Gagan Silk Mills Pvt.Ltd., Surat V. The Income tax Officer,Ward-1(3), Surat

ITA 4036/AHD/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6630 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 10-05-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 15-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P TALATI

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : AH MEDABAD ( BEFORE HONBLE SHRI T.K.SHARMA, J.M. & HONBLE SHRI A.N.PAHUJA, A.M.) I.T.A.NO. 4036/AHD./2008 : ASSESSMENT YEAR 200 5-06 GAGAN SILK MILLS PVT. LTD., SURAT V S- ITO, WARD-1(3), SURAT (PAN : AAACG 8905D) (APPELLANT) (RESPONDENT) APPELLANT BY : NONE (WRITTEN SUBMISSION) RESPONDENT BY: SHRI S.P.TALATI, D.R. O R D E R PER SHRI T.K.SHARMA, JUDICIAL MEMBER : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF LD. CIT(A)-I, SURAT DATED 14.11.2008 SUSTAINING THE ADDITION OF RS.5,35 ,942/- ON ACCOUNT OF CLOSING STOCK OF WORK-IN-PROGRESS FOR THE ASSESSMENT YEAR 2005-20 06. 2. BRIEFLY STATED THE FACTS ARE THAT THE ASSESSEE I S A COMPANY ENGAGED IN THE BUSINESS OF DYEING AND PRINTING OF ART SILK CLOTH. THE AO, ON PERUSAL OF INVENTORY OF CLOSING STOCK, NOTICED THAT THE ASSESSEE HAS NOT SH OWN ANY WORK-IN-PROGRESS. THE AO ALSO OBSERVED THAT THE PROCESSING DONE BY THE ASSES SEE HAS FIVE DAY CYCLE AND, THEREFORE, THE FABRIC UNDER PROCESS BEARS EXPENSES INCURRED ON ACCOUNT OF COLOUR, CHEMICALS, WAGES, POWER, FUEL, ETC. FOR THESE FIVE DAYS. THEREFORE, THE FABRIC LYING ON THE MACHINE AS ON 31.03.2005 CARRIES EXPENDITURE WH ICH HAS BEEN DEBITED TO THE PROFIT & LOSS ACCOUNT BUT IN RESPECT OF WHICH NO INCOME HA S BEEN SHOWN. THE A.O. THEREFORE, ASKED THE ASSESSEE AS TO WHY WORK-IN-PRO GRESS SHOULD NOT BE MADE. IN REPLY TO THE ABOVE, THE ASSESSEE STATED THAT THE OWNERSHI P OF BASIC RAW MATERIAL, I.E. GREY CLOTH WAS ALWAYS PERTAIN TO OTHER PARTIES BECAUSE T HE ASSESSEE HAS BEEN DOING PROCESSING ON JOB WORK BASIS. FURTHER, THIS METHOD OF VALUATION IS FOLLOWED BY ALL THE PROCESSING HOUSES IN SURAT AND HENCE NO ADDITION IS TO BE MADE. THE A.O. DID NOT ACCEPT THIS REPLY AND STATED THAT AS PER THE DECISI ON OF THE HONBLE SUPREME COURT IN THE CASE OF BRITISH PAINTS INDIA LTD. (188 ITR 44) IT IS MANDATORY ON THE ASSESSEE TO ITA NO.4036/AHD/2008 2 DISCLOSE THE CLOSING STOCK CORRECTLY. IN THIS CASE, THE HONBLE SUPREME COURT STATED AS UNDER:- IT IS NOT ONLY THE RIGHT, BUT THE DUTY OF THE ASSE SSING OFFICER TO CONSIDER WHETHER OR NOT THE BOOKS DISCLOSE THE TRUE STATE OF ACCOUNTS AND THE CORRECT INCOME CAN BE DEDUCED THEREFROM. IT IS INCO RRECT TO SAY THAT THE OFFICER IS BOUND TO ACCEPT THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE THE CORRECTNESS OF WHICH HAD NOT BE EN 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. IN VIEW OF THE ABOVE, THE A.O. WORKED OUT THE VALUE OF WORK-IN-PROGRESS BY TAKING 360 DAYS AS WORKING DAYS. AVERAGE PROCESSING PER DA Y WAS WORKED OUT AT 28660 METERS PER DAY. IN VIEW OF THIS REASON, THE A.O. ST ATED THAT THE FABRICS LIES ON THE MACHINE IN FIVE DAYS WOULD BE 143300 METERS. HE WOR KED OUT THE AVERAGE PROCESSING CHARGE AT RS.7.48 PER METER. HE STATED THAT COST OF WORK-IN-PROGRESS WOULD BE HALF OF THAT. HE, THEREFORE, WORKED OUT THE UNDER VALUATIO N OF CLOSING STOCK AT RS.5,35,942/- AND MADE THE ADDITION. 3. ON APPEAL, IN THE IMPUGNED ORDER, THE LD. CIT(A) UPHELD THE ACTION OF THE AO FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF BRITISH PAINTS INDIA LTD. ( SUPRA ). AGGRIEVED WITH THE ORDER OF THE LD. CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4. AT THE TIME OF HEARING BEFORE US, NONE APPEARED ON BEHALF OF THE ASSESSEE. ONLY THE WRITTEN SUBMISSIONS WERE FILED ON BEHALF OF THE ASSESSEE WHEREIN THE ASSESSEE POINTED OUT THAT THE ASSESSEE IS DOING PROCESSING O N JOB WORK BASIS. THE ASSESSEE ALSO SUBMITTED THE PAPER BOOK CONTAINING (1) WRITTEN SUB MISSION, (2) COPY OF LETTER DATED 18.07.07 SUBMITTED TO THE CIT(A), (3) COPIES OF JUD GMENTS OF HONBLE ITAT, AHMEDABAD IN CASE OF (I) RISHABH DYEING & PRINTING MILLS PVT. LTD., (II) VARDHAMAN FABRICS (P) LTD. (III) M/S. BAJRANG PROCESSORS PVT . LTD., (IV) PRATIK PROCESSORS PVT. LTD., (V) BAJAJ FASHIONS PVT. LTD. AND (VI) EMA IND IA LTD. IN THE WRITTEN SUBMISSION, IT WAS STATED THAT AS FAR AS CONSUMPTION OF COLOUR CHE MICAL AND OTHER MATERIALS ARE HAVING INSIGNIFICANT VALUE AND THAT COMPANY HAS BEE N FOLLOWING CONSISTENTLY THE SAME METHOD SINCE LONG AND HAS NOT SHOWN VALUE OF WORK I N PROGRESS. THE ASSESSEE ITA NO.4036/AHD/2008 3 COMPANY ALSO STATED THAT THE CONTROVERSY INVOLVED I N THIS APPEAL IS COVERED IN FAVOUR OF THE ASSESSEE BY THE FOLLOWING DECISIONS : I) CIT-VS- DOOM DOOMA INDIA LTD. REPORTED IN 117 C TR (GAU) 156 II) INVESTMENT LTD. VS- CIT REPORTED IN 77 ITR 53 3 (SC) III) SANJEEV WOOLLEN MILLS VS- CIT REPORTED IN 27 9 ITR 434(SC) IV) UNITED COMMERCIAL BANK VS- CIT REPORTED IN 24 0 ITR 355 (SC) V) TRIVENI ENGINEERING WORKS LTD. VS- CIT REPORTE D IN 167 ITR 742(ALL) VI) CIT-VS- BHARAT COMMERCE & INDUSTRIES LTD. REPO RTED IN 157 CTR (DEL) 53 VII) CONCORDIA CORPORATION LTD. VS- CIT REPORTED I N 22 ITR 344 (TRAV- COCHIN) VIII) CIT & EXCESS PROFITS TAX VS- CHARI AND RAM REPORTED IN 17 ITR 1 (MAD) IX) CIT-VS- SANT RAM MANGAT RAM REPORTED IN 195 CTR (P&H) 345 5. ON THE OTHER HAND, SHRI S.P.TALATI, APPEARING ON BEHALF OF THE REVENUE, VEHEMENTLY SUPPORTED THE ORDER OF THE LD. CIT(A). 6. HAVING HEARD THE LD. D.R. AND CONSIDERED THE WRI TTEN SUBMISSIONS FILED ON BEHALF OF THE ASSESSEE, WE HAVE CAREFULLY GONE THRO UGH THE ORDERS OF THE AUTHORITIES BELOW. THE TRIBUNAL IN THE CASE OF KANHAIYA PROCESS ORS PRIVATE LTD. ( SUPRA ) OBSERVED THAT THE AO COULD NOT BE ABLE TO APPRECIATE THE TRU E NATURE OF THE BUSINESS OF A PROCESSING HOUSE. HE UNDERTOOK THE JOB WORK. THE FA BRIC DOES NOT BELONG TO THE ASSESSEE. THERE IS DIFFERENCE IN RAW MATERIAL AND T HE CONSUMABLES. RAW MATERIAL ONCE CONSUMED DOES NOT LOSE ITS IDENTITY, IT ONLY GETS I TS UTILITY TRANSFERRED. WHILE THE CONSUMABLES, ONCE CONSUMED, CANNOT BE SEPARATELY ID ENTIFIED AND IT LOSES ITS IDENTITY. WHEN THE ASSESSEE HAS BEEN ENGAGED IN THE BUSINESS OF DYEING AND PRINTING OF ART-SILK CLOTH ON JOB WORK BASIS, THE RAW MATERIAL DOES NOT BELONG TO THE ASSESSEE. THE ASSESSEE HAS SIMPLY TO INCUR THE EXPENDITURE ON COLOUR, CHEM ICAL, WAGES, POWER AND FUEL. COLOUR AND CHEMICALS ARE CONSUMABLES AND ONCE THESE ARE APPLIED TO THE FABRIC UNDER PROCESS, THEY LOSE THEIR IDENTITY AND CANNOT BE PAR T OF THE STOCK IN PROCESS. THE ASSESSEE IS VALUING THE STOCK BY FOLLOWING THE SAME METHOD CONSISTENTLY IN WHICH THERE IS NO ILLEGALITY. ON THIS BASIS, ADDITION MAD E ON ACCOUNT OF SUPPRESSED WORK-IN- ITA NO.4036/AHD/2008 4 PROGRESS IS DELETED BY THE TRIBUNAL, D BENCH VIDE ORDER DATED 3 RD APRIL, 2009 IN THE CASE OF KANHAIYA PROCESSORS PVT. LTD. ( SUPRA ). 6.1 THE SIMILAR VIEW HAS BEEN TAKEN IN OTHER CASES RELIED ON BY THE ASSESSEE COMPANY IN THE WRITTEN SUBMISSIONS. UNDER THE FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE AO WAS NOT CORRECT IN LAW IN VALUING THE WORK-IN-PROGRESS IN RESPECT OF VARIOUS EXPENSES INCURRED BY THE ASSESSEE RELATING TO FABRIC WHILE IN PROCESS FOR DYEING AND PRINTING. WE, ACCORDINGLY, DELETE THE AD DITION OF RS.5,35,942/-. RESULTANTLY, THE APPEAL OF THE ASSESSEE IS ALLOWED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE COURT ON 13.05.2011 SD/- SD/- (A.N.PAHUJA) (T.K.SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 13/05/2011 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE 2) THE DEPARTMENT 3) CIT(A) CONCERNED 4) CIT CONCERNED 5) D.R., ITAT, AHMEDABAD TRUE COPY BY ORDER DEPUTY REGISTRAR, ITAT, AHMEDABAD TALUKDAR/SR.P.S. ITA NO.4036/AHD/2008 5