M/s. Latha Steel Suppliers, Pondicherry V. ITO, Pondicherry

ITA 631/CHNY/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4860 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 16-06-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 04-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P B SEKARAN
• Assessee Lawyers: G BASKAR
• Keywords: Opportunity of being heard

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH B CHENNAI BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER I.T.A.NO. 631/MDS/2009 ASSESSMENT YEAR : 2003-04 M/S. LATHA STEEL SUPPLIERS, NO.99, KAMARAJ SALAI, PUDUCHERY 605 001. PAN AAAFL 2477 N VS. THE INCOME-TAX OFFICER, WARD-I(1), PUDUCHERY. (APPELLANT) (RESPONDENT) APPELLANT BY : S HRI G. BASKAR RESPONDENT BY : SHRI P.B.SEKARAN, CIT-DR O R D E R PER DR. O.K. NARAYANAN, VICE-PRESIDENT THIS APPEAL IS FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2003-04. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-X II, AT CHENNAI DATED 19.12.2008 AND ARISES OUT OF THE ASSE SSMENT COMPLETED UNDER SEC.143(3) OF THE INCOME-TAX ACT, 1 961. 2. THE GROUNDS RAISED BY THE ASSESSEE IN THE PRESEN T CASE ARE EXTRACTED BELOW : ITA 631/09 :- 2 -: 1.1 THE C.I.T.(A) IGNORED THE FACT THAT EVEN WIT H RESPECT TO UNACCOUNTED PURCHASES & SALES, THERE IS A SYSTEM OF SELF-FINANCING IN AS MUCH AS PURCHASES AR E PAID FOR, WITH SALES PROCEEDS WITHIN A SHORT SPAN O F TIME, AS THE SUPPLIER ALLOW A WEEKS CREDIT PERIOD A ND DEMAND NO ADVANCE PAYMENTS. THERE IS ABSOLUTELY NO NEED FOR INTRODUCING FRESH WORKING/CIRCULATING CAPI TAL, EVEN IF THE TRANSACTIONS HAPPEN TO BE OFF THE BOOKS 1.2 IN AN ON GOING BUSINESS, THE CIT(A) DID NOT APPRECIATE, THAT THERE WILL NOT BE ANY FURTHER CAPI TAL REQUIREMENT, IN VIEW OF THE VELOCITY OF BUSINESS TRANSACTIONS WHICH WILL ON ITS OWN MANAGE THE FUNDS REQUIREMENTS WITHOUT ANY EXTERNAL FUNDING. THE CIT (A) HAS NOT TAKEN NOTE OF THE FACT THAT CIRCULATING CAP ITAL IS A PHENOMENON OF CONTINUOUS PROCESS OF RECYCLING THE FUNDS IN THE BUSINESS, AND IT AUGMENTS BY THE INCREASED VOLUME OF BUSINESS. 2.1 WITHOUT PREJUDICE TO THE ABOVE GROUND OF APPEA L, THE APPELLANT SUBMITS THAT THE HONORABLE CIT(A) ERR ED IN SUSTAINING THE ACTION OF THE AO IN ASSUMING INFU SION OF WORKING CAPITAL, IN RESPECT OF UNACCOUNTED PURCHASES & SALES, THE AMOUNT OF WHICH WAS DERIVED ON THE BASIS OF STOCK TURN OVER RATIO. THIS ACT OF THE AO RESULTED IN THE ENHANCEMENT OF THE RETURNED INCOME. ITA 631/09 :- 3 -: 2.2 THE CIT (A) WRONGLY APPROVED THE A.OS METHOD OF WORKINGS FOR COMPUTATION OF CIRCULATING CAPITAL BY CONSIDERING THE ADMITTED TURNOVER, INSTEAD OF COST OF GOODS SOLD AS THE NUMERATOR AND ADMITTED CLOSING STOCK INSTEAD OF AVERAGE OF OPENING AND CLOSING STO CK IN TRADE AS THE DENOMINATOR. 2.3 THE CIT(A) OVERLOOKED THE FACT THAT THE PROFI T GENERATED ALSO WOULD HAVE BEEN PLOUGHED BACK IN THE BUSINESS THEREBY AVOIDING THE NEED FOR OUTSIDE FUNDING. FOR THIS PURPOSE 50% OF THE WHOLE YEARS PROFIT RELATABLE TO OFF THE BOOKS SALES, COULD HAVE BEEN USED FOR CIRCULATING CAPITAL WHICH WOULD REDUCE THE AMOUNT OF CIRCULATING CAPITAL AS DERIVED BY THE ABO VE METHOD. 2.4 IN THE LIGHT OF THESE FACTS, THE DIRECTION OF CIT(A) [IN PARAGRAPH 4.8.1 OF HER ORDER], TO ADOPT THE REV ISED FIGURE OF ` 19,66,253 IN THE PLACE OF ` 22,61,998 MAY NEED CORRECTION. THE CIT (A) OUGHT TO HAVE DIRE CTED THE AO TO ADOPT ` 13,97,501 INSTEAD OF ` 22,61,998 AS PER CORRECT WORKINGS FURNISHED [ANNEX I] 3.1 THE C.I.T.(A) SIMPLY AGREED TO THE ACTION OF T HE A.O IN ADDING ` 51,95,781 AS BOGUS CREDIT WITHOUT APPRECIATING THE GROUND REALITIES OF THE SITUATION. 3.2 THE CIT(A) HAS NOT CONSIDERED THE FINDINGS OF THE CIT(A) IN HIS ORDER NO.334/2005-06 DATED 30-3-2006 ITA 631/09 :- 4 -: ON PAGE 11, IN THE SAME APPELLANTS CASE FOR THE AY 2002-03, WHERE HE HAD DIRECTED THE A.O TO DEDUCT TH E OPENING BALANCES FROM THE CLOSING BALANCES OF CREDITORS FOR THE PURPOSE OF ADDITION ON THIS SCORE. 3.3 THE CIT(A)S OBSERVATION THAT ONCE THE OPENING BALANCE (AS ON 1-4-2001) IS DEDUCTED FROM THE CLOSI NG BALANCE OF SUNDRY CREDITORS AS ON 31-3-2002, SIMILA R DEDUCTION OF THE BALANCE (AS ON 1-4-2002) IS NOT TO BE MADE FROM THE CLOSING BALANCE AS ON 31-3-2003 IS NO T TENABLE FROM PURE ACCOUNTING POINT OF VIEW. AS SUBMITTED IN OUR LETTER DATED 25-11-2008, TO THE CI T(A) [ANNEX II] THERE WOULD NOT BE ANY ADDITION TO BE MA DE BECAUSE THE OPENING BALANCE AS ON 1-4-2002 WAS ` 1,18,45,167 AND THE CLOSING BALANCE AS ON 31-3-2003 WAS ` 1,17,82,279. 3.4 THE CIT(A) WHO IS AWARE OF DISALLOWANCE OF BOG US CREDITS IN THE SUPPLIERS ACCOUNT IN THE AY 2002-03 OUGHT TO HAVE CONSIDERED REMOVING SUCH AMOUNTS WHILE DETERMINING THE DISALLOWANCE ON SIMILAR GROUN DS. FOR THE SAKE OF EASY REFERENCE THE CORRECT AMOUNT T O BE DISALLOWANCE ON SUCH GROUNDS IS ENCLOSED IN [ANNEX III] [ ` 1848614]. 3. AS THE ASSESSEE IS HAVING NECESSARY DETAILS IN I TS HANDS AND THOSE DETAILS HAVE NOT BEEN CONSIDERED BY THE L OWER AUTHORITIES, THE ISSUES RAISED IN THE PRESENT APPEA L ARE REMITTED ITA 631/09 :- 5 -: BACK TO THE ASSESSING OFFICER FOR FRESH CONSIDERATI ON IN ACCORDANCE WITH LAW. THE ASSESSEE SHALL BE GIVEN A N OPPORTUNITY OF BEING HEARD BEFORE PASSING THE ORDER. 4. IN RESULT, THIS APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF H EARING, ON THURSDAY, THE 16 TH DAY OF JUNE, 2011 AT CHENNAI. SD/- SD/- (HARI OM MARATHA) (DR.O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED THE 16 TH JUNE, 2011 MPO* COPY TO : APPELLANT/RESPONDENT/CIT/CIT(A)/DR