COMMISSIONER OF INCOME TAX LUDHAINA V. M/S NAHAR EXPORTS LTD

ITA/94/1999

AI Insights

The case revolves around the valuation of closing stock and the admissibility of deductions under Section 80I of the Income Tax Act, 1961, concerning M/s Nahar Exports Limited for the assessment year 1989-90. The Assessing Officer initially valued the stock at actual cost and disallowed certain deductions, which was contested by the respondent. The CIT(A) modified some of these decisions, which were further contested by both parties before the Tribunal. The Tribunal's decision, which partly favored the respondent, led to the present appeal by the revenue. The High Court's decision addressed the method of stock valuation and the treatment of duty drawback in relation to manufacturing activities.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 744520 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 03-07-2014
• Assessment Year: misc
• Other Referred Cases: Liberty India vs. CIT, CIT vs. British Paints India Limited, CIT vs. Fazilka Cooperative Sugar Mills Limited
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: SANJAY BANSAL; RAJNI PAL
• Assessee Lawyers: RAJESH KATOCH
• Keywords: Duty Drawback; Income Tax; Manufacturing Activities; Valuation of stock; Average Cost Method
• Section: 143(3); 260A; 80I

Judgement Text

"ITA No.94 of 1999 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.94 of 1999 Date of decision:3.7.2014 Commissioner of Income Tax (Central) Ludhiana ……Appellant Vs. M/s Nahar Exports Limited, Ludhiana …..Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE JASPAL SINGH Present: Mr. Rajesh Katoch, Advocate for the appellant. Mr. Sanjay Bansal, Sr. Advocate with Ms. Rajni Pal, Advocate for the respondent. Ajay Kumar Mittal,J. 1. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 4.3.1999, Annexure A.3, passed by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (in short, “the Tribunal”) in ITA No.968/Chandi/91, for the assessment year 1989-90, claiming following substantial questions of law:- “1) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was right in directing to work out the value of finished goods lying at port on the basis of average cost? GURBAX SINGH 2014.08.20 10:50 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.94 of 1999 2 2) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was right in holding that deduction under Section 80I is admissible on the Duty Draw back, the receipt of which is not attributable to conduct of any manufacturing activities by the respondent? 2. Briefly, the facts necessary for adjudication of the controversy involved as narrated in the appeal may be noticed. The respondent company is deriving income from manufacture, purchase and export of cotton hosiery goods. For the accounting year ending 31.3.1989 relevant to the assessment year 1989-90, a return declaring an income of ` 69,870/- was filed on 1.1.1990. It was noticed by the Assessing officer during the assessment proceedings that the assessee had valued the yarn as well as own manufactured finished products at average cost and not on cost basis. Similarly, finished goods purchased from the market which were lying in the closing stock were also found to be valued at average manufacturing cost though such products were purchased from the market at a much higher price. Accordingly, the Assessing officer held that the respondent had undervalued its stock in order to reduce book profits amounting to ` 2,68,712/-. The Assessing officer also noticed that the respondent had claimed deduction under Section 80I of the Act amounting to ` 2,38,604/- in the computation chart filed with the return on the profits of ` 15,76,474/-. The Assessing officer held that the deduction was not admissible under Section 80I of the Act on the cash assistance received by the respondent on the export of goods as it was not a receipt relatable to the manufacturing activities of the respondent but it was instead a receipt on account of the policy of the Central government for boosting the exports. The Assessing GURBAX SINGH 2014.08.20 10:50 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.94 of 1999 3 officer thus allowed deduction of only ` 1,04,825/- against ` 2,38,604/- which was claimed by the respondent. The assessment was completed at income of ` 3,89,380/- vide order dated 29.11.1990, Annexure A.1 under Section 143(3) of the Act. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 4.3.1991, Annexure A.2, the CIT(A) partly allowed the appeal holding that the Assessing officer should value the acrylic yarn on actual cost basis and cotton yarn on the basis of weighted monthly cost instead of the cost taken by the Assessing officer at the time of assessment. As regards finished goods lying in the docks for shipment and contracted to be sold, it was directed that the same should be valued at contract rates (Invoice rates) plus Incentives Less Shipment Cost. The finished goods lying in the factory were directed to be valued at cost inclusive of Overheads and Interest or Net Realisable Value, whichever was lower. With regard to deduction under section 80I of the Act, the CIT(A) allowed part relief and directed that duty draw back should be bifurcated between manufacturing and trading activities for computing the deduction. Not satisfied with the order, both the revenue and the respondent filed appeals before the Tribunal. Vide order dated 4.3.1999, Annexure A.3, the Tribunal dismissed the appeal of the revenue on the issue of value of closing stock of yarn and finished product. The Tribunal partly allowed the respondent's appeal. With reference to stock of finished pieces lying at port, it was directed by the Tribunal that their valuation should also be made on the basis of average cost. The Tribunal also directed that the amount of duty draw back received by the respondent GURBAX SINGH 2014.08.20 10:50 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.94 of 1999 4 had to be treated as part of profits and gains derived by it from the industrial undertaking. Hence the present appeal by the revenue. 3. We have heard learned counsel for the parties and perused the record. 4. Learned counsel for the appellant submitted that the Tribunal had erred in accepting the determination of value of finished goods which were lying on the port on the basis of average cost. According to the learned counsel, the Assessing officer had rightly valued the finished goods lying at the port on the basis of actual cost incurred by the assessee. Adverting to the second question, learned counsel for the revenue on the strength of the judgment of the Apex court in Liberty India vs. CIT, (2009) 317 ITR 218 urged that the issue was concluded in favour of the revenue and that the Tribunal had erred in allowing deduction under section 80I of the Act on the duty draw back which was not permissible. 5. On the other hand, learned counsel for the assessee submitted that the Tribunal had categorically recorded a finding that the assessee had been following average cost method which was a recognized method by the Institute of Chartered Accountants and in view of the judgment of the Apex Court in CIT vs. British Paints India Limited, (1991) 188 ITR 44 and of this Court in CIT vs. Fazilka Cooperative Sugar Mills Limited, (2002) 255 ITR 411, the issue has been rightly decided in favour of the assessee. However, as regards question No.(2), it was fairly accepted that the issue stands concluded by the judgment of the Apex Court in Liberty India's case (supra). GURBAX SINGH 2014.08.20 10:50 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.94 of 1999 5 6. After hearing learned counsel for the parties, we find that with regard to question No.(1), the Tribunal while accepting the plea of the assessee came to the conclusion as under:- “5. We have carefully considered the submissions made by both the parties on this issue and have perused the orders of the tax authorities. We have also perused the various documents placed in the paper book to which our attention was invited during the course of hearing. We have also seen the case law relied upon by both the parties. It is observed that the thrust of the submission made by the learned counsel is that the assessee has the right to choose the method of valuation of closing stock on the basis of average cost, which is a recognized method of valuation. In this connection he has relied on the standards laid down by the Institute of CAs – AS2, a copy whereof is placed at pages 1-7 of the paper book. In addition to the aforesaid case law, the learned DR has also relied on various decisions mentioned above. A majority of the said decisions as relied upon by the learned DR are distinguishable on facts. However, the Hon’ble Supreme court has clearly held that the AO is duty bound to examine as to whether the method of valuation as adopted by the assessee has been regularly followed or not and as to whether the correct profits and gains could be deduced from the accounts maintained by following the said method. It is observed that in the present case, it is not disputed that the assessee has regularly followed the method of valuation of stock on the basis of average cost. Further there is no specific finding by the AO that the profits cannot be correctly deduced on the basis of the method of valuation followed by the assessee. The provisions of section 145 have not been specifically invoked in the present case. In view of the foregoing facts, we therefore feel that the learned CIT(A) has rightly held in para 2.3 of the order that in the case of cotton GURBAX SINGH 2014.08.20 10:50 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.94 of 1999 6 yarn average weighted cost of closing stock may be taken and the valuation of closing stock should be worked out on the basis of weighted monthly cost. It is also observed that the said method of valuation of closing stock of raw material has been accepted by the assessee and it has been stated before us that the assessee is not aggrieved on this part of the valuation.” 7. In view of the aforesaid finding which has not been shown to be erroneous or perverse in any manner by the learned counsel for revenue, no fault could be found in the approach adopted by the Tribunal. Accordingly, question No.1 is decided against the revenue and in favour of the assessee. 8. In view of the fact that there is no dispute with regard to the issue arising in question No.2, between learned counsel for the parties, in view of the judgment of the Apex Court in Liberty India's case (supra), the duty draw back would not form part of net profit and, therefore, no deduction under Section 80I of the Act was admissible thereon. The question is, thus, decided against the assessee and in favour of the revenue. 9. In view of the above, the appeal is disposed of in the manner indicated above. (Ajay Kumar Mittal) Judge July 03, 2014 (Jaspal Singh) ‘gs’ Judge GURBAX SINGH 2014.08.20 10:50 I attest to the accuracy and integrity of this document High Court Chandigarh "