Mamta Silk Mills Pvt.Ltd., Surat V. The Income tax Officer,Ward-1(3), Surat

ITA 2405/AHD/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 50876 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 24-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 17-08-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Salary income
• Section: 144

Judgement Text

-1- IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'B' [BEFORE SHRI T K SHARMA JUDICIAL MEMBER] [AND SHRI A K GARODIA, ACCOUNTANT MEMBER] ITA NO.2405/AHD/2009 (ASSESSMENT YEAR:-2006-07) M/S MAMTA SILK MILLS LTD., K-1286, SURAT TEXTILE MARKET, RING ROAD, SURAT V/S THE INCOME-TAX OFFICER, WARD-1(3), SURAT PAN: AABCM 5904 D [APPELLANT] [RESPONDENT] APPELLANT BY :- SHRI HARDIK VORA, AR RESPONDENT BY:- SHRI SAMIR TEKRIWAL, SR. DR DATE OF HEARING:- 24-10-2011 DATE OF PRONOUNCEMENT:- 25-10-2011 O R D E R PER T K SHARMA (JM) : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 14-07-2009 OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-I, SURAT [THE CIT(A)] FOR ASSESSMENT YEAR (AY) 2006-07. 2 GROUND NO.1 IN THE APPEAL READS AS UNDER:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION OF RS.5,341/-O N ACCOUNT OF WORK IN PROGRESS. 2 3 BRIEFLY STATED THE FACTS RELATING TO THE CONTROVE RSY INVOLVED IN THIS GROUND OF APPEAL ARE THAT IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER [AO] MADE AN ADDITION OF RS.5,3 41/- IN RESPECT OF SUPPRESSED VALUE OF WORK-IN-PROGRESS [WI P] FOR THE DETAILED REASONS GIVEN IN PARA-4 OF THE ASSESSMENT ORDER, WHICH READS AS UNDER:- 4. DURING THE COURSE OF HEARING, THE ASSESSEE COMP ANY WAS ASKED AS TO WHY THE VALUATION OF CLOSING STOCK OF WORK-IN -PROGRESS SHOULD NOT BE MADE AND ADDED TO THE TOTAL INCOME. IN RESPO NSE, THE ASSESSEE COMPANY HAS FILED WRITTEN SUBMISSION DATED 26.09.20 08, THE RELEVANT PORTION OF THE SAME IS REPRODUCED HERE UNDER FOR RE ADY REFERENCE. '2. REGARDING THE QUERY WHY THE WIP CALCULATED ON T HE BASIS OF LAST YEAR SHOULD BE NOT ADDED TO THE INCOME, WE HAVE TO STATE AS UNDER: A. ASSESSEE IS CONSISTENTLY FOLLOWED THE METHOD OF NOT CONSIDERING THE WORK IN PROGRESS FOR MANY YEARS AND THE SAME HAS BEEN ACCEPTED BY DEPARTMENT. B. IN RESPECT OF JOB WORKER, THE CONCEPT OF WORK IN PROGRESS IS NOT APPLICABLE AS THE SAME ESSENTIALLY APPLIES T O ONLY THOSE PERSONS WHO ARE ENGAGED IN MANUFACTURING ACTI VITY OF THEIR OWN. IT IS FURTHER PERTINENT TO POINT OUT THAT ACCOUNTING STANDARD 2 ISSUED BY INSTITUTE OF CHARTE RED ACCOUNTANTS OF INDIA IS NOT APPLICABLE TO WORK IN P ROGRESS ARISING IN CASE OF SERVICE PROVIDERS. THUS, VALUATI ON OF SAME IS NOT REQUIRED TO BE MADE IN CASE OF SERVICE PROVIDERS. WITHOUT PREJUDICE TO ABOVE, YOUR GOOD SE LF IS REQUESTED TO GIVE THE SET OFF OF RS.5,814,363/-, WH ICH WAS CONSIDERED AS THE CLOSING STOCK FOR THE A. Y.2005-0 6.' ON GOING THROUGH THE ABOVE REPLY, THE ASSESSEE COMP ANY ARGUED TWO FOLLOWING ASPECTS: 1. METHOD OF VALUATION IS CONSISTENTLY FOLLOWED. 2. VALUATION OF WIP IS NOT APPLICABLE BEING SERVICE PROVIDER. 3 AS REGARDS PARA 1, THE ARGUMENT FOR FOLLOWING A PAR TICULAR METHOD CONSISTENTLY IS ALSO NOT ACCEPTABLE IN VIEW OF DECI SION OF HON'BLE SUPREME COURT'S DECISION IN THE CASE OF CIT VS. BRI TISH PAINTS INDIA LTD REPORTED IN 188 ITR 44. THE HON'BLE SUPREME COU RT HAS HELD AS UNDER: '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 THER EFROM. IT IS INCORRECT TO SAY THAT THE OFFICER IS BOUND TO ACCEP T THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE THE C ORRECTNESS OF WHICH HAD NOT BEEN QUESTIONED IN THE PAST. THERE IS NO ESTOPPEL IN THESE MATTERS AND THE OFFICER IS NOT BO UND BY THE METHOD FOLLOWED IN THE EARLIER YEARS'. AS REGARDS PARA-2, THE ARGUMENT OF THE ASSESSEE THA T THE COMPANY ENGAGED IN SERVICE INDUSTRY IS NOT FACTUALLY CORREC T, THE PROCESS HOUSE HAVE BEEN CONSIDERED UNDER MANUFACTURING INDUSTRIES NOT UNDER SERVICE INDUSTRY. ACCORDINGLY, THE VALUATION OF W ORK IN PROGRESS IN THE CASE OF ASSESSEE HAS TO BE MADE. 5. SINCE THE ASSESSEE COMPANY HAS NOT KEPT DAY TO DAY RECORDS OF COLOR/CHEMICALS, AND OTHER RAW MATERIALS , THE BOOK RESULT SHOWN BY THE ASSESSEE COULD NOT BE ACCEPTED, ACCORD INGLY, THE SAME IS REJECTED BY INVOKING PROVISION OF SECTION 145(3) OF THE IT. ACT AND THE ISSUE IS DETERMINED IN THE MANNER PRESCRIBED U/S 14 4 OF THE IT. ACT. THE ASSESSEE HAS PROCESSED 12424297 METERS DURING T HE YEAR UNDER CONSIDERATION. TAKING INTO CONSIDERATION 360 DAYS A S WORKING DAYS PER YEAR, THE AVERAGE OF PROCESS OF CLOTH PER DAY WORKS OUT TO 34512 METERS. IT IS COMMON KNOWLEDGE THAT TO COMPLETE A C IRCLE OF PROCESS IN TEXTILE PROCESSING UNIT, IT TAKES AT LEAST FIVE DAY S. THEREFORE, A LOT OF GREY CLOTH PUT TO PROCESS ON FIRST DAY COMES OUT ON THE 6TH DAY DULY PROCESSED. THEREFORE, IT CAN BE HELD THAT THE ASSES SEE MUST HAVE FIVE DAYS WORK-IN-PROCESS AS ON 31.03.2006. THIS WORKS O UT TO 34512 METERS X 5 DAYS = 172560 METERS. THE AVERAGE COST O F PROCESSING CHARGES PER METER WORKS OUT AT RS.6.07 - (AVERAGE S ALES PRICE PER METER - GROSS PROFIT = COST PER METER = 6.80 - 0.73 = 6.07). CONSIDERING THE VARIOUS STAGES OF PROCESS, IT WOULD BE REASONABLE TO ADOPT 50% I.E. RS.3.4/- PER METER FOR ARRIVING AT V ALUE OF WORK-IN- PROCESS. THEREFORE, THE CLOSING STOCK OF WORK-IN-PR OCESS IN THIS CASE IS WORKED OUT AT RS.5,86,704/- (172560 METERS X RS.3.4 /-). SINCE THE ASSESSEE HAS NOT SHOWN THE CLOSING STOCK OF WIP AND PROFIT TO CHAT 4 EXTENT IS SUPPRESSED, IT IS NECESSARY TO ADD THE WO RK-IN-PROGRESS TO ARRIVE AT THE CORRECT PROFIT OF THE BUSINESS OF THE ASSESSEE. HERE, IT WOULD BE NECESSARY TO GIVE SET OFF OF THE ADDITION MADE ON THIS COUNT IN THE PREVIOUS YEAR TO ARRIVE CORRECT PROFIT FOR T HE YEAR UNDER CONSIDERATION, ACCORDINGLY, THE ADDITION OF RS.5,81 , 363/- MADE IN THE A.Y. 2005-06 WHICH FORM THE PART OF OPENING STOCK O F THIS YEAR, HAS BEEN REDUCED OUT OF THE ADDITION OF RS.5,86,704/-, THE NET ADDITION AMOUNT COMES TO RS.5,341/-. THEREFORE, THE SUPPRESS ED VALUE OF WORK- IN-PROGRESS OF RS.5,341/- AS WORKED OUT ABOVE IS AD DED TO THE TOTAL INCOME OF THE ASSESSEE. 4 ON APPEAL IN THE IMPUGNED ORDER, THE LEARNED CIT( A) CONFIRMED THE AFORESAID ADDITION KEEPING IN VIEW TH E JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. BR ITISH PAINTS INDIA LTD. [188 ITR 44]. 5 AGGRIEVED WITH THE ORDER OF THE LEARNED CIT(A), T HE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 6 AT THE TIME OF HEARING BEFORE US, ON BEHALF OF TH E ASSESSEE SHRI HARDIK VORA APPEARED AND RELYING UPON THE DECI SION OF THE ITAT BENCH-C IN THE CASE OF M/S ADARSH TEXTILE MILL S [ITA NO.2728/AHD/2000, ORDER DATED 30-06-2011], CONTENDE D THAT THE ADDITION MADE BE DELETED IN RESPECT OF WIP. 7 AS AGAINST THIS, SHRI SAMIR TEKRIWAL, LEARNED SEN IOR DR APPEARED ON BEHALF OF THE REVENUE AND CONTENDED THA T THE ADDITION IS RIGHTLY MADE. HE RELIED ON THE DECISION OF THE ITAT BENCH-D IN THE CASE OF M/S FERRARIO (INDIA) LTD. [I TA NO.1308/AHD/2007 AND OTHERS, ORDER DATED 17-02-2009 ], WHEREIN ON IDENTICAL FACTS, THE ADDITION MADE IN RESPECT OF WIP HAS BEEN 5 UPHELD. HE FURTHER POINTED OUT THAT IN THE ASSESSM ENT ORDER, THE AO HAS MENTIONED THAT THE ADDITION OF RS.5,81,363/- WAS MADE IN AY 2005-06 WHICH FORMS PART OF OPENING STOCK OF THI S YEAR. THIS OPENING STOCK HAS BEEN REDUCED OUT OF ADDITION OF R S.5,86,704/- AND ONLY NET ADDITION OF RS.5,341/- HAS BEEN MADE, THEREFORE, THE VIEW TAKEN BY THE LEARNED CIT(A) BE UPHELD. 8 AFTER HEARING BOTH THE SIDES, WE HAVE CAREFULLY G ONE THROUGH THE ORDER OF THE AUTHORITIES BELOW. BEFORE US, THE ASSESSEE HAS NOT FURNISHED THE COPY OF ASSESSMENT O RDER FOR AY 2005-06. IN ORDER TO ARRIVE AT THE CORRECT PROFIT F OR THE ASSESSMENT YEAR UNDER APPEAL, THE AO HAS WORKED OUT THE WIP AT RS.5,86,704/-. OUT OF THIS HE DEDUCTED THE ADDITION OF RS.5,81,363/- MADE IN AY 2005-06. IN THIS MANNER, T HE AO HAS MADE NET ADDITION OF RS.5,341/-. KEEPING IN VIEW TH E PECULIAR FACTS MENTIONED IN THE ASSESSMENT ORDER, WHICH WERE NOT CONTROVERTED BEFORE THE LEARNED CIT(A), WE ARE INCL INED TO UPHOLD THE ORDER OF THE LEARNED CIT(A) CONFIRMING T HE ADDITION OF RS.5,341/- MADE IN RESPECT OF WIP IN THE ASSESSM ENT YEAR UNDER APPEAL. THIS GROUND OF APPEAL IS ACCORDINGLY REJECTED. 9 THE ONLY OTHER GROUND I.E. GROUND NO.2 IN THE APP EAL READS AS UNDER:- 2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS WE LL AS LAW ON THE SUBJECT, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF ASSESSING OFFICER IN MAKING DISALLOWANCE OF RS.3,60 ,000/- ON ACCOUNT OF REMUNERATION TO DIRECTORS. 6 10 AT THE TIME OF HEARING BEFORE US, BOTH THE SIDES CONCEDED THAT IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR I .E. AY 2005- 06, THE ITAT BENCH-A IN THE ASSESSEES OWN CASE IN ITA NO.370/AHD/2009, ORDER DATED 11-02-2011, RESTORED T HIS ISSUE TO THE FILE OF THE AO. THE RELEVANT DISCUSSION IS CONT AINED IN PARAS- 12 TO 14 OF THE ORDER OF THE TRIBUNAL, WHICH READ A S UNDER:- 12. AT THE TIME OF HEARING BEFORE US, SHRI HARDIK VORA APPEARED FOR THE ASSESSEE AND CONTENDED THAT THE REMUNERATION PA ID TO BOTH THE DIRECTORS, BY NO STRETCH OF IMAGINATION, CAN BE CAL LED EXCESSIVE OR UNREASONABLE. THE ID. COUNSEL OF THE ASSESSEE POINT ED OUT THAT THE ASSESSEE COMPANY HAS MAINTAINED THE REGISTER OF DIR ECTORS WHICH, IT REQUIRED TO MAINTAIN UNDER SECTION 303 OF THE COMPA NIES ACT, 1956. THE ASSESSEE COMPANY HAS ALSO SUBMITTED FROM NO.32 BEING THE RETURN SUBMITTED TO THE REGISTRAR OF COMPANIES, GUJARAT DA DRA AND NAGAR HAVELI AT AHMEDABAD CITY OF GUJARAT STATE IN THE UN ION TERRITORY OF DELHI UNDER THE COMPANIES ACT BEING THE INTIMATION TO THE STATUTORY OFFICE ABOUT THE CHANGES, APPOINTMENT OF CESSATION AMONG THE DIRECTORS OF AN INCORPORATED COMPANY. HE SUBMITTED THAT THE FORM NO.32 WAS SUBMITTED VIDE RECEIPT NO. 47 DATED 24.06 .2003 WITH PRESCRIBED FEE UNDER THE COMPANIES ACT. IN SUPPORT OF THIS, HE HAS ALSO FURNISHED A CERTIFICATE FROM SHRI A.G.SHAIKH COMPAN Y SECRETARY, MEMBERSHIP NO.ACS 4596, CP NO.2171 DATED 21ST JULY, 2003 WHEREIN HE HAS CERTIFIED THAT BOTH THESE LADIES WER E APPOINTED AS ADDITIONAL DIRECTORS OF M/S. MAMTA SILK MILLS PRIVA TE LTD. (COMPANY NUMBER 04-11141), K-1286, SURAT TEXTILE MARKET, RIN G ROAD, SURAT - 395 002, GUJARAT W.E.F. 01.06.03. THE ID. COUNSEL O F THE ASSESSEE ALSO PRODUCED A COPY OF BACHELOR OF COMMERCE (SPECIAL) D EGREE, AWARDED BY SOUTH GUJARAT UNIVERSITY TO SMT. SINGHVI KALPANA MAHENDRA AND SMT. SINGHVI MENLCA MAHENDRA. THE COPIES OF RETURN UNDER THE COMPANIES ACT SUBMITTED WERE ALSO FURNISHED. ON THE STRENGTH OF THESE DOCUMENTS, HE SUBMITTED THAT BOTH THE DIRECTO RS WERE WORKING IN THE COMPANY, WHICH IS EVIDENT FROM THE FACT THAT BO TH WERE NOT DOING ANY OTHER WORK. IN SUPPORT OF THIS, THE ASSESSEE HA S ALSO FURNISHED THE COPIES OF INCOME-TAX RETURN SUBMITTED BY BOTH THE L ADIES INDICATING THAT SALARY PAID TO BOTH OF THEM HAS BEEN DULY ASSE SSED. APART FROM THIS, THE ID. COUNSEL ALSO EXPLAINED TNAT ASSESSED INCOME OF THE ASSESSEE FOR BOTH THE ASSESSMENT YEARS IS NIL WHERE AS ON SALARY INCOME BOTH THE LADIES HAVE PAID INCOME-TAX. IN THESE CIRC UMSTANCES, IT CAN 7 NOT BE SAID THAT BOTH THE LADIES HAVE NOT WORKED WI TH THE ASSESSEE COMPANY. LD. COUNSEL OF THE ASSESSEE FURTHER EXPLAI NED THAT BOTH THE LADIES CAN BE PRODUCED BEFORE THE ASSESSING OFFICER WHO CAN EXAMINE THEM ARID ASCERTAIN THE TRUTH. 13. ON THE OTHER HAND, SHRI R.K.DHANESTA, APPEARING ON BEHALF OF THE ASSESSEE, POINTED OUT THAT EVIDENCE OF QUALIFIC ATION AND COPIES OF RETURN AND CORRESPONDENCES WITH THE REGISTRAR OF CO MPANY WERE NEITHER .SUBMITTED BEFORE THE ASSESSING OFFICER NOR BEFORE THE ID. LEARNED COMMISSIONER OF INCOME TAX(APPEALS). QUALIF ICATION CERTIFICATES WERE ALSO NOT FILED BEFORE THE A.O. OR THE ID. LEARNED COMMISSIONER OF INCOME TAX (APPEALS). THEREFORE, AT THIS STAGE, THESE CANNOT BE ADMITTED. 14. AFTER HEARING BOTH THE SIDES, WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. ADMITTEDLY, BOTH T HE DOCUMENTS WHICH WERE FURNISHED BEFORE US ARE NOT FURNISHED BEFORE A NY OF THE DEPARTMENTAL AUTHORITIES BELOW. BE THAT IT MAY BE, THESE DOCUMENTS CANNOT BE CREATED OR CANNOT BE CATEGORIZED AS AFTER -THOUGHT BECAUSE THESE ARE RECORDS OF THE THIRD PARTY. FROM THE RETU RNS OF BOTH THE LADIES FURNISHED WITH THE INCOME-TAX DEPARTMENT, IT APPEAR S THAT BOTH THE LADIES HAVE NO OTHER INCOME EXCEPT SALARY INCOME FR OM THE ASSESSEE COMPANY. BE THAT IT MAY BE, LOOKING TO THE FACTS AN D CIRCUMSTANCES OF THE CASE, IT WILL MEET THE ENDS OF JUSTICE, IF THE ORDER OF THE ID. LEARNED COMMISSIONER OF INCOME TAX(APPEALS) IS SET ASIDE AN D THE MATTER IS RESTORED TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION THAT THE ASSESSING OFFICER WILL VERIFY THE DOCUMENTS, NOW SU BMITTED BEFORE US AND IF REQUIRED, THE ASSESSING OFFICER MAY ASK THE ASSESSEE TO PRODUCE BOTH THE LADIES TO ASCERTAIN THE NATURE OF WORK DON E BY THEM IN THE COMPANY IN BOTH THE ASSESSMENT YEARS UNDER APPEAL A ND READJUCLICATE THE DISALLOWANCE OF REMUNERATION AFRESH, IN ACCORDA NCE WITH LAW. IN THE RESULT, GROUND NO. 3 FOR THE ASSESSMENT YEAR 20 04-05 IS TREATED AS ALLOWED AND APPEAL FOR THE ASSESSMENT YEAR 2005-06 IS TREATED AS ALLOWED. WE, THEREFORE, FOLLOWING THE DECISION OF THE ITAT I N THE ASSESSEES OWN CASE FOR AY 2005-06 (SUPRA), SET ASI DE THE ORDER OF THE LEARNED CIT(A) AND RESTORE THE ISSUE TO THE FILE OF THE AO WITH THE DIRECTION THAT THE AO WILL RE-ADJUDICATE T HIS ADDITION AFRESH IN ACCORDANCE WITH LAW AND KEEPING IN VIEW T HE DIRECTIONS 8 OF THE TRIBUNAL IN AY 2005-06, AFTER GIVING AN OPPO RTUNITY OF HEARING TO BOTH THE SIDES. 11 IN THE RESULT, FOR STATISTICAL PURPOSE, THE APPE AL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT TODAY ON 25-10-2011 SD/- SD/- (A K GARODIA) ACCOUNTANT MEMBER (T K SHARMA) JUDICIAL MEMBER DATE : 25-10-2011 COPY OF THE ORDER FORWARDED TO: 1. M/S MAMTA SILK MILLS LTD., K-1286, SURAT TEXTILE MARKET, RING ROAD, SURAT 2. THE INCOME-TAX OFFICER, WARD-1(3), SURAT 3. CIT CONCERNED 4. CIT(A)-I, SURAT 5. DR, ITAT, AHMEDABAD BENCH-B, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD