C. Mohan Reddy (HUF), Nellore, Hyderabad V. DCIT, Circle-1, Nellore, Nellore

ITA 989/HYD/2016

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 0719 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-A
• Next Hearing Date: 02-07-2019
• Assessment Year: 2010-2011
• Appeal Filed On: 05-07-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K KOMALI KRISHNA
• Assessee Lawyers: A V RAGHURAM
• Section: 143(3); 40(a)(ia); 194C; 143(1); 6

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.989/HYD/2016 ASSESSMENT YEAR: 2010 - 11 C. MOHAN REDDY - HUF, (PROP. MOHAN REDDY JEWELLERS), 13/420, KAKARLAVARI STREET, CHAINA BAZAR, NELLORE 524001, ANDHRA PRADESH. PAN: AABHC 9906 L VS. DCIT, CIRCLE - 1, D.NO.24 - 2 - 38, G.T. ROAD, DARGAMITTA, NELLORE 524001, ANDHRA PRADESH. (APPELLANT) (RESPONDENT) ASSESSEE BY: SRI A.V. RAGHURAM REVENUE BY: SMT. K. KOMALI KRISHNA, DR DATE OF HEARING: 02/07/2019 DATE OF PRONOUNCEMENT: 26 /07/2019 ORDER PER A. MOHAN ALANKAMONY, AM.: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT(A), TIRUPATI IN APPEAL NO. 40/14 - 15/CIT(A)/TPT, DATED 30/03/2016 PASSED U/S. 143(3) & 250(6) OF THE ACT FOR THE ASSESSMENT YEAR 2010 - 11. 2. IN THIS APPEAL, ASSESSEE HAS RAISED SEVERAL GROUNDS AND ALSO ADDITIONAL GROUNDS HOWEVER THE CRUX ES OF THE ISSUE S ARE THAT: - 2 (I) THE LD. CIT (A) HAS ERRED IN SUSTAINING THE ADDITION OF RS. 86,54,036/ - WITH RESPECT TO THE ADDITION MADE BY THE LD. AO OF RS. 1,52,62,688/ - BY VALUING THE CLOSING STOCK (GOLD JEWELLERY) OF THE ASSESSEE BY APPLYING THE WEIGHTED AVERAGE COST METHOD WHEN THERE IS NO ERROR IN THE METHOD OF VALUATION ADOPTED BY THE ASSESSEE . (II) THE LD. CIT (A) HAS ERRED IN SUSTAINING THE DISALLOWANCE OF EXPENDITURE BEING THE PAYMENT MADE TO LABOURERS TOWARDS MAKING CHARGES OF GOLD JEWELLERY AMOUNTING TO RS. 27,37,050/ - INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT FOR NON - COMPLIANCE OF THE PROVISIONS OF SECTION 194C OF THE ACT. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A HUF ENGAGED IN THE BUSINESS OF TRADING IN GOLD JEWELLERY AND SILVER ARTICLES UNDER THE NAME AND STYLE OF M/S. C. MOHAN R EDDY JEWELLERS. THE ASSESSEE FILED ITS E - RETURN FOR THE AY 2010 - 11 ON 15/10/2010 ADMITTING TOTAL INCOME OF RS. 17,38,240/ - . INITIALLY, THE RETURN WAS PROCESSED U/S. 143(1) OF THE ACT ON 30/06/2011, THEREAFTER THE CASE WAS SELECTED FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED ON 31/3/2013 WHEREIN THE L D. AO MADE ADDITION INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT AND FOR UNDER - VALUATION OF CLOSING STOCK. 4. GROUND NO.:1: UNDERVALUATION OF CLOSING STOCK : 3 5. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE LD. AO THA T THE ASSESSEE HAD VALUED ITS CLOSING STOCK OF GOLD JEWELLERY CONSISTING OF 71,254.620 GRAMS AT RS. 6,86,13,975/ - . IT WAS FURTHER OBSERVED FROM THE TAX AUDIT REPORT IN FORM 3CB & 3CD THAT THE CLOSING STOCK WAS VALUED AT LOWER OF COST O R MARKET RATE FOR THE RELEVANT ASSESSMENT YEAR. ON FURTHER EXAMINATION IT WAS OBSERVED THAT THE ASSESSEE HAD ADOPTED THE VALUE OF THE CLOSING STOCK OF 51,893.293 GRAMS WHICH WAS PART OF THE OPENING STOCK AT THE OPENING STOCK RATE AND THE REMAINING CLOSING STOCK 19,361.327 GRAMS WHICH WAS PURCHASED DURING THE RELEVANT PREVIOUS YEAR AND REMAINED UNSOLD WAS VALUED AT THE CU RRENT YEAR COST PRICE. THE LD. AO OPINED THAT THE ASSESSEE HAD NOT VALUED HIS CLOSING STOCK IN THE GENERALLY ACCEPTED METHOD SUCH AS FIFO (FIRST IN FIRST OUT) METHOD, LIFO (LAST IN FIRST OUT) METHOD, AVERAGE METHOD OR WEIGHTED AVERAGE METHOD . THEREAFTER T HE LD. AO ADOPTED WEIGHTED AVERAGE COST PRICE METHOD AND ARRIVED AT THE VALUE OF THE CLOSING STOCK WHEREIN HE OBSERVED THAT THE ASSESSEE HA D UNDER - VALUED THE CLOSING STOCK BY RS. 1,52,62,688/ - AND ACCORDINGLY MADE ADDITION . ON APPEAL, THE LD . CIT (A) SUSTA INED THE ORDER OF THE LD. AO TO THE EXTENT OF RS. 86,54,036/ - BY OBSERVING AS UNDER: 7. THE ABOVE SUBMISSIONS ARE CONSIDERED. IT IS CLEAR THAT THE APPELLANTS OPENING STOCK STOOD AT 51893.293 GMS. FROM THE GOLD STOCK REGISTER, IT IS SEEN THAT IT HAS PURCHASED OR ADDED NEW STOCK ON 13/04/2009 ONLY WHICH MEANS THAT WHATEVER IT HAS SOLD UPTO 1 3/04/2009 SHOULD HAVE BEEN OUT OF ITS OPENING STOCK ONLY. THUS, THE APPELLANT SALES BETWEEN 01/04/2009 & 13/4/2009 (BOTH DAYS INCLUSIVE) OF 3068.860 GMS WAS MET OUT OF THE OPENING STOCK. AS POINTED OUT BY THE A.O., THIS MUCH QUALITY I.E., 3068.860 GMS OF GOLD HAS TO BE 4 EXCLUDED FROM THE OPENING STOCK OF 51893.293 GMS. SIMILARLY, DURING THE INTERVENING PERIOD OF FIRST PURCHASE & SECOND PURCHASE I.E., AFTER 13/04/2009 & 24/04/2009, THE APPELLANT MADE SALES OF 1810.810 GRAMS WHICH IS MORE THAN THAT OF THE P URCHASES MADE ON 13/04/2009. THUS, THE APPELLANT HAS UTILISED 261.190 GRAMS OF GOLD FROM OUT OF THE OPENING STOCK. THUS, THE A.O. IS RIGHT IN SAYING THAT THE APPELLANT SOLD 3330.050 GMS OUT OF ITS OPENING STOCK AND HENCE IT HAS TO BE SPARED FOR ADOPTING THE PREVAILING MARKET RATE. ASSUMING THAT THE GOLD REMAINED UNSOLD, EVEN THEN, THE APPELLANT HAS UNDERVALUED ITS CLOSING STOCK BY RS. 86,54,036/ - AS SHOWN BELOW. 6. AT THE OUTSET, WE DO NOT FIND ANY MERIT IN THE ORDER OF THE LD. AO AS WELL AS TH AT OF THE LD. CIT (A). THE ASSESSEE HAS BEEN CONSISTENTLY VALUING ITS CLOSING STOCK AT COST OR MARKET PRICE WHICHEVER IS LESS. FROM THE ORDER OF THE LD. AO IT IS APPARENT THAT THE ASSESSEE HAS VALUED THE CLOSING STOCK OF GOLD JEWELLERY WHICH REMAIN ED PART OF T HE OPENING STOCK AT THE RATE ADOPTED IN THE OPENING STOCK. WITH RESPECT TO THE VALUE OF THE GOLD JEWELLERY PURCHASED DURING THE RELEVANT PREVIOUS YEAR WHICH REMAIN UNSOLD THE ASSESSEE HAS ADOPTED THE PURCHASE PRICE FOR THE PURPOSE OF VALUATION OF CLOSING S TOCK. IT IS FURTHER OBVIOUS THAT ACCORDING TO THE WISDOM OF THE ASSESSEE THE ENTIRE VALUE OF THE CLOSING STOCK OF OLD JEWELLERY AS WELL AS THE CLOSING STOCK OF NEW JEWELLERY IS MORE THAN THE ORIGINAL HISTORIC COST , THEREFORE THE ASSESSEE HAS ADOPTED THE HI STORICAL COST OF THE GOLD JEWELLERY FOR THE PURPOSE OF VALUING THE CLOSING STOCK. THIS CONSISTENT METHOD OF VALUING THE CLOSING STOCK ADOPTED BY THE ASSESSEE BEING COST OR MARKET RATE WHICHEVER IS LESS CANNOT BE SAID TO BE ERRONEOUS. THEREFORE, WE DO NOT FIND ANY MERIT IN THE ORDER OF THE LD. AO AS WELL AS THAT OF THE LD. CIT (A) ON THIS ISSUE. 5 HENCE, WE HEREBY DIRECT THE LD. AO TO DELETE THE ADDITION MADE ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK. 7. GROUND NO.2: DISALLOWANCE OF EXPENDITURE TOWARDS MAKING CHARGES BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT FOR NON - COMPLIANCE OF SECTION 194C OF THE ACT: DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE LD . AO THAT THE ASSESSEE HAS PAID ON SEVERAL DAYS DURING THE RELEVANT ASSESSMENT YEAR AMOUNT AGGREGATING TO RS. 4,27,000/ - , RS. 6,18,050/ - , RS. 5,74,000/ - , RS. 3,78,000/ - , RS. 2,84,000/ - , RS. 2,56,000/ - TO THE GOLDSMITHS MR. MANOJ (KORADA VEEDHI, NELLORE), M R. NAGAIAH CHAR I (KORADA VEEDHI, NELLORE), MR. PURUSHOTTAM (MUALIKRISHNA MANDIR, KOTAMITTA, NELLORE), MR. BULLIBABU (NEAR MONDAPPA NAIDU, KALYANAMANDAPAM, B.V. NAGAR, NELLORE), MR. ABDUL KHALEEL (NEAR WATER TANK, JANDA VEEDHI, NELLORE), MR. SHIVA (PALAVOOCH CENTRE, GIDDAN GI STREET, NELLORE) RESPECTIVELY. THE ASSESSEE HAD DEBITED THE ENTIRE AGGREGATE AMOUNT OF RS. 26,35,284/ - PAID TO THE ABOVE - MENTIONED PERSONS IN HIS TRADING ACCOUNT UNDER THE HEAD COOLIES PAID. THE ASSESSEE HAD EXPLAINED THAT THE AFORESTATED AMOUNT WAS PAID FOR MAKING CHARGES OF THE GOLD JEWELLERY. THE LD. AO OPINED THAT ALL THE SIX PERSONS BEING GOLDSMITHS MENTIONED HEREINABOVE ARE CONTRACTORS AND THE PAYMENT MADE TO THEM TOWARDS MAKING CHARGES OF GOLD JEWELLERY , TAX HAS TO BE DEDUCTED AT SOURCE BY VI RTUE OF SECTION 194C 6 OF THE ACT . SINCE THE ASSESSEE HA D NOT DEDUCTED THE TAX AT SOURCE FROM THE SIX CONTRACTORS MENTIONED HEREINABOVE THE LD. AO DISALLOWED THE ENTIRE EXPENDITURE OF RS. 26,00,050/ - BEING THE AMOUNT PAYABLE / PAID TO THEM TOWARDS MAKING CH ARGES OF GOLD JEWELLERY. ON APPEAL THE LD. CIT (A) CONFIRMED THE ORDER OF THE LD. AO BY AGREEING WITH HIS VIEW HOWEVER, PARTIAL RELIEF OF RS. 63,000/ - WAS GRANTED AS THERE WAS A N EARROR IN COMPUTATION WITH RESPECT TO THE PAYMENT MADE TO GOLDSMITH MR. NAGA IAH ACHARI. WHILE DOING SO, THE LD. CIT (A) REJECTED THE CLAIM OF THE ASSESSEE THAT THE GOLD WAS HANDED OVER TO VARIOUS SKILLED WORKERS RECOMMENDED BY FEW TRUSTWORTHY WHOLETIME WORKERS OF THE ASSESSEE AS THE ASSESSEE WAS DEALING WITH PRECIOUS METAL AND THE MAKING CHARGES WERE PAID TO THOSE SKILLED WORKERS THROUGH THE TRUSTWORTHY WHOLETIME WORKERS OF THE ASSESSEE . 8 . AT THE OUTSET, WE DO NOT FIND ANY MERIT IN THE ORDERS OF THE LD. REVENUE AUTHORITIES ON THIS ISSUE. FROM THE FACTS OF THE CASE IT IS APPARENT THAT THE ASSESSEE HAS BEEN PROVIDING GOLD TO SEVERAL SKILLED WORKERS WHO ARE NOT HIS EMPLOYEES FOR MAKING GOLD JEWELLERY. THESE VERY MANY SKILLED WORKERS ARE OBVIOUSLY TRUSTED BY THE ASSESSEE BECAUSE OF THE RECOMM ENDATION OF HIS RELIABLE PERSONNEL. THEREFORE, IT IS QUITE NATURAL FOR THE ASSESSEE TO MAKE PAYMENTS FOR THE SERVICE RENDERED TO THE VARIOUS INDIVIDUAL SKILLED WORKERS THROUGH HIS TRUSTED PERSONNEL . HENCE, APPARENTLY THERE IS NO CONTRACTUAL RELATIONSHIP 7 B ETWEEN THE ASSESSEE, AND THE SIX TRUSTED PERSONNEL MENTIONED HEREINABOVE. I N FACT, IN THE CASE OF THE ASSESSEE , IT IS SIMPLE PAYMENT OF MAKING CHARGES , PAID BY THE ASSESSEE TO VARIOUS INDIVIDUAL SKILLED WORKERS. TO ESTABLISH THIS FACT THE ASSESSEE HAS ENCL OSED IN HIS PAPER BOOK PAGE NO. 30 TO PAGE NO.95 XEROX COPIES OF PAYMENT VOUCHERS EVIDENCING PAYMENTS MADE TO SEVERAL INDIVIDUALS AND NOT ONLY TO THE SIX INDIVIDUALS MENTIONED HEREINABOVE . THE LD. REVENUE AUTHORITIES HAS EITHER FAILED TO EXAMINE THE SAME OR NOT CONSIDERED THE SAME AT ALL. IT IS PERTINENT TO MENTION THAT E VENT OTHERWISE THERE IS NO FINDING THAT THE PAYMENTS MADE TO EACH INDIVIDUAL SKILLED LABOUR HAS EXCEEDED THE THRESHOLD L IMIT PRESCRIBED UNDER THE ACT. HENCE, WE ARE OF THE VIEW THAT THE PROVISIONS OF SECTION 194C WILL NOT BE APPLICABLE IN THE CASE OF THE ASSESSEE AND THEREFORE, THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT WILL NOT BE ATTRACTED. FOR THE AFORE S TATED REASO NS WE HEREBY DIRECT THE LD. AO TO DELETE THE ADDITION MADE BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. IT IS ORDERED ACCORDINGLY. 9 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 26 TH JULY, 2019. SD/ - SD/ - (P. MADHAVI DEVI) ( A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED: 26 TH JULY , 2019 8 OKK COPY TO: - 1) C. MOHAN REDDY - HUF, C/O. A.V. RAGHU RAM, ADVOCATES, 610, BABUKHAN ESTATE, BASHEERBAGH, HYDERABAD 500001. 2) DCIT, CENTRAL - 1, D.NO.24 - 2 - 38, G.T. ROAD, DARGAMITTA, NELLORE - 524001. 3) THE CIT(A) , TIRUPATI. 4) THE PR. CI T, TIRUPATI. 5) THE DR, ITAT, HYDERABAD 6) GUARD FILE