal has also stated that he was busy with the searching party in his residence and factory premises and, therefore, he was visiting the searching party as and when he was allowed and getting time. The learned Authorised Representative of the" assessee also submitted that Shri Mathuram Agrawal has suggested the searching party to undertake inventory of stock on physical weighment basis to come to the actual weight of stock available both of finished and raw material. But the searching party did not heed to his suggestions and no trucks or cranes or manpower of the assessee was utilised for the purpose. It is also seen that Sri Mathuram Agrawal clarified that there were iron slabs weighing 1 tonne to 18 tonnes which cannot be handled without the help of cranes and in the factory premises only one tonne capacity crane was working. Hence weighing of higher weighted material was not possible. Secondly no truck or weighbridge was utilised by the searching party for physical weighment of the stock. The suggestion of Sri Mathuram Agrawal was not accepted by the searching party for physical weighment only on the ground that the said statement of Shri Mathuram Agrawal was an afterthought as the search was continuing and the search was concluded only on November 4, 1995, after the deposition was taken. The learned Authorised Representative of the assessee also stated that the stock available in the premises of the concerns are as per the books of account and stock book. In this connection he stated that "steel" comes under the Central Excise control and the Central Excise staff regularly visits the premises for checking the stock and put their signature on the stock register after verification. Therefore, the rejection of the stock as per the stock book without specific defects noticed in the account is not in order. The rejection of the said stock registers which have been regularly inspected by the Central Excise authorities is purely on surmises and conjectures and the adoption of high estimation is incorrect. As regards the submissions of the authorised officer during the course of hearing of the appeals, calculations which have been done on rough sheets, is not also correct and unscientific. It is also stated that physical inventory taken by the searching party in the course of search is not correct as the materials were neither correctly identified, classified nor physically weighed. In physical weighment of iron and steel materials requires cranes, trucks, manpower for handling to and from weighbridge and tally sheet of such weighment is the proper and authentic document of physical verification. No such tally sheet has been prepared while taking the physical inventory. It is further submitted that Sri Mathuram Agrawal offered his services in men and materials, etc., for physical weighment but the same was not availed by the authorities which is not in order and which has resulted in glaring discrepancy between the books of account and the estimations made by the authorities. Therefore, it is submitted that as the method of taking stock in the course of the search was wrong and as the daily stock account and raw materials register maintained by the assessee which is regularly authenticated by the Central Excise Department gave the correct position of the stock, the same should have been accepted as correct without making any addition.
4. The learned Authorised Representative of the assessee further submitted that natural justice has been denied to the assessee and the Commissioner of Income-tax has approved the draft of the Assessing Officer without giving opportunity of being heard to the assessee. In this connection after hearing the learned Departmental Representative, we may state that the same is not fatal and durable and, therefore, not much significance can be given to the said action of the authorities.
The learned Authorised Representative of the assessee has also filed Paper Books, Volumes I and II, and he took us through pages Nos. 22, 32A, 32B and 34 of Paper Book, Volume I and pages Nos. 24, 26 and 38 of Volume II. He also took us through the details regarding deposition of Sri Mathuram Agrawal which are in pages Nos. 1 to 16 of the Paper Book, Volume I. Finally, the learned Authorised Representative of the assessee submitted that the entire inventory prepared by the authorities is wrong and not accurate. The volume can be calculated accurately only in prime and tested materials where dimensions are uniform throughout. In the case of defective and reject materials, here in the case of the assessee, of three dimensions, i.e., length, breadth and thickness are not uniform throughout due to which it is not possible to ascertain the correct volume and thereby the correct weight, density weight method. Therefore, adoption of this method by the Revenue authorities is not at all reliable and can never even be to the nearer to accurate weight.
5. The learned Departmental Representative, on the other hand, relied on the assessment orders in respect of the assessees mentioned above and submitted that the search in the premises of the assessees started on November 2, 1995. During the course of search, the searching party found discrepancy in the stock of materials as well as finished products. It is also submitted that the searching party did not find any valuable assets. Therefore, there is no seizure of assets or cash.
The three concerns had only the stock both of raw materials and finished products. Therefore, the searching party straightaway took up the preparation of inventories of the goods when they did not find anything worth seizing. The learned Departmental Representative also submitted that the estimation and quantification of the inventory is not an "eye estimate" as stated by the learned Authorised Representative of the assessee but on scientific basis which is nearer to the accurate. According to the Departmental Representative detailed inventory was prepared which is annexure 3 of panchanama drawn by the conclusion of search. A copy of the said inventory has also been filed before us and the learned Departmental Representative took us through the inventory and explained how the inventory was prepared. The authorised officer of the search was also present during the course of hearing and he explained how the inventory was prepared and also filed copies of rough working sheets for preparation of inventory of various items. In this background it is submitted that the preparation of the inventory is scientific and nearer to accurate. Therefore, the same should be accepted as correct and valuation made by the officers and the difference should be treated as undisclosed income of the three concerns. The Departmental Representative further submitted that the request of Sri Mathuram Agrawal was not accepted by the searching party as that would have resulted in closure of factory for nearly six months for which the party would not have agreed. In reply, to the above, the learned Authorised Representative of the assessee submitted that the submission of the learned Departmental Representative regarding closure of factory for six months is without any basis and it is his own because the searching party or the authorised officer or even the Assessing Officer has not mentioned anything about the same and it is submitted that physical weighment would have taken maximum four to five days for which the assessee has agreed and in fact requested the authorities for physical weighment. Therefore, this contention of the learned Departmental Representative at the Income-tax Appellate Tribunal hearing stage is no basis and should be rejected outright.
6. We have considered the submissions of the parties, gone through the assessment orders, paper books filed and find that the action of the authorities is not legally tenable and factually not correct. It is a fact that the Assessing Officer has not disputed that the assessee maintains regular books of account including stock book. The Central Excise authorities periodically and regularly check those registers and put their initials in support of having inspected the materials. They have not found any omission or commission as there is no comment by those authorities in those registers. They have also not commented anything adversely regarding maintenance of stock registers, etc.
Therefore, the Revenue authorities are not justified in resorting to estimation of stock without rejecting the books of account. There is not even a whisper whether the account books as regards the stock disclosed which is written on day-to-day basis and why the same is not acceptable to them. The Assessing Officer has observed in page 2 of his order that in the course of the search substantial discrepancy was noted in the stocks of raw materials as well as finished products. From the order it appears that the above statement has been made only after the searching party valued the same according to their own method which the assessee styled as "eye estimation". In this connection we may also observe that the accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The authorities have to prove satisfactorily that the account books are unreliable, incorrect or incomplete before it can reject the accounts which may be done by showing that important purchases were omitted therefrom or proper particulars or vouchers are not forthcoming or the accounts do not include entries relating to particular class of business. The rejection of the accounts should not be done light-heartedly as has been held by the Kerala High Court in the case of St. Teresa's Oil Mills v. State of Kerala [1970] 76 ITR 365 (at pages 367 and 368). Similarly, in the case of Tolaram Daga v. CIT [1966] 59 ITR 632, the Assam High Court held the same view. The basic principle is the same in law relating to income-tax as well as in civil law, namely, that if there is no challenge to the transaction represented by the entries or to the genuineness of the entries, then it is not open to the other side--to contend that what is shown by the entries is not the real state of affairs (CIT v. Amitbhai Gunvantbhai [1981] 129 ITR 573, at page 580 (Guj)). The ratio of the decision reported 0/788 (sic) is directly in the issue before us.
7. When a return is furnished and the accounts are put in, in support of that return, the accounts should be taken as the basis for the assessment. They should not be rejected because they are complicated.
The procedure of the Assessing Officer is of judicial nature and in making the assessment, the Assessing Officer should proceed on judicial principles. If the evidence is produced by the assessee in support of his return it should be accepted unless it is rebutted by other admissible evidence and not by mere hearsay or arbitrarily (George Oommen v. Commr. of Agrl. I. T. [1964] 52 ITR 977 (Ker)). From the assessment order it is clear that the Assessing Officer has not mentioned any reason why the stock books or other books were not acceptable to him. Therefore, the action of the officers in straightaway proceedings to inventorise the stock on estimate basis, that too which is not accurate and correct, is not in order. The above discussion and the case laws clearly go to show that the stocks shown by the assessee which has been mentioned in page 2 of the assessment order should be accepted in the absence of any defects in the accounts or omission or commission by the assessee.
8. Now we proceed to discuss the inaccuracy in preparation of the inventory. Actually the method adopted by the searching party in taking inventory of raw materials as well as the finished products is unscientific and not correct at all. While preparing inventory the authorities have assumed and surmised certain things. That is why the variation is glaring between the stock disclosed as per stock registers and as estimated by the searching party which has been clearly brought out by the Assessing Officer in the form of a chart in page two of the assessment order. The chart is as follows :------------------------------------------------------------------------------------Items Stock as per books (mt.) Stock as per physical Discrepancy5. M. S. rods (rounds) 61.355 136.300 + 74.945------------------------------------------------------------------------------------ 9. The Assessing Officer claims that the method of valuation adopted is most scientific but, according to us, the same is not so. The physical inventory taken in the course of search is not correct as materials were neither identified, classified nor physically weighed. In the language of the assessee the inventory has been taken on "eye estimation". In this connection it may be mentioned that if the materials having specific size, i.e., length, breadth and thickness that can be calculated on the basis of sectional weight, but in case of the assessee most of the raw materials and finished goods are of uneven size because raw materials purchased are scrap and rejects of RSP. The authorities have assumed that the raw materials purchased, items manufactured of uniform size which is far from truth. Scrap requires physical weighment and no method or formula can be applied for weighing raw material. Similar is the position with regard to other items. We may also mention that initially iron and steel manufacturing process starts from hot mills into various moulds to make solid semis and thereafter rolling and rerolling of solid hot metal into various steel products. Because of this process there will always be arising of defectives, rejects and misroles and scrap, and some loss of weight.
The authorities have not considered this aspect of the issue. In view of this basic characters it is standard practice that all the iron and steel products are purchased and sold on actual weight. In this connection the letter dated August 26, 1998, of the Regional Development Commissioner for Iron and Steel which is in the paper book Volume 2 at page 38 may be seen. Here also he has certified that the correct and accurate method for quantification of the type of material dealt with by the assessee is actual weighment. In this regard Paper Book, Volume II, pages 5 to 9 is worth noting and examined wherein the revenue authorities have inventorised and arrived at weight of slab and slab cutting without actual weighment. The assessee purchased raw materials from RSP out of defective and rejected sizes and each piece weighs 15 to 30 mt. on physical weighment which are weighed on RSP weighbridge. These are put to further gas-cut into various re-rollable sizes according to rolling requirements by weight. Since the materials are defective and rejects, they cannot be uniform in thickness, length and breadth. While gas cutting these slabs into re-rollable sizes the same are not uniform (as they are cut-outs of uneven slabs) as mentioned by the searching party in serial Nos. 1 to 24 (pages 1-6) of Volume II, Paper Book) whereas the size of each piece in various lengths has been taken as uniform in most cases at 4" x 3" and, in pages 7 to 9 serial Nos. 25 to 93 all sizes are different. The various dimensions as recorded were not uniform throughout. Therefore, in this case it can be concluded that total weight near to actual weight can be determined by applying density weight, i.e., 7.85 kg. per cubic metre only when the volume can be calculated accurately which is possible only in prime and tested materials where dimensions are uniform throughout. In case of defective material and rejects, as that of the assessee, all the three dimensions--length, width and thickness, are not uniform throughout due to which it is not possible to ascertain the correct volume and thereby the correct weight by density weight.
Therefore, the adoption of this method by the Revenue authorities is not correct and not even nearer to accuracy.
10. As regards "pencil ingots" (page 10 of the Paper Book, Volume II), it is trapezoidal in shape, i.e., cross-section at both ends of each piece is varying due to which it is not possible to write in correct volume and, therefore, the correct weight is by measuring the cross-section at one end only, i.e., 4" x 3". In order to ascertain correct density weight cross-section at both ends has to be measured correctly along with length of each piece and then the correct formula for calculation of volume has to be applied. From the records it appears that the authorities have not done correctly as is evident from page 10 of the Paper Book, Volume 2. Hence the method used by the Revenue authorities for ascertaining density weight just by taking standard cross-sections and measuring the running length is not correct. In this item alone there is discrepancy of 265.785 mt.
(477.570-211.785). See page 2 of the assessment order because of wrong method of quantification and volume adopted by the authorities. In this regard we may mention that the learned Authorised Representative of the assessee produced two pencil ingots for our perusal and examination during the course of hearing. We have seen them and find that though the length of pencil ingots is the same, their size and shape is not at all uniform. Their weight is so glaring from one another and that is why the discrepancy in the weight between the books of account of the assessee and the wrong method of valuation adopted by the authorities.
The valuation can be scientific if the specification of all pencil ingots are identical in all respects, but it is not so as mentioned hereinabove. Therefore, the assessment of the authorities that they are identical in all respect is not at all correct and which has resulted in glaring variations as already stated above. Similar is the case with regard to samples like M. S. rod (round) and M. S. flat, etc., which were produced during the course of hearing before us.
11. Similarly there is discrepancy of weight of 171.305 mt. in M. S.sections (angles) because of wrong method adopted by the authorities.
They should physically weigh those articles. The assessee-company manufactures M. S. angles of various sizes, thickness in various lengths. Inventory of these products by sectional weight can be determined only after having regard to the total running meters in each of the sizes. The total weight by applying sectional weight on total running meters of various sizes will be nearer to actual physical weighing.
12. Similarly there is discrepancy of 79.975 mt in case of M. S. flats because of wrong method adopted by the Revenue authorities. Here also the assessee-company manufactures M. S. flats of various sizes and thickness and various lengths. The inventory of these products by sectional weight can be determined only after having recorded the total running meters in each of the sizes. The total weight by applying sectional weight on total running meters of various sizes will be nearer to the actual physical weight, but the authorities have not adopted this method and hence the huge discrepancy.
13. The position regarding M. S. rod (rounds) is also same like M. S.angles and M. S. flats. The assessee-company manufactures 8 mm. to 32 mm. diameters in various lengths. The inventory of these products by sectional weight can be determined only after having recorded the total running meters in each of the diameters. The total weight by applying sectional weight on total running meters of various diameters will be nearer to actual physical weighment. Non-adoption of correct method of weighment has resulted in discrepancy of 74.945 mt.
14. The Assessing Officer has observed in the case of M/s. Utkal Alloys P. Ltd. that the assessee-company has indulged in both unaccounted sales as well as unaccounted purchases. The excess stocks are treated as unaccounted purchases whereas the deficit stocks are treated as unaccounted sales. This statement of the Assessing Officer is purely on assumption, surmises and guess work without any evidence. He has not pointed out any unaccounted purchases or unaccounted sales to substantiate his statement. This observation of ours is equally applicable to the facts of other two assessees also.
15. Finally, to sum up, we may state the undisputed facts in the present appeals are that the purchases from RSP are on physical weighment in weighbridge and sales are also on actual weight. It is also not disputed by the Revenue that the inventory prepared by the searching party is not on physical weighment basis but by applying some formula which is not at all accurate. But the learned Departmental Representative submitted that the formula adopted by the authorities is near accurate. In this regard we may mention that the formula may be near accurate but the same is not accurate. The authorities should have adopted the method which is accurate. For doing the same the assessee offered the best method for valuation of the stocks and that was physical weighment. The assessee also offered men, material, etc., for physical weighment but the same was not accepted by the authorities without mentioning any reasons thereof. On the contrary they have adopted the so-called second test method for valuation of the stocks which, according to us, is not even second best method if one looks at the discrepancy in the stocks as per books and the stocks as estimated by the authorities. In this connection we may observe that the motto of the Revenue is to collect actual tax and not more or less, but in the instant case by applying the so-called second best method and not the best method, they have raised so much of taxes and burdened the assessee which is against the motto of the Revenue. It is also not disputed that the assessee maintains regular books of account including stock registers which are regularly checked by the Central Excise authorities and the Assessing Officer has not pointed out any deficiency or defects in those books of account.
16. The assessee's accounts were also duly audited. It is also not disputed that Sri Mathuram Agrawal has offered all assistance for physical weighment of the stocks but the authorities have not accepted the same without specifying any reasons therefor. The physical weighment as offered by Sri Agrawal would have lasted for 4-5 days and is practicable, but the searching authorities have short-circuited the entire procedure of valuation. But, according to us, there is no short-cuts to physical weighment. Lastly we may observe that the Assessing Officer has stated that the offer of Sri Mathuram Agrawal for physical weighment was an afterthought, but we fail to understand how the offer made during deposition under section 132(4) of the Act on November 4, 1995, is an afterthought. In view of the above stated facts and considering the totality of facts and circumstances of the case, we direct the Assessing Officer to accept the stocks disclosed by the assessee as per the stock registers maintained which are regularly checked by the Central Excise authorities and also reflected in respective assessment orders of the assessees.
1. I have gone through the order drafted by learned Accountant Member, I most respectfully disagree with his findings on the following point.
2. The only point of dispute in these group of cases is whether the method of valuation of stock adopted by the Department is appropriate or proper.
3. The learned Authorised Representative's contention that the search parties did not at all make any actual weighment of the goods is wholly not correct. During the course of hearing, it was brought to our notice that the stock inventory has been made in the presence of Shri Nathulal Agrawal and two witnesses. Xerox copies of notings made in different rough calculation sheets during stock-inventory were placed before the Bench at the time of hearing. Weighment of some of the goods were made and rest were calculated on the sample basis. In view of the same, the contention of the assessee that no weighment was made was not at all correct.
4. The assessee was purchasing raw-materials like scraps, rejects, etc., from Rourkela Steel Plant on actual weighment basis. Therefore, accurate weighment of 3,000 mts. would yield accurate valuation. It is found from the statements recorded by the income-tax authorities that the income-tax officials had allowed opportunity to the assessee's representative to decide as to whether the stockyard and factory would remain under lock and key till the actual weighment was completed which would take several months. For their own interest, the assessee did not want such a long closure of the factory and had left the matter to the income-tax authorities for their best judgment/possible valuation.
5. There is no dispute that for valuation of about 3,000 mts. iron scraps of small to very large sizes the best and proper method is the exact weighment using weighbridges, cranes and high tonnage dumpers.
This could not be weighed due to time constraints and the apprehension of disruption of normal factory work even closure for a long time. It is evident from the argument and papers filed in the course of hearing that the Department had adopted the next best method available to them during the search which was wholly not scientific but the best possible approximation. As the works manager and other senior factory workers were present at the factory premises there was hardly any necessity of summoning any technical expert for doing such exercises. It is not out of place to mention here that the income-tax authorities were getting all types of assistance from the abovementioned officials of the factory to arrive at the best possible approximation. It has further been observed from the rough calculation sheets presented at the time of hearing that some of the items were actually weighed and others were estimated with the assistance of the assessee's representative at the factory premises. What the income-tax officials have done may not be wholly scientific, but the calculation which have been made cannot be ruled as without any logic or statistical sampling. In view of the complexity of the issue there is nothing wrong on the part of the income-tax officials in adopting the next best possible valuation method. It was also reported by the learned counsel for the assessee that there were huge quantity of materials scattered in different places inside the factory and all the cranes were not in working condition to assist the income-tax officials to arrive at the actual or nearer accurate weighment.
6. The points of difference of opinion between the two Members are as follows : "(1) Whether the method of valuation of stock adopted by the Income-tax Department can be considered as proper (2) If the assessee is not maintaining day-to-day record while issuing the inputs (raw materials) on the basis of actual weighment then how there could be any reason for the assessee to agitate the stock estimated by the department not on actual weighment but by adopting near scientific method on approximation ?" Re : (1) IT(SS) A. No. 4/Ctk of 1996 (Block years 1986-87 to 1996-97)--Utkal Steels Ltd. v. Deputy CIT, SR, Sambalpur.
(2) IT(SS) A. No. 1/Ctk of 1996 (Block years 1986-87 to 1996-97)--Utkal Alloys P. Ltd. v. Deputy CIT, SR, Sambalpur.
(3) IT(SS) A. No. 5/Ctk of 1996 (Block years 1986-87 to 1996-97)--S. L.
Agarwal and Co. v. Deputy, CIT, SR, Sambalpur.
7. In the above mentioned appeals, on a difference of opinion between the Members who heard these appeals, the following point of difference is referred to the hon'ble President for opinion of the Third Member.
"Whether, on the facts and circumstances of the case, the view of the Accountant Member is correct in holding that the authorities are not justified in straightaway estimating the value of stock without physically weighing them during the operation under section 132 of the Income-tax Act particularly when the assessee maintains regular books of account which are checked by the Central Excise authorities time to time, or the view of the Judicial Member is correct in holding that in the absence of maintenance of day-to-day record while issuing the inputs (raw materials) on the basis of actual weighment then how there could be any reason for the assessee to agitate the stock estimated by the Department not on actual weighment but by adopting near scientific method on approximation ?" 1. On a difference of opinion between the two Members, the matter was referred by the hon'ble President, Income-tax Appellate Tribunal, for my opinion as Third Member on the following point of difference : "Whether, on the facts and in the circumstances of the case, the view of the Accountant Member is correct in holding that the authorities are not justified in straightaway estimating the value of stock without physically weighing them during the operation under section 132 of the Income-tax Act particularly when the assessee maintains regular books of account which are checked by the Central Excise authorities from time to time, or the view of the Judicial Member is correct in holding that in the absence of maintenance of day-to-day record while issuing the inputs (raw materials) on the basis of actual weighment then how there could be any reason for the assessee to agitate the stock estimated by the Department not on actual weighment but by adopting near scientific method on approximation ?" 2. The three assessees--two limited companies and one partnership firm, are dealing in iron and steel. In a search action under section 132, the Revenue authorities found certain stock lying at the premises and valued the stock of raw material and finished goods at some particular figures and finding the valuation at a higher amount than the book value, the difference was added to the assessees' income. The dispute in these appeals based on the valuation by the Department--says that it was based on eye estimation and some hypothetical calculations, whereas the Judicial Member states that it was nearing actual basis, i.e., the next best method of sampling. The result is the addition in income based on such difference.
3. The Assessing Officer stated on the method of valuation as under. In course of the physical inspection of the stock lying in the factory premises it was noticed that in case of the heavy items like M. S.slabs and slab cuttings, etc., the measurement of sizes were engraved by the markings of Steel Authority of India Limited from whom these materials were purchased. Taking the same as the basis the volume of these materials have been arrived at cubic feet. This volume has been converted into weights by taking a sample weight of one item. As per example one M. S. slab of the size of 8 ft. x 2 ft. x 8 inches = 10.66 cft. weighed 2.315 m.t. Taking this as the volume of all the heavy materials have been converted into weights. The stock inventory prepared in the course of the search gives the details of all these items. Therefore, the method adopted for taking the physical inventory of stock cannot be called unscientific.
4. The Assessing Officer also observed that the assessee's representative Sri N. R. Agarwal was told about this method while recording his statement and his reply was "some of the materials having specific size, i.e., length, width and thickness can be calculated on the basis of sectional weight like slabs and slab cuttings regular shape but most of materials are of uneven size." He rejected this explanation of the assessee because of the markings by the SAIL regarding their size, etc., on the scrap items. Though the material was a reject but this was because of uneven size. That, according to him, would not alter the weight, because they came out of the standard moulds. He also stated that while valuing, all the materials have been properly identified and classified. Treating the excess stock because of unaccounted purchase and differential stock because of unaccounted sale, the Assessing Officer added a sum of Rs. 30,880 to the income of the assessee, M/s. Utkal Alloys (P.) Ltd., Rs. 60,63,350 in the income of the assessee, M/s. Utkal Steels Ltd. and Rs. 19,37,229 in the income of the assessee M/s. S. L. Agarwal and Co.
5. In appeal, the two Members differed in their opinion about the method of valuation--stated that the authorities have assumed and surmised certain things while preparing inventory; that the materials were neither identified, classified nor physically weighed; that the inventory was taken on eye estimation; that most of the raw material and finished goods in the case of the assessee were of uneven size because the raw material purchased were scrap and rejects; that these were further put to gas cut into various re-rollable sizes which would also be not in uniform size; that the searching party took the size of each piece at 4" x 3" at serial Nos. 1 to 24, whereas at serial Nos. 25 to 93 all sizes are different; that various dimensions as recorded, were not uniform throughout; that in case of defective and rejects, all the dimensions--length, width and thickness not being uniform they cannot be weighed by density, that as regards "pencil ingots" they were of trapezoidal in shape, i.e., cross-section at both ends but not measured by standard cross-section nor running length; that two samples produced by the assessee were though of same length but their size and shape was not uniform; that the difference in their weight was glaring; that similar was the position of samples produced for M. S. rod (round) and M. S. flat produced during the course of the year; that similarly there was discrepancy of weight of 171.305 m.t., in M. S. section (angles); that M. S. flat (angles) causing a discrepancy of 74.945 m.t.
that M. S. rod (rounds) produced by the assessee were of 8mm. to 32mm.
diameter and their weight by applying sectional weight on total running meters would be nearing physical weight but resulted in discrepancy of 74.945 m.t. He, therefore, held that the method of valuation by the Department was not scientific and book weight should be accepted, because no defects were found in maintaining the books of account and its stocks were subject to control of excise authority. He, therefore, held that no addition should be made on the alleged difference of valuation.
6. The Judicial Member, on the other hand, held that weighment of some of the goods were made and the rest were calculated on sample basis; that the income-tax officials allowed opportunity to the assessee's representative to decide that if the actual weighment might take several months and stockyard and factory remained under lock and key until then, the assessee left the matter in that situation to the best judgment of official; that though the correct method of valuation is physical weighment, but under the circumstances the apprehension of disruption of normal factory work and even closure, the next best method which was not wholly scientific was adopted by the Department and that cannot be ruled out as without any logic or statistical sampling. According to him, the addition was, therefore, justified.
7. Learned counsel for the assessee, Shri A. K. Roy, and learned counsel of the Department, the Commissioner of Income-tax, Shri E. M.Mohanty, were heard and their rival submissions were considered. It is an admitted fact that the stock was not weighed physically. It was partly physical and partly adopting sampling method. When a sampling method is adopted, some difference has to be there and cannot be 100 per cent true account of the weighment. It may represent a discrepancy as observed by the Accountant Member at various places and as discussed in various paragraphs of his order or it may be a difference over or below what is recorded by the assessee. In view of stamping by the Steel Authority/RSP for the size and weight, there might not be much difference in valuation if it goes by weight inscribed therein but it has been taken as a sample in a cubic feet storage where scraps of different sizes were stored. That the difference is bound to be there, because sample always does not represent actual. It may be less or it may be more. Difference may be large if there is a large scale difference in various scraps and rejects and small or nil if the items are of lesser difference of size and weight. Both the Accountant Member and Judicial Member agree on the point that the correct method of valuation is physical weighment and the assumption by sampling does not result in actual valuation in the opinion of the Accountant Member and is the next best method as per the Judicial Member can, therefore, be in such a situation any addition be made in assessment I find a decision of the Orissa High Court in the case of Haribhagat Agarwalla v. State of Orissa [1982] 51 STC 355, a case under the Sales Tax Act, stating that no addition can be made on the basis of difference of the stock arrived at by sampling method. It observed as under (headnote) : "In 1969-70 the assessee, a rice miller, was the purchasing agent of the Food Corporation of India for paddy. Two revenue officials on two different dates verified the stock held by the assessee by a sampling method and not physically and found a huge shortage though their findings were different regarding quantity. The Assessing Officer taking notice of the practice of the assessee to pay purchase tax on paddy by calculating backwards on the basis of the sale of rice raised a demand by treating the deficit as the turnover of purchase of paddy without payment of tax. But the principal of the assessee, namely, the Food Corporation of India, through its officer made a physical verification and found the shortfall in the stock of the assessee as 61 quintals only. On reference : Held, that a sampling method of verification might be useful for certain purposes but could not be utilised as the basis for imposition of tax. In the facts and circumstances of the case, the principal's physical measurement on the basis of which payment should have been made should be given greater importance, and, therefore, the assessee was liable to pay purchase tax on 61 quintals of paddy only." 8. This being a binding decision of the jurisdictional High Court, I hold that no addition can be made in this case and agree with the Accountant Member for deleting the same.
9. Learned counsel for the Department submitted that the assessee itself has accepted the existence of 28,000 m.t. which is nearing the valuation of the stock estimated by the Department and, therefore, the addition was bound to be made. I do not find it to be so. The letter dated September 21, 1996 was written by Utkal Steels Ltd. on the basis of which the contention has been raised by learned counsel for the Department was in connection with and for pointing out the impossibility of having valued the stock physically. In that connection it was stated that the stock 28,000 m.t. would require seven to ten days even all handling the equipments in the factory were employed.
That is not an admission of the existence of the stock to that extent but a statement to show largeness of the stock and might have been made because the Revenue had estimated the stock to that extent. In my opinion, that cannot be a statement of admission of existence of stock to that extent by the assessee.
10. A point was made out that the assessee himself has accepted the method correct and offered the valuation by estimate when confronted with the fact that the actual weight will take long time and factory shed would be under lock and key of the Department until then. This is what was stated in the statement of Sri Nathmal Agrawal recorded on November 4, 1996, at 3 p.m. : "I was asked to arrange carriers and trucks which were not available in the night and weighments could not be done. It was said to me that physical weighment will take long time and hence stock will be taken on estimation basis and estimation were started. I did not agree to calculation of weight by high estimation. I was told to seize the factory then I said you may verify the weighment as per your choice." 11. That, in my opinion, does not amount to acceptance of the method as correct one but leaving the choice to the Department. Be that as it may, it does not carry the matter any further because if the method of weighment is wrong it is wrong or if right it is right. As pointed out above by the jurisdictional High Court, the sampling method cannot be utilised for imposition of tax on the difference in valuation on that basis.
12. Various arguments were raised about the correctness of the accounts maintained under the checks and supervision of excise and other authorities, but determination of that issue might not have any impact in deciding these appeals, because the addition is based on the difference in the stock and the valuation thereof. If the difference is there actually, addition can be made. On the other hand, if difference is estimated by sampling method or there is no difference, no addition can be made. It is, therefore, not necessary to express any opinion on the correctness or otherwise of the maintenance of accounts by the assessee.
13. The case now shall be fixed before the Division Bench for final disposing of the appeals.