ACIT 17(3), MUMBAI V. HEMANI AROMATICS, MUMBAI

ITA 2400/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 83591 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 21-08-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 28-03-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PITAMBAR DAS
• Assessee Lawyers: M M MEHTA
• Keywords: Cost of acquisition
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUM BAI .. , , BEFORE SHRI I. P. BANSAL, JM AND SHRI SANJAY ARORA , AM ./ I.T.A. NO. 2400/MUM/2013 ( / ASSESSMENT YEAR: 2008-09) ASST. CIT-17(3), ROOM NO. 604, 6 TH FLOOR, PIRAMAL CHAMBERS, PAREL, MUMBAI-400 012 / VS. HEMANI AROMATICS PLOT NO.A-261, MIDC TTC INDUSTRIAL AREA, MAHAPE, MUMBAI-400 701 ./! ./PAN/GIR NO. AAAFH 0603 E ( ' /APPELLANT ) : ( #$ ' / RESPONDENT ) ' % & / APPELLANT BY : SHRI PITAMBAR DAS #$ ' % & / RESPONDENT BY : SHRI M. M. MEHTA ' ()* % +, / DATE OF HEARING : 21.08.2014 -./ % +, / DATE OF PRONOUNCEMENT : 27.08.2014 0 / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE REVENUE DIRECTED AGAINST T HE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-29, MUMBAI (CIT(A) FOR SH ORT) DATED 21.01.2013, PARTLY ALLOWING THE ASSESSEES APPEAL CONTESTING ITS ASSES SMENT U/S.143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMEN T YEAR (A.Y.) 2008-09 VIDE ORDER DATED 21.12.2010. 2. THE ONLY ISSUE ARISING IN THE INSTANT APPEAL IS THE VALIDLY IN LAW OF THE RESTRICTION OF THE ADDITION BY THE ASSESSING OFFICER (A.O.) ON ACC OUNT OF UNDER-VALUATION OF WORK-IN- PROGRESS (WIP) AT RS.77.85 LACS TO RS.5.74 LACS BY THE LD. CIT(A) IN THE FACTS OF THE CASE. 2 ITA NO. 2400/MUM/2013 (A.Y. 2008-09) ASST. CIT VS. HEMANI AROMATICS 3. THE ASSESSEE-FIRM IS A MANUFACTURER OF INDUSTRIA L PERFUMERY COMPOUND. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE A.O. OBSE RVED THE VALUATION OF THE WIP (15481 KGS.) TO BE AT RS.415/- PER KG. THIS WAS, IN HIS VIEW, NOT PROPER AS THE V ALUATION WAS TO BE ADMITTEDLY MADE AT COST, BEING LOWER THAN THE NET R EALIZABLE VALUE - THE AVERAGE SALE RATE BEING AT RS.1,266 PER KG., WHILE THE AVERAGE COST O F PURCHASE COST OF RAW MATERIAL FOR THE YEAR WAS AT RS.585/- PER KG. THE ASSESSEE HAD ALSO INCURRED COST OF CON VERSION, WHICH WOULD ALSO REQUIRE BEING ADDED TO THE RAW MATERIAL COST COMPONENT TO DETERMINE THE COST. WORKING OUT THE DIRECT COST AT RS.332/- PER KG (RS. 179.28 LACS/53969 KG.), HE COMPUTED THE SAID COST AT RS.918/- PER KG., AND VALUED THE WIP AS AT THE YEAR-END ACC ORDINGLY, RESULTING IN THE DETERMINATION OF THE UNDER-VALUATI ON THEREOF AND, CONSEQUENTLY, ADDITION, AT RS.77,84,974/- (REFER PARA 4 OF THE ASSESSMENT O RDER). IN APPEAL, THE ASSESSEE FOUND FAVOUR WITH THE LD. C IT(A), I.E., TO A SUBSTANTIAL EXTENT. THE ASSESSEE HAD MAINTAINED COMPLETE RECORD S, SO THAT THERE WAS NO SCOPE FOR IMPUTING THE RAW MATERIAL COST COMPONENT OF THE WIP AT THE AVERAGE COST OF PURCHASE FOR THE YEAR. THE OTHER DIRECT COSTS, HOWEVER, HAD NOT BEEN LOADED, WHICH STOOD WORKED OUT BY HIM AT RS.37.07 PER KG. THE SAME, AS PER HIS WOR KING, AMOUNTED TO RS.5,73,881/- (I.E., 15481 KG X RS.37.07 PER KG.), WHICH WAS ACCORDINGLY DIRECTED FOR BEING ADDED TO THE RAW MATERIAL COST OF WIP, SUSTAINING THE ADDITION TO TH AT EXTENT IN-AS-MUCH AS THE SAME WOULD REQUIRE BEING ADDED IN COMPUTING THE COST OF PRODUC ING THE SAME (REFER PAGE 11 OF THE IMPUGNED ORDER). AGGRIEVED, THE REVENUE IS IN APPEA L. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 4.1 AT THE VERY OUTSET, IT WAS CLARIFIED BY THE LD. AUTHORIZED REPRESENTATIVE (AR), THE ASSESSEES COUNSEL, ON A QUESTION BY THE BENCH, THA T THE ASSESSEE IS NOT IN APPEAL, WHICH ALSO EXPLAINS OUR FRAMING THE ISSUE ARISING FOR OUR ADJUDICATION IN THE MANNER DONE. 4.2 COMING TO THE MERITS OF THE CASE, THE REDUCTION IN THE ADDITION AS DIRECTED BY THE LD. CIT(A) HAS, AS APPARENT, TWO COMPONENTS TO IT, I.E., THE RAW MATERIAL AND THE CONVERSION COST, SO THAT WE SHALL BE REQUIRED TO IS SUE A FINDING/S QUA EACH ASPECT. AS REGARDS THE RAW MATERIAL COST, THE ASSESSEES CASE BEFORE THE FIRST APPELLATE AUTHORITY WAS 3 ITA NO. 2400/MUM/2013 (A.Y. 2008-09) ASST. CIT VS. HEMANI AROMATICS THAT IT WOULD BE IMPROPER TO ARRIVE AT THE RAW MATE RIAL COST COMPONENT OF THE WIP ON THE BASIS OF THE PURCHASE COST OF THE RAW MATERIAL FOR THE YEAR (RS.585 PER KG.), WHICH HAD BEEN ADOPTED BY THE A.O. THIS IS FOR THE REASON THA T THE AVERAGE COST OF RAW MATERIAL IN STOCK AS AT THE YEAR-END (12309 KGS.) IS AT RS.1009 PER KG. THE SAME WOULD ITSELF SHOW THAT THE AVERAGE COST OF THE RAW MATERIAL CONSUMED DURING THE YEAR, WHICH IS THE RELEVANT FIGURE, IS MUCH LESS, AND HAS BEEN RIGHTLY ASSUMED AT RS.415 PER KG. THE ARGUMENT IS UNEXCEPTIONAL INASMUCH AS IT IS ONLY THE RAW MATERI AL CONSUMED WHICH IS COMPRISED IN THE WIP, SO THAT IT IS ITS COST WHICH IS TO BE TAK EN INTO ACCOUNT. THE ASSESSEE HAS MAINTAINED QUANTITATIVE RECORDS, AND THE ENTIRE DET AILS STOOD FURNISHED BEFORE THE A.O. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS. TH E SAID FIGURES/DETAILS HAVE NOT BEEN DISPUTED OR IMPUGNED BY THE REVENUE IN ANY MANNER. ACCORDINGLY, WE FIND NO BASIS FOR DISTURBING THE RAW MATERIAL COST COMPONENT OF THE W IP, AS DETERMINED BY THE ASSESSEE, I.E., AT RS.64.27 LACS, BY IMPUTING THE AVERAGE COS T OF PURCHASE FOR THE YEAR IN ITS STEAD. 4.3 AS REGARDS THE CONVERSION COST, THE LD. CIT(A) HAS CONSIDERED THE DIRECT COST OF PRODUCTION FOR THE YEAR AT RS.25.72 LACS, AS AGAINS T RS.179.28 LACS BY THE A.O. THE MAJOR COMPONENTS OF THE DIFFERENCE TO WHICH WE SHALL CO NFINE OURSELVES, BEING SO BY THE LD. CIT(A), CONSISTS FIRSTLY OF FREIGHT (RS.14.13 LACS) AND DUTIES & TAXES (RS.77.98 LACS), WHICH STAND EXCLUDED BY HIM ON THE BASIS THAT THE S AME STAND ALREADY INCLUDED IN THE RAW MATERIAL COST, SO THAT ADDING THE SAME AGAIN WOULD AMOUNT TO TAKING A DOUBLE EFFECT OF THE SAME COST. WITHOUT DOUBT, THE SAID COSTS FORM PART OF THE ACQUISITION COST OF RAW MATERIAL AND, THEREFORE, CANNOT BE CONSIDERED AS A PART OF T HE CONVERSION COST. THERE IS NO GAIN- SAYING THAT THERE CAN BE NO DOUBLE ADDITION, WHICH SHALL INURE WHERE THE SAME COST IS RECKONED TWICE, ONCE IN COMPUTING THE RAW MATERIAL COST COMPONENT OF WIP, AND THEN AGAIN AS A PART OF THE CONVERSION COST ON ITS PROC ESSING. HOWEVER, THE ASSESSEE NOWHERE SAYS THAT IT HAS INCLUDED THE SAID DIRECT COSTS IN VALUING THE RAW MATERIAL COST OF WIP. IT IS IN FACT NOBODYS CASE THAT IT IS SO, AND THE LD. CI T(A) HAS CLEARLY MISLED HIMSELF IN THE MATTER, ISSUING A FINDING AS TO DOUBLE ADDITION, EV EN AS HE HIMSELF DOES NOT ISSUE ANY FINDING AS TO THE SAID DIRECT COSTS HAVING BEEN FOU ND, UPON VERIFICATION, TO HAVE BEEN 4 ITA NO. 2400/MUM/2013 (A.Y. 2008-09) ASST. CIT VS. HEMANI AROMATICS INCLUDED IN VALUING THE RAW MATERIAL COST OF WIP. T HIS IS IN FACT EVEN OTHERWISE APPARENT FROM THE LARGE VARIATION THAT ATTENDS THE COST OF T HE RAW MATERIAL IN STOCK (AT RS.1009 PER KG.) AND THAT INCLUDED IN THE WIP (AT RS.415 PER KG .). EVEN THE AVERAGE PURCHASE COST FOR THE YEAR IS AT RS.585 PER KG. THE ONLY MISTAKE, ALB EIT ONLY TECHNICAL AND, THEREFORE, TO NO EFFECT, BY THE A.O., IS THAT HE CONSIDERS THE SAID COSTS AS PART OF THE CONVERSION COST, RATHER THAN AS A DIRECT COST OF RAW MATERIAL ITSELF. AS SU CH, THOUGH WE AGREE WITH THE LD. CIT(A) IN PRINCIPLE, THE FACTS SUGGEST OTHERWISE, AND THE MATTER, IN THE VERY LEAST, REQUIRES VERIFICATION. WE, ACCORDINGLY, DIRECT THAT THE FREI GHT AND DUTIES & TAXES, INCIDENT ON AND INCURRED IN RESPECT OF THE RAW MATERIAL FORMING PAR T OF THE WIP AS AT THE YEAR-END, WHERE AND TO THE EXTENT NOT INCLUDED IN ITS VALUATION, SH ALL BE SO INCLUDED. THE ASSESSEES CASE FOR NON-INCLUSION IS WHOLLY UNM AINTAINABLE IN VIEW OF THE NON- OBSTANTE CLAUSE OF SECTION 145A, ALLUDED TO BY THE A.O. THE DECISION BY THE APEX COURT IN CIT VS. INDO NIPPON CHEMICALS CO. LTD. [2003] 261 ITR 275 (SC) IS IN RESPECT OF SECTION 145 AND NOT SECTION 145A. THE MATTER HAS BEEN EXAMI NED AT LENGTH BY THE TRIBUNAL, AS IN THE CASE OF HERCULES PIGMENT INDUSTRY VS. ITO [2014] 146 ITD 31 (MUM). THE TRIBUNAL HAS MADE IT ABUNDANTLY CLEAR THAT NOTWITHSTANDING T HE CLAIM OF NO DIFFERENCE IN PROFIT ARISING ON FOLLOWING THE EXCLUSIVE METHOD OF VALUAT ION OF INVENTORIES, AS APPEARS TO OBTAIN IN THE INSTANT CASE, THE ONLY SURE WAY TO ES TABLISH SO IS BY FOLLOWING UNSCRUPULOUSLY THE MANDATE OF SECTION 145A OF THE A CT. WE MAY CLARIFY THAT THE PROVISION DOES NOT COMPEL THE ASSESSEE/S TO ADOPT A DIFFERENT METHOD OF ACCOUNTING, SO THAT IT MAY, AT ITS OPTION, CONTINUE TO RETAIN THE BOOK VALUE OF THE INVENTORIES. SO, HOWEVER, THE PROFIT AND GAINS OF BUSINESS SHALL HAV E TO BE NECESSARILY COMPUTED FOLLOWING THE PRESCRIPTION OF THE SAID NON-OBSTANTE PROVISION. IF IT DOES NOT RESULT IN ANY VARIATION IN PROFIT, AS CLAIMED, WHAT, WE WONDER, IS THE FUSS AN D CUSSEDNESS ABOUT; ALL THAT THE ASSESSEE IS TO DO IS TO EXHIBIT SO BY DRAWING A SEPARATE STA TEMENT? THE SEVERAL DECISIONS REFERRED TO BY THE ASSESSEE IN ITS PAPER-BOOK ARE AGAIN PREMISE D ON THE PARITY OF THE TWO METHODS. THE ESSENTIAL POINT IS THAT TAX NEUTRALITY IS NOT A MATTER OF PRESUMPTION AND WOULD HAVE TO BE EXHIBITED, EVEN AS EXPLAINED BY THE TRIBUNAL IN HERCULES PIGMENT INDUSTRY VS. ITO (SUPRA) INASMUCH AS IT MAY NOT ALWAYS HOLD. AGAIN, WITHOUT DOUBT, SECTION 145A SHALL NOT 5 ITA NO. 2400/MUM/2013 (A.Y. 2008-09) ASST. CIT VS. HEMANI AROMATICS APPLY TO THE VALUATION OF THE CLOSING STOCK IN ISOL ATION, BUT EQUALLY TO OPEN STOCK, PURCHASES AND SALES AS WELL. ACCORDINGLY, OUR DIREC TION FOR INCLUSION OF DIRECT COSTS OF ACQUISITION OF RAW MATERIAL IN VALUING WIP, I.E., W HERE AND TO THE EXTENT NOT SO INCLUDED, WOULD STAND MODIFIED TO INCLUDE THE VALUATION OF TH E OTHER COMPONENTS OF THE MANUFACTUR -ING ACCOUNT AS WELL, I.E., IN STRICT COMPLIANCE OF SECTION 145A. WE DECIDE ACCORDINGLY. THE THIRD AND THE ONLY OTHER MAJOR COMPONENT OF DIR ECT COSTS EXCLUDED BY THE LD. CIT(A) IS THE REMUNERATION TO PARTNERS (RS.47.22 LA CS), INCLUDED @ 50% OF THE TOTAL SUCH COST ON THE BASIS THAT THE SAME FORMS PART OF THE C OST INCURRED IN BRINGING THE GOODS TO THEIR LOCATION AND CONDITION AS ON THE DATE OF VALU ATION, I.E., DIRECTED TOWARD PRODUCTION. WE DO NOT AGREE WITH THE LD. CIT(A) THAT THE REMUNE RATION TO WORKING PARTNERS IS A PART OF THE PROFITS OF THE FIRM WHICH FORMS HIS REASON FO R EXCLUDING THE SAME; IT BEING, IN OUR CLEAR VIEW, ONLY A CHARGE ON ITS PROFITS. IT IS ON LY ON THAT BASIS THAT THE SAME STANDS ALLOWED AS A DEDUCTIBLE COST/EXPENSE, WHICH IS ONLY U/S. 37(1), IN COMPUTING ITS INCOME. AT THE SAME TIME, THE SAID COST COULD BE ADDED IF A ND ONLY IF THE SAME STANDS INCURRED AS A PART OF THE DIRECT COST. IMPLICIT IN THE INCLUSION OF THE SAID COST IS THE ASSUMPTION THAT THE PARTNERS ARE ENGAGED, ON AN AVERAGE, IN THE PURCHAS E AND/OR PRODUCTION FUNCTION TO THE EXTENT OF 50%. THE SAME IS NOT UNREASONABLE; RATHER , THE ASSESSEES EXPLANATION, WHICH FOUND FAVOR WITH THE LD. CIT(A), NOTED HERE-IN-ABOV E WITH DISAPPROVAL, BEING A TACIT ADMISSION OF IT BEING SO. THE MATTER REQUIRES VERIF ICATION AND CONSIDERATION. WE ALSO NOTE HOWEVER THAT THE FINISHED GOODS STAND VALUED AT THE COST OF PRODUCTION, AT RS.1030 PER KG. DETAIL THEREOF IS NOT ON RECORD, THOUGH THE COST ST ANDS ACCEPTED BY THE A.O. IF THE SAME INCLUDES THE COST OF REMUNERATION TO THE PARTNERS T O ANY EXTENT, THERE IS NO REASON WHY IT SHOULD NOT LIKE-WISE WARRANT INCLUSION TO THE PROPO RTIONATE EXTENT IN VALUING WIP, AND IF NOT; THE REVENUE HAVING ACCEPTED THE VALUATION OF F INISHED GOODS, WHICH ONLY REPRESENTS RAW MATERIAL, PROCESSING OF WHICH STANDS COMPLETED, AS AGAINST ONLY PARTIALLY QUA WIP, THERE IS NO REASON FOR ITS INCLUSION IN VALUING WIP . WE DECIDE ACCORDINGLY. 4.4 FINALLY, BEFORE PARTING WITH THIS ORDER, WE MAY STATE THAT WE OBSERVE THAT THE PROCESSING OF WIP QUANTITY BEING ADMITTEDLY NOT COM PLETE, THE EQUIVALENT PRODUCTION IN 6 ITA NO. 2400/MUM/2013 (A.Y. 2008-09) ASST. CIT VS. HEMANI AROMATICS ITS RESPECT OUGHT TO HAVE BEEN TAKEN AT LESS THAN T HE NOMINAL QUANTITY (15481 KGS.). ADOPTING THE EQUIVALENT PRODUCTION AT 7740.5 KGS., I.E., ASSUMING THE PROCESSING TO BE COMPLETE, ON AN AVERAGE, AT 50%, WOULD LEAD TO A CO NVERSION COST OF RS.41.73 PER KG. (OF FINISHED GOODS). THIS SHALL IN FACT REDUCE THE WIP (CONVERSION COST COMPONENT) TO RS.3,13,011/- (7740.5 KGS. X RS.41.73 PER KG.), AS AGAINST TO RS.5.74 LACS. HOWEVER, THE ASSESSEE IS NOT IN APPEAL BEFORE US TO DIRECT THE A DOPTION OF THE SAID VALUE. ALSO, IT WOULD SIMULTANEOUSLY LEAD TO AN ENHANCEMENT IN THE PRODUC TION COST OF FINISHED GOODS BY RS.4.66 PER KG. (RS.41.73 RS.37.07), VALUATION OF WHICH IS AGAIN NOT A SUBJECT MATTER OF APPEAL. WE, ACCORDINGLY, DECLINE TO INTERFERE WITH THE IMPUGNED ORDER ON THIS SCORE/S. 5. IN THE RESULT, THE REVENUES APPEAL IS PARTLY AL LOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON AUGUST 27, 20 14 SD/- SD/- (I. P. BANSAL) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER ' * MUMBAI; 1( DATED : 27.08.2014 ).(. ./ ROSHANI , SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. ' / THE APPELLANT 2. #$ ' / THE RESPONDENT 3. ' 2+ ( ) / THE CIT(A) 4. ' 2+ / CIT - CONCERNED 5. 5)67 #+(89 , , 89/ , ' * / DR, ITAT, MUMBAI 6. 7:; <* / GUARD FILE ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , ' * / ITAT, MUMBAI