Betex India Limited, Surat V. The Dy.CIT.,-1, Surat

ITA 3250/AHD/2009

• Counselvise Citation: 325020514 RSA 2009
• Duration Of Justice: 1 year(s) 11 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-12-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 29-11-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 04-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 143(3)

Judgement Text

, , . .. . . .. . , , , , ! ! ! ! ' '' '# ## # ' ' ' '. .. .$ #$ $ #$ $ #$ $ #$ , %& ' %& ' %& ' %& ' % ! % ! % ! % ! IN THE INCOME TAX APPELLATE TRIBUNAL : C BENCH : AHMEDABAD BEFORE HONBLE SHRI G.C.GUPTA, V.P. & HONBLE SHRI A.MOHAN ALANKAMONY, A.M.) # # # #. ITA NO. 3250 / AHD./2009 : ()- 200 6 -200 7 BETEX INDIA LTD., SURAT VS- DCIT, CIRCLE-1, SURAT (PAN : AABCB 2413L) (,- /APPELLANT) ( ./,- /RESPONDENT ) ,- 0 1 % / APPELLANT BY : NONE (WRITTEN SUBMISSION) ./,- 0 1 % / RESPONDENT BY : SHRI VINOD TANWANI, SR.D.R. 2 0 34& / DATE OF HEARING : 29/11/2011 5$( 0 34& / DATE OF PRONOUNCEMENT : 02/12/2011 %6 %6 %6 %6 / ORDER PER SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER : THIS APPEAL IS FILED BY THE ASSESSEE, AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-I, SURAT IN APP EAL NO.CAS-I/158/08-09 DATED 28.10.2009 FOR THE ASSESSMENT YEAR 2006-2007 PASSED UNDER SECTION 250 R.W.S.143(3) OF THE I.T. ACT, 1961. 2. THE ASSESSEE HAS RAISED ONE ELABORATE GROUND IN A NARRATIVE MANNER. FOR THIS, WE LIKE TO DRAW THE ATTENTION OF THE LD. A.R. TO RULE 8 OF THE ITAT RULES, 1963. IN THE ARGUMENTATIVE AND NARRATIVE GROUND RAISED BY THE AS SESSEE, THE ONLY ISSUE EMERGES IS THAT LD. CIT(A) ERRED IN CONFIRMING THE ORDER OF TH E LD. A.O. WHO HAD MADE AN ADDITION OF RS.7,14,526/- ON ACCOUNT OF CLOSING STOCK OF WOR K-IN-PROCESS. 3. THE ASSESSEE IS A COMPANY AND IS THE PROPRIETOR OF M/S. SUMEET SILK MILLS. THE PROPRIETARY CONCERNS OF THE ASSESSEE ARE ENGAGED IN DYEING AND PRINTING OF SYNTHETIC ITA NO. 3250-AHD-2009 2 FABRICS ON JOB WORK BASIS. THE ASSESSEE FILED ITS RETURN OF INCOME ON 13.01.2006 SHOWING TOTAL INCOME OF RS.32,58,350/-, ACCOMPANIED BY TAX AUDIT REPORT UNDER SECTION 44AB OF THE ACT IN FORM NO. 3CB AND 3CD. SUBSEQU ENTLY, THE COMPANY FILED ITS E-RETURN ON 11.11.2006 SHOWING THE SAME INCOME. TH E CASE WAS SELECTED FOR SCRUTINY AND FINALLY ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT ON 27.11.2008. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, TH E LD. A.O. OBSERVED THAT THE ASSESSEE HAS SHOWN INVENTORY OF CLOSING STOCK OF RS .32,03,720/- IN SCHEDULE-5 TO THE BALANCE-SHEET AS UNDER: INVENTORIES COLOUR & CHEMICALS RS.50,05,130/- COAL RS.25,83,892/- STORE & SPARES RS. 4,12,963/- RS.80,01,985/- 3.1 THE LD. A.O., AFTER PERUSING THE BALANCE-SHEET, REALIZED THAT THE ASSESSEE HAS NOT DISCLOSED ITS CLOSING STOCK OF WORK-IN-PROCESS. ON THE QUERY RAISED BY THE LD. A.O. THE ASSESSEE CAME OUT WITH THE FOLLOWING SUBMISSIONS: YOU HAVE ASKED TO SHOW CAUSE THAT WHY THE ADDITION SHOULD NOT BE MADE ON THE POINT OF WIP. FOR THAT MATTER I BEG TO STATE THAT T HE COMPANY IS NOT THE OWNER OF THE BASIC RAW MATERIAL I.E. GREY CLOTH RECEIVED FOR PROCESSING THE OWNERSHIP RESTS WITH THE PARTY WHO GIVES THE SAME FOR PROCESS ING. THE COMPANY UTILIZES ITS COLOUR CHEMICALS AND LABOUR FOR THE GREY ON MACHINE S AT THE YEAR END. THE PROCESSING CYCLE IS 2 TO 3 DAYS AND, THEREFORE, THE EXPENDITURE IS VERY INSIGNIFICANT. LOOKING TO THE MATERIALITY CONCEPT, COMPANY HAS NOT FOLLOWED THE SYSTEM OF VALUING WIP AT THE YEAR END. THE ASSESSEE COMPANY HAS NOT TAKEN OPENING WIP FOR THE CONCERNED YEAR AND IN THE SAME WAY NO WIP IS TAKEN AT THE END OF THE YEAR. TAKING INTO CONSIDERATION THE OPEN ING AND CLOSING WIP TOGETHER, IT CAN BE SAID THAT THE RESULT WILL REMAI N NEUTRAL I.E. IT DOES NOT HAVE ANY EFFECT ON THE PROFIT AND LOSS ACCOUNT. CONSIDER ING ALL THESE ISSUES INVOLVED IN THE PROCESS, THE ASSESSEE HAS RIGHTLY NOW SHOWN ANY WIP DURING THE YEAR UNDER CONSIDERATION. 3.2 THE LD. A.O. WAS NOT CONVINCED WITH THE SUBMISS IONS OF THE ASSESSEE. HE WAS OF THE OPINION THAT THE ASSESSEE WAS REQUIRED TO INCOR PORATE THE VALUE OF WORK-IN-PROCESS IN THE CLOSING STOCK, FAILURE OF WHICH WILL DISTORT THE PICTURE OF TRADING RESULTS. THEREFORE, HE CAME TO CONCLUSION THAT THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE IS DEFECTIVE AND NOT ACCEPTABLE AND BY REL YING ON THE DECISION OF THE HONBLE ITA NO. 3250-AHD-2009 3 SUPREME COURT IN THE CASE OF CIT-VS- BRITISH PAINTS INDIA LTD. REPORTED IN 188 ITR 44, PROCEEDED TO CALCULATE THE CLOSING WORK-IN-PROCESS IN THE FOLLOWING MANNER AND MADE AN ADDITION OF RS.7,14,526/- AND INITIATED PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. THE RELEVANT PORTION OF THE AOS ORDER IS REPRODUCED HEREINBELOW: 5.8 IN VIEW OF THE ABOVE, THE ASSESSEE CONTENTIONS ARE NOT CORRECT AND ACCORDINGLY THE SAME ARE NOT ACCEPTABLE. THE ASSESS EE HAS PROCESSED 1,70,17,727 METERS DURING THE YEAR UNDER CONSIDERAT ION. TAKING INTO CONSIDERATION 26 DAYS AS WORKING DAYS PER MONTH, TH E TOTAL WORKING DAYS OF THE YEAR WORKS OUT TO 312 DAYS, THE AVERAGE OF PROCESS OF CLOTH PER DAY WORKS OUT TO 54,544 METERS. IT IS COMMON KNOWLEDGE THAT TO COMPL ETE A CIRCLE 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 6 TH DAY DULY PROCESSED. THEREFORE, IT CAN BE PRESUMED THAT THE ASSESSEE MUST HAVE FIVE DA YS WORK-IN-PROCESS AS ON .31.03.2006. THIS WORKS OUT TO RS.2,72,720 METERS [ 54,544 METRES X 5 DAYS]. THE AVERAGE COST OF PROCESSING CHARGES PER METER WO RKS OUT AT RS.5.23 (GROSS RECEIPTS - GROSS PROFIT = COST METER PROCESSED). CONSIDERING THE VARIOUS STAGES OF PROCESS, IT WOULD BE REASONABLE TO ADOPT 50% I.E. RS.2.62 PER METER FOR ARRIVING AT THE VALUE OF WORK-IN-PROCESS. THERE FORE, THE CLOSING STOCK OF WORK-IN-PROCESS IN THIS CASE IS WORKED OUT AT RS.7, 14,526/- (2,72,720 METERS X RS.2.62). THE ASSESSING OFFICER IS DUTY BOUND TO CO RRECT WHATEVER INCORRECT COMES BEFORE HIM. THIS IS NECESSARY TO ARRIVE AT TH E CORRECT RESULT I.E. PROFIT OR LOSS OF THE BUSINESS. 4. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A). AFTER BRIEFLY CONSIDERING THE ISSUE, THE LD. CIT(A) CONFIRMED THE ORDER OF TH E LD. A.O. WITH THE FOLLOWING OBSERVATIONS: 2.3 I HAVE CONSIDERED THE SUBMISSION MADE BY THE APPELLANT AND THE OBSERVATION OF THE A.O. THE OPENING WORK-IN-PROGRES S COMES FROM CLOSING WORK-IN-PROGRESS OF EARLIER YEAR. THERE COULD NOT B E ANY DIFFERENCE IN THE SAME HENCE THE WORK-IN-PROGRESS CANNOT BE DISTURBED. NO FAULT HAS BEEN FOUND IN THE VALUATION OF CLOSING STOCK OF WORK-IN-PROGRESS. AS PER THE BASIC ACCOUNTING PRINCIPLE AS WELL AS THE DECISION OF THE HON'BLE SU PREME COURT IN THE CASE OF BRITISH PAINTS INDIA LTD. (SUPRA), THE CORRECT PROF IT CAN ONLY BE ASCERTAINED IF THE CLOSING STOCK IS CORRECTLY SHOWN. ADMITTEDLY, T HE COST OF VARIOUS INPUTS LIKE COLOUR & CHEMICALS, LABOUR, POWER, FUEL, COAL, ETC. HAVE BEEN PUT ON THE FABRIC LYING ON THE MACHINE UNDER VARIOUS STAGES OF COMPLE TION FOR FIVE DAYS. THESE COSTS HAVE BEEN DEBITED TO THE PROFIT & LOSS ACCOUN T BUT CORRESPONDING WORK- IN-PROGRESS HAS NOT BEEN SHOWN WHICH LEADING TO DIS CLOSURE OF LESS PROFIT. HENCE, THE ADDITION MADE BY THE A.O. IS CORRECT AND , THEREFORE, THIS GROUND OF APPEAL IS DISMISSED. ITA NO. 3250-AHD-2009 4 5. AT THE TIME OF HEARING, NONE APPEARED ON BEHALF OF THE ASSESSEE BUT WRITTEN SUBMISSIONS WERE FILED. HOWEVER, THE LD. D.R. WAS P RESENT AND IT WAS DECIDED BY THE BENCH TO PROCEED WITH THE MATTER EX-PARTE . THE LD. D.R. RELIED ON THE ORDERS OF THE AO AND THE LD. CIT(A) AND SUBMITTED THAT VALUATION OF CLOSING STOCK OF WORK-IN-PROGRESS IS VERY RELEVANT AND ESSENTIAL, OTHERWISE THE BALANCE- SHEET OF THE ASSESSEE WILL NOT HAVE A TRUE AND FAIR DISCLOSURE DISTORTING THE PROFIT OF T HE ASSESSEE. THEREFORE, IT WAS PRAYED THAT THE ORDER OF THE REVENUE AUTHORITIES MAY BE CO NFIRMED. 6. WE HAVE HEARD THE SUBMISSIONS OF THE LD. D.R. AN D PERUSED THE WRITTEN SUBMISSIONS AND THE PAPER BOOK SUBMITTED BY THE ASS ESSEE. ON PERUSING THE ASSESSMENT ORDER, IT IS EVIDENT THAT THE ASSESSEE HAD A TOTAL TURNOVER OF RS.1033.49 CRORES FOR THE RELEVANT ASSESSMENT YEAR AND RS.775.69 CRORES FOR T HE PRECEDING ASSESSMENT YEAR. FURTHER, THE ASSESSEE HAD SHOWN A GROSS PROFIT OF R S.140.24 LACS FOR THE RELEVANT ASSESSMENT YEAR AND THE G.P. RATE WORKS OUT TO 13.8 1% AS AGAINST THE G.P. RATE OF 9.44% FOR THE PRECEDING YEAR. ON SUCH AN EXTENSIVE TURNOVER AND PROFITS DECLARED BY THE ASSESSEE AND THE NET PROFIT DECLARED BY THE ASS ESSEE OF RS.32,58,350/- AND TAKING INTO EFFECT OF THE NET RESULT OF OPENING AND CLOSIN G WORK-IN-PROGRESS, THE NET FIGURE WHICH WILL EMERGE WILL BE VERY NEGLIGIBLE. EVEN, AC CORDING TO THE REVENUES CALCULATION, THE CLOSING STOCK OF WORK-IN-PROGRESS WORKS OUT TO RS.7,14,526/-. SIMILARLY, WHEN THE OPENING WORK-IN-PROGRESS IS ALS O CONSIDERED, THE NET RESULT WILL BE QUITE NEGLIGIBLE. FURTHER, PROFIT ARISING OUT OF SU CH DISCREPANCY WILL BE TAXED IN THE SUBSEQUENT YEAR. THEREFORE, CONSIDERING THE CONCEPT OF MATERIALITY, SUCH NON- DISCLOSURE OF WORK-IN-PROGRESS IN THE BOOKS OF ACCO UNTS WILL NOT AFFECT THE TRUE AND FAIRNESS OF THE STATEMENT OF ACCOUNTS DRAWN BY THE ASSESSEE. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE ORDERS OF THE LD. A.O. AND THE LD. CIT(A) HAVE NO MERITS AND THE APPEAL STANDS IN FAVOUR OF THE ASSESSEE. IT IS ORDERED ACCORDINGLY. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 7 %6 0 5$( 8#) 02 / 12 /2011 $ 9 0 2 : SD/- SD/- (G.C.GUPTA) (A.MOHAN ALANKAMONY) VICE PRESIDENT A CCOUNTANT MEMBER DATED : 02/11/2011 ITA NO. 3250-AHD-2009 5 %6 %6 %6 %6 0 00 0 .3; .3; .3; .3; <%;(3) <%;(3) <%;(3) <%;(3)- -- - 1. ,- 2. ./,- 3. ## 3 @ 4. @- - 5. ;C .3 , , : 6. E F7 %6 %, / # , : TALUKDAR/ SR. P.S.