BUNGE AGRIBUSINESS INJIDA P. LTD ( NOW KNOWN AS BUNGE INDIA P. LTD), MUMBAI V. ACIT 10(1), MUMBAI

ITA 381/MUM/2010

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6268 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-11-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-10-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 15-01-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANURAG PRASAD
• Assessee Lawyers: V MOHAN
• Keywords: Reopening of assessment; Transfer pricing; Cost of acquisition; Tangible material; Wrong claim; Difference of opinion; Reason to believe; Change of opinion; Reassessment proceedings; Capital expenditure
• Section: 143(3); 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'B' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 381/MUM/2010 (ASSESSMENT YEAR: 2002-03) BUNGE AGRIBUSINESS INDIA P. LTD. ACIT - 10(1) (NOW KNOWN AS BUNGE INDIA PVT. LTD.) AAYAKAR BHAVAN, M.K. ROAD B401 & 501, BUSINESS SQUARE VS. MUMBAI 400020 ANDHERI(E), MUMBAI 400093 PAN - AAACG 7034 K APPELLANT RESPONDENT APPELLANT BY: SHRI V. MOHAN RESPONDENT BY: SHRI ANURAG PRASAD O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER OF THE CIT(A) XXI, MUMBAI DATED 30.10.2009. 2. ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: - (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) ERRED IN DISMISSING THE GROUND T HAT REOPENING OF ASSESSMENT WAS BAD IN LAW. (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE, LEARNED CIT(A) HAVING HELD IN HIS ORDER THAT L OWER OF COST OR MARKET VALUE CAN BE THE BASIS FOR VALUING STOCK IN TRADE ERRED IN NOT ALLOWING THE GROUND WHEREIN THIS ISSUE WAS RAISED. (III) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE, LEARNED CIT(A) ERRED IN NOT ALLOWING STOCK IN TRADE TO BE VALUE AS AT THE BALANCE SHEET AT LOWER OF COST OR N ET REALIZABLE VALUE. (IV) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE, LEARNED CIT(A) ERRED IN NOT ALLOWING THE VALUE OF TRANSIT LOSS OF STOCK IN TRADE AS DEDUCTION. (V) APPELLANT CRAVES TO LEAVE TO ADD FURTHER GROUNDS OR AMEND OR ALTER THE EXISTING GROUNDS AT THE TIME OF HEARING. ITA NO. 381/MUM/2010 BUNGE AGRIBUSINESS INDIA P. LTD. 2 3. THE CHRONOLOGY OF DATES THAT ARE RELEVANT ARE GIVEN BELOW: ASSESSMENT YEAR : 2002-03 RETURN FILED ON : 29.10.2002 ORDER U/S. 143(3) : 29.09.2004 148 NOTICE ISSUED ON : 20.03.2007 ORDER U/S. 143(3) R/W 148 : 25.09.2007 DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2002-03, THE ASSESSEE IMPORTED 4441.75 MTS OF RBD PALMOLEIN EDIB LE OIL FROM MALAYSIA AT A LANDED COST OF RS.13,90,05,970/-. IT HAS ALSO IMPORTED 29,839.59 MT OF DEGUMMED SOYABEAN OIL FOR RS.78,19, 62,338. THERE WAS NO SALE OF RBD PALMOLEIN OIL DURING THE YEAR AND TH E MATERIAL THAT CAME IN FROM MALAYSIA WAS STORED IN THE KAKINADA PORT, A NDHRA PRADESH. AS PER THE POLICY FOLLOWED BY THE ASSESSEE, THE CLOSING ST OCK OF MATERIAL LYING IN THE STORAGE TANKS AT KAKINADA WAS PHYSICALLY VERIFI ED BY MESSRS. STUART SURVEYORS AND ASSESSORS PVT. LTD. (PAGE 24 TO 26 OF THE PAPER BOOK) AND THEY CERTIFIED THAT THE PHYSICAL STOCK OF RBD PALMO LEIN OIL WAS 4403.967 MT ONLY. THERE WAS SHORTAGE OF 37,79 MT. IN THE CAS E OF DEGUMMED SOYABEAN OIL, THERE WAS EXCESS STOCK OF 21.04 MT. B ASED ON THE SURVEYORS PHYSICAL VERIFICATION CERTIFICATE, 4403. 967 MT OF RBD PALMOLEIN OIL WAS VALUED AT THE PREVAILING NET REAL IZABLE RATE OF RS.30,010/- PER MT, THUS THE CLOSING STOCK WERE VAL UED AT RS.13,21,61,949/-. IN VALUING CLOSING STOCK OF SOYA BEAN OIL EXCESS STOCK FOUND WAS CONSIDERED IN VALUATION. AS CAN BE SEEN F ROM THE ABOVE, AS AGAINST THE COST OF IMPORT OF RBD PALMOLEIN OIL OF RS.13,90,05,970/-, THE CLOSING STOCK CAME TO BE VALUED AT ` 13,21,61,949/-, THUS ABSORBING IN THE PROFIT AND LOSS ACCOUNT, LOSS OF RS.68,44,021/-. TH IS AMOUNT WAS DISALLOWED IN THE REOPENED ASSESSMENT. 4. WE HAVE HEARD THE LEARNED COUNSEL AND THE LEARNED D .R. WRITTEN SUBMISSIONS AND PAPER BOOK WERE ALSO ON RECORD. 5. THE ORIGINAL ASSESSMENT IN THIS CASE HAS BEEN COMPL ETED BY THE A.O. ON 29.09.2004 AFTER REFERRING THE MATTER TO THE ADD ITIONAL CIT, TRANSFER PRICING UNDER THE TRANSFER PRICING GUIDELINES, ACCE PTED THE BUSINESS LOSS ITA NO. 381/MUM/2010 BUNGE AGRIBUSINESS INDIA P. LTD. 3 AFTER CERTAIN DISALLOWANCES OF RS 249126 AT (-) ` 2,16,87,404/-. THE SAME WAS REOPENED UNDER SECTION 148 BY RECORDING REASONS AND ISSUING NOTICE ON 23.03.2007 AND IN THE REASSESSMENT PROCEEDINGS THE A.O. DISALLOWED THE CLAIM OF LOSS TO THE EXTENT OF ` 68,44,021/- STATED TO BE UNDERVALUATION OF STOCK AND ACCORDINGLY THE TOTAL INCOME WAS DETERMIN ED AT ` 1,48,43,383/-. THE ASSESSEE IS CONTESTING THE ISSUE OF REOPENING A S WELL AS THE ISSUE OF MERITS OF DISALLOWING THE LOSS. ASSESSEE CONTESTED THE REOPENING BEFORE THE CIT(A) AND THE CIT(A) HAS GIVEN THE FOLLOWING FINDI NG WITH REFERENCE TO THE REOPENING: - 2.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE. THE ASSESSMENT YEAR INVOLVED WAS A.Y. 2002-03 AND THE NOTICE U/S. 147/148 WAS ISSUED ON 20-03-2007. THUS, THE NOTICE U/S. 148 WAS ISSUED WITHIN FOUR YEARS FROM THE END OF THE ASSESSMENT YEAR. AS PER P ROVISIONS OF SECTION 147, THE A.O. COULD ISSUE NOTICE U/S. 148 IF HE HAD REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX ESCAPED ASSESSMENT. AS PER PROVISO TO SECTION 147, SUCH NOTICE U/S. 148 COULD NOT BE ISSUED AFTER THE END OF FOUR YEARS OF THE RELEVANT ASSESSMENT YEAR UNLESS THE INCOME E SCAPED ASSESSMENT ON ACCOUNT OF FAILURE ON THE PART OF THE APPELLANT TO DISCLOSURE FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR THE PURPOSE OF ASSESSMENT. SINCE, IN THE CASE UNDER CONSIDERATION, THE NOTICE U/S. 14 8 WAS ISSUED WITHIN FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR, THEREFORE, THE CONDITION OF FAILURE ON THE PART OF THE APPELLANT TO DISCLOSURE FULLY AND TRULY ALL MATERIAL FACTS WAS NOT APPLICABLE. AS PE R PROVISIONS OF SECTION 147, THE A.O. COULD ISSUE NOTICE U/S. 148 IF HE HAD REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX ESCAPED ASSESSMENT. SUCH R EASON TO BELIEVE SHOULD BE BASED ON SOME MATERIAL/INFORMATION IN POS SESSION OF A.O. IN THE CASE UNDER CONSIDERATION, THE A.O. FORMED HIS B ELIEF ON THE BASIS OF INFORMATION AVAILABLE IN THE TAD AUDIT REPORT. IN T HE TAX AUDIT REPORT, THE OPENING QUANTITY OF RBD PALMOLEIN OIL WAS SHOWN AT 4441.71M.T. VALUED AT RS.13.90 CRORE AND CLOSING STOCK WAS SHOWN AT 44 03.97 MT VALUED AT ` 13.21 CRORE. IT WAS ALSO EXPLAINED THEREIN THAT THE CLOSING STOCK WAS SHOWN AFTER ADJUSTING FOR SHORTAGE OF 37.69 MT ON P HYSICAL VERIFICATION. HOWEVER, THE INFORMATION CONTAINED THEREIN REGARDIN G THE SHORTAGE OF STOCK WAS NOT SELF EXPLANATORY AS IT WAS NOT CLEAR AS TO WHY THERE WAS SHORTAGE OF STOCK ON PHYSICAL VERIFICATION. THUS, T HE A.O. WAS HAVING INFORMATION IN HIS POSSESSION THAT THE CLOSING STOC K WAS UNDER VALUED BY THE APPELLANT WITHOUT ANY SATISFACTORY EXPLANATION. IT HAS BEE HELD IN VARIOUS CASES (101 ITD 391 (DEL), 269 ITR 338 (CAL. ), 263 ITR 34 (SC), AND OTHER CASES) THAT FOR REOPENING THE ASSESSMENT, THERE SHOULD BE REASON TO BELIEVE BASED ON SOME MATERIAL THAT INCOM E CHARGEABLE TO TAX ESCAPED ASSESSMENT. HOWEVER, IT HAS ALSO BEEN HELD THAT ADEQUACY OR SUFFICIENCY OF REASON TO BELIEVE CANNOT BE CALLED I N QUESTION. IT IS SUFFICIENT IF THERE WAS SOME INFORMATION OR MATERIA L FOR MAKING SUCH BELIEF. IN THE CASE UNDER CONSIDERATION, THE A.O. F ORMED HIS BELIEF ON THE ITA NO. 381/MUM/2010 BUNGE AGRIBUSINESS INDIA P. LTD. 4 BASIS OF INFORMATION AVAILABLE IN THE TAX AUDIT REP ORT. IT HAS BEEN HELD IN VARIOUS DECISIONS THAT THE INFORMATION/MATERIAL SHO ULD PRIMA FACIE PROVE THE ESCAPEMENT OF INCOME. IN THE CASE OF JAIBHARAT MARUTI LTD. (180 TAXMAN 192), THE HON'BLE DELHI HIGH COURT HELD THAT THE STAGE OF ISSUE OF NOTICE U/S. 148, ONLY ASPECT COULD BE EXAMINED IS W HETHER THERE WAS RELEVANT MATERIAL BEFORE THE A.O. BASED ON WHICH A REASONABLE PERSON COULD HAVE FORMED REQUISITE BELIEF THAT INCOME CHAR GEABLE TO TAX ESCAPED ASSESSMENT. IT WAS FURTHER HELD THAT AT THIS STAGE, ONE IS NOT CONCERNED WHETHER MATERIAL WOULD CONCLUSIVELY PROVE ESCAPEMEN T. IN THE FACTS OF CASE UNDER CONSIDERATION, THE A.O. WAS HAVING MATER IAL BEFORE HIM WHICH PIMA FACIE SHOWN THAT CLOSING STOCK WAS UNDER VALUED WITHOUT ANY ACCEPTABLE SATISFACTORY AND THE EXPLANATION GIV EN BY THE APPELLANT IN THE TAX AUDIT REPORT WAS NOT SELF EXPLANATORY. T HE REASON GIVEN BY THE APPELLANT IN THE TAX AUDIT REPORT WAS VAGUE IN NATU RE. IN THE CASE UNDER CONSIDERATION, THE APPELLANT HAD CLAIMED THAT FULL AND TRUE DISCLOSURE WAS NOT APPLICABLE IN THE CASE OF APPELLANT, HOWEVE R, THE APPELLANTS THIS CLAIM WAS ALSO NOT CORRECT. THE EXPLANATION FURNISH ED IN THE TAX AUDIT REPORT WAS VAGUE IN NATURE. THE APPELLANT HAS ARGUE D THAT THE ASSESSMENT WAS MADE U/S. 143(3) OF THE ACT AND THER EFORE, IT IS PRESUMED THAT THE A.O. MUST HAVE LOOKED INTO ALL TH E ASPECTS OF THE CASE. APPELLANTS THIS ARGUMENT IS ALSO NOT CORRECT. IN T HE ASSESSMENT ORDER PASSED U/S. 143(3), THE A.O. DID NOT CONSIDER THIS ASPECT AND THEREFORE, IT COULD NOT BE SAID THAT THE REASSESSMENT PROCEEDI NGS WERE BASED ON MERE CHANGE OF OPINION. IN THE CASE OF YUVRAJ VS. U NION OF INDIA, (2009) 25 DTR (BOM) 185,THE COURT HELD THAT THE A.O. HAVIN G MERELY NOTED THAT ASSESSEE HAS SOLD HIS RIGHT TO PURCHASE AN OPEN PLO T AND COMPUTED TOTAL INCOME, AS PER CHART MENTIONED IN THE ORDER, WITHOU T ADDRESSING THE ISSUE RELATING TO ASSESSABILITY OF CAPITAL GAIN OF CASUAL INCOME, NOTICE U/S. 148 ISSUED BY A.O. AFTER APPLYING HIS MIND CAN NOT BE SAID TO BE BASED ON MERE CHANGE OF OPINION. IN THE CASE UNDER CONSIDERATION, THE A.O. PASSED ASSESSMENT U/S. 143(3) WITHOUT GOING IN TO THE ISSUE OF SHORTAGE OF CLOSING STOCK. THEREFORE, IT COULD NOT BE SAID THAT IN THE ORIGINAL ASSESSMENT PROCEEDINGS, THE A.O. ACCEPTED APPELLANTS CLAIM AND CONSEQUENTLY, THE REOPENING ON THE SAME ISSUE W AS ON THE BASIS OF CHANGE OF OPINION. THOUGH IN VARIOUS CASES THE COUR TS HAVE UPHELD THE ISSUE OF NOTICE U/S. 148 ON THE BASIS OF CHANGE OF OPINION ALSO, BUT IN THE CASE UNDER CONSIDERATION, THERE WAS NO CHANGE ON OP INION. DURING THE APPELLATE PROCEEDINGS, THE APPELLANT HA S FILED COPIES OF DECISION OF THE COURTS AND ITAT. THE SAME HAVE BEEN CONSIDERED. THE SAME WERE NOT APPLICABLE IN THE CASE OF APPELLANT A S IN MOST OF THE CASES, THE NOTICE U/S. 148 WERE ISSUED AFTER END OF FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR, WHEREAS IN APP ELLANTS CASE, THE NOTICE WAS ISSUED WITHIN FOUR YEARS OF THE END OF R ELEVANT ASSESSMENT YEAR. TO CONCLUDE IT IS HELD THAT THE NOTICE ISSUED U/S. 148 BY THE A.O. WAS ON THE BASIS OF REASON/BELIEF FORMED ON THE BAS IS OF MATERIAL/ INFORMATION AVAILABLE, WHICH PRIMA FACIE PROVED THA T INCOME CHARGEABLE TO TAX ESCAPED ASSESSMENT ON ACCOUNT OF SHORTAGE OF CLOSING STOCK. IN THE ITA NO. 381/MUM/2010 BUNGE AGRIBUSINESS INDIA P. LTD. 5 FACTS AND CIRCUMSTANCES, THE ACTION OF THE A.O. IN INITIATING PROCEEDINGS U/S. 147 IS HEREBY CONFIRMED. THIS GROUND OF APPEAL IS DISMISSED . 6. THE LEARNED COUNSEL CONTESTING THE ABOVE SUBMITTED THAT THE ASSESSEES CASE WAS SCRUTINIZED ORIGINALLY AND THE A.O. HAD ACCEPTED THE LOSS AT THE TOME OF ORIGINAL ASSESSMENT AND ACCORDINGLY THERE WAS A CHANGE OF OPINION WHICH FOLLOWING THE JUDGEMENT OF THE HON'BL E SUPREME COURT IN THE CASE OF KELVINATOR INDIA LTD. 320 ITR 561 AND SUBSE QUENT DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF ASTEROIDS TRADING & INVESTMENTS (P) LTD. VS. DCIT 308 ITR 190 AND THE DECISION OF THE H ON'BLE BOMBAY HIGH COURT IN THE CASE OF IOT INFRASTRUCTURE & ENERGY SE RVICES LTD. VS. ACIT REPORTED AS 2010-TIOL-463-HC-MUM-IT DATED 21.06.201 0, THE REOPENING IS BAD IN LAW. THE LEARNED COUNSEL ALSO RELIED ON VARI OUS STATEMENTS FILED BEFORE THE A.O. AT THE TIME OF ORIGINAL ASSESSMENT TO SUBMIT THAT VALUATION OF STOCK WAS DONE ON THE BASIS OF PHYSICAL VERIFICATIO N AND SURVEY CERTIFICATE ISSUED BY A THIRD PARTY SURVEYOR AND THERE WAS EXCE SS STOCK OF 21.04 MT OF DEGUMMED SOYA BEAN OIL AND SHORTAGE OF 37.39 MT OF RBD PALMOLEIN AND THESE FACTS WERE STATED IN THE NOTES TO ACCOUNT IN SCHEDULE 14 OF THE ANNUAL REPORT AND THESE FACTS WERE ALSO STATED IN THE AUDI T REPORT AND ACCORDINGLY ON THE SAME SET OF FACTS THE REOPENING CAN ONLY BE CONSIDERED AS A CHANGE OF OPINION. 7. THE LEARNED D.R., HOWEVER, SUBMITTED THAT THE ASSES SMENT WAS REOPENED WITHIN FOUR YEARS AND SO THE PROVISO TO SE CTION 147 DOES NOT APPLY TO THE FACTS OF THE CASE. IT WAS HIS SUBMISSION THA T THE ASPECT OF VALUATION OF CLOSING STOCK WAS NOT EXAMINED BY THE A.O. AT ALL A ND SINCE THERE WAS UNDERVALUATION OF CLOSING STOCK THE SAME WAS REOPE NED UNDER SECTION 148, WHICH IS CORRECT ACCORDING TO THE LAW. 8. WITH REFERENCE TO MERITS IT WAS SUBMITTED BY THE LE ARNED COUNSEL THAT THERE WAS FALL IN THE NET REALISABLE VALUE OF RBD P ALMOLEIN FROM THE IMPORT COST OF ` 31,390/- PER MT TO ` 30,100/- AS ON THE BALANCE SHEET DATE. IT IS AN ACCEPTED POSITION THAT CLOSING STOCK IS REQUIRED TO BE VALUED AT LOWER OF COST OR NET REALISABLE VALUE. THE NET REALISABLE VALUE B EING LOWER THE STOCK WAS VALUED AT A LESSER VALUE AND THE LOSS DUE TO FALL I N THE NET REALISABLE VALUE WAS ` 57,08,932/- AND THE LOSS ON ACCOUNT OF TRANSIT AND SHORTAGE LOSS WAS ITA NO. 381/MUM/2010 BUNGE AGRIBUSINESS INDIA P. LTD. 6 ` 11,35,089/-. THEN HE REFERRED TO THE ORDER OF THE C IT(A) TO SUBMIT THAT THE CIT(A) HAS ACCEPTED THE LOSS IN NET REALISABLE VALU E IN THE ORDER BUT HAS NOT CONSIDERED THE SAME AND DISMISSED THE WHOLE GROUND WITHOUT REALISING THAT THE CLOSING VALUE, TO A LARGE EXTENT, IS DUE TO FAL L IN THE NET REALIZABLE VALUE. IT WAS HIS SUBMISSION THAT ON MERITS THERE IS NO NE ED FOR ANY ADDITION. 9. THE LEARNED D.R., HOWEVER, COULD NOT CONTROVERT THE FACTS BUT SUBMITTED THAT THE CLAIM CANNOT BE ALLOWED. 10. WE HAVE CONSIDERED THE ISSUE. BEFORE ADVERTING TO T HE ISSUE OF REOPENING, IT IS NECESSARY TO EXAMINE WHETHER THE A .O. HAS CONSIDERED THE ISSUE OF CLOSING STOCK VALUATION AT THE TIME OF ASS ESSMENT UNDER SECTION 143(3). AS SEEN FROM THE STATEMENTS ENCLOSED TO THE P & L ACCOUNT AND AUDIT REPORT THE ASSESSEE HAS FAIRLY REPORTED THAT THERE IS EXCESS STOCK OF DEGUMMED SOYA BEAN OIL AND SHORTAGE OF RBD PALMOLEI N AS STATED IN SCHEDULE 14 OF THE ANNUAL ACCOUNTS. HOWEVER, THERE IS NO MENTION OF FALL IN NET REALIZABLE VALUE EVENTHOUGH THE NET CLOSING STO CK VALUATION HAS BEEN FURNISHED IN GROSS FIGURES. AS SEEN FROM ITEM NO. 5 IN SCHEDULE 14 WITH REFERENCE TO CLASS OF GOODS AND DETAILS, IT WAS STA TED THAT DEGUMMED SOYA BEAN OIL OF 17,854.05 QUANTITY WAS SOLD FOR ` 47,55,46,840/- WHICH HAS BEEN TAKEN TO THE P & L ACCOUNT AS SALES DURING THE YEAR . THE PURCHASE COST WAS ` 26,205/- AND SALE PRICE WAS ` 26,635/- AND CLOSING STOCK WAS VALUED AT ` 26,440/-. AS FAR AS RBD PALMOLEIN WAS CONCERNED, TH IS WAS ONLY IMPORTED AND THERE WERE NO SALES DURING THE YEAR. THE IMPORT WAS SHOWN AT 4441.75 M.T. WHEREAS THE CLOSING STOCK WAS SHOWN AT 4403.9 7 M.T. WITH A NOTE THAT THERE WAS A SHORTAGE OF STOCK ON PHYSICAL VERIFICAT ION. THESE GOODS ARE PURCHASED FOR TRADING ONLY AND AS THE ASSESSEE HAD NO STORAGE FACILITIES THESE WERE KEPT WITH A THIRD PARTY AND STORAGE CHARGES WE RE CLAIMED IN THE P & L ACCOUNT. THE CLOSING STOCK VERIFICATION WAS DONE BY THE SURVEYORS M/S. STEWART SURVEYORS & ASSAYERS PVT. LTD. AT KAKINADA ON 31.03.2002. THE VALUATION AS ON 31.03.2002 OF CLOSING STOCK WAS FUR NISHED BY M/S. MURJI MEGHAN SERVICES PVT. LTD. ACCORDINGLY THE ASSESSEE CLAIMED THE CLOSING STOCK VALUATION ON THE BASIS OF THE PHYSICAL STOCK AVAILA BLE AND RATE OF THE SAME AS ON THE VALUATION DATE. THUS THERE WAS LOSS DUE TO F ALL IN THE NET REALISATION ITA NO. 381/MUM/2010 BUNGE AGRIBUSINESS INDIA P. LTD. 7 VALUE OF RBD PALMOLEIN OF ` 57,08,932/- AND DUE TO LOSS ON ACCOUNT OF TRANSIT AND STORAGE LOSS AT ` 11,35,089/- TOTALLING TO ` 68,44,021/- ASSESSEE HAS SHOWN THE CLOSING STOCK VALUATION IN THE P & L ACCO UNT AND ARRIVED AT THE TOTAL LOSS WHICH INCLUDED PAYMENT OF STORAGE CHARGE S, FOREIGN EXCHANGE LOSS AND OTHER ADMINISTRATIVE EXPENDITURE IN ITS TRADING ACTIVITY OF FIVE MONTHS BEING THE FIRST YEAR OF ITS BUSINESS. IN VIEW OF TH IS, EVENTHOUGH THE A.O. HAS NOT SPECIFICALLY EXAMINED THE ISSUE OF CLOSING STOC K IT CAN NOT BE STATED THAT THE ASSESSEE MADE ANY WRONG CLAIM IN THE BOOKS OF A CCOUNT. ON VERIFICATION OF THE FACTS AVAILABLE ON RECORD, WE ARE OF THE OPINIO N THAT THERE IS NO BASIS FOR DISALLOWING THE AMOUNT CLAIMED BY THE ASSESSEE AND ENHANCING THE CLOSING STOCK VALUATION BY THE AMOUNT OF ` 68,44,021/-. IN FACT IN THE NEXT ASSESSMENT YEAR THE ASSESSEE HAS SHOWN PROFIT AND T HIS LOSS CLAIMED IN THIS YEAR ORIGINALLY WAS ALLOWED AS ASSESSED AT ` 2,16,87,404/- TO SET OFF IN ASSESSMENT YEAR 2003-04 BY THE A.O. VIDE HIS ORDER DATED 28.06.2006. 11. IN CHAINRUP SAMPATRAM VS. CIT 24 ITR 481 A CONSTITU TION BENCH OF THE HON'BLE SUPREME COURT REFERRED TO THE PRINCIPLE THAT CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWE R AND THE HON'BLE SUPREME COURT HAS HELD THAT THIS IS NOW GENERALLY A CCEPTED AS AN ESTABLISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNTANCY. THE SA ME PRINCIPLE WAS REITERATED IN A SUBSEQUENT DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. BRITISH PAINTS INDIA LTD. 188 ITR 44 WHE REIN THE HON'BLE SUPREME COURT ONCE AGAIN CONSIDERED IT TO BE A WELL RECOGNI SED PRINCIPLE OF COMMERCIAL ACCOUNTING TO ENTER IN THE P & L ACCOUNT THE VALUE OF STOCK-IN-TRADE AT THE BEGGING AND END OF THE ACCOUNTING YEAR AT COST OR M ARKET PRICE, WHICHEVER LOWER. IN VIEW OF THIS ACCOUNTING PRINCIPLE, WE AR E OF THE OPINION THAT THE ASSESSEE HAS CORRECTLY VALUED THE STOCK AT THE REAL ISABLE VALUE WHICH IS LOWER THAN THE PURCHASE COST AND ACCORDINGLY THE LOSS TO THE EXTENT OF ` 57,08,932/- ARISING OUT OF THE DIFFERENCE BETWEEN THE IMPORT CO ST AND NET REALISATION VALUE WAS CORRECTLY ACCOUNTED FOR IN THE BOOKS OF ACCOUNT WHICH DOES NOT REQUIRE ANY MODIFICATION. EVEN THE CIT(A) IN HIS ORDER HAS ANALYSED THE LOSS STATING THAT THERE WERE TWO ISSUES INVOLVED AND HE OPINED T HAT THE ASSESSEES CLAIM OF REDUCTION IN THE VALUE OF STOCK ON ACCOUNT OF FALL IN SALE PRICE WAS CONCERNED, THE SAME WAS ACCEPTABLE, BEING IN ACCORDANCE WITH T HE PRINCIPLE OF MERCANTILE ITA NO. 381/MUM/2010 BUNGE AGRIBUSINESS INDIA P. LTD. 8 ACCOUNTING. WHILE HOLDING THIS HE, HOWEVER, REJECTE D THE WHOLE OF THE ISSUE WITHOUT ANALYSING HOW MUCH OF THE LOSS WAS DUE TO F ALL IN REALISABLE VALUE. WE ARE OF THE OPINION THAT TO THE EXTENT OF FALL IN THE NET REALISABLE VALUE ASSESSEES CLAIM IS CORRECT. 12. NOW WITH REFERENCE TO THE LOSS ON ACCOUNT OF TRANSI T AND STORAGE LOSS, THE A.O. HAS NOT DEALT WITH THIS ASPECT AT ALL AND THE CIT(A), WHEN THESE FACTS ARE BROUGHT TO HIS NOTICE REJECTED THEM STATI NG THAT THE ASSESSEE HAS NOT GIVEN THE FULL DETAILS. AS ALREADY STATED THE A SSESSEE IS ONLY A TRADER AND HAS IMPORTED GOODS OF RBD PALMOLEIN WHICH WAS NOT S OLD DURING THE YEAR AT ALL AND DEGUMMED SOYA BEAN OIL WAS PARTLY SOLD DURI NG THE YEAR. SINCE THE ASSESSEE DOES NOT HAVE ANY STORAGE FACILITIES IT HA S KEPT AT KAKINADA, MUMBAI AND A THIRD PARTY SURVEYOR HAS SURVEYED THE STOCK BY PHYSICAL VERIFICATION AND ANOTHER PARTY HAS FURNISHED THE RE ALIZABLE VALUE. ON THE BASIS OF THESE, THE ASSESSEE MADE ADJUSTMENTS IN TH E ACCOUNTS ON ACCOUNT OF TRANSIT AND STORAGE LOSS. THIS IS AN INCIDENTAL LOSS IN THE IMPORT AND STORAGE OF ASSESSEES TRADING BUSINESS AND WITHOUT ANY REASON THE CIT(A) HAS REJECTED, EVENTHOUGH THE ASSESSEES BOOKS OF AC COUNT INDICATE THAT THERE WAS EXCESS STOCK AS FAR AS DEGUMMED SOYA BEAN OIL I S CONCERNED AND SHORTAGE OF RBD PALMOLEIN. THESE FIGURES HAVE BEEN REPORTED AND ACCEPTED BY THE AO AND ACCORDINGLY WE ARE OF THE OPINION THA T THE CIT(A) HAS WRONGLY REJECTED ASSESSEES CONTENTIONS WITHOUT ANY JUSTIFI CATION. WE ARE OF THE VIEW THAT THE ASSESSEES CLAIM ON ACCOUNT OF TRANSIT AND STORAGE LOSS OF NET AMOUNT AT ` 11,35,089/- ALSO WAS AN ELIGIBLE LOSS. IN VIEW OF T HIS THE ASSESSEES VALUATION OF CLOSING STOCK AND ITS CONSE QUENT REDUCTION IN VALUE BY ` 68,44,021/- IS CORRECT. THEREFORE, ON MERITS THE AS SESSEES GROUND NOS. 2, 3 & 4 ARE ALLOWED. 13. CONSEQUENT TO THIS, THE ISSUE OF REOPENING BECOMES AN ACADEMIC ISSUE. HOWEVER, WE NOTICE THAT THE A.O. HAS NOT EXA MINED THE ISSUE OF CLOSING STOCK VALUATION AT THE TIME OF COMPLETION O F ORIGINAL ASSESSMENT. THE RATES AT WHICH THESE ARE VALUED AND THE EXTENT OF T RANSIT LOSS HAS NOT BEEN PLACED BEFORE THE A.O. NOR THESE WERE ENQUIRED INTO . EVENTHOUGH CERTAIN FACTS HAVE BEEN MENTIONED IN THE ANNUAL REPORT ABOU T THE PHYSICAL ITA NO. 381/MUM/2010 BUNGE AGRIBUSINESS INDIA P. LTD. 9 AVAILABILITY OF THE STOCK, CONSEQUENT FALL IN VALUA TION/TRANSIT LOSS HAD NOT BEEN SPECIFICALLY PLACED ON RECORD AT THE TIME OF O RIGINAL ASSESSMENT. CONSEQUENTLY, WE ARE OF THE OPINION THAT THE A.O. I S WELL WITHIN HIS RIGHTS TO REOPEN THE ASSESSMENT WITHIN FOUR YEARS. SINCE THE A.O. HAS NOT FORMED ANY OPINION ON THE ISSUE OF CLOSING STOCK VALUATION AT THE TIME OF ORIGINAL ASSESSMENT, WE ARE OF THE VIEW THAT THE PRINCIPLES ESTABLISHED BY THE HON'BLE SUPREME COURT IN THE CASE OF KELVINATOR OF INDIA LT D. 320 ITR 561 DOES NOT APPLY TO THE FACTS OF THE CASE. 14. THE LEARNED COUNSEL PLACED ON RECORD THE ORDER OF T HE HON'BLE BOMBAY HIGH COURT IN THE CASE OF IOT INFRASTRUCTURE & ENER GY SERVICES LTD. DATED 21.06.2010. THE HON'BLE BOMBAY HIGH COURT HAS CONSI DERED THE WRIT PETITION ON THE JURISDICTION OF THE A.O. IN REOPENI NG UNDER SECTION 147. THE FACTS IN THE CASE AS STATED BY THE HON'BLE BOMBAY H IGH COURT IN PARA 5 ARE AS UNDER: - 5. IN ORDER TO APPRECIATE THE BASIS ON WHICH THE A SSESSMENT IS SOUGHT TO BE REOPENED, A REFERENCE TO SOME OF THE SALIENT ASPECTS OF THE CASE WOULD BE IN ORDER. THE ASSESSEE, IN SCHEDULE 18 T O ITS BALANCE SHEET AS OF 31 MARCH 2004 MADE A PROVISION FOR DIMINUTION IN THE VALUE OF ASSETS OF ` 1.41 CRORES UNDER THE HEAD OF OPERATING AND OTHER E XPENSES. IN THE COMPUTATION OF INCOME, AMONG THE ITEMS DISALLOWED B Y THE ASSESSEE, WAS AN EXPENDITURE IN THE AMOUNT OF ` 1.12 CRORES INCURRED DURING THE CONSTRUCTION PERIOD, WHICH WAS WRITE DOWN. IN THE TAX AUDIT REPORT UNDER SECTION 44AB, THE ASSESSEE DISCLOSED IN ITEM 17 AMOUNTS DEBITED TO THE PROFIT & LOSS ACCOUNT. SUB PARAGRAPH (A) OF ITEM 17 DEALS WITH EXPENDITURE OF A CAPITAL NATURE. WHILE FURNISHING A BREAK UP UNDER THIS ITEM, THE ASSESSEE DISCLOSED THAT AN AMOUNT OF ` 1.12 CRORES WAS A WRITE DOWN IN THE VALUE OF ASSETS. THIS WAS STATED TO EX CLUDE AN AMOUNT OF ` 29.23 LAKHS WHICH, ACCORDING TO THE ASSESSEE, WAS A WRITE DOWN IN THE VALUE OF SLOW/NON MOVING INVENTORY VALUED AT ESTIMA TED REALIZABLE VALUE BEING CONSIDERED AS NOT IN THE NATURE OF CAPITAL EX PENDITURE. THEREFORE, A PLAIN READING OF ITEM 17 OF THE TAX AUDIT REPORT SHOWS THAT THE ASSESSEE DISCLOSED THAT AN AMOUNT OF ` 29.23 LAKHS WAS NOT IN THE NATURE OF CAPITAL EXPENDITURE AND REPRESENTED A WRI TE OFF ON ACCOUNT OF SLOW OR NON MOVING INVENTORY WHICH WAS VALUED AS IT S ESTIMATED REALIZABLE VALUE. THE AO HAS PURPORTED TO REOPEN T HE ASSESSMENT ON THE GROUND THAT THE ASSESSEE HAD DEBITED A PROVISION AM OUNTING TO ` 1.41 CORES ON ACCOUNT OF DIMINUTION IN THE VALUE OF ASSE TS. THIS, ACCORDING TO THE AO, IS NOT A PROPER CHARGE ON PROFITS AS THE AM OUNT REPRESENTS A PROVISION MADE FOR A FALL IN THE VALUE OF CAPITAL A SSETS, WHICH IS CONSIDERED TO BE CAPITAL IN NATURE. THE ASSESSEE FI LED ITS OBJECTIONS ON 18 MARCH, 2010 IN WHICH THE ATTENTION OF THE AO WAS DR AWN TO THE FACT THAT ITA NO. 381/MUM/2010 BUNGE AGRIBUSINESS INDIA P. LTD. 10 IN THE STATEMENT OF TOTAL INCOME, UNDER THE HEAD I TEMS DISALLOWED, THE AMOUNT OF ` 1.12 CRORES HAD ALREADY BEEN ADDED BACK IN THE RETU RN OF INCOME. HENCE, IT WAS URGED THAT THERE COULD BE NO REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMENT IN RESPECT OF THE AMO UNT OF ` 1.12 CRORES BECAUSE THE ASSESSEE HAD DISALLOWED THE AMOUNT IN T HE COMPUTATION OF INCOME. AS REGARDS THE BALANCE OF ` 29.23 LAKHS, THE ASSESSEE NOTED THAT IT RELATES TO A WRITE DOWN IN VALUE ON ACCOUNT OF S LOW OR NON MOVING INVENTORY ESTIMATED ON THE BASIS OF REALIZABLE VALU E WHICH COULD NOT BE REGARDED AS BEING IN THE NATURE OF CAPITAL EXPENDIT URE. THE ASSESSEE RELIED ON PRECEDENTS TO SUPPORT ITS CONTENTION. THE AO DEALT WITH THE OBJECTIONS OF THE ASSESSEE IN HIS ORDER DATED 22.03 .2010 AND ACCEPTED THE FACTUAL POSITION THAT THE AMOUNT OF ` 1.12 CRORES OUT OF ` 1.41 CRORES HAD BEEN DISALLOWED BY THE ASSESSEE IN THE RETURN OF IN COME. HOWEVER, THE BALANCE OF ` 29.23 LAKHS WAS TREATED BY THE AO TO BE OF A CAPIT AL NATURE. AT THIS STAGE, IT APPEARS FROM RECORD THAT THE OBJE CTION OF THE ASSESSEE THAT A WRITE DOWN IN THE VALUE OF SLOW MOVING INVENTORY COULD NOT BE TREATED AS OF A CAPITAL NATURE WAS NOT DEALT WITH IN ORDER OF THE AO. 15. IN THIS JUDGEMENT, IT WAS STATED THAT THE QUESTION OF THE A.O. FORMING A REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSM ENT DOES NOT ARISE BECAUSE THE ASSESSEE ITSELF DISALLOWED IN ITS COMPU TATION AND HAS BEEN ACCEPTED IN THE ORDER PASSED SUBSEQUENTLY. WITH REF ERENCE TO THE BALANCE AMOUNT OF ` 29.23 LAKHS THE CLAIM PERTAINS TO WRITING DOWN OF I NVENTORY WHICH CAN NEVER BE TREATED AS CAPITAL IN NATURE. IN VIEW OF THIS,AFTER ANALYSING THE DECISION IN THE CASE OF KELVINATOR OF INDIA LTD. THE HON'BLE BOMBAY HIGH COURT CAME TO THE CONCLUSION THAT THERE IS MERIT IN THE SUBMISSION THAT REOPENING THE ASSESSMENT IS NOT BAS ED ON TANGIBLE MATERIAL AND THE A.O. HAS ACTED OUTSIDE THE POLE OF HIS JURI SDICTION. IN VIEW OF THIS THE NOTICE ISSUED WAS SET ASIDE. HOWEVER, THE FACTS IN THE PRESENT CASE ARE QUITE DIFFERENT. IN THIS CASE EVENTHOUGH THERE IS A NOTE REGARDING EXCESS AND SHORTAGE OF STOCK ON PHYSICAL VERIFICATION THE FACT THAT THERE IS FALL IN NET REALISABLE VALUE AND LOSS DUE TO TRANSIT HAS NOT BE EN PLACED ON RECORD AND THIS CANNOT BE NOTICED UNLESS THE A.O. EXERCISE LIT TLE MORE EFFORT. SINCE THE A.O. NEITHER ENQUIRED ABOUT THE VALUATION, EVENTHOU GH PURCHASE OF GOODS FROM SISTER CONCERN HAS BEEN REFERRED TO TRANSFER P RICING OFFICER, WE ARE OF THE OPINION THAT THE A.O. HAS NOT FOUND ANY OPINION AT THE TIME OF COMPLETION OF ORIGINAL ASSESSMENT WITH REFERENCE TO CLOSING STOCK VALUATION AND ACCORDINGLY REOPENING ON THE ISSUE OF CLOSING S TOCK VALUATION IS JUSTIFIED. HOWEVER, AS STATED EARLIER THIS BECOMES AN ACADEMIC ISSUE. AS DISCUSSED ITA NO. 381/MUM/2010 BUNGE AGRIBUSINESS INDIA P. LTD. 11 ABOVE, THERE IS NO CASE ON MERITS AND ASSESSEES CL AIM IS AN ALLOWABLE CLAIM. IN VIEW OF THIS, WHILE HOLDING THAT THE A.O. HAS JU RISDICTION TO REOPEN THE ASSESSMENT ON THE FACTS OF THE CASE, GROUND NOS. 2, 3 & 4 ARE ALLOWED. A.O. IS DIRECTED TO DELETE THE ADDITION SO MADE. 16. IN THE RESULT, APPEAL IS CONSIDERED PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH NOVEMBER 2010. SD/- SD/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 24 TH NOVEMBER 2010 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXI, MUMBAI 4. THE CIT X, MUMBAI CITY 5. THE DR, B BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.