Income Tax Appellate Tribunal - Pune
Rieco Industries Ltd.,, Pune vs Assessee on 21 December, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND
SHRI G.S. PANNU, ACCOUNTANT MEMBER
ITA No. 1389/PN/06 & 157/PN/10
(Asstt. Year 2003-04)
Rieco Industries Ltd., .. Appellant
1162/2 Shivajinagar,
Pune- 411 005
PAN AAACR8217P
Vs.
Asstt. Commissioner of Income-tax, .. Respondent
Cir. 6, Pune
AND
ITA No 55/PN/2007
(Asstt.year 2003-04)
Asstt. Commissioner of Income-tax, .. Appellant
Cir. 6, Pune
Vs.
Rieco Industries Ltd., .. Respondent
Pune- 411 005
Assessee by: Shri C H Naniwadekar
Department by: Shri S.K. Ambastha
Date of hearing: 21.12.2011
Date of pronouncement: 25.01.2012
ORDER
PER G S PANNU, AM:
Since the cross appeals by the assessee and the Revenue pertain to same assessee and involve common facts, the captioned three appeals were 2 heard together and are being disposed of by a consolidated order for the sake of convenience and brevity.
2. The appeal of assessee, vide ITA No 1389/PN/06 and Revenue's appeal, vide ITA No 55/PN/07 arise out of the same order of the Commissioner of Income-tax (Appeals)-II, Pune dated 3.10.2006, which in turn emanate from the order dated 2.3.2006 passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 (in short "the Act"), pertaining to the assessment year 2003-04.
3. The assessee is in appeal against the sustenance of addition of Rs 19,28,259/- in respect of non-moving stock, whereas the Revenue is in appeal against the relief of Rs 25,47,211/- granted by the Commissioner of Income- tax (Appeals) out of total addition of Rs 44,75,470/- made by the Assessing Officer. The relevant facts are that the assessee is in the business of manufacturing air pollution control equipments, size reduction equipments, pneumatic handling system etc. The facts as emerging from the orders of the authorities below are that the assessee had valued the closing stock of non-moving items at 5% of the cost, thereby decreasing the value of stock by Rs 44,74,470/- from the total value of stock of Rs 1,87,62,307/-. According to the Assessing Officer, this fact was not disclosed by the assessee in the return of income and the auditors had also not pointed out specifically that the value of stock had been decreased on account of valuation of non/slow moving stock. The non/slow moving stock also included the stock of the current year amounting to Rs 2.63 lakhs and as per the Assessing Officer, the stock can be discharged or sold as scrap if the same is lying since long time, say over 5 years. Further, the Assessing Officer observed that the assessee did not furnish the complete details of such stock and it was incumbent on the part of the assessee to preserve and produce the 3 same to substantiate the impugned claim. For all these reasons, the Assessing Officer rejected the contentions of the assessee and made addition of Rs 44,74,470/-. Against the said addition, assessee preferred appeal to the first appellate authority.
4. Before the Commissioner of Income-tax (Appeals), besides reiterating the submissions made before the Assessing Officer, the assessee furnished details of year-wise purchases of total non- moving inventory which as on 31.3.2000 was Rs 25,47,211/-, while inventory as on 31.3.2003 was Rs 44,75,470/-. On the basis of this, it was stated that the item remaining in stock and not moved during the year 31.3.2000 were Rs 25,47,211/- which had increased to Rs 44,75,470/- during the year under appeal. It was further explained that at the time of placing an order, the customer may want some specific product, but during the course of subsequent technical discussion sometimes the specifications change and the product had to be supplied as per the new specification, the items already procured become surplus and become non-moving after a lapse of time. As the orders were custom built and specification of some of the items were not common, the non-moving items generally cannot be used elsewhere. The non-moving items of 2-3 years were kept as inventory awaiting its utilization. It was further explained that the records before 31.3.2000 could not be produced for verification, as the same were at Roha and due to heavy rains in Konkan area, all records have been destroyed due to flooding and the same were not in readable condition. The assessee submitted that the principle of valuing slow moving/obsolete items at lower than cost was also judiciously acceptable. As regards the disclosure of facts in the return, it was submitted that the same was backed by the Auditor's report. The Commissioner of Income-tax (Appeals) was not fully convinced with the submissions of the assessee. According to him, it was clear that there 4 was non-disclosure of the method of valuation of closing stock in the statutory audit as also in the report in Form 3CD under section 44AB of the Act. As per the Commissioner of Income-tax (Appeals), the quality, quantity or the nature of the items termed as slow/non-moving was entirely at the discretion of the assessee. In the view of the Commissioner of Income-tax (Appeals), under the garb of non/slow moving items, the assessee cannot be allowed to value the closing stock at 5% of the purchase even for items purchased during the year, especially when there was a non disclosure of the method of valuation of closing stock followed by the assessee. Ultimately, out of the total addition of Rs 44,75,470/- made by the Assessing Officer, the Commissioner of Income- tax (Appeals) sustained an addition of Rs 19,28,259/- thereby deleting the balance addition of Rs 25,47,211/-. The concluding portion of the findings of the Commissioner of Income-tax (Appeals) is as follows:
"The AO, however, has added the entire amount of Rs 44,75,470/- being the non moving/slow moving items from the first year itself since the assessee had not produce the records of non moving items prior to the year 2000. The inventory of such nonmoving/slow moving inventory as on 31.3.2000 was Rs 25,47,211/-. The additional items becoming nonmoving during the year are only Rs 19,28,259/- which included Rs 2,63,524/- of the current year. In my considered opinion, since the non moving items added to the closing stock during the year under consideration is only Rs 19,28,259/- even if the proof prior to the year 2000 is not produced by the appellant, the increase in stock during the year amounting to Rs 19,28,259/- can only be sustained. In consequence, grounds of appeal No. 1 to 4 are partly allowed."
Against the aforesaid decision, both the assessee in appeal against the sustenance of addition of Rs 19,28,259/-,while Revenue is in appeal against the relief of Rs 25,47,211/- granted by the Commissioner of Income-tax (Appeals).
5. Before us, learned Counsel for assessee has vehemently submitted that the lower authorities have erroneously disregarded the method of valuation of non-moving stock at 5% of the purchase price even when it is evident that items of such stock were not moving for a sufficient long period of time. In this connection, our attention was invited to pages 169 to 170 of the 5 Paper Book wherein the details of slow and non- moving inventory on account of raw materials, bought out components and finished equipments etc. have been placed. At pages 11 to 38 of the Paper Book is placed the details of such items showing the quantities, value and the date of last movement of items to demonstrate that the same were in the nature of slow/non-moving items. It was pointed out that a large number of such items have not moved for last three years and in fact the actual date of purchase of such items is even earlier than two to three years. In para 2.2 of the order of the Commissioner of Income-tax (Appeals) a reference has been made to year-wise purchases of total non-moving inventory as on 31.3.2003 amounting to Rs 44,875,470/- which shows that there are items purchased since the year 1994-95 onwards. It was pointed out that with regard to the non- moving item of Rs 2,63,524/- which have been purchased during the year itself the assessee had purchased such items for a particular project which has not been so used and, therefore, the same has been classified and valued as non-moving. In sum and substance, it is pointed out that the claim of the assessee for valuing its non-moving inventory at 5% of its purchase cost is fair and proper and is in accordance with generally accepted commercial principles and in this regard, placed was placed on the following judgments:
(i) Alfa Laval India Ltd. v. DCIT 186 CTR 390 (Bom);
(ii) CIT v Wolkem India Ltd 315 ITR 211(Raj);
(iii) CIT v Hotline Teletube & Components Ltd. 175 Taxman 286 (Del), and
(iv) Milton Cycle Industries Ltd. V. DCIT 54 TTJ 380 (Del) (Trib). It is further pointed out that even the Auditors have pointed out that the basis of the stock valuation is fair and proper and is in accordance with the normally accepted principles. It has been submitted that the Auditors have reported that the assessee has procedure of determining the unserviceable and damaged 6 stocks at the end of the year and adequate provision thereof is made after determination. It was also pointed out that no such disallowance has been made in the past or even in the subsequent assessment years and the assessee has been following similar policy. It has also been pointed out that assessee has undertaken steps to dispose of such items of slow/non-moving stocks by giving advertisement in the newspapers for which a reference was made to pages 114 & 115 of the Paper Book. It is pointed out that in the subsequent years some items of slow/non moving stock inventory has been sold at prices which are proximate to the rate at which such inventories have been valued by the assessee, i.e. at 5% of the original purchase cost. For details, reference has been made to page 116 of the Paper Book. On the aforesaid basis, it is sought to be made out that the valuation of non moving stock at 5% of the purchase cost is fair and reasonable and the lower authorities were not justified in disallowing the claim of the assessee.
6. On the other hand, the learned Departmental Representative, appearing for the Revenue has reiterated the stand of the Assessing officer by pointing out that the stated method of valuing the non- moving inventory at 5% of cost has not been appropriately disclosed in the financial statements and the assessee also could not furnish complete details of purchase of such stocks made in the earlier years. The learned Departmental Representative also justified the stand of the Assessing Officer that a particular item of inventory can be classified as non-moving only if it has remained unused for a long period, say 5 years, and not for a shorter period as considered by the assessee. The learned Departmental Representative submitted that since the assessee has claimed a deduction on account of diminution in value in stock, it was therefore incumbent on the assessee to justify and substantiate the same with adequate records. The learned Departmental Representative also 7 assailed the decision of the Commissioner of Income-tax (Appeals) in confining the disallowance to a sum of Rs 19,28,259/- instead of Rs 44,74,470/- made by the Assessing Officer.
7. We have carefully considered the rival submissions. The dispute in the present case revolves around the method of valuation of closing stock of certain items of inventory classified as non-moving items. The assessee is a Company which is engaged in the business of manufacturing of Air Pollution Control Equipments, Size Reduction Equipments, Pneumatic Handling System etc. It has been explained that the machines/equipments manufactured by the assessee are used in cement, pharmaceutical and chemical industries etc. The claim of the assessee is that the major production is of air pollution control systems which require a lot of raw materials, like steel plates, bought-out items like motors, panels, etc. It is also explained that the products manufactured by the assessee are customer specific and are tailor-made to suit the specific requirements of individual customers. It has also been explained that in the manufacturing of such specialized equipments, large number of components are required wherein lot of bought-out components are also involved. The assessee explained that on account of the production being linked to the specific requirements of the customers it undertakes procurement of specific components meeting with the requirements of the particular customer. However, for various reasons which have been enumerated in detail in the assessment order, the assessee submitted that even after completing the order of a particular customer, it is left with certain unused items. It is explained that such items are kept in stock to meet any similar requirements in future. The assessee explained that in such cases where items do not move for more than 3 years, the value thereof at the end of the year is taken at 5% of the original purchase price. On account of such policy, the Assessing 8 Officer noticed that as on 31.3.2003, the assessee had reduced the valuation of its closing inventory by Rs 44,75,470/- on account of Raw material inventory - Rs 12,19,913/-, Bought-out inventory - Rs 17,64,564/-,. and Finished equipment inventory - Rs 14,90,993/-. The Assessing Officer has rejected the aforesaid claim of the assessee and added the sum of Rs 44,75,470/- to the returned income.
8. The primary reason adopted by the Assessing Officer is to the effect that such methodology of valuing the closing stock was not specifically disclosed in the financial statements. Secondly, as per the Assessing Officer the assessee has not furnished complete details pertaining to the original purchase of such items of non-moving inventory. Thirdly, as per the Assessing Officer, such slow/non-moving inventory includes the stock purchased in the current year also. Notwithstanding the aforesaid, the Assessing Officer also observed that an item can be classified as slow moving or non moving only if it is lying without sale or utilization over a certain period, say 5 years and not as taken by the assessee.
9. Before we proceed to adjudicate on the merits of the assessee's claim, we may take up the partial relief allowed by the Commissioner of Income-tax (Appeals) and which is contested by the Revenue in its appeal by way of Ground Nos. 2 to 4. The Commissioner of Income-tax (Appeals) has in principle upheld the stand of the Assessing Officer, but has restricted the addition of Rs 19,28,259/- on the ground that it is only such amount which pertains to the year under consideration. As per the Commissioner of Income- tax (Appeals), the items of stock becoming non-moving during the year are only Rs 19,28,259/- and, therefore, the addition, if any, pertaining to the year under consideration is only Rs 19,28,259/-. On this factual aspect, we find no cogent material brought out by the Revenue. Ostensibly, the addition for the 9 year under consideration, if required to be made, ought to be such amount which is relevant for the year under consideration Therefore, in our view, the relief granted by the Commissioner of Income-tax (Appeals) is quite justified and, therefore, appeal of the Revenue on this aspect is liable to be dismissed.
10. Now, in so far as the position made out by the Assessing Officer and which has been approved by the Commissioner of Income-tax (Appeals) to the effect that the method of valuation of determination and valuation of slow/non- moving stock of the assessee is unacceptable. On this aspect, we have carefully considered the rival submissions. It is a settled proposition that in order to compute income from business, an assessee is required to value its inventory in accordance with generally recognized methods of accounting. In other words, if the method of valuation adopted by the assessee is a recognized method, the same cannot be disregarded on mere technicalities. In the present case, the assessee contends that it has determined items of stock which are slow/non-moving and has accordingly valued the same at 5% of its cost of purchase. Such estimate of its value being lower than the actual cost, such items have been taken by inventory as on the year-end at such lower values. In our view, the method of valuing slow/non-moving stocks at the lower of cost or net realizable value, on the basis of certain estimate is a recognized method. So, however, an intertwined aspect is the manner of determination of such items of slow/non-moving stocks, which undoubtedly has to be based on a scientific and bona fide methodology. The claim of the assessee is that it has classified certain items of stock as slow/non-moving in cases where such items are lying in stock unused for 2 to 3 years. It has been explained that non-usage is primarily on account of the nature of business effected by the assessee. The assessee manufactures equipment based on particular requirements of each customer and in order to complete an order, it procures 10 components specific to each order. Sometimes, on account of change in specifications by a customer on a subsequent order, some of the components procured are rendered unusable for a particular year, but the same are kept in stock for any future usage etc. After certain lapse of time, it is claimed that same are classified as slow/non-moving and its value is reduced. In order to appreciate the aforesaid factual matrix, we have perused the list of items placed at pages 11 to 37 of the Paper Book which depicts that there are items which have been purchased as early as financial year 1994-95 and such items are still carried out as stock. The details also indicate that such items have not moved for last 2 to 3 years. Broadly speaking, we find the approach of the assessee quite reasonable in identifying such items of slow/non-moving stock. However, the Assessing Officer and thereafter, the Commissioner of Income- tax (Appeals) has also noticed that assessee has claimed certain items to be slow/non-moving which have been purchased during the current year itself and the value of such items is Rs 2,66,524/-. In our considered opinion, the same is required to be specifically justified by the assessee.
11. Further, one of the pertinent points raised by the Assessing Officer is that the purchase cost of some of the items contained in the slow/non-moving inventory and which has been purchased prior to 2000, could not be verified as the assessee failed to produce such vouchers. The assessee explained that the same could not be filed for verification because the same were at Roha (at its factory premises) and due to heavy rains in the Konkan area, such record was damaged due to flooding and was not in a readable condition. The assessee produced all the related vouchers for the period after April 2000 for verification before the Assessing Officer. Even with regard to the period 1995 to 2000, the assessee produced Goods Receipt Report (GRR), as the same were available in its computer back-up which depicted the rates applied for the 11 valuation of inventory as also the date of purchase of the relevant material. In our considered opinion, in the face of the aforesaid position, the Assessing Officer was not justified in denying the claim on account of non-production of records. In any case, the CIT(A) has rightly observed thayt the diminution in value claimed as deduction during the year is only to the extent of Rs 19,28.259/- comprised in Rs 44,75,470- and, therefore, it is only to that extent the Assessing Officer could have examined/verified the case of the assessee.
12. Another point made out by the Assessing Officer is that the aforesaid methodology has not been disclosed by the assessee in the financial statements and that the classification of slow/non-moving inventory be done on the basis of 5 years of non utilization of the stock. In so far as the former aspect is concerned, the learned Counsel pointed out that in the Annual accounts accompanying the Balance Sheet, the assessee had disclosed full details. The learned Counsel submitted that in so far as the said statement of accounting policy is concerned, it was an error so however, factually speaking in the past as well as in the subsequent years the assessee has been undertaking the exercise of identifying non-moving items of stock and valuing the same at 5% of original purchase cost. Moreover, it has also been pointed out that the statutory Auditors of the assessee have clearly reported in Clause 6 of their Report, copy of which has been placed at page 143 to 147 of the Paper Book, that on the basis of examination of the stock records, the valuation of stock was fair and proper in accordance with the normally accepted accounting principles. Further, the Auditors had reported in Clause 2 that the stock of finished goods, stores, spare-parts and raw materials including components were physically verified by the management and such procedures are reasonable and adequate in relation to the size of the company. It is also pointed out that in clause 12 the auditors have reported 12 that the assessee has a procedure of determining unserviceable and damaged stores at the end of the year and adequate provisions, wherever required had been made in the accounts for the loss arising on the items so determined. On the basis of all these material, it is sought to be pointed out that the non-mentioning of the specific method of valuing the non-moving stock in the accounting policies was only an error but the same has been otherwise consistently applied by the assessee and was also a subject matter of examination by the Auditors and there has been no adverse comments thereof. In our view, the aforesaid factual matrix brought out by the assessee and which is uncontroverted and is borne out of record, does not dis-entitle the assessee from staking the claim for provision towards diminution in value of stock on account of non-moving stocks. In our considered opinion, non- mentioning of the specific method is evident, so however, it is also emerging without contravention from the Revenue that in the past as well as in the subsequent assessment year, assessee has carried out similar exercise. Therefore consistency in the method applied by the assessee is fairly emerging. Further, with regard to the stand of the Revenue that only items which have not been sold or utilized for 5 years be considered as non moving items, we find that the assessee claims to have adopted a period of 2 to 3 period of non-use as the basis. It is further pointed out that the actual purchase date of such items sometimes relate back to 2 to 3 years, prior to its date of last use and in-fact, such items are 5-6 years old. In our considered opinion, the threshold of 2 to 3 years of non-use claimed by the assessee is fair and reasonable considering the nature of the assessee's business, wherein the products are manufactured primarily specific to the requirements of each customer. In fact, even the aspect of valuing the same at 5% of the original purchase cost can also not be said to be an under-estimation because the assessee has illustrated that sales made in subsequent period of some of 13 the items have fetched prices which is near about 5% of its original cost. In fact, in the case before the Hon'ble High Court of Rajasthan in the case of Wolkem India Ltd. (supra), the valuation of unusable and non-moving items on account of obsolescence at 5% of the cost on estimation has been found to be reasonable. Therefore, on all these aspects, we uphold the plea of the assessee in principle.
13. Now, we may come to the specific aspects of the identification of non- moving items as on 31.3.2003 undertaken by the assessee. In this regard, we find ample substance in the plea of the Commissioner of Income-tax (Appeals) that since the non-moving items added to the closing stock during the year is only 19,28,259/-, the Assessing Officer shall be justified to put such working for further verification and examination. For examination of this aspect, we set aside the matter to the file of the Assessing Officer to verify as to whether the said working corresponds to the policy being sought to be brought out by the assessee. The assessee shall furnish the necessary workings to the Assessing Officer so as to satisfy the Assessing Officer that the non-moving items or stock has been appropriately identified and same has been valued at 5% of the purchase cost in terms of the policy consistently claimed to have been adopted by the assessee in the past as well as in the future years. In this manner for the limited purpose the matter is remanded back to the file of the Assessing Officer.
14. On this ground assessee succeeds and the cross-ground of the Revenue against deletion of the addition of Rs 25,47,211/- is dismissed.
15. The next Ground of appeal raised by the Revenue is as follows:
"On the facts and in the circumstances of the case, the CIT (A) erred in directing to exclude Sales-tax and Excise duty from the total turnover following the ratio of the Hon'ble Bombay high Court in the case of Cit v. Sudarshan Chemical Inds. Ltd. 245 14 ITR 318, without appreciating that as the Hon'ble Supreme Court have dismissed the SLP filed by the Department against the aforesaid judgment only technically and no on merit, therefore, the issue cannot be regarded as having become final. The CIT(A) also failed to appreciate that on similar issue a contrary judgment of the Hon'ble Bombay High Court exists in the case of Hindustan Petroleum Corpn. V. CIT 143 ITR 318."
16. Before us, it was a common ground between the parties that the above issue now stands settled by the judgment of the Hon'ble Supreme Court in the case of CIT v. Laxmi Machine Works 290 ITR 667 (SC) in favour of the assessee. In view of this settled legal position, we affirm the order of the Commissioner of Income-tax (Appeals) that the Sales-tax and Excise duty be excluded from the total turnover. This Ground of appeal of the Revenue fails.
17. In the result, appeal of the assessee, vide ITA No 1389/PN/06 is allowed for statistical purposes, whereas appeal of the Revenue vide ITA No 55/PN/07 is dismissed.
18. We shall now take up assessee's appeal, vide ITA No 157/PN/2010, which is directed against the order of the Commissioner of Income-tax (Appeals) confirming the penalty of Rs 7,08,635/- levied by the Assessing Officer under section 271(1)(c) of the Act for the assessment year 2003-04. The facts leading to the levy of penalty have already been narrated above in the quantum proceedings.
19. By our above order, we have set aside the issue relating to addition of Rs 19,28,259/- to the file of the Assessing Officer to adjudicate the issue afresh with certain directions. The impugned penalty has been levied by the Assessing Officer with reference to this amount of Rs 19,28,259/-. Since the issue relating to the addition of Rs. 19,28,259/- has been restored to the file of the Assessing Officer as stated above, the penalty levied by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals) is liable to be set-aside. We hold so.
15
20. In the result, the appeal of the assessee is allowed.
21. Resultantly, assessee's appeals, vide ITA Nos 1389/PN/06 and 157/PN/10 are allowed, whereas Revenue's appeal, vide ITA No 55/PN/2007 is dismissed.
Decision pronounced in the open Court on this 25th Day of January, 2012.
Sd/- Sd/-
(SHAILENDRA KUMAR YADAV) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune: 25 th January, 2012
B
Copy to:-
1) Assessee
2) Department
3) The CIT (A) -II, Pune
4) The CIT - III, Pune
5) The D R, "A" Bench, Pune
6) Guard File
By Order
"true copy"
Sr. PS, I.T.A.T., Pune