Income Tax Appellate Tribunal - Ahmedabad
Veera Exports, Surat vs Assessee on 26 June, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH - AHMEDABAD
(BEFORE SHRI A. MOHAN ALANKAMONY, AM AND KUL BHARAT, JM)
ITA No.1208/Ahd/2010 (A.Y.: 2003-04)
M/s. Veera Exports, Vs The A. C. I. T., Circle-6,
301, Kohinoor Chambers, Surat
Jadakhadi, Mahidharpura, Surat
P. A. No. AACFV 1092 P
(Appellant) (Respondent)
ITA No.1537/Ahd/2012 (A.Y.: 2003-04)
The A. C. I. T., Circle-6, Vs M/s. Veera Exports,
Surat 301, Kohinoor Chambers,
Jadakhadi, Mahidharpura,
Surat
P. A. No. AACFV 1092 P
(Appellant) (Respondent)
Appellant by Shri J. P. Shah, AR
Respondent by Shri D. K. Singh, Sr. DR
Date of hearing: 26-06-2013
Date of pronouncement: 28-06-2013
ORDER
PER A. MOHAN ALANKAMONY: The appeal preferred by the assessee in ITA No.1208/Ahd/2010 aggrieved by the order of the learned CIT(A)-IV, Surat in appeal No. CAS-IV/109/09-10 dated 24- 02-2010, for the assessment year 2003-04 passed u/s 250 read with section 143 (3) of the IT Act was adjudicated on the earlier occasion by the Tribunal vide order dated 19-08-2010 which was recalled vide order dated 27-07-2012 in M. A. No.233/Ahd/2010 for non-
ITA No.1208/Ahd/2010 (AY 2003-04) 2 ITA No.1537/Ahd/2012 (AY 2003-04)M/s. Veera Exports adjudication of ground No.4 and 5 and they are reproduced herein below for our consideration:-
"(4) In case the addition of Rs.1,06,09,194/- or any profit thereon comes to be upheld, the assessee ought to be allowed deduction under section 80 HHC in respect of the same.
(5) The closing stock valuation ought not to have been disturbed and in case it is upheld, the opening stock ought to be revalued on the same basis as adopted for closing stock."
2. The revenue has preferred the appeal in ITA No.1537/Ahd/2012 being aggrieved by the order of the learned CIT(A), Surat in appeal No. CAS-IV/386/10-11 dated 14-03-2012 for the assessment year 2003-04 passed u/s 250 read with section 154 of the Act on the following two surviving grounds, the other two grounds being general do not survive for adjudication:-
"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the A. O. to allow deduction u/s. 80 HHC on the business profit of Rs.2,06,05,646/- assessed by the A. O.
2. On the facts and in the circumstances of the case and in Law, the CIT(A) has erred in allowing the appeal of the assessee filed against the rejection of application made u/s. 154 of the Act for rectifying the mistake of not having granted deduction u/s. 80 HHC of the Act, on the amount added to the business income."ITA No.1208/Ahd/2010
(Assessee's appeal for 2003-04)
3. Ground No.1:-
"(4) In case the addition of Rs.1,06,09,194/- or any profit thereon comes to be upheld, the assessee ought to be allowed deduction under section 80 HHC in respect of the same."ITA No.1208/Ahd/2010 (AY 2003-04) 3 ITA No.1537/Ahd/2012 (AY 2003-04)
M/s. Veera Exports 3.1 The learned AR submitted before us that since the addition of Rs.1,06,09,194/- was upheld by the Tribunal vide its order dated 19-08-2010, it was pertinent for the revenue to consider such profit arising out of the addition to be profits of the business and accordingly, it should have been taken into account for computing deduction u/s 80 HHC of the Act. He pointed out to the provisions of section 80HHC (4C) [(baa)] of the Act which is reproduced hereunder for reference:-
"[(baa) "profits of business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by -
(1) ..........
(2) .........."]
4. We find merits in the submission of the learned AR. Facts of the case reveal that the learned AO had made an addition of Rs.1,06,09,194/- because these expenses were unverifiable. Therefore, the learned AO disregarded the expenditure to be genuine and added to the income of the assessee. We do not find any dispute with respect to the source of expenditure incurred by the assessee and it is accounted. In these circumstances, when the profits are recomputed by the learned AO, obviously, it shall be considered as business profits of the assessee unless there is some materials to establish that they are nor arising out of the regular business activity of the assessee and accordingly the relevant provisions of the Act has to be applied either for granting any deduction or computation of tax liability. Since, the Act has provided "profits of the business" to ITA No.1208/Ahd/2010 (AY 2003-04) 4 ITA No.1537/Ahd/2012 (AY 2003-04) M/s. Veera Exports mean as profits of the business computed under the head "profits and gains of business or profession" under section 80HHC (4C) [(baa)] of the Act, the revenue ought to have adopted the profits declared by the assessee as well as the additions made by the learned AO by disallowing expenditure, for computation of deduction u/s 80 HHC of the Act. Further, the revenue has not produced before us any contrary decisions on this issue. Therefore, in the case before us, we hereby direct the revenue to adopt under the head "profits or gains of business or professions" the profits declared by the assessee as well as the addition made by the revenue for Rs.1,06,09,194/- being unverifiable expenses and accordingly compute the deduction u/s 80 HHC of the Act. Thus, this ground of appeal of the assessee is allowed in its favour.
5. Ground No.2:-
"(5) The closing stock valuation ought not to have been disturbed and in case it is upheld, the opening stock ought to be revalued on the same basis as adopted for closing stock."
6. The learned AR argued before us stating that when closing stock valuation is disturbed by following a scientific method acceptable to the revenue holding the valuation adopted by the assessee to be incorrect, in such eventuality, similar treatment should be extended for the valuation of the opening stock and the profits of the business should be accordingly re-computed. For the above said proposition, the learned AR cited number of decisions which are listed herein below for reference:-
ITA No.1208/Ahd/2010 (AY 2003-04) 5 ITA No.1537/Ahd/2012 (AY 2003-04)M/s. Veera Exports Sr. Citation/case laws Date of No. pronouncement 01 4 ITC 245 (SC) CIT Vs The Ahmedabad New 04-11-1929 Cotton Mills Co. Ltd.
02 (1946) 14 ITR 110 (Mad) CIT Vs Shri 14-12-1944 Visweswardas Gokuldas 03 (1991) 188 ITR 44 AT 48, 56 (SC) CIT Vs British 13-12-1990 Paints 04 (1992) 107 CTR 34 (Cal) CIT Vs Bengal Jute 05-02-1990 Mills Co. Ltd.
05 (1999) 60 TTJ 125 (Ahd) ACIT Vs Shree Krishna 04-09-1997 Salt Industries 06 (2008) 14 DTR 206 (Mum) (T) Hawkins Cookers 11-08-2008 Ltd. Vs ITO 07 (2008) 297 ITR 77 (Del) Dept.'s SLP dismissed 11-28-2007 307 ITR 4 (St) CIT Vs Mahavir Alluminium Ltd. 08 (2008) 26 SOT 141 (Bom) DCIT, Range 3(1) 09-11-2008 Mumbai s Beck India Ltd.
09 (Statute) 307 ITR 4 Department's SLP dismissed 20-10-2008 against the judgment of Delhi High Court in the case of CIT Vs Mahavir Alluminium Ltd. reported in 297 ITR 77
7. On this issue, we have also perused the decision in the following cases which are more relevant to the facts of the case before us:-
Sr. Citation/case laws Date of
No. pronouncement
01 202 ITR 789 Melmould Corporation Vs CIT 11-02-1993
Case referred to: CIT v. Corporation Bank Ltd. [1988] 174 ITR 616 02 215 ITR441 CIT Vs Dalmia Cement (Bharat) Ltd. 26-05-1995 Cases referred to:
CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC) CIT v. Carborandum Universal Ltd. [1984] 149 ITR 759 (Mad) CIT v. Corporation Bank Ltd. [1988] 174 ITR 616 (Kar) CIT v. Mopeds India Ltd. [1988] 173 ITR 347 (AP) Melmould Corporation v. CIT [1993] 202 ITR 789 (Bom) Income-tax Case No.164 of 1992
03 230 ITR 820 CIT v. Modi Rubber Ltd. (No.2) 01-16-1998 Cases referred to:
Chhabldas Tribhuvandas Shah v. CIT [1966) 59 ITR 733 (SC) ITA No.1208/Ahd/2010 (AY 2003-04) 6 ITA No.1537/Ahd/2012 (AY 2003-04) M/s. Veera Exports CIT (Addl) v. Akkamba Textiles Ltd. [1979] 117 ITR 294 (AP) CIT (Addl) v. Akkamba Textiles Ltd. [1997] 227 ITR 464 (SC) CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 (SC) CIT v. Sivakami Mills Ltd. [1997] 227 ITR 465 (SC) India Machienry Stores (P.) Ltd. v. CIT [1970] 78 ITR 50 (SC) Investment Ltd. vs. CIT [1970] 77 ITR 533 (SC) Melmould Corporation v. CIT [1993] 202 ITR 789 (Bom.) I. T. C. No.40, 48 ad 57 of 1995
04 255 ITR 85 CIT v. Atul Products Ltd. 02-02-2001 Cases referred to:-
CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC) CIT v. Carborandum Universal Ltd. [1984] 149 ITR 759 (Mad) CIT v. Dalmia Cement (Bharat) Ltd. [1955] 215 ITR 441 (Delhi) CIT v. Delta Plantation Ltd. [1993] 114 CTR 271 (Cal) CIT v. Ganga Charity Trust Fund [1986] 162 ITR 612 (Guj) CIT vs. Haryana Minerals Ltd. [2000] 242 ITR 704 (P & H) Kalpetta Estates Ltd. v. CIT& [1966] 221 ITR 601 (SC) McDowell and Co. Ltd. v. Commercial Tax Officer [1985] 154 ITR 148 (SC); [1985] 59 STC 277 (SC) Income-tax Application No.351 of 1999 with Tax Appeals Nos. 758 to 761 of 1999
8. The brief facts as emerged from the order of the Tribunal dated 30-04-2008 in ITA No.966/Ahd/2007 and ITA No.1107/Ahd/2007 for the assessment year 2003-04 with respect to addition of Rs.66,90,772/- is that the assessee engaged in the business of manufacturing, importing, exporting and processing of diamonds had declared the value of closing stock of polished diamonds at Rs.1,14,92,711/- for 942.98 carats of diamonds and Rs.1,51,131/- for 6396.58 carats of rough diamonds. The learned AO required the assessee to produce the stock register and manufacturing register for the diamonds and rough diamonds. It was revealed that the assessee did not maintaining quality wise and quantity wise details of polished ITA No.1208/Ahd/2010 (AY 2003-04) 7 ITA No.1537/Ahd/2012 (AY 2003-04) M/s. Veera Exports diamonds which were manufactured or locally purchased. It was further observed that the closing stock value of polished diamonds was taken at an average actual cost. Various contentions were raised by the assessee to justify its stand. The learned AO rejected the claim of the assessee and worked out the value of polished diamonds at average cost of Rs.19282.90 per carat and made addition of Rs.66,90,772/-. This addition is confirmed by the learned CIT(A) and the Tribunal. It is apparent from the above fact that the assessee though engaged in a trade of high value precious stones, preferred not to maintain books of accounts accurately and value the stock in an acceptable scientific manner. Normally, stock has to be valued on the basis of cost or market value whichever is lesser. In trading and processing of diamond business, "lots" of diamonds are procured by paying lump sum; they are processed incurring cost and finally sold.
In such circumstances, the value of closing stock will be the cost of the diamonds procured coupled with the manufacturing cost and other overheads. Further the stock in hand may consist of rough block/raw material, semi finished diamonds, finished or processed diamonds or diamond waste/powder etc. The value of all the above nature/class of stock will accordingly be determined by apportioning the cost. These details can be maintained by the assessee very easily and the cost of purchase of the raw materials (rough lots) can be very easily apportioned to the diamonds produced along with overhead and other cost, in a scientific manner and similarly with other nature/class of stock. This exercise has not been done by the assessee, which is very important for disclosing true and fair state of ITA No.1208/Ahd/2010 (AY 2003-04) 8 ITA No.1537/Ahd/2012 (AY 2003-04) M/s. Veera Exports affairs of the assessee. In the present case before us, the learned AR has not demonstrated as to how the assessee had valued the closing stock and in what manner it was disturbed by the learned AO. Further, the Tribunal has also upheld the valuation adopted by the learned AO. The learned AR has come out only with the proposition that if the method of valuation of closing stock is disturbed, then the same method should be adopted for valuing the opening stock. It is pertinent to note that the opening stock of the relevant previous year and the closing stock of earlier year has a close link and any alteration made in the opening stock of the relevant previous year will have cascading effect resulting in corresponding adjustments right up to the first year in which the balance sheet was drawn by the assessee. When, a mistake in valuation of stock is observed, the accounts of the assessee need to be corrected at that stage though such correction may either benefit the assessee or be detrimental to the assessee. The Principles of Accountancy also require that when loss or profit is unearthed and ascertained, at a point of time, the corresponding entries in the books of accounts have to be made because, only at that point of time profit or loss to the assessee will crystallize. It is pertinent to mention here that this principle was not brought up before the Hon'ble Court while deciding the cases which were cited by the learned AR. The gist of the decisions which are more appropriate considering the facts and circumstances of the case before us, listed supra, are reproduced here in below for reference:-
ITA No.1208/Ahd/2010 (AY 2003-04) 9 ITA No.1537/Ahd/2012 (AY 2003-04)M/s. Veera Exports
(a) Melmould Corporation Vs CIT, 202 ITR 789:-
"Held, that the assessee could not be required to revalue the opening stock by excluding all overhead expenses when the assessee had been permitted to revise the method of valuing the closing stock for that year, as the assessee had decided to adopt this new method of valuation henceforth."
(b) CIT Vs Dalmia Cement (Bharat) Ltd., 215 ITR 441(Del):-
"Held, dismissing the application for reference, that the Tribunal had found that the change in the method of valuation of closing stock adopted by eh assessee was bona fide and the same method was followed by the assessee subsequently. On the basis of the aforesaid findings, the Tribunal came to the conclusion that a realistic method of valuation of closing stock of DBM dust in the present case would be to value the stock at nil. This was a finding of fact and no question of law arose therefrom (see p. 445 B, C). .......
The two principles applicable with regard to the valuation of sock are that the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower, and that the closing stock must be the value of the opening stock in the succeeding year. It is, thus, clear that irrespective of the basis adopted for valuation in the earlier years, the assessee has the option to change the method of valuation of the closing stock at cost or market price, whichever is lower, provided the change is bona fide and followed regularly thereafter."
(c) CIT Vs Modi Rubber Ltd., 230 ITR 820:-
"Held, (i) that in the instant case, the Tribunal had found that the method adopted by the assessee was a recognized and scientific method and having been allowed for the assessment year 1976-77, was followed regularly for the subsequent years, and it was not going to cause any loss to the Revenue. These were all findings of fact and none was under challenge by the Department. The Tribunal was, therefore, right in refusing to refer the questions as question of law, so far as they were referable to the controversy relating to the mode of valuation.ITA No.1208/Ahd/2010 (AY 2003-04) 10 ITA No.1537/Ahd/2012 (AY 2003-04)
M/s. Veera Exports
(d) CIT Vs Atul Products Ltd., 255 ITR 85:-
"Held, that the Tribunal found that the change made in the method of stock valuation by the assessee, was not with a mala fide intention. Simply because, by virtue of the change introduced by the assessee, the taxable income of the assessee had been reduced, by no stretch of imagination, it could be said that the assessee had an intention to deliberately undervalue its stock so as to reduce its taxation. The new method which was adopted had been continuously followed in the subsequent years. The assessee had changed the method so as to see that the method adopted by the assessee was also as per the method adopted by other business units in the industry. In the subsequent years, the Revenue had not objected to the change made by the assessee in the method of stock valuation. Therefore, the Tribunal was right in confirming the order of the Commissioner of Income-tax (Appeals) deletion the addition of Rs.2,93,56,000 representing the alleged undervaluation of closing stock. No question of law arose."
9. Considering the above decisions and the discussions, we do not find any merit in the argument of the learned AR. In this given case, the learned AO had rejected the valuation of closing stock of the assessee, and in a scientific method as far as possible based on the information furnished by the assessee, had worked out the value of closing stock and made additions thereon. The valuation of the opening stock is not in dispute because the valuation of the closing stock of the preceding year is accepted to be genuine by the assessee as well as by the revenue. Further, even if, there is any error, only at that point of time when such discrepancy which is not deliberate is unearthed, such error needs a correction because only at that point of time when such discrepancy is unearthed the resultant consequence of profit and loss crystallizes. Therefore, we dismiss this ground raised by the assessee.
ITA No.1208/Ahd/2010 (AY 2003-04) 11 ITA No.1537/Ahd/2012 (AY 2003-04)M/s. Veera Exports ITA No. No.1537/Ahd/2012 (Revenue's appeal for AY - 2003-04)
10. Ground No.1:-
"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the A. O. to allow deduction u/s. 80 HHC on the business profit of Rs.2,06,05,646/- assessed by the A. O.
11. Since, we have decided ground No.1 of the assessee's appeal with respect to the same issue in favour of the assessee, this issue stands decided against the revenue and, therefore, we dismiss the this ground raised by the revenue.
12. Ground No.2:-
"2. On the facts and in the circumstances of the case and in Law, the CIT(A) has erred in allowing the appeal of the assessee filed against the rejection of application made u/s. 154 of the Act for rectifying the mistake of not having granted deduction u/s. 80 HHC of the Act, on the amount added to the business income."
13. Ground No.2 relates to allowing the miscellaneous application of the assessee made u/s 154 of the Act, wherein the issue relates to deduction u/s 80HHC of the Act on the business profit of Rs.2,06,05,646/- where an addition of Rs.1,06,09,194/- is made by disallowing certain expenditure which were not verifiable. Since, we have decided the issue of deduction u/s 80 HHC of the Act for the addition made for Rs.1,06,09,194/- in the assessee's appeal in ground No.1, in favour of the assessee, we do not find it necessary to address this ground raised by the revenue since it has become ITA No.1208/Ahd/2010 (AY 2003-04) 12 ITA No.1537/Ahd/2012 (AY 2003-04) M/s. Veera Exports infructuous. Therefore, we dismiss this ground raised by the revenue as such.
14. In the result, the appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.
Order pronounced in the open Court on 28-06-2013 Sd/- Sd/-
(KUL BHARAT) (A. MOHAN ALANKAMONY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Deka/--
Lakshmikant Deka/
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Asst. Registrar, ITAT, Ahmedabad
1. Date of dictation: direct on computer 20-06-2013/27-06-2013
2. Date on which the typed draft is placed before the Dictating Member: 20-06-2013/27-06-2013 other Member:
3. Date on which approved draft comes to the Sr. P. S./P.S.:
4. Date on which the fair order is placed before the Dictating Member for pronouncement:
5. Date on which the fair order comes back to the Sr. P.S./P.S.:
6. Date on which the file goes to the Bench Clerk:
7. Date on which the file goes to the Head Clerk:
8. The date on which the file goes to the Assistant Registrar for signature on the order:
9. Date of Despatch of the Order: