Income Tax Appellate Tribunal - Chennai
Atlantic Fabrics, Karur vs Assessee on 25 August, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH 'A' : CHENNAI
[BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER
AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER]
I.T.A.No.1690/Mds/2009
Assessment year : 2004-05
M/s Atlantic Fabrics vs The Dy. CIT
SF No.1658, 1659 Circle II
Amaravathy Nagar Tiruchirapalli
Andankoil
Karur
[PAN - AAAFA4315Q]
(Appellant) (Respondent)
Appellant by : Shri Philip George
Respondent by : Shri Shaji P. Jacob
ORDER
PER HARI OM MARATHA, JUDICIAL MEMBER:
This appeal of the assessee, for assessment year 2004-05, is directed against the order of the ld. CIT(A), Tiruchirapalli, dated 25.8.2009.
2. Briefly stated, the facts of the case are that assessee is a supporting manufacturer to an Export House. The assessee manufactures home textiles made of cotton fabrics and sold to a export house only. Its total export turnover as supporting :- 2 -: ITA 1690/09 manufacturer during the relevant year was `19,06,51,635/-. The version of the assessee is that during the month of March 2004, it received purchase orders from the export house. With the confidence that it would be able to dispatch the goods in the month of March itself the assessee prepared invoices and sent them for approval of the export house. It also entered total of the invoices, coming to `2,41,43,400/-, in the books crediting sales and debiting the export house for the corresponding sum although neither the export house sent the invoice nor the assessee completed the manufacture of the goods ordered. As the sale transaction was not put through, the said entries passed in the books were reversed and hence, reduced to that extent. The process of manufacturing of the assessee involves procuring and processing of yarn and other raw materials and giving them to weavers in the surrounding villages for weaving according to the designs and specifications of the importer. The wages payable to the weavers are decided by the market conditions like the urgency, quality, design, etc. The weavers are doing the job as a cottage industry and their family contributes towards labour. They are not registered under any law for the time being in force and they do not issue receipt for labour charges. They are paid wages every week-end to enable them to buy their necessities at Karur. Therefore, vouchers :- 3 -: ITA 1690/09 are self-made, generally signed by the weavers or a representative of a group of weavers and one responsible officer of the assessee who certify the payments. The assessee has been maintaining regular and detailed books of account supported by vouchers and such books of account are audited as per section 44AB of the Act. The net profit declared as per the books of account also included a sum of ` 1,82,49,796/- as incentive profit received from the export house. For the year under consideration, the assessee filed its return of income on 28.12.2004 after claiming deduction u/s 80HHC on export profits. While examining the return of the assessee, the Assessing Officer was not agreeable that weaving is a cottage industry in Karur and that the payment debited to the weavers was genuine and commensurate with the volume of business. He found some of the vouchers to be defective. The amounts so given through hand-made vouchers being heavy, he chose to disallow a sum of ` 6,03,340/- @ 2% of the total expenses claimed. In fist appeal, the ld. CIT(A) has upheld this disallowance in principle, but has reduced it to 1% of the total expenses claimed under the head 'weaving charges'. The assessee is further aggrieved.
:- 4 -: ITA 1690/09
3. We have considered the rival submissions and have carefully perused the entire records available before us. We have noticed that the Assessing Officer has in one breath substantially accepted the claim of the assessee, but at the same time has made an adhoc disallowance of 2% without any valid basis. Again, the ld. CIT(A) has done the same thing but he has reduced disallowance to 1% on token basis. After perusing the entire record, we find that in Income- tax Act, no such notional and adhoc disallowance are permitted. It is the duty of the Assessing Officer to find as to what is the reason for disallowing a particular part of the disallowance. The Assessing Officer as well as the ld. CIT(A) has not disputed the substantial claim of the assessee and in principle have accepted the mode of payment to weavers' for job work. Therefore, in our considered opinion, this addition based on adhoc disallowance cannot be sustained in the eyes of law. Consequently, we order to delete the entire disallowance so made. In case a token disallowance is upheld, it will go a long way in giving discretion to the authorities without any legal sanctity to make such adhoc disallowance that to without any basis. What defect was exactly found in self-made vouchers could have been mentioned the amount mentioned thereon could be proposed to be disallowed. The assessee should have been given an opportunity to explain that defect. :- 5 -: ITA 1690/09 In case, it was not explained, to that extent, disallowance could be made. But nothing concrete has been done in this case. But some passing remarks of defects in vouchers cannot be made a basis for making adhoc percentage disallowance. Accordingly, we do not approve such type of disallowances being made in assessment proceedings and delete the same. Consequently, we allow this issue in favour of the assessee.
4. Further, the assessee's total turnover as per the books of account is ` 21,47,95,035/-, but it has accounted for total sales at ` 19,06,51,635/- only. When called upon to explain this anomaly, the assessee's representative stated that the assessee is a supporting manufacturer of IKEA Trading India Pvt. Ltd. On receiving confirmed order from the buyer the assessee plan the production and decide whether to start own manufacturing or to purchase the required quantity through sub-contractors. The orders were placed to the sub- contractors in the month of February 2004 and sub-contractors delivered the goods in April and May 2004 and thereafter the goods were dispatched. It was stated that as per normal practice, the invoices were prepared four weeks prior to the date of dispatch and sent to the export house. The export house prepares the invoices :- 6 -: ITA 1690/09 based on assessee's invoices and send their copies. Within three or four weeks from the receipt of invoice from the export house, the goods are dispatched and accounted for as sales. As the goods were not received from the sub-contractors before March 2004, the entries were reversed to the extent of ` 2,41,43,400/-. When the goods were received from sub-contractors in the month of April and May, these were dispatched. The assessee also furnished the list of invoices that were reversed and furnished the quantity of goods that were exported. The assessee also furnished the quantity of goods purchased in April and May 2004 which were utilized for export. The assessee's explanation was not accepted by the Assessing Officer. The reason for not accepting the explanation of the assessee are as under:
(i) The assessee has to keep the goods ready atleast two weeks before the goods has to be dispatched. The goods has to be inspected by the Handloom Export Promotion Council and a certificate has to be issued that the goods exported are hand loom goods. The goods has to be then loaded into containers and send to the Port atleast two days before the arrival of Ship.
The goods will be inspected by the Custom authorities after reaching the Port. Hence. the assessee can not say that the goods dispatched in the month of April 2004 were not available with the assessee.
(ii) It is also seen that the assessee's purchases upto May 2004 was at ` 3,53,71,883/-. The total sales were at `5,11,32,060/-. The purchases include cloth purchase of ` 1,72,15,191/-. The sales include the amounts that were reversed on 31-03-2004. Since the turnover of the assessee was more than ` 5 crores the cloth that has been purchased upto :- 7 -: ITA 1690/09 31.5.2004 would have been utilized for export of goods during April and May 2004 amounting to `2,69.88,660/--.
(iii) Though the assessee argued that the yarn purchased was utilized for export in the month of April and May and it is not acceptable since it takes a minimum of 45 days for the yarn purchased to be converted into export goods. The certificate of the inspection by the hand loom export promotion council reveal that certain goods w'ere inspected on 31-03-2004 and on 06-04- 2004 itself. Hence. the assessee cannot argue that the goods that were received in April 2004 were packed according to the specifications of the export house and sent for export.
(iv) The assessee has omitted to disclose the goods that were available for export as its closing stock. Hence. the sum of ` 2,41,43,400/- that was reversed on 31- 03-2004 is treated as the undisclosed stock of the assessee and added to the total income. "
5. Hence, he has made the impugned addition towards undisclosed stock. Against this addition, assessee preferred appeal before the ld.
CIT(A), who was also not agreeable and has confirmed the same.
6. Before us, similar stand was taken by both the parties as was taken before the ld. CIT(A). It was argued by the ld.AR that the ld.
CIT(A) should have appreciated the method and system of its raising invoices vis-à-vis the export house as explained in detail before him and should have deleted the addition. It was argued that this addition is based solely on suspicion and surmises of the Assessing Officer who :- 8 -: ITA 1690/09 has ignored to consider the material evidence on record. The gist of the ld.AR's submission are as under:
(i) Appellant declared a turnover of ` 19,06,51,635/- to the sales tax authorities in the returns filed on the due dates and a copy of the sales tax order is on the records of the Department.
(ii) The goods in respect of purchases recorded in the second and third week of March were received much earlier as evident from the date of such invoices, though such invoices were entered in the books after confirming the quality of the goods by issuing it for processing. In fact, for the purchases entered in the books on 31.3.2004 appellant received the goods on 19.03.2004 and appellant filed evidences to prove the same. The assumption of the officer that a minimum period of 45 days was required to complete the process of manufacturing is not correct. It is submitted that yarn can be weaved in about nine to ten days and cloth is then given for further processing. As the yarn purchased during the month of March and immediately issued for processing, was at different stages of completion for the sake of convenience appellant took those items as finished product as on 31 .03.2004 and admitted closing stock accordingly.
(iii) It may be seen from the records that the sales during the year was `19,06,51,635 and the gross profit earned was ` 1,82,31,127/- giving a gross profit turnover ratio of 9.56%. If the alleged understated stock is included the gross profit the gross profit is ` 4,23,74,527 giving a gross profit/turnover ratio of 22.22%. If the alleged understated stock is carried to the next year the gross profit turnover ratio is 3% as against 22.22% in the previous year.
(iv) It is submitted that the purchases and sales during April 2004 was ` 2,04,84,784 and ` 1,67,55.660 respectively, clearly explaining availability of. material for subsequent exports.
(v) The above data supported by the evidences filed during the assessment proceedings clearly demonstrate that appellant did not understate the stock and the allegation made to the contrary without fully and :- 9 -: ITA 1690/09 properly appreciating business practices and the materials on record, was incorrect. "
7. On the other hand, the ld.DR has countered the above submission put forth on behalf of the assessee by making oral as well as written submission which are being extracted from written submission dated 1.2.2011.
" Gr.3 Addition towards Undisclosed Stock Total sales during the year as per the books of accounts maintained by the assessee is ` 21,47,95,035 whereas P & L a/c of the assessee showed sales at ` 19,06,51,635. It is noticed that in the Ledger folio of "Sales a/c" a reversal entry was passed on 31-03-2004 for a sum of ` 2,41,43,400.
On a query raised by the A.O., assessee stated that such sales were already accounted in books but the goods were dispatched only in April/May 2004 and hence entry was reversed. It was also submitted that such sales were accounted again in April/May, 2004 i.e. next F.Y. A.O. examined this claim with reference to the books of accounts of next F.Y. The following are the salient points noted.
As revealed from the Audit report furnished u/s 44AB, assessee has not maintained any stock register, no quantitative details of raw materials is available and figures of opening and closing stock were adopted in the final accounts as furnished by the assessee.
Closing stock as on 31-03-2004 is only ` 30,43,400 comprising of ` 19,60,000 as fabric and balance yarn.
Sale bills/invoices prepared by assessee shows the sales having been made in this A.Y. itself.
sale bills/Invoices prepared by Ikea Trading India Pvt. Ltd., New Delhi who exported these items (assessee is a supporting manufacturer to the said company) also shows the sales having been made in this A.Y. itself.:- 10 -: ITA 1690/09
Total sales made during April/May, 2004 is `5,11,32,060 whereas purchases during that period only ` 3,53,71,883 out of which only ` 1,72,15,191 is fabric and balance yarn. Since yarn will take minimum 45 days for processing as export items (after finishing as the final product, packing, getting all clearances etc.) the fabric raw material available is only ` 1,91,75,191 purchases + ` 19,60,000 opening stock). It is impossible to make such huge sales turnover with this stock as per accounts.
Assessee has to keep the goods ready for export atleast 2 weeks before the actual date of export Such goods have to be examined by the Handloom Export promotion Council and to certify that as handloom goods It has to be loaded in containers and send to the Port atleast 2 days prior to the arrival of the ship Customs Inspection at the port to be conducted which will take few days.
Considering the time taken for all these procedures, it is impossible for the assessee to convert the yarn purchased by it April/May, 2004 and to export them as fabrics after processing as per the specification of the exporter ie. Ikea Trading India Pvt. Ltd., New Delhi in April, 2004 itself.
There is a finding in the assessment order that the certificate of inspection by the Handloom Export Promotion Council reveal that certain goods were inspected on 31-03-2004 and 06-06-2004 itself. This contradicts the claim made by assessee.
These facts are not controverted by the assessee before the lower authorities. Even before the Tribunal assessee did not produce • Any confirmation letter from the purchase ie. Ikea Trading India Pvt. Ltd., New Delhi to the effect that though sale invoices were raised during the year, the actual supply took place only in the subsequent year. :- 11 -: ITA 1690/09 • The Inspection Report of Handloom Export Promotion Council evidencing the date of inspection conducted by them • Evidence showing loading the final goods to the containers for export Hence the addition made to closing stock may be upheld."
8. We have also gone through the copies of other records available before us by both the parties for and against the claim of the assessee including the decisions relied on before us. After considering the entire submissions, we find that total sales as per the Profit & Loss Account and as per the books is only ` 19,06,51,635/- during this year. The assessee has made entire sales to IKEA Trading India Pvt. Ltd and Forms H issued by IKEA confirms the sale of this amount. The sale entries of ` 2,41,43,400 based on proforma invoices prepared and sent to IKEA for approval and for further dispatch were made by the Accountant of the assessee. As the goods for the entire value of this amount was not ready as on 31.3.2004, consequently, as per cancelled entries, the goods worth ` 2,41,43,400/- were bought and produced after 1.4.2004 and was dispatched in the month of April and May 2004. The assessee submitted details for purchases before the Assessing Officer. The assessee has not admittedly maintained stock details. It is the assertion of the ld.AR that in this line of business it is :- 12 -: ITA 1690/09 not possible to maintain stock details and so physical verification is done on the last day to ascertain the stock in hand. We find that the assessee's claim that purchases amounting to `3,53,71,883/- were made by it during the period and also produced its own goods during the period from 1.4.2004 to 31.5.2004. The claim of the assessee that the own produced goods form part of the total sales made for `5,11,32,060/-. Now, we have to decide the controversial reasons on the basis of which the authorities below have based their findings.
9. The Assessing Officer has taken the sales upto 31.5.2004 but has not taken into account the inflow of own production and purchases. The statement showing quantitative details and tally with the sales was produced before the Assessing Officer as has been mentioned in the order itself and was not disputed by him. The Assessing Officer has simply ignored this submission of the assessee without giving any reasons. He has based his finding on purchase vouchers only. In our opinion, the inflow is adequate to meet the sales. The sales turnover is inclusive of gross profit which fluctuate during various periods of the year as has been explained before us by the ld.AR. It was found that during some period, it may be more on account of the lower price of inputs and the increase in prices would :- 13 -: ITA 1690/09 render it, it would further get lowered. In our opinion, the average yearly gross profit has to be taken into account. The average gross profit is around 10% which is consistent with that of the earlier and subsequent years, as per the chart produced before us giving the details of gross profit for three years. The Assessing Officer has mentioned that it takes 45 days to produce the finished product. This was contested by the ld.AR on the premise that the Assessing Officer has based his opinion on simply surmises and conjectures. On the contrary, he submitted that only two weeks would take to finish the product and this controversial stand taken by the assessee has to be accepted particularly when the Assessing Officer has not substantiated his conclusion with any documentary evidence. IKEA is the only customer of the assessee and the assessee had entered into a contract with this company in the year 2002. This company had approved the samples which the assessee manufactures at the time of contract itself. It has been claimed by the assessee that the weavers are fully aware of the requirements and the time schedule so that the products can be made ready for the supply to IKEA. In our considered opinion, the time of 45 days capitulated for finished production is purely a speculation of the Assessing Officer. The assessee has only one customer i.e IKEA and all the products are supplied to it at a stipulated :- 14 -: ITA 1690/09 and agreed standards. It was explained that the assessee purchases the goods as per specifications from various co-operative societies as well as individuals who have their own stock and keep them in production as per the supply needed by the assessee. It was stated that certification of Handloom Export Promotion Council (HEPC) is not a must in each and every export and it applies only in case of few countries. It was so stated to explain the doubt of the Assessing Officer that whatever few items were inspected by the HEPC were relating to those items and not all the items supplied to IKEA. In relation to clearance at the customer's point, it was explained that the Clearing Agents do the job and that the time taken for this does not have any relevance to the supply being made by the assessee. We are in agreement with the above explanation of the assessee because there is no contrary evidence available on the record except for the subjective opinion of the Assessing Officer.
10. The ld.DR contended that the assessee did not file any confirmation letter from the purchaser(i.e IKEA), to the effect that the sales invoices were raised during the year but the actual supply took place only in the subsequent year. In our opinion, this argument is controverted by the fact that the goods were exported only after :- 15 -: ITA 1690/09 1.4.2004 as this fact is not disputed and has been proved by the dispatch and shipment details filed before the Assessing Officer. It is also not the case of the Assessing Officer that the supply took place in this year. So, the facts on this issue are not in controversy. Therefore, the question of filing any confirmation letter from IKEA is not relevant as it does not arise in the year under consideration. Regarding the other objection of the ld.DR that evidence of loading of the finished goods was not produced, it was found that the evidence of loading of the finished goods was filed before the Assessing Officer and that is why he did not dispute the same. Regarding the inspection report of HEPC evidencing the date of inspection conducted by them is concerned, it was brought to our notice that there are two inspection reports referred to in the assessment order - one is dated 31.3.2004 and the other is 6.4.2004. It was vehemently argued that HEPC inspects few samples only and on 31.3.2004 only 15 cartons out of total 1092 cartons were inspected and found to be correct goods. The value of the items in these 15 cartons was stated to be only `34,000/-. It was argued that this stock is covered by the closing stock declared by the assessee. Keeping these uncontroverted submissions of the ld.AR, we are of the considered opinion that the huge addition made towards closing stock is unwarranted. To further justify our above :- 16 -: ITA 1690/09 conclusion, the total value of items which were dispatched on 4.4.2004 is shown at ` 24,07,860/- vide invoice No.1990 which was filed before us. This value would be inclusive of gross profit @ 10%. So, the production cost of these items would be of ` 21,67,074/-. This would have to be a part of the closing stock. The assessee has already declared a closing stock valuing ` 19,60,000/-. Thus, there is a difference of only `2,07,074/- which could be included in the closing stock but in the next year's opening stock, the stock of ` 21,67,074/- would be taken as the exports have been made utilizing this closing stock. As is evident from the quantitative details filed before the lower authorities and also before us, there are sufficient purchases and own production which shall cover the exports made under the certificate dated 6.4.2004 issued by HEPC. Under these circumstances, no adverse view can be drawn from the same, yet to be fair to both sides, we can sustain an addition of `2,07,074/- in this year's closing stock in place of `2,41,43,400/-. Except for an addition of `2,07,074/- , we delete the entire addition and hence, partly allow this issue.
11. The next issue of this appeal relates to deduction u/s 80HHC. In substance, this ground is based on the premise that the assessee being a supporting manufacturer is also entitled for deduction u/s :- 17 -: ITA 1690/09 80HHC on DEPB claims received by it. The Assessing Officer has not disputed the claim in principle but he has made the disallowance in view of the fact that the turnover of the assessee being more than `10 crores, the assessee has to prove that DEPB licence receivable is less than the Duty Drawback receivable.
12. We have heard the rival submissions and have carefully examined the record available before us. The issue is that the assessee, being a supporting manufacturer, is not entitled to receive any Duty Drawback and only the exporter is entitled to the same. The exporter gives up its rights and gives a certificate forgoing its claim and asking the Government to pay the said amount to the supporting manufacturer. This amount when received by the assessee is only an additional sale consideration and not Duty Drawback/DEPB as it could not in very first instance have received any duty drawback/DEPB. A Coordinate Bench of this Tribunal has considered this fact and in its order in a bunch of cases in ITA Nos.1581 to 1583, 1585 to 1589, 1760 to 1764, 1818 to 1821, 1795 & 1533/Mds/2008 dated 21.04.09, applied the principle laid down by the Supreme Court in the case of CIT Vs. Baby Marine Exports (290 ITR 323), and has held that the amount must be treated as a premium and deduction u/s.80HHC can :- 18 -: ITA 1690/09 not be refused. The assessee was a party in that decision in ITA Nos.1581 to 1583/Mds/2008. The facts being identical, respectfully following the precedent we decide this issue in favour of the assessee and against the Revenue.
13. In the result, the appeal filed by the assessee stands partly allowed.
The order pronounced in the open court on 25.2.2011.
Sd/- Sd/-
(ABRAHAM P GEORGE) ( HARI OM MARATHA )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 25th February, 2011
RD
Copy to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR