Krishna Art Silk Cloth Pvt.Ltd., Surat V. The Dy.CIT.,Circle-1, Surat

ITA 1264/AHD/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5724 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-07-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 02-07-2010
• Assessment Year: 2007-2008
• Appeal Filed On: 22-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SHELLEY JINDIAL

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI, JM AND D.C.AGRAWAL, A M KRISHNA ART SILK CLOTH (P) LTD., 261-A, GIDC, PANDESARA, SURAT. VS. DY. COMMISSIONER OF INCOME-TAX, CIR-1, SURAT. (APPELLANT) .. (RESPONDENT) REVENUE BY :- SHRI HARDIK VORA, AR ASSESSEE BY:- SHRI SHELLEY JINDIAL, CIT, DR O R D E R PER D. C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE ASSESSEE RAISING FOLLOWING GROUND : (1) ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WE LL AS LAW ON THE SUBJECT, THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF THE AO IN MAKING ADDITION OF RS.4,96,625/- ON ACCOU NT OF CLOSING STOCK OF WORK IN PROGRESS. 2. THE FACTS OF THE CASE ARE THAT ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF DYING AND PRINTING OF FABRICS ON JOB WO RK BASIS. THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS CONSIDE RED THAT ASSESSEE SHOULD HAVE SOME WORK-IN-PROGRESS IN THE CLOSING ST OCK. HE DETERMINED CLOSING STOCK OF WORK-IN-PROGRESS AT RS.4,96,625/- AS UNDER :- THEREFORE, THE VALUE OF CLOSING STOCK OF WIP HAS T O BE WORKED OUT AND ADDED TO THE TOTAL INCOME. THE ASSESSEE HAS PRO CESSED 21372201 METERS DURING THE YEAR UNDER CONSIDERATION. TAKING INTO CONSIDERATION 26 DAYS AS WORKING DAYS PER MONTH, THE TOTAL WORKIN G DAYS OF THE YEAR WORKS OUT TO 312 DAYS, THE AVERAGE OF PROCESS OF CL OTH PER DAY WORKS ITA NO.1264/AHD/2010 ASST. YEAR :2007-08 2 OUT TO 68,500 METERS. IT IS COMMON KNOWLEDGE THAT T O COMPLETE A CIRCLE OF PROCESS IN TEXTILE PROCESSING UNIT, IT TAKES AT LEAST FIVE DAYS. THEREFORE, A LOT OF GREY CLOTH PUT TO PROCESS ON FI RST DAY COMES OUT ON THE 6 TH DAY DULY PROCESSED. THEREFORE, IT CAN BE PRESUMED THAT THE ASSESSEE MUST HAVE FIVE DAYS WORK-IN-PROCESS AS ON 31.03.2007. THIS WORKS OUT TO 3,42,500 METERS (68,500 METERS X 5 DAY S). THE AVERAGE COST OF PROCESSING CHARGES PER METER WORKS OUT AT R S.2.90 (GROSS RECEIPTS GROSS PROFIT = COST METER PROCESSED). CONSIDERING THE VARIOUS STAGES OF PROCESS, IT WOULD BE REASONABLE T O ADOPT 50% I.E. RS.1.45 PER METER FOR ARRIVING AT VALUE OF WORK-IN- PROCESS. THEREFORE, THE CLOSING STOCK OF WORK-IN-PROCESS IN THIS CASE I S WORKED OUT AT RS.4,96,625/- (3,42,500 METERS X RS.1.45). SINCE TH E ASSESSEE HAS NOT SHOWN THE CLOSING STOCK OF WIP AND PROFIT TO THAT E XTENT IS SUPPRESSED, IT IS NECESSARY TO ADD THE WORK-IN-PROGRESS TO ARRI VE AT THE CORRECT PROFIT OF THE BUSINESS OF THE ASSESSEE. THEREFORE, THE CLOSING STOCK OF WORK-IN-PROGRESS OF RS.4,96,625/- AS WORKED OUT ABO VE IS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. HE ACCORDINGLY MADE THE ADDITION OF RS.4,96,625/- T O THE TOTAL INCOME OF THE ASSESSEE. THE LD. CIT(A) CONFIRMED THE ADDITION ON THE BASIS OF DECISION OF THE TRIBUNAL IN THE CASE OF AKRUTI DYEI NG & PRINTING MILLS BY OBSERVING AS UNDER :- 2.3 I HAVE CONSIDERED THE SUBMISSION MADE BY THE A PPELLANT AND THE OBSERVATION OF THE A.O. ADMITTEDLY THE APPELLANT HA S DEBITED EXPENSES WHICH ARE INCURRED ON THE CLOTH UNDER PROCESS FOR F IVE DAYS. THEREFORE, AS PER ACCOUNTING PRINCIPLES AS WELL AS, AS PER THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF BRITISH PAINTS (SUPRA), THE APPELLANT SHOULD SHOW WORK-IN-PROGRESS IN THE CLOSI NG STOCK. THE DECISION OF THE HON'BLE ITAT IN THE CASE OF BAJRANG PROCESSORS PVT. LTD. (SUPRA) IS A SINGLE BENCH DECISION WHEREAS IN THE CASE OF AKRUTI DYEING & PRINTING MILLS IN ITA NO.2551, 2752/AHD/2G Q6 FOR A,Y, 2003-04 DATED 26.10.2007, WHICH IS A TWO MEMBER BEN CH, HAS UPHELD THE ADDITION ON ACCOUNT OF WORK-IN-PROGRESS- THE HO N'BLE ITAT HAS STATED AS UNDER:- '13. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE OF THE LOWER AUTHORITIES WE FIND THAT THE ASSESSES IS DOING JOB WORK OF DYEI NG OF DOTH. THE A.O. FOUND THAT THE ASSESSES HAS NOT SHOWN ANY WORK IN PROGRES S IN THE CLOTH .LYING IN MACHINE. ACCORDINGLY, HE ADDED RS.5,09,616/- AS THE VALUE OF WORK IN PROGRESS TO THE INCOME OF THE ASSESSES. HE HAS WORKED OUT TH IS AMOUNT ON THE AVERAGE OF 5 DAYS REQUIRED TO COMPLETE THE JOB AND TAKING 5 0% OF THE COST INCURRED FOR 3 DYEING FOR THE RTE OF THE DOTH TYING INCOMPLETE IN MACHINE. THE CONTENTION OF THE ASSESSEE IS THAT HE HAS BEEN CONSISTENTLY FOLLO WING THIS METHOD OF ACCOUNTING WHICH HAS BEEN ACCEPTED IN THE PAST. THE ASSESSEE ALSO CONTENDED THAT AS PER ACCOUNTING STANDARD II OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA A SERVICE PROVIDER IS NOT REQUIRED TO ACCOUNT FOR WORK IN PROGRESS. HOWEVER, THE TEAMED AP. OF THE ASSESSEE COULD NOT P RODUCE BEFORE US COPY OF THE RELEVANT ACCOUNTING STANDARD. WE ARE OF THE CON SIDERED OPINION THAT THE LEARNED CIT(A) WHILE UPHOLDING THE ORDER OF THE A.O . FOR MAKING ADDITION ON ACCOUNT OF WORK IN PROGRESS HAS DIRECTED THE A.O. T O CONSIDER THE SAME AS OPENING STOCK OF THE SUBSEQUENT YEAR. THUS, WHATEVE R HAS BEEN ADDED TO THE INCOME OF THE ASSESSEE IN THE YEAR UNDER APPEAL HAS BEEN ALLOWED DEDUCTION IN THE SUBSEQUENT YEAR BY WAY OF OPENING STOCK. MOREOV ER, THE ASSESSEE HAS NOT DISPUTED THE WORKING OF THE WORK IN PROGRESS BY THE A.O. AND HAS ALSO NOT DENIED THE EXISTENCE OF WORK IN PROGRESS IN THE BUS /NESS OF THE ASSESSEE. HENCE, WE DO NOT FIND ANY GOOD REASON TO INTERFERE WITH THE FINDINGS OF THE TEAMED C1T(A) WHICH IS CONFIRMED AND THE GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED,' IN VIEW OF THE ABOVE, I AGREE WITH THE A.O. THAT SI NCE THE ASSESSEE HAS NOT MADE ANY ADDITION OF WORK-IN-PROGRESS TO THE CL OSING STOCK, THE ACTION OF THE A.O. IS CORRECT. THE A.O. IS, THEREFO RE, DIRECTED TO CONSIDER THE SAME AS OPENING STOCK IN THE SUBSEQUEN T YEAR. THE GROUND NO.1 IS, THEREFORE, DISMISSED AND GROUND NO. 2 IS ALLOWED. 3. BEFORE US, LD. AR SUBMITTED THAT IN CASE OF JOB WORK, ASSESSEE COULD NOT HAVE ANY WORK-IN-PROGRESS OF HIS OWN BECA USE ENTIRE GOODS BELONGED TO 3 RD PARTIES. THOUGH THERE MAY BE SOME LABOUR INPUT BUT THIS AS SUCH COULD NOT BE IDENTIFIED. ASSESSEE HAS BEEN MAINTAINING SIMILAR ACCOUNTS FROM YEAR TO YEAR, THEREFORE, AS PER ACCOU NTING STANDARD AS-2 NO ADDITION CAN BE MADE, FOR WORK-IN-PROGRESS. 4. HE SUBMITTED THAT THE CASE OF THE ASSESSEE IS CO VERED IN FAVOUR OF ASSESSEE BY THE FOLLOWING DECISIONS OF THE TRIBUNAL IN (I) ITA NO.1823/AHD/2007 IN THE CASE OF ITO VS. M/S RISHABH DYEING & PRINTING MILLS (P) LTD. PRONOUNCED ON 28.5.2010, (II) IN ITA NO. 794/AHD/2008 IN THE CASE OF VARDHAMAN FABRICS (P) LTD., VS. ACIT P RONOUNCED ON 28.5.210 AND (III) IN ITA NOS.3635 & 3636/AHD/2008 IN THE CASE OF BAJAJ FASHIONS (P) LTD. VS. DCIT PRONOUNCED ON 24.0 7.2009. 4 5. ON THE OTHER HAND, LD. DR RELIED ON THE ORDERS O F LD. AO & THE LD. CIT(A). 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW, THE CASE IS COVE RED IN FAVOUR OF THE ASSESSEE BY THE LATEST DECISION IN THE CASE OF ITO VS. M/S RISHABH DYEING & PRINTING MILLS (P) LTD. (SUPRA). IN THAT JUDGMENT THE TRIBUNAL HAS HELD AS UNDER :- 3. AGAINST THIS LD. AR SUBMITTED THAT SIMILAR ISSU E HAD COME BEFORE THE TRIBUNAL IN THE CASE OF PRATIK PROCESSORS PVT. LTD V DCIT IN ITA NO.1956/AHD/2007, WHEREIN TRIBUNAL HAS HELD THAT TH ERE CANNOT BE ANY WORK-IN-PROGRESS IN A CASE WHERE BUSINESS OF DYEING AND PRIMING OF CLOTH IS DONE ON JOB WORK BASIS. HE REFERRED TO PAR A-6 FROM THAT ORDER AS UNDER:- '6. AT THE TIME OF HEARING BOTH THE REPRESENTATIVES AGREED THE SIMILAR ISSUE AROSE IN AN APPEAL BY THE REVENUE IN ITA NO. 2649/A HD/2006 IN THE CASE OF VIPUL INDUSTRIES PVT. LTD. V/S ACIT ORDER DATED 17. 9.2003 IN THE SAID CASE, WHEN IN THE SAID CASE THE ASSESSEE WHICH IS ENGAGED IN THE BUSINESS OF DYEING AND PRINTING OF CLOTH ON JOB WORK BASIS AND WHERE T HE ASSESSES HAD NOT SHOWN ANY WORK-IN-PROGRESS AT THE YEAR END, THE SAME WAS ESTIMATED TO BE 50% OF THE JOB RECEIPT OF THE LIKELY STOCK REMAINING IN PROCES S. HOWEVER WAS DELETED BY THE LD. CIT(A) BY OBSERVING AS UNDER: 12 I HAVE CAREFULLY CONSIDERED THE FACT OF THE C ASE AND SUBMISSIONS MADE BY THE ID AR. AS REGARDS THE ADDITION MADE IN RESPECT OF ESTIMATED WORK IN PROGRESS, IT IS SEEN THAT THE APPELLANT IN THE INST ANT CASE IS A JOB-WORKER AND PROCESS GREY CLOTH FOR ITS CUSTOMERS ACCORDING TO THEIR REQUIREMENT. THE APPELLANT NOT ENGAGED IN ANY MANUFACTURING ACTIVITIES OF ITS OWN. THE CLOTH PROCESSED BY THE APPELLANT THUS BELONG TO ITS CUST OMERS IS PROCESSED BY THE APPELLANT AND. AFTER PROCESSING THE SAME IN ACCOR DANCE WITH THE CUSTOMERS REQUIREMENT, IT IS RETURNED. IN THE ABOVE FACTS O F THE CASE THE QUESTION OF SHOWING ANY WORK IN PROGRESS IN THE BOOKS OF ACCOUN T OF THE APPELLANT IN RESPECT OF THE CLOTH BELONGING TO ITS CUSTOMERS DID NOT ARISE AS SUCH CLOTH WAS REQUIRED TO BE SHOWN IN THE CLOSING STOCK OF THE CONCERNED CUSTOMERS. ON THE BASIS OF THE COMPLETION OF WORK ON THE CUST OMERS CLOTH, THE APPELLANT IS ENTITLED TO RECEIVE ITS WORK CHARGES. NO INTERIM PAYMENTS OR ADVANCES PAYMENTS ARE RECEIVED BY THE APPELLANT FROM ITS CUSTOMERS DURING THE PENDENCY OF THE JOB WORK. THE RECEIPTS FR OM THE JOB WORK ARE BEING ACCOUNTED FOR BY THE APPELLANT ON COMPLETED CONTRAC T METHOD AS PER AS-9. THE CLOSING STOCK OF MATERIALS USED FOR PROCESSING OF C LOTH, I.E. COLOUR, CHEMICALS 5 ETC. HAVE BEEN DULY ACCOUNTED FOR BY THE APPELLANT IN ACCORDANCE WITH AS-9 IN REGARD TO THE VALUE ADDITION MADE BY THE APPELLA NT ON THE CUSTOMER'S CLOTH, WHICH MAY HAVE BEEN AT DIFFERENT INTERMEDIATE STAGE S OF PROCESSING AS ON 31.3.2003, NEITHER ANY OPENING STOCK NOR CLOSING ST OCK WAS EVER SHOWN BY THE APPELLANT. A S PER THE PRINCIPLES OF ACCOUNTING LAID DOWN BY THE I CAI, UNDER THE SCOPE OF VALUATION OF INVENTORIES IN ITEM 1 (SUB-ITEM (B) OF AS-2 (REVISED) THE 'WORK-IN-PROGRESS ARISING IN THE ORDINARY COURSE OF BUSINESS OF SERVICE PROVIDER' HAS BEEN SPECIFICALLY SCOPED OUT OF THE SAID STATEMENT. FURTHER, IN THE DEFINITIONS PROVIDED UNDER ITEM 3 O F THE AS-2 'INVENTORIES' HAVE BEEN DEFINED AS 'ASSETS (A) HELD FOR SALE M TH E ORDINARY COURSE OF BUSINESS (B) IN THE PROCESS OF PRODUCTION, FOR SUCH SALE' OR (C) IN THE FORM OF MATERIALS OR SUPPLIES TO BE CONSUMED IN THE PRODUCT ION FOR SALE' OR IN THE RENDERING OF SERVICES. SINCE THE APPELLANT WAS NOT ENGAGED IN THE BUSINESS OF SALE OF THE PROCESSED CLOTH OR IN THE PRODUCTION FO R SALE OF THE PROCESSED CLOTH BUT WAS ENGAGED IN THE BUSINESS OF RENDERING OF SER VICES FOR PROCESSING OF GREY CLOTH FOR ITS CUSTOMERS THE PRINCIPLES LAID DO WN IN AS-2 FOR ;HE 'VALUATION OF INVENTORIES' WERE NOT APPLICABLE IN ITS CASE IN ACCORDANCE WITH ITEM L(B) THEREOF. HOWEVER, THE MATERIALS OR SUPPLIES TO BE C ONSUMED IN THE PRODUCTION PROCESS OR IN THE RENDERING OF SERVICES WOULD EVIDE NTLY FAIL IN CATEGORY (C) OF THE AFORESAID DEFINITIONS' PROVIDED IN ITEM 3 OF T HE ACCOUNTING PRINCIPLES LAID DOWN IN AS-2, AND THE SAME WOULD BE REQUIRED TO BE ACCOUNTED FOR BY IT IN THE FORM OF STOCK, WHICH HAS BEEN DONE IN THE INSTANT C ASE. THE METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT IS THUS SEEN T O BE IN ACCORDANCE WITH THE ACCOUNTING PRINCIPLES LAID DOWN BY THE ICAI. 13 IT IS FURTHER SEEN THAT THE AFORESAID METHOD OF ACCOUNTING OF OPENING/CLOSING STOCK HAS BEEN REGULARLY AND CONSIS TENTLY FOLLOWED BY THE APPELLANT COMPANY SINCE THE BELONGING THE APPELLANT HAS ALSO CONSISTENTLY FOLLOWED, THE ACCOUNTING POLICY OF RECOGNIZING REVE NUE OF COMPLETED CONTRACT METHOD. WHILE THE PRINCIPLES OF RES-JUDICATA ARE NO T APPLICABLE TO THE INCOME- TAX PROCEEDINGS, IT HAS BEEN HELD BY THE COURTS IN SEVERAL JUDGMENTS: THAT, WHERE THE APPELLANT HAS BEEN FOLLOWING REGULAR SYST EM OF ACCOUNTING SINCE THE LAST SO MANY YEARS AN SUCH METHOD WAS BASED ON ACCE PTED PRINCIPLES OF ACCOUNTING THERE WAS NO JUSTIFICATION FOR REJECTING THE SAID METHOD FOR VALUATION OF STOCK. THIS WOULD ESPECIALLY HOLD IN A CASE WHERE THE PROPOSED CHANGE IN THE METHOD OF VALUATION IS FOUND TO HAVE NO IMPACT, AS IN THE INSTANT CASE, IF THE CHANGED METHOD ADOPTED BY THE ASSESSIN G OFFICER WERE APPLIED FOR VALUATION OF THE OPENING AS WELL AS THE CLOSING STO CK. 14 FOR REASONS DISCUSSED ABOVE M DETAILS, M MY OPIN ION THERE WAS NO BASIS OR JUSTIFICATION IN MAKING THE ANY ESTIMATED ADDITION ON ACCOUNT OF WORK-IN- PROGRESS IS THIS CASE. THE ADDITION OF RS.12.56.970 /- MADE BY THE AO IN RESPECT OF ESTIMATED WORK IN PROGRESS IS THEREFORE DELETED. THIS GROUND OF APPEAL IS ALLOWED ' THUS DELETION WAS CONFIRMED BY THE TRIBUNAL. THER EFORE IN, THE PRESENT CASE ALSO FOLLOWING THE DECISION OF THE TRI BUNAL CONFIRM THE ORDER OF THE CIT(A), THE ADDITION ON ACCOUNT OF EST IMATED VALUE OF WORK-IN-PROGRESS IS REQUIRED TO BE DELETED. 6 4. LD SR. DR ON THE OTHER HAND SUBMITTED THAT IF A SSESSES HAS SPENT MONEY WHICH HAS BEEN DEBITED IN THE PROFIT & LOSS A CCOUNT AND TO THE EXTENT THE ASSESSEE DOES NOT GET RECEIPT FROM THE P RINCIPLE, WORK-IN- PROGRESS SHOULD BE ESTIMATED. 5. AFTER CONSIDERING THE RIVAL SUBMISSIONS OF THE P ARTIES, WE ARE OF THE VIEW THAT ISSUE IS NOW COVERED IN FAVOUR OF THE ASS ESSEE BY THE DECISION OF TRIBUNAL IN THE CASE OF PRATIK PROCESSORS PVT. LTD. (SUPRA) PRONOUNCED ON 15.01.2010. RESPECTFULLY FOLLOWING THE ABOVE ORDER WE DISMISS THE GROUND NO.1 & 2 OF THE REVENUES APPEAL. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE ALLOW THE APPEAL FILED BY THE ASSESSEE. 7. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS A LLOWED. ORDER WAS PRONOUNCED IN OPEN COURT ON 16/7/2010 SD/- SD/- (BHAVNESH SAINI) (D.C.AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD, DATED : 16/7/2010 MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD