Jay Santoshi Tex Prints Pvt.Ltd., Surat V. The Income tax Officer, Ward-1(3), Surat

ITA 130/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6633 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 10-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 12-01-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P TALATI
• Keywords: Tax effect

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : AH MEDABAD ( BEFORE HONBLE SHRI T.K.SHARMA, J.M. & HONBLE SHRI A.N.PAHUJA, A.M.) I.T.A.NO. 130/AHD./2009 : ASSESSMENT YEAR 2006 -07 JAY SANTOSHI TEX PRINTS PVT. LTD., SURAT VS- ITO, WARD-1(3), SURAT (PAN : AAACJ 6008J) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI URVASHI SHODHAN, A.R. RESPONDENT BY: SHRI S.P.TALATI, D.R. O R D E R PER SHRI T.K.SHARMA, JUDICIAL MEMBER : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF LD. CIT(A)-I, SURAT DATED 15.12.2008 CONFIRMING THE ADDITION OF RS.4,11 ,335/- ON ACCOUNT OF SUPPRESSED VALUE OF WIP FOR THE ASSESSMENT YEAR 2006-2007. 2. BRIEFLY STATED THE FACTS ARE THAT THE ASSESSEE I S A COMPANY ENGAGED IN THE BUSINESS OF DYEING AND PRINTING OF ART SILK CLOTH. THE AO NOTICED THAT THE ASSESSEE HAS NOT SHOWN ANY CLOSING STOCK OF WORK-IN-PROGRESS. TH E AO PROPOSED ADDITION OF WORK- IN-PROGRESS FOR THE FOLLOWING REASONS:- (I) THE DYEING AND PRINTING PROCESS OF FIVE DAYS AN D THE FABRIC UNDER PROCESS BEARS VARIOUS EXPENSES IN THE FORM OF COLOU R, CHEMICALS, WAGES, POWER AND FUEL, COST OF WHICH HAS BEEN DEBITED TO PROFIT & LOSS ACCOUNT BUT THE CORRESPONDING INCOME HAS NOT BEEN SHOWN. (II) AS PER THE ACCOUNTING PRINCIPLE, THE CLOSING S TOCK HAS TO BE CORRECTLY SHOWN INCLUDING THAT OF WORK-IN-PROGRESS. (III) THE HONBLE SUPREME COURT ALSO STATED IN THE CASE OF BRITISH PAINTS INDIA LTD. (188 ITR 44) THAT UNLESS THE CLOSING STO CK IS CORRECTLY DISCLOSED CORRECT PROFIT CANNOT BE OBTAINED. IN THIS CASE, TH E HONBLE SUPREME COURT STATED AS UNDER:- 2 THE TRUE PURPOSE OF CREDITING THE VALUE OF UNSOLD S TOCK IS TO BE BALANCE THE COST OF THOSE GOODS ENTERED ON THE OTHER SIDE O F THE ACCOUNT AT THE TIME OF THEIR PURCHASE, SO THAT THE CANCELLING OUT OF THE ENTRIES RELATING TO THE SAME STOCK FROM BOTH SIDES OF THE ACCOUNT WO ULD LEAVE ONLY THE TRANSACTIONS ON WHICH THERE HAVE BEEN ACTUAL SALES IN THE COURSE OF THE YEAR SHOWING THE PROFIT OR LOSS ACTUALLY REALISED O N THE YEARS TRADING... IT IS NOT ONLY THE RIGHT, BUT THE DUTY OF THE ASSE SSING OFFICER TO CONSIDER WHETHER OR NOT THE BOOKS DISCLOSE THE TRUE STATE OF ACCOUNTS AND THE CORRECT INCOME CAN BE DEDUCED THEREFROM. IT IS INCO RRECT TO SAY THAT THE OFFICER IS BOUND TO ACCEPT THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE THE CORRECTNESS OF WHICH HAD NOT BE EN QUESTIONED IN THE PAST. THERE IS NO ESTOPPEL IN THESE MATTERS AND THE OFFICER IS NOT BOUND BY THE METHOD FOLLOWED IN THE EARLIER YEARS. (IV) TAKING INTO CONSIDERATION 360 WORKING DAYS, TH E A.O. COMPUTED THE AVERAGE PRODUCTION OF FIVE DAYS AT 166195 METERS. H E COMPUTED THE AVERAGE COST OF PROCESSING AT RS.5.16 PER METER AND ADOPTED 50% OF THIS COST FOR VALUING THE WORK-IN-PROGRESS BECAUSE THE FABRIC LYI NG ON THE MACHINE WAS UNDER THE VARIOUS STAGES OF COMPLETION. HE, THEREFO RE, CALCULATED THE VALUE OF WORK-IN-PROGRESS OF RS.4,11,335/- IN PARA-7 OF THE ASSESSMENT ORDER. 3. IN RESPONSE TO THE ABOVE, THE ASSESSEE REPLIED T HAT ADDITION SHOULD NOT BE MADE BECAUSE THE ASSESSEE COMPANY IS A SERVICE INDUSTRY AND COST OF INPUT FOR COLOUR AND CHEMICALS, ETC. WERE VERY NOMINAL. THERE IS NO TAX EFFECT AS THIS WILL BECOME OPENING STOCK IN THE NEXT YEAR. THE ASSESSEE HAS BEEN FOLLO WING THIS METHOD CONTINUOUSLY AND THE DEPARTMENT HAD EARLIER ACCEPTED THIS METHOD. TH E AO DID NOT ACCEPT THIS EXPLANATION AND MADE ADDITION OF RS.4,11,335/- ON A CCOUNT OF SUPPRESSED VALUE OF WORK-IN-PROGRESS. 4. ON APPEAL, IN THE IMPUGNED ORDER, THE LD. CIT(A) UPHELD THE ACTION OF THE AO FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF BRITISH PAINTS INDIA LTD. ( SUPRA ). AGGRIEVED WITH THE ORDER OF THE LD. CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3 5. AT THE TIME OF HEARING BEFORE US, ON BEHALF OF T HE ASSESSEE, SHRI URVASHI SODHAN APPEARED AND POINTED OUT THAT THE ASSESSEE I S DOING JOB WORK. THE CONTROVERSY INVOLVED IN THIS APPEAL IS COVERED IN FAVOUR OF THE ASSESSEE BY THE FOLLOWING DECISIONS OF THE TRIBUNAL. I ) ITAT, AHMEDABAD DATED 15.01.10 IN ITA NO.1956/A HD/2007 IN THE CASE OF PRATIK PROCESSORS PVT. LTD. VS- DCIT II) ITAT, D BENCH, AHMEDABAD DATED 28.05.10 IN IT A NO. 1823/AHD/2007 IN THE CASE OF ITO-VS- M/S. RISHABH D YEING & PRINTING MILLS PVT. LTD. III) ITAT, B BENCH, AHMEDABAD DATED 30.04.10 IN I TA NO. 515- 516/AHD/2007 IN THE CASE OF ACIT-VS- M/S. SUPRIYA P RINTS PVT. LTD. (FORMERLY KNOWN AS M/S. AMAN PRINTS PVT. LTD.) IV) ITAT, D BENCH, AHMEDABAD DATED 03.04.09 IN IT A NO. 167/AHD/2009 IN THE CASE OF KANHAIYA PROCESSORS PVT . LTD. VS- ITO 6. ON THE OTHER HAND, SHRI S.P.TALATI, APPEARING ON BEHALF OF THE REVENUE, VEHEMENTLY SUPPORTED THE ORDER OF THE LD. CIT(A). 7. HAVING HEARD BOTH THE SIDES, WE HAVE CAREFULLY G ONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE TRIBUNAL IN THE CASE OF KANH AIYA PROCESSORS PRIVATE LTD. ( SUPRA ) OBSERVED THAT THE AO COULD NOT BE ABLE TO APPRECI ATE THE TRUE NATURE OF THE BUSINESS OF A PROCESSING HOUSE. HE UNDERTOOK THE JO B WORK. THE FABRIC DOES NOT BELONG TO THE ASSESSEE. THERE IS DIFFERENCE IN RAW MATERIAL AND THE CONSUMABLES. RAW MATERIAL ONCE CONSUMED DOES NOT LOSE ITS IDENTITY, IT ONLY GETS ITS UTILITY TRANSFERRED. WHILE THE CONSUMABLES, ONCE CONSUMED, CANNOT BE SEP ARATELY IDENTIFIED AND IT LOSES ITS IDENTITY. WHEN THE ASSESSEE HAS BEEN ENGAGED IN THE BUSINESS OF DYEING AND PRINTING OF ART-SILK CLOTH ON JOB WORK BASIS, THE RAW MATERIAL DOES NOT BELONG TO THE ASSESSEE. THE ASSESSEE HAS SIMPLY TO INCUR THE EXPENDITURE ON COL OUR, CHEMICAL, WAGES, POWER AND FUEL. COLOUR AND CHEMICALS ARE CONSUMABLES AND ONCE THESE ARE APPLIED TO THE FABRIC UNDER PROCESS, THEY LOSE THEIR IDENTITY AND CANNOT BE PART OF THE STOCK IN PROCESS. THE ASSESSEE IS VALUING THE STOCK BY FOLLOWING THE SAME METHOD CONSISTENTLY IN WHICH THERE IS NO ILLEGALITY. ON THIS BASIS, ADDITION MAD E ON ACCOUNT OF SUPPRESSED WORK-IN- 4 PROGRESS IS DELETED BY THE TRIBUNAL, D BENCH VIDE ORDER DATED 3 RD APRIL, 2009 IN THE CASE OF KANHAIYA PROCESSORS PVT. LTD. ( SUPRA ). 7.1 THE SIMILAR VIEW HAS BEEN TAKEN IN OTHER CASES RELIED ON BY THE LD. COUNSEL OF THE ASSESSEE. UNDER THE FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE AO WAS NOT CORRECT IN LAW IN VALUING THE WORK-IN-PROGRESS IN RESPECT OF VARIOUS EXPENSES INCURRED BY THE ASSESSEE RELATING TO FABRIC WHILE I N PROCESS FOR DYEING AND PRINTING. WE, ACCORDINGLY, DELETE THE ADDITION OF RS.4,11,335 /-. RESULTANTLY, THE APPEAL OF THE ASSESSEE IS ALLOWED. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE COURT ON 13.05.2011 SD/- SD/- (A.N.PAHUJA) (T.K.SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 13/05/2011 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE 2) THE DEPARTMENT 3) CIT(A) CONCERNED 4) CIT CONCERNED 5) D.R., ITAT, AHMEDABAD TRUE COPY BY ORDER DEPUTY REGISTRAR, ITAT, AHMEDABAD TALUKDAR/SR.P.S.