Income Tax Appellate Tribunal - Panji
Khetan Tiles Private Limited, Jaipur vs Acit, Jaipur on 9 August, 2017
vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj
IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
Jh dqy Hkkjr] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k
BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA No. 353/JP/2017
fu/kZkj.k o"kZ@Assessment Year :2013-14
Khetan Tiles Pvt. Ltd., cuke ACIT
C/o Kalani & Co. Vs. Circle-4
th
5 Floor, The Mile Stone, Gandhi Jaipur
Nagar Turn, Tonk Road, Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCK0431H
vihykFkhZ@Appellant izR;FkhZ@Respondent
vk;dj vihy la-@ITA No. 505/JP/2017
fu/kZkj.k o"kZ@Assessment Year :2013-14
DCIT cuke Khetan Tiles Pvt. Ltd.,
Circle-4 Vs. C/o Kalani & Co.
Jaipur 5th Floor, The Mile Stone, Gandhi
Nagar Turn, Tonk Road, Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCK0431H
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj l@
s Assessee by : Shri P.C. Parwal
jktLo dh vksj ls@ Revenue by : Shri R.A. Verma
lquokbZ dh rkjh[k@ Date of Hearing : 03/08/2017
mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 09/08/2017
vkns'k@ ORDER
2 ITA No. 353 & 505/JP/2017
Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur
PER: VIKRAM SINGH YADAV, A.M.
These are two cross appeals filed by the assessee and the revenue against the order of Ld. CIT (A)-2, Jaipur dated 27.03.2017 for A.Y. 2013-14 wherein the respective grounds of the appeal are as under:-
ITA No. 353/JP/17 (Ground of Assessee's appeal):-"1. The Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in upholding the action of AO in disallowing the claim of deduction u/s 80IA(1) of Rs. 13,04,887/- by holding that assessee has neither complied with the mandatory requirement of e-filing the tax audit report for claiming the deduction nor filed the audit report manually before the due date.
2. The Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in confirming the disallowance of Rs. 2,97,115/- u/s 40A(3) of IT Act, 1961.
3. The Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in confirming the disallowance of Rs. 13,414/- u/s 14A read with Rule 8D."ITA No. 505/JP/17 (Ground of Revenue's appeal):-
"(i). Whether on the facts and circumstances of the case and in law, the ld. CIT(A) was justified in directing to treat 25% of stock as defective as against the findings of the AO that no stock was found defective on the basis of sale bills denoting similar value."
2. Firstly, regarding ground No. 1 of the assessee, brief facts of the case are that the assessee claimed deduction u/s 80IA of Rs. 13,04,887/- on the income from two wind mill turbines. The assessee filed e-return of income for the year under consideration on 30.09.2013.
3 ITA No. 353 & 505/JP/2017Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur This return was filed without attaching the audit report in Form 10CCB. any document. As per the assessee, the amendment to Rule 12(2) which provides for furnishing the audit report electronically is applicable from AY 2014-15. The AO however observed that Amendment to Rule 12(2) was made by IT(Seventh Amendment) Rule, 2013 dt. 11.06.2013. It provides that the audit report required u/s 80IA is also to be furnished electronically. The proviso was made applicable w.r.e.f. 01.04.2013 and is thus applicable for subject assessment year 2013-14, and e-filing of audit report u/s 44AB and section 80IA in Form 10CCB have become mandatory to be file on or before the due date of filing of the return. The CBDT has issued order u/s 119(2)(a) on 26/09/2013 and extended the date of filing of audit report to 31.10.2013 subject to the condition that the assessee should file the audit report along with copy of return in paper form before the AO before 30.09.2013 and thereafter mandatory e-file the audit report before 31.10.2013. However, the assessee has not filed Form 10CCB in paper form before 30.09.2013 before the AO. Even Form 10CCB was not e-filed till date although it was mandatory to file upto 31.10.2013. He therefore, disallowed the claim of deduction u/s 80-IA.
3. The Ld. CIT(A) upheld the order of the AO. The relevant finding of the CIT(A) is reproduced which is as under:
"The Assessing Officer noted that the audit report has not been filed electronically within the due date and the report is also filed manually during the assessment proceedings. It is seen that the amendment to Rule 12(2) relating to e-filing of audit report in order to claim deduction under section 80IA was introduced by 4 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur Income Tax (seventh amendment) Rules 2013 w.e.f. 01.04.2013 and was applicable from assessment year 2013-14. The report was also not filed in the extended date for the same under section 119(2)(a) to 31.10.2013. Thus, the assessee has not complied with the mandatory requirement of e-filing of the tax audit report for claiming the deduction. The Authorized Representative placed reliance on Raj Kumar Bafna vs. ITO (2016) 48 CCH 244 (Jaipur Tribunal). This case relates to penalty under section 271B and the assessee was illiterate and dependent on professionals which was a finding of the appellate authority. In the case of Harisbhai Babubhai vs. ITO in ITA No. 646/Ahd/2016 (Ahd. Trib.) also the audit report under section 44AB was filed manually within the due date. In the present case neither the reports were e-filed nor manually filed before the due date.
Further, no valid reasons for not e-filing the report have been forwarded. There is a clear violation of the provisions of the Act. In view of the same, deduction under section 80IA cannot be allowed. The ground of appeal is dismissed."
4. During the course of hearing, the ld. AR submitted that from the facts stated above, the moot question which arises in the present case is whether non filing of audit report in Form 10CCB before the due date of filing of return is so fatal as to disallow the claim of deduction u/s 80IA.
The ld AR took us through the amendment to the Rules and it was submitted that By IT(Third Amendment) Rule, 2013 dt. 01.05.2013, a 5 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur proviso was inserted to Rule 12(2) to provide that where an assessee is required to furnish a report of audit u/s 44AB, 92E or 115JB of the Act, the same shall be furnished electronically. The proviso was substituted by IT(Seventh Amendment) Rule, 2013 dt. 11.06.2013 to provide that the audit report required u/s 80IA is also to be furnished electronically. It was submitted that the proviso was made applicable w.r.e.f. 01.04.2013 and is thus applicable for the subject assessment year.
It was further submitted that there is no dispute as to the fact that assessee has filed the audit report manually during the course of assessment proceedings and that it is eligible to claim deduction u/s 80IA. The only default on part of assessee is that it has not filed the audit report in Form 10CCB either manually or electronically on or before the due date of filing of return. This default has arisen because initially by the IT (Third Amendment) rule, 2013 dt. 01.05.2013, assessee was required to file only the tax audit report u/s 44AB electronically. This was filed by the Assessee while e-filing the return on 30.09.2013. Thereafter, by IT (Seventh Amendment) Rule, 2013 dt. 11.06.2013, the audit report u/s 80IA was also required to be filed electronically with the return. This amendment missed the attention of the assessee and therefore, audit report in Form 10CCB could not be filed on or before the due date of filing of the return or by the extended date of 31.10.2013. these amendments having been introduced for the first time in the relevant AY, there is a reasonable cause for not e-filing the audit report in Form 10CCB electronically.
4.1 It was further submitted that it has been held in various cases that obtaining the audit report to claim exemption/deduction wherever 6 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur required by a section is a mandatory requirement but filing of the same is a procedural requirement and therefore, even when such report is filed in before the completion of assessment, the requirement of the section as to the filing of the report should be taken as complied with. For this proposition, reliance is placed on the following cases:-
CIT Vs. G.M. Knitting Industries Pvt. Ltd. & Anr. (2015) 125 DTR 38 (SC) It was held that assessee is entitled to deduction u/s 80IB even though it has not filed the audit report in Form 10CCB along with the return but has filed the same before the completion of assessment.
CIT Vs. Fortuna Foundation Engineers & Consultants Pvt. Ltd. (2017) 152 DTR 236 (All.)(HC) Filing of audit report along with return is not mandatory and only directory and assessee cannot be made to suffer if it filed audit report in Form 10CCB in the course of assessment proceedings and not along with return.
CIT Vs. Godha Chemicals (P.) Ltd. 83 DTR 190 (Raj.) The expression 'along with return of income' as occurring in sub-section (4) of section 80HHC is directory in nature in so far as it relates to the time for furnishing of the report of an accountant by the assessee in the prescribed form & even if such a report in the prescribed form is not furnished along with the ROI but is furnished during the course of assessment proceeding, it cannot be removed out of consideration only for the reasons of the same having not been filed at the initial stage of 7 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur filing the return. Therefore, assessee could not be denied the benefit of deduction u/s 80HHC because the audit report in Form No. 10CCAC had been filed during the course of assessment proceedings.
CIT Vs. Rai Bahadur Bissesswarlal Motilal Malwasie Trust 195 ITR 825 (Cal.) The assessee has been denied the benefit of exemption u/s 11 as the audit report in Form No. 10B was not filed along with the return of income and the filing of said report later did not satisfy the condition stated in section 12A. The denial of exemption is supported on the ground that the provisions of section 12A are mandatory. There is no doubt that sec. 12A specifically states that the provisions of sec 11 & 12 shall not apply in relation to income of any trust if conditions stated therein are not fulfilled and in the conditions, it is provided that the accounts of the trust should be audited and the report of the auditor in Form 10B should be furnished along with the return. If sec. 12A is read in isolation and the rule of strict and literal construction is applied, the approach of the revenue in this case has to be held as correct. But there is no justification for applying the rule of strict construction or for considering the provisions of section 12A is isolation.
Having regard to the other provisions of the act regarding filing of the return or revised return or rectifying the defects in the return, the provisions of section 12A are directory in the sense That the AO is not powerless to allow an assessee to file the audit report, if not filed along with the return, any time before the completion of the assessment. One has to look at the purpose of the provisions. One has to construe the provision to ensure coherence and consistency to avoid undesirable 8 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur consequences. Where the audit report was made ready after the return was filed, there was no reason why such audit report should not be allowed to be filed before the completion of the assessment. No case has been made out that the delay in getting the accounts audited and in filing of the report in Form No. 10B defeated any object of the Act, or the assessee's action was in substance not in conformity with the intent and purpose of the Act. The IT authorities fell into error in denying the claim of exemption u/s 11.
In view of above, the AO be directed to allow claim of deduction u/s 80IA to the assessee.
5. The ld. D/R supported the order of the lower authorities and submitted that e-filing of audit report within the prescribed time limit is mandatory in nature and the AO has rightly denied the deduction on account of failure of the assessee to comply with the said requirements.
6. We have heard the rival submissions and pursued the material available on record. It is not in dispute that the assessee was entitled to deduction under section 80IA of the Act. The provisions of section 80IA(8) under consideration reads as under:
"(8) Where the assessee is a person other than a company or a co-
operative society, the deduction under sub-section (1) from profits and gains derived from an industrial undertaking shall not be admissible unless the accounts of the industrial undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with 9 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant."
7. Admittedly, in support of claim of deduction under section 80IA, the audit report in prescribed Form 10CCB has been filed by the assessee company during the course of assessment proceedings. The Hon'ble Supreme Court in CIT v. G.M. Knitting Industries (P) Ltd. (supra) dismissed the appeal of Revenue and confirmed the view taken by Madras High Court in case of CIT v. AKS Alloys (P.) Ltd. [2012] 18 taxmann.com 25 (Mad.) holding that "Even though necessary certificate in Form 10CCB along with return of income had not been filed but same was filed before final order of the assessment was made, the assessee was entitled to claim deduction under section 80-IB." In light of the above, we agree with the contention of the ld AR that while filing of the audit report is mandatory, the further condition that it should be filed with the return of income is directory in nature and so long as the audit report has been filed during the course of assessment proceedings, substantial compliance has been made. In the result, ground no. 1 of the assessee's appeal is allowed.
8. Regarding ground No. 2 of the assessee's appeal, brief facts of the case are that the AO observed that the assessee has made the following cash payments in violation of provisions of section 40A(3) of Income Tax Act, 1961:-
Date Amount Paid to
30-07-2012 50,000/- Arihant Roadlines
10 ITA No. 353 & 505/JP/2017
Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur
22-10-2012 36,000/- Delhi Hariyana Roadlines
16-11-2012 37,500/- Dinesh Goods Transport
Company
26-11-2012 36,595/- Dinesh Goods Transport
Company
30-11-2012 40,000/- Arihant Roadlines
10-08-2012 97,020/- For Marble Block Purchase
Total 2,97,115/-
8.1 In assessment proceeding, assessee filed its submission justifying
the cash payment and also that how section 40A (3) is not applicable to such payment in as much as the payment made to the individual drivers does not exceed the limit specified u/s 40A(3). The AO, however, held that submission of assessee does not explain as to how section 40A(3) is not applicable. Accordingly, he made disallowance of Rs. 2,97,115/-.
9. The ld. CIT(A) confirmed the disallowance. The relevant finding of the CIT(A) is reproduced as under:
"4.3 I have perused the facts of the case, the assessment order and the submissions of the appellant. The books of accounts clearly reflected that cash amounts exceeding the limit prescribed under section 40A(3) had been made and the same were not covered in the exceptions enumerated in Rule-6DD. The Authorized Representative submissions that these were advances which were later adjusted against payments is not supported by any evidence whatsoever. In view of the same the disallowance made by the Assessing Officer is confirmed. The ground of appeal is dismissed."11 ITA No. 353 & 505/JP/2017
Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur
10. During the course of hearing, the ld. AR submitted that the assessee is exporting the marble and for this purpose it hired the trailers from various transport agencies for transportation of goods at the Mundra port. From the same transport agency on the same day, more than one trailer is hired. As per the general market practice, assessee give advance to the individual trailor driver and the advance so given is less than the limit of Rs. 35,000/- prescribed u/s 40A(3). Thus, the individual payment to trailor driver has not exceeded the limit of Rs. 35,000/- u/s 40A(3) but the lower authorities have added the payment made to all the trailor drivers of such transport agency on that date. Section 40A(3) is attracted when payment made to a person in a day exceeds the prescribed limit. In the present case, payment made to a person, i.e. to the individual driver do not exceed the prescribed limit and therefore, provisions of section 40A(3) is not violated. The Ld. CIT(A) has observed that assessee has not filed evidence in this regard whereas such evidence were available with the AO in the books of accounts produced and examined by him on test check basis. Copy of ledger account of M/s Arihant Roadlines along with the copy of GR is produced for ready reference. In this connection, reliance is placed on the decision in case of ITO Vs. Dhanshree Ispat (2017) 50 CCH 86 (Pune) (Trib.).
10.1 It was further submitted that the provision contained in section 40A(3) and Rule 6DD are intended to regulate business transactions and to prevent the use of unaccounted money or to reduce the chances to use black money for business transactions. While making addition of 12 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur Rs. 2,97,115/-, lower authorities have not objected to the genuineness of the payments made to the transporters. Where the person to whom payment is made is genuine and cash is paid in business expediency, the same cannot be disallowed u/s 40A(3). Reliance in this connection is placed on the following cases:-
- Brothers Pharma (P.) Ltd. ITO (2016) 45 ITR(Trib.) 0154 (Jpr.):
- Anupam Tele Services vs. Income Tax Officer (2014) 366 ITR 122 (Guj)(HC)
- Sri Laxmi Satyanarayana Oil Mills Vs. Commissioner of Income Tax (2014) 367 ITR 0200 (AP)
11. The ld. D/R supported the order of the authorities below.
12. We have heard the rival submissions and pursued the material available on record including the various judicial precedents cited and brought to our notice by the ld AR. The ld. CIT(A) confirmed the disallowance by holding that the books of accounts clearly reflected that cash amounts exceeding the limit prescribed u/s 40A (3) had been made and the same were not covered in the exceptions enumerated in Rule 6DD. The Hon'ble Supreme Court in case of Attar Singh Gurmukh Singh reported in 191 ITR 667 has held that "Section 40A(3) must not be read in isolation or to the exclusion of rule 6DD. The section must be read along with rule." It was further held by the Hon'ble Supreme Court that "it is open to the assessee to furnish to the satisfaction of the AO the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would 13 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur have caused genuine difficulty to the payee." In the instant case, the assessee company has hired trailers from well-established transport agencies such as Arihant Roadlines, Delhi Haryana Roadlines, Dinesh Good Transport company. The ld AR has submitted that it hired the trailers from various transport agencies for transportation of goods at the Mundra port and from the same transport agency on the same day, more than one trailer is hired. It was further submitted that as per the general market practice, assessee give advance to the individual trailor driver and the advance so given is less than the limit of Rs. 35,000/- prescribed u/s 40A(3). So, the question is whether general market practice is good enough to satisfy the test of genuine or practical difficulty for the payee not to accept cheque payment. In our view, more than the market practice, it is the compelling circumstances in the given facts and situations which should determine the allowability of cash payments. There is nothing on record to suggest any compelling circumstances whereby the cash payments were made to truck drivers instead of transport agencies or such cash payments were requested for by such transport agencies to be paid to their truck drivers in any compelling circumstances.
13. Now, coming to another contention of the ld AR that the term "
payment to a person" referred to in section 40A(3) should be read in the instant case to "payment to individual truck drivers" and should not be read as "payment to individual transport agency". In this regard, we refer to the provisions of Section 40A(3) which provides that "Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by 14 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure." The proviso further provides that "Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words "twenty thousand rupees", the words "thirty-five thousand rupees" had been substituted." It talks about incurrence of expenditure and payment made towards such an expenditure for plying, hiring or leasing goods carriages otherwise than through an account payee cheque or account payee bank draft. The reference to "the person" therefore has to be seen in this context. In the present case, the assessee company has hired the services of transport agency, it thus incurs a liability and owe payment to such transport agency for availing its services. It can either make payment through account payee cheque or bank draft or in cash. Where it makes payment in cash, it is hit by provisions of section 40A(3). The payment to a truck driver is thus a payment to and on behalf of the transport agency and is not a payment to the truck driver in his individual capacity as the assessee has availed the services of the transport agency to transport its goods and not that of the truck driver simpliciter. It would therefore to be read as the payment or aggregate of payment to a transport agency (and not to an individual driver) in a single day and where the same exceeds the threshold of Rs 35,000, unless it is specifically covered by the exception as provided in Rule 6DD, it will be subject to disallowance. Infact, Rule 6DD(k) talks about the reverse situation where the payment is made by any person to his agent who is required to make payment in cash for goods or services on 15 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur behalf of such person. Therefore, where the payment is made to the agent of the payer, Rule 6DD comes to the rescue and not otherwise. The truck drivers are not the agent of the assessee company and thus not covered under the exception carved out in Rule 6DD. Given the current provisions in section 40A(3) read with Rule 6DD, in the instant case, the payments to individual transport agencies exceed the threshold of Rs 35,000 and thus rightly disallowed by the AO. In the result, ground no. 2 of the assessee is dismissed.
14. Regarding ground No. 3 of the assessee's appeal, brief facts of the case are that assessee invested Rs. 2,97,358/- in shares of SBBJ in earlier years. It received dividend income of Rs. 32,480/- during the year which was claimed exempt u/s 10(34) of the Act. Since the assessee has not shown any expenses relatable to exempt income, the AO disallowed Rs. 14,901/- by computing the expenditure incurred in relation to earning exempt income in accordance with Rule 8D of Income Tax Rules, 1962.
15. The ld. CIT(A) accepted the submission of the assessee that the interest free funds were available with the assessee which were much than the investment made by the assessee and thus, no disallowance on account of interest expenses is called for. However, she confirmed the disallowance of Rs. 13,414/- out of administrative expenses by holding that some expenditure would have gone into earning the dividend income.
16 ITA No. 353 & 505/JP/2017Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur
16. During the course of hearing, the ld. AR submitted that at the outset, it may be noted that the AO while computing the disallowance in accordance with Rule 8D of Income Tax Rules, 1962, made disallowance out of interest expenses at Rs. 13,414/- and out of administrative expenses at Rs. 1,487/- (refer Pg 10 of the assessment order). The ld. CIT(A) accepted that no disallowance is to be made out of the interest expenses but has wrongly confirmed the disallowance out of administrative expenses at Rs. 13,414/- as against Rs. 1,487/- disallowed by AO. Therefore, even if order of Ld. CIT(A) is upheld, the disallowance be directed to be restricted at Rs. 1,487/- as against Rs. 13,414/- incorrectly mentioned by the Ld. CIT(A).
17. After hearing both the parties, disallowance of administrative expenses is restricted to Rs 1,487. In the result, the ground is partly allowed.
ITA No. 505/JP/1718. Regarding sole ground of appeal taken by the revenue, brief facts of the case are that the assessee company is engaged in manufacturing, trading and export of marble tiles & slabs. The AO observed that assessee has shown closing stock of Rs. 5,20,26,159/- in respect of marble blocks, slabs, tiles etc. In stock register, no stock is mentioned as defective. No identification was maintained by the assessee for the defective goods. There is no instance of selling the defective goods. All the sale vouchers are for fresh goods and of similar values. Accordingly, he issued show cause notice as to why the method 17 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur of valuation of stock should not be rejected. The assessee filed its explanation which is reproduced at page 3 & 4 of the assessment order. The AO, however, rejected the contention of the assessee by holding that assessee has no basis to value 25% of the stock at 50% of value holding it as defective. Accordingly, he held the stock as non-defective stock and thus enhanced the value of closing stock by Rs. 73,28,633/-. During AY 2012-13, value of closing stock was enhanced by Rs. 31,44,138/- which resulted in increase in value of opening stock for the year under consideration. Accordingly, AO made net addition of Rs. 41,84,495/- (73,28,633-31,44,138) on account of under valuation of the closing stock. On appeal, the ld CIT(A) has partly upheld the order of the AO and partly allowed the appeal of the assessee. The assessee has accepted the order of the ld CIT(A) and the revenue is in appeal against the relief granted by the ld CIT(A) whereby the latter has directed to treat 25% of stock as defective.
19. During the course of hearing, the ld. AR submitted that the assessee is regularly valuing finished stock at cost of production or net realizable value whichever is lower. In Schedule 21 to the accounts, the method of valuation of the finished goods is stated as under:-
"Finished goods are valued on cost of production and net realizable value whichever is less, after giving effect of defective goods on estimated basis if any. Further the cost of production is considered according to the extent of manufacturing process as per estimate."
It was further submitted that in this business, goods are sold on selective basis and therefore, the best quality goods are sold first and 18 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur the remaining goods gets accumulated. Such accumulated stock has a lower realizable value and therefore, stock of such goods is valued at lower than cost. Normally, considering the past experience, the assessee in respect of certain items like marble blocks/tiles/slab, etc., treat 75% of the stock as fresh and 25% as defective. The fresh stock is valued at average cost of production and defective goods are valued at 50% of the average cost of production. However, in some cases, this ratio is increased or decreased considering the actual position of the defective goods. This method of valuation of closing stock has been consistently followed by the assessee.
20. It may be noted that assessee is valuing closing stock of various items of finished stock at cost or realisable value whichever is lower after giving effect of defective goods on estimate basis. This estimation is made on year to year basis. The estimation of the defective finished goods and its valuation in different assessment year is as under:-
Particulars Nature and AY AY AY AY AY AY
Value 08-09 09-10 10-11 11-12 12-13 13-14
Marbles Slabs Defective % 50 50 50 50 50 25
Valuation % 25 25 25 25 25 50
Marbles Slabs Defective % 0 0 0 50 50 50
Imported Valuation % 0 0 0 50 50 50
Polish Tiles Defective % 50 50 25 25 50 25
Valuation % 25 25 50 50 25 50
Gangsaw Tiles Defective % 50 50 50 50 50 25
Valuation % 25 25 50 50 25 50
19 ITA No. 353 & 505/JP/2017
Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur
From the above table it can be noted that assessee on the basis of physical verification is estimating the defective stock and the same is valued at certain percentage of the average cost of production to arrive at the net realisable value. This is followed consistently on year to year basis. Assessee has consistently taken the defective stock at 50% and valued it at 25% (50% in case of marble slab imported) of the average cost of production. During the year, assessee has taken the defective stock at 25% (50% in case of marble slab imported) and valued it at 50% of the average cost of production on the basis of physical verification. Therefore, there is no reason with the AO to consider the stock of these items as good and value the same at average cost of production.
21. It is a settled law that closing stock of one year becomes the opening stock of the next year. The AO simply increased the value of the closing stock of the year by Rs. 73,28,633/- without directing to correspondingly increase the value of the opening stock of next year. The Ld. CIT(A) has given the direction to increase the value of opening stock by the amount of addition confirmed by him. This direction is not challenged by the department. Hence, in case the valuation of stock as done by AO is approved, he has to adopt the same as opening stock in next year. Therefore, in AY 2014-15, the income would be reduced by the same amount. The Supreme Court in case of CIT Vs. Excel Industries Ltd., 388 ITR 295 has also held that where in several A.Y.'s the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some A.Y.'s, the matter was taken in appeal before the High Court but 20 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur without any success, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the taxpayers' money in pursuing litigation for the sake of it. It further held that when the rate of tax remained the same in present A.Y. as well as in subsequent A.Y., the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. It was therefore, no need for the Revenue to continue with the litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers. It may also be noted that the Punjab & Haryana High Court in case of CIT Vs. Satish Estate Pvt. Ltd. (2014) 226 Taxman 11 where addition of Rs. 75 lakhs was made on account of undervaluation of closing stock of the land but the closing stock of land shown by the assessee is accepted by AO as opening stock for the subsequent made by the AO as on loss to the revenue has been caused. In the present case also, for subsequent AY 2014-15, AO has accepted the closing stock declared by the assessee as opening stock and also accepted the closing stock declared in that year. Therefore, the ground raised by the department is only academic having no tax effect.
22. Similar issue has come up before the Hon'ble ITAT in AY 2005-06, 2008-09, & 2009-10 where the order of ld. CIT(A) was upheld. Therefore, also the ground of the department should be dismissed.In view of above, ground of the department be dismissed by upholding the order of Ld. CIT(A).
21 ITA No. 353 & 505/JP/2017Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur
23. The ld. D/R supported the order of the Assessing Officer and submitted that there was no basis for ld CIT(A) to treat 25% of stock as defective.
24. We have heard rival submissions and perused the material available on record. The issue under consideration relates to finding of the ld CIT(A) to the limited extent it relates to determination of 25% of stock as defective and basis thereof for the purposes of valuing the closing stock. Regarding the other finding of the ld CIT(A) that an addition made on account of undervaluation of closing stock in this year will result in increase in the value of opening stock in subsequent year, the same has not been challenged by the Revenue before us and hence, we are not commenting on the same.
25. We now refer to the detail findings of the CIT(A) which are reproduced as under:
"2.3 I have perused the facts of the case, the assessment order and the submissions of the appellant. This ground relates to addition of Rs. 41,84,495/- on account of undervaluation of closing stock and not considering increase in the value of opening stock of next year by Rs. 13,25,633/-. The Assessing Officer noticed that certain amount (25%) of stock was being treated as defective stock and valued at 50% of its value. The Assessing Officer further observed that there is no basis for such valuation being followed and it was on lump sum or estimated basis. Such stock had been shown over the years and for the last five years the value of the same stood at Rs. 4,17,24,506/-. Further, the Assessing Officer noted that no stock was found to have been sold at lower rate as per the books of accounts and sale bills. In view of the above, the Assessing officer enhanced the closing stock by treating the 22 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur stock treated as defective by the assessee as normal stock and valuing it at full value instead of 50% applied by the assessee.
In the present proceedings, it is submitted that as per schedule 21 to the accounts, reference to valuation of defective good on estimated basis is appearing. The nature of business is such that goods are sold on selective basis and stock gets accumulated. A chart showing the estimation of goods for previous years and rates applied was filed. Lastly, it was submitted that closing stock of one year become the opening stock of next year and if the value of closing stock for the current year is increased, the opening stock value for next year would also increase and reliance was placed on the Apex Court in the case of CIT vs. Excel Industries ltd. 358 ITR 295. It was also submitted that the same issue arose in assessment year 2005-06 and travelled upto ITAT, in assessment year 2008-09 and 2009-10 also issue arose and the CIT(A) following the decision of the ITAT for earlier years deleted the same. In assessment year 2010-11, the Assessing Officer has accepted the valuation of the closing stock as such in the assessment under section 143(3).
It is seen that the assessee has been adopting different percentage of stock to be treated as defective without any specific basis. Further, when confronted by the Assessing Officer, the appellant could not prove that any stock was actually sold at a lower price with reference to its books of accounts and bills and vouchers.
A comparative chart of estimation of defective stock was called for, for the last 6 years i.e. 2008-09 onwards and it is seen that the appellant has been valuing the percentage of defective stock sometimes at 50% and sometimes at 25%, no consistent policy has been adopted. Even compared to the previous year purchases of marble slabs, polish tiles and gangsaw tiles have been changed. As regards imported tiles, my predecessor for the assessment year 2011-12, which is the first year of these tiles, has held that 50% of stock being taken as defective is on higher side and has restricted the same to 25%. In the present year 23 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur also, the assessee has taken the same at 50%. In the other categories it is seen that the appellant has valued the defective stock at lesser percentage i.e. 25% and valued at a higher value (50%) as compared to last year. In view of the orders of ITAT for earlier years, the contention of the Assessing Officer that there was no defective stock cannot be accepted. However, in case of imported marble slabs which were dealt with for first time in assessment year 2010-11, the decision of CIT(A)-2, for assessment year 2011-12 is being followed and the 50% of defective stock is restricted to 25%, to that extent the addition for under valuation of closing stock is upheld. The ground no. 1 is partly allowed.
Further as held in the assessment year 2011-12 by my predecessor, an addition made on account of under valuation of closing stock in this year will result in increase of the same in the next year. The Assessing Officer is therefore directed to increase the value of opening stock of assessment year 2014-15 by the amount of addition made in this year on account of under valuation of closing stock. The ground No. 1.1 is allowed."
26. On perusal of the above findings of the ld CIT(A), it is noted that firstly, she has acknowledged the fact that the assessee has been adopting different percentage of stock to be treated as defective without any specific basis. Further, she also acknowledged that when confronted by the Assessing Officer, the appellant could not prove that any stock was actually sold at a lower price with reference to its books of accounts and bills and vouchers. Thereafter, she has examined the comparative chart showing defective percentage of stock in the previous years and observed the comparative position vis-a-vis previous year and further taking into consideration the orders of ITAT for earlier years, held that "the contention of the Assessing Officer that there was 24 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur no defective stock cannot be accepted." Apparently, this finding is in relation to finished stock other than "imported marble slabs". In respect of stock of imported marble slabs, she has followed the decision of her predecessor for AY 2010-11 where percentage of defective stock was restricted to 25% as against 50% done by the AO.
27. The above factual matrix thus present a situation where the ld CIT(A) at first place accept the fact that the assessee has been adopting different percentage of stock to be treated as defective without any specific basis and then, following the position in the appellate proceedings in the earlier years, accept the fact that the assessee does possess defective stock for the year under consideration.
28. In our view, the results of the earlier years might show the relevant trend but are not necessary conclusive for determination of position of actual stock of defective goods for the year under consideration. It is a function of identifying and determining the position of defective stock through an appropriate methodology taking into consideration the physical condition and movement of stock during the year. Secondly, the position in the past years can be relied upon as far as method of valuation of stock is concerned. Where there is consistency in the method of valuation, the same should not be disturbed and ordinarily be followed unless there are valid reasons identified by the AO to deviate from the same. However, the fact remains that such method of valuation has to be applied to the actual facts pertaining to year under consideration. There cannot be a situation where the actual facts are not emerging from the records but following the past years, where it is 25 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur found that there is a consistency in the method of valuation of stock is concerned, the same should be followed in the year under consideration. In the instant case, there is no dispute regarding valuation of defective stock at lower of cost and net realisable value. The dispute relates to determination of the extent of the defective stock. In the instant case, the ld AR has contended that based on past experience, estimation of defective stock is made on year on year basis. It is interesting to note from table reproduced at para 20 above, in respect of marble slabs, percentage of defective stock has been static at 50% right from AY 2008-09 onwards and suddenly, there is drastic fall to 25% during the year under consideration. Similar is the position in respect of imported marble slabs starting AY 2011-12 onwards wherein defective stock has been estimated at 50%. In respect of polish tiles, percentage of defective stock has been shown fluctuating between 25% and 50% during the same period. In respect of Gangsaw tiles, percentage of defective stock has been static at 50% right from AY 2008-09 onwards and suddenly, there is drastic fall to 25% during the year under consideration. What is therefore unclear is how the percentage of defective stock can be so consistent and static, and that too over a long period of six years and secondly, what is the reason for sudden fall in the percentage of defective stock during the years in respect of some of the items as noted above. On perusal of records, we also find that the defective stock has been referred to by the assessee as a stock which is not of best quality, is slow moving and has got accumulated at the end of the year and which is determined based on physical verification. It is thus a stock which is identifiable and not a dead stock but a slow moving stock in the sense that it takes longer to 26 ITA No. 353 & 505/JP/2017 Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur dispose it off and the fact that it has been disposed off subsequently at a particular value. The onus is thus on the assessee to demonstrate the position of defective stock and movement (sale) thereof over the past years. Where through such movement of stock, it can be demonstrated that the trend of defective stock throws a percentage of 25% or 50% of specified goods as defective, the same can then be accepted as a reliable and robust basis to help determination of relevant trend for identification of defective stocks. However, as we have held above, the assessee has to demonstrate through facts of the instant year that such a trend percentage of defective stock can be applied for the year under consideration taking into consideration the position of opening stock, purchases, sale and closing stock. There is however nothing on record to suggest that the assessee has discharged this initial onus placed on it. In the result, we are setting aside the matter to the file of the ld CIT(A) to examine the matter afresh as per law after providing appropriate opportunity to the assessee. In the result, the ground of the revenue is allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed and appeal of the revenue is allowed for statistical purposes.
Order pronounced in the open court on 09/08/2017
Sd/- Sd/-
¼dqy Hkkjr ½ ¼foØe flag ;kno½
(Kul Bharat) (Vikram Singh Yadav)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
27 ITA No. 353 & 505/JP/2017
Khetan Tiles Pvt. Ltd., Jaipur vs. ACIT, Jaipur
Tk;iqj@Jaipur
fnukad@Dated:- 09/08/2017.
*Ganesh Kr.
vkns'k dh izfrfyfi vxzfs 'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- Khetan Tiles Pvt. Ltd., Jaipur
2. izR;FkhZ@ The Respondent- ACIT, Circle-4, Jaipur
3. vk;dj vk;qDr@ CIT
4. vk;dj vk;qDr@ CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur.
6. xkMZ QkbZy@ Guard File {ITA No. 353 & 505/JP/2017} vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar