Income Tax Appellate Tribunal - Ahmedabad
Avishkar Processing Mills Pvt.Ltd., ... vs Assessee on 30 August, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C"
Before SHRI BHAVNESH S AINI, JUDICI AL MEMBER
And SHRI A N P AHUJ A, ACCOUNTANT MEMBER
ITA no.3236/Ahd/2009
(Assessment Year:-2006-07)
M/s Avishkaar Processing Deputy Commissioner of
V/s
Mills (P) Ltd., 145, GIDC, Income-tax, Circle-1,
Pandesara, Surat Aayakar Bhavan,Majura
Gate, Surat
PAN: AACCA 0038 P
[Appellant] [Respondent]
Assessee by :- Shri K K Shah, AR
Revenue by:- Shri Vinod Tanwani,DR
Date of Hearing:- 30-08-2011
Date of Pronouncement:- 30-08-2011
O R D E R
A N Pahuja: This appeal by assessee against an order dated 28- 10-2009 of the ld. CIT(Appeals)-I, Surat for the Assessment Year 2006-07, raises the following grounds:-
"[1] The learned CIT(A) erred in confirming estimating value of work in progress as part of closing stock at Rs.7,99,740/- as per para 2.3 of the CIT(A) order.
[2] The appellant reserves right to add, alter or withdraw any grounds of appeal."
2 Facts, in brief, as per relevant orders are that return declaring income of Rs.19,99,686/- filed on 31-12-2006 by the assessee, engaged in dyeing and printing of cloth on job work basis, was selected for scrutiny with the issue of a notice u/s 143(2) of the Income-tax Act, 1961 [hereinafter referred to as the "Act"] on 10-09- 2007.During the course of assessment proceedings, the Assessing Officer ['AO' in short] noticed that the assessee reflected Gross Profit [GP] @ 10.49% on turnover of Rs.11,15,03,658/- for the year under consideration as compared to 13.74% on turnover of 2 ITA no.3236/Ahd/2009 Rs.7,43,06,363/- in the preceding year . To a query by the AO, seeking reasons for fall in GP rate, the assessee submitted that the fall in GP was due to the increase in the cost of coal and fuel. However, the AO did not accept the submissions of the assessee and rejected the book results for the f ollowing reasons:-
(i) The assessee did not maintain the details as per the quality of colour chemicals purchased and hence the different rates of purchases were unverifiable;
(ii) the assessee failed to maintain the stock movement register which could help the A.O. to ascertain the quality of goods purchased and hence consumption of colour chemical was unverifiable;
(iii) the assessee maintained only the quantity of goods consumed and produced but did not maintain the quality and hence even sales rate were not verifiable;
(iv) the assessee did not submit the details of closing stock of work-in-progress and .
(v) the assessee did not submit details total grey cloth processed nor shortage/shrinkage thereof during the process and did not furnish qualitative details of production and opening stock of consumables..
2.1 Before the AO, the assessee, made a general submission that its production increased in volume terms and further explained that the imported coal had four times more capacity of producing heat than the lignite coal purchased from the local market while the average cost of purchase per ton increased during the year along with increase in consumption of coal from 2234.620 MT to 2642.420 MT besides increase in the rate of freight charges of coal and cost of colour chemicals, GP declined in the year under consideration. The AO did not accept this explanation and accordingly, rejected the book results for the aforesaid reasons. Consequently, while following the decision of the Hon'ble Supreme Court in the case of British Paints India Pvt. Ltd.,188-ITR- 3 ITA no.3236/Ahd/2009 44(SC), and Samir Diamonds Export Pvt. Ltd.,71-ITD-75(Mum), the AO added an estimated amount of Rs.7,99,740/-towards W IP in para-5.3 of the assessment order besides an addition of 1% on account of GP, resulting in an addition of Rs.11,15,036/-.
3. On appeal, the learned CIT(A) sustained the addition of Rs.7,99,740/- while telescoping the GP addition in the following terms:-
"2.2 During the appellate proceedings, the appellant stated that the AO had issued notices u/s. 133(6) to various suppliers of chemicals but no adverse materials have been brought on record. Almost 99% of the total purchases were supported by bills and challans and the payments are by account payee cheques. The A.O. has brought no specific defects on record. The arguments given by the A.O. are general. It was further argued that the turnover has increased from Rs.7.43 crores to Rs.11.15 crores which could be achieved only a competitive rates thereby decreasing G.P. margin. With respect to the work-in-progress addition, the appellant stated that the assessee has been following the same method year to year and hence no addition should be made.
2.3 I have considered the submission made by the appellant and the observation of the A.O. Firstly the work-in-progress addition is taken. As per the basic accounting principle as well as the decision of the Hon'ble Supreme Court in the case of British Paints India Ltd. (supra), the correct profit can only be ascertained if the closing stock is correctly shown. Admittedly, the cost of various inputs like colour & chemicals, labour, power, fuel, coal, etc. have been put on the fabric lying on the machine under various stages of completion for five days. These costs have been debited to the Profit & Loss Account but corresponding work-in-progress has not been shown which leading to disclosure of less profit. The appellant has found no mistake in calculation made by the A.O. Hence, the addition of Rs.7,99,740/- on account of work-in-progress is sustained.
2.4 With respect to the G.P. addition, I agree with the appellant that the increase of turnover is due to non-disclosure of work-in-progress and no other major defects have been brought on record by the A.O. The addition of work-in-progress has taken care of major amount of addition and hence the G.P. addition cannot be sustained.
2.5 In view of the above, Ground No.2 in respect of the work-in- progress addition is, therefore, confirmed but Ground No.1 is dismissed."
4 ITA no.3236/Ahd/2009 4 The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee contended that issue is covered in favour of the assessee in terms of decisions in Krishna Art Silk Cloth V/s. DCIT in ITA no. 1264/ Ahd/2010 and Pratik Processors Pvt. Ltd. V/s. DC1T in ITA no. 165/ Ahd/2009. The learned DR, on the other hand, supported the findings of the ld. CIT(A).
5. W e have heard both the parties and gone through the facts of the case as also the aforesaid decisions of the ITAT. There is nothing to suggest as to whether or not Revenue is in appeal before the ITAT against the findings of the ld. CIT(A) in para 2.4 of the impugned order. W e find that while adjudicating an identical issue, a co-ordinate Bench in their decision dated 28.5.2010 in the case of ITO vs. M/s Rishabh Dyeing & Printing Mills (P) Ltd. in ITA no. 1823/Ahd./2007 held as under :-
"3. Against this Ld. AR submitted that similar issue had come before the Tribunal in the case of Pratik Processors Pvt. Ltd v DCIT in ITA No.1956/Ahd/2007, wherein Tribunal has held that there cannot be any work-in-progress in a case where business of Dyeing and priming of cloth is done on job work basis. He referred to para-6 from that order as under:-
"6. At the time of hearing both the Representatives agreed the similar issue arose in an appeal by the revenue in ITA No. 2649/Ahd/2006 in the case of Vipul Industries Pvt. Ltd. V/s ACIT order dated 17.9.2003 In the said case, when in the said case the assessee which is engaged in the business of dyeing and printing of cloth on job work basis and where the assesses had not shown any work-in-progress at the year end, the same was estimated to be 50% of the job receipt of the likely stock remaining in process. However was deleted by the ld. CIT(A) by observing as under:
"12 I have carefully considered the fact of the case and submissions made by the Id AR. As regards the addition made in respect of estimated work in progress, it is seen that the appellant in the instant case is a job- worker and process grey cloth for its customers according to their requirement. The appellant not engaged in any manufacturing activities 5 ITA no.3236/Ahd/2009 of its own. The cloth processed by the appellant thus belong to its customers is processed by the appellant and. after processing the same in accordance with the customers requirement, it is returned. In the above facts of the case the question of showing any work in progress in the books of account of the appellant in respect of the cloth belonging to its customers did not arise as such cloth was required to be shown in the closing stock of the concerned customers. On the basis of the completion of work on the customers cloth, the appellant is entitled to receive its work charges. No interim payments or advances payments are received by the appellant from its customers during the pendency of the job work. The receipts from the job work are being accounted for by the appellant on completed contract method as per AS-9. The closing stock of materials used for processing of cloth, i.e. colour, chemicals etc. have been duly accounted for by the appellant in accordance with AS-9 In regard to the value addition made by the appellant on the customer's cloth, which may have been at different intermediate stages of processing as on 31.3.2003, neither any opening stock nor closing stock was ever shown by the appellant. As per the principles of accounting laid down by the ICAI, under the scope of Valuation of Inventories in item 1 (sub-item
(b) of AS-2 (revised) the "work-in-progress" arising in the ordinary course of business of service provider" has been specifically scoped out of the said statement. Further, in the definitions provided under item 3 of the AS-2 "Inventories" have been defined as "assets (a) held for sale in the ordinary course of business (b) in the process of production, for such sale" or (c) in the form of materials or supplies to be consumed in the production for sale" or in the rendering of services. Since the appellant was not engaged in the business of sale of the processed cloth or in the production for sale of the processed cloth but was engaged in the business of rendering of services for processing of grey cloth for its customers the principles laid down in AS-2 for ;he "valuation of Inventories" were not applicable in its case in accordance with item l(b) thereof. However, the materials or supplies to be consumed in the production process or in the rendering of services would evidently fail in category (c) of the aforesaid "definitions" provided in item 3 of the Accounting principles laid down in AS-2, and the same would be required to be accounted for by it in the Form of stock, which has been done in the instant case. The method of accounting followed by the appellant is thus seen to be in accordance with the Accounting Principles laid down by the ICAI.
13 It is further seen that the aforesaid method of accounting of opening/closing stock has been regularly and consistently followed by the appellant company since the belonging The appellant has also consistently followed, the accounting policy of recognizing revenue of completed contract method. While the principles of res-judicata are not applicable to the Income-tax proceedings, it has been held by the courts 6 ITA no.3236/Ahd/2009 in several judgments: that, where the appellant has been following regular system of accounting since the last so many years an such method was based on accepted principles of accounting there was no justification for rejecting the said method for valuation of stock. This would especially hold in a case where the proposed change in the method of valuation is found to have no impact, as in the instant case, if the changed method adopted by the Assessing Officer were applied for valuation of the opening as well as the closing stock.
14 For reasons discussed above in detail, in my opinion there was no basis or justification in making the any estimated addition on account of work-in-progress is this case. The addition of Rs.12.56.970/- made by the AO in respect of estimated work in progress is therefore deleted. This ground of appeal is allowed "
Thus deletion was confirmed by the Tribunal. Therefore in, the present case also following the decision of the Tribunal confirm the order of the CIT(A), the addition on account of estimated value of work-in-progress is required to be deleted."
5.1 Following the view taken in the aforcited decision, the ITAT in their decision dated 16-07-2010 in the case of Krishna Art Silk Cloth (P) Ltd. vs. DCIT in ITA No.1264/Ahd/2010, in which case also, the ld. CIT(A) upheld the findings of the AO in the light of decision dated 26.10.2007 in the case of Akruti Dyeing & Printing Mills Pvt. Ltd. in ITA No.2551/Ahd/2006, allowed the claim of the assessee.
5.2 In another decision dated 13-05-2011,following the view taken by the ITAT in their decision dated 3.04.09 in ITA No. 167/Ahd/2009 in the case of Kanhaiya Processors Pvt. Ltd. vs. ITO , the ITAT concluded as under:
7. Having heard both the sides, we have carefully gone through the orders of the authorities below. The Tribunal in the case of Kanhaiya Processors Private Ltd. (supra) observed that the AO could not be able to appreciate the true nature of the business of a processing house. He undertook the job work. The fabric does not belong to the assessee. There is difference in raw material and the consumables. Raw material once consumed does not lose its identity, it only gets its utility transferred. While the consumables, once consumed, cannot be separately identified and it loses its 7 ITA no.3236/Ahd/2009 identity. When the assessee has been engaged in the business of dyeing and printing of art-silk cloth on job work basis, the raw material does not belong to the assessee. The assessee has simply to incur the expenditure on colour, chemical, wages, power and fuel.
Colour and chemicals are consumables and once these are applied to the fabric under process, they lose their identity and cannot be part of the stock in process. The assessee is valuing the stock by following the same method consistently in which there is no illegality. On this basis, addition made on account of suppressed work-in- progress is deleted by the Tribunal, 'D' Bench vide order dated 3rd April, 2009 in the of Kanhaiya Processors Pvt. Ltd. (supra).
7.1 The similar view has been taken in other cases relied on by the Id. Counsel of assessee. Under the facts and circumstances, we are of the view that the AO was mot correct in law in valuing the work-in-progress in respect of various expenses incurred by the assessee relating to fabric while in process for dyeing and printing. We. accordingly, delete the addition of Rs.4,11,335/-. Resultantly, the appeal of the assessee is allowed."
5.3 Indisputably, the assessee is doing the job work and the grey cloth lying in the premises or in the machine at the end of accounting year belongs to other parties . The assessee is consistently following the method of valuation right since its inception and has been accepted by the Department. The assessee never reflected any opening of stock of work in progress nor closing stock thereof . The ITAT in their decision dated 13.5.11 in Gagan Silk Mills Pvt. Ltd. in ITA No.4036/Ahd/2008; decision dated 27.5.2011 in Bhagwati Syntex P. Ltd. in ITA No.3249/Ahd/2009 and decision dated 28.5.2010 in Vardhaman Fabrics P. Ltd. in ITA No.794/Ahd/2008, allowed a similar claim of the assessee while holding that the AO was not correct in law in valuing the work-in- progress in respect of various expenses incurred by the assessee relating to fabric in process of dyeing and printing. In the light of consistent view taken in the aforesaid decisions including in Bhagwati Syntex P. Ltd.(supra), Vardhaman Fabrics P. Ltd.(supra),and M/s.Bajrang Processors P. Ltd.(supra) on identical facts and circumstances, we have no alternative but to allow the 8 ITA no.3236/Ahd/2009 claim of the assessee in the instant case. Therefore, ground no.1 in the appeal is allowed.
6. No additional ground having been raised before us in terms of residuary ground no.2 in the appeal, accordingly, this ground is dismissed.
7. In the result, appeal is allowed.
Order pronounced in the court today on 30-08-2011 Sd/- Sd/-
(BHAVNESH S AINI) (A N P AHUJ A) JUDICI AL MEMBER ACCOUNTANT MEMBER Dated : 30-08-2011 Copy of the order forwarded to:
1. M/s Avishkaar Processing Mills (P) Ltd., 145, GIDC, Pandesara, Surat
2. The Deputy Commissioner of Income-tax, Circle-1, Surat
3. CIT concerned
4. CIT(A)-I, Surat
5. DR, ITAT, Ahmedabad Bench-C, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD