M/s. Goodwill Fabrics Pvt. Ltd., Bhilwara V. ACIT, , Bhilwara

ITA 525/JODH/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 5276 (ITAT-JODHPUR)
• Duration Of Justice: 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-05-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2014-2015
• Appeal Filed On: 19-11-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B K GUPTA DHK
• Keywords: Reopening of assessment; Rejection of books of accounts; Business income; Depreciation; Additional evidence; Question of law; Tangible material; Avoidance of tax; Valuation report; Competent authority; Assessment record; Right to appeal; Tax effect; Reason to believe; Revenue expenditure; Reassessment proceedings; Borrowed satisfaction; Set aside
• Section: 143(3); 244A; 80HHC; 205; 195; 147; 148

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES B, JAIPUR JH JES'K LH 'KEKZ] YS[KK LNL; ,OA JH FOT; IKY JKO] U;KF;D LNL; DS LE{K BEFORE: SHRI RAMESH C SHARMA, AM & SHRI VIJAY PAL RAO, JM VK;DJ VIHY LA -@ ITA NO. 525/JODH/2018 FU/KZKJ.K O'KZ@ ASSESSMENT YEAR : 2014-15 M/S GOODWILL FABRICS PVT. LTD., B-204, R.K. COLONY, BHILWARA- 311001. CUKE VS. A.C.I.T., BHILWARA. LFKK;H YS[KK LA -@THVKBZVKJ LA-@ PAN/GIR NO.: AABCG 1944 M VIHYKFKHZ@ ASSESSEE IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ LS @ ASSESSEE BY : SHRI MAHENDRA GARGIEYA (ADV) JKTLO DH VKSJ LS @ REVENUE BY : SHRI B.K. GUPTA (CIT-DR) LQUOKBZ DH RKJH[K@ DATE OF HEARING : 07/05/2019 MN?KKS 'K.KK DH RKJH[K @ DATE OF PRONOUNCEMENT : 22/05/2019 VKNS 'K@ ORDER PER: R.C. SHARMA, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF LD.CIT(A), AJMER DATED 29/10/2018 FOR THE A.Y. 2014-15 IN THE MATTER OF ORDER PASSED U/S 143(3) READ WITH SECTION 147 OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE: 1.1 THE VERY ACTION TAKEN U/S 147 R.W.S 148 IS BAD IN LAW WITHOUT JURISDICTION AND BEING VOID AB-INITIO, THE SAME KINDLY BE QUASHED. CONSEQUENTLY, THE IMPUGNED ASSESSMENT FRAMED U/S 143(3) R.W.S. 147 DATED 31.12.2017 ALSO KINDLY BE QUASHED. ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 2 1.2 THE IMPUGNED ORDER U/S 143(3) R.W.S. 147 DATED 31.12.2017 IS BAD IN LAW AND ON FACTS OF THE CASE, FOR WANT OF JURISDICTION AND VARIOUS OTHER REASONS AND HENCE THE SAME KINDLY BE QUASHED. 2.1 RS. 2,13,67,830/-: THE ID. CIT(A) FURTHER ERRED IN LAW AS WELL AS ON THE FACTS OF THE CASE IN CONFIRMING THE ADDITION MADE ON ACCOUNT OF THE ALLEGED UNDER-VALUATION OF CLOSING STOCK BY SHOWING FINISHED GOODS OF READYMADE GARMENTS AS REJECTION. 2. 2 RS. 2,03,36,304/-: THE LD. CIT(A) FURTHER ERRED IN LAW AS WELL AS ON THE FACTS OF THE CASE IN CONFIRMING THE ADDITION MADE ON ACCOUNT OF THE ALLEGED UNDER-VALUATION OF CLOSING STOCK BY SHOWING FINISHED GOODS OF READYMADE GARMENTS AS STOCK LYING WITH JOB UNITS. 3. THE AO FURTHER ERRED IN LAW AS WELL AS ON THE FACTS OF THE CASE IN CHARGING INTEREST U/S 234A, 234B, 234C & 234D OF THE ACT AND AS ALSO IN WITHDRAWING INTEREST U/S 244A OF THE ACT. THE ASSESSEE TOTALLY DENIES ITS LIABILITY OF CHARGING AND WITHDRAWAL OF ANY SUCH INTEREST. THE INTEREST SO CHARGED/WITHDRAWN, BEING CONTRARY TO THE PROVISIONS OF LAW AND FACTS, KINDLY BE DELETED IN FULL. 4. THE ASSESSEE PRAYS YOUR HONOUR INDULGENCES TO ADD, AMEND OR ALTER OF OR ANY OF THE GROUNDS OF THE APPEAL ON OR BEFORE THE DATE OF HEARING. 2. IN THIS APPEAL, THE ASSESSEE HAS ALSO TAKEN ADDITIONAL GROUNDS, WHICH READS AS UNDER: 1.1. THE VERY ACTION TAKEN U/ S 147 R.W.S 148 IS BAD IN LAW WITHOUT JURISDICTION AND BEING VOID AB-INITIO, THE SAME KINDLY BE QUASHED. CONSEQUENTLY, THE IMPUGNED ASSESSMENT FRAMED U/S 143(3) R.W.S. 147 DATED 31.12.2017 ALSO KINDLY BE QUASHED. 1.2 THE IMPUGNED ORDER U/S 143(3) R.W.S. 147 DATED 31.12.2017 IS BAD IN LAW AND ON FACTS OF THE CASE, FOR WANT OF JURISDICTION AND VARIOUS OTHER REASONS AND HENCE THE SAME KINDLY BE QUASHED. ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 3 2.1 RS. 2,13,67,830/-: THE LD. CIT(A) FURTHER ERRED IN LAW AS WELL AS ON THE FACTS OF THE CASE IN CONFIRMING THE ADDITION MADE ON ACCOUNT OF THE ALLEGED UNDER-VALUATION OF CLOSING STOCK BY SHOWING FINISHED GOODS OF READYMADE GARMENTS AS REJECTION. 2.2 RS. 2,03,36,304/-: THE LD. CIT(A) FURTHER ERRED IN LAW AS WELL AS ON THE FACTS OF THE CASE IN CONFIRMING THE ADDITION MADE ON ACCOUNT OF THE ALLEGED UNDER-VALUATION OF CLOSING STOCK BY CONSIDERING THE FABRICS AS READYMADE GARMENTS IN THE CLOSING STOCK LYING WITH JOB UNITS. 3. THE AO FURTHER ERRED IN LAW AS WELL AS ON THE FACTS OF THE CASE IN CHARGING INTEREST U / S 234A, 234B, 234C 86 234D OF THE ACT AND AS ALSO IN WITHDRAWING INTEREST U/S 244A OF THE ACT. THE ASSESSEE TOTALLY DENIES ITS LIABILITY OF CHARGING AND WITHDRAWAL OF ANY SUCH INTEREST. THE INTEREST SO CHARGED/WITHDRAWN, BEING CONTRARY TO THE PROVISIONS OF LAW AND FACTS, KINDLY BE DELETED IN FULL. 4. THE ASSESSEE PRAYS YOUR HONOUR INDULGENCES TO ADD, AMEND OR ALTER OF OR ANY OF THE GROUNDS OF THE APPEAL ON OR BEFORE THE DATE OF HEARING. 3. IT WAS ARGUED BY THE LD AR OF THE ASSESSEE THAT THESE GROUNDS WERE ALREADY FILED BEFORE THE LD. CIT(A) BUT WHILE FILING THE APPEAL, IT WAS INADVERTENTLY LEFT, THEREFORE, TAKEN AS ADDITIONAL GROUNDS. 4. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS A LIMITED COMPANY INCORPORATED UNDER THE PROVISIONS OF COMPANIES ACT, 1956, ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF READYMADE GARMENTS ETC. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD E-FILED ITS RETURN OF INCOME ELECTRONICALLY ON 27.09.2014 SHOWING TOTAL INCOME OF RS.4,31,91,680/-. THE ASSESSMENT WAS COMPLETED VIDE ORDER DATED 16.12.2016 U/S 143(3) ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 4 OF THE ACT AT AN INCOME OF RS. 4,34,48,500/-. THEREAFTER, THE A.O. ISSUED NOTICE U/S 148 OF THE ACT AND ALLEGED THAT THERE IS AN ESCAPEMENT OF INCOME TO THE EXTENT OF RS.8,65,30,424/-. 5. BY THE IMPUGNED ORDER, THE LD. CIT(A) CONFIRMED THE ACTION OF THE A.O. FOR INITIATION OF PROCEEDINGS U/S 147 AS WELL AS MERIT OF THE ADDITION SO MADE BY THE A.O. AGAINST THE ORDER OF THE LD. CIT(A), THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE ITAT. 6. IT WAS ARGUED BY THE LD AR THAT THE AO HAS WRONGLY ASSUMED JURISDICTION U/S 147 OF THE ACT AND THE PROCEEDINGS INITIATED THERE UNDER ARE ABSOLUTELY ILLEGAL & ARBITRARY IN AS MUCH AS THERE DID NOT EXIST ANY REASON AT ALL MUCH LESS REASON TO BELIEVE AS CONTEMPLATED UNDER THE LAW AND IN THE LIGHT OF JUDICIAL PRONOUNCEMENTS CITED AT BAR. AS PER THE LD. AR, THE REOPENING OF THE CONCLUDED ASSESSMENTS AFTER THE LAPSE OF VARIOUS YEARS, HAS BEEN SEEN BY THE HONBLE COURTS AS A SERIOUS INVASION OVER THE RIGHTS OF A CITIZEN, WHICH IS HAVING THE EFFECT OF UNSETTLING THE ISSUES WHICH ALREADY STOOD SETTLED LONG BACK BETWEEN THE PARTIES. SOME OF THE INBUILT SAFEGUARDS SO AS TO PREVENT THE ARBITRARY EXERCISE OF THE POWERS BY THE AO TO FIDDLE WITH THE COMPLETED ASSESSMENT ARE PROVIDED IN THE ACT VIZ. RECORDING OF REASONS, MANDATORY SERVICE OF A NOTICE U/S 148 OF THE ACT, PRIOR APPROVAL OF THE SUPERIOR AUTHORITY BEFORE ISSUING SUCH NOTICE AND ISSUANCE OF NOTICE WITHIN THE PRESCRIBED TIME LIMIT. THE COURTS ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 5 THEREFORE, HAVE REPEATEDLY HELD THAT THE FULFILLMENT OF THE STATUTORY REQUIREMENT IS SUBSTANTIVE, MANDATORY AND THE FAILURE THEREOF, IS FATAL TO VERY VALIDITY OF THE INITIATION OF PROCEEDINGS U/S 147 OF THE ACT. 7. THE LD AR HAS FURTHER ARGUED THAT THE BELIEF MUST BE OF AN HONEST AND REASONABLE PERSON BASED UPON REASONABLE GROUNDS IN GOOD FAITH AND NOT A SHEER PRETENCE. AS PER THE LD AR, THESE PRINCIPLES WERE PROPOUNDED IN THE FOLLOWING CASE LAWS: GANGASHARAN & SONS PVT. LTD. 130 ITR 1 (SC), ITO V/S LAKHMANI MEWAL DAS (1976) 103 ITR 437 (SC), SHEO NATH SINGH V/S AAC, (1971) 82 ITR 147 (SC). 8. RELIANCE WAS ALSO PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ITO V/S LAKHMANI MEWAL DAS (1976) 103 ITR 437 (SC) WHEREIN IT WAS HELD THAT: ' 11. AS STATED EARLIER, THE REASONS FOR THE FORMATION OF THE BELIEF MUST HAVE RATIONAL CONNECTION WITH OR RELEVANT BEARING ON THE FORMATION OF THE BELIEF. RATIONAL CONNECTION POSTULATES THAT THERE MUST BE A DIRECT NEXUS OR LIVE LINK BETWEEN THE MATERIAL COMING TO THE NOTICE OF THE ITO AND THE FORMATION OF THIS BELIEF THAT THERE HAS BEEN ESCAPEMENT OF THE INCOME OF THE ASSESSEE FROM ASSESSMENT IN THE PARTICULAR YEAR OF HIS FAILURE TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS. IT IS NO DOUBT TRUE THAT THE COURT CANNOT GO INTO SUFFICIENCY OR ADEQUACY OF THE MATERIAL AND SUBSTITUTE ITS OWN OPINION FOR THAT OF THE ITO ON THE POINT AS TO WHETHER ACTION SHOULD BE INITIATED FOR REOPENING ASSESSMENT. AT THE SAME TIME WE HAVE TO BEAR IN MIND THAT IT IS NOT ANY AND EVERY MATERIAL, HOWSOEVER VAGUE AND INDEFINITE OR DISTANT, REMOTE AND FARFETCHED, WHICH WOULD WARRANT THE FORMATION OF THE BELIEF RELATING TO ESCAPEMENT OF THE INCOME OF THE ASSESSEE FROM ASSESSMENT. ----------X---------X---------X-- THE REASON ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 6 FOR THE FORMATION OF THE BELIEF MUST BE HELD IN GOOD FAITH AND SHOULD NOT BE A MERE PRETENCE . 12. THE POWERS OF THE ITO TO REOPEN ASSESSMENT, THOUGH WIDE, ARE NOT PLENARY. THE WORDS OF THE STATUTE ARE 'REASON TO BELIEVE' AND NOT 'REASON TO SUSPECT'. THE REOPENING TO THE ASSESSMENT AFTER THE LAPSE OF MANY YEARS IS A SERIOUS MATTER . THE ACT, NO DOUBT, CONTEMPLATES THE REOPENING OF THE ASSESSMENT IF GROUNDS EXIST FOR BELIEVING THAT INCOME OF THE ASSESSEE HAS ESCAPED ASSESSMENT. ------------ THE PROVISIONS OF THE ACT IN THIS RESPECT DEPART FROM THE NORMAL RULE THAT THERE SHOULD BE, SUBJECT TO RIGHT OF APPEAL AND REVISION, FINALITY ABOUT ORDERS MADE IN JUDICIAL AND QUASI-JUDICIAL PROCEEDINGS. IT IS, THEREFORE, ESSENTIAL THAT BEFORE SUCH ACTION IS TAKEN THE REQUIREMENTS OF THE LAW SHOULD BE SATISFIED .--- 9. THE LD AR ALSO ARGUED THAT WITH REGARD TO THE VALUATION OF FINISHED GOODS, THE ONLY REASON OR/ JUSTIFICATION PROVIDED TO FORM AN OPINION AS TO INCOME ESCAPING ASSESSMENT IS THAT THE ASSESSEE-COMPANY HAS UNDERVALUED THE CLOSING STOCK OF RAW MATERIAL BY APPLYING AVERAGE RATE PER METER @ RS.89.62 AS AGAINST THE VALUATION BY ASSESSEE-COMPANY @ RS.70.43 PER METER WHILE VALUING ITS CLOSING STOCK AT COST AND HENCE, INCOME TO THE EXTENT OF RS.2,35,82,030/- IS ALLEGED TO HAVE ESCAPED ASSESSMENT. 10. IT WAS FURTHER CONTENDED THAT A BARE PERUSAL OF THE ABOVE REASONS, CLEARLY REVEALS THAT THE AO HAD PROCEEDED ON MERE SUSPICION, SURMISES AND CONJECTURES RATHER THAN HAVING ANY TANGIBLE MATERIAL IN HIS POSSESSION. THE LAW IS WELL SETTLED THAT THERE MUST REALLY EXIST AT LEAST SOME PRIMA FACIE MATERIAL SO AS TO JUSTIFY THE FORMATION OF BELIEF AS ALLEGED BY THE RESPONDENT TO HAVE A REASON TO BELIEVE. IT SHOULD NOT BE A ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 7 MERE PRETENCE OR ALLEGATION MADE BY THE AO BASED ON SUSPICION, GOSSIPS & RUMORS. 11. OUR ATTENTION WAS ALSO INVITED BY THE LD AR TO THE OBSERVATION OF THE A.O. THAT IN THE REASONS THAT FINISHED STOCK (IN PIECES) WAS UNDERVALUED BY RS.6,29,48,003/-. HOWEVER, AGAIN HERE ALSO THE VERY METHOD ADOPTED BY THE AO OF REDUCING GP @ 13.65% FROM THE SALE PRICE, IS A VERY CRUDE METHOD NEITHER KNOWN NOR RECOGNIZED BY ANY ACCOUNTING PRINCIPLES OR EVEN BY THE ICAI. AS AGAINST THIS, THE ASSESSEE-COMPANY HAS IDENTIFIED ALL THE ITEMS OF INVENTORY OF THE FINISHED STOCKS AS ON 31.03.2014 AND AFTER CONSIDERING ALL THE ELEMENTS OF THE COST INCURRED TILL THAT DATE, THE VALUATION HAS BEEN ARRIVED AT. A DETAILED LIST OF INVENTORY ALONG WITH THE VALUES ASSIGNED, BASED ON THE COST SHEET AND DULY SUPPORTED BY THE VARIOUS INVOICES WERE SUBMITTED BEFORE THE AO IN SUPPORT OF THE VALUATION TO THE EXTENT OF RS.2,13,51,494/- W.R.T 60,139 PIECES. 12. OUR ATTENTION WAS ALSO INVITED BY THE LD AR TO THE NEXT ITEM OF THE CLOSING STOCK OF FABRIC CONSISTED OF THE STOCK LYING AT THE JOB WORKERS UNDER PROCESS OF 1,41,987 PIECES VALUED AT RS.3,00,69,081/-. AS PER THE LD AR EVEN THE ASSESSEE-COMPANY ALSO VALUED THE RAW FABRIC SUPPLIED TO THE JOB WORKERS FOR GETTING THE DESIRED QUANTITY OF THE STITCHED GARMENTS AT COST BASED ON FIFO METHOD. A DETAILED CHART SHOWING THE NAME OF THE ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 8 JOB WORKER, STYLE NAME, DATE OF ISSUE, BUYER, P.O. NO., COLOUR, QUANTITY (EXPECTED/ORDERED TO BE STITCHED BY THE JOB WORKERS), QUALITY OF THE FINISHED GOODS/ GARMENTS, QUANTITY OF METERED SUPPLIED AND LYING WITH THE JOB WORKERS TOGETHER WITH THE RATE APPLIED AND FINALLY THE AMOUNT ARRIVED AT, (WHICH ULTIMATELY RESULTED INTO THE TOTAL CLOSING STOCK VALUATION OF RS.3,00,69,081/-) TOWARDS 1,41,987 PIECES ALONG WITH THE COPIES OF EXEMPLARY INVOICES WERE SUBMITTED BEFORE THE AO. 13. THE LD AR HAS FURTHER ARGUED THAT THE CLOSING STOCK CONSISTS OF REJECTION GARMENTS OF 64,751 PIECES WHICH WERE VALUED @ OF RS.25 PER PIECE. IT IS PERTINENT TO NOTE THAT THE ASSESSEE-COMPANY WAS MANUFACTURING THE EXPORT ITEMS OF THEIR CLIENTS ON CERTAIN BINDING TERMS AND CONDITIONS AS PER CONTRACT AND ONE OF THE CLAUSES PROHIBITED THE ASSESSEE-COMPANY MANUFACTURER-SUPPLIER TO SALE IN CASE, FOR ANY REASON, THE PRODUCT IS TREATED IT TO BE CONSIDERED TO BE OF GRADE SECOND, THIRD OR EXCESS, THE ASSESSEE-COMPANY-MANUFACTURER-SUPPLIER COULDNT BE SALE THE SAME TO ANY OTHER PARTY IN THE MARKET EXCEPT THE SAID CLIENTS. THUS, THE VALUE OF SUCH REJECTED GOODS, WAS VIRTUALLY NOTHING/NIL SO FAR AS THE ASSESSEE-MANUFACTURER-SUPPLIER WAS CONCERNED FOR THE OBVIOUS REASONS THAT IN THE LIGHT OF THIS AGREEMENT AND IN VIEW OF THESE FACTS WHY EVEN THE SAID CUSTOMER SHOULD BUY THE REJECTED/DAMAGED GOODS. THUS, FOR THE ASSESSEE-COMPANY IT WAS A DUMP/WASTAGE HAVING NO REALIZABLE VALUE AT ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 9 ALL. EVEN THEN THE ASSESSEE-COMPANY TO BE ON A VERY FAIR SIDE VALUED SUCH REJECTED GOODS @ OF RS.25 PER PIECE THOUGH WAS NOT AT ALL REQUIRED. 14. IT WAS THE FURTHER CONTENTION OF THE LD AR THAT THE AO DID NOT AT ALL DEALT WITH THE ABOVE OBJECTIONS BY MERELY OBSERVING THAT THEY ARE THE SUBJECT MATTER OF THE ASSESSMENT AND SHALL BE EXAMINED AT THAT POINT OF TIME. THE AO COMPLETELY FAILED TO APPRECIATE THAT THE REQUIREMENT OF THE LAW THAT THERE MUST BE SOME MATERIAL SO AS TO INVEST THE AO TO HAVE A PRIMA FACIE REASON TO BELIEVE AS TO ESCAPED ASSESSMENT OF INCOME BUT IN THE LIGHT OF THE ABOVE OBJECTION IT IS EVIDENTIARY CLEARLY THAT THERE WAS NO MATERIAL AT ALL THAT EVEN PRIMA FACIE OR REMOTELY ONE COULD NOT HAVE FORMED ANY FORMATION OF OPINION. THE AO COMPLETELY FAILED TO APPRECIATE THAT ANY ADDITION OF INCOME MADE BY WAY OF ENHANCING THE VALUE OF THE CLOSING STOCK SHALL RESULTS IN THE ENHANCEMENT OF THE VALUATION OF THE OPENING STOCK OF THE IMMEDIATELY NEXT YEAR BY THE SAME AMOUNT AND THUS, EVEN ASSUMING (ALTHOUGH NOT ADMITTING), THE VALUATION OF THE STOCK IS INCREASED IN THE CURRENT YEAR, THE VALUATION OF THE OPENING STOCK OF THE IMMEDIATELY SUCCEEDING YEAR SHALL STAND INCREASED TO THE SAME VERY EXTENT RESULTING INTO A REDUCTION IN THE PROFIT OF THE NEXT YEAR TO THE SAME EXTENT. THUS, SUCH A TREATMENT I.E. THE INCREASE IN THE VALUATION OF THE CLOSING STOCK OF THE SUBJECTED YEAR IS NOTHING BUT A TAX NEUTRAL EXERCISE. IT RESULTS NEITHER GAIN TO THE REVENUE NOR A LOSS TO THE PETITIONER- ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 10 ASSESSEE. THEREFORE, ONCE THERE IS NO INCOME AT ALL WHAT TO TALK OF ANY INCOME ESCAPING ASSESSMENT. HENCE, IT WAS NOTHING MORE THAN A SUSPICION ON THE PART OF THE AO. 15. THE LD AR FURTHER ARGUED THAT THE AO HOWEVER, DID NOT APPRECIATE HERE THE ACCOUNTS FULLY REFLECTED THE TRUE & CORRECT PICTURE OF INCOME AND IT WAS ONLY A DISTORTION BEING MADE BY THE AO AND THAT TOO IGNORING THE SETTLED PAST HISTORY, THE COMMERCIALLY ACCEPTED ACCOUNTING PRINCIPLES AND THE BINDING GUIDELINES AND ACCOUNTING STANDARDS OF THE ICAI. IT IS IN THIS CONTEXT THAT THE OVERVALUATION MADE BY THE AO DID NOT BRING ANY INCOME AND MUCH LESS ESCAPED INCOME WHICH, HAD TO BE CARRIED FORWARD TO THE NEXT YEAR AND THUS, ULTIMATELY RESULTING INTO NO INCOME ESCAPING ASSESSMENT SO FAR AS THE REVENUE IS CONCERNED. THE AO WAS MERELY EXPLORING THE POSSIBILITY OF THERE BEING SOME ESCAPED INCOME WHICH IS NOT CONTEMPLATED BY SEC.147 OF THE ACT. IN CHHUGAMAL RAJPAL V/S S.P. CHALIHA & ORS. (1971) 79 ITR 603 (SC), IT IS HELD THAT '--------- 4. IN HIS REPORT THE ITO DOES NOT SET OUT ANY REASON FOR COMING TO THE CONCLUSION THAT THIS IS A FIT CASE TO ISSUE NOTICE UNDER S. 148. THE MATERIAL THAT HE HAD BEFORE HIM FOR ISSUING NOTICE UNDER S. 148 IS NOT MENTIONED IN THE REPORT. IN THIS REPORT HE VAGUELY REFERS TO CERTAIN COMMUNICATIONS RECEIVED BY HIM FROM THE CIT, BIHAR AND ORISSA. HE DOES NOT MENTION THE FACTS CONTAINED IN THOSE COMMUNICATIONS. ALL THAT HE SAYS IS THAT FROM THOSE COMMUNICATIONS 'IT APPEARS THAT THESE PERSONS (ALLEGED CREDITORS) ARE NAME-LENDERS AND THE TRANSACTIONS ARE BOGUS.' HE HAS NOT EVEN COME TO A PRIMA FACIE CONCLUSION THAT THE TRANSACTIONS TO WHICH HE REFERRED ARE NOT GENUINE TRANSACTIONS. HE APPEARS TO HAVE HAD ONLY A VAGUE FEELING THAT THEY MAY BE BOGUS TRANSACTIONS. SUCH A CONCLUSION DOES NOT FULFIL THE REQUIREMENTS OF S. 151(2). WHAT THAT PROVISION ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 11 REQUIRES IS THAT HE MUST GIVE REASONS FOR ISSUING A NOTICE UNDER S. 148. IN OTHER WORDS HE MUST HAVE SOME PRIMA FACIE GROUNDS BEFORE HIM FOR TAKING ACTION UNDER S. 148. FURTHER HIS REPORT MENTIONS: 'HENCE PROPER INVESTIGATION REGARDING THESE LOANS IS NECESSARY.' IN OTHER WORDS HIS CONCLUSION IS THAT THERE IS A CASE FOR INVESTIGATING AS TO THE TRUTH OF THE ALLEGED TRANSACTIONS. THAT IS NOT THE SAME THING AS SAYING THAT THERE ARE REASONS TO ISSUE NOTICE UNDER S. 148. BEFORE ISSUING A NOTICE UNDER S. 148, THE ITO MUST HAVE EITHER REASONS TO BELIEVE THAT ---------------INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT FOR THAT YEAR OR ----- THE ITO HAS IN CONSEQUENCE OF INFORMATION IN HIS POSSESSION REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT FOR ANY ASSESSMENT YEAR. ------------ WE ARE NOT SATISFIED THAT THE ITO HAD ANY MATERIAL BEFORE HIM WHICH COULD SATISFY THE REQUIREMENTS OF EITHER CL. (A) OR CL. (B) OF S. 147. THEREFORE, HE COULD NOT HAVE ISSUED A NOTICE UNDER S. 148.-----------THE IMPORTANT SAFEGUARDS PROVIDED IS SS. 147 AND 151 WERE LIGHTLY TREATED BY THE ITO AS WELL AS BY THE CIT. BOTH OF THEM APPEAR TO HAVE TAKEN THE DUTY IMPOSED ON THEM UNDER THESE PROVISIONS AS OF LITTLE IMPORTANCE. THEY HAVE SUBSTITUTED THE FORM FOR THE SUBSTANCE.' 16. FOR BETTER APPRECIATION, THE LD AR ALSO INVITED OUR ATTENTION TO THE RELEVANT PART FROM THE SAID LETTER HEREUNDER IN VERBATIM: ----THEREFORE, YOU ARE REQUESTED TO EXAMINE THE MATTER AND TAKE NECESSARY ACTION, IF REQUIRED AND ACTION TO BE REPORTED TO THIS OFFICE. SOON THEREAFTER, THE AO RECORDED THE REASONS ON DATED 17.03.2017 (AS MENTIONED IN THE FORM SEEKING APPROVAL FROM THE ADD. CIT). THEREAFTER, THE REASONS WHERE COMMUNICATED TO THE ASSESSEE VIDE LETTER NO.24 DATED 10.04.2017, WHEN DEMANDED. A BARE PERUSAL OF THE REASONS SO RECORDED AFTER THE SAID LETTER OF THE ADD. CIT, IT IS EVIDENTLY CLEAR THAT THE AO ALMOST REPRODUCED THE CONTENTS THEREOF, MORE OR LESS IN VERBATIM, AS IF THESE WERE THE REASONS TO BELIEVE AS ENTERTAINED BY THE AO. THE AO HOWEVER, HAS NOT AT ALL SPELT OUT AS TO HOW THE INFORMATION CONTAINED IN ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 12 THE SAID LETTER, HAS PROVIDED HIM ANY CAUSE OR JUSTIFICATION TO HAVE A REASON TO BELIEVE AS TO ESCAPEMENT OF SOME INCOME. THE ADD. CIT THUS, CLEARLY HINTED AND RATHER DIRECTED THE AO TO TAKE SUITABLE ACTION, THEREBY, DIRECTING THE AO TO ACT IN A PARTICULAR MANNER AND THEREBY TAKING HIS OWN DISCRETION (AO). UNDENIABLY, THE INFORMATION/MATERIAL USED BY THE ADD. CIT AND THE AO BOTH, WERE THE AUDITED ACCOUNTS AND TAX AUDIT REPORTS, BASED ON THE FIGURES MENTIONED THEREIN, THE ADD. CIT ARRIVED AT NEW FIGURES OF THE VALUATION OF THE CLOSING STOCK OF RAW MATERIAL AND FINISHED GOODS, SO DID THE AO ALSO IN THE REASONS WHEN HE WAS ASKED BY THE ADD CIT, AS ABOVE. THIS IS ALSO EVIDENT FROM THE FACT THAT IN THE SAID LETTER DATED 17.12.2016, THE ADD. CIT RETURNED BACK THE ASSESSMENT RECORD TO THE AO IN ONE VOLUME, MEANING THEREBY HE DID NOT HAVE ANYTHING ELSE/NEW INFORMATION MATERIAL IN HIS POSSESSION. AS A MATTER OF FACT, THE AO WAS NEVER OF THE OPINION/MINDSET MUCH LESS OF A BELIEF THAT THERE WAS A CASE OF UNDERVALUATION IN AS MUCH AS HE WAS THE VERY PERSON WHO COMPLETED THE SCRUTINY ASSESSMENT U/S 143(3) AFTER GOING THROUGH BOOKS OF ACCOUNTS, SUBSIDIARY RECORDS, AUDITED ACCOUNTS, TAX AUDIT REPORTS ETC. AND SO ON. (AND MUST HAVE ALSO GONE THROUGH THE ASPECT OF VALUATION OF CLOSING STOCK THOUGH NOT SPECIFICALLY STATED IN ORIGINAL ASSESSMENT ORDER). HAD HE BEEN OF SUCH OPINION/BELIEF, HE HIMSELF COULD HAVE A SOUGHT PERMISSION OF HIS SUPERIOR I.E. THE ADD. CIT IN THE LIGHT OF THE CBDT ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 13 INSTRUCTION NO. 7/2014 DATED 26.09.2014 FOR EXPANDING THE SCOPE OF SCRUTINY ASSESSMENT. THE CLEAR DIRECTION GIVEN BY THE ADD. CIT (THOUGH NOT MENTIONING THE PROVISIONS OF S.147), WAS OTHERWISE VISIBLE, APPARENT AND COULD BE UNDERSTOOD BY ANY SENSIBLE PERSON OF A REASONABLE PRUDENCE IN AS MUCH AS THE DISCRETION GIVEN TO TAKE ANY ACTION TO THE AO, COULD HAVE PERMITTED HIM EITHER TO PROCEED U/S 154-RECTIFICATION PROCEEDINGS (WHICH WAS NOT LEGALLY POSSIBLE IN THE PRESENT CASE) OR ELSE TO INITIATE PROCEEDINGS U/S 147. THUS, IN THESE CIRCUMSTANCES, THE ADD. CIT DIRECTED THE AO (TO TAKE ACTION U/S 147) IN WHICH, THE AO HAD NO ROLE TO APPLY HIS MIND. THIS CLEARLY GOES TO SUGGEST THE AO MERELY ACTED AT THE BEHEST OF THE CLEAR DIRECTION OF HIS SUPERIOR OFFICER AND THAT THERE WAS NO INDEPENDENT APPLICATION OF MIND BY THE AO AND THEREFORE, IT WAS A CASE OF BORROWED SATISFACTION. THE AO HAD NO REASON TO BELIEF OF HIS OWN BUT HE WAS DIRECTED TO TAKE NECESSARY ACTION. THE DISCUSSION MADE IN THE LETTER NO.1198 DATED 17.12.2016 CLEARLY HINTED THE AO OF THE ALLEGED UNDERVALUATION OF THE STOCKS. 17. IN SUPPORT OF THE ABOVE PROPOSITION, RELIANCE WAS PLACED ON THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT V/S SHRI RAJASTHAN SYNTAX LTD. (2009) 313 ITR 231/ 7 DTR 393 (RAJ) AGAINST WHICH SLP FILED BY THE DEPARTMENT WAS DISMISSED (2009) 313 ITR 27 (STATUES). IN THAT CASE IT WAS HELD THAT: ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 14 REASSESSMENTREASON TO BELIEVEOPINION OF ANOTHER AOASSESSEE AT U LEASED ASSETS TO LESSEE AT M AND CLAIMED DEPRECIATION THEREON AS OWNER WHICH WAS ALLOWEDAO OF LESSEE AT M DISALLOWED LEASE RENTALS AS BUSINESS INCOME, TREATED THE LESSEE AS OWNER OF ASSETS AND ALLOWED DEPRECIATIONAO AT U ON THE BASIS OF OPINION OF AO AT M TO THE EFFECT THAT LESSEE WAS THE OWNER OF ASSETS, REOPENED ASSESSMENT OF ASSESSEE AND DISALLOWED DEPRECIATIONNOT JUSTIFIED SIMPLY BECAUSE THE AO OF LESSEE AT M HAD FORMED A DIFFERENT OPINION, ON THE SAME SET OF DOCUMENTS, INITIATION OF REASSESSMENT PROCEEDINGS OF ASSESSEE (LESSOR) BY THE AO AT U, ON THE BASIS, WAS RIGHTLY HELD BY THE TRIBUNAL AS ON 'BORROWED SATISFACTION NOT SUFFICIENT FOR INITIATING REASSESSMENT PROCEEDINGS REASSESSMENT WAS INITIATED ONLY ON THE BASIS OF OPINION ARRIVED AT BY AO AT M, HENCE INVALID ALSO, IN THE CASE OF CIT & ANR. VS. ASLAM ULLA KHAN (2010) 321 ITR 0150/34 DTR 0058 (KOL HC), IT WAS HELD AS UNDER: HELD : WHILE THE QUESTION AS TO WHETHER A DECLARATION FILED BY THE ASSESSEE UNDER THE VOLUNTARY DISCLOSURE SCHEME CAN CONSTITUTE INFORMATION FOR THE PURPOSE OF REOPENING UNDER S. 147 MAY BE A DEBATABLE POINT AND EITHER WAY MAY BE THE POSITION, IT IS NOT OPEN FOR THIS COURT TO CONSIDER THE MATTER NOW, AS THE TRIBUNAL HAS RECORDED A FINDING THAT THERE WAS NO APPLICATION OF MIND ON THE PART OF THE ASSESSING AUTHORITY FOR REOPENING. THE ASSESSING AUTHORITY CANNOT ACT ON THE DICTATES OF THE CIT, WHO HAD DIRECTED HIM TO REOPEN THE CONCLUDED ASSESSMENT FOR THE YEAR 1991-92, AS THAT, DOES NOT CONSTITUTE AN INFORMATION WITHIN THE SCOPE OF S. 147. APART FROM THIS, THE SUBMISSION THAT THE SANCTION ITSELF WAS DEFECTIVE, FOR THE REASON THAT THE SANCTION WAS FROM THE CIT, WHEREAS THE AUTHORIZED AUTHORITY FOR SANCTION WAS ONLY THE JT. CIT, PARTICULARLY, AS THE CIT WILL HAVE TO ACT AS THE APPELLATE AUTHORITY AGAINST THE ORDERS PASSED BY THE ASSESSING AUTHORITY, IS ONLY REITERATING THE CIRCUMSTANCE THAT THE REOPENING WAS BAD IN LAW. (PARAS 11 TO 13) ALSO IN MADANLAL JINDAL VS. ITO & ORS. (1973) 92 ITR 0546 (CAL. HC), IT WAS HELD AS UNDER: REASSESSMENT UNDER S. 147(A)ITO COULD NOT REOPEN THE ASSESSMENT OF ASSESSEE MERELY ACTING ON THE BASIS OF A LETTER FROM ANOTHER ITO WHO HAPPENED TO ASSESS ASSESSEES WIFE CONVEYING THAT SHE WAS A BENAMI PARTNER IN A FIRM ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 15 XXXXXXX THERE WAS NO EXPRESS STATEMENT OF THE ITO THAT HE WAS FORWARDING THE REOPENING PROPOSAL OF THE CIT ON THE GROUND OF THE LETTER FROM THE ITO, 'J' WARD, BUT FROM THE FACTS AND CIRCUMSTANCES AND FROM THE FACT THAT THERE IS NO SPECIFIC STATEMENT INDICATING THE SOURCE ON WHICH THE ITO IN THE INSTANT CASE HAD FORMED THE BELIEF AS TO THE ESCAPEMENT OF INCOME AND AS TO THE OMISSION OR FAILURE ON THE PART OF THE ASSESSEE, IT IS APPARENT THAT HE ALSO ACTED MERELY ON THE LETTER OF THE ITO, 'J' WARD. IT IS TRUE THAT THE LETTER OF THE ITO, 'J' WARD, COULD HAVE BEEN A SOURCE OF INFORMATION UPON WHICH THE ITO IN THIS CASE COULD HAVE INDEPENDENTLY FORMED HIS OWN BELIEF. BUT IT IS NOT CLEAR AS TO WHETHER THE ITO MADE ANY EFFORT TO FORM ANY INDEPENDENT BELIEF BUT HAD MERELY ACTED ON THE SUGGESTION OF THE ITO, 'J' WARD. IN THE AFORESAID VIEW OF THE MATTER THE SAID IMPUGNED NOTICE MUST ALSO BE QUASHED . SITARAM JINDAL VS. ITO (1972) 84 ITR 162 (CAL) : TC51R.648 FOLLOWED. CIT V/S SMT. VYJAYANTHIMALA BALI (1985) 45 CTR 0191/155 ITR 0662 (MUM HC), WHEREIN IT IS HELD AS UNDER: AFTER PERUSING THE LETTER ADDRESSED TO THE ITO ON BEHALF OF THE CIT AND THE NOTE OF THE ITO IN THE NOTICE ISSUED TO THE ASSESSEE, ONE WOULD BE COMPELLED TO COME TO THE CONCLUSION THAT IT IS NOT ANY NEW INFORMATION WHICH HAD COME IN POSSESSION OF THE ITO WHICH HAD INDUCED HIM TO ISSUE NOTICE UNDER S. 147(B) AND COMMENCE REASSESSMENT PROCEEDINGS THEREAFTER BUT THAT SUCH ACTION WAS STATED AS A RESULT OF CLEAR DIRECTIVES ISSUED BY THE CIT WHICH DIRECTIVES THE ITO WAS OBLIGED TO COMPLY WITH. THIS WAS NOT AND CANNOT BE CONSIDERED OR ACCEPTED TO BE THE INFORMATION AS PRESCRIBED BY THE STATUTORY PROVISION VIZ., S. 147(B). ACCORDINGLY, THE REASSESSMENT MADE BY THE ITO UNDER S. 147(B) WAS INVALID. SHEO NARAIN JAISWAL & ORS. V/S ITO & ORS. (1989) 176 ITR 0352 (PAT HC), WHEREIN IT WAS HELD THAT REASSESSMENT UNDER S. 147(A)CONDITION PRECEDENTWHERE THE CONCERNED ITO NEVER FORMED THE REQUISITE BELIEF THAT THERE HAD BEEN ESCAPEMENT OF INCOME OR THAT INCOME HAD ESCAPED ASSESSMENT BY REASON OF THE OMISSION OR FAILURE ON THE PART OF ASSESSEE TO DISCLOSE FULLY AND TRULY MATERIAL FACTS FOR THE ASSESSMENT ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 16 OF THAT YEAR BUT MERELY ACTS AT THE BEHEST OF SUPERIOR AUTHORITY, IT MUST BE HELD THAT THE ASSUMPTION OF JURISDICTION UNDER S. 148 WAS BAD FOR NON-SATISFACTION OF THE CONDITIONS PRECEDENT HELD : THE REQUISITE BELIEF UNDER S. 147 MUST BE THAT OF THE ITO CONCERNED AND NOT OF ANY OTHER OFFICER. IF THE ITO DOES NOT FORM HIS OWN BELIEF, BUT MERELY ACTS AT THE BEHEST OF ANY SUPERIOR AUTHORITY, IT MUST BE HELD THAT THE ASSUMPTION OF JURISDICTION UNDER S. 148 WAS BAD FOR NON-SATISFACTION OF THE CONDITIONS PRECEDENT. IN THE PRESENT CASE THERE WAS EXCHANGE OF VIEWS BETWEEN THE CIT, ADDL. CIT AND THE ITO CONCERNED. IT ALSO APPEARS THAT THE ITO EXPRESSED HIS VIEW THAT, IN HIS OPINION, THE AMOUNT COULD NOT BE BROUGHT UNDER ASSESSMENT. ADDL. CIT HELD A VIEW OTHERWISE. IT ALSO APPEARS THAT THE ITO WHO HAD ULTIMATELY SUBMITTED A PROPOSAL UNDER S. 147 ALSO EXPRESSED HIS DOUBTS AND DIFFICULTIES REGARDING TAXABILITY OF THE AMOUNT IN QUESTION AND ASKED FOR INSTRUCTIONS. THEREAFTER, HE RECEIVED DIRECTIONS FROM THE CIT TO SUBMIT A PROPOSAL UNDER S. 147 AND IN OBEDIENCE TO THE AFORESAID DIRECTION, HE SUBMITTED A PROPOSAL FOR INITIATING THE PROCEEDINGS UNDER S. 147. THEREFORE, IT CANNOT BE DOUBTED THAT THE CONCERNED ITO NEVER FORMED THE REQUISITE BELIEF THAT THERE HAD BEEN ESCAPEMENT OF INCOME OR THAT INCOME HAD ESCAPED ASSESSMENT BY REASON OF THE OMISSION OR FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY THE MATERIAL FACTS FOR THE ASSESSMENT FOR THAT YEAR. CIT VS. ABDUL KADAR AHAMED (2006) 156 TAXMAN 206 (KER), WHEREIN IT WAS HELD THAT REASSESSMENT PROCEEDING AT THE INSTANCE OF SUPERIOR AUTHORITY DICTATING THE SUBORDINATE OFFICER TO ACT IN PARTICULAR MANNER THEREBY TAKING AWAY THE DISCRETION VESTED IN THE SUBORDINATE. IN THE CASE OF DCIT VS. DHARAMPAL SATYAPAL LTD., [2017] 82 TAXMANN.COM 322 (DELHI - TRIB.) (DPB 53-60) ON THIS ASPECT IT WAS HELD: 33. IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES DISCUSSED ABOVE, WE CAN SEE THAT ONLY BASED ON THE 'RECOMMENDATION' OF THE ADIT (INV.) DATED 24.03.2011, THE AO HAS INITIATED REPORT FOR SANCTION U/S 151 AND ISSUED NOTICE, WHICH IS NOTHING BUT 'BORROWED BELIEF'. IT HAS BEEN HELD BY THE HON'BLE SUPREME COURT IN ANIRUDHSINHJI KARANSINHJI JADEJA V. STATE OF GUJARAT [1995] 5 SCC 302, THAT 'IF A STATUTORY AUTHORITY HAS BEEN VESTED WITH JURISDICTION, HE HAS TO EXERCISE IT ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 17 ACCORDING TO ITS OWN DISCRETION. IF DISCRETION IS EXERCISED UNDER THE DIRECTION OR IN COMPLIANCE WITH SOME HIGHER AUTHORITY'S INSTRUCTIONS, THEN IT WILL BE A CASE OF FAILURE TO EXERCISE DISCRETION ALL TOGETHER.' IT HAS TO BE KEPT IN MIND THAT SATISFACTION RECORDED SHOULD BE 'INDEPENDENT' AND 'NOT BORROWED' OR 'DICTATED' SATISFACTION. THUS, WE FIND THERE WAS NO FRESH TANGIBLE MATERIAL FOR THE AY 2004- 05 WITH THE AO AND HE HAS SIMPLY ISSUED NOTICE ON BORROWED BELIEF OF ADIT (INV.). 18. IN VIEW OF THE ABOVE, IT WAS ARGUED THAT INITIATION OF PROCEEDINGS U/S 147 OF THE ACT DESERVES TO BE QUASHED. 19. THE LD AR ALSO ARGUED THAT INITIATION OF PROCEEDINGS U/S 147 IS WITHOUT JURISDICTIONS AS THE ADDITION FOUND RECORDED IN THE REASONS WERE NOT MADE BY THE A.O. WHILE FINALIZING THE ASSESSMENT. IN THE CONTEXT OF THE PECULIAR FACTS OF THIS CASE AND KEEPING IN MIND THE PROVISIONS OF S. 147 AND EXPL. 3 TO S. 147, A QUESTION ARISES THAT IN A CASE THE AO IS SATISFIED ON THE ISSUE ON WHICH THE REOPENING WAS MADE AND DOES NOT MAKE ANY ADDITION, CAN HE MAKE ADDITIONS ON OTHER ISSUES, WHICH CAME TO HIS NOTICE AT THE TIME OF REASSESSMENT AND WHICH DIDNT FROM PART OF THE REASON FOR THE REOPENING. IT IS SUBMITTED THAT IN THE PRESENT CASE, WHEREAS THE REASONS RECORDED BY THE AO, THOUGH SPEAKS OF A BRIEF FORMED BY THE AO ON THE ESCAPEMENT OF INCOME ON ACCOUNT OF ALLEGED VALUATION OF CLOSING STOCK OF RAW MATERIAL AND OF FINISHED GOODS. HOWEVER, WHILE COMPLETING THE ASSESSMENT NO ADDITION WAS MADE W.R.T. ISSUE OF RAW MATERIAL AT ALL. AGAIN, THOUGH THE AO MADE ADDITIONS W.R.T. THE VALUATION ASPECT OF FINISHED GOODS BUT THE ENTIRE BASIS OF MAKING THE ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 18 ADDITION IN THE IMPUGNED ASSESSMENT ORDER WAS COMPLETELY CHANGED, WHEN COMPARED WITH THE GROUNDS ADAPTED IN THE REASONS RECORDED FOR THE FORMATION OF BELIEF AS TO THE ESCAPEMENT OF INCOME IN MUCH AS IN THE REASONS RECORDED HE APPLIED A CRUEL METHOD OF VALUING THE ENTIRE CLOSING STOCK SHOWN UNDER THE HEAD FINISHED GOODS, AT COST, HOWEVER, IN THE ASSESSMENT ORDER, HE ALLEGED UNDER VALUATION OF RS.2,13,67,830/- (W.R.T REJECTION OF GOODS) AND OF RS.2,03,36,304/- (UNDER THE HEAD STOCK LYING AT THE JOB UNITS), WHICH WAS NOT AT ALL A CASE MADE OUT IN THE REASONS RECORDED EVEN REMOTELY. WHEN THE AO HAS FORMED A REASON TO BELIEVE KEEPING IN MIND SOME FACTS AND THE INFORMATION AVAILABLE BEFORE HIM, HE COULD NOT HAVE COMPLETELY CHANGED THE NATURE OF THE ADDITIONS. NO DOUBT, THE ESCAPEMENT OF INCOME CONCEIVED IN THE REASONS RECORDED MAY NOT BE THERE BUT AT LEAST THE VERY BASIS FOR THE GROUNDS INSPIRING HIM TO FORM A REASONABLE BELIEF AS TO ESCAPEMENT MUST BE PRESENT WHILE MAKING THE ADDITION IN THE ASSESSMENT ORDER. HENCE, IT CAN BE SAID THAT THE NO ADDITIONS WERE MADE ON THE ISSUES ON WHICH RE-OPENING WAS MADE AND THEREFORE, THE AO CANNOT MAKE ANY ADDITIONS OTHER THAN THE ONE STATED IN THE REASONS. 20. IN SUPPORT OF ABOVE PROPOSITION, RELIANCE WAS PLACED ON THE DECISION OF CIT V/S JET AIRWAYS (I) LIMITED (2011) 52 DTR 71/331 ITR 236 (MUM HC) (DPB 23-30), THE HIGH COURT INTERPRETED THE PHRASE 'AND ALSO' ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 19 AS BEING CONJUNCTIVE AND CUMULATIVE AND NOT BEING IN THE ALTERNATIVE. THUS, HAVING HELD THAT THE SCOPE OF S.148 INCLUDES NOT ONLY SUCH INCOME FOR WHICH THE ASSESSMENT WAS REOPENED BUT ALSO ANY OTHER INCOME WHICH COMES TO THE NOTICE OF THE AO SUBSEQUENTLY IN THE COURSE OF REASSESSMENT PROCEEDINGS. BUT THE HON'BLE HIGH COURT HELD THAT IF THE ORIGINAL REASON FOR WHICH THE ASSESSMENT WAS REOPENED DOES NOT SURVIVE, THEN THE AO CANNOT ASSESS THE INCOME RELATED TO THE OTHER ISSUES THAT CAME TO NOTICE DURING THE REASSESSMENT PROCEEDINGS. FOR BETTER APPRECIATION RELEVANT PART IS REPRODUCED HERE UNDER: 22. WE HAVE APPROACHED THE ISSUE OF INTERPRETATION THAT HAS ARISEN FOR DECISION IN THESE APPEALS, BOTH AS A MATTER OF FIRST PRINCIPLE, BASED ON THE LANGUAGE USED IN S. 147(1) AND ON THE BASIS OF THE PRECEDENT ON THE SUBJECT. WE AGREE WITH THE SUBMISSIONS WHICH HAS BEEN URGED ON BEHALF OF THE ASSESSEE THAT S. 147(1) AS IT STANDS POSTULATES THAT UPON THE FORMATION OF A REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT FOR ANY ASSESSMENT YEAR, THE AO MAY ASSESS OR REASSESS SUCH INCOME 'AND ALSO' ANY OTHER INCOME CHARGEABLE TO TAX WHICH COMES TO HIS NOTICE SUBSEQUENTLY DURING THE PROCEEDINGS AS HAVING ESCAPED ASSESSMENT. THE WORDS 'AND ALSO' ARE USED IN A CUMULATIVE AND CONJUNCTIVE SENSE. TO READ THESE WORDS AS BEING IN THE ALTERNATIVE WOULD BE TO REWRITE THE LANGUAGE USED BY PARLIAMENT. OUR VIEW HAS BEEN SUPPORTED BY THE BACKGROUND WHICH LED TO THE INSERTION OF EXPLN. 3 TO S. 147. PARLIAMENT MUST BE REGARDED AS BEING AWARE OF THE INTERPRETATION THAT WAS PLACED ON THE WORDS 'AND ALSO' BY THE RAJASTHAN HIGH COURT IN SHRI RAM SINGH (SUPRA). PARLIAMENT HAS NOT TAKEN AWAY THE BASIS OF THAT DECISION. WHILE IT IS OPEN TO PARLIAMENT, HAVING REGARD TO THE PLENITUDE OF ITS LEGISLATIVE POWERS TO DO SO, THE PROVISIONS OF S. 147(1) AS THEY STOOD AFTER THE AMENDMENT OF 1ST APRIL, 1989 CONTINUE TO HOLD THE FIELD. THIS DECISION WAS FOLLOWED BY HONBLE DELHI HIGH COURT IN THE CASE OF RANBAXY LABORATORIES LTD. V/S CIT (2011) 336 ITR 136/57 DTR 281 (DEL ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 20 HC) WHEREIN, IT WAS HELD THAT THE AO HAD JURISDICTION TO REASSESS INCOME OTHER THAN THE INCOME IN RESPECT OF WHICH PROCEEDINGS U/S 147 WERE INITIATED BUT HE WAS NOT JUSTIFIED IN DOING SO WHEN THE VERY REASONS FOR INITIATION OF THOSE PROCEEDINGS CEASED TO SURVIVE. LEGISLATURE COULD NOT BE PRESUMED TO HAVE INTENDED TO GIVE BLANKET POWERS TO THE AO THAT ON ASSUMING JURISDICTION U/S 147 REGARDING ASSESSMENT OR REASSESSMENT OF ESCAPED INCOME, HE WOULD KEEP ON MAKING ROVING INQUIRIES AND THEREBY INCLUDING DIFFERENT ITEMS OF INCOME, NOT CONNECTED OR RELATED WITH THE REASONS TO BELIEVE, ON THE BASIS OF WHICH HE ASSUMED JURISDICTION. IT WAS FURTHER HELD THAT THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE AO HAD THE JURISDICTION TO REASSESS ISSUES OTHER THAN THE ISSUES IN RESPECT OF WHICH PROCEEDINGS WERE INITIATED BUT HE WAS NOT SO JUSTIFIED WHEN THE REASONS FOR INITIATION OF THOSE PROCEEDINGS CEASED TO SURVIVE. THE OBSERVATIONS OF THE HONBLE HIGH COURT ON PAGES 147 AND 148 OF IN 336 ITR 136 ARE WORTH NOTING. 21. RELIANCE WAS ALSO PLACED ON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V/S MOHMED JUNED DADANI (2013) 85 DTR 12/355 ITR 172 (GUJ HC): HEADNOTE : REOPENING OF ASSESSMENT - JURISDICTION OF AO - REASONS FOR REOPENING - NOTICE WAS ISSUED U/S 148 ON GROUNDS OF WRONG COMPUTATION BY ASSESSEE U/S 80HHC - SUBSEQUENTLY, NO ADDITIONS WAS MADE BY AO ON GROUND BASED UPON WHICH THE ASSESSMENT WAS REOPENED BUT RATHER ADDITIONS WERE MADE ON SOME OTHER GROUNDS WHICH DID NOT FORM PART OF THE REASONS RECORDED BY AO - ASSESSEE ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 21 CLAIMED THAT THE AO HAD NO JURISDICTION TO TRAVEL BEYOND THE REASONS FOR REOPENING THE ASSESSMENT - CIT(A) REJECTED CLAIM OF ASSESSEE - ITAT ALLOWED ASSESSEES APPEAL HOLDING THE ACTION OF AO WITHOUT JURISDICTION - HELD : S. 147 GIVES VIDE POWER TO THE AO FOR REOPENING AN ASSESSMENT SUBJECT TO FULFILLMENT OF CERTAIN CONDITIONS - FOR ASSUMING JURISDICTION TO FRAME AN ASSESSMENT U/S 147 WHAT IS ESSENTIAL IS A VALID REOPENING OF A PREVIOUSLY CLOSED ASSESSMENT - ONCE FOUNDATION OF THE REOPENING IS REMOVED ,ANY FURTHER PROCEEDING IN RESPECT TO SUCH ASSESSMENT WAS NOT PERMISSIBLE - THUS DROPPING OF GROUND ON WHICH THE NOTICE FOR REOPENING WAS ISSUED BY AO SHOWS THAT HE HAD NO 'REASON TO BELIEVE' THAT INCOME HAD ESCAPED ASSESSMENT AND THUS HE HAS NO JURISDICTION TO ASSESS THE OTHER ESCAPED INCOME - IF THE REASON ON WHICH THE ASSESSMENT IS REOPENED FAILS, IT WAS NOT OPEN FOR AO STILL PROCEED TO ASSESS SOME OTHER INCOME WHICH ACCORDING TO HIM HAD ESCAPED ASSESSMENT AND WHICH CAME TO HIS LIGHT DURING THE COURSE OF THE ASSESSMENT BY VIRTUE OF EXPLANATION (3) TO S. 147 - REVENUES APPEAL DISMISSED. WHILE HOLDING SO, THE HIGH COURT REFERRED TO A DECISION, WHICH WAS BASED ON THE LAW PRIOR TO THE AVAILABILITY OF EXPLANATION 3, IT WAS HELD: REASSESSMENT - SCOPE - ADDITION IN RESPECT OF ITEMS OTHER THAN THE ONE ON WHICH NOTICE IS GIVEN - IT IS ONLY WHEN, IN PROCEEDINGS U/S 147 THE AO ASSESSES OR REASSESSES ANY INCOME CHARGEABLE TO TAX, WHICH HAS ESCAPED ASSESSMENT FOR ANY ASSESSMENT YEAR, WITH RESPECT TO WHICH HE HAD 'REASON TO BELIEVE' TO BE SO, THEN ONLY, IN ADDITION, HE CAN ALSO PUT TO TAX, THE OTHER INCOME, CHARGEABLE TO TAX, WHICH HAS ESCAPED ASSESSMENT, AND WHICH HAS COME TO HIS NOTICE SUBSEQUENTLY, IN THE COURSE OF PROCEEDINGS U/S 147 - ONCE THE AO CAME TO THE CONCLUSION, THAT THE INCOME, WITH RESPECT TO WHICH HE HAD ENTERTAINED 'REASON TO BELIEVE' TO HAVE ESCAPED ASSESSMENT, WAS FOUND TO HAVE BEEN EXPLAINED, HIS JURISDICTION CAME TO A STOP AT THAT, AND HE DID NOT CONTINUE TO POSSESS JURISDICTION, TO PUT TO TAX, ANY OTHER INCOME, WHICH SUBSEQUENTLY CAME TO HIS NOTICE, IN THE COURSE OF REASSESSMENT PROCEEDINGS, WHICH WERE FOUND BY HIM, TO HAVE ESCAPED ASSESSMENT - CIT V/S SHRI RAM SINGH (2008) 8 DTR 118/306 ITR 343(RAJ HC). THE OTHER DECISIONS TAKING THE SAME VIEW ARE CIT V/S ADHUNIK NIRYAT ISPAT LTD. (2011) 63 DTR 212 (DEI HC) AND ACIT V/S MAJOR DEEPAK ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 22 MEHTA (2012) 65 DTR 237/ 344 ITR 641 (CHHATTISGARH HC). ALSO REFER DCIT V/S TAKSHILA EDUCATIONAL SOCIETY (2016) 284 CTR 306 (PAT HC) WHEREIN IT WAS HELD THAT AO HAVING MADE NO ADDITION ON ISSUES WHICH WERE SUBJECT MATTER OF REASON TO BELIEVE FOR PURPOSE OF REOPENING, ADDITION ON OTHER ISSUES WAS WITHOUT JURISDICTION. IN HOTEL REGAL INTERNATIONAL & ANR. VS. ITO (2010) 320 ITR 573 (CAL) WHEREIN THE PETITIONER WERE CALLED UPON TO FILE OBJECTION TO THE NOTICE U/S. 148 PROPOSING TO REOPEN THE ASSESSMENT ON GROUND THAT RS. 73,219 HAD ESCAPED ASST. NOW THE AUTHORITIES COULD NOT SHIFT THEIR STAND AND PASS ON ORDER ON OTHER GROUND THAT VALUATION REPORT RECEIVED SUBSEQUENT TO PASSING OF THE ORDER DISPOSING THE OBJECTION THE ASSESSING OFFICER MUST CONSIDER THE MATERIAL AND PASS SPEAKING ORDER. ASSESSMENT QUASHED. HOWEVER, IN THE PRESENT CASE, AS PER THE LD AR, THIS MANDATORY PRECONDITION HAS NOT BEEN FULLY AND PROPERLY SATISFIED, IN AS MUCH AS, THE LD. ADD. CIT WHILE GRANTING APPROVAL HAS RECORDED HIS SATISFACTION AS UNDER: YES, I SATISFIED AS THE REASONS RECORDED BY THE AO THAT IT IS A FIT CASE FOR ISSUANCE OF NOTICE U/S 148. RECORDING OF THE SATISFACTION IN SUCH MANNER IS NOTHING BUT RECORDING OF THE SATISFACTION USING THE WORDS YES' OR IT IS A FIT CASE OR YES I AM SATISFIED AND NOTHING MORE THAN THAT. THE LD. ADD. CIT, HAS NOT AT ALL ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 23 WHISPERED A SINGLE WORD FURTHER REFERRING TO THE MATERIAL/INFORMATION DISCUSSED IN THE REASONS PUT BEFORE HIM BY THE AO THAT THERE IS ABSOLUTELY NO NEW INFORMATION/MATERIAL STATED IN THE REASONS BUT IT WAS NOTHING BUT A REAPPRAISAL/ SECOND THOUGHT ON THE SAME SET OF FACTS AND MATERIAL WHICH WAS ALREADY AVAILABLE WHILE MAKING THE ORIGINAL ASSESSMENT U/S 143(3). THUS, THE ENTIRE SUBSEQUENT PROCEEDINGS ARE VITIATED DUE TO NON- FULFILLMENT OF SUCH A VITAL PRECONDITION. 22. IN SUPPORT OF THE ABOVE CONTENTIONS, RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF RAJ KISHORE PRASAD VS ITO (1992) 195 ITR 438 (ALL.) AND LANDMARK JUDGMENT OF SUPREME COURT IN THE CASE OF CHHUGAMAL RAJPAL V. S.P. CHALIHA [1971] 79 ITR 603 (SC), WHEREIN IT WAS HELD AS UNDER: FURTHER, THE REPORT SUBMITTED BY HIM UNDER SECTION 151(2) DOES NOT MENTION ANY REASON FOR COMING TO THE CONCLUSION THAT IT IS A FIT CASE FOR THE ISSUE OF A NOTICE UNDER SECTION 148. WE ARE ALSO OF THE OPINION THAT THE COMMISSIONER HAS MECHANICALLY ACCORDED PERMISSION. HE DID NOT HIMSELF RECORD THAT HE WAS SATISFIED THAT THIS WAS A FIT CASE FOR THE ISSUE OF A NOTICE UNDER SECTION 148. TO QUESTION NO. 8 IN THE REPORT WHICH READS 'WHETHER THE COMMISSIONER IS SATISFIED THAT IT IS A FIT CASE FOR THE ISSUE OF NOTICE UNDER SECTION 148', HE JUST NOTED THE WORD 'YES' AND AFFIXED HIS SIGNATURE THEREUNDER. WE ARE OF THE OPINION THAT IF ONLY HE HAD READ THE REPORT CAREFULLY, HE COULD NEVER HAVE COME TO THE CONCLUSION ON THE MATERIAL BEFORE HIM THAT THIS IS A FIT CASE TO ISSUE NOTICE UNDER SECTION 148. THE IMPORTANT SAFEGUARDS PROVIDED IN SECTIONS 147 AND 151 WERE LIGHTLY TREATED BY THE INCOME-TAX OFFICER AS WELL AS BY THE COMMISSIONER. BOTH OF THEM APPEAR TO HAVE TAKEN THE DUTY IMPOSED ON THEM UNDER THESE PROVISIONS AS OF LITTLE IMPORTANCE. THEY HAVE SUBSTITUTED THE FORM FOR THE SUBSTANCE. ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 24 23. RELIANCE WAS ALSO PLACED ON THE DECISION OF MUMBAI ITAT IN THE CASE OF HIRACHAND KANUGA VS. DCIT (2015) 68 SOT 205 (MUM. ITAT), WHEREIN IT WAS HELD AS UNDER: 9. A SIMPLE READING OF THE PROVISIONS OF SEC. 151(1) WITH THE PROVISO CLEARLY SHOW THAT NO SUCH NOTICE SHALL BE ISSUED UNLESS THE ADDL. COMMISSIONER IS SATISFIED ON THE REASONS RECORDED BY THE ASSESSING OFFICER THAT IT IS A FIT CASE FOR THE ISSUE OF NOTICE WHICH MEANS THAT THE SATISFACTION OF THE COMMISSIONER IS PARAMOUNT FOR WHICH THE LEAST THAT IS EXPECTED FROM THE COMMISSIONER IS APPLICATION OF MIND AND DUE DILIGENCE BEFORE ACCORDING SANCTION TO THE REASONS RECORDED BY THE ASSESSING OFFICER. 10. IN THE PRESENT CASE THE LETTER WHICH IS PLACED ON RECORD SHOWS THAT THE ADDL. COMMISSIONER HAS SIMPLY SANCTIONED THE PROPOSAL FOR INITIATING PROCEEDINGS UNDER S. 147 IN GROUP CASES OF BENEFICIARIES OF MAHASAGAR SECURITIES P. LTD. NOWHERE THE ADDL. CIT HAS RECORDED HIS DISSATISFACTION. THE HONBLE SUPREME COURT IN THE CASE OF CHHUGAMAL RAJPAL VS.S.P. CHALIHA & ORS. (1971) 79 ITR 603 (SC) OBSERVED THAT THE IMPORTANT SAFEGUARDS PROVIDED IN SEC. 147 AND 151 WERE LIGHTLY TREATED BY THE ITO AS WELL AS THE COMMISSIONER. 11. IN THE LIGHT OF THE ABOVE MENTIONED REASONS, IN OUR CONSIDERATE VIEW, S. 147 AND 148 ARE CHARTER TO THE REVENUE TO REOPEN EARLIER ASSESSMENTS AND ARE, THEREFORE PROTECTED BY SAFEGUARDS AGAINST UNNECESSARY HARASSMENT OF THE ASSESSEE. THEY ARE SWORD FOR THE REVENUE AND SHIELD FOR THE ASSESSEE. SEC. 151 GUARDS THAT THE SWORD OF SEC.147 MAY NOT BE USED UNLESS A SUPERIOR OFFICER IS SATISFIED THAT THE ASSESSING OFFICER HAS GOOD AND ADEQUATE REASONS TO INVOKE THE PROVISIONS OF SEC. 147. THE SUPERIOR AUTHORITY HAS TO EXAMINE THE REASONS, MATERIAL OR GROUNDS AND TO JUDGE WHETHER THEY ARE SUFFICIENT AND ADEQUATE TO THE FORMATION OF THE NECESSARY BELIEF ON THE PART OF THE ASSESSING OFFICER. IF, AFTER APPLYING HIS MIND AND ALSO RECORDING HIS REASONS, HOWSOEVER BRIEFLY, THE COMMISSIONER IS OF THE OPINION THAT THE ASSESSING OFFICERS BELIEF IS WELL REASONED AND BONAFIDE, HE IS TO ACCORD HIS SANCTION TO THE ISSUE OF NOTICE UNDER S. 148 OF THE ACT. IN THE INSTANT CASE, WE FIND FROM THE PERUSAL OF THE ORDER SHEET WHICH IS ON RECORD, THE COMMISSIONER HAS SIMPLY PUT 'APPROVED' AND SIGNED THE REPORT THEREBY GIVING SANCTION TO THE ASSESSING OFFICER. NOWHERE THE COMMISSIONER HAS RECORDED A SATISFACTION NOTE NOT EVEN IN BRIEF. THEREFORE, IT ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 25 CANNOT BE SAID THAT THE COMMISSIONER HAS ACCORDED SANCTION AFTER APPLYING HIS MIND AND AFTER RECORDING HIS SATISFACTION. FURTHER, THE JUDGEMENT OF HIGH COURT OF CHHATTISGARH IN THE CASE OF MARUTI CLEAN COAL & POWER LTD. VS. ACIT (2018) 400 ITR 397, IS SQUARELY APPLICABLE TO THE PRESENT CASE, WHEREIN IT WAS HELD AS UNDER : 15. NOW, WHEN WE LOOK AT THE ENDORSEMENT MADE BY THE CIT GRANTING SANCTION UNDER S. 151, THE ENDORSEMENT MADE BY THE CIT WHILE GRANTING SANCTION READS AS UNDER : 'YES, I AM SATISFIED THAT THIS IS A FIT CASE FOR REOPENING UNDER EXPLN. 2(C) OF S. 147 OF THE ACT. ACCORDINGLY, SANCTION IS GIVEN UNDER S. 151(1) OF THE ACT FOR ISSUE OF NOTICE UNDER S. 148 OF THE ACT.' X X X X X 21. WHEN WE REFER TO S. 151(1) THE PROVISO THEREIN, SPECIFICALLY DEALS WITH THE CHIEF CIT OR THE CIT TO BE SATISFIED ON THE REASONS RECORDED BY THE AO FOR ISSUANCE OF A NOTICE AFTER THE EXPIRY OF 4 YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR. IT IS THIS WHAT IS MISSING IN THE INSTANT CASE. THERE CAN BE NO DISPUTE AS REGARDS THE REQUIREMENT OF ACT TO BE STRICTLY COMPLIED WITH. IN THE ABSENCE OF THE NON-COMPLIANCE OF THE STATUTORY REQUIREMENT AS IS REQUIRED FOR ISSUANCE OF A NOTICE UNDER S. 148, PARTICULARLY WHEN IT IS BEING ISSUED BEYOND THE PERIOD OF 4 YEARS, THEN THE NOTICE AND THE PROCEEDINGS INITIATED STANDS VITIATED FOR WANT OF SPECIFIC SANCTION AS IS REQUIRED UNDER THE PROVISO TO S. 151(1). X X X X X 24. SINCE THIS COURT FINDS THAT ISSUANCE OF NOTICE UNDER S. 148 AT THE FIRST INSTANCE ITSELF WAS WITHOUT A PROPER SANCTION AS IS REQUIRED UNDER THE PROVISO TO S. 151(1) OF THE IT ACT. WE NEED NOT GO INTO THE VERACITY AND MERITS OF THE CASE ANY FURTHER AT THIS STAGE . LEAVING OPEN THE ISSUE ON MERITS, THE PRESENT NOTICE UNDER S. 148 STANDS SET ASIDE/ QUASHED ONLY ON ACCOUNT OF NON-FULFILLMENT OF THE CONDITION PRECEDENT AS IS ENVISAGED UNDER THE OF THE PROVISO TO S. 151(1) OF THE IT ACT. THE WRIT PETITION STANDS ALLOWED ONLY ON THIS GROUND ALONE. 24. FURTHER RELIANCE WAS PLACED ON THE DECISION OF CIT VS S. GOYANKA LIME & CHEMICALS LTD [2015] 56 TAXMANN.COM 390 (MP), WHEREIN IT WAS HELD AS UNDER: ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 26 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND WE FIND THAT WHILE ACCORDING SANCTION, THE JOINT COMMISSIONER, INCOME TAX HAS ONLY RECORDED SO 'YES, I AM SATISFIED '. IN THE CASE OF ARJUN SINGH (SUPRA), THE SAME QUESTION HAS BEEN CONSIDERED BY A COORDINATE BENCH OF THIS COURT AND THE FOLLOWING PRINCIPLES ARE LAID DOWN: 'THE COMMISSIONER ACTED, OF COURSE, MECHANICALLY IN ORDER TO DISCHARGE HIS STATUTORY OBLIGATION PROPERLY IN THE MATTER OF RECORDING SANCTION AS HE MERELY WROTE ON THE FORMAT 'YES, I AM SATISFIED' WHICH INDICATES AS IF HE WAS TO SIGN ONLY ON THE DOTTED LINE. EVEN OTHERWISE ALSO, THE EXERCISE IS SHOWN TO HAVE BEEN PERFORMED IN LESS THAN 24 HOURS OF TIME WHICH ALSO GOES TO INDICATE THAT THE COMMISSIONER DID NOT APPLY HIS MIND AT ALL WHILE GRANTING SANCTION. THE SATISFACTION HAS TO BE WITH OBJECTIVITY ON OBJECTIVE MATERIAL.' 8. IF THE CASE IN HAND IS ANALYSED ON THE BASIS OF THE AFORESAID PRINCIPLE, THE MECHANICAL WAY OF RECORDING SATISFACTION BY THE JOINT COMMISSIONER, WHICH ACCORDS SANCTION FOR ISSUING NOTICE UNDER SECTION 148, IS CLEARLY UNSUSTAINABLE AND WE FIND THAT ON SUCH CONSIDERATION BOTH THE APPELLATE AUTHORITIES HAVE INTERFERED INTO THE MATTER. IN DOING SO, NO ERROR HAS BEEN COMMITTED WARRANTING RECONSIDERATION. IN THE CASE OF DCIT VS. DHARAMPAL SATYAPAL LTD., [2017] 82 TAXMANN.COM 322 (DELHI - TRIB.) (DPB 53-60), ON THIS ASPECT, THE ABOVE DECISION CHHUGAMAL RAJPAL (SUPRA) WAS FOLLOWED, HOLDING AS UNDER: 68. WE FIND THAT ON THE FORMAT WHICH HAS BEEN REPRODUCED, THE ADDITIONAL CIT AND COMMISSIONER HAS SIMPLY WRITTEN 'YES I AM SATISFIED' ON THE SAME DAY, I.E. 28.03.2011 WHICH DOES NOT IN ANY MANNER SHED ANY LIGHT AS TO WHETHER THERE WAS ANY APPLICATION OF MIND AT ALL BY THE AFORESAID TWO SENIOR OFFICERS, WHO WERE DUTY BOUND TO HAVE LOOKED IN TO CAREFULLY THE REASONS RECORDED BY THE AO AND SEEN THE HISTORY BEHIND THE ASSESSMENT WHICH WAS PROPOSED TO BE REOPENED BY THE AO. WHEN A SUPERIOR AUTHORITY IS GIVEN POWER BY THE LEGISLATURE, TO GRANT SANCTION TO DO AN ACT BY AN AUTHORITY BELOW HIM, THEN THAT POWER NEEDS TO BE EXERCISED WITH DUE CARE AND CIRCUMSPECTION AND AFTER DUE APPLICATION OF MIND. MECHANICAL MANNER OF GIVING SANCTION LIKE IN THIS CASE HAVE NOT BEEN APPROVED BY THE HON'BLE SUPREME COURT IN A SIMILAR CASE IN CHHUGAMAL RAJPAL V. S.P. CHALIHA [1971] 79 ITR 603 AND HON'BLE HIGH COURT OF MADHYA PRADESH IN ARJUN SINGH V. ASSTT. DIRECTOR OF INCOME TAX [2000] 246 ITR 363 . THUS, WE ARE NOT ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 27 SATISFIED THAT AO HAD ANY MATERIAL BEFORE HIM WHICH SATISFIES THE REQUIREMENTS OF SECTION 147. THEREFORE, HE COULD NOT HAVE ISSUED NOTICE U/S 148. FURTHER, THE REPORT SUBMITTED BY HIM U/S 151 DOES NOT MENTION ANY REASON AND DOES NOT MENTION WHICH FACTS WERE NOT DISCLOSED BY THE ASSESSEE. WE ARE ALSO OF THE OPINION THAT THE COMMISSIONER HAS MECHANICALLY ACCORDED PERMISSION. IF ONLY HE HAD READ THE REPORT AND SEEN THE HISTORY OF THE ORIGINAL ASSESSMENT, HE WOULD NOT HAVE GRANTED PERMISSION. THE SAFEGUARD AGAINST REOPENING U/S 151 OF THE ACT HAS BEEN DONE BY BOTH THE SUPERIOR AUTHORITIES VERY LIGHTLY AND AS HELD BY THE HON'BLE SUPREME COURT IN CHUGAMAL RAJPAL (SUPRA), THE AUTHORITIES SUBSTITUTED FORM OVER SUBSTANCE. THUS, WE HOLD THAT THE SANCTION GRANTED BY THE COMMISSIONER U/S 151 IS INVALID AND SO, THE NOTICE OF THE AO DATED 29.03.2011 IS BAD IN LAW AND HAS TO BE NECESSARILY STRUCK DOWN. HENCE THE PROCEEDINGS U/S 147 AND THE NOTICE U/S 148 DESERVES TO BE QUASHED. 25. THE LD AR FURTHER CONTENDED THAT THE A.O. HAS WRONGLY INVOKED THE PROVISIONS OF SECTION 145(3) OF THE ACT. THE LAW U/S 145(3) PROVIDED THREE BASIS TO INVOKE THE SAME, VIZ (I) WHERE THE AO IS NOT SATISFIED ABOUT THE CORRECTNESS/COMPLETENESS OF THE ACCOUNTS (II) WHERE THE METHOD OF ACCOUNTING PROVIDED IN SUB SEC. (1), IS NOT FOLLOWED OR (III) THE ACCOUNTING STANDARDS AS NOTIFIED U/S 145(2) HAVE NOT BEEN FOLLOWED BY THE ASSESSEE. HENCE, IT IS OBLIGATORY FOR THE AO TO HAVE ESTABLISHED ALL/ANY ONE OF ABOVE CONDITIONS BEFORE INVOKING SEC 145(3) AND IF HE FAILS HE WOULD BE ACTING WITHOUT JURISDICTION IN MAKING ADDITIONS. IN THE PRESENT CASE HOWEVER, THERE APPEARS NO DISPUTE ON ANY OF THE THREE CONDITIONS. IN OTHER WORDS, THE AO HAS COMPLETELY FAILED TO ESTABLISH ALL/ANY OF THE GROUNDS. ON THE CONTRARY, HIS GROUND THAT THE ASSESSEE HAS INCLUDED THE REJECTED GOODS ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 28 AND RAW MATERIAL (LYING WITH JOB UNITS) IN FINISHED GOODS AS SHOWN IN THE BALANCE SHEET, IS NOT AT ALL PROVIDED IN SEC 145. OTHERWISE ALSO, IT WAS A MATTER OF MERE PRESENTATION AND THAT TOO IN THE FINAL ACCOUNTS BUT NOT IN THE REGULARLY MAINTAINED ACCOUNTS. THE OTHER ALLEGATION OF UNDERVALUATION IS COMPLETELY MISCONCEIVED AND IS NOT A GOODS BASIS. FURTHER, IT IS NOT DISPUTED THAT THE ASSESSEE HAS MAINTAINED ALL THE BOOKS OF ACCOUNT AND OTHER SUBSIDIARY RECORDS I.E. FINANCIAL AND QUANTITATIVE BOTH, CONSISTING OF CASH BOOK, LEDGER, PURCHASE BOOK, SALES BOOK, MANUFACTURING REGISTERS, QUANTITATIVE DETAILS OF OPENING STOCK AND CLOSING STOCK AND STOCK/PRODUCTION REGISTER, GOODS SENT ON JOB WORK REGISTER AND ALL OTHER SUBSIDIARY RECORDS AS REQUIRED IN THE GARMENT INDUSTRY. THE ENTIRE SALES, PURCHASES AND EXPENSES ARE FULLY VOUCHED. THE CENTRAL EXCISE RECORDS ARE ALSO MAINTAINED AS PER THE NORMS AND PRESCRIPTIONS. THE ACCOUNTS ARE AUDITED U/S 44AB OF THE ACT AS ALSO UNDER THE COMPANIES ACT, RELEVANT VAT ACT AND EXCISE ACT. FURTHER ALL THE BOOKS OF ACCOUNTS WERE DULY PRODUCED BEFORE THE AO AS ADMITTED BY HIM AT PAGE-1 PARA 1. 26. IN SUPPORT OF ABOVE PROPOSITION, RELIANCE WAS PLACED ON THE DECISION OF TRIVENI PHARMA V/S ITO 85 TTJ 950 (JP) (TM), WHEREIN IT HAS BEEN HELD THAT ASSESSEE HAVING MAINTAINED COMPLETE LEDGER ACCOUNT OF SALES AND PURCHASES AND HAVING FILED RETURN WITH TAX AUDIT REPORT CONTAINING QUANTITY DETAILS OPENING STOCK, PURCHASES, SALES AND CLOSING ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 29 STOCK, THERE WAS NO WARRANT FOR REJECTION OF BOOKS ON THE GROUNDS THAT THEY WERE INCORRECT OR INCOMPLETE, OR NOT SUBJECT TO VERIFICATION. IN CIT V/S POONAM RANI (2010) 326 ITR 223 (DEL), ASSESSEE HAVING FURNISHED COMPLETE DETAILS, INCLUDING QUANTITATIVE DATA IN RESPECT OF PURCHASE OF RAW MATERIAL, MANUFACTURE OF COPPER WIRE AND SALE OF FINISHED PRODUCTS AND THE AO HAVING NOT POINTED OUT ANY PARTICULAR DEFECT OR DISCREPANCY IN THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE , FALL IN GP RATE ALONE COULD NOT BY ITSELF BE A GROUND TO REJECT THE ACCOUNTS BY INVOKING S. 145(3); CIT(A) AND THE TRIBUNAL HAVING ACCEPTED THE EXPLANATION GIVEN BY THE ASSESSEE FOR THE FALL IN GP RATE AND THE FINDING OF FACT RECORDED BY THEM HAVING NOT BEEN SHOWN TO BE PERVERSE IN ANY MANNER, NO SUBSTANTIAL QUESTION OF LAW ARISES FOR CONSIDERATION. IN CIT V/S JACKSONS (2010) 39 DTR 212 (DEL.) ASSESSEES BOOKS OF ACCOUNTS COULD NOT BE REJECTED BY INVOKING S. 145(3) WHEN THERE IS NO SPECIFIC DEFECT POINTED OUT IN THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE FOLLOWING A REGULAR METHOD OF ACCOUNTING AND STOCK REGISTER WAS ALSO MAINTAINED THOUGH NOT IN THE FORM EXPECTED BY AO. IN CIT V/S JAS JACK ELEGANCE EXPORTS (2010) 324 ITR 95 (DEL.) ACCOUNTSREJECTION NON MAINTENANCE OF STOCK REGISTER AND GP RATE TRIBUNAL NOTED THAT THE AO HAD NOT FOUND ANY DEFECT IN THE BOOKS OF ACCOUNTS AND MAINTENANCE OF STOCK REGISTER WAS NOT FEASIBLE CONSIDERING THE NATURE OF THE BUSINESS OF THE ASSESSEE SINCE FABRIC WAS MEASURED IN METRES AND WAS THEREAFTER STITCHED TO MAKE GARMENTS WHICH HAD TO BE COUNTED IN PIECESAS REGARDS FAILURE OF THE ASSESSEE TO PRODUCE THE PERSONS TO WHOM PAYMENTS WERE MADE FOR FABRICATION, EMBROIDERY, DYEING, FINISHING ETC., THE AO WAS AT LIBERTY TO SUMMON ALL OF THEM IN CASE HE WANTED TO VERIFY THE GENUINENESS OF THE PAYMENTSFAILURE OF THE ASSESSEE TO PRODUCE THOSE PERSONS COULD NOT HAVE BEEN A GROUND FOR REJECTING ACCOUNTS UNDER S. 145BOTH, THE TRIBUNAL AS WELL AS CIT(A) HAVE ACCEPTED THE EXPLANATION GIVEN BY THE ASSESSEE REGARDING FALL IN GP RATENO PERVERSITY IS POINTED OUT IN THE FINDING OF THE TRIBUNALNO SUBSTANTIAL QUESTION OF LAW ARISES ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 30 27. THE LD AR HAS FURTHER CONTENDED THAT SHOWING THE REJECTED GOODS AND THE RAW MATERIAL LYING WITH THE JOB UNITS UNDER THE HEADING OF FINISHED GOODS IN THE AUDITED ANNUAL STATEMENT OF ACCOUNTS, CANNOT BE MADE A BASIS OF THE WHOLESOME REJECTION OF BOOKS OF ACCOUNTS. IT WAS ONLY AN ANNUAL PRESENTATION OF THE ACCOUNTS. THE FACT IS NOT DENIED THAT THE FINISHED GOODS OF RS.5,30,39,350/- AS SHOWN IN THE BALANCE SHEET WAS BIFURCATED IN DIFFERENT ITEMS LIKE FINISHED GOODS, REJECTED GOODS AND GOODS LYING WITH JOB UNITS IN THE LEDGER ACCOUNTS. THEREFORE, THERE IS NO SUBSTANCE IN SUCH ALLEGATIONS. THE AO OBJECTED THE CORRECTNESS OF BOOKS OF ACCOUNTS ALSO ON ONE INTERESTING GROUND THAT THE SHIPMENT WAS OF HIGHER QUANTITY IN COMPARISON TO QUANTITY ORDERED HENCE THERE WAS NO CONTROL OVER THE PRODUCTION. IN THIS REGARDS IT WAS SUBMITTED BY THE LD AR THAT ASSESSEE ENTERED INTO A MANUFACTURING/VENDOR AGREEMENTS WITH IMPORTER AND AS PER THE AGREEMENTS CONDITION, THE ASSESSEE IS NOT AUTHORIZED TO SALE ANY FIRST/SECOND/THIRD REJECTION OR EXCESS QUANTITY AND DUE TO THIS PROHIBITION THE PURCHASE ORDER COMES WITH SOME LIBERTY OF CERTAIN QUANTITY MAY PLUS OR MINUS IN COMPARISON TO ORDERED QUANTITY. HENCE THERE ARE TWO WAYS EITHER TO KEEP EXCESS QUANTITIES WITH HIMSELF AND REJECT THEM AND SUFFER A TOTAL LOSS OR TO SEND THESE EXCESS QUANTITIES TO THE IMPORTER. NEEDLESS TO SAY THE LATTER IS THE BETTER COURSE. FURTHER IT IS NORMAL BUSINESS PRACTICE IN READYMADE GARMENT INDUSTRY TO ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 31 MANUFACTURE SOME EXCESS QUANTITIES OF PIECES TO COVER UP THE SAMPLES, REJECTION ON QUALITY CONTROL ETC. HENCE DOUBTING THIS PRACTICE IS TOTALLY BASELESS. LASTLY, THE AO IS EXPECTING THE PRODUCTION PROCESS TO BE DONE WITH A MATHEMATICAL PRECISION THOUGH HE IS NOT AN EXPERT OF THE FIELD NOR HE VISITED THE FACTORY. IN INDIA, THE ROBOTS ARE YET TO BE EMPLOYED HENCE SUCH AN INFERENCE WAS COMPLETELY UNWARRANTED. THE ACCOUNTS ARE AUDITED MANY TIMES, UNDER DIFFERENCE STATUTES, FOR DIFFERENT PURPOSES BUT IT IS NOT THE CASE OF THE AO THAT THE ACCOUNTS DO NOT SHOW A TRUE AND FAIR VIEW OF PROFIT /LOSSES OR THERE IS SOME QUALIFICATION W.R.T. INCORRECTNESS OR INCOMPLETENESS NOR ON ANY OF THE GROUNDS MENTIONED U/S 145(3). ALTERNATIVELY, IT WAS ARGUED BY THE LD AR THAT MINOR IRREGULARITIES, EVEN ASSUMING WERE THERE, CANNOT BE MADE A BASIS OF THE REJECTION OF THE BOOKS OF ACCOUNTS OR OF TRADING ADDITION. 28. HE FURTHER ARGUED THAT EVEN ON MERITS NO ADDITION WAS WARRANTED. THE ASSESSEE IS HAVING 64,751 PIECES OF READYMADE GARMENTS WHICH WERE CLASSIFIED AS REJECTED AND NOT CARRYING ANY REALIZABLE VALUE AS PER THE TERMS OF THE CONTRACT BETWEEN THE ASSESSEE EXPORTER AND IMPORTER. HOWEVER, FOR ACCOUNTING PURPOSE THESE ITEMS WERE VALUED AT A NOMINAL RATE OF RS.25/- PER PIECE AND ACCORDINGLY RS.16,18,775/- WERE SHOWN UNDER THE HEAD FINISHED STOCK. ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 32 29. ON THE OTHER HAND, THE LD CIT-DR HAS RELIED ON THE ORDERS OF THE AUTHORITIES BELOW AND CONTENDED THAT AFTER COMPLETION OF ASSESSMENT U/S 143(3) OF THE ACT, THE A.O. FOUND THAT THE INCOME OF THE ASSESSEE TO THE TUNE OF RS. 8,65,30,425/- HAS ESCAPED ASSESSMENT ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK. ACCORDINGLY, AFTER TAKING PERMISSION FROM THE HIGHER AUTHORITIES, THE ASSESSMENT WAS REOPENED BY ISSUE OF NOTICE U/S 148 AFTER RECORDING REASONS. AS THERE WAS UNDER VALUATION OF CLOSING STOCK IN THE FORM OF REJECTED ITEMS INCLUDED IN THE FINISHED GOODS AND THE MATERIALS SENT FOR JOB WORK, THE A.O. HAS CORRECTLY REACHED TO THE CONCLUSION THAT THE INCOME HAS ESCAPED ASSESSMENT AND ACCORDINGLY REOPENING WAS VALID IN TERMS OF THE REASONS RECORDED AND THE APPROVAL GIVEN BY THE COMPETENT AUTHORITY. HE HAS FURTHER CONTENDED THAT EVEN DURING THE COURSE OF REASSESSMENT PROCEEDINGS, THE ASSESSEE FAILED TO SUBMIT ANY PROOF REGARDING DESTRUCTION OF DAMAGED GOODS. THUS, THERE WAS NO BASIS FOR VALUING THE SAME AT NOMINAL PRICE OF 25 PER PIECE. MOREOVER, THE REDUCTION SHOWN BY THE ASSESSEE AT 2.16% OF PRODUCTION AS COMPARED TO THE NORMAL REDUCTION OF ONLY 0.5% TO 1%, THE A.O. WAS JUSTIFIED IN VALUING THE FINISHED GOODS @ RS. 355 PER PIECE IN RESPECT OF SUCH REJECTED GOODS. SIMILARLY, WITH RESPECT TO GOODS SENT FOR JOB WORK, THE ASSESSEE HAS WRONGLY VALUED THE SAME AT COST PRICE OF RAW MATERIAL INSTEAD OF VALUING THE SAME AS PER RATES OF FINISHED GOODS THE ASSESSEE ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 33 WAS HAVING. THE LD CIT-DR HAS FURTHER RELIED ON THE FINDINGS RECORDED BY BOTH THE LOWER AUTHORITIES AND CONTENDED THAT THE ADDITIONS SO MADE WITH REGARD TO UNDER VALUATION OF THE CLOSING STOCK SHOULD BE UPHELD. 30. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAD ALSO DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS REFERRED BY THE LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AS WELL AS CITED BY THE LD. AR AND LD. DR DURING THE COURSE OF HEARING WITH REFERENCE TO THE VALIDITY OF REOPENING OF ASSESSMENT AS WELL AS INVOCATION OF PROVISIONS OF SECTION 145(3) OF THE ACT AND ALSO FOR ADDITION MADE WITH REFERENCE TO UNDER VALUATION OF CLOSING STOCK INCLUDED IN THE FINISHED GOODS. FROM THE RECORD WE FOUND THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF READYMADE GARMENTS. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED ON 26/9/2013. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER SCRUTINY ASSESSMENT ORDER U/S 143(3) OF THE ACT WAS PASSED ON 30/10/2015 ASSESSING INCOME AT RS. 3,97,06,200/- AFTER MAKING ADDITION IN RESPECT OF INADMISSIBLE ITEMS AND DISALLOWANCE OF CERTAIN EXPENDITURE. THEREAFTER THE ASSESSMENT WAS REOPENED BY RECORDING REASONS THAT THE ASSESSEE HAS UNDER VALUED ITS STOCK OF FINISHED GOODS. IN REPLY TO NOTICE U/S 148, THE ASSESSEE FILED OBJECTIONS VIDE LETTER DATED 06.10.2017 AGAINST THE INITIATION OF PROCEEDINGS U/S 147, HOWEVER, ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 34 REJECTING THE ASSESSEE`S OBJECTION, THE AO FRAMED THE ASSESSMENT. HE ALLEGED THAT THE ASSESSEE HAS UNDERVALUED ITS STOCKS BY SHOWING FINISHED GOODS OF READYMADE GARMENTS AS REJECTED GOODS BEING 64751 PCS @ RS.25/- PER PCS AND FAILED TO PROVIDE ANY DOCUMENTARY EVIDENCE FOR MAKING VALUATION. THEREFORE, CONSIDERING THAT THESE PCS CONSIST OF ALL VARIETY OF FINISHED GOODS, HE VALUED THE SAME @ RS.355/- PER PCS (RS.2,13,51,494/- / 60139 PCS) AND ADDED RS.2,13,67,830/- (RS.2,29,86,605/- LESS RS.16,18,775/- SHOWN BY THE ASSESSEE) ON ACCOUNT OF THE ALLEGED UNDER VALUATION OF CLOSING STOCK. THE A.O. ALSO ALLEGED THAT THE ASSESSEE HAS UNDERVALUED ITS STOCKS LYING WITH JOB UNITS BEING 1,41,987 PCS @ RS. 211.77 INSTEAD OF SHOWING THE SAME AS FINISHED GOODS OF READYMADE GARMENTS AND FAILED TO SUBMIT ANY DOCUMENTARY EVIDENCE TO PROVE THE FACT OF STOCKS LYING WITH JOB UNITS AND FAILED TO PROVIDE ANY EVIDENCE FOR MAKING VALUATION. THEREFORE, CONSIDERING THAT THESE PCS CONSIST OF ALL VARIETY OF FINISHED GOODS, THE A.O. VALUED THE SAME AT RS.355/- PER PCS (RS.2,13,51,494/- / 60139 PCS) AND ADDED RS.2,03,36,304/- (RS.5,04,05,385/- ESTIMATED LESS RS.3,00,69,081/- SHOWN BY THE ASSESSEE) ON ACCOUNT OF THE ALLEGED UNDER VALUATION OF CLOSING STOCK. BEFORE US, THE LD AR OF THE ASSESSEE HAS OPPOSED THE VALIDITY OF REOPENING ON THE PLEA THAT THERE WAS NO REASON TO BELIEVE NOR ANY REASON TO SUSPECT THAT THERE WAS UNDER VALUATION OF CLOSING STOCK. IT ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 35 IS CONTENTION OF THE LD AR THAT AS PER THE LAW PREVAILED AT THE RELEVANT POINT OF TIME AND TILL DATE, THE BEDROCK CONDITION OR WORDS, WHICH STILL CONTINUE RIGHT SINCE INCEPTION, IN THE STATUTE, ARE 'REASON TO BELIEVE' AND NOT 'REASON TO SUSPECT'. THE WORD BELIEVE HAS TO BE UNDERSTOOD IN CONTRADISTINCTION OF SUSPICION OR OPINION. THE BELIEF OF THE ASSESSING OFFICER AS TO ESCAPEMENT OF INCOME SHOULD NOT BE A PRODUCT OF IMAGINATION OR SPECULATION. IT IS NOT THE BELIEF ALONE BUT SUCH BELIEF MUST BE COUPLED WITH SOME REASONS. AS PER THE LD AR, THERE ARE VARIOUS FACTS/INDICATORS WHICH CLEARLY PROVE THAT THE AO PROCEEDED ON MERE SUSPICION. THERE WAS NOTHING TO INDICATE EVEN REMOTELY WHAT TO SAY OF PRIMA FACIE BELIEF THAT THERE WAS SOME INCOME ESCAPING ASSESSMENT. ON THE FACTS, AS PER LD AR, IT CAN BE PROVED THAT JUDICIAL GUIDELINE HAS NOT BEEN FOLLOWED BY THE AO IN THIS CASE, HE DID NOT HAVE ANY MATERIAL TO HAVE BASED HIS BELIEF, NOR THAT HIS BELIEF WAS BONAFIDE AND IN GOOD FAITH, IF THE FACTS & GROUNDS, WHICH WERE UNDISPUTEDLY AVAILABLE ON RECORD, ON THE DATE OF RECORDING OF THE REASONS, IN THE LIGHT OF THE JUDICIAL GUIDELINE, ARE CONSIDERED. IT WAS ALSO THE ARGUMENT OF THE LD AR THAT THERE IS ABSOLUTELY NO NEW AND/OR TANGIBLE MATERIAL IN AS MUCH AS IN THE REASONS THE AO HAS SIMPLY DISCUSSED THE ALLEGATION OF UNDER VALUATION, BASED ON THE SAME MATERIAL, THE FIGURES, THE ACCOUNTS AND THE SAME FACTS AND CIRCUMSTANCES WHICH, WERE ADMITTEDLY AVAILABLE AT THE TIME OF MAKING OF THE ORIGINAL ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 36 ASSESSMENT VIDE ORDER DATED 16.12.2016 U/S 143(3). THERE IS NO ALLEGATION OF FAILURE OF THE ASSESSEE TO DISCLOSE TRULY AND FULLY ALL MATERIAL FACTS NECESSARY FOR THE ASSESSMENT AND HENCE IT WAS A MISTAKE COMMITTED BY THE AO FOR WHICH REMEDY LIES ELSEWHERE BUT NOT U/S 147. HE FURTHER CONTENDED THAT THE REOPENING WAS ONLY ON THE BORROWED SATISFACTION THAT THE LAW IS WELL SETTLED THAT TO ASSUME A VALID JURISDICTION U/S 147 OF THE ACT, THE AO MUST FORM A REASON TO BELIEVE OF HIS OWN AND SUCH A BELIEF (OR SATISFACTION) SHOULD NOT/CANNOT BE BORROWED FROM SOMEONE ELSE. HOWEVER, IN THE PRESENT CASE, ON THE OFFICIAL INSPECTION CARRIED OUT BY THE CA & AR OF THE ASSESSEE-COMPANY NAMELY SHRI T.C. CHOUDHARY, FCA, IT WAS FOUND THAT WHEN THE AO SOUGHT ADMINISTRATIVE APPROVAL BEFORE GRANTING A REFUND FROM A SUPERIOR OFFICER, THE LD. ADD. CIT ISSUED A LETTER NO.1198 DATED 17.12.2016. THE LD. ADD. CIT, HOWEVER, INSTEAD OF DEALING WITH THE ISSUE OF REFUND FOR WHICH, THE AO SOUGHT PERMISSION, MADE A DETAILED DISCUSSION WITH REGARD TO THE VALUATION OF THE CLOSING STOCK REFERRING TO THE SAME AUDITED FINAL ACCOUNTS AND THE TAX AUDIT REPORT AND ON A SECOND THOUGHT, SUBSTITUTED HIS OPINION THAT THERE APPEARS AN UNDERVALUATION OF THE CLOSING STOCK OF THE RAW MATERIAL TO THE EXTENT OF RS. 2.35 CRORE AND FINISHED GOODS OF RS. 6.29 CRORE, TOTALING TO RS. 8.65 CRORE. IN THE ENTIRE BODY OF THE SAID LETTER, THERE WAS ABSOLUTELY NO REFERENCE/WHISPER OF ANY OTHER NEW INFORMATION OR NEW MATERIAL (WHICH ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 37 WAS NOT AVAILABLE AT THE TIME OF THE MAKING OF THE ORIGINAL ASSESSMENT U/S 143(3) BEFORE THE AO). PERTINENTLY AT THE END OF THE SAID LETTER, THE ADD. CIT EVEN DIRECTED THE AO TO EXAMINE THE RECORD AND TAKE SUITABLE ACTION. A BARE PERUSAL OF THE REASONS SO RECORDED AFTER THE SAID LETTER OF THE ADD. CIT, IT IS EVIDENTLY CLEAR THAT THE AO ALMOST REPRODUCED THE CONTENTS THEREOF, MORE OR LESS IN VERBATIM, AS IF THESE WERE THE REASONS TO BELIEVE AS ENTERTAINED BY THE AO. THE AO HOWEVER, HAS NOT AT ALL SPELT OUT AS TO HOW THE INFORMATION CONTAINED IN THE SAID LETTER, HAS PROVIDED HIM ANY CAUSE OR JUSTIFICATION TO HAVE A REASON TO BELIEVE AS TO ESCAPEMENT OF SOME INCOME. THE ADD. CIT THUS, CLEARLY HINTED AND RATHER DIRECTED THE AO TO TAKE SUITABLE ACTION, THEREBY, DIRECTING THE AO TO ACT IN A PARTICULAR MANNER AND THEREBY TAKING HIS OWN DISCRETION (AO). THIS CLEARLY GOES TO SUGGEST THE AO MERELY ACTED AT THE BEHEST OF THE CLEAR DIRECTION OF HIS SUPERIOR OFFICER AND THAT THERE WAS NO INDEPENDENT APPLICATION OF MIND BY THE AO AND THEREFORE, IT WAS A CASE OF BORROWED SATISFACTION. THE AO HAD NO REASON TO BELIEF OF HIS OWN BUT HE WAS DIRECTED TO TAKE NECESSARY ACTION. THE DISCUSSION MADE IN THE LETTER NO.1198 DATED 17.12.2016 CLEARLY HINTED THE AO OF THE ALLEGED UNDERVALUATION OF THE STOCKS. IT WAS ALSO THE CONTENTION OF THE LD AR THAT APPROVAL SO GIVEN FOR REOPENING WAS JUST A MECHANICAL APPROVAL. AS PER LD AR, SECTION 151 OPERATES AS AN ADDITIONAL SAFEGUARD TO HINDER EXERCISE OF POWERS OF REASSESSMENT IN ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 38 ARBITRARY FASHION. AS PER SECTION 151(2), BEFORE THE AO ISSUES NOTICE U/S 148, SATISFACTION IS TO BE RECORDED BY THE CONCERNED HIGHER AUTHORITY, WHICH IS A SINE QUA NON. SUCH SATISFACTION DOES NOT MEAN MERELY AGREEING AND APPROVING TO WHAT THE AO HAS SAID, RATHER THE CONCERNED HIGHER AUTHORITY SHOULD RECORD A PROPER SATISFACTION, APPLYING HIS MIND, AS TO WHY IT IS A FIT CASE, GIVING PROPER REASONING. THE COURTS HAVE TIME AND AGAIN HELD THAT JUST NOTING THE WORD 'YES' OR IT IS A FIT CASE OR YES I AM SATISFIED AND AFFIXED HIS SIGNATURE THEREUNDER CANNOT BE CONSIDERED TO BE A PROPER OR VALID SANCTION AS CONTEMPLATED BY LAW. HOWEVER, IN THE PRESENT CASE, THIS MANDATORY PRECONDITION HAS NOT BEEN FULLY AND PROPERLY SATISFIED, IN AS MUCH AS, THE LD. ADD. CIT WHILE GRANTING APPROVAL HAS NOT RECORDED HIS SATISFACTION. 31. WITH REGARD TO MERIT OF ADDITION, WE FOUND THAT THE ADDITION HAS BEEN MADE BY THE A.O. BY REJECTING THE VALUATION OF CLOSING STOCK IN RESPECT OF REJECTED GOODS AND ALSO ON ACCOUNT OF GOODS SENT AND LYING WITH THE JOB WORK UNITS AT THE END OF YEAR. FROM THE RECORD WE FOUND THAT ALL THESE REJECTIONS WERE WITH RESPECT TO EXPORT ORDER OF READYMADE GARMENTS SO PROCURED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. AS PER THE TERMS OF EXPORT ORDER, THE ASSESSEE WAS NOT AUTHORIZED TO SELL ANY FIRST/SECOND/THIRD REJECTION OR EXCESS QUANTITY. FROM THE RECORD WE ALSO FOUND THAT THE ASSESSEE IS HAVING 64,751 PIECES OF ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 39 READYMADE GARMENTS WHICH WERE CLASSIFIED AS REJECTED AND NOT CARRYING ANY REALIZABLE VALUE AS PER THE TERMS OF THE CONTRACT BETWEEN THE ASSESSEE EXPORTER AND IMPORTER. HOWEVER, FOR ACCOUNTING PURPOSE THESE ITEMS WERE VALUED BY THE ASSESSEE AT A NOMINAL RATE OF RS.25/- PER PIECE AND ACCORDINGLY RS.16,18,775/- WERE SHOWN UNDER THE HEAD FINISHED STOCK. THE AO MADE ADDITION ON FOLLOWING GROUNDS: (I) THE ASSESSEE WAS REQUIRED TO DESTROY THE REJECTED ITEMS IMMEDIATELY AND THE ASSESSEE FAILED TO SUBMIT ANY DOCUMENTARY EVIDENCE. (II) THE ASSESSEE FAILED TO SUBMIT ANY DOCUMENTARY EVIDENCE REGARDING OPENING STOCK OF 24,063/- REJECTION PIECES. (III) THE ASSESSEE HAS NOT MENTIONED IN FINAL ACCOUNTS/NOTES OF ACCOUNTS THAT FINISHED GOODS ALSO INCLUDES REJECTION. (IV) ASSESSEE FAILED TO PROVIDE ANY DOCUMENTARY EVIDENCE FOR MAKING VALUATION OF REJECTION @ RS.25 PER PCS. IN THE REMAND PROCEEDING FOLLOWING ADDITIONAL GROUNDS WERE TAKEN BY THE AO. (I) THE ASSESSEE FAILED TO SUBMIT ANY PROOF REGARDING DESTRUCTION OF DAMAGED GOODS. NOT A SINGLE INSTANCE OF SUCH DESTRUCTION HAS BROUGHT INTO THE NOTICE OF THE AO. (II) REPORTED REJECTION IS 2.16% OF PRODUCTION WHEREAS AS PER WORK SHEET OF INSPECTION REJECTION IS ONLY 0.5% TO 1%. HENCE CLAIM OF ASSESSEE REGARDING REJECTION AT 2.16% IS WITHOUT ANY BASIS. (III) SHIPMENT IS OF HIGHER QUANTITY IN COMPARISON TO QUANTITY ORDERED, THIS SHOWS THERE IS NO SPECIFIC MECHANISM AND CONTROL OVER PRODUCTION OF GOODS AND EXPORT/SALE THEREOF. THUS, BOOKS OF ACCOUNTS ARE NOT RELIABLE AND DO NOT SHOW THE TRUE PICTURE OF BUSINESS AFFAIRS OF THE ASSESSEE. THEREFORE, AO RIGHTLY REJECTED BOOKS U /S 145(3). ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 40 ACCORDINGLY, AO MADE ADDITION BY HOLDING THAT THE ASSESSEE HAS UNDERVALUED ITS STOCKS BY SHOWING FINISHED GOODS OF READYMADE GARMENTS AS REJECTION GOODS AND AN ADDITION OF RS.2,13,67,830/- WAS MADE BY TAKING VALUE OF REJECTED GOODS @ RS.355/- PER PIECE. IN THE FIRST APPEAL THE CIT(A) CONFIRMED THE ADDITION BY HOLDING AS UNDER: I HAVE GONE THROUGH THE ASSESSMENT ORDER, STATEMENT OF FACTS, GROUNDS OF APPEAL, WRITTEN SUBMISSION, REMAND REPORT AND REJOINDERS CAREFULLY. I HAVE GONE THROUGH THE VALUATION OF CLOSING STOCK MADE BY THE AO. I FIND NO INFIRMITY OR INCORRECTNESS IN THE WORKING MADE BY THE AO, AFTER ANALYZING ALL THE EVIDENCES AVAILABLE WITH HIM. I AM OF THE CONSIDERED VIEW THAT THE AO HAD RIGHTLY VALUED THE CLOSING STOCK OF 64,751/- PCS. OF REJECTION (FINISHED STOCK) AT RS.2,29,86,605/- AND VALUATION OF 1,41,987/- PCS. LYING WITH JOB UNITS AT RS.5,04,05,385/-. HENCE, THE UNDERVALUATION OF CLOSING STOCK WORKED OUT BY THE AO AT RS.2,13,67,830/- (RS.2,29,86,605 RS.16,18,775) AND RS.2,03,36,304/- (RS.5,04,05,385- RS.3,00,69,081) IS HELD TO BE CORRECT. ACCORDINGLY, THE TOTAL ADDITION OF RS.4,17,04,134/- (RS.2,13,67,830+RS.2,03,36,304) MADE BY THE AO ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK MADE BY THE ASSESSEE IS HEREBY CONFIRMED. 32. FROM THE RECORD WE FOUND THAT THE AO WAS HAVING NO BASIS OR RELIABLE MATERIAL SO AS TO DRAW AN INFERENCE THAT THE STOCK SHOWN BY THE ASSESSEE UNDER THE HEAD REJECTED GOODS WAS, IN FACT, FINISHED GOODS AND WAS NOT REJECTED GOODS THEREFORE, IT WAS UNDERVALUED I.E. VALUED @ RS.25 PER PIECE ONLY AS AGAINST RS.355/- PER PIECE. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE IS AN EXPORTER AND THE ENTIRE SALE PROCEEDS ARE FROM EXPORT OF GARMENT ONLY (EXCEPT A MINOR AMOUNT FROM THE LOCAL SALE). ALSO IT IS A MATTER OF COMMON KNOWLEDGE THAT TO REMAIN CONTINUE IN THE INTERNATIONAL MARKET WITH GOODWILL, THERE CANNOT BE ANY COMPROMISES ON ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 41 QUALITY. THE REJECTION OF THE GOODS EXPORTED, IS NORMALLY A MATTER OF SERIOUS CONCERN FOR ALL THE EXPORTER INASMUCH AS MANY A TIMES, BECAUSE OF THE REJECTION OF ONLY A FEW PIECES, THE WHOLE/LOT CONSIGNMENT IS REJECTED AND EVEN THE COST OF TAKING SUCH REJECTED GOODS BACK TO INDIA, COSTS SO HEAVILY THAT IT NOT ONLY EATS UP ENTIRE PROFIT BUT RATHER COULD RESULT INTO A HEAVY LOSS. IT IS NOT DENIED THAT THE ASSESSEE HAS EXPORTED ITS GOODS I.E. STITCHED READYMADE GARMENTS TO THE COUNTRIES LIKE UNITED STATES OF AMERICA, UNITED KINGDOM WHICH ARE ALL THE MORE HIGHLY QUALITY CONSCIOUS AND EVEN A SLIGHTEST DEFECT IN THE GARMENT MAY RENDER THE WHOLE LOT OR RATHER SOME TIME THE WHOLE CONSIGNMENT AS REJECTION OR SCRAP. THEREFORE, TO AVOID ANY UNPLEASANT SITUATION OF BEING DELISTED OR BLACK LISTED OR TO LOSE THE EXPORT BUSINESS THE ASSESSEE WAS REQUIRED TO METICULOUSLY MAINTAIN THE HIGH STANDARDS AND THE PRODUCT BEING SUPPLIED HAS TO BE STRICTLY IN ACCORDANCE WITH THE REQUIREMENTS MADE BY THE IMPORTER-BUYER. THEREFORE, THE POSSIBILITY OF GENERATION OF THE REJECTION GOODS ON ACCOUNT OF THE DEFECT OR LACKING OF THE QUALITY IS NOT SOMETHING ABNORMAL WHICH, AO IS UNWARRANTEDLY DOUBTING. FROM THE RECORD WE ALSO FOUND THAT THE AO INVARIABLY ACCEPTED THE FACT THAT THESE GOODS ARE REJECTED GOODS AND THE ASSESSEE SHALL NOT HAVE ANY RIGHT TO SELL ANY OF THESE PIECES AS PER THE AGREEMENTS WITH OVERSEAS CLIENTS. THE SAMPLE COPIES OF AGREEMENTS WITH OVERSEAS CLIENTS WERE SUBMITTED BEFORE THE ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 42 AO, CLEARLY MENTIONING THE CLAUSE THAT THESE PRODUCTS SHALL NOT BE SOLD. HOWEVER, THE AO DID NOT ACCEPT SUCH STIPULATION ON THE SOLE GROUND THAT IF THERE IS ANY REJECTION IT HAD TO BE DESTROYED IMMEDIATELY AND THE ASSESSEE FAILED TO PRODUCE ANY DOCUMENTARY EVIDENCE FOR SUCH DISPOSAL. IN THIS REGARDS WE OBSERVE THAT THE AO IS DRAWING THIS INFERENCE BY PICKING UP ONE SAMPLE AGREEMENT ONLY, WHEREIN CONDITION OF DESTRUCTION WAS MENTIONED. THE DESTRUCTION STIPULATION WAS NOT APPLICABLE TO ALL AGREEMENTS. THE AO PICKED UP AN AGREEMENT AND CONSIDERED THE SAME TO BE UNIVERSALLY APPLICABLE AND DRAWN AN INFERENCE THAT EVERY REJECTED ITEM SHALL BE DESTRUCTED AND THAT TOO WITH IMMEDIATE EFFECT. IT IS A MATTER OF RECORD THAT THE PRIMARY CONDITION OF EVERY AGREEMENT IS RESTRICTION ON SALE OF REJECTED GOODS. WHETHER TO DESTROY OR NOT IS A SECONDARY REQUIREMENT WHICH WILL BE BASED UPON CERTAIN CONDITIONS AND UNDER CERTAIN CIRCUMSTANCES. HOWEVER, SOME AGREEMENTS ARE HAVING CONDITION OF DESTRUCTION WHICH WAS DULY COMPLIED WITH. IF A PARTICULAR ITEM HAS BEEN CLASSIFIED AS REJECTED AND NO FURTHER SALE HAS BEEN MADE OF THAT ITEM THEN CONDITIONS OF AGREEMENT HAS BEEN FULFILLED. IT IS NOT THE CASE THAT THE ASSESSEE IS SELLING THESE REJECTED GOODS IN THE GREY MARKET NEITHER THE AO NOR THE LD CIT(A) MADE ANY SUCH ALLEGATION. HENCE IF A PARTICULAR ITEM HAS BEEN CLASSIFIED AS REJECTED AND SIMPLY LYING IN THE FACTORY WITH NO FURTHER ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 43 SALE THEN IT IS BEYOND ANY UNDERSTANDING THAT HOW WILL IT FETCH A VALUE OF RS.355/- PER PIECE FOR VALUATION PURPOSE. 33. IN VIEW OF ABOVE, WE OBSERVE THAT THE ALLEGATION OF THE AO THAT THESE GOODS ARE NOT DESTROYED IS BASELESS. HE MIGHT BE CONFINING THE WORD DESTRUCTION TO SOME FORM OF BURNING ONLY, WHICH IS NOWHERE INCLUDED IN THE DEFINITION. THE MEANING OF DESTRUCTION IN READYMADE GARMENTS IS TO MAKE THEM UNSALEABLE/UNUSABLE. THE SAME WAS DONE WITH ALL THE REJECTED PCS WITH CUTTING THE REJECTED GARMENTS TO MAKE THEM UNUSABLE. THE LD. CIT(A) HAS ALSO RECORDED THIS FACT AT PAGE NOS. 11 AND 12 PARA I TO J OF HIS APPELLATE ORDER, THE CONDITION OF AGREEMENT WAS TO DESTROY THESE REJECTED ITEMS AND PROVIDE THE EVIDENCE TO IMPORTER ON REQUEST. SINCE NO REQUEST WAS MADE BY ANY IMPORTER HENCE THE QUESTION OF PROVIDING DOCUMENTARY EVIDENCE DOES NOT ARISE AT ALL. IN ANY CASE IT WAS A MATTER TO BE SOLVED BY THE ASSESSEE AND THE PARTY PLACING IMPORT ORDER. MERELY BECAUSE IMPORTER HAS NOT ASKED FOR ANY SUCH CERTIFICATE, CANNOT BE MADE TO REASON TO PRESUME THAT SUCH REJECTED GOODS HAD BEEN SOLD IN THE MARKET WITHOUT BRINGING ANY POSITIVE MATERIALS ON RECORD. FROM THE RECORD WE ALSO FOUND THAT WHILE ALLEGING THAT THE ASSESSEE HAS SHOWN ITS FINISHED GOODS AS REJECTIONS AND UNDER VALUED THE SAME, THE A.O. FAILED TO BRING ANY INSTANCE THAT THE ASSESSEE IS SELLING GOODS IN THE OPEN MARKET WHICH HAS BEEN CLASSIFIED AS REJECTED. IF THE A.O. HAD ANY ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 44 DOUBT HE COULD HAVE MADE ENQUIRIES DIRECTLY FROM THE IMPORTERS AS COMPLETE STOCK DETAILS ALONGWITH STYLE, COLOUR, GARMENT COMPOSITION, BRAND NAME ETC. WERE FILED BEFORE THE A.O.. AS PER OUR CONSIDERED VIEW, SELLING SUCH REJECTED GOODS IN THE OPEN MARKET WOULD HAVE INVITED SERIOUS LEGAL ACTION AGAINST THE ASSESSEE, BUT NOTHING LIKE THIS IS REPORTED. MOREOVER, WE FOUND THAT THE DECLARED SALES HAS BEEN ACCEPTED BY THE COMMERCIAL DEPARTMENT ALSO, MEANING THEREBY THERE WAS NO SALE OF THE REJECTED GOODS. FROM THE RECORD WE ALSO FOUND THAT THERE WERE ALSO QUALITY AUDIT REPORTS IN RESPECT OF EXPORT ORDERS WHICH HAS NOT BEEN DENIED BY THE A.O. SINCE THE ASSESSEE WAS HAVING BEEN REGULAR INTERNAL CONTROL SYSTEM TO KEEP A CHECK OVER THE QUALITY AND PERMANENTLY EMPLOYED QUALITY INSPECTORS WERE REGULARLY PREPARING QUALITY AUDIT REPORT, WHICH ALSO PLACED BEFORE THE A.O. AND THE SAME WAS NOT DISPUTED BY HIM. WE ALSO FOUND THAT SOMETIMES MANY QUALITY AUDIT REPORTS WAS REQUIRED WITH RESPECT TO A PARTICULAR PURCHASE ORDER. MOREOVER, SEPARATE QUALITY REPORTS WERE PREPARED FOR SEPARATE PURCHASE ORDER. WE ALSO FOUND THAT COPIES OF SAMPLE QUALITY AUDIT REPORTS WERE SUBMITTED BEFORE THE LD. CIT(A) AND THE LD. CIT(A) HIMSELF IN THE APPELLATE ORDER AT PAGE 11 PARA 5.2 ADMITTED THE SAME AND HE ALSO FORWARDED THE SAME TO THE A.O. FOR HIS REMAND REPORT. PERUSAL OF SUCH QUALITY AUDIT REPORT REVEALS THAT IT CONTAINS ALL THE RELEVANT DETAILS BEING THE NAME OF THE BUYER, STYLE NUMBER, STYLE ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 45 NAME, THE NAME OF THE PRODUCT, THE PURCHASE ORDER REFERENCE, NAME OF THE INSPECTOR, DATE OF INSPECTION, NUMBER OF QUANTITIES RELATING TO THAT PURCHASE ORDER INSPECTED AND LASTLY THE COMPLETE DETAILS OF THE DEFECTS NOTICED DUE TO WHICH THE QUALITY INSPECTOR CONSIDERED THE GOODS AS REJECTION, THE SAME IS PLACED AT PAGE 153 OF THE PAPER BOOK, WE FOUND THAT THERE WAS QUALITY AUDIT REPORT WITH REGARD TO DAMAGE FOR EMBROIDERY- 40 PIECES, GARMENT STAINS/WASHING-25 PIECES ETC., ALL THESE AUDIT REPORTS IS MADE AVAILABLE TO THE A.O. BUT VERACITY AND BONAFIDE OF SUCH AUDIT REPORT HAS NOT BEEN CHALLENGED NOR THE QUALITY INSPECTOR WAS EXAMINED BY THE A.O.. FURTHERMORE, WE FOUND THAT THE A.O. HAS ALSO DOUBTED THE VALUATION OF RS.25 PER PC BY ALLEGING LACK OF DOCUMENTARY EVIDENCES. IT IS PERTINENT TO NOTE THAT THE ASSESSEE WAS MANUFACTURING THE EXPORT ITEMS OF THEIR CLIENTS ON CERTAIN BINDING TERMS AND CONDITIONS AND ONE OF THE CLAUSES PROHIBITED THE ASSESSEE MANUFACTURER-SUPPLIER THAT IN CASE, FOR ANY REASON, THE PRODUCT IS TREATED IT TO BE CONSIDERED TO BE OF GRADE SECOND, THIRD OR EXCESS, THE ASSESSEE-MANUFACTURER-SUPPLIER COULDNT SALE THE SAME TO ANY OTHER PARTY IN THE MARKET EXCEPT THE SAID CLIENTS. THUS, THE VALUE OF SUCH REJECTED GOODS, WAS VIRTUALLY NOTHING/NIL SO FAR AS THE ASSESSEE-MANUFACTURER-SUPPLIER WAS CONCERNED FOR THE OBVIOUS REASONS THAT IN THE LIGHT OF SUCH EXPORT AGREEMENT AND IN VIEW OF THESE FACTS WHY EVEN THE SAID CUSTOMER SHOULD BUY THE REJECTED/DAMAGED GOODS. THUS, ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 46 FOR THE ASSESSEE IT WAS A DUMP/WASTAGE HAVING NO REALIZABLE VALUE AT ALL. EVEN THEN THE ASSESSEE TO BE ON A VERY FAIR SIDE VALUED SUCH REJECTED GOODS @ OF RS.25 PER PIECE THOUGH WAS NOT AT ALL REQUIRED. UNDISPUTEDLY, THE ASSESSEE HAS NO LEGAL RIGHT TO SELL THESE REJECTED/DESTRUCTED GOODS IN THE OPEN MARKET DUE TO CONDITION OF AGREEMENT HENCE, THE VALUE OF THESE GOODS WAS NIL FOR THE ASSESSEE. TO ACCOUNT FOR THE REJECTED GOODS/DESTRUCTED GOODS IN THE FINANCIAL ACCOUNT AND FOR THE PURPOSE OF INTERNAL CONTROLS ONLY THESE GOODS WERE VALUED ON A SYMBOLIC VALUE OF RS.25/- PER PIECE. THE ALLEGATION OF THE AO THAT NO DOCUMENTARY EVIDENCES WERE SUBMITTED TO SUPPORT THIS PRICE IS COMPLETELY WRONG ON THE FACTS. THE ASSESSEE FILED QUALITY CONTROL AUDIT REPORT MENTIONING COMPLETE DETAILS OF GOODS IN DEFECT ALONG WITH DESCRIPTION OF DEFECTS. HAVING ADMITTED THE BINDING AGREEMENT, ITS LEGAL EFFECT COULD NOT BE IGNORED. 34. WE ALSO FOUND THAT THE A.O. HAS ALLEGED THAT PERCENTAGE OF REJECTION CLAIMED BY THE ASSESSEE AT 2.16% OF TOTAL PRODUCTION WAS ON HIGHER SIDE, ON THE PLEA THAT AS PER THE INSPECTOR REPORTS, REJECTION RANGED BETWEEN 0.50% TO 1% AND ONLY IN VERY FEW CASES IT IS MORE THAN 1%. IN THIS REGARD, WE OBSERVE THAT TREND OF REJECTION DOES NOT FOLLOW A STRAIT JACKET FORMULA. THE REJECTION PERCENTAGE VARIES LOT TO LOT AND IT DEPENDS UPON VARIOUS FACTORS VIZ. COMPLEXITY OF DESIGN OF GARMENT, ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 47 QUALITY OF FABRIC USED IN PRODUCTION, REPETITION OF ORDERS OF PARTICULAR DESIGN, COLOR COMBINATION AND WASHING EFFECT ON THESE COLORS AND DESIGNS. THE INSPECTION REPORTS SUBMITTED WERE ON RANDOM BASIS ONLY. THE ASSESSEE COMPANY IS MANUFACTURING MORE THAN 5000 DESIGNS IN DIFFERENT COLOR COMBINATIONS AND ON DIFFERENT TYPE OF FABRICS HENCE, DRAWING REJECTION PERCENTAGE BASED ON SOME SAMPLE INSPECTION REPORT CANNOT BE CONSIDERED LOGICAL. MOREOVER, THE PERCENTAGE OF REJECTED GOODS DIRECTLY DEPEND UPON THE SIZE OF THE PURCHASE ORDER. MORE THE SIZE OF ORDER MORE WILL BE THE PERCENTAGE OF SUCH GOODS FOR THE SIMPLE REASON THAT LARGER THE QUANTITY PRODUCED LARGER WILL BE REJECTION. IT IS NOT THAT THE ASSESSEE INCURRED ONLY 0.50 % TO 1% BUT IN SOME CASES, IT WENT AS HIGH AS 3.21%. IN SUPPORT OF HIS CONTENTION, THE ASSESSEE HAS FILED FOLLOWING CHART BEFORE THE A.O.: QUALITY CONTROL REPORT FOR SAMPLE TEST CHECKING (AY 2014-15) P.O.NO. STYLE NO P.O.ORDER QTY. PCS QTY INSPECTED /MFG. SALEABLE QTY REJECTION QTY REJECTION % 24052 44530744 4000 4073 3955 118 2.90 A 2804 KAP-7536 MW 606 ROY 12200 12588 12222 366 2.91 KAP-7540 4500057934 AD BW 50000B 2400 2531 2458 73 2.88 17590 GS 111 7600 7852 7624 252 3.21 25396 44230818 1700 1782 1731 51 2.86 06671 KAP6580 L J133692 1350 1411 1370 41 2.91 7575 AM WSRV 4850 4907 4859 48 0.98 7574 AM WSNC 3800 3929 3815 114 2.90 512027 634213 3850 3917 3879 38 0.97 P220075/73/74 9531716 A/B 1900 1925 1906 19 0.99 99863/97451 CPA4AA 1700 1769 1752 17 0.96 2053513 KAP-7621 AQYWS042 2600 2617 2592 25 0.96 ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 48 2053516 KAP-7622 TQMWS 702 1950 1990 1971 19 0.95 515302/514986 641987 1850 1867 1858 9 0.48 1041099 CWA6AG 3200 3265 3249 16 0.49 P222657/62/59 9521720A/20E 5000 5068 5043 25 0.49 4500073850 KAP 7653 AQWWS00055 3950 3999 3980 19 0.48 24663 A0911406 1020 1041 1031 10 0.96 3289249 612806 4050 4141 4080 61 1.47 7671 B 0270 2000 2012 1993 19 0.94 7125553 ISHTC 3T 8500 8570 8486 84 0.98 7783 MW 606 RUS 2850 2853 2825 28 0.98 7788 AOYWS00213 7200 7209 7138 71 0.98 7797/7798 MW 606 RIUS 6800 6847 6775 67 0.98 7801 AOYWS00206 4950 4991 4942 49 0.98 7875 MW 606 RIUS 8250 8272 8191 81 0.98 1005868 402502 550 560 552 8 1.43 7139490 ISHTC3T 9250 9268 9177 91 0.98 228071/69/70/72 62030203A 4100 4145 4104 41 0.99 402540 9100 9158 9068 90 0.98 BL 7154523 ITR0PU4 2150 2166 2145 21 0.97 7942/7949 MWS0002060 7550 7599 7524 75 0.99 29937 44530808P001 2600 2607 2582 25 0.96 8063/7970 MW606BARS 6070 6103 6043 60 0.98 MOREOVER, WE FOUND THAT THE ASSESSEE PRODUCED AS HIGH AS 18,81,362 PIECES IN THE YEAR AND THE QUALITY REPORT AS PER THE CHART SO SUBMITTED WAS FOR THE HIGHEST QUANTITY PRODUCED OF 12,200 PIECES, MEANING THEREBY LARGE NUMBER OF QUALITY REPORTS WERE PREPARED AND THEREFORE IT WAS PRACTICALLY DIFFICULT TO PRODUCE ALL OF THEM BEFORE THE AO. 35. IN TERMS OF NATURE OF EXPORT BUSINESS, THE ASSESSEE WAS CARRYING ON, THE ASSESSEE USED TO PRODUCE/MANUFACTURE MORE THAN THE ORDERED QUANTITY SO THAT THE EXCESS QUANTITY CAN BE SUBSTITUTED FOR THE WASTER/REJECTION BEING FOUND OUT AT THE TIME OF SUCH QUALITY AUDIT. IN SO ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 49 FAR AS THERE WAS DESTRUCTION/PROHIBITION CLAUSE AND HENCE SUCH EXCESS QUANTITIES ARE TAKEN TO BE REJECTED GOODS. LOOKING TO THE PREVAILING TRADE PRACTICE AND INDUSTRY NORMS AND VARIOUS DOCUMENTARY EVIDENCES AS PLACED ON RECORD, WE FOUND THAT THE AVERAGE REJECTION PERCENTAGE OF 2.16% FOR THE ENTIRE YEAR IS WITHIN THE TOLERANCE LIMIT. WE FOUND THAT DURING THE YEAR THE ASSESSEE MANUFACTURED 18,81,362 UNITS AND 40,688 UNITS WERE REJECTED. IT IS NOT SO ABNORMALLY HIGH AS TO PERMIT THE AO TO MAKE SUCH A HUE AND CRY ON THIS COMPARATIVELY NOT MAJOR ISSUE MORE PARTICULARLY WHEN THE AO DID NOT BRING ANY COMPARABLE CASE SO AS TO FALSIFY THE AVERAGE REJECTION SO CLAIMED BY THE ASSESSEE. 36. WE ALSO FOUND FROM THE RECORD THAT SUCH REJECTION OF GOODS WAS CONSISTENTLY CLAIMED BY THE ASSESSEE IN THE EARLIER YEAR, WHICH ARE AS UNDER: 37. IT IS CLEAR FROM THE ORDER OF THE A.O. THAT HE HIMSELF HAS ACCEPTED THAT THE ASSESSEE WAS HAVING REJECTED ITEMS WHICH CANNOT BE SOLD. FOR THIS PURPOSE, COMPLETE QUANTITATIVE DETAILS OF REJECTED ITEMS WERE FILED AY REJECTION DURING THE YEAR 2013-14 20,964 2014-15 40,688 2015-16 21,741 2016-17 23,689 ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 50 BEFORE THE AO (CIT(A) PAGE-21 PARA-E) AND IT WAS SPECIFICALLY SUBMITTED THAT THE REQUIRED DESTRUCTION METHOD HAS BEEN APPLIED ON THESE ITEMS. THE LD. CIT(A) HAS ALSO RECORDED A FINDING IN THIS REGARD AT HIS APPELLATE ORDER AT PAGE 11 AND 12 PARA I TO J. STILL TO FURTHER SATISFY THE TAX AUTHORITIES THE FURTHER DISPOSAL TRANSACTION DETAILS WERE ALSO FILED BY THE ASSESSEE BEFORE THE A.O.. AS PER OUR CONSIDERED VIEW SINCE THE ASSESSEE HAS NO RIGHT TO SALE THESE GOODS HENCE TO MINIMIZE THE LOSSES REUSABLE ACCESSORIES (BUTTONS, ZIPS ETC.) WERE EXTRACTED FROM THESE ITEMS. THIS EXTRACTION WORK IS CARRIED OUT IN VERY ROUGH AND SPEEDY MANNER AND AFTER THIS IT IS TOTALLY IMPOSSIBLE TO SALE THESE ITEMS. AFTER THIS OPERATION THEY GOT CONVERTED INTO A SCRAP ITEMS (ALSO KNOWN AS CHINDI) AND THIS WAS SOLD ON KILOGRAM BASIS. THE BILLS OF CHINDI ITEMS SOLD WERE ALSO SUBMITTED BEFORE THE LOWER AUTHORITIES. THE AO DID NOT DENY FROM THIS FACT BUT MERELY SUSPECTED THAT IT DID NOT SHOW THE SALE OF CHINDI RESULTING FROM THE REJECTION GOODS WHICH HOWEVER, WAS AN IMPRACTICAL AND ALMOST IMPOSSIBLE TASK. FURTHER THE REGULAR LABOURER ENGAGED BY THE ASSESSEE, WAS ALSO ENGAGED IN THE DESTRUCTION OF THE REJECTION GOODS BUT TO EVIDENCE SUCH ACTIVITY, WAS NOT HUMANLY PRACTICAL AND POSSIBLE. HENCE THERE REMAINS NO DOUBT THAT THE ASSESSEE HAD REJECTED ITEMS, WHICH WERE NOT AS SUCH OPEN FOR SALE IN THE OPEN MARKET AND TO MINIMIZE THE LOSSES THESE WERE SOLD AS CHINDI. ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 51 38. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, WE HOLD THAT THE A.O. WAS NOT JUSTIFIED IN MAKING ADDITION ON ACCOUNT OF UNDER VALUATION OF REJECTED GOODS WHICH WAS INCLUDED IN THE LIST OF CLOSING STOCK. 39. THE A.O. HAS ALSO MADE ADDITION BY REVALUING THE FABRIC SENT TO JOB WORKERS IN JOB WORK UNITS. FROM THE RECORD WE FOUND THAT AT THE YEAR END, THERE WERE 1,41,987 PCS WERE LYING WITH THE JOB UNITS. SINCE THE ASSESSEE HAS BEEN CONSISTENTLY VALUING SUCH STOCK AT COST AND SINCE APART FROM THE COST OF THE FABRICS LYING WITH THE JOB UNITS, THE ASSESSEE DID NOT INCUR ANY FURTHER COST THEREON (EXCEPT COST OF FABRICS) HENCE ONLY SUCH COST @ RS.211.77 PER PIECE WAS CONSIDERED WHILE VALUING THESE PIECES AT RS. 3,00,69,081/-. WHEN ASKED, IT WAS SUBMITTED THAT THE STOCK LYING AT THE JOB UNIT IS ONLY FABRIC AND THE ASSESSEE YET NOT INCURRED ANY COST THEREON THEREFORE THE ASSESSEE CONSIDERED ONLY COST OF FABRIC. THE AO HOWEVER, ALLEGED THAT THE ASSESSEE HAS UNDERVALUED ITS STOCKS LYING WITH JOB UNITS BEING 1,41,987 PCS @ RS.211.77 PER PIECE INSTEAD OF SHOWING THE SAME AS FINISHED GOODS OF READYMADE GARMENTS ON THE FOLLOWING GROUNDS: (I) ASSESSEE FAILED TO SUBMIT ANY DOCUMENTARY EVIDENCE REGARDING LYING OF STOCK WITH JOB UNITS (II) THE ASSESSEE HAS NOT MENTIONED IN FINAL ACCOUNTS/NOTES OF ACCOUNTS THAT FINISHED GOODS ALSO INCLUDES REJECTION AND STOCK OF RAW MATERIAL (WHICH IS IN FACT SEPARATELY SHOWN) (III) THE ASSESSEE SUBMITTED THAT NO COST EXCEPT COST OF FABRIC IS INCURRED BUT INSTEAD OF MAKING VALUATION IN METERS, THE ASSESSEE IS MAKING VALUATION ON THE BASIS OF PCS. ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 52 (IV) NO DOCUMENTARY EVIDENCE FOR MAKING VALUATION OF GARMENT STOCK WITH JOB UNITS AT RS. 3,00,69,081/- 40. HOWEVER, IN THE REMAND REPORT, THE A.O. HAS ALSO MADE SOME MORE ALLEGATIONS. IN VIEW OF ABOVE ALLEGATION, THE A.O. ASSUMED THAT SUCH STOCK (THESE PCS) CONSISTED OF ALL VARIETY OF FINISHED GOODS, HE VALUED THE SAME @ RS.355/- PER PCS (RS.2,13,51,494/- / 60139 PCS), AND ARRIVED AT RS.5,04,05,385/-. THE AO THUS, ENHANCED THE VALUE OF THE CLOSING STOCK OF GOODS LYING AT JOB UNITS AND ADDED RS.2,03,36,304/- (RS.5,04,05,385/- ESTIMATED LESS RS.3,00,69,081/- SHOWN BY THE ASSESSEE) ON ACCOUNT OF THE ALLEGED UNDER VALUATION OF CLOSING STOCK. IN THE FIRST APPEAL CIT(A) CONFIRMED THE ADDITION (PAGE-25 PARA-5.3) BY HOLDING AS UNDER: I HAVE GONE THROUGH THE ASSESSMENT ORDER, STATEMENT OF FACTS, GROUNDS OF APPEAL, WRITTEN SUBMISSION, REMAND REPORT AND REJOINDERS CAREFULLY. I HAVE GONE THROUGH THE VALUATION OF CLOSING STOCK MADE BY THE AO. I FIND NO INFIRMITY OR INCORRECTNESS IN THE WORKING MADE BY THE AO, AFTER ANALYZING ALL THE EVIDENCES AVAILABLE WITH HIM. I AM OF THE CONSIDERED VIEW THAT THE AO HAD RIGHTLY VALUED THE CLOSING STOCK OF 64,751/- PCS. OF REJECTION (FINISHED STOCK) AT RS.2,29,86,605/- AND VALUATION OF 1,41,987/- PCS. LYING WITH JOB UNITS AT RS.5,04,05,385/-. HENCE, THE UNDERVALUATION OF CLOSING STOCK WORKED OUT BY THE AO AT RS.2,13,67,830/- (RS.2,29,86,605 RS.16,18,775) AND RS.2,03,36,304/- (RS.5,04,05,385-RS.3,00,69,081) IS HELD TO BE CORRECT. ACCORDINGLY, THE TOTAL ADDITION OF RS.4,17,04,134/- (RS.2,13,67,830+RS.2,03,36,304) MADE BY THE AO ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK MADE BY THE ASSESSEE IS HEREBY CONFIRMED. 41. WITH REGARD TO ABOVE ADDITION WE FOUND FROM THE RECORD THAT THE ASSESSEE IS IN THE BUSINESS OF EXPORT OF THE READYMADE GARMENTS AND ITS MANUFACTURING UNIT IS SITUATED AT BANGALORE. AS PER THE PREVAILING TRADE PRACTICE IN THE READYMADE GARMENT BUSINESS, SOME DESIGNS/WORK ARE TO ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 53 BE OUTSOURCED IN AS MUCH THE ASSESSEE ITSELF IS NOT HAVING ALL THE FACILITIES, WHICH IS GOT DONE FROM THE DIFFERENT MANUFACTURES KNOWN AS JOB UNITS. IN THIS PROCESS, THE PRINCIPLE MANUFACTURER (I.E. ASSESSEE HERE) SENDS FABRICS TO THE JOB UNITS AND ORDER IS PLACED IN TERMS OF THE NUMBER OF PIECES TO BE MANUFACTURED BY THAT JOB UNIT. THE ASSESSEE IS USED TO RECORD THE FABRICS SENT IN TERMS OF METERS AND THE NUMBER OF PIECES OF A PARTICULAR DESIGN EXPECTED FROM THE JOB UNIT, THEREFORE IT ALSO RECORDS THE FABRIC SENT IN TERMS OF THE PIECES AND THE SAME IS THEREAFTER, COMPARED AND RECONCILED WHILE RECEIVING BACK THE STITCHED/WORKED PIECES FROM THE JOB UNIT. SUCH FABRIC, SO SENT, IS REDUCED FROM THE RAW MATERIAL AND THEN TAKEN TO THE ACCOUNT OF GARMENT PIECES LYING WITH THE JOB UNITS IN THE STOCK BOOKS. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE IS A PVT. LTD. COMPANY FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THE ASSESSEE HAS BEEN SENDING ITS FABRIC TO VARIOUS JOB UNITS FOR CARRYING OUT VARIOUS PROCESSES THEREON AND THE PROCESSING EXPENSES ARE ACCOUNTED FOR AS AND WHEN EXPENSE HAVE BEEN INCURRED (WHETHER BY THE ASSESSEE OR BY JOB UNITS). THE PIECES WHICH GOT COMPLETED DURING THE YEAR, WERE TRANSFERRED TO FINISHED GOODS AND THE PIECES ON WHICH NO COST WAS INCURRED EVEN TILL 31 ST MARCH 2014 WERE SHOWN AS STOCK WITH JOB UNITS BUT AT THE COST OF FABRIC ONLY BECAUSE NO COST WAS INCURRED ON SUCH PIECES EITHER BY THE ASSESSEE OR REPORTED BY THE JOB UNITS. WHILE DOING SO, IT IS NOT DENIED THAT ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 54 THE ASSESSEE DULY COMPLIED WITH AS-2 (VALUATION OF INVENTORIES) WHICH PROVIDES FOR ADDITION OF COST INCURRED UP TO THE DATE OF VALUATION. THERE IS NO DISPUTE THAT THE ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING A COMPLETELY SCIENTIFIC AND RECOGNIZED METHOD OF VALUATION. EVEN THE LD. STATUTORY AUDITOR ACCORDED THEIR CONSENT SO ALSO THE LD. TAX AUDITOR. 42. WE ALSO FOUND FROM THE RECORD THAT THE ASSESSEE HAS PRODUCED COMPLETE QUANTITATIVE DETAILS BEFORE THE A.O.. THE AO REJECTED THE CONTENTION OF THE ASSESSEE DUE TO THE ALLEGED LACK OF EVIDENCE WHICH IS FACTUALLY INCORRECT BECAUSE THE ASSESSEE SUBMITTED COMPLETE DETAILS OF GARMENT STOCK LYING WITH THE JOB UNITS. A DETAILED CHART (A) SHOWING THE NAME OF THE JOB WORKER, STYLE NAME, DATE OF ISSUE, BUYER, P.O. NO., COLOUR, QUANTITY (EXPECTED/ORDERED TO BE STITCHED BY THE JOB WORKERS), QUALITY OF THE FINISHED GOODS/ GARMENTS, QUANTITY OF MATERIAL SUPPLIED AND LYING WITH THE JOB WORKERS TOGETHER WITH THE RATE APPLIED AND FINALLY THE AMOUNT ARRIVED AT, (WHICH ULTIMATELY RESULTED INTO THE TOTAL CLOSING STOCK VALUATION OF RS.3,00,69,081/-) TOWARDS 1,41,987 PIECES ALONG WITH THE COPIES OF EXEMPLARY INVOICES WERE SUBMITTED BEFORE THE AO VIDE LETTER DATED 06.10.2017. THE A.O. HAS ALSO OBSERVED THIS AT PAGE 4.1 OF HIS ORDER. IN THIS REGARD WE OBSERVE THAT THE ASSESSEE SENT 364.6 METERS OF FABRIC (COTTON JQRD SH-REG 1650) BY WAY OF CHALLAN DATED 24.03.2014 TO JOB UNITS M/S VINAYAK GARMENT COSTING RS.72,920/-. THE EXPECTED ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 55 NUMBER OF PIECES TO BE PRODUCED OUT OF THIS FABRIC WERE 432 (FULTON MENS SHORTS). HENCE PIECES LYING WITH THE JOB UNITS WERE SHOWN AS 432 UNITS OF FULTON MENS SHORTS AT RS.72,920/- I.E. COST IN METERS. THE ASSESSEE RECEIVED THESE PIECES FROM M/S SRI VINAYAK GARMENTS VIDE INVOICES NO.371 DATED 07.04.2014 ALONGWITH SOME OTHER PIECES AND JOB CHARGES WERE CHARGED @ RS.95 PER PIECE. THE AO ASKED FOR FURTHER DETAILS AND DOCUMENTS RELATED TO JOB WORK IN LATE HOURS OF SATURDAY, 30.12.2017. THE ASSESSEES MANUFACTURING UNIT IS SITUATED AT BANGLORE AND PRODUCTION RECORDS ARE MAINTAINED THERE ONLY HENCE IT WAS NOT POSSIBLE FOR THE ASSESSEE TO ARRANGE THESE DETAILS IN A VERY SHORT SPAN OF TIME TO BE PRODUCED BEFORE THE AO AT BHILWARA, YET THE ASSESSEE FILED SOME FURTHER DETAILS AND EVIDENCES CONTAINING DETAILS OF JOB UNITS NAME, GOODS DISPATCH CHALLAN NUMBER, CHALLAN DATE, DETAILS IN METERS AND SUBSEQUENT RECEIPT OF PCS FROM JOB WORKER ALONG WITH JOB WORKER INVOICE NUMBER, INVOICE DATE BEFORE THE CIT(A) AS ADDITIONAL EVIDENCE ON WHICH HE DULY OBTAINED THE REMAND REPORT OF THE AO. 43. IN VIEW OF THE ABOVE WE FOUND THAT EXTENSIVE DETAILS WERE FILED BEFORE THE LOWER AUTHORITIES, ACCORDINGLY, THERE IS NO DOUBT ABOUT THE UNITS LYING WITH THE JOB UNITS. THE FURTHER ALLEGATION OF THE AO THAT THESE UNITS WERE NOT DISCLOSED SEPARATELY IN FINANCIAL ACCOUNTS AND NOT SEPARATELY DISCLOSED IN NOTES OF ACCOUNTS IS ILL JUDGED. NO ADDITION CAN BE ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 56 MADE MERELY BECAUSE A SEPARATE DISCLOSURE HAS NOT BEEN MADE IN THE NOTES OF ACCOUNTS. THE FINANCIAL ACCOUNTS ARE PREPARED ACCORDING TO SOME ACCOUNTING CONVENTIONS AND IN DISCLOSURE & PRESENTATION ASPECTS, CERTAIN SUBJECTIVITY EXISTS. THESE UNITS WERE NEITHER RAW MATERIAL NOR FINISHED GOODS HENCE FOR SAKE OF CONVENIENCE AND BETTER PRESENTATION WERE CLASSIFIED AS PCS. LYING WITH JOB UNITS. THE ASSESSEE, AS PER CONSISTENT PAST PRACTICE, WHEN SENT THE FABRICS TO THE JOB UNITS, SHIFTED THE COST THEREOF TO THE LEDGER ACCOUNT HEAD GARMENTS LYING WITH JOB UNITS WHICH, IS ALSO A PREVAILING TRADE PRACTICE. BUT OTHERWISE ALSO, A DISCLOSER OR NON- DISCLOSER IN THE ACCOUNTS OR MAKING/NON-MAKING IN A PARTICULAR MANNER, IS NOT DECISIVE OF THE TRUE CHARACTER OF A TRANSACTION AND HENCE THERE IS NO ESTOPPLE AGAINST THE ASSESSEE WHICH IS A LAW SETTLED. FOR THIS PROPOSITION, RELIANCE IS PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF KEDARNATH JUTE MFG. CO. LTD. VS CIT (1971) 82 ITR 363 (SC) WHICH WAS FOLLOWED BY THE HONBLE SUPREME COURT IN THE CASE OF SUTLEJ COTTON MILLS LTD. VS CIT (1979) 116 ITR 1 (SC). 44. NOW WE COME TO THE OBSERVATION OF THE A.O. WHERE THE A.O. HAS TREATED THESE UNITS AT PAR WITH PCS WHICH ARE COMPLETED IN ALL RESPECT AND READY TO EXPORT ON THE SOLE GROUND THAT INSTEAD OF MAKING VALUATION OF THIS STOCK IN METER, THE ASSESSEE IS MAKING VALUATION ON THE BASIS OF PCS. IN THIS REGARD WE OBSERVE THAT WHEN THE MATERIAL IS SENT TO JOB WORKER, ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 57 THE UNIT OF GOODS STANDS CHANGES FROM METER TO PCS. TO PUT INTERNAL CONTROL ON SUBSEQUENT RECEIPT OF PIECES AFTER PROCESSING. THE ASSESSEE PURPORTEDLY RECORDS NUMBER OF PIECES BECAUSE THE JOB UNITS ARE SUPPOSED TO SEND BACK THE EXPECTED NUMBER OF PIECES AND NOT FABRICS IN METERS. IT IS ONLY A MISCONCEPTION OF THE AO THAT THE RECORDS MAINTAINED BY THE ASSESSEE IS VERIFIABLE ONLY WHEN THE GOODS SENT AND RECEIVED BOTH, ARE RECORDED IN SAME UNITS. ONCE HE IS NOT AN EXPERT OF THE FIELD, HE MUST HAVE ACCEPTED THE PREVAILING INDUSTRY PRACTICE AND WHAT THE ASSESSEE HAS DONE, AS CORRECT OR ELSE SHOULD HAVE OBTAINED INDEPENDENT OPINION. MERE CHANGE IN MEASUREMENT METHOD DOES NOT MEAN ADDITION/DELETION IN THE QUANTITY MANUFACTURED OR THAT AN ADDITIONAL PRODUCT MUST HAVE BEEN PRODUCED. THE CONVERSION OF FABRIC INTO PIECES HAS BEEN DONE FOR INTERNAL CONTROL PURPOSE USING A VERY SIMPLE METHOD OF CONVERSION METERS TO PIECES METHOD. HENCE ADDITION ON THIS GROUND IS COMPLETELY UNJUSTIFIED. 45. WE ALSO FOUND THAT THE AO HAS ALSO ALLEGED THAT BY USING SUCH PRACTICE, THE ASSESSEE PURPORTEDLY MADE UNDERVALUATION OF CLOSING STOCK TO AVOID TAX. HOWEVER, SUCH AN ALLEGATION IS VERY STRANGE ON THE FACE OF IT. THE ALLEGATION OF THE CHANGE IN MEASUREMENT UNIT IS WITH RESPECT TO THE RAW FABRIC LYING AT THE JOB UNITS. AFTER THE WORK IS DONE, THE STITCHED GARMENT HAS TO BE VALUED IN TERMS OF PIECES ONLY AS AGAINST METERS. HOWEVER, IN ANY CASE, WHETHER SUCH GOODS ARE MEASURED IN METERS OR ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 58 PIECES IS NOT GOING TO MAKE ANY DIFFERENCE BECAUSE METER/PIECE IS ONLY A UNIT OF MEASUREMENT (UOM) AND BY APPLYING APPROPRIATE CONVERSION FORMULA ONE COULD CORRECTLY VALUE THE GOODS. FROM THE RECORD WE ALSO FOUND THAT EVEN IN THE PAST THE ASSESSEE HAS BEEN CONSISTENTLY VALUING THE RAW MATERIAL- FABRIC AT COST INCLUDING THE CURRENT YEAR. THE RAW MATERIAL LYING AT THE JOB UNITS ALSO THEREFORE WAS VALUED FOLLOWING THE SAME METHOD. WE HAD VERIFIED THE SHEETS CONTAINING COMPLETE DETAILS OF FABRIC LYING AT JOB UNITS. THE NUMBER OF PIECE HAVE ALSO BEEN SHOWN IN THE SAME SHEET APART FROM SHOWING THE RAW FABRIC IN METER WHICH ARE EXPECTED TO BE PREPARED OUT OF SUCH RAW FABRIC SENT TO THESE JOB UNITS. THUS, WHETHER IT IS NUMBER OF PIECES SHOWN OR FABRIC IN METER IS SHOWN, THE ULTIMATE VALUATION SHALL REMAIN THE SAME AND IS NOT GOING TO MAKE ANY DIFFERENCE. HOWEVER, THIS WAS NOT PROPERLY UNDERSTOOD BY THE AO. THEREFORE, THE ALLEGATION OF AVOIDANCE OF TAXES IS BASELESS, MORE PARTICULARLY, WHEN OTHERWISE ALSO ANY ENHANCEMENT IN THE VALUATION OF CLOSING STOCK OF THIS YEAR WILL ENHANCE THE VALUE OF OPENING STOCK OF THE NEXT YEAR LEAVING A TAX NEUTRAL EFFECT. 46. AS PER OUR CONSIDERED VIEW IN CASE OF BUSINESS OF MANUFACTURING OF READYMADE GARMENTS, THERE ARE CERTAIN SCIENTIFICALLY EVOLVED CONVERSION FORMULA, BASED ON WHICH, ONE CAN ASCERTAIN THE NUMBER OF PIECES DESIRED/EXPECTED OF A PARTICULAR DESIGN, TYPE OF THAT PARTICULAR GARMENT, ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 59 SAY A SHIRT CONSUMING A PARTICULAR AMOUNT OF METER OF FABRIC. TO PUT IT DIFFERENTLY, ONE CAN ASCERTAIN THE NUMBER OF PARTICULAR TYPE OF SHIRT TO BE OBTAINED OUT OF THE GIVEN QUANTITY OF THE FABRIC. SURPRISINGLY, THE AO NEITHER REQUIRED ANY SUCH CONVERSION FORMULA TO BE FURNISHED NOR HE MADE ANY ENQUIRY ON HIS OWN FROM THE EXPERTS OF READYMADE GARMENT INDUSTRY. THEREFORE, THERE IS NO VALID POINT BEHIND THE AO RAISING THIS ISSUE MERELY TO SUSPECT THAT SOMETHING MAY BE WRONG. IN THE ENTIRE EXERCISE THE AO HAS PROCEEDED MERELY ON SUSPICION & SUSPICION AND THERE IS ABSOLUTELY NO IOTA OF MATERIAL BROUGHT IN SUPPORT. 47. IN VIEW OF THE ABOVE, WE OBSERVE THAT THE ALLEGATION OF THE UNDERVALUATION OF THE STOCK LYING WITH JOB UNITS OF RS. 2.03 CRORES, IS IMAGINARY IN AS MUCH AS THE AO HAD NO IOTA OF EVIDENCE SHOWING EVEN REMOTELY THAT THE ASSESSEE INCURRED SOME COST AFTER DELIVERING THE FABRIC TO THE JOB UNITS SO AS TO ENHANCE THE VALUATION FROM THE MERE COST OF FABRIC TO INCLUDE SOME OVERHEADS. ADMITTEDLY NO BILLS WERE RAISED BY THE JOB UNITS UP TO THE YEAR-END SO AS TO BE TAKEN INTO THE ACCOUNT WHILE VALUING THE CLOSING STOCK. THEREFORE, SUCH VALUATION WAS ALSO HIGHLY IMAGINARY WITHOUT ANY EVIDENCE. 48. WE FOUND FROM THE RECORD THAT DURING THE REMAND PROCEEDINGS, THE A.O. REFERRED TO AN INVOICE NO. 485 OF DATED 03.04.2014 AND ALLEGED THAT SOME OTHER INVOICE BEARING SERIAL NUMBER 483 IS DATED 07.04.2014, WHICH ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 60 IS CONTRADICTORY. SINCE IT WAS AN INVOICE RAISED BY SOME JOB UNIT AND NOT BY THE ASSESSEE, IT IS DIFFICULT FOR THE ASSESSEE TO MAKE ANY COMMENT BUT IF IT WAS SO, IT WAS FOR THE AO TO HAVE ENQUIRED FROM THE CONCERNED JOB UNIT AND NOT TO ADD IT TO THE ALLEGED DEFECTS. 49. SIMILARLY, THE AO IN THE REMAND REPORT ALSO ALLEGED THAT ONE OF THE JOB UNITS HAS INVALID TIN NO. AGAIN, IT WAS FOR THE AO TO HAVE ENQUIRED FROM THAT PARTICULAR JOB UNIT TO SHOW THE CORRECT POSITION. BUT IT WILL BE PERTINENT TO CLARIFY HERE THAT THE AO FIRSTLY, SELECTED A WRONG WEBSITE AND HENCE MADE THIS ALLEGATION BUT THEN, WHEN ASKED, THE ASSESSEE CLARIFIED AND GAVE THE CORRECT WEBSITE SHOWING THE SAME TIN NO., SURPRISINGLY THE AO ADMITTED THE SAME. AGAIN, HE ALLEGED THAT SOME OF THE JOB UNITS ARE NOT HAVING TIN NUMBER, BUT THEN HOW THE ASSESSEE IS CONCERNED WITH THAT. THESE JOB UNITS ARE NOT REQUIRED TO GET REGISTRATION UNDER VAT LAWS HENCE THEY ARE NOT HAVING TIN NUMBERS. 50. WE ALSO FOUND THAT THE ASSESSEE HAS GIVEN A FULL CHART (PB-188) SHOWING A RECONCILIATION BETWEEN WHAT WAS SENT IN TERMS OF METERS AND WHAT WAS RECEIVED BACK IN TERMS OF PIECES AND EVEN AFTER MAKING A SPECIFIC CLAIM OF THE SUCCESSFUL RECONCILIATION BEFORE THE CIT(A) AT PAGE- 13. THE AO MAINTAINED A COMPLETE SILENCE IN HIS REMAND REPORT. THUS, HE IS NOT DISTURBING THE SUBSTANTIVE FINDINGS BUT RATHER RAISING TINY ISSUES, WHICH IS NOT EXPECTED OF HIM. WE ALSO FOUND THAT 89% OF THE RAW FABRIC ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 61 I.E. 1,27,258 PIECES (2,12,937.32 METERS) (OUT OF THOSE LYING WITH THE JOB UNITS), WERE DISPATCHED TO THE JOB UNITS ONLY AT THE FAG-END OF THE FINANCIAL YEAR AND MAJORITY OF THEM WERE SENT AFTER 20 TH MARCH, 2014, MEANING THEREBY NOBODY COULD HAVE EXPECTED THE JOB UNITS TO HAVE COMPLETED ANY WORK THEREON BEFORE THE YEAR END SO THAT THE ASSESSEE COULD ACCOUNT FOR FURTHER COST WHILE VALUING THE CLOSING STOCK. THIS FACT ITSELF IS SUFFICIENT TO DEMOLISH THE ENTIRE CASE MADE OUT BY THE AO. 51. IN THIS REGARD IT WAS ALSO CONTENDED OF THE LD. AR THAT ALTHOUGH THERE IS ABSOLUTELY NO EVIDENCE REFERRED TO OR RELIED UPON BY THE ASSESSING OFFICE AND ADMITTEDLY EVEN NO ENQUIRIES WERE MADE FROM THE JOBBER/UNITS WHERE, THE FABRIC BEING RAW MATERIAL WAS LYING FOR FURTHER WORK TO BE DONE YET HOWEVER, THE AO PRESUMED THE VALUE OF SUCH STOCK AT THE RATE OF 355/- PER PIECE WHICH IS THE VALUE WHICH, THE ASSESSEE ADAPTED FOR VALUING ITS FINISHED STOCK PER PIECE AT THE END OF THE YEAR. THIS, IN TURN, MEANS AND IMPLIES THAT THE AO ADMITTED THE ASSESSEE HAVING INCURRED THE TOTAL COST OF RS. 355/-. ONCE THE AO HIMSELF ADMITS THAT THE ASSESSEE HAS INCURRED THIS COST AND THEREFORE ONLY, THE VALUATION OF THE CLOSING STOCK OF SUCH RAW FABRICS HAS BEEN ENHANCED BY HIM TO THE EXTENT OF THE COST OF THE FINISHED GOODS I.E. @ RS. 355/-. BY HIS OWN ADMISSION, IT HAS TO BE ACCEPTED THAT THE ASSESSEE HAS INCURRED THE COST TO THE EXTENT OF RS.355. THUS, ON ONE HAND THE AO HAD ENHANCED THE VALUATION OF THE CLOSING ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 62 STOCK BUT AT THE SAME TIME, HE HAS TO ALLOW THE REVENUE EXPENDITURE (JOB CHARGES/STITCHING CHARGES) TO THIS EXTENT RESULTING INTO NO TAX EFFECT. IN OTHER WORDS, THE ENTIRE EXERCISE TO ENHANCE THE VALUE OF THE RAW FABRIC IS COMPLETELY TAX NEUTRAL IN THIS YEAR ITSELF. 52. IN VIEW OF THE ABOVE DETAILED DISCUSSION, WE DO NOT FIND ANY MERIT IN THE ADDITION MADE BY THE A.O. IN RESPECT OF RAW MATERIAL LYING WITH THE JOB WORKER UNIT, BY TREATING THE SAME AS FINISHED GOODS. 53. AS WE HAVE ALREADY DECIDED THE ISSUE ON MERIT IN ASSESSEES FAVOUR, WE ARE NOT GOING TO DEAL WITH LEGAL GROUND TAKEN BY THE ASSESSEE WITH REGARD TO VALIDITY OF REOPENING AS DISCUSSED ABOVE. 54. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED IN TERMS INDICATED HEREINABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND MAY, 2019. SD/- SD/- FOT; IKY JKO JES'K LH 'KEKZ (VIJAY PAL RAO) (RAMESH C SHARMA) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 22 ND MAY, 2019 *RANJAN VKNS'K DH IZFRFYFI VXZSFKR @ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ @ THE ASSESSEE- M/S GOODWILL FABRICS PVT. LTD., BHILWARA. 2. IZR;FKHZ @ THE RESPONDENT- THE ACIT, BHILWARA. 3. VK;DJ VK;QDR @ CIT ITA 525/JP/2018_ M/S GOODWILL FABRICS P LTD. VS ACIT 63 4. VK;DJ VK;QDRVIHY @ THE CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ @ DR, ITAT, JAIPUR 6. XKMZ QKBZY @ GUARD FILE (ITA NO. 525/JP/2018) VKNS'KKUQLKJ @ BY ORDER, LGK;D IATHDKJ @ ASST. REGISTRAR