The DCITNavsari Circle, Navsari V. M/s. Nanalal Jewellers, Navsari

ITA 121/AHD/2011

• Counselvise Citation: 12120514 RSA 2011
• Duration Of Justice: 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 16-09-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 19-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Fair market value

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, C BENCH, AHMEDABAD BEFORE SHRI D. K. TYAGI, JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER I.T.A. NO. 121/ AHD/2011 (ASSESSMENT YEAR 2007-08) DCIT, NAVSARI CIRCLE, NAVSARI VS. M/S. NANALAL JEWELLERS, MOTA BAZAR, NAVSARI PAN/GIR NO. : AACFN0542L (APPELLANT) .. (RESPONDENT) APPELLANT BY: SHRI VINOD TANWANI, SR. DR RESPONDENT BY: SHRI HARDIK VORA, AR DATE OF HEARING: 16.09.2011 DATE OF PRONOUNCEMENT: 23.09.2011 O R D E R PER SHRI A. K. GARODIA, AM:- THIS IS REVENUES APPEAL DIRECTED AGAINST HE ORDER OF LD. CIT(A) VALSAD DATED 20.10.2010 FOR THE ASSESSMENT YEAR 200 7-08. 2. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER: 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE HONBLE CIT(A) ERRED IN DELETING THE ADDITION O F RS.9,44,826/- MADE ON ACCOUNT OF DISALLOWANCE OF EXCESS PAYMENT O F INTEREST U/S 40A(2)(B). 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE SE AND IN LAW, THE HONBLE CIT(A) ERRED IN DELETING THE ADDITION O F RS.10,62,203/- MADE ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK. 3) ON THE FACT AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ADDITION MA DE BY THE A.O. 4) IT IS, THEREFORE, PRAYED TO SET ASIDE THE ORDER PASSED BY THE CIT(A) AND THAT OF THE ORDER PASSED BY THE A.O. BE RESTORED. I.T.A.NO. 121 /AHD/2011 2 3. LD. D.R. FOR THE REVENUE SUPPORTED THE ASSESSMEN T ORDER WHEREAS THE LD. A.R. FOR THE ASSESSEE SUPPORTED THE ORDER O F LD. CIT(A). 4. REGARDING THE 1 ST GROUND OF THE REVENUE, THE FACTS TILL THE ASSESSMENT STAGE ARE NOTED BY LD. CIT(A) IN PARA 5. 1 OF HIS ORDER WHICH IS REPRODUCED BELOW: WHILE MAKING THE DISALLOWANCE, THE A.O. OBSERVED AS UNDER: UNDISPUTEDLY, THE PAYMENT TO THE RELATIVES OF PART NERS FALL UNDER CLAUSE (B) OF SECANT 40A OF THE ACT AND, THEREFORE, THE UNDERSIGNED IS DUTY BOUND TO MAKE INQUIRY WHETHER SUCH EXPENDIT URE WAS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES RENDERED. PROPER ENQUIRY WAS MADE TO ASCERTAIN WHETHER THE PAYMENT WAS EXCESSIVE OR UNREASONABLE H AVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES. THE SCO PE OF ENQUIRY UNDER THE ABOVE PROVISION IS WITH REFERENCE TO THE FAIR MARKET VALUE OF THE SERVICES RENDERED. THE ONUS ON THE A.O. TO BRING THE MATERIAL ON RECORD TO PROVE THAT THE PAYMENT MADE B Y THE ASSESSEE WAS EXCESSIVE OR UNREASONABLE HAVING REGARD TO FAIR MARKET VALUE OF THE SERVICES RENDERED, HAS BEEN DISCHARGED IN FO RM OF TAKING NOTE OF RATE PAID TO PARTNERS. IN VIEW OF THE ABOVE DIS CUSSION, THE CONTENTIONS OF THE ASSESSEE ARE NOT ACCEPTABLE AND A DISALLOWANCE OF RS.9,44,826/- IS LIABLE ON THE GROUND.. 5. THIS ISSUE HAS BEEN DECIDED BY LD. CIT(A) AS PER PARA 5.3 OF HIS ORDER, WHICH IS ALSO REPRODUCED BELOW: I HAVE GONE THROUGH THE ASSESSMENT ORDER AS WELL A S THE SUBMISSION FILED BY THE A.R. OF THE APPELLANT, IT I S OBSERVED THAT THE APPELLANT FIRM HAD PAID INTEREST AT THE SAME, RATE IN THE EARLIER YEARS ALSO AND THE SAME HAD BEEN ACCEPTED AS REASONABLE I N SCRUTINY ASSESSMENTS IN EARLIER YEARS, IT IS ALSO OBSERVED T HAT THE APPELLANT FIRM HAD FILED EXPLANATION FOR JUSTIFICATION OF RAT E OF INTEREST DURING ASSESSMENT PROCEEDINGS AND HAD ALSO SUBMITTED THAT THE PREVAILING RATE OF BANK INTEREST WAS BETWEEN 16.50%-% TO 17.50 % AND THE APPELLANT HAD ALSO SUBMITTED A CERTIFICATE FROM HDF C BANK SHOWING PLR RATE DURING THAT PERIOD TO JUSTIFY ITS CASE. HOWEVER THE ASSESSING, OFFICER FAILED TO REBUT THE SUBMISSI ON OF THE APPELLANT I.T.A.NO. 121 /AHD/2011 3 WHILE PASSING THE ORDER. IN THE APPELLATE PROCEEDIN GS OF IMMEDIATELY PRECEDING YEAR ALSO THE RATE OF INTERES T WAS ACCEPTED AT 18% AS REASONABLE. THE ASSESSING OFFICER FAILED TO PROVIDE JUSTIFICATION FOR ADOPTING THE RATE OF INTEREST @12 % AS REASONABLE AS AGAINST THE HIGHER BANK RATE OF FINANCE. I ALSO FOUND FORCE IN THE ARGUMENTS OF THE APPELLANT THAT THE PRIVATE FINANCE IS GENERALLY AVAILABLE AT HIGHER RATE AS COMPARED TO FINANCE FRO M THE BANK 'BUT AT THE.-SAME TIME THE PRIVATE FINANCE IS EASILY AVA ILABLE AND MORE CONVENIENT WITHOUT MUCH PAPER WORK. CONSIDERING THE OVERALL FACTS OF THE CASE, I AM NOT INCLINED TO ACCEPT THE STAND OF THE ASSESSING OFFICER TO DISALLOW THE INTEREST OF RS.9,44,826/- B Y TREATING THE RATE OF INTEREST AT 12% AS REASONABLE AS AGAINST 18% AS CLAIMED BY THE APPELLANT MORE PARTICULARLY IN VIEW OF THE FACT THA T THE BANK .FINANCE RATE WAS AROUND 17% DURING THE YEAR UNDER APPEAL. I, THEREFORE DIRECT THE A. O. TO DELETE THE ADDITION O F RS.9,44,8267- MADE U/S 46A(2)(B), THUS, THIS GROUND OF APPEAL STA NDS ALLOWED. 6. FROM THE ABOVE PARA OF LD. CIT(A)S ORDER, WE FI ND THAT A CLEAR FINDING HAS BEEN GIVEN BY LD. CIT(A) THAT THE PREVA ILING RATES OF BANK INTEREST WAS BETWEEN 16.5% TO 17.5% WHICH IS ALSO S UPPORTED BY A CERTIFICATE FROM HDFC BANK. THE ASSESSEE HAS PAID INTEREST @ 18% WHEREAS THE A.O. HAS ADOPTED THE INTEREST RATE @ 12 % BEING REASONABLE. THERE IS ALSO A FINDING GIVEN BY LD. CIT(A) THAT PR IVATE FINANCE IS GENERALLY AVAILABLE AT HIGHER RATE AS COMPARED TO F INANCE FROM THE BANKS BECAUSE SUCH PRIVATE FINANCE IS EASILY AVAILABLE AN D MORE CONVENIENT WITHOUT MUCH PAPER WORK. CONSIDERING THESE FACTS, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF LD. CIT(A) ON T HIS ISSUE. ACCORDINGLY GROUND NO.1 OF THE REVENUES APPEAL IS REJECTED. 7. REGARDING GROUND NO.2 OF THE REVENUES APPEAL, T HE FACTS TILL THE ASSESSMENT STAGE ARE NOTED BY LD. CIT(A) IN PARA 6. 2 OF HIS ORDER WHICH IS REPRODUCED BELOW: THE A.R. SUBMITTED THAT THE APPELLANT HAD SHOWN TH E CLOSING STOCK AT RS.2,73,70,194/- WHICH WAS VALUED ON THE BASIS O F AVERAGE COST I.T.A.NO. 121 /AHD/2011 4 METHOD AS RECOGNIZED VIDE ACCOUNTING STANDARDS 2 (A S 2) RELATED TO VALUATION OF INVENTORIES PRESCRIBED BY THE INSTI TUTE OF CHARTERED ACCOUNTANTS OF INDIA, THE APPELLANT HAD CONSIDERED ALL DIRECT COSTS APART FROM THE COST OF RAW MATERIALS TO VALUE THE C LOSING STOCK AND HENCE THERE WAS NO QUESTION OF NOT CONSIDERING THE SAME AND GETTING ANY DISTORTED PICTURE. THE A.R. ARGUED THAT THE SAID METHOD WAS CONTINUOUSLY AND CONSISTENTLY ADOPTED BY THE AS SESSEE SINCE THE INCEPTION OF THE BUSINESS AND WAS ACCEPTED IN S CRUTINY ASSESSMENT FOR A.Y. 2005-06 AND A.Y. 2006-07. THE A PPELLANT WAS DEALING WITH SUCH- MATERIAL I.E. STANDARD GOLD BAR WHERE THE PRODUCT WAS, HOMOGENEOUS IN NATURE AND DIFFERENT LOTS WERE NOT DISTINGUISHABLE FROM EACH OTHER AND WERE INTERCHANG EABLE GOODS. THE A.R. FURTHER ARGUED THAT THE METHOD APPLIED MUS T BE FAIR TO THE TAX PAYER AND FAIR TO THE REVENUE AND WHATEVER IS T HE METHOD IT MUST BE RECOGNIZED BY ACCOUNTING PRACTICE: AND SANC TIONED BY COMMERCIAL PRACTICE AND THE METHOD ADOPTED ARID REG ULARLY FOLLOWED BY THE APPELLANT AND ACCEPTED BY THE REVEN UE SHOULD NOT HAVE BEEN DEPARTED FROM, UNLESS THERE WAS GOOD REAS ON FOR THE SAME. THE A.R FURTHER CONTENDED THAT THE FIFO METHO D COULD ALSO NOT BE ADOPTED BECAUSE IT WAS NOT POSSIBLE TO ASCER TAIN WITH PRECISION THE EXACT COST OF PURCHASE OF A PARTICULA R LOT OF GOODS LYING IN CLOSING STOCK AS THE GOLD ORNAMENTS WERE M ADE FROM MIXED UP LOTS OF GOLD PURCHASED IN FORM OF STANDARD BARS HAVING UNIFORM QUALITY AND THE VALUE OF CLOSING STOCK ADOP TED BY THE AO ON FIFO BASIS WAS RS. 2,84,32,397/- AS COMPARED TO RS. 2,73,70,194/- AS ADOPTED BY THE APPELLANT ON AVERAG E COST BASIS AND THAT THERE WAS A VARIATION OF JUST 3.88% WHICH WAS REVENUE ,NEUTRAL. THE A.O. ALSO ARGUED THAT THE VALUATION OF STOCK WA S QUITE FAIR WHICH IS EVIDENT FROM THE FACT THAT .THE ; GROSS PROFIT RATIO OF THE APPELLANT HAD INCREASED FROM 32.13% TO 42.16%. THE ARS RELIED ON FOLLOWING CASE LAWS. ACIT. VS. JAGDISH CHAND (90 TTJ 943) ACIT VS. GOPALDAS VALLABHDAS (59 TTJ 768) ACIT VS SREE RAMA BOOK DEPOT (30 TTJ 140) 8. THIS ISSUE HAS BEEN DECIDED BY LD. CIT(A) AS PAR A 6.3 OF HIS ORDER WHICH IS ALSO REPRODUCED BELOW: I HAVE GONE THROUGH THE ASSESSMENT ORDER AS WELL A S THE SUBMISSION FILED BY THE A.R. IT -IS OBSERVED THAT T HE APPELLANT FIRM I.T.A.NO. 121 /AHD/2011 5 HAD SHOWN THE CLOSING STOCK VALUATION ON AVERAGE CO ST METHOD AND THE STATEMENT OF CLOSING STOCK VALUATION WAS SUBMIT TED DURING ASSESSMENT PROCEEDINGS. THE A.O. STATED THAT THE AP PELLANT HAD EXCLUDED THE COST OF OTHER OVERHEADS WHILE VALUING THE STOCK AND HE ADOPTED THE VALUATION ON THE BASIS OF FIFO METHOD A ND MADE THE ADDITION OF RS.10,62,2037-. ON PERUSAL OF CLOSING S TOCK VALUATION SUBMITTED BY THE APPELLANT DURING THE ASSESSMENT PR OCEEDINGS, IT IS VERY CLEAR THAT THE APPELLANT FIRM HAD TAKEN THE LA BOUR COST ARID ALL DIRECT COSTS INTO CONSIDERATION FOR DETERMINING THE VALUE OF CLOSING STOCK AND HAD FOLLOWED THE AVERAGE COST METHOD AS R ECOGNIZED BY ACCOUNTING STANDARD-2 RELATED TO VALUATION OF INVEN TORIES AS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANT S OF INDIA. THE APPELLANT FIRM HAD ALSO FOLLOWED CONTINUOUSLY AND C ONSISTENTLY THE SAME METHOD OF VALUATION OF CLOSING STOCK SINCE BEG INNING OF THE FIRM IN 1992 AND THE SAME WAS ACCEPTED BY THE DEPAR TMENT AND WAS ALSO EXAMINED AND ACCEPTED IN SCRUTINY ASSESSMENT F OR A.Y. 2005- 06 AND A.Y.2006-07. I ALSO FOUND FORCE IN THE CONT ENTION OF THE APPELLANT FOR ADOPTING THIS METHOD THAT IT WAS DEAL ING WITH SUCH MATERIAL, I.E. STANDARD BAR OF GOLD WHERE THE PRODU CT WAS HOMOGENEOUS IN NATURE AND DIFFERENT LOTS WERE NOT D ISTINGUISHABLE FROM EACH OTHER AND WERE INTER CHANGEABLE GOODS AND THEREFORE IT WOULD BE DIFFICULT TO IDENTIFY THE LOT OF STANDARD BAR UTILIZED FOR MAKING A PARTICULAR GOLD ORNAMENTS. THE A.O. FAILED TO GIVE ANY COGENT REASON TO DEVIATE FROM THE METHOD ADOPTED BY THE APPELLANT WHICH WAS A RECOGNIZED METHOD AND REGULARLY FOLLOWE D BY IT. VARIOUS CASE LAWS CITED BY THE APPELLANT (SUPRA) AL SO EXPRESSED THE SIMILAR VIEWS. MOREOVER, THE BOOK RESULTS ALSO SHOW ED THAT THE APPELLANT FIRM HAD SHOWN MUCH BETTER GROSS PROFIT W HICH HAD INCREASED TO 42.16% FROM 32.13% IN EARLIER YEAR AND THEREFORE THERE WAS NO JUSTIFICATION IN TREATING THE VALUATIO N OF STOCK AS UNFAIR. WITHOUT ASSIGNING GOOD AND SUFFICIENT REASO NS, THE A.O. CAN NOT SAY THE METHOD OF VALUATION OF CLOSING STOCK AS NOT PROPER WHEN THE METHOD HAS BEEN CONSISTENTLY FOLLOWED IN P AST AND ACCEPTED BY THE DEPARTMENT. IN VIEW OF .THIS, I AM NOT INCLINED TO SUPPORT THE ACTION OF THE A.O. AND I DIRECT HIM TO DELETE THE ADDITION OF RS.10,62,203/- MADE ON ACCOUNT OF VALUA TION OF CLOSING STOCK BY ADOPTING DIFFERENT METHOD. THUS, THIS GROU ND OF APPEAL IS ALLOWED. I.T.A.NO. 121 /AHD/2011 6 9. WE FIND THAT AS PER ABOVE PARA OF CIT(A), THE IS SUE WAS DECIDED BY LD. CIT(A) MAINLY ON THIS BASIS THAT THE A.O. FAILE D TO GIVE ANY COGENT REASON TO DEVIATE FROM THE METHOD ADOPTED BY THE AS SESSEE AND WHICH WAS THE RECOGNIZED METHOD AND WAS REGULARLY FOLLOWED BY THE ASSESSEE. IT IS NOTED BY THE LD. CIT(A) THAT THE ASSESSEE WAS FOLLO WING THIS METHOD ON REGULAR BASIS AND VALUATION OF CLOSING STOCK ON AVE RAGE COST METHOD WHEREAS THE A.O. HAS ADOPTED THE VALUATION OF CLOSI NG STOCK ON THE BASIS OF FIFO METHOD AND MADE THE ADDITION. IT IS BY NOW A SETTLED POSITION OF LAW THAT AVERAGE COST METHOD IS ALSO A RECOGNIZED M ETHOD OF STOCK VALUATION AND SINCE THE ASSESSEE WAS FOLLOWING THIS METHOD CONSISTENTLY AND WAS ACCEPTED BY THE DEPARTMENT IN EARLIER YEARS , THERE IS NO REASON OR BASIS TO DEVIATE IN THE PRESENT YEAR. UNDER THESE FACTS, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF LD. CIT(A) ON T HIS ISSUE ALSO BECAUSE IT IS ALSO NOTED BY THE LD. CIT(A) THAT THE ASSESSEE H AD SHOWN MUCH BETTER GROSS PROFIT WHICH HAS INCREASED TO 42.16% FROM 32. 16% IN THE EARLIER YEAR AND, THEREFORE, THERE WAS NO JUSTIFICATION IN NOT TREATING THE VALUATION OF STOCK AS FAIR. WE, THEREFORE, DECLINE TO INTERF ERE IN THE ORDER OF LD. CIT(A) ON THIS ISSUE ALSO. THIS GROUND OF THE REVE NUE IS REJECTED. 10. THE REMAINING GROUNDS OF THE REVENUE ARE GENERA L AND DO NOT CALL FOR ANY SEPARATE ADJUDICATION. 11. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. 12. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD SEP., 2011. SD./- SD./- (D.K. TYAGI) (A. K. GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED : 23.09.2011 SP I.T.A.NO. 121 /AHD/2011 7 COPY OF THE ORDER FORWARDED TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS) 5. THE DR, AHMEDABAD BY ORDER 6. THE GUARD FILE AR,ITAT,AHMEDABAD 1. DATE OF DICTATION 20/9 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER21/9 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P .S./P.S. 22/9 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 23/9 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S./P.S.23/9 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 23/9/2011 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK .. 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 9. DATE OF DESPATCH OF THE ORDER. ..