ACIT Circle I, V. Karam Veer Electronics LTd,

ITA 1021/DEL/2008

• Counselvise Citation: [2008] 114 COUNSELVISE.COM (IT) 3108 (ITAT-DELHI)
• Duration Of Justice: 1 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-04-2008
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 26-09-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 18-03-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: LEENA SRIVASTAVA
• Keywords: Rectification of order; Valuation report; Set aside
• Section: 254(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH D NEW DELHI) BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. NO.1021/DEL/2008 ASSESSMENT YEAR : 2003-04 ACIT, M/S KARAMVIR ELECTRONICS LTD., CIRCLE-1, KISDHAN FLOUR MILLS COMPOUND, MEERUT. V. RAILWAY ROAD, MEERUT. (APPELLANT) (RESPONDENT) PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO.AAACK AAACK AAACK AAACK- -- -7606 7606 7606 7606- -- -D DD D APPELLANT BY : MS. LEENA SRIVASTAVA, DR. RESPONDENT BY : SHRI SANJAY MALIK, ADVOCATE. ORDER PER TS KAPOOR, AM: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE OR DER OF LD CIT(A) DATED 28.12.2007. THE GROUNDS RAISED BY THE REVENUE A RE AS UNDER:- 1. IN THE FACTS & CIRCUMSTANCES OF THE CASE, THE LD CIT(A ) HAS ERRED IN LAW IN DELETING THE ADDITION OF ` .21,09,745/- MADE ON ACCOUNT OF REDUCTION OF OPENING AND CLOSING STOCK WITHOUT APP RECIATING THE FACTS THAT THE ENTIRE VALUE OF TAKEN OVER MUST HAVE BEEN CLAIMED AS A DEDUCTION AT THE TIME OF TRANSFER OF STO CK. 2. IN THE FACTS & CIRCUMSTANCES OF THE CASE, THE LD CIT(A ) HAS ERRED IN LAW IN DELETING THE ADDITION OF ` .21,09,745/- WITHOUT APPRECIATING THE FACTS THAT THE ASSESSING OFFICER IN HIS ASSESSMENT ORDER HAD ELABORATELY DISCUSSED THE REASONS FOR ITA NO1021/DEL/08 2 WHICH THE ASSESSING OFFICER CONCLUDED THAT THE ASSESSEE WAS NOT IN POSSESSION OF 75 TONES OF DEFECTIVE STOCK. 3. IN THE FACTS & CIRCUMSTANCES OF THE CASE, THE LD CIT(A ) HAS ERRED IN LAW IN DELETING THE ADDITION OF ` .21,09,745/- WITHOUT APPRECIATING THE FACTS THAT THE VALUATION OF THE STOC K WAS NOT DONE BY A COMPETENT PERSON ON SOUND PRINCIPLES OF VALU ATION. 4. IN THE FACTS & CIRCUMSTANCES OF THE CASE, THE LD CIT(A ) HAS ERRED IN LAW IN DELETING THE ADDITION OF ` .21,09,745/- WITHOUT APPRECIATING THE FACTS THAT NO SELLER UNDER ORDINARY CIRCUMSTANCES WOULD ACCEPT A REDUCTION IN VALUATION A FTER FIVE YEARS BECAUSE STOCK WOULD LOSE VALUE IN NORMAL COURSE O VER SUCH A LONG PERIOD OF TIME AND THE SELLING PARTY ACQUIESCE D IN THE REDUCTION ONLY BECAUSE BOTH THE BUYER AND SELLER WERE CLOSELY RELATED. 5. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT( A) HAS ERRED IN LAW IN UPHOLDING THAT ` .21,09,745/- HAS BEEN SUBTRACTED FROM CONSUMPTION. IF THE STOCK HAD BECOME BAD, CONSUM PTION WOULD INCREASE AND NOT DECREASE. 6. THE ASSESSEE HAS REDUCED ITS OPENING STOCK WHICH IS NOT PERMISSIBLE ACCORDING TO ACCOUNTING PRINCIPLES. 7. IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE ORDER OF THE LD CIT(A) MAY BE SET ASIDE AND THAT OF ASSESSING OFFICER RE STORED. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS EN GAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF ELECTRICA L LAMINATION AND ALLIED ITEMS. THE RETURN OF INCOME WAS FILED ON 28.1 1.2003. THE CASE WAS SELECTED FOR SCRUTINY. DURING THE ASSESSMENT PROCEEDI NGS, THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAD WRITTEN OFF IT S LIABILITY AGAINST M/S SURYA INDUSTRIAL CORPORATION LTD. TO THE EXTENT OF ` .21,09,745/-. THE ASSESSING OFFICER MADE THE ADDITION O F ` .21,09,745/- ITA NO1021/DEL/08 3 U/S 41 OF THE INCOME TAX ACT, 1961 TREATING IT AS C ESSATION OF LIABILITY. THE ASSESSEE HAD EXPLAINED THAT IT HAD TAKEN OVER A RUN NING UNIT OF SURYA INDUSTRIAL CORPORATION ALONGWITH ITS ALL ASSETS A ND LIABILITIES INCLUDING STOCK IN THE YEAR 1998 AND CONTINUED THE C ONSUMPTION OF STOCK TAKEN OVER FROM THE ABOVE COMPANY UNTIL MARCH, 2003 WHEN IT FOUND THAT OUT OF UN-USED STOCK OF 75 METRIC TONES WAS NOT FIT FOR CONSUMPTION. THEREFORE, THE VALUATION REPORT WAS OBTA INED AND DIFFERENCE IN VALUATION OF STOCK AND PURCHASE PRICE P AID TO THE SELLER OF UNIT WAS REDUCED FROM LIABILITY AND SIMULTANEOUSLY RED UCTION WAS MADE IN THE STOCK. THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE EXPLANATION SUBMITTED BY THE ASSESSEE AND HE MADE ADDIT ION OF ` .21,09,745/-. THE ASSESSEE HAD APPROACHED LD CIT(A) WHO HAD DELETED THIS ADDITION AND ON A FURTHER APPEAL BY THE REVENUE TO ITAT, THE ITAT HAD CONFIRMED THE SAME VIDE ITS EARLIER ORD ER DATED 28.11.2008. HOWEVER, THE SAME WAS RECALLED VIDE ORDE R 17.9.2010 ON AN APPLICATION FILED BY THE ASSESSEE FOR RECTIFICATION OF MISTAKE U/S 254(2) OF THE ACT. THE ORDER WAS RECALLED ON THE GRI EVANCE OF THE ASSESSEE THAT APPLICATION OF SECTION 41(1) OF THE ACT WA S NOT COVERED BY THE GROUNDS OF APPEAL RAISED BY THE REVENUE AND ASSE SSEE WAS NOT GIVEN AN OPPORTUNITY ON THIS ISSUE REGARDING APPLICA BILITY OR OTHERWISE OF SECTION 41 OF THE ACT. THE APPEAL WAS AGAIN THEN L ISTED FOR FRESH HEARING WHICH IS BEFORE US. THE REVENUE VIDE LETTER D ATED 1.6.2010 HAS CONTENDED THAT ISSUE OF APPLICABILITY OF SECTION 41(1) WAS ALREADY THERE IN THE GROUNDS OF APPEALS WHICH WERE BROADER IN NATUR E AND WHICH ACTUALLY MEANT APPLICABILITY OF PROVISIONS OF ISSUE OF SECTION 41 OF THE ACT. 3. AT THE OUTSET, THE LD AR SUBMITTED THAT THERE WAS NO APPLICABILITY OF THE PROVISIONS OF SECTION 41 AS THE ASSESSEE HAD REDUCED THE LIABILITY AS WELL AS THE VALUE OF STOCK WITH THE EQUIVALENT AMOU NT. HE FURTHER EXPLAINED THAT IF ON THE ONE HAND, THE LIABILITY OF ASSESSEE HAD ITA NO1021/DEL/08 4 DECREASED ON THE OTHER HAND EXPENSES IN THE P&L ACCOUN T IN THE FORM OF REDUCTION OF VALUE IN CONSUMPTION OF STOCK AND BAD COMPENSATED THE SAME EQUALLY. THEREFORE THERE WAS NO EFFECT ON T HE PROFIT OF THE ASSESSEE. IN THIS RESPECT HE TOOK US TO PAGE 3 OF PAPER B OOK WHERE A COMPARATIVE TRADING ACCOUNT COMPARING THE FIGURE OF PROFITS AFTER RE- VALUATION AND BEFORE RE-VALUATION WAS PLACED. HE INV ITED OUR ATTENTION TO THE FACT THAT GROSS PROFIT UNDER BOTH METHODS REMAI NED SAME. HE ALSO TOOK US TO PAGE 3 OF PAPER BOOK AND INVITED OUR ATTENTION TO THE REDUCTION OF ` .21,09,745/- FROM CONSUMPTION OF STOCK. THEREFORE, IN VIEW OF THE ABOVE, HE ARGUED THAT SINCE THERE WAS NO EFFECT ON PROFIT, THERE WAS NO REASON FOR MAKING ADDITION. 4. THE LD DR, ON THE OTHER HAND RELIED UPON THE ORD ER OF ASSESSING OFFICER. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PAR TIES AND HAVE GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE DISPUTE BETWEEN THE PARTIES IS WITH RESPECT TO WRITING OFF AN AMOUNT WHICH WAS DUE TO A CREDITOR OF THE COMPANY ON ACCOUN T OF PURCHASE OF A RUNNING UNIT. THE LIABILITY WAS REDUCED BECAUSE SOME PART OF STOCK TAKEN OVER BY THE ASSESSEE WAS NOT USEABLE AND HENCE ON A MUTUAL VALUATION DONE THROUGH AN INDEPENDENT VALUER, THE A SSESSEE AND CREDITOR HAD ARRIVED AT THE AMOUNT OF DIFFERENCE AN D CREDITOR HAD AGREED FOR A LESSER AMOUNT TO THAT EXTENT BY GIVING I TS CONSENT FOR WRITING OFF THE SAME FROM BALANCE OUTSTANDING. IT IS A CASE WHERE IN FACT AFTER REACHING AN AGREEMENT FOR SALE OF UNIT A T PRICE THE AMOUNT WAS REDUCED BY CERTAIN AMOUNT. WHEN ASSESSEE HAD TAKEN O VER THE UNIT IT MUST HAVE DEBITED THE VARIOUS ASSETS UNDER VARIO US HEADS INCLUDING DEBIT UNDER THE HEAD STOCK AND MUST HAVE C REDITED THE TOTAL CONSIDERATION TO THE CREDIT OF CREDITOR. WHEN A PART OF IT HAS BEEN AGREED TO BE REDUCED THE NATURE OF ENTRY SHOULD BE T HE REVERSAL OF ITA NO1021/DEL/08 5 ABOVE ENTRY WITH THE AGREED AMOUNT WHICH IN THE PRE SENT CASE IS ` .21,09,745/- WHICH THE ASSESSEE DID AND THERE IS NO WRON G IN IT. THE ASSESSEE HAS DECREASED THE VALUE OF CONSUMPTION BY AN EQUI VALENT WHICH IS APPARENT FROM COPY OF P&L ACCOUNT PLACED AT PAGE 5 OF PAPER BOOK WHEREIN UNDER THE HEAD MATERIAL AND MANUFACTUR ING EXPENSES AN AMOUNT OF ` .21,09,745/- HAS BEEN REDUCED FROM THE TOTAL VALUE O F MATERIAL CONSUMED AND IN THIS WAY PRACTICALLY THE ASSE SSEE ITSELF HAD SURRENDERED THE SAID AMOUNT IN THE FORM OF LOWER CLAI M OF CONSUMPTION OF MATERIAL. THE PROVISIONS OF SECTION 41(1) ARE DIFFE RENT WHICH ARE APPLICABLE IN THE CASE OF CESSATION OF LIABILITY ACCRU ED ON ACCOUNT OF SOME EXPENDITURE OR PURCHASES MADE IN THE EARLIER YEAR . IN THE PRESENT CASE THOUGH THE LIABILITY WHICH HAS BEEN WRITTEN OFF HAD ACCRUED DUE TO PURCHASES MADE IN AN EARLIER YEAR BUT THE ASSESSEE HAS SIMU LTANEOUSLY REDUCED EQUIVALENT AMOUNT FROM THE AMOUNT OF CONSUM PTION OF MATERIAL NULLIFYING THE EFFECT OF CESSATION OF LIABIL ITY. THEREFORE, ON THE ONE HAND LIABILITY HAD CEASED AND ON THE OTHER HAND THE ASSESSEE CLAIMED LOWER EXPENDITURE IN THE FORM OF LOWER CONS UMPTION OF MATERIAL. THEREFORE, IN OUR CONSIDERED VIEW, THE ASSE SSEE HAS SET OFF THE GAIN ON ACCOUNT OF CESSATION OF LIABILITY BY CLAI MING LOWER AMOUNT OF AN EQUIVALENT AMOUNT IN THE P&L ACCOUNT. THE NAT URE OF TRANSACTION CAN BE COMPARED AS THAT OF RETURN OF GOODS PURCHASED I N AN EARLIER YEAR. IN VIEW OF THE ABOVE, WE DO NOT SEE ANY INFIRM ITY IN THE ORDER OF LD CIT(A). 6. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 7. ORDER PRONOUNCED IN THE OPEN COURT ON 26TH DAY O F APRIL, 2013. SD/- SD/- (U.B.S. BEDI) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER DT.26.4.2013. HMS ITA NO1021/DEL/08 6 COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. BY ORDER (ITAT, NEW DELHI). DATE OF HEARING 30.1.2013 DATE OF DICTATION 10.4.2013 DATE OF TYPING 10.4.2013 DATE OF ORDER SIGNED BY 26.4.2013 BOTH THE MEMBERS & PRONOUNCEMENT. DATE OF ORDER UPLOADED ON NET 26.4.2013 & SENT TO THE BENCH CONCERNED.