HINDUSTAN FORGING & STEEL INDUSTRIES, MUMBAI V. JCIT RG 17(1), MUMBAI

ITA 5580/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79557 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 21-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 04-09-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VAIBHAVI PATEL
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUM BAI , , BEFORE SHRI SANJAY ARORA, AM AND SHRI AMIT SHUKLA, JM ./ I.T.A. NO. 5580/MUM/2012 ( / ASSESSMENT YEAR: 2008-09) HINDUSTAN FORGING & STEEL INDUSTRIES 4 TH LANE CORNER, DARUKHANA, REAY ROAD, MUMBAI-400 010 / VS. JT. CIT, RANGE 17(1), 4 TH FLOOR, PIRAMAL CHAMBER, LALBAUG, MUMBAI ' ./# ./PAN/GIR NO. AAAFH 6643 J ( '$ /APPELLANT ) : ( %&'$ / RESPONDENT ) '$ ' ( / APPELLANT BY : SHRI BHAVIN SHAH & MS. VAIBHAVI PATEL %&'$ ' ( / RESPONDENT BY : SHRI PITAMBAR DAS )* + ' , / DATE OF HEARING : 21.07.2014 -./ ' , / DATE OF PRONOUNCEMENT : 31.07.2014 / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-34, MUMBAI (CIT(A) FOR SH ORT) DATED 19.06.2012, PARTLY ALLOWING THE ASSESSEES APPEAL CONTESTING ITS ASSES SMENT U/S.143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMEN T YEAR (A.Y.) 2008-09 VIDE ORDER DATED 27.12.2010. 2. THE ASSESSEE, A PARTNERSHIP FIRM, IS IN THE BUSI NESS OF FORGING. ITS APPEAL CONCERNS THE VALIDITY OF THE ADJUSTMENTS MADE IN ITS ASSESSM ENT TO THE VALUE OF THE RAW MATERIAL IN 2 ITA NO. 5580/MUM/2012 (A.Y. 2008-09) HINDUSTAN FORGING & STEEL INDUSTRIES VS. JT. CIT THE FORM OF STEEL IGNOTS FOR THE PURPOSE OF VALUING THE CLOSING INVENTORY THEREOF, I.E., AS AT THE YEAR-END. THE ASSESSING OFFICER (A.O.) FOUND TH E FOLLOWING DIRECT EXPENSES, AGGREGATING TO RS.269.28 LACS, INCURRED DURING THE YEAR, AS NOT INCLUDED TOWARD THE COST OF RAW MATERIAL: HEADS OF EXPENSES AMOUNT (RS.) CLEARING & FORWARDING 35,86,611 TRANSPORT CHARGES 1,21,24,890 WAGES 9,85,419 LOADING & CARTAGE 1,24,445 OCTROI 1,02,30,605 TOTAL 2,69,27,525 HE, ACCORDINGLY, FOUND THE RAW MATERIAL, TO THE EXT ENT IT PERTAINED TO THE PURCHASES DURING THE YEAR (645.523 MT), TO BE UNDERVALUED BY RS.1494 PER METRIC TON (PMT), SO THAT THERE WAS UNDER-VALUATION TO THE EXTENT OF RS.9,64,411/- , ASSESSING IT U/S. 28 OF THE ACT. IN APPEAL, THE LD. CIT(A) CONFIRMED THE SAME AT RS. 1,477/- PMT, I.E., TOWARD THE TRANSPORT CHARGES AND LOADING AND CARTAGE. IN R ESPECT OF THE ASSESSEES CLAIM THAT THE OLD MATERIAL LYING IN STOCK EXCLUDED BY THE A.O. (5 82.535 MT), SO THAT THE DIRECT COST INCURRED ON ITS PURCHASE WOULD NOT IMPACT THE VALUA TION OF THE CLOSING STOCK, TO BE IN FACT AT 794.38 MT, HE FOUND IT AS NOT SO; RATHER, ON THE BASIS OF HIS EXAMINATION, AS 565 MT, SO THAT EVEN THE FIGURE ADOPTED BY THE A.O. WAS NOT IN AGREEMENT WITH THE ASSESSEES RECORDS. HE, ACCORDINGLY, DIRECTED FOR THE VERIFICA TION OF THE ASSESSEES CLAIM QUA THE OLD STOCK AND A DECISION ACCORDINGLY, WHILE APPLYING TH E INCREASE @ RS.1477 PMT ON THE BALANCE QUANTITY IN STOCK, I.E., AS ATTRIBUTABLE TO THE PURCHASES DURING THE YEAR. AGGRIEVED, THE ASSESSEE IS IN APPEAL, RAISING THE FOLLOWING GR OUNDS: 1. (A) ON THE FACTS AND IN LAW, THE LEARNED CIT(A ) ERRED IN PARTIALLY CONFIRMING ADDITION MADE BY THE AO TO THE VALUE OF THE CLOSING STOCK OF THE APPELLANT FIRM. (B) AMONG OTHERS, LD. CIT(A) OUGHT TO HAVE APPRECI ATED THAT SINCE THE ASSESSEE FIRM HAS BEEN CONSISTENTLY FOLLOWING THE S AME METHOD OF VALUATION OF STOCK, UNDER AMENDED PROVISIONS OF SECTION 145A ANY ADJUSTMENT TO VALUE OF STOCK IS RESTRICTED ONLY TO ANY TAX DUTY, CESS OR FEE ACTUALLY PAID OR 3 ITA NO. 5580/MUM/2012 (A.Y. 2008-09) HINDUSTAN FORGING & STEEL INDUSTRIES VS. JT. CIT INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CONDITION AS ON THE DATE OF VALUATION. (C) WITHOUT PREJUDICE TO THE ABOVE GROUND, LD. CIT (A) FURTHER ERRED IN NOT APPRECIATING THAT THE AO HAVING FOUND THE METHO D OF VALUATION ADOPTED BY THE ASSESSEE AS DEFECTIVE, IT IS OBLIGATORY TO R ECTIFY NOT ONLY THE CLOSING STOCK BUT ALSO THE OPENING STOCK. 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE FIRST ISSUE BEFORE US IS THE COMPOSITION OF TH E DIRECT EXPENDITURE OF RS.1,23,86,661/- LOADED BY THE A.O. ON THE PURCHASE S, TO ARRIVE AT THE UNDER-VALUATION OF RS. 1494 PMT, EVEN AS HE FOUND THE TOTAL OF SUCH EX PENDITURE TO BE AT RS.269.28 LACS. WE FIND NO ANSWER THERETO, EITHER IN THE ORDERS OF THE AUTHORITIES BELOW OR EVEN FROM THE PARTIES DURING HEARING. THE LD. CIT(A) HAS RENDERED FINDING QUA TRANSPORT CHARGES; LOADING AND CARTAGE; AND WAGES, WHILE CHOOSING TO R EMAIN SILENT ON THE OTHER TWO, I.E., CLEARING AND FORWARDING AND OCTROI EXPENSES. HO WEVER, EVEN THE EXPENSES DEALT WITH BY HIM DO NOT, AS APPARENT, ADD UP TO THE LOADED FI GURE OF RS.123.87 LACS. FURTHER, BOTH THE EXPENSES NOT CONSIDERED BY HIM FIND INCLUSION I N WORKING OF THE GROSS PROFIT (GP) [ANNEXURE 4 TO TAX AUDIT REPORT TAR/PB PG.6]. WHI LE, THE CLEARING AND FORWARDING EXPENDITURE STANDS INCLUDED AS A PRODUCTION (CONVER SION) COST, OCTROI STANDS DEDUCTED FROM SALES, SUGGESTING IT TO BE ON SALES. THE LD. A UTHORIZED REPRESENTATIVE (AR), HOWEVER, COULD NOT FURNISH ANY DEFINITE ANSWER QUA OCTROI. IN FACT, THE LOADING AND CARTAGE EXPENSES ALSO STAND SIMILARLY EXCLUDED FRO M SALES, WHILE TRANSPORT CHARGES STAND INCLUDED AS A PRODUCTION COST. IN FACT, WAGE S STAND INCLUDED AS A PART OF THE PRODUCTION COST (PB PG. 6), BELYING THE ASSESSEES CASE BEFORE THE LD. CIT(A), WHICH FOUND HIS ACCEPTANCE, THAT THE SAME ARE TOWARD OFFI CE EXPENSES (REFER PARA 1.7 OF THE IMPUGNED ORDER). THE ASSESSEES STATEMENT IS, THUS , INTERNALLY CONSISTENT AS WELL AS WITH REFERENCE TO THE FINDINGS BY THE AUTHORITIES BELOW. THE IMPACT ON THE VALUATION OF THE INVENTORIES, I.E., OF SUCH INCONSISTENCY, THOUGH MA Y NOT BE AS OBTUSE AS APPEARS TO BE. THIS IS AS IF THE EXPENDITURE REPRESENTS THE DIRECT COST OF RAW MATERIAL, THE SAME IS ALSO LIABLE TO BE TAKEN INTO ACCOUNT IN ARRIVING AT ITS COST AND, THUS, SHALL IMPACT THE VALUATION 4 ITA NO. 5580/MUM/2012 (A.Y. 2008-09) HINDUSTAN FORGING & STEEL INDUSTRIES VS. JT. CIT OF BOTH THE RAW MATERIAL IN STOCK AND THEREBY THE V ALUATION, AT COST, OF THE FINISHED GOODS PRODUCED IN STOCK. WE SHALL, THEREFORE, FOR THE PUR POSES OF DECIDING THE INSTANT APPEAL, ISSUE FINDINGS FOR ALL THE ITEMS OF EXPENDITURE; TH E COMPOSITION OF THE COST LOADED ON THE PURCHASES, TO DETERMINE THE COST OF RAW MATERIAL, B EING NOT CLEAR AND, BESIDES, THE MATTER BEING INTERTWINED WITH THE VALUATION OF FINISHED GO ODS. IN OUR VIEW, THE MATTER WOULD REQUIRE BEING RESTORE D BACK TO THE FILE OF THE A.O., WHO SHALL ISSUE SPECIFIC FINDING QUA EACH OF THEM. ONLY TO THE EXTENT INCURRED IN RELATI ON TO BRINGING THE RAW MATERIAL TO ITS PRESENT LOCATIO N AND CONDITION, WOULD FORM A PART OF ITS COST AND, THUS, INCLUDED AS A PART OF THE RAW MATER IAL COST, WHETHER HELD AS STOCK AS AT THE YEAR-END OR CONSUMED DURING THE YEAR. FURTHER ON, T HOUGH THE VALUATION OF FINISHED GOODS IS NOT AN ISSUE BEFORE US, IN-AS-MUCH AS THE ASSESS EE HAS INCLUDED THE RELEVANT COSTS IN THE VALUE OF THE FINISHED GOODS PRODUCED AND, THUS, IN STOCK AS AT THE YEAR-END, THE VALUATION OF FINISHED GOODS SHALL ALSO BE REQUIRED TO BE REWO RKED. THIS IS AS, WITHOUT DOUBT, THE SAME COST COULD NOT BE INCLUDED TWICE. AS SUCH, TO THE EXTENT THE DIRECT COSTS UNDER REFERENCE ARE INCURRED IN BRINGING THE RAW MATERIAL TO ITS PRESENT CONDITION AND LOCATION, FORMING PART OF THE COST OF RAW MATERIAL, THE SAME SHALL STAND EXCLUDED IN VALUING THE PRODUCTION COST. AGAIN, BY DEFINITION, THE RAW MATE RIAL COST FOR THE PURPOSE OF VALUATION OF FINISHED GOODS PRODUCED WILL HAVE TO BE WITH REF ERENCE TO THE RAW MATERIAL COST AS FINALLY ARRIVED AT. WHERE THE COST OF THE RAW MATER IAL CONSUMED IS DIFFERENT FOR THAT PURCHASED DURING THE YEAR, AND THAT LYING IN THE OP ENING STOCK, AS APPEARS TO BE THE CASE, FIFO, AVERAGE, ETC., METHOD, AS CONSISTENTLY FOLLOW ED BY THE ASSESSEE, SHALL BE FOLLOWED FOR DETERMINING THE COST OF THE RAW MATERIAL CONSUM ED. THE LD. AR ALSO MADE A PLEA THAT IF AND TO THE EXTE NT THERE IS AN INCREASE IN THE VALUE OF THE CLOSING STOCK, THE SAME SHOULD LEAD TO , SIMILARLY, AN INCREASE IN THE OPENING STOCK FOR THE FOLLOWING YEAR AS WELL. THE SAME WAS AGREED TO, WITH A CAVEAT THOUGH, AGREED TO BY HIM, I.E., THAT THE CLOSING STOCK FOR THE FOLLOWING YEAR WOULD ALSO WARRANT, IN THAT CASE, BEING VALUED ON THE SAME BASIS. THIS IS AS EQUALLY BOTH THE OPENING AND THE CLOSING STOCK ARE TO BE VALUED ON THE SAME BASIS. T HE PROPOSITION, IN FACT, FLOWS FROM THE DECISION BY THE APEX COURT IN THE CASE OF CIT VS. BRITISH PAINTS INDIA LTD. [1991] 188 ITR 5 ITA NO. 5580/MUM/2012 (A.Y. 2008-09) HINDUSTAN FORGING & STEEL INDUSTRIES VS. JT. CIT 44 (SC), WHICH IS BASED ON TWO FUNDAMENTAL PRINCIPLES OF JU RISPRUDENCE ON TAX LAW, I.E., IT IS THE CORRECT INCOME FOR THE YEAR THAT IS TO BE BR OUGHT TO TAX FOR THAT YEAR AND, TWO, EACH YEAR IS AN INDEPENDENT AND SELF-CONTAINED UNIT OF A SSESSMENT . REFERENCE IN THIS CONTEXT MAY BE MADE TO THE DECISION BY THE TRIBUNAL IN THE CASE OF DY. CIT V. DAMAN GANGA PAPER LTD . (IN ITA NO. 7756/MUM(D)/2010 DATED 26/2/2014). THE EXCEPTION WO ULD ONLY BE FOR THE TRANSITIONAL YEAR, WHERE, EITHER AT THE INSTANCE OF THE ASSESSEE OR BY LAW, THERE IS A CHANGE IN THE METHOD OF VALUATION, EVEN AS THE CU RRENT YEAR IS NOT A TRANSITIONAL YEAR. FINALLY, AS APPARENT, AND EVEN AS CONCEDED TO BY TH E LD. AR DURING HEARING, SECTION 145A HAS NO BEARING IN THE FACTS OF THE PRESENT CAS E. WE DECIDE ACCORDINGLY. 4. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 0/ 1 )2 30 ' 4' 567 8 * 9 ' :; ORDER PRONOUNCED IN THE OPEN COURT ON JULY 31, 2014 SD/- SD/- (AMIT SHUKLA) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER <+ MUMBAI; =) DATED : 31.07.2014 *.)../ ROSHANI , SR. PS !' # $%&' (!'% / COPY OF THE ORDER FORWARDED TO : 1. '$ / THE APPELLANT 2. %&'$ / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. @*A B %)C2 , , C2/ , <+ / DR, ITAT, MUMBAI 6. B D3 E + / GUARD FILE !' ) / BY ORDER, */)+ , (DY./ASSTT. REGISTRAR) , <+ / ITAT, MUMBAI