HINDUSTAN APPAREL INDUSTRIES, MUMBAI V. JCIT 18(2), MUMBAI

ITA 3540/MUM/2011

• Counselvise Citation: 354019914 RSA 2011
• Duration Of Justice: 3 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-06-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 04-06-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 04-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PITAMBAR DAS
• Assessee Lawyers: MRS AARTI VISSANJI
• Keywords: Cost of acquisition
• Section: 6; 143(3)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL H , BENCH MUMBAI , BEFORE SHRI R.C.SHARMA , A M & VIVEK VARMA , J M ITA NO S . 3540 & 4201 / MUM/20 1 1 ( ASSESSMENT YEAR S : 200 5 - 0 6 & 2006 - 07 ) HINDUSTAN APPAREL INDUSTRIES,, UNIT NO.4, BRADYS GLADY PLAZA, SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI VS. JCIT - 18(2), MUMBAI PAN/GIR NO. : A A AFH 0455 J ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : MRS. AARTI VISSANJI /REVENUE BY : MR. PITAMBA R DAS DATE OF HEARING : 4 TH JUNE , 201 4 DATE OF PRONOUNCEMENT : 11 TH JUNE , 201 4 O R D E R PER R.C.SHARMA ( A .M.) : BOTH THE APPEALS FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) FOR THE ASSESSMENT YEAR S 200 5 - 06 & 2006 - 07 , IN THE MATTER OF ORDER PASSED UNDER SECTION 143(3) OF THE I.T. ACT. 2 . SINCE COMMON GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE IN BOTH THE YEARS UNDER CONSIDERATION, THEREFORE, BOTH THE APPEALS HAVE BEEN HEARD TOGETHER AND ARE BEING NOW DISPOSED OF BY THIS CONSOLIDATED ORDER. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN THE MANUFACTURING AND EXPORT ITA NO S . 3540 & 4201 /1 1 2 OF GARMENTS. DURING THE ASSESSMENT YEAR 2005 - 06, RETURN OF INCOME AT LOSS OF RS. 1.15 CRORES WAS FILED BY THE ASSESSEE. UNDER SCRUTINY ASSESSMENT, THE AO MADE ADDITION BY CHANGING THE VALUATION OF HIS STOCK OF FINISHED GOODS AND WOVEN FABRICS AMOUNTING TO RS. 38,41,199/ - AND RS. 38,40,564/ - . THE AO ALSO MADE AN ADDITION ON ACCOUNT OF STOCK GIVEN FOR CHARITY AMOUNTING TO RS. 11,42,680/ - . THE AO ALSO MADE AD - HOC DISALLOWANCE ON EXPENDITURE INCURRED ON ACCOUNT OF TRANSPORT, STITCHING, EMBROIDERY, FREIGHT, FORWARDING EXPENSES AND PROCESSING CHARGES. BY THE IMPUGNED ORDER, CIT(A) CONFIRMED THE ADDITION, AGAINST WHICH THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 4 . WE HAVE CONSIDERE D RIVAL CONTENTIONS AND FOUND FROM THE RECORD THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADING, MANUFACTURING AND EXPORT OF GARMENTS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE WAS ASKED TO TALLY THE CLOSING STOCK OF FINISHED GARMENTS. THE ASSESSEE HAD GIVEN BREAK - UP OF THE CLOSING STOCK OF FINISHED GOODS WHICH WAS AS FOLLOWS : - NO. OF PIECES VALUE RS. A V ERAGE RT. MANUFACTURED DURING THE YEAR OLD OPENING STOCK (39005 PICS. AT THE BEGINNING OF THE YEAR) TOTAL RS. 86,183 31,146 -------- ------ 117,329 ======= 1,26, 40,081 7,26,398 --------------- 1,33,66,479 ========= 146.67 PER PC 23.33 PER PC ----------------- 1,33,66,479 ========== THE ASSESSEE VALUED FINISHED GOODS AT COST O R MARKET VALUE WHICH IS LOWER. HOWEVER, THE ASSESSING OFF ICER HAS VALUED THE OPENING STOCK AT A PRICE OF RS.146.67 PER PIECE I.E. AT RS. 45,67,597/ - INSTEAD OF RS. 7,26,398/ - (BEING AVERAGE COST OF MANUFACTURING DURING THE YEAR) ITA NO S . 3540 & 4201 /1 1 3 AND MADE AN ADDITION OF RS. 38,41,199/ - BEING THE DIFFERENCE IN ACTUAL VALUE OF THE OLD STOCK OF FINISHED GOODS AND THE VALUE ADOPTED BY THE ASSESSING OFFICER. THE ASSESSEE HAS VALUED CLOSING STOCK/FABRIC WOVEN AS FOLLOWS : MTR. RS. AVERAGE RT. (RS.) CURRENT YEAR 50,944 30,25,805 59.40 PER MTR. OLD STOCK 64919 METERS & TRANSFER DURING THE YEAR 5970 METER TOTAL STOCK 70889 METERS) TOTAL RS. 70,889 -------------- 121 , 833 ======= 3,70 , 242 --------------- 33,96,047 ========= 5.22 MTR. THE ASSESSING OFFICER HAS VALUED OLD OPENING STOCK AT AVERAGE RATE OF THE CURRENT YEARS PURCHASES I.E. 59.40 PER METER AND MADE AN ADDITION OF RS.3 8 , 40 ,564/ - BEING THE DIFFERENCE. 4.1 FROM THE RECORD, WE FOUND THAT THE AO HAS VALUED OLD STOCK 31,142 PIECES AT RS. 146.67 PER PIECE, WHICH IS THE AVERAGE COST OF MANUFACTURING DURING THE YEAR UNDER CONSI DERATION. WE FOUND THAT NO NEW STOCK ON ASSORTED GARMENTS OR MADE UPS HAVE BEEN GENERATED. IN OTHER WORDS, NO PROVISIONS HAVE BEEN MADE DURING THE YEAR IN RESPECT OF REJECTED ASSORTED GARMENTS AND MADE UP GARMENTS AND THUS ALL THE REJECTED STOCK WAS BROUGH T FORWARD FROM EARLIER YEAR AND THEREFORE IT IS ADDITION MADE DURING THE YEAR FOR OLD STOCK WAS NOT JUSTIFIED , INSOFAR AS OLD STOCK HAVE ALREADY BEEN ASSESSED AT THE RATE ADOPTED BY THE ASSESSEE IN THE EARLIER YEAR. THERE WAS NO JUSTIFICATION FOR MAKING AD DITION DURING THE YEAR UNDER CONSIDERATION. ACCORDINGLY, WE DO NOT ITA NO S . 3540 & 4201 /1 1 4 FIND ANY JUSTIFICATION FOR THE ADDITION MADE BY THE AO BY CHANGING THE VALUATION OF STOCK . 5 . THE AO HAS ALSO MADE AN ADDITION OF RS. 38,40 ,564/ - ON ACCOUNT OF VALUATION OF OLD STOCK OF FAB RICS. FROM THE RECORD, WE FOUND THAT THE ASSESSEE HAD GENERATED ONLY 5970 MTRS. OF EXPORT FABRICS (KNOWN AS CHINDI IN THE TRADE) AS AGAINST CLOSING STOCK OF 70,889 MTRS. IN OTHER WORDS, OUT OF 70,889 METERS 64,191 METERS PERTAINS TO BROUGHT FORWARD STOCK O F EARLIER YEAR WHICH HAS BEEN ASSESSED IN THE EARLIER YEAR. REASON FOR GENERATION OF SUCH STOCK WAS AS UNDER : - 1. DUE TO CANCELLATION OF ORDERS/LEFTOVERS FROM PRODUCTION. 2. EXCESS (SMALL) QUANTITY RECEIVED FROM MILLS AGAINST ORDERS WITH TOLERANCE OR SAMP LE YARDAGES ORDERS. 3. LEFTOVER WHICH COULD NOT UTILIZED. ACCORDINGLY, WE DIRECT THE AO TO DELETE THE ADDITION ATTRIBUTABLE TO 64,919 METERS (RS. 59.40 - RS. 5.24) I.E. RS. 35,16,014/ - , WHICH PERTAINS TO BROUGHT FORWARD STOCK OF EARLIER YEAR. 6 . DURING THE Y EAR, THE ASSESSEE HAD GIVEN ON ACCOUNT CHARITY TO TSUNAMI VICTIMS BEING 7859 PIECES OF FINISHED GARMENT OUT OF THE OLD STOCK. THE AO HAS HELD THAT THIS ACTIVITY HAS NO NEXUS WITH THE BUSINESS OF THE ASSESSEE AND HAS MADE AN ADDITION OF RS. 11,52,680/ - . AS T HE OPENING STOCK HAS ALREADY BEEN ASSESSED AT VALUE ADOPTED BY THE ASSESSEE THE ACTION OF THE AO TO VALUE THE OLD STOCK AT THE AVERAGE RATE OF MANUFACTURING DURING THE YEAR IS WRONG. ITA NO S . 3540 & 4201 /1 1 5 7 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT CHARITY WAS GIVEN TO THE NEEDY PEOPLE AFFECTED BY TSUNAMI. THE CHARITY WAS GIVEN OUT OF OLD STOCK WHICH WAS NOT UNDER SALEABLE CONDITION. THE GESTURE OF ASSESSEE IS IN THE TUNE WITH SOCIAL RESPONSIBILITY OF A BUSINESS MAN AND THUS THERE IS A NEXUS WITH THE BUSINESS OF THE ASSESSEE. THE ASSESSEE HAS NOT CLAIMED THIS AS AN EXPENDITURE BUT REDUCED THE VALUE OF ITS UNSALEABLE STOCKS. ACCORDINGLY, WE DO NOT FIND ANY JUSTIFICATION IN THE ADDITION OF RS. 11,52,680/ - MADE BY THE AO. 8 . THE AO HAS ALSO MADE ADDITION BY DISALLOWING 10% ON EXPENDITURE INCURRED ON ACCOUNT OF TRANSPORTATION, STITCHING ETC. , WHICH WAS REDUCED TO 5% BY THE CIT(A) . THE PRECISE OBSERVATION OF THE CIT(A) WAS AS UNDER : - 5.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, ARGUMENTS OF THE ASSESSING OFFI CER AND THE WRITTEN SUBMISSIONS OF THE AUTHORISED REPRESE N TATIVE OF THE APPELLANT. I FIND THAT THERE IS ABNORMAL INCREASE IN VARI O US EXP ENSES SUCH AS TRANSP ORT CHARGES (54%) , STITCHING CHARGES 92% , EMBROIDERY CHARGES 155% , FREIGHT AND FORWARDING 58% , MAIN TENANCE AND REPAIR 103% , PROCESSING CHARGES 147% ETC. IT IS POSSIBLE THAT EMBROIDERY CHARGES HAVE INCREASED BECAUSE THERE IS SALE IN KNITTED GARMENT SEGMENT. THERE IS A 514% INCREASE IN THE SALE OF THESE GARMENTS. HOWEVER, THAT DOES NOT EXPLAIN THE INCREA SE IN EXPENDI T URE UNDER SEVERAL OTHER HEADS SUC H AS TRANSPORT, STITCHING, FREIGHT AND FORWARDING, MAINTENANCE AND REPAIR, PROCESSING ETC. THE APPELLANT HAS FAILED TO EXPLAIN ABNORMAL INCREASE UNDER VARIOUS EXPENSES WITHOUT DIRECT NEXUS TO SALES OR INCOME. THEREFORE, ASSESSING OFFICER WAS JUSTICE IN DISALLOWING A CERTAIN PERCENT OF EXPENSES. HOWEVER, A SUMMARY DISALLOWANCE OF 10% OF THE EXPENSES IS ON HIGHER SIDE. AFTER CONSIDERING THE RELEVANT FACTS I AM OF THE OPINION THAT A DISALLOWANCE OF 5% WILL MEET TH E ENDS OF JUSTICE. ACCORDINGLY THE DISALLOWANCE IS RESTRICTED TO 5% . OUT OF TOTAL DISALLOWANCE OF RS. 24,32,456/ - 50% OF THIS DISALLOWANCE IS DELETED AND THE BALANCE DISALLOWANCE IS CONFIRMED. THIS GROUND OF APPEAL IS PARTLY ALLOWED. ITA NO S . 3540 & 4201 /1 1 6 IT IS CLEAR FROM THE ABOVE OBSERVATION OF CIT(A) THAT AFTER KEEPING INTO ACCOUNT ABNORMAL INCREASE IN THE VARIOUS EXPENSES, THE CIT(A) HAS RESTRICTED THE DISALLOWANCE TO 5% WHICH APPEARS TO BE REASONABLE KEEPING IN VIEW THE SHORTCOMINGS POINTED OUT BY THE AO. 9. NOW, WE SHAL L TAKE UP APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2006 - 07 , WHEREIN THE ASSESSEE HAS RAISED SOLITARY GROUND WITH REGARD TO INACTION ON THE PART OF THE CIT(A) IN CONFIRMING THE ADDITION MADE BY REVALUING OLD AND REJECTED STOCK AT AVERAGE MANUFACTURING COST OR AVERAGE PURCHASE COST. 10. IN VIEW OF THE REASONING GIVEN IN ITA NO. 3540/MUM/2011 , FOR THE ASSESSMENT YEAR 2005 - 06, WE DO NOT FIND ANY JUSTIFICATION IN THE ADDITIONS SO MADE BY THE AO BY REVALUING THE OLD AND REJECTED STOCK . ACCORDINGLY, THE AO I S DIRECTED TO DELETE THE SAME. 11 . IN THE RESULT, APPEAL OF THE ASSESSEE (I.E ITA NO. 3540/MUM/2011) FOR A.Y. 2005 - 06 IS PARTLY ALLOWED AND THE APPEAL (ITA NO. 4201/MUM/2011) FOR A.Y. 2006 - 07 IS ALLOWED . (I.E ITA NO.3540/MUM/20 11) ITA NO.4201/MUM/2011 ORDER PRONOUNCED IN THE OPEN COURT ON THIS 11 TH JUNE, 201 4 . 11 TH JUNE ,2014 SD/ - SD/ - ( ) ( VIVEK VARMA ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 11 /06 /2014 /PKM , PS ITA NO S . 3540 & 4201 /1 1 7 COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A), MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//