Bhagwati Syntex Pvt.Ltd., Surat V. The Income tax Officer,Ward-1(1), Surat

ITA 3249/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6516 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 09-09-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 04-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: J P JANGID

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE S/SHRI D.K. TYAGI, JM AND D.C.AGRAWAL, AM BHAGWATI SYNTEX (P) LTD., PLOT NO.572, GIDC, PANDESARA, SURAT. VS. INCOME-TAX OFFICER, WD- 1(1), SURAT. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- WRITTEN SUBMISSION. RESPONDENT BY:- SHRI J.P. JANGID, SR.DR O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE ASSESSEE RAISING FO LLOWING GROUND :- (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. CIT(A)-I, SURAT, HAS ERRED IN SUSTAINING THE AD DITION OF RS.2,26,740/- TO THE TOTAL TAXABLE INCOME OF THE AS SESSEE OF WIP. THE LD. CIT(A) HAS SOMEHOW IGNORED ALL THE SUB MISSION AND CONFIRMED THE ADDITION. 2. THUS THE ONLY ISSUE INVOLVED IN THE APPEAL IS TH AT THE LD. CIT(A) HAS CONFIRMED THE ADDITION OF RS.2,67,740/- MADE BY AO IN THE CLOSING STOCK ON ACCOUNT OF WORK IN PROGRESS. 3. THE FACTS RELATING TO THE ISSUE ARE THAT THE ASS ESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF PROCESSI NG OF ART SILK CLOTH ON ITA NO.3249/AHD/2009 ASST. YEAR 2006-07 ITA NO.3249/AHD/2009 ASST. YEAR2006-07 2 JOB WORK BASIS. DURING THE COURSE OF ASSESSMENT PRO CEEDINGS THE AO FOUND THAT ASSESSEE COMPANY HAS NOT SHOWN ANY WORK IN PROGRESS AS ON 31.3.2006 I.E. AT THE END OF THE ACCOUNTING PERIOD. IT WAS EXPLAINED TO THE AO THAT BASIC RAW MATERIAL I.E. GREY CLOTH RECEIVED FOR PROCESSING RESTS WITH THE PARTIES WHO GIVE THE SAME FOR PROCESSING. THE AO, HOWEVER, DID NOT AGREE AND CALCULATED WORK IN PROGRESS AT RS.2,6 7,740/- AS UNDER :- TOTAL METERS PROCESSED DURING THE YEAR = 81,83,071.50 MTS. TOTAL JOB CHARGES RECEIVED = RS.3,79,26,732/- GP RATIO = 15.20% AVERAGE RATE OF JOB CHARGE = RS.4.63/METER AVERAGE PER DAY PROCESSING = 8183071.50 MTS. 300 (WORKING DAYS) CONSIDERING THE PROCESSING AS A CYCLE OF 5 DAYS, METERS IN WIP = 272777 MTS. X 5 DAYS = 136385 MTS. JOB CHARGES OF 136385 MTS. = 136385 X RS.4.63 = RS.631462 CONSIDERING AVERAGE COMPLETION OF PROCESSING AT 50%, JOB CHARGES ON WIP WOULD BE = 631462 2 = RS.3,15,731/- DEDUCTION GP @ 15.20% (47991/-) OUT OF RS.3,15,731/- THE VALUE OF WIP = 2,67,740/- NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE, HE MADE THE ADDITION. 4. THE LD. CIT(A) DISMISSED THE APPEAL FILED BY THE ASSESSEE BY REFERRING TO THE DECISION OF HON. SUPREME COURT IN THE CASE OF BRITISH PAINTS INDIA LTD. 188 ITR 44, WHEREIN FOLLOWING OBS ERVATIONS WERE MADE:- ITA NO.3249/AHD/2009 ASST. YEAR2006-07 3 THE TRUE PURPOSE OF CREDITING THE VALUE OF UNSOLD STOCK IS TO BE BALANCE THE COST OF THOSE GOODS ENTERED ON THE OTHER SIDE OF THE ACCOUN T AT THE TIME OF THEIR PURCHASE, SO THAT THE CANCELING OUT OF THE ENTRIES RELATING TO T HE SAME STOCK FROM BOTH SIDES OF THE ACCOUNT WOULD LEAVE ONLY THE TRANSACTIONS ON WHICH THERE HAVE BEEN ACTUAL SALES IN THE COURSE OF THE YEAR SHOWING THE PROFIT OR LOSS A CTUALLY REALIZED ON THE YEARS TRADING. IT IS NOT ONLY THE RIGHT, BUT THE DUTY OF THE AO T O CONSIDER WHETHER OR NOT THE BOOKS DISCLOSE THE TRUE STATE OF ACCOUNTS AND THE CORRECT INCOME CAN BE DEDUCTED THEREFROM. IT IS INCORRECT TO SAY THAT THE OFFICER IS BOUND TO ACCEPT THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE THE CORRECTNESS OF WHICH HAD NOT BEEN 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. 5. BEFORE US, ONLY WRITTEN SUBMISSIONS ARE FILED BY THE ASSESSEE AND THE LD. DR HAD SUPPORTED THE ORDERS OF AUTHORITIES BELOW. IN THE WRITTEN SUBMISSIONS THE ASSESSEE MADE FOLLOWING POINTS:- (1) THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DYEI NG AND PRINTING OF ART SILK CLOTH ON JOB WORK BASIS, THEREFORE, THE RA W MATERIAL DOES NOT BELONG TO THE ASSESSEE. (2) ASSESSEE SIMPLY INCURS EXPENDITURE ON COLOR, CH EMICALS, POWER FUEL ETC. WHICH GETS TRANSFORMED INTO THE WORK DONE BY T HE ASSESSEE. (3) THE ASSESSEE VALUED THE STOCK BY FOLLOWING THE SAME METHOD CONSISTENTLY AND NO ILLEGALITY HAS BEEN FOUND. (4) ADDITION ON ACCOUNT OF SUCH SUPPRESSED WORK-IN- PROGRESS HAS BEEN DELETED BY THE TRIBUNAL IN THE CASE OF M/S GAGAN SI LK MILLS (P) LTD., SURAT VS. ITO IN ITA NO.4036/AHD/2008 VIDE OR DER DATED 13.05.2011 WHICH HAD ALLOWED THE ISSUE IN FAVOUR OF THE ASSESSEE BY FOLLOWING ANOTHER DECISION OF THE TRIBUNAL IN TH E CASE OF PRATIK PROCESSORS (P) LTD. VS. DCIT IN ITA NO.1956/AHD/200 7 WHICH HAS BEEN REFERRED TO IN THE ORDER IN THE CASE OF M/S RI SHABH DYEING & PRINTING MILLS (P) LTD. (5) IN ANY CASE THE DEPARTMENT SHOULD FOLLOW THE CO NSISTENT METHOD FOR VALUING BOTH THE OPENING STOCK AS WELL AS CLOSING S TOCK. IF CLOSING STOCK IS BEING VALUED BY INCLUDING WORK IN PROGRESS THEN OPENING ITA NO.3249/AHD/2009 ASST. YEAR2006-07 4 STOCK OF THE CURRENT YEAR SHOULD ALSO BE VALUED BY INCLUDING WORK IN PROGRESS AND THE DIFFERENCE, IF ANY, ALONE SHOUL D BE CONSIDERED FOR ADDITION. 6. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIND THAT THE ISSUE IS NOW DIRECTLY COVERED BY THE DECISION OF THE TRIBUNA L IN THE CASES OF PRATIK PROCESSORS (P) LTD. VS. DCIT (SUPRA) AND ITO VS. M/ S RISHABH DYEING & PRINTING MILLS (P) LTD. (SUPRA). THE TRIBUNAL IN T HE CASE OF ITO VS. M/S RISHABH DYEING & PRINTING MILLS (P) LTD. HAS OBSERV ED AS UNDER :- 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN BUSINESS OF DYEING & PRINTING OF ART SILK CLOTH. RE TURN OF INCOME DECLARING TOTAL INCOME AT RS. NIL WAS FILED. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSING OFFICER NOTICED T HAT ASSESSEE HAS NOT SHOWN WORK-IN-PROGRESS IN THE CLOSING STOCK AS ON 31-03-2003. WHEN ASKED, IT WAS EXPLAINED THAT IT IS CONSISTENTL Y FOLLOWING A ACCOUNTING METHOD IN WHICH GOODS DISPATCHED AFTER C ONSIDERING JOB CHARGES ARE ACCOUNTED FOR. HOWEVER, ASSESSING OFFI CER WAS OF THE VIEW THAT ASSESSEE HAD CLAIMED ALL THE EXPENSES MADE DUR ING THE YEAR UNDER CONSIDERATION ON UN-DISPATCHED GRAY CLOTH LAYING AT DIFFERENT STAGES OF PROCESSING, WHICH SHOULD HAVE BEEN SHOWN AS WORK-IN -PROGRESS AS ON 31-03-2003. THE ASSESSING OFFICER ACCORDINGLY CALC ULATED WORK-IN- PROGRESS AT RS.6,34,217/-. THE LD. CIT(APPEALS) DEL ETED THE ADDITION ON THE GROUND THAT ASSESSEE IS ENGAGED IN PROCESSING O F MATERIAL FOR OUTSIDE PARTIES AND DOES NOT HAVE STOCK OF ITS OWN. FURTHER, ASSESSEE IS FOLLOWING THE SAME METHOD OF ACCOUNTING YEAR-AFTER- YEAR. THERE IS NO JUSTIFICATION IN DISTURBING THIS METHOD. 3. AGAINST THIS LD. AR SUBMITTED THAT SIMILAR ISSUE 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 PRINTING OF CLOTH IS DONE ON JOB WORK BASIS. HE REFERRED TO PA RA-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/AH D/2006 IN THE CASE OF VIPUL INDUSTRIES PVT. LTD. V/S ACIT ORDER DATED 17. 9.2009. IN THE SAID CASE, WHEN IN THE SAID CASE THE ASSESSEE WHICH IS ENGAGED IN THE BUSINESS OF DYEING ITA NO.3249/AHD/2009 ASST. YEAR2006-07 5 AND PRINTING OF CLOTH ON JOB WORK BASIS AND WHERE T HE ASSESSEE 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 LEARNED CIT(APPEALS) BY OBSERVING AS UNDER:- 12. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND THE SUBMISSIONS MADE BY THE LD. AR. AS REGARDS THE ADDI TION MADE IN RESPECT OF ESTIMATED WORK IN PROGRESS, IT IS SEEN T HAT THE APPELLANT IN THE INSTANT CASE IS A JOB-WORKER AND PROCESS GRAY C LOTH FOR ITS CUSTOMERS ACCORDING TO THEIR REQUIREMENT. THE APPEL LANT NOT ENGAGED IN ANY MANUFACTURING ACTIVITIES OF ITS OWN. THE CLO TH PROCESSED BY THE APPELLANT THUS BELONG TO ITS CUSTOMERS IS PROCESSED BY THE APPELLANT AND, AFTER PROCESSING THE SAME IN ACCORDANCE WITH T HE CUSTOMERS REQUIREMENT, IT IS RETURNED. IN THE ABOVE FACTS OF THE CASE, THE QUESTION OF SHOWING ANY WORK IN PROGRESS IN THE BOOKS OF ACC OUNT OF THE APPELLANT IN RESPECT OF THE CLOTH BELONGING TO ITS CUSTOMERS DID NOT ARISE, AS SUCH CLOTH WAS REQUIRED TO BE SHOWN IN TH E CLOSING STOCK OF THE CONCERNED CUSTOMERS. ON THE BASIS OF THE COMPLE TION OF WORK ON THE CUSTOMERS CLOTH, THE APPELLANT IS ENTITLED TO R ECEIVE ITS WORK CHARGES. NO INTERIM PAYMENTS OR ADVANCES PAYMENTS A RE RECEIVED BY THE APPELLANT FROM ITS CUSTOMERS DURING THE PENDENC Y OF THE JOB WORK. THE RECEIPTS FROM THE JOB WORK ARE BEING ACCOUNTED FOR BY THE APPELLANT ON COMPLETED CONTRACT METHOD AS PER AS-9. THE CLOSING STOCK OF MATERIALS USED FOR PROCESSING OF CLOTH, I.E. COL OUR CHEMICALS ETC. HAVE BEEN DULY ACCOUNTED FOR BY THE APPELLANT IN AC CORDANCE WITH AS- 9. IN REGARD TO THE VALUE ADDITION MADE BY THE APPE LLANT ON THE CUSTOMERS CLOTH, WHICH MAY HAVE BEEN AT DIFFERENT INTERMEDIATE STAGES OF PROCESSING AS ON 31.3.2003, NEITHER ANY OPENING STOCK NOR CLOSING STOCK WAS EVER SHOWN BY THE APPELLANT. AS PER THE P RINCIPLES OF ACCOUNTING LAID DOWN BY THE ICAI, UNDER THE SCOPE O F VALUATION OF INVENTORIES IN ITEM 1(SUB-ITEM(B) OF AS-2 (REVISED) THE WORK-IN- PROGRESS ARISING IN THE ORDINARY COURSE OF BUSINES S OF SERVICE PROVIDER HAS BEEN SPECIFICALLY SCOPED OUT OF THE S AID STATEMENT. FURTHER, IN THE DEFINITIONS PROVIDED UNDER ITEM 3 O F THE AS-2 INVENTORIES HAVE BEEN DEFINED AS ASSETS (A) HELD FOR SALE IN THE ORDINARY COURSE OF BUSINESS (B) IN THE PROCESS OF P RODUCTION FOR SUCH SALE OR (C) IN THE FORM OF MATERIALS OR SUPPLIES T O BE CONSUMED IN THE PRODUCTION FOR SALE OR IN THE RENDERING OF SERVICE S. SINCE THE APPELLANT WAS NOT ENGAGED IN THE BUSINESS OF SALE O F THE PROCESSED CLOTH OR IN THE PRODUCTION FOR SALE OF THE PROCESSE D CLOTH BUT WAS ENGAGED IN THE BUSINESS OF RENDERING OF SERVICES FO R PROCESSING OF GRAY CLOTH FOR ITS CUSTOMERS, THE PRINCIPLES LAID DOWN I N AS-2 FOR THE VALUATION OF INVENTORIES WERE NOT APPLICABLE IN I TS CASE IN ACCORDANCE WITH ITEM 1(B) THEREOF. HOWEVER, THE MAT ERIALS OR SUPPLIES TO BE CONSUMED IN THE PRODUCTION PROCESS OR IN THE RENDERING OF SERVICES WOULD EVIDENTLY FALL IN CATEGORY (C) OF TH E AFORESAID DEFINITIONS PROVIDED IN ITEM 3 OF THE 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 CASE. THE ITA NO.3249/AHD/2009 ASST. YEAR2006-07 6 METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT IS T HUS SEEN TO 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 APPE LLANT HAS ALSO CONSISTENTLY FOLLOWED THE ACCOUNTING POLICY OF RECO GNIZING REVENUE OF COMPLETED CONTRACT METHOD. WHILE THE PRINCIPLES OF RES-JUDICATA ARE NOT APPLICABLE TO THE INCOME-TAX TAX PROCEEDINGS, I T HAS BEEN HELD BY THE COURTS IN SEVERAL JUDGMENT THAT, WHERE THE APPE LLANT HAS BEEN FOLLOWING REGULAR SYSTEM OF ACCOUNTING SINCE THE LA ST SO MANY YEARS AN SUCH METHOD WAS BASED ON ACCEPTED PRINCIPLES OF ACC OUNTING, THERE WAS NO JUSTIFICATION FOR REJECTING THE SAID METHOD FOR VALUATION OF STOCK. THIS WOULD ESPECIALLY HOLD IN A CASE WHERE T HE PROPOSED CHANGE IN THE METHOD OF VALUATION IS FOU9ND TO HAVE NO IMP ACT, AS IN THE INSTANT CASE, IF THE CHANGED METHOD ADOPTED BY THE ASSESSING OFFICER WERE APPLIED FOR VALUATION OF THE OPENING AS WELL A S THE CLOSING STOCK. 14. FOR REASONS DISCUSSED ABOVE IN DETAILS, IN MY O PINION, THERE WAS NO BASIS OR JUSTIFICATION IN MAKING THE ANY ESTIMAT ED ADDITION ON ACCOUNT OF WORK-IN-PROGRESS IS THIS CASE. THE ADDIT ION OF RS.12,56,970/- MADE BY THE AO IN RESPECT OF ESTIMAT ED WORK IN PROGRESS IS THEREFORE, DELETED. THIS GROUND OF APPE ALS IS ALLOWED. THUS DELETION WAS CONFIRMED BY THE TRIBUNAL. THEREF ORE, IN THE PRESENT CASE ALSO FOLLOWING THE DECISION OF THE TRIBUNAL CONFIRM THE ORDER OF THE CIT(A), THE ADDITION ON ACCOUNT OF ESTIMATED VALUE OF WORK-IN-P ROGRESS IS REQUIRED TO BE DELETED. 4. LD.SR-DR ON THE OTHER HAND SUBMITTED THAT IF ASS ESSEE HAS SPENT MONEY WHICH HAS BEEN DEBITED IN THE PROFIT & LOSS A /C. AND TO THE EXTENT THE ASSESSEE DOES NOT GET RECEIPT FROM THE PRINCIPL E, 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 ASSESSEE BY THE DECISION OF TRIBUNAL IN THE CASE OF PRATIK PROCESSO RS PVT. LTD. (SUPRA) PRONOUNCED ON 15-01-2010. RESPECTFULLY FOLLOWING TH E ABOVE ORDER WE DISMISS THE GROUND NO.1 AND 2 OF THE REVENUES APPE AL. FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL, WE ALLOW THE APPEAL FILED BY THE ASSESSEE. ITA NO.3249/AHD/2009 ASST. YEAR2006-07 7 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER WAS PRONOUNCED IN OPEN COURT ON 27/5/11. SD/- SD/- (D. K. TYAGI) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD, DATED : 27/5/11. 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 1.DATE OF DICTATION 25/05/2011 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 26/05/2011 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..