Rieco Industries Ltd., Pune V. ACIT, Cir.-6,Pune, Pune

ITA 1389/PUN/2006

• Counselvise Citation: 138924514 RSA 2006
• Duration Of Justice: 5 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 21-12-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 12-12-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA
• Keywords: Cost of acquisition
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NO. 1389/PN/06 & 157/PN/10 (ASSTT. YEAR 2003-04) RIECO INDUSTRIES LTD., .. APPELLANT 1162/2 SHIVAJINAGAR, PUNE- 411 005 PAN AAACR8217P VS. ASSTT. COMMISSIONER OF INCOME-TAX, .. RESPON DENT CIR. 6, PUNE AND ITA NO 55/PN/2007 (ASSTT.YEAR 2003-04) ASSTT. COMMISSIONER OF INCOME-TAX, .. APP ELLANT CIR. 6, PUNE VS. RIECO INDUSTRIES LTD., .. RESPONDENT PUNE- 411 005 ASSESSEE BY: SHRI C H NANIWADEKAR DEPARTMENT BY: SHRI S.K. AMBASTHA DATE OF HEARING: 21.12.2011 DATE OF PRONOUNCEMENT: 25.01.2012 ORDER PER G S PANNU, AM: SINCE THE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE PER TAIN TO SAME ASSESSEE AND INVOLVE COMMON FACTS, THE CAPTIONED THREE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY A CONSOLIDA TED ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 2. THE APPEAL OF ASSESSEE, VIDE ITA NO 1389/PN/06 AND REVENUES APPEAL, VIDE ITA NO 55/PN/07 ARISE OUT OF THE SAME OR DER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-II, PUNE DATED 3. 10.2006, WHICH IN TURN EMANATE FROM THE ORDER DATED 2.3.2006 PASSED BY THE A SSESSING OFFICER UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT TH E ACT), PERTAINING TO THE ASSESSMENT YEAR 2003-04. 3. THE ASSESSEE IS IN APPEAL AGAINST THE SUSTENANCE OF ADD ITION OF RS 19,28,259/- IN RESPECT OF NON-MOVING STOCK, WHEREAS THE REVENUE IS IN APPEAL AGAINST THE RELIEF OF RS 25,47,211/- GRANTED BY THE C OMMISSIONER OF INCOME- TAX (APPEALS) OUT OF TOTAL ADDITION OF RS 44,75,470/- MADE BY THE ASSESSING OFFICER. THE RELEVANT FACTS ARE THAT THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING AIR POLLUTION CONTROL EQUIPMEN TS, SIZE REDUCTION EQUIPMENTS, PNEUMATIC HANDLING SYSTEM ETC. THE FACTS AS EME RGING FROM THE ORDERS OF THE AUTHORITIES BELOW ARE THAT THE ASSESSEE HAD VALUED THE CLOSING STOCK OF NONMOVING ITEMS AT 5% OF THE COST, THEREBY DECRE ASING THE VALUE OF STOCK BY RS 44,74,470/- FROM THE TOTAL VALUE OF STOCK OF RS 1,87,62,307/-. ACCORDING TO THE ASSESSING OFFICER, THIS FACT WAS NOT DISCLOSED BY THE ASSESSEE IN THE RETURN OF INCOME AND THE AUDITORS HAD ALSO NOT POINTED OUT SPECIFICALLY THAT THE VALUE OF STOCK HAD BEEN DECREASED ON ACCOUNT OF VALUATION OF NON/SLOW MOVING STOCK. THE NON/SLOW MOVING STOCK ALSO INCLUDED THE STOCK OF THE CURRENT YEAR AMOUNTING TO RS 2.63 LAKHS AND AS PER THE ASSESSING OFFICER, THE STOCK CAN BE DISCHARGED OR SOLD AS SCRAP I F THE SAME IS LYING SINCE LONG TIME, SAY OVER 5 YEARS. FURTHER, THE A SSESSING OFFICER OBSERVED THAT THE ASSESSEE DID NOT FURNISH THE COMPLETE D ETAILS OF SUCH STOCK AND IT WAS INCUMBENT ON THE PART OF THE ASSESSEE TO PRES ERVE AND PRODUCE THE SAME TO SUBSTANTIATE THE IMPUGNED CLAIM. FOR ALL THESE R EASONS, THE ASSESSING OFFICER REJECTED THE CONTENTIONS OF THE ASSESSEE AN D MADE ADDITION OF RS 44,74,470/-. AGAINST THE SAID ADDITION, ASSESSEE PRE FERRED APPEAL TO THE FIRST APPELLATE AUTHORITY. 4. BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS), BE SIDES REITERATING THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER, THE ASSESSE E FURNISHED DETAILS OF YEAR-WISE PURCHASES OF TOTAL NON- MOVING I NVENTORY WHICH AS ON 31.3.2000 WAS RS 25,47,211/-, WHILE INVENTORY AS ON 31 .3.2003 WAS RS 44,75,470/-. ON THE BASIS OF THIS, IT WAS STATED THAT T HE ITEM REMAINING IN STOCK AND NOT MOVED DURING THE YEAR 31.3.2000 WERE RS 25,4 7,211/- WHICH HAD INCREASED TO RS 44,75,470/- DURING THE YEAR UNDER APPE AL. IT WAS FURTHER EXPLAINED THAT AT THE TIME OF PLACING AN ORDER, THE CUSTOMER MAY WANT SOME SPECIFIC PRODUCT, BUT DURING THE COURSE OF SUBSEQUENT TECHN ICAL DISCUSSION SOMETIMES THE SPECIFICATIONS CHANGE AND THE PRODUCT HAD TO BE SUPPLIED AS PER THE NEW SPECIFICATION, THE ITEMS ALREADY PROCURED BE COME SURPLUS AND BECOME NON-MOVING AFTER A LAPSE OF TIME. AS THE ORDERS WERE CUSTOM BUILT AND SPECIFICATION OF SOME OF THE ITEMS WERE NOT COMMON, THE NON-MOVING ITEMS GENERALLY CANNOT BE USED ELSEWHERE. THE NON-MOVING IT EMS OF 2-3 YEARS WERE KEPT AS INVENTORY AWAITING ITS UTILIZATION. IT WAS FURT HER EXPLAINED THAT THE RECORDS BEFORE 31.3.2000 COULD NOT BE PRODUCED FOR VERI FICATION, AS THE SAME WERE AT ROHA AND DUE TO HEAVY RAINS IN KONKAN AREA, A LL RECORDS HAVE BEEN DESTROYED DUE TO FLOODING AND THE SAME WERE NOT IN RE ADABLE CONDITION. THE ASSESSEE SUBMITTED THAT THE PRINCIPLE OF VALUING SLOW MOVI NG/OBSOLETE ITEMS AT LOWER THAN COST WAS ALSO JUDICIOUSLY ACCEPTABLE. AS REGARDS THE DISCLOSURE OF FACTS IN THE RETURN, IT WAS SUBMITTED THAT THE SAME WAS BACKED BY THE AUDITORS REPORT. THE COMMISSIONER OF INCOME-TAX (APPEALS) WAS NOT FULLY CONVINCED WITH THE SUBMISSIONS OF THE ASSESSEE. ACCORDING TO HIM, IT W AS CLEAR THAT THERE WAS NON-DISCLOSURE OF THE METHOD OF VALUATION OF CLOSING STOCK IN THE STATUTORY AUDIT AS ALSO IN THE REPORT IN FORM 3CD UNDER SECTION 4 4AB OF THE ACT. AS PER THE COMMISSIONER OF INCOME-TAX (APPEALS), THE QUALITY, QUANTITY OR THE NATURE OF THE ITEMS TERMED AS SLOW/NON-MOVING WAS ENTIRELY AT THE DISCRETION OF THE ASSESSEE. IN THE VIEW OF THE COMMISSIONER OF INCOME-TAX (A PPEALS), UNDER THE GARB OF NON/SLOW MOVING ITEMS, THE ASSESSEE CANNOT BE ALLO WED TO VALUE THE CLOSING STOCK AT 5% OF THE PURCHASE EVEN FOR ITEMS PURCHASED DURING THE YEAR, ESPECIALLY WHEN THERE WAS A NON DISCLOSURE OF THE METHOD OF VALUATION OF CLOSING STOCK FOLLOWED BY THE ASSESSEE. ULTIMATELY, OUT OF T HE TOTAL ADDITION OF RS 44,75,470/- MADE BY THE ASSESSING OFFICER, THE COMMI SSIONER OF INCOME- TAX (APPEALS) SUSTAINED AN ADDITION OF RS 19,28,259/- THEREBY DELETING THE BALANCE ADDITION OF RS 25,47,211/-. THE CONCLUDING POR TION OF THE FINDINGS OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IS AS FOLLOWS: THE AO, HOWEVER, HAS ADDED THE ENTIRE AMOUNT OF RS 44,75,470/- BEING THE NON MOVING/SLOW MOVING ITEMS FROM THE FIRST YEAR ITSELF SINCE THE ASSESSEE HAD NOT PRODUCE THE RECORDS OF NON MOVING ITEMS PRIOR TO TH E YEAR 2000. THE INVENTORY OF SUCH NONMOVING/SLOW MOVING INVENTORY AS ON 31.3.2000 WAS RS 25,47,211/-. THE ADDITIONAL ITEMS BECOMING NONMOVING DURING THE YEAR ARE ONLY RS 19,28,259/- WHICH INCLUDED RS 2,63,524/- OF THE CURRENT YEAR. IN MY C ONSIDERED OPINION, SINCE THE NON MOVING ITEMS ADDED TO THE CLOSING STOCK DURING THE YEAR UNDER CONSIDERATION IS ONLY RS 19,28,259/- EVEN IF THE PROOF PRIOR TO THE YEAR 2000 IS NOT PRODUCED BY THE APPELLANT, THE INCREASE IN STOCK DURING THE YEAR AM OUNTING TO RS 19,28,259/- CAN ONLY BE SUSTAINED. IN CONSEQUENCE, GROUNDS OF APPEAL NO. 1 TO 4 ARE PARTLY ALLOWED. AGAINST THE AFORESAID DECISION, BOTH THE ASSESSEE IN APPEA L AGAINST THE SUSTENANCE OF ADDITION OF RS 19,28,259/-,WHILE REVENUE IS IN APPEAL AGAINST THE RELIEF OF RS 25,47,211/- GRANTED BY THE COMMISSION ER OF INCOME-TAX (APPEALS). 5. BEFORE US, LEARNED COUNSEL FOR ASSESSEE HAS VEHEMENTL Y SUBMITTED THAT THE LOWER AUTHORITIES HAVE ERRONEOUSLY DISREGAR DED THE METHOD OF VALUATION OF NON-MOVING STOCK AT 5% OF THE PURCHASE PRI CE EVEN WHEN IT IS EVIDENT THAT ITEMS OF SUCH STOCK WERE NOT MOVING FOR A S UFFICIENT LONG PERIOD OF TIME. IN THIS CONNECTION, OUR ATTENTION WAS INVITED TO PAGES 169 TO 170 OF THE PAPER BOOK WHEREIN THE DETAILS OF SLOW AND NON- MOVING INVENTORY ON ACCOUNT OF RAW MATERIALS, BOUGHT OUT COMPONENTS AND FINISHED E QUIPMENTS ETC. HAVE BEEN PLACED. AT PAGES 11 TO 38 OF THE PAPER BOOK IS PL ACED THE DETAILS OF SUCH ITEMS SHOWING THE QUANTITIES, VALUE AND THE DATE OF L AST MOVEMENT OF ITEMS TO DEMONSTRATE THAT THE SAME WERE IN THE NATURE OF SLOW/N ON-MOVING ITEMS. IT WAS POINTED OUT THAT A LARGE NUMBER OF SUCH ITEMS HAVE NOT MOVED FOR LAST THREE YEARS AND IN FACT THE ACTUAL DATE OF PURCHASE OF SUCH ITEMS IS EVEN EARLIER THAN TWO TO THREE YEARS. IN PARA 2.2 OF THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) A REFERENCE HAS BEEN MADE TO YEAR- WISE PURCHASES OF TOTAL NON-MOVING INVENTORY AS ON 31.3.2003 AMOUNTING TO RS 44,875,470/- WHICH SHOWS THAT THERE ARE ITEMS PURCHASED SINCE THE YEAR 1 994-95 ONWARDS. IT WAS POINTED OUT THAT WITH REGARD TO THE NON- MOVI NG ITEM OF RS 2,63,524/- WHICH HAVE BEEN PURCHASED DURING THE YEAR ITSELF THE ASS ESSEE HAD PURCHASED SUCH ITEMS FOR A PARTICULAR PROJECT WHICH HAS N OT BEEN SO USED AND, THEREFORE, THE SAME HAS BEEN CLASSIFIED AND VALUED AS NON -MOVING. IN SUM AND SUBSTANCE, IT IS POINTED OUT THAT THE CLAIM OF THE A SSESSEE FOR VALUING ITS NON-MOVING INVENTORY AT 5% OF ITS PURCHASE COST IS FAIR AND PROPER AND IS IN ACCORDANCE WITH GENERALLY ACCEPTED COMMERCIAL PRINCIPLES AN D IN THIS REGARD, PLACED WAS PLACED ON THE FOLLOWING JUDGMENTS: (I) ALFA LAVAL INDIA LTD. V. DCIT 186 CTR 390 (BOM) ; (II) CIT V WOLKEM INDIA LTD 315 ITR 211(RAJ); (III) CIT V HOTLINE TELETUBE & COMPONENTS LTD. 175 T AXMAN 286 (DEL), AND (IV) MILTON CYCLE INDUSTRIES LTD. V. DCIT 54 TTJ 38 0 (DEL) (TRIB). IT IS FURTHER POINTED OUT THAT EVEN THE AUDITORS HAVE POINTED OUT THAT THE BASIS OF THE STOCK VALUATION IS FAIR AND PROPER AND IS IN ACCO RDANCE WITH THE NORMALLY ACCEPTED PRINCIPLES. IT HAS BEEN SUBMITTED THAT THE AUDI TORS HAVE REPORTED THAT THE ASSESSEE HAS PROCEDURE OF DETERMINING THE UNSERVICEAB LE AND DAMAGED STOCKS AT THE END OF THE YEAR AND ADEQUATE PROVISION THE REOF IS MADE AFTER DETERMINATION. IT WAS ALSO POINTED OUT THAT NO SUCH DI SALLOWANCE HAS BEEN MADE IN THE PAST OR EVEN IN THE SUBSEQUENT ASSESSMENT YEA RS AND THE ASSESSEE HAS BEEN FOLLOWING SIMILAR POLICY. IT HAS ALSO BEE N POINTED OUT THAT ASSESSEE HAS UNDERTAKEN STEPS TO DISPOSE OF SUCH ITEMS OF SLOW/NO N-MOVING STOCKS BY GIVING ADVERTISEMENT IN THE NEWSPAPERS FOR WHICH A REFERENCE WAS MADE TO PAGES 114 & 115 OF THE PAPER BOOK. IT IS POIN TED OUT THAT IN THE SUBSEQUENT YEARS SOME ITEMS OF SLOW/NON MOVING STOCK INVENTO RY HAS BEEN SOLD AT PRICES WHICH ARE PROXIMATE TO THE RATE AT WHICH SUCH INVENTORIES HAVE BEEN VALUED BY THE ASSESSEE, I.E. AT 5% OF THE ORIGINAL PURCHASE COST. FOR DETAILS, REFERENCE HAS BEEN MADE TO PAGE 116 OF THE P APER BOOK. ON THE AFORESAID BASIS, IT IS SOUGHT TO BE MADE OUT THAT THE VA LUATION OF NON MOVING STOCK AT 5% OF THE PURCHASE COST IS FAIR AND REASONABLE AND THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE. 6. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE, APPEARING FOR THE REVENUE HAS REITERATED THE STAND O F THE ASSESSING OFFICER BY POINTING OUT THAT THE STATED METHOD OF VALUING THE N ON- MOVING INVENTORY AT 5% OF COST HAS NOT BEEN APPROPRIATELY DISCLOSED IN THE FINAN CIAL STATEMENTS AND THE ASSESSEE ALSO COULD NOT FURNISH COMPLETE DETAILS OF PU RCHASE OF SUCH STOCKS MADE IN THE EARLIER YEARS. THE LEARNED DEPARTMENT AL REPRESENTATIVE ALSO JUSTIFIED THE STAND OF THE ASSESSING OFFICER THAT A P ARTICULAR ITEM OF INVENTORY CAN BE CLASSIFIED AS NON-MOVING ONLY IF IT HA S REMAINED UNUSED FOR A LONG PERIOD, SAY 5 YEARS, AND NOT FOR A SHORTER PERIOD AS CONSIDERED BY THE ASSESSEE. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITT ED THAT SINCE THE ASSESSEE HAS CLAIMED A DEDUCTION ON ACCOUNT OF DIMINUTION I N VALUE IN STOCK, IT WAS THEREFORE INCUMBENT ON THE ASSESSEE TO JUSTIFY A ND SUBSTANTIATE THE SAME WITH ADEQUATE RECORDS. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO ASSAILED THE DECISION OF THE COMMISSIONER OF INCOME-TAX ( APPEALS) IN CONFINING THE DISALLOWANCE TO A SUM OF RS 19,28,259/- I NSTEAD OF RS 44,74,470/- MADE BY THE ASSESSING OFFICER. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. THE DISPUTE IN THE PRESENT CASE REVOLVES AROUND THE METHOD OF VALUATION O F CLOSING STOCK OF CERTAIN ITEMS OF INVENTORY CLASSIFIED AS NON-MOVING ITEM S. THE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURIN G OF AIR POLLUTION CONTROL EQUIPMENTS, SIZE REDUCTION EQUIPMENTS, PNEUMAT IC HANDLING SYSTEM ETC. IT HAS BEEN EXPLAINED THAT THE MACHINES/EQUIPMENT S MANUFACTURED BY THE ASSESSEE ARE USED IN CEMENT, PHARMACEUTICAL AND CHEMICAL INDU STRIES ETC. THE CLAIM OF THE ASSESSEE IS THAT THE MAJOR PRODUCTION I S OF AIR POLLUTION CONTROL SYSTEMS WHICH REQUIRE A LOT OF RAW MATERIALS, LIKE STEEL P LATES, BOUGHT-OUT ITEMS LIKE MOTORS, PANELS, ETC. IT IS ALSO EXPLAINED THAT THE PRODUCTS MANUFACTURED BY THE ASSESSEE ARE CUSTOMER SPECIFIC AND ARE TAILOR-MADE TO SUIT THE SPECIFIC REQUIREMENTS OF INDIVIDUAL CUSTOMERS. IT HAS ALSO BEEN E XPLAINED THAT IN THE MANUFACTURING OF SUCH SPECIALIZED EQUIPMENTS, LARGE NUMB ER OF COMPONENTS ARE REQUIRED WHEREIN LOT OF BOUGHT-OUT COMPONENTS AR E ALSO INVOLVED. THE ASSESSEE EXPLAINED THAT ON ACCOUNT OF THE PRODUCTION BEING LINKED TO THE SPECIFIC REQUIREMENTS OF THE CUSTOMERS IT UNDERTAKES PRO CUREMENT OF SPECIFIC COMPONENTS MEETING WITH THE REQUIREMENTS OF THE PARTICU LAR CUSTOMER. HOWEVER, FOR VARIOUS REASONS WHICH HAVE BEEN ENUMERATED IN DETAIL IN THE ASSESSMENT ORDER, THE ASSESSEE SUBMITTED THAT EVEN AFTER C OMPLETING THE ORDER OF A PARTICULAR CUSTOMER, IT IS LEFT WITH CERTAIN UNUSED ITEMS. IT IS EXPLAINED THAT SUCH ITEMS ARE KEPT IN STOCK TO MEET ANY SIM ILAR REQUIREMENTS IN FUTURE. THE ASSESSEE EXPLAINED THAT IN SUCH CASES WHERE IT EMS DO NOT MOVE FOR MORE THAN 3 YEARS, THE VALUE THEREOF AT THE END OF THE YEAR IS TAKEN AT 5% OF THE ORIGINAL PURCHASE PRICE. ON ACCOUNT OF SUCH POLICY, THE ASSESSING OFFICER NOTICED THAT AS ON 31.3.2003, THE ASSESSEE HAD REDUCED THE VALUATION OF ITS CLOSING INVENTORY BY RS 44,75,470/- ON ACCOUNT OF RAW MATERIAL INVENTORY RS 12,19,913/-, BOUGHT-OUT INVENTORY - RS 17,64,564/-,. AND FINISHED EQUIPMENT INVENTORY RS 14,90,993/-. THE A SSESSING OFFICER HAS REJECTED THE AFORESAID CLAIM OF THE ASSESSEE AND ADDED TH E SUM OF RS 44,75,470/- TO THE RETURNED INCOME. 8. THE PRIMARY REASON ADOPTED BY THE ASSESSING OFFICER I S TO THE EFFECT THAT SUCH METHODOLOGY OF VALUING THE CLOSING STOCK WAS NOT SPECIFICALLY DISCLOSED IN THE FINANCIAL STATEMENTS. SECONDLY, AS PER T HE ASSESSING OFFICER THE ASSESSEE HAS NOT FURNISHED COMPLETE DETAILS PERTAINING TO THE ORIGINAL PURCHASE OF SUCH ITEMS OF NON-MOVING INVENTORY. THIRDLY , AS PER THE ASSESSING OFFICER, SUCH SLOW/NON-MOVING INVENTORY INCLUDES THE ST OCK PURCHASED IN THE CURRENT YEAR ALSO. NOTWITHSTANDING THE AFORESAID, THE A SSESSING OFFICER ALSO OBSERVED THAT AN ITEM CAN BE CLASSIFIED AS SLOW MOVING OR NON MOVING ONLY IF IT IS LYING WITHOUT SALE OR UTILIZATION OVER A CERTAIN PE RIOD, SAY 5 YEARS AND NOT AS TAKEN BY THE ASSESSEE. 9. BEFORE WE PROCEED TO ADJUDICATE ON THE MERITS OF T HE ASSESSEES CLAIM, WE MAY TAKE UP THE PARTIAL RELIEF ALLOWED BY THE COM MISSIONER OF INCOME-TAX (APPEALS) AND WHICH IS CONTESTED BY THE REVENUE IN ITS AP PEAL BY WAY OF GROUND NOS. 2 TO 4. THE COMMISSIONER OF INCOME-TAX (AP PEALS) HAS IN PRINCIPLE UPHELD THE STAND OF THE ASSESSING OFFICER, BUT HAS RESTRICTED THE ADDITION OF RS 19,28,259/- ON THE GROUND THAT IT IS O NLY SUCH AMOUNT WHICH PERTAINS TO THE YEAR UNDER CONSIDERATION. AS PER THE CO MMISSIONER OF INCOME- TAX (APPEALS), THE ITEMS OF STOCK BECOMING NON-MOVING DUR ING THE YEAR ARE ONLY RS 19,28,259/- AND, THEREFORE, THE ADDITION, IF ANY, PERTAINING TO THE YEAR UNDER CONSIDERATION IS ONLY RS 19,28,259/-. ON THIS FA CTUAL ASPECT, WE FIND NO COGENT MATERIAL BROUGHT OUT BY THE REVENUE. OSTENSIBLY , THE ADDITION FOR THE YEAR UNDER CONSIDERATION, IF REQUIRED TO BE MADE, OUG HT TO BE SUCH AMOUNT WHICH IS RELEVANT FOR THE YEAR UNDER CONSIDERATION THER EFORE, IN OUR VIEW, THE RELIEF GRANTED BY THE COMMISSIONER OF INCOME-TAX (APPE ALS) IS QUITE JUSTIFIED AND, THEREFORE, APPEAL OF THE REVENUE ON THIS ASPECT IS LIABLE TO BE DISMISSED. 10. NOW, IN SO FAR AS THE POSITION MADE OUT BY THE ASSESSI NG OFFICER AND WHICH HAS BEEN APPROVED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) TO THE EFFECT THAT THE METHOD OF VALUATION OF DETERMINATION AND VALUATION OF SLOW/NON- MOVING STOCK OF THE ASSESSEE IS UNACCEPTABLE. ON THIS ASPECT, W E HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IT IS A SETTLED PROPOSITION THAT IN ORDER TO COMPUTE INCOME FROM BUSINESS, AN ASSESSEE IS REQUIRE D TO VALUE ITS INVENTORY IN ACCORDANCE WITH GENERALLY RECOGNIZED METHO DS OF ACCOUNTING. IN OTHER WORDS, IF THE METHOD OF VALUATION ADOPTED BY T HE ASSESSEE IS A RECOGNIZED METHOD, THE SAME CANNOT BE DISREGARDED ON ME RE TECHNICALITIES. IN THE PRESENT CASE, THE ASSESSEE CONTENDS THAT IT HAS DETERMI NED ITEMS OF STOCK WHICH ARE SLOW/NON-MOVING AND HAS ACCORDINGLY VALUED THE SAME AT 5% OF ITS COST OF PURCHASE. SUCH ESTIMATE OF ITS VALUE BEING LOWER THAN THE ACTUAL COST, SUCH ITEMS HAVE BEEN TAKEN BY INVENTORY AS ON THE YEAR-E ND AT SUCH LOWER VALUES. IN OUR VIEW, THE METHOD OF VALUING SLOW/NON-M OVING STOCKS AT THE LOWER OF COST OR NET REALIZABLE VALUE, ON THE BASIS OF CERTAI N ESTIMATE IS A RECOGNIZED METHOD. SO, HOWEVER, AN INTERTWINED ASPECT IS THE MANN ER OF DETERMINATION OF SUCH ITEMS OF SLOW/NON-MOVING STOCKS, WHICH UNDOUBTEDLY HAS T O BE BASED ON A SCIENTIFIC AND BONA FIDE METHODOLOGY. THE CLAIM OF T HE ASSESSEE IS THAT IT HAS CLASSIFIED CERTAIN ITEMS OF STOCK AS SLOW/NON-MOVING IN CASES WH ERE SUCH ITEMS ARE LYING IN STOCK UNUSED FOR 2 TO 3 YEARS. IT HAS B EEN EXPLAINED THAT NON-USAGE IS PRIMARILY ON ACCOUNT OF THE NATURE OF BUSIN ESS EFFECTED BY THE ASSESSEE. THE ASSESSEE MANUFACTURES EQUIPMENT BASED ON PARTICUL AR REQUIREMENTS OF EACH CUSTOMER AND IN ORDER TO COMPLETE AN ORDER, IT PROCURES COMPONENTS SPECIFIC TO EACH ORDER. SOMETIMES, ON ACCOUNT OF CHANGE IN SPECIFICATIONS BY A CUSTOMER ON A SUBSEQUENT ORDER, SOME O F THE COMPONENTS PROCURED ARE RENDERED UNUSABLE FOR A PARTICULAR YEAR, BUT THE SAME ARE KEPT IN STOCK FOR ANY FUTURE USAGE ETC. AFTER CERTAIN LAPSE OF TI ME, IT IS CLAIMED THAT SAME ARE CLASSIFIED AS SLOW/NON-MOVING AND ITS VALUE IS RE DUCED. IN ORDER TO APPRECIATE THE AFORESAID FACTUAL MATRIX, WE HAVE PERU SED THE LIST OF ITEMS PLACED AT PAGES 11 TO 37 OF THE PAPER BOOK WHICH DEPICTS THAT THERE ARE ITEMS WHICH HAVE BEEN PURCHASED AS EARLY AS FINANCIAL YEAR 1994 -95 AND SUCH ITEMS ARE STILL CARRIED OUT AS STOCK. THE DETAILS ALSO INDICATE THAT SUCH ITEMS HAVE NOT MOVED FOR LAST 2 TO 3 YEARS. BROADLY SPEAKING, WE FIND THE APPROACH OF THE ASSESSEE QUITE REASONABLE IN IDENTIFYING SUCH ITEMS OF SLOW/ NON-MOVING STOCK. HOWEVER, THE ASSESSING OFFICER AND THEREAFTER, THE COMM ISSIONER OF INCOME- TAX (APPEALS) HAS ALSO NOTICED THAT ASSESSEE HAS CLAIMED CERT AIN ITEMS TO BE SLOW/NON-MOVING WHICH HAVE BEEN PURCHASED DURING THE CURRENT YEAR ITSELF AND THE VALUE OF SUCH ITEMS IS RS 2,66,524/-. IN OUR CON SIDERED OPINION, THE SAME IS REQUIRED TO BE SPECIFICALLY JUSTIFIED BY THE ASSESSEE . 11. FURTHER, ONE OF THE PERTINENT POINTS RAISED BY TH E ASSESSING OFFICER IS THAT THE PURCHASE COST OF SOME OF THE ITEMS CONTAINED IN THE SLOW/NON-MOVING INVENTORY AND WHICH HAS BEEN PURCHASED PRIOR TO 2000, COULD NOT BE VERIFIED AS THE ASSESSEE FAILED TO PRODUCE SUCH VOUCHERS. THE ASSESSEE EXPLAINED THAT THE SAME COULD NOT BE FILED FOR VERIFICATION BECA USE THE SAME WERE AT ROHA (AT ITS FACTORY PREMISES) AND DUE TO HEAVY RAINS IN THE KONKAN AREA, SUCH RECORD WAS DAMAGED DUE TO FLOODING AND WAS NOT IN A RE ADABLE CONDITION. THE ASSESSEE PRODUCED ALL THE RELATED VOUCHERS FOR THE PERIOD AFTER APRIL 2000 FOR VERIFICATION BEFORE THE ASSESSING OFFICER. EVEN WITH REGA RD TO THE PERIOD 1995 TO 2000, THE ASSESSEE PRODUCED GOODS RECEIPT REPORT (G RR), AS THE SAME WERE AVAILABLE IN ITS COMPUTER BACK-UP WHICH DEPICTED THE RATES APPLIED FOR THE VALUATION OF INVENTORY AS ALSO THE DATE OF PURCHASE OF THE RELEVANT MATERIAL. IN OUR CONSIDERED OPINION, IN THE FACE OF THE AFORESAID PO SITION, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DENYING THE CLAIM ON ACCOUN T OF NON-PRODUCTION OF RECORDS. IN ANY CASE, THE CIT(A) HAS RIGHTLY OBSERVED THA YT THE DIMINUTION IN VALUE CLAIMED AS DEDUCTION DURING THE YEAR IS ONLY TO T HE EXTENT OF RS 19,28.259/- COMPRISED IN RS 44,75,470- AND, THEREFORE, IT IS ONLY TO THAT EXTENT THE ASSESSING OFFICER COULD HAVE EXAMINED/VERIFIED THE CASE OF THE ASSESSEE. 12. ANOTHER POINT MADE OUT BY THE ASSESSING OFFICER IS THAT THE AFORESAID METHODOLOGY HAS NOT BEEN DISCLOSED BY THE ASSESSEE IN THE FINANCIAL STATEMENTS AND THAT THE CLASSIFICATION OF SLOW/NON-MOVING INVENTORY BE DONE ON THE BASIS OF 5 YEARS OF NON UTILIZATION OF THE STOCK. IN SO FAR AS THE FORMER ASPECT IS CONCERNED, THE LEARNED COUNSEL POINTED OUT THAT IN THE ANNUAL ACCOUNTS ACCOMPANYING THE BALANCE SHEET, THE ASSESSEE HAD D ISCLOSED FULL DETAILS. THE LEARNED COUNSEL SUBMITTED THAT IN SO FAR AS THE SAID STATEMENT OF ACCOUNTING POLICY IS CONCERNED, IT WAS AN ERROR SO HOWEVER , FACTUALLY SPEAKING IN THE PAST AS WELL AS IN THE SUBSEQUENT YEARS THE ASSESSEE HAS BEEN UNDERTAKING THE EXERCISE OF IDENTIFYING NON-MOVING ITE MS OF STOCK AND VALUING THE SAME AT 5% OF ORIGINAL PURCHASE COST. MOREOVER, IT H AS ALSO BEEN POINTED OUT THAT THE STATUTORY AUDITORS OF THE ASSESSEE HAVE CLEAR LY REPORTED IN CLAUSE 6 OF THEIR REPORT, COPY OF WHICH HAS BEEN PLACED AT PAG E 143 TO 147 OF THE PAPER BOOK, THAT ON THE BASIS OF EXAMINATION OF THE ST OCK RECORDS, THE VALUATION OF STOCK WAS FAIR AND PROPER IN ACCORDANCE WIT H THE NORMALLY ACCEPTED ACCOUNTING PRINCIPLES. FURTHER, THE AUDITORS HAD REPORTED IN CLAUSE 2 THAT THE STOCK OF FINISHED GOODS, STORES, SPARE-PARTS AND R AW MATERIALS INCLUDING COMPONENTS WERE PHYSICALLY VERIFIED BY THE MANA GEMENT AND SUCH PROCEDURES ARE REASONABLE AND ADEQUATE IN RELATION TO THE SIZE OF THE COMPANY. IT IS ALSO POINTED OUT THAT IN CLAUSE 12 THE A UDITORS HAVE REPORTED THAT THE ASSESSEE HAS A PROCEDURE OF DETERMINING UNSERVICE ABLE AND DAMAGED STORES AT THE END OF THE YEAR AND ADEQUATE PR OVISIONS, WHEREVER REQUIRED HAD BEEN MADE IN THE ACCOUNTS FOR THE LOSS ARIS ING ON THE ITEMS SO DETERMINED. ON THE BASIS OF ALL THESE MATERIAL, IT IS SO UGHT TO BE POINTED OUT THAT THE NON-MENTIONING OF THE SPECIFIC METHOD OF VALU ING THE NON-MOVING STOCK IN THE ACCOUNTING POLICIES WAS ONLY AN ERROR BUT THE SAME HAS BEEN OTHERWISE CONSISTENTLY APPLIED BY THE ASSESSEE AND WAS ALSO A SUBJECT MATTER OF EXAMINATION BY THE AUDITORS AND THERE HAS BEEN NO ADVERSE COMMENTS THEREOF. IN OUR VIEW, THE AFORESAID FACTUAL MATRIX BR OUGHT OUT BY THE ASSESSEE AND WHICH IS UNCONTROVERTED AND IS BORNE OUT OF RECORD, DOES NOT DIS-ENTITLE THE ASSESSEE FROM STAKING THE CLAIM FOR PROVISION TOWARDS DIMINU TION IN VALUE OF STOCK ON ACCOUNT OF NON-MOVING STOCKS. IN OUR CONSIDERED OPINI ON, NON- MENTIONING OF THE SPECIFIC METHOD IS EVIDENT, SO HOWEVER , IT IS ALSO EMERGING WITHOUT CONTRAVENTION FROM THE REVENUE THAT IN THE P AST AS WELL AS IN THE SUBSEQUENT ASSESSMENT YEAR, ASSESSEE HAS CARRIED OUT SIMILAR EX ERCISE. THEREFORE CONSISTENCY IN THE METHOD APPLIED BY THE ASS ESSEE IS FAIRLY EMERGING. FURTHER, WITH REGARD TO THE STAND OF THE R EVENUE THAT ONLY ITEMS WHICH HAVE NOT BEEN SOLD OR UTILIZED FOR 5 YEARS BE CO NSIDERED AS NON MOVING ITEMS, WE FIND THAT THE ASSESSEE CLAIMS TO HAVE ADOPTED A PERIOD OF 2 TO 3 PERIOD OF NON-USE AS THE BASIS. IT IS FURTHER POINTED O UT THAT THE ACTUAL PURCHASE DATE OF SUCH ITEMS SOMETIMES RELATE BACK TO 2 TO 3 YEARS, PRIOR TO ITS DATE OF LAST USE AND IN-FACT, SUCH ITEMS ARE 5-6 YEARS OLD. IN OUR CONSIDERED OPINION, THE THRESHOLD OF 2 TO 3 YEARS OF NON-USE CLAIM ED BY THE ASSESSEE IS FAIR AND REASONABLE CONSIDERING THE NATURE OF THE ASSESSE ES BUSINESS, WHEREIN THE PRODUCTS ARE MANUFACTURED PRIMARILY SPECIFIC TO THE REQUIREMENTS OF EACH CUSTOMER. IN FACT, EVEN THE ASPECT OF VALUING T HE SAME AT 5% OF THE ORIGINAL PURCHASE COST CAN ALSO NOT BE SAID TO BE AN UN DER-ESTIMATION BECAUSE THE ASSESSEE HAS ILLUSTRATED THAT SALES MADE IN SUBSEQUENT PERIOD OF SOME OF THE ITEMS HAVE FETCHED PRICES WHICH IS NEAR ABOUT 5% OF ITS ORIGINAL COST. IN FACT, IN THE CASE BEFORE THE HONBLE HIGH COURT OF RAJ ASTHAN IN THE CASE OF WOLKEM INDIA LTD. (SUPRA), THE VALUATION OF UNUSABLE A ND NON-MOVING ITEMS ON ACCOUNT OF OBSOLESCENCE AT 5% OF THE COST ON ESTIMATION HA S BEEN FOUND TO BE REASONABLE. THEREFORE, ON ALL THESE ASPECTS, WE UPHOLD THE PLEA OF THE ASSESSEE IN PRINCIPLE. 13. NOW, WE MAY COME TO THE SPECIFIC ASPECTS OF THE IDENT IFICATION OF NON- MOVING ITEMS AS ON 31.3.2003 UNDERTAKEN BY THE ASSESSEE . IN THIS REGARD, WE FIND AMPLE SUBSTANCE IN THE PLEA OF THE COMMISSIONER O F INCOME-TAX (APPEALS) THAT SINCE THE NON-MOVING ITEMS ADDED TO THE CLOSING STOCK DURING THE YEAR IS ONLY 19,28,259/-, THE ASSESSING OFFICER SHALL BE JUSTIFIE D TO PUT SUCH WORKING FOR FURTHER VERIFICATION AND EXAMINATION. FOR EXAMIN ATION OF THIS ASPECT, WE SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER T O VERIFY AS TO WHETHER THE SAID WORKING CORRESPONDS TO THE POLICY BEING SOUGHT TO BE BROUGHT OUT BY THE ASSESSEE. THE ASSESSEE SHALL FURNISH THE NECESSARY WORKINGS TO T HE ASSESSING OFFICER SO AS TO SATISFY THE ASSESSING OFFICER THAT T HE NON-MOVING ITEMS OR STOCK HAS BEEN APPROPRIATELY IDENTIFIED AND SAME HAS BEEN VALUED AT 5% OF THE PURCHASE COST IN TERMS OF THE POLICY CONSISTENTL Y CLAIMED TO HAVE BEEN ADOPTED BY THE ASSESSEE IN THE PAST AS WELL AS IN THE FUTURE YEARS. IN THIS MANNER FOR THE LIMITED PURPOSE THE MATTER IS REMANDED BACK TO THE FILE OF THE ASSESSING OFFICER. 14. ON THIS GROUND ASSESSEE SUCCEEDS AND THE CROSS-GROUND OF T HE REVENUE AGAINST DELETION OF THE ADDITION OF RS 25,47, 211/- IS DISMISSED. 15. THE NEXT GROUND OF APPEAL RAISED BY THE REVENUE IS AS FOLLOWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT (A) ERRED IN DIRECTING TO EXCLUDE SALES-TAX AND EXCISE DUTY FROM THE TOTAL TU RNOVER FOLLOWING THE RATIO OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. SUD ARSHAN CHEMICAL INDS. LTD. 245 ITR 318, WITHOUT APPRECIATING THAT AS THE HONBLE S UPREME COURT HAVE DISMISSED THE SLP FILED BY THE DEPARTMENT AGAINST THE AFORESAID J UDGMENT ONLY TECHNICALLY AND NO ON MERIT, THEREFORE, THE ISSUE CANNOT BE REGARDED A S HAVING BECOME FINAL. THE CIT(A) ALSO FAILED TO APPRECIATE THAT ON SIMILAR ISSUE A C ONTRARY JUDGMENT OF THE HONBLE BOMBAY HIGH COURT EXISTS IN THE CASE OF HINDUSTAN PETROLEUM CORPN. V. CIT 143 ITR 318. 16. BEFORE US, IT WAS A COMMON GROUND BETWEEN THE PART IES THAT THE ABOVE ISSUE NOW STANDS SETTLED BY THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V. LAXMI MACHINE WORKS 290 ITR 667 (SC) IN F AVOUR OF THE ASSESSEE. IN VIEW OF THIS SETTLED LEGAL POSITION, WE AFFIR M THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) THAT THE SALES-TAX AND EXCISE DUTY BE EXCLUDED FROM THE TOTAL TURNOVER. THIS GROUND OF APPE AL OF THE REVENUE FAILS. 17. IN THE RESULT, APPEAL OF THE ASSESSEE, VIDE ITA NO 1389/PN/06 IS ALLOWED FOR STATISTICAL PURPOSES, WHEREAS APPEAL OF THE REVENUE VIDE ITA NO 55/PN/07 IS DISMISSED. 18. WE SHALL NOW TAKE UP ASSESSEES APPEAL, VIDE ITA NO 15 7/PN/2010, WHICH IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER O F INCOME-TAX (APPEALS) CONFIRMING THE PENALTY OF RS 7,08,635/- LEVI ED BY THE ASSESSING OFFICER UNDER SECTION 271(1)(C) OF THE ACT FOR THE ASS ESSMENT YEAR 2003-04. THE FACTS LEADING TO THE LEVY OF PENALTY HAVE ALREADY BEEN NARRATED ABOVE IN THE QUANTUM PROCEEDINGS. 19. BY OUR ABOVE ORDER, WE HAVE SET ASIDE THE ISSUE RE LATING TO ADDITION OF RS 19,28,259/- TO THE FILE OF THE ASSESSING OFFICER TO A DJUDICATE THE ISSUE AFRESH WITH CERTAIN DIRECTIONS. THE IMPUGNED PENALTY HA S BEEN LEVIED BY THE ASSESSING OFFICER WITH REFERENCE TO THIS AMOUNT OF RS 19,2 8,259/-. SINCE THE ISSUE RELATING TO THE ADDITION OF RS. 19,28,259/- HAS BEEN RESTORED TO THE FILE OF THE ASSESSING OFFICER AS STATED ABOVE, THE PENALTY LEVIED BY THE ASSESSING OFFICER AND CONFIRMED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) IS LIABLE TO BE SET-ASIDE. WE HOLD SO. 20. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED . 21. RESULTANTLY, ASSESSEES APPEALS, VIDE ITA NOS 1389/PN/0 6 AND 157/PN/10 ARE ALLOWED, WHEREAS REVENUES APPEAL, VIDE ITA NO 55/PN/2007 IS DISMISSED. DECISION PRONOUNCED IN THE OPEN COURT ON THIS 25TH DAY OF JANUARY, 2012. SD/- SD/- (SHAILENDRA KUMAR YADAV) (G.S. PANNU) JUDICIAL MEMBER ACC OUNTANT MEMBER PUNE: 25 TH JANUARY, 2012 B COPY TO:- 1) ASSESSEE 2) DEPARTMENT 3) THE CIT (A) II, PUNE 4) THE CIT III, PUNE 5) THE D R, A BENCH, PUNE 6) GUARD FILE BY ORDER TRUE COPY SR. PS, I.T.A.T., PUNE