ADDL CIT RG 13(1), MUMBAI v. VORA BROTHERS & CO., MUMBAI

I.T.A NO.1493/ MUM/2010 VORA BROTHERS & CO 1 IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH MUMBAI. [ CORAM: D.K. AGARWAL JM AND PRAMOD KUMAR AM ] I.T.A NO.1493/ MUM/2010 ASSESSMENT YEAR: 2006-07 ASST. COMMISSIONER OF INCOME TAX 13(1) .. APPELL ANT 4 TH FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI VS VORA BROTHERS & CO. . RESPONDEN T 193 NAGDEVI STREET MUMBAI-400003 PA NO.AAAFV 1805 A APPEARANCES: ASHIMA GUPTA FOR THE APPELLANT K. GOPAL FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL THE ASSESSING OFFICER HAS CALLED INTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 18 TH DECEMBER 2009 IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX A CT 1961 FOR THE ASSESSMENT YEAR 2006-07 ON THE FOLLOWING GROUNDS: (1)(A) THE LD CIT (A) ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE AND IN LAW ERRED IN REDUCING THE ADDITION OF RS 1 14 27 396 TO RS 2 92 888 MADE ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK. I.T.A NO.1493/ MUM/2010 VORA BROTHERS & CO 3 GALVANIZED PIPES AS SHOWN BY WAY OF PURCHASE AND CR EDIT NOTES RECEIVED CONSIDERED FOR REDUCING THE VALUE OF CLOSING STOCK. 4. THE ASSESSEE HAS NOT BEEN ABLE TO GIVE ANY JUSTI FICATION FOR CLAIMING DEDUCTION IN RESPECT OF MATERIAL IN BAD CO NDITION OF RS 3 31 753. IT IS NOT THE CASE OF THE ASSESSEE TH AT HE HAS PURCHASED DEFECTIVE MATERIALS. THE ASSESSEE HAS NO T BEEN ABLE TO SUBSTANTIATE THE AFORESAID DEDUCTION OF RS 3 31 753 WITH ANY COGENT MATERIAL/EVIDENCE. 5. ANALYSIS OF THE UNIT VALUE OF PIPE REVEALS THAT THE PURCHASE CONSIDERATION AS PER BILL AND THE VALUE ADOPTED WHI LE VALUING CLOSING STOCK GIVES SUBSTANTIALLY HIGH VARIATION. THE VARIATION IN RESPECT OF 4 PIPE IS FROM RS 2 414 TO RS 1 449 WHICH COMES TO AROUND 40%. THE VARIATION IN RESPEC T OF 3 PIPE FROM RS 2 260 TO RS 1 210 GIVES THE DIFFERENCE OF MORE THAN 45%. SIMILARLY THE VARIATION IN RESPECT OF P IPES FROM 1.25 INCH TO 2.5 INCH IS ALSO ABNORMALLY HIGH. 6. THE CHART AS FURNISHED BY THE ASSESSEE IS IN RES PECT OF TATA GALVANIZED PIPES ONLY. THE STOCK OF THE SAID ITEMS IS HARDLY ABOUT 30% OF THE TOTAL STOCK OF RS 5.83 CRORES. 3. THE ASSESSING OFFICER FURTHER OBSERVED THAT AS A GAINST ANNUAL PURCHASES OF RS 55.99 CRORES CREDIT NOTES AMOUNTED TO RS 2.88 CRORES WHICH WORKED OUT TO 5 15%. HOWEVER DEDUCTION CLAIM ED BY THE ASSESSEE IN COMPUTATION OF CLOSING STOCK VALUE WORKS OUT TO RS 56 69 169 WHICH IS 24.72% OF RELATED PURCHASES. HE ACCORDINGLY COMP UTED UNDERSTATEMENT OF STOCK VALUE BY ADOPTING 19.57% (I.E. 24.72% - 5. 15%) AS INFLATED VALUE OF STOCK. WHILE DOING SO THE ASSESSING OFFICER OB SERVED AS FOLLOWS: THE ASSESSEE HAS FURNISHED THE COMPLETE CHART OF C REDIT NOTES RECEIVED FROM VARIOUS SUPPLIERS DURING THE FI NANCIAL YEAR ENDING 31.3.2006. THE COPY OF THE SAID CHART IS ALSO ATTACHED TO THIS ORDER BY WAY OF ANNEXURE-B AND IT FORMS PART OF THIS ORDER. IT WILL BE SEEN FROM THE AFORE SAID CHART THAT THE TOTAL CREDIT NOTES RECEIVED BY THE ASSESSE E DURING THE ENTIRE YEAR COMES TO RS 2 88 15 228 AGAINST PUR CHASES OF RS 55 99 21 454 WHICH GIVES RATIO OF 5.15% ON OVERA LL PURCHASES SHOWN BY THE ASSESSEE. AS AGAINST THIS THE DEDUCTION SOUGHT BY THE ASSESSEE WHILE VALUING CLOS ING STOCK I.T.A NO.1493/ MUM/2010 VORA BROTHERS & CO 5 EITHER COST OR MARKET PRICE THE WORKING OF THE APPE LLANT IS CORRECT BECAUSE IN THIS CASE WHEN THE MATERIAL ARE IN A DEFECTIVE CONDITION AND FOR WHICH CREDIT NOTES ARE GIVEN BY THE SUPPLIERS THE APPELLANT WILL REDUCE THE VALUE OF CLOSING STOCK WITH REFERENCE TO THOSE CREDIT NOTES FOR ARRI VING AT THE CORRECT FIGURE OF CLOSING STOCK. THIS PRINCIPLE FO R A GOING CONCERN HAS BEEN REITERATED BY THE HONBLE SUPREME COURT IN THE CASE OF A.L.A. FIRM 189 ITR 285(SC) AND FOLLOWI NG THIS PRINCIPLE THE ADDITION OF RS 1 14 27 396 DESERVES T O BE DELETED BECAUSE IT WOULD RESULT IN TAXING THE APPEL LANT ON AN ARTIFICIAL AND NOTIONAL BASIS WHICH IS NOT PERMISSI BLE IN LAW IN CASE OF A GOING CONCERN. HOWEVER AS PER THE WORKING GIVEN BY THE LD COUNSEL SHOWING THE DIFFERENCE IN G.P. WHICH WOULD BE 8.93% OF THE SALES TURNOVER AND AS ORIGINALLY SHOWN BY THE APPELLANT B Y REDUCING THE CREDIT NOTES FROM OPENING STOCK PURCH ASES AND CLOSING STOCK IT WAS AROUND 8.88% AND THEREFORE TH IS DIFFERENCE WOULD LEAD TO AN INCREASE FIGURE OF `.2 92 888 TO THE GROSS PROFIT AND SO THIS ADDITION HAS TO BE MAD E BY THIS FIGURE TO THE CLOSING STOCK AND ACCORDINGLY THE AD DITION IS REDUCED FROM 1 14 27 396 TO 2 92 888. 5. THE ASSESSING OFFICER IS NOT SATISFIED WITH THE RELIEF SO GRANTED BY THE CIT (A) AND IS IN APPEAL BEFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED THE FACTUAL MATRIX OF TH E CASE AS ALSO THE APPLICABLE LEGAL POSITION. 7. WE FIND THAT IT IS WELL SETTLED IN LAW THAT THE CLOSING STOCK IS TO BE VALUED AT COST PRICE OR MARKET PRICE-WHICHEVER IS L ESS. THERE IS NO DISPUTE ABOUT THIS FUNDAMENTAL PROPOSITION AND THE DISPUTE IS CONFINED ONLY ON THE MECHANISM OF COMPUTING THE COST PRICE AND MARKET PRICE. UNDOUBTEDLY COST PRICE MUST TAKE INTO ACCOUNT ANY SUBSEQUENT CREDITS THAT THE ASSESSEE RECEIVES IN CONNECTION WITH PURCH ASES MADE FOR RELATED MATERIAL AS LONG AS THESE CREDITS ARE ACCOUNTED FO R IN THE SAME PERIOD. HOWEVER THE ONUS IS ON THE ASSESSEE TO DEMONSTRATE THAT THE ASSESSEE I.T.A NO.1493/ MUM/2010 VORA BROTHERS & CO 7 THE INCORRECT FIGURE. IT WOULD THUS FOLLOW THAT T HE VALUATION OF CLOSING STOCK WHEN AT PURCHASE PRICE MUST BE SUCH AS TO C ANCEL THE CORRESPONDING DEBIT ENTRIES IN THE PROFIT AND LOSS ACCOUNT. A STOCK VALUATION AT A LOWER FIGURE WILL DISTORT THE PROFIT S OF THE ASSESSEE. WE THEREFORE DEEM IT FIT AND PROPER TO REMIT THE MATT ER TO THE FILE OF THE AO FOR RE-EXAMINING THE MATTER. THE ASSESSEE HAS TO DE MONSTRATE THAT PARTICULAR CREDIT NOTES RECEIVED AND ACCOUNTED FOR IN THE BOOKS RELATE TO THE ITEM IN RESPECT OF WHICH CORRESPONDING LOWER VA LUATION IS ADOPTED. THE ADHOC APPROACH ADOPTED BY THE CIT (A) BY ADOPTI NG GROSS PROFIT FIGURES ETC DOES NOT MEET OUR APPROVAL. AS FOR THE CONSISTENCY IN ACCOUNTING METHOD AS LONG AS VALUE OF CLOSING STOC K IS UNDERSTATED SUCH A CONSISTENCY IF AT ALL CAN ONLY RESULT IN PERPET UAL DEFERMENT OF TAX LIABILITY. HONBLE SUPREME COURT HAS IN THE CASE OF CIT VS BRITISH PAINTS LIMITED (188 ITR 44) AND DISAPPROVING SUCH A PRACTI CE OBSERVED AS FOLLOWS :- THE PROFIT OF ONE YEAR IS LIKELY TO BE SHIFTED TO ANOTHER YEAR WHICH IS AN INCORRECT METHOD OF COMPUTING PROFITS AND GAI NS FOR THE PURPOSE OF ASSESSMENT. EACH YEAR BEING A SELF-CONTA INED UNIT AND THE TAXES OF A PARTICULAR YEAR BEING PAYABLE WITH R EFERENCE TO THE INCOME OF THAT YEAR AS COMPUTED IN TERMS OF THE AC T THE METHOD ADOPTED BY THE ASSESSEE HAS BEEN FOUND TO BE SUCH T HAT INCOME CANNOT PROPERLY BE DEDUCED THEREFROM. IT IS THEREF ORE NOT ONLY THE RIGHT BUT THE DUTY OF THE ASSESSING OFFICER TO ACT IN EXERCISE OF HIS STATUTORY POWER AS HE HAS DONE IN THE INSTANT CASE FOR DETERMINING WHAT IN HIS OPINION IS THE CORRECT TAXABLE INCOME 9. IN THIS VIEW OF THE MATTER MERE CONSISTENCY OF METHOD CANNOT JUSTIFY AN A STOCK VALUATION METHOD WHICH RESULTS IN UNDERSTATEMENT OF CLOSING STOCK AND RESULTANT DISTORTION OF PROFITS O F THE YEAR WE ARE THEREFORE OF THE CONSIDERED VIEW THAT THE CIT (A) HAS BEEN SUPERFICIAL IN HIS APPROACH AND CONSISTENCY IN METHOD OF ACCOUNTIN G CANNOT JUSTIFY A CLEAR UNDERVALUATION OF CLOSING STOCK.