ADDL CIT RG 14(1), MUMBAI V. MEHTA & SONS, MUMBAI

ITA 351/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55216 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 06-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 14-01-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: REENA JHA TRIPATHI

Judgement Text

IN THE INCOME TAX APPELLATE TRIB UNAL MUMBAI BENCHES B, MUMBAI BEFORE SHRI R.S.SYAL, AM AND SHRI VIJAY PAL RAO, JM ITA NO.351/MUM/2010 : ASST.YEAR 2006-2007 THE DY.COMMISSIONER OF INCOME-TAX CIRCLE 14(1) MUMBAI. VS. M/S.MEHTA & SONS 276A, 278 SHEIKH MEMON STREET ZAVERI BAZAAR, MUMBAI 400 002. PAN : AADFM0407E. (APPELLANT) (RESPONDENT) CO NO.140/MUM/2010 : ASST.YEAR 2006-2007 M/S.MEHTA & SONS 276A, 278 SHEIKH MEMON STREET ZAVERI BAZAAR, MUMBAI 400 002. VS. THE DY.COMMISSIONER OF INCOME - TAX CIRCLE 14(1) MUMBAI. (CROSS OBJECTOR) (RESPONDENT) REVENUE BY : SMT.REENA JHA TRIPATHI ASSESSEE BY : S/SHRI VIJAY MEHTA & SUNIL HIRAWAT DATE OF HEARING : 06.09.2011 DATE OF PRONOUNCEMENT :09.09.2011 O R D E R PER R.S.SYAL, AM : THIS APPEAL BY THE REVENUE AND CROSS OBJECTION BY T HE ASSESSEE ARISE OUT OF THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON 30.10.2009 IN RELATION TO THE ASSESSMENT YEAR 2006-2007. 2. FIRST GROUND OF THE REVENUES APPEAL IS GENERAL AND DOES NOT REQUIRE ANY ADJUDICATION. 3. SECOND GROUND IS AGAINST THE DELETION OF ADDITIO N OF RS.52,74,952. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSEE WAS ENGAG ED IN THE BUSINESS OF JEWELLERY MANUFACTURING AND SALES. THE ASSESSING OFFICER, DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS, OBSERVED THAT THE CLOSING STOCK IN RES PECT OF GOLD ORNAMENTS TOTALED 1,02,300 GMS. OF JEWELLERY AGAINST SALES SHOWN AT 2 7,726.3 GMS. IT WAS OBSERVED ITA NO.351 & CO 140/MUM/2010 M/S.MEHTA & SONS. 2 THAT THE ASSESSEE WAS MAINTAINING STOCK OF APPROXIM ATELY FOUR TIMES (BY WEIGHT) OF THE SALE MADE DURING THE YEAR. THE AO OPINED THAT T HERE WAS NO JUSTIFICATION OF MAINTAINING SUCH A HIGH INVENTORY. IN HIS OPINION E VEN IF 100% OF THE SALES HAD BEEN MAINTAINED AS INVENTORY THERE COULD HAVE BEEN SOME JUSTIFICATION FOR THE SAME. THE ASSESSEE WAS CALLED UPON TO SHOW AS TO WH Y INTEREST COST OF INVENTORY SHOULD NOT BE ADDED TO ITS VALUATION. THE ASSESSEE DID SUBMIT ITS JUSTIFICATION. THE ASSESSING OFFICER OBSERVED THAT IF THE INVENTORY LE VELS HAD BEEN IN THE RANGE OF 10% OF THE SALES, THE ISSUE OF HOLDING COST OF INVE NTORY WOULD NOT HAVE ARISEN. BUT THE ASSESSEE HAVING SUCH A HIGH INVENTORY WAS NOT JUSTIFIED IN NOT INCLUDING THE INTEREST COST TO THE VALUATION OF INVENTORY. B Y A MATHEMATICAL EXERCISE HE COMPUTED INTEREST COST AT RS.52,74,952 AND MADE THE ADDITION FOR THE SAME BY INCLUDING IT IN THE CLOSING STOCK VALUATION. THE LE ARNED CIT(A) DELETED THIS ADDITION. 4. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD IT IS NOTICED THAT THE ASSESSEE DID MAINTAIN INVENTORY AT THE LEVEL DISCLOSED IN THE ACCOUNTS INASMUCH AS SUCH FIGURE OF INVENTORY H AS NOT BEEN DISTURBED BY THE ASSESSING OFFICER IN QUANTITATIVE TERMS. THE ONLY V IEW POINT OF THE ASSESSING OFFICER FOR MAKING ADDITION OF RS.52.74 LAKH TOWARD S INTEREST COST TO BE INCLUDED IN THE INVENTORY WAS THAT IN CASE OF HIGHER LEVELS OF INVENTORY, SUCH INTEREST COST WAS LIABLE TO BE INCLUDED. WE ARE UNABLE TO ACCEPT THIS VIEW POINT FOR THE REASON THAT THERE IS NO LOGIC IN PRESUMING THAT IF INVENTORY IS AT A PARTICULAR LEVEL OF SALES THEN INTEREST COST SHOULD NOT BE INCLUDED AND IF IT IS O THERWISE THEN THE INTEREST COST SHOULD FORM PART OF VALUATION OF INVENTORY. THERE I S NO SUCH MANDATE IN THE ACT. SECTION 36(1)(III) GRANTS DEDUCTION FOR INTEREST WH EN IT IS PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION. PROVISO TO THIS SECTION TALKS OF CAPITALIZING THE INTEREST TILL THE ASSETS FOR WHICH LOANS ARE BORROWED, HAS NOT BEEN PUT TO USE. THERE IS NO REQUIREMENT OF THE ACT THAT IF THE ASSESSEE HAS INVESTED THE BORROWED MONEY IN STOCK, THE INTEREST COST SHOULD B E ADDED. IT IS SIMPLE AND PLAIN ITA NO.351 & CO 140/MUM/2010 M/S.MEHTA & SONS. 3 THAT THE INDIRECT EXPENSES CANNOT FORM PART OF THE COST OF INVENTORY. IF THE LOGIC OF THE ASSESSING OFFICER IS FURTHER EXTENDED, THEN OTH ER PROPORTIONATE INDIRECT EXPENSES, SUCH AS SALARY TO STAFF, RENT ETC. SHOULD ALSO BE INCLUDED IN THE VALUE OF STOCK. OBVIOUSLY IT IS NOT THE CASE. IT IS FURTHER RELEVANT TO NOTE THAT THE ASSESSEE WAS MAINTAINING INVENTORY AT HIGH LEVEL IN THE EARL IER YEARS ALSO. SCRUTINY ASSESSMENT WAS MADE U/S.143(3) IN RESPECT OF ASSESS MENT YEARS 2003-2004, 2004- 2005 AND 2005-2006 IN WHICH NO SUCH ADDITION WAS MA DE. IN OUR CONSIDERED OPINION THE PRESCRIPTION OF SECTION 36(1)(III) IS F ULLY SATISFIED IN RESPECT OF THE INTEREST PAYMENT AND AS SUCH IT IS NOT PERMISSIBLE TO INCLUDE THE INTEREST PART IN THE VALUE OF INVENTORY. WE, THEREFORE, UPHOLD THE IMPUG NED ORDER ON THIS ISSUE. THIS GROUND OF THE REVENUE FAILS. 5. THE ONLY OTHER GROUND IS AGAINST THE DELETION OF ADDITION OF RS.2,16,36,514 WHICH WAS MADE BY THE AO BY ADOPTING FIFO METHOD O F VALUATION OF STOCK OF DIAMOND STUDDED ON JEWELLERY. THE ASSESSEE VALUED DIAMONDS AT AN AVERAGE RATE OF RS.27,296.47 PER CT. THE ASSESSEE WAS CALLED UPON T O CO-RELATE THE SALES WITH PURCHASE OF EACH ITEM OF DIAMOND, WHICH THE ASSESS EE COULD NOT. ON BEING CALLED UPON TO EXPLAIN AS TO WHY THE FIFO METHOD OF VALUIN G CLOSING STOCK SHOULD NOT BE APPLIED, THE ASSESSEE RAISED ITS OBJECTION. NOT CON VINCED, THE ASSESSING OFFICER TOOK THE FIGURES OF PURCHASES FOR THE MONTHS OF NOV EMBER, OCTOBER AND SEPTEMBER AND WORKED OUT DIFFERENCE AT RS.2.16 CRORE TOWARDS UNDER-VALUATION OF STOCK, WHICH WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE . THE LEARNED CIT(A) DELETED THIS ADDITION. 6. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD IT IS OBSERVED THAT THE ASSESSEE WAS CONSIST ENTLY FOLLOWING AVERAGE PURCHASE RATE METHOD FOR VALUING ITS DIAMOND JEWELLERY STOCK . THE SAME METHOD WAS FOLLOWED IN THE INSTANT YEAR AS WELL. THE A.O. REJE CTED THIS METHOD ON THE GROUND THAT THE ASSESSEE OUGHT TO HAVE VALUED THE CLOSING STOCK OF DIAMOND STUDDED ITA NO.351 & CO 140/MUM/2010 M/S.MEHTA & SONS. 4 JEWELLERY ON FIFO METHOD. THE LEARNED CIT(A) HAS RE CORDED A CATEGORICAL FINDING THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MA NUFACTURING AND SALE OF 22 CT. GOLD ORNAMENTS, 18 CT. GOLD ORNAMENTS AND DIAMOND J EWELLERY STUDDED IN 18 CT. GOLD ON RETAIL BASIS. IT IS NOT THE CASE THAT THE D IAMONDS PURCHASED BY THE ASSESSEE WERE SOLD AS SUCH. SOME OF SUCH DIAMONDS WERE SOLD DIRECTLY WHILE OTHERS WERE UTILIZED FOR MANUFACTURING DIAMOND STUDDED JEWELLER Y. WHEN A PARTICULAR METHOD OF STOCK VALUATION IS CONSISTENTLY FOLLOWED AND ACC EPTED BY THE REVENUE, IT IS NOT OPEN TO DISCARD THE SAME SIMPLY ON THE GROUND THAT IN THIS YEAR THE CHANGED METHOD WOULD AMOUNT TO SOME ADDITION. ADVERTING TO THE FAC TS OF THE INSTANT CASE IT IS NOTED THAT THE ASSESSEE WAS CONSISTENTLY FOLLOWING THE METHOD OF VALUATION OF DIAMOND STUDDED JEWELLERY ON AVERAGE PURCHASE RATE METHOD. WHAT LED THE AO TO DEVIATE FROM THE SAME HAS NOT BEEN MENTIONED IN THE ORDER. IN SUCH A SITUATION THERE WAS ABSOLUTELY NO LOGIC TO REJECT THE SAME AN D ADOPT FIFO METHOD AS PER HIS CONVENIENCE. ONCE A CHANGE IS MADE IN THE METHOD OF VALUATION OF STOCK, IT HAS REPERCUSSIONS OVER THE SUBSEQUENT YEARS AS WELL. UN LESS THE CHANGED METHOD IS CONSISTENTLY FOLLOWED THEREAFTER ALSO, NO EXCEPTION CAN BE MADE FOR ADOPTING CHANGE METHOD FOR ONE YEAR ONLY. IT IS OBVIOUS THAT THE CLOSING STOCK OF THIS YEAR BECOMES OPENING STOCK OF THE NEXT YEAR AND IN THE L IKE MANNER THE CLOSING STOCK OF THE PRECEDING YEAR BECOMES OPENING STOCK OF THE CUR RENT YEAR. IF THE CURRENT YEARS CLOSING STOCK VALUATION METHOD IS CHANGED THEN ITS EFFECT ON THE OPENING STOCK VALUATION IS ALSO TO BE LOOKED INTO. BE THAT AS IT MAY SINCE THE ASSESSEE DID NOT CHANGE ITS METHOD OF VALUING THE STOCK IN THE CURRE NT YEAR AND FOLLOWED AS IT CONSISTENTLY DONE OVER THE YEARS INCLUDING THOSE AS SESSED UNDER SCRUTINY ASSESSMENT, WE ARE OF THE CONSIDERED OPINION THAT T HE AO WAS NOT JUSTIFIED IN MAKING ANY ADDITION ON THIS SCORE. THE IMPUGNED ORD ER IS UPHELD ON THIS ISSUE. THIS GROUND IS NOT ALLOWED. 7. THE ONLY GROUND RAISED BY THE ASSESSEE IN ITS CR OSS OBJECTION IS AGAINST THE SUSTENANCE OF ADDITION OF RS.2,32,123 ON ACCOUNT OF UNDER-VALUATION OF CLOSING ITA NO.351 & CO 140/MUM/2010 M/S.MEHTA & SONS. 5 STOCK OF BIG DIAMONDS. THE ASSESSING OFFICER HAS DA WN A CHART ON PAGE 7 OF THE ASSESSMENT ORDER BY CONSIDERING OPENING STOCK, PURC HASES, SALES AND CLOSING STOCK, BOTH IN CTS. AND VALUE IN RESPECT OF BIG DIAMONDS. SINCE THE ASSESSEE HAD 10.100 CTS. IN THE CLOSING STOCK, THE A.O. HELD THAT THE P URCHASE COST OF 10.100 CT. OF DIAMONDS AT RS.99,81,893 WAS LIABLE TO BE INCLUDED IN THE VALUATION OF CLOSING STOCK, AS AGAINST RS.97,49,770 DECLARED BY THE AS SESSEE ON AVERAGE PURCHASE PRICE METHOD. HE AGAIN HELD THAT FIFO METHOD SHOULD BE US ED. RESULTANTLY ADDITION OF RS.2,32,123 (RS.99,81,893 97,49,770) WAS MADE. NO RELIEF WAS ALLOWED IN THE FIRST APPEAL. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. AGAIN IT IS SEEN THAT THE ASSESSEE WAS CON SISTENTLY FOLLOWING THE AVERAGE PURCHASE PRICE METHOD FOR VALUING ITS STOCK. NO DOU BT THAT THE ASSESSEE PURCHASED 10.100 CTS. OF BIG DIAMONDS IN OCTOBER 2005 BUT IT IS STILL WORTH NOTING THAT THEREAFTER IN DECEMBER AGAIN 5.000 CT. OF BIG DIAMO NDS WERE PURCHASED AT A DIFFERENT PRICE. THE ASSESSING OFFICER HAS SIMPLY A DOPTED THE PURCHASE PRICE OF 10.100 CTS. OF DIAMOND PURCHASED IN OCTOBER BY HOLD ING THAT HE WAS CONVINCED WITH THE FIFO METHOD WITHOUT CONSIDERING THAT THERE AFTER IN DECEMBER AGAIN 5.000 CTS. WERE PURCHASED AND THE EQUAL QUANTITY WAS SOLD . THE VALUATION DONE BY THE ASSESSING OFFICER, EVEN GOING BY FIFO METHOD, IS INCORRECT INASMUCH AS HE SHOULD HAVE TAKEN THE VALUE OF 5.000 CTS. PURCHASED IN DECEMBER AND FOR REMAINING 5.100 CTS., HE SHOULD HAVE TAKEN THE PURCHASE PRIC E OF THE DIAMOND PURCHASED IN OCTOBER. BE THAT AS IT MAY SINCE THE ASSESSEE IS CO NSISTENTLY FOLLOWING THE AVERAGE PURCHASE PRICE METHOD, IN OUR CONSIDERED OPINION, T HERE IS NO SENSE IN DEVIATING FROM THE SAME IN THE INSTANT YEAR. WE, THEREFORE, H OLD THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN SUSTAINING THE ADDITION TO THE TUN E OF RS.2.32 LAKH. THE SAME IS HEREBY DISMISSED. ITA NO.351 & CO 140/MUM/2010 M/S.MEHTA & SONS. 6 9. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED AND THE ASSESSEES CROSS OBJECTION IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 09 TH DAY OF SEPTEMBER, 2011. SD/- SD/- (VIJAY PAL RAO) (R.S.SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI : 09 TH SEPTEMBER, 2011. DEVDAS*` COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) - XXV, MUMBAI. 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.