M/s. Atlantic Fabrics, Karur v. DCIT, Trichy

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 SF NO.1658 1659 AMARAVATHY NAGAR ANDANKOIL KARUR VS THE DY. CIT CIRCLE II TIRUCHIRAPALLI [PAN AAAFA4315Q] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PHILIP GEORGE RESPONDENT BY : SHRI SHAJI P. JACOB O R D E R PER HARI OM MARATHA JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE FOR ASSESS MENT YEAR 2004-05 IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) TIRUC HIRAPALLI DATED 25.8.2009. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT A SSESSEE IS A SUPPORTING MANUFACTURER TO AN EXPORT HOUSE. THE AS SESSEE MANUFACTURES HOME TEXTILES MADE OF COTTON FABRICS A ND SOLD TO A EXPORT HOUSE ONLY. ITS TOTAL EXPORT TURNOVER AS SU PPORTING ITA 1690/09 :- 2 -: 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. WI TH 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 AP PROVAL OF THE EXPORT HOUSE. IT ALSO ENTERED TOTAL OF THE INVOICE S COMING TO ` 2 41 43 400/- IN THE BOOKS CREDITING SALES AND DEB ITING THE EXPORT HOUSE FOR THE CORRESPONDING SUM ALTHOUGH NEITHER TH E 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 ASSESS EE INVOLVES PROCURING AND PROCESSING OF YARN AND OTHER RAW MATE RIALS AND GIVING THEM TO WEAVERS IN THE SURROUNDING VILLAGES FOR WEA VING ACCORDING TO THE DESIGNS AND SPECIFICATIONS OF THE IMPORTER. TH E WAGES PAYABLE TO THE WEAVERS ARE DECIDED BY THE MARKET CONDITIONS LI KE THE URGENCY QUALITY DESIGN ETC. THE WEAVERS ARE DOING THE JO B AS A COTTAGE INDUSTRY AND THEIR FAMILY CONTRIBUTES TOWARDS LABOU R. THEY ARE NOT REGISTERED UNDER ANY LAW FOR THE TIME BEING IN FORC E AND THEY DO NOT ISSUE RECEIPT FOR LABOUR CHARGES. THEY ARE PAID WA GES EVERY WEEK-END TO ENABLE THEM TO BUY THEIR NECESSITIES AT KARUR. THEREFORE VOUCHERS ITA 1690/09 :- 3 -: ARE SELF-MADE GENERALLY SIGNED BY THE WEAVERS OR A REPRESENTATIVE OF A GROUP OF WEAVERS AND ONE RESPONSIBLE OFFICER OF T HE ASSESSEE WHO CERTIFY THE PAYMENTS. THE ASSESSEE HAS BEEN MAINTA INING 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 IT S RETURN OF INCOME ON 28.12.2004 AFTER CLAIMING DEDUCTION U/S 80HHC ON EX PORT PROFITS. WHILE EXAMINING THE RETURN OF THE ASSESSEE THE ASS ESSING OFFICER WAS NOT AGREEABLE THAT WEAVING IS A COTTAGE INDUSTRY IN KARUR AND THAT THE PAYMENT DEBITED TO THE WEAVERS WAS GENUINE AND COMM ENSURATE WITH THE VOLUME OF BUSINESS. HE FOUND SOME OF THE VOUCH ERS 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) H AS 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. ITA 1690/09 :- 4 -: 3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE C AREFULLY PERUSED THE ENTIRE RECORDS AVAILABLE BEFORE US. WE HAVE NOTICED THAT THE ASSESSING OFFICER HAS IN ONE BREATH SUBSTANTIAL LY ACCEPTED THE CLAIM OF THE ASSESSEE BUT AT THE SAME TIME HAS MAD E AN ADHOC DISALLOWANCE OF 2% WITHOUT ANY VALID BASIS. AGAIN THE LD. CIT(A) HAS DONE THE SAME THING BUT HE HAS REDUCED DISALLOWAN CE TO 1% ON TOKEN BASIS. AFTER PERUSING THE ENTIRE RECORD WE FIND THAT IN INCOME- TAX ACT NO SUCH NOTIONAL AND ADHOC DISALLOWANCE AR E PERMITTED. IT IS THE DUTY OF THE ASSESSING OFFICER TO FIND AS TO WHA T 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 SUBS TANTIAL CLAIM OF THE ASSESSEE AND IN PRINCIPLE HAVE ACCEPTED THE MODE OF PAYMENT TO WEAVERS FOR JOB WORK. THEREFORE IN OUR CONSIDERE D OPINION THIS ADDITION BASED ON ADHOC DISALLOWANCE CANNOT BE SUST AINED IN THE EYES OF LAW. CONSEQUENTLY WE ORDER TO DELETE THE ENTIR E DISALLOWANCE SO MADE. IN CASE A TOKEN DISALLOWANCE IS UPHELD IT W ILL GO A LONG WAY IN GIVING DISCRETION TO THE AUTHORITIES WITHOUT ANY LE GAL SANCTITY TO MAKE SUCH ADHOC DISALLOWANCE THAT TO WITHOUT ANY BASIS. WHAT DEFECT WAS EXACTLY FOUND IN SELF-MADE VOUCHERS COULD HAVE BEE N MENTIONED THE AMOUNT MENTIONED THEREON COULD BE PROPOSED TO BE DI SALLOWED. THE ASSESSEE SHOULD HAVE BEEN GIVEN AN OPPORTUNITY TO E XPLAIN THAT DEFECT. ITA 1690/09 :- 5 -: IN CASE IT WAS NOT EXPLAINED TO THAT EXTENT DISA LLOWANCE COULD BE MADE. BUT NOTHING CONCRETE HAS BEEN DONE IN THIS C ASE. BUT SOME PASSING REMARKS OF DEFECTS IN VOUCHERS CANNOT BE MA DE A BASIS FOR MAKING ADHOC PERCENTAGE DISALLOWANCE. ACCORDINGLY WE DO NOT APPROVE SUCH TYPE OF DISALLOWANCES BEING MADE IN AS SESSMENT PROCEEDINGS AND DELETE THE SAME. CONSEQUENTLY WE ALLOW THIS ISSUE IN FAVOUR OF THE ASSESSEE. 4. FURTHER THE ASSESSEES TOTAL TURNOVER AS PER THE BOOKS OF ACCOUNT IS ` 21 47 95 035/- BUT IT HAS ACCOUNTED FOR TOTAL SAL ES AT ` 19 06 51 635/- ONLY. WHEN CALLED UPON TO EXPLAIN T HIS ANOMALY THE ASSESSEES REPRESENTATIVE STATED THAT THE ASSESSEE IS A SUPPORTING MANUFACTURER OF IKEA TRADING INDIA PVT. LTD. ON RE CEIVING CONFIRMED ORDER FROM THE BUYER THE ASSESSEE PLAN THE PRODUCTI ON AND DECIDE WHETHER TO START OWN MANUFACTURING OR TO PURCHASE T HE REQUIRED QUANTITY THROUGH SUB-CONTRACTORS. THE ORDERS WERE PLACED TO THE SUB- CONTRACTORS IN THE MONTH OF FEBRUARY 2004 AND SUB-C ONTRACTORS DELIVERED THE GOODS IN APRIL AND MAY 2004 AND THERE AFTER 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 PREPARE S THE INVOICES ITA 1690/09 :- 6 -: BASED ON ASSESSEES INVOICES AND SEND THEIR COPIES . WITHIN THREE OR FOUR WEEKS FROM THE RECEIPT OF INVOICE FROM THE EXP ORT HOUSE THE GOODS ARE DISPATCHED AND ACCOUNTED FOR AS SALES. A S 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 L IST OF INVOICES THAT WERE REVERSED AND FURNISHED THE QUANTITY OF GOODS T HAT WERE EXPORTED. THE ASSESSEE ALSO FURNISHED THE QUANTITY OF GOODS P URCHASED IN APRIL AND MAY 2004 WHICH WERE UTILIZED FOR EXPORT. THE A SSESSEES EXPLANATION WAS NOT ACCEPTED BY THE ASSESSING OFFIC ER. THE REASON FOR NOT ACCEPTING THE EXPLANATION OF THE ASSESSEE ARE A S UNDER: (I) THE ASSESSEE HAS TO KEEP THE GOODS READY ATLEAS T 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 ISSUE D THAT THE GOODS EXPORTED ARE HAND LOOM GOODS. THE GOODS HAS TO BE THEN LOADED INTO CONTAINERS AND SEN D TO THE PORT ATLEAST TWO DAYS BEFORE THE ARRIVAL OF SHIP. THE GOODS WILL BE INSPECTED BY THE CUSTOM AUTHORITI ES AFTER REACHING THE PORT. HENCE. THE ASSESSEE CAN NO T 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 ITA 1690/09 :- 7 -: 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 PURC HASED WAS UTILIZED FOR EXPORT IN THE MONTH OF APRIL AND M AY AND IT IS NOT ACCEPTABLE SINCE IT TAKES A MINIMUM O F 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 CERT AIN 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 EXPOR T HOUSE AND SENT FOR EXPORT. (IV) THE ASSESSEE HAS OMITTED TO DISCLOSE THE GOOD S THAT WERE AVAILABLE FOR EXPORT AS ITS CLOSING STOCK. HEN CE. 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 UN DISCLOSED STOCK. AGAINST THIS ADDITION ASSESSEE PREFERRED A PPEAL BEFORE THE LD. CIT(A) WHO WAS ALSO NOT AGREEABLE AND HAS CONFIRME D THE SAME. 6. BEFORE US SIMILAR STAND WAS TAKEN BY BOTH THE PART IES 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 SYSTE M OF ITS RAISING INVOICES VIS--VIS THE EXPORT HOUSE AS EXPLAINED I N DETAIL BEFORE HIM AND SHOULD HAVE DELETED THE ADDITION. IT WAS ARGUE D THAT THIS ADDITION IS BASED SOLELY ON SUSPICION AND SURMISES OF THE A SSESSING OFFICER WHO ITA 1690/09 :- 8 -: HAS IGNORED TO CONSIDER THE MATERIAL EVIDENCE ON RE CORD. THE GIST OF THE LD.ARS 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 D UE 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 AFTE R CONFIRMING THE QUALITY OF THE GOODS BY ISSUING IT F OR 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 T HE SAME. THE ASSUMPTION OF THE OFFICER THAT A MINIMUM PERIOD OF 45 DAYS WAS REQUIRED TO COMPLETE THE PROC ESS OF MANUFACTURING IS NOT CORRECT. IT IS SUBMITTED TH AT YARN CAN BE WEAVED IN ABOUT NINE TO TEN DAYS AND CLOTH I S 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 T OOK 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 SAL ES DURING THE YEAR WAS ` 19 06 51 635 AND THE GROSS PROFIT EARNED WAS ` 1 82 31 127/- GIVING A GROSS PROFIT TURNOVER RATI O OF 9.56%. IF THE ALLEGED UNDERSTATED STOCK IS INCLU DED THE GROSS PROFIT THE GROSS PROFIT IS ` 4 23 74 527 GIVING A GROSS PROFIT/TURNOVER RATIO OF 22.22%. IF THE ALLEG ED UNDERSTATED STOCK IS CARRIED TO THE NEXT YEAR THE GROSS PROFIT TURNOVER RATIO IS 3% AS AGAINST 22.22% IN TH E PREVIOUS YEAR. (IV) IT IS SUBMITTED THAT THE PURCHASES AND SAL ES DURING APRIL 2004 WAS ` 2 04 84 784 AND ` 1 67 55.660 RESPECTIVELY CLEARLY EXPLAINING AVAILABILITY OF. MATERIAL FOR SU BSEQUENT EXPORTS. (V) THE ABOVE DATA SUPPORTED BY THE EVIDENCES F ILED DURING THE ASSESSMENT PROCEEDINGS CLEARLY DEMONSTRATE THAT APPELLANT DID NOT UNDERSTATE THE STOCK AND THE ALLEGATION MADE TO THE CONTRARY WITHOUT FULLY AND ITA 1690/09 :- 9 -: PROPERLY APPRECIATING BUSINESS PRACTICES AND THE MATERIALS ON RECORD WAS INCORRECT. 7. ON THE OTHER HAND THE LD.DR HAS COUNTERED THE ABO VE SUBMISSION PUT FORTH ON BEHALF OF THE ASSESSEE BY M AKING ORAL AS WELL AS WRITTEN SUBMISSION WHICH ARE BEING EXTRACTED FRO M WRITTEN SUBMISSION DATED 1.2.2011. GR.3 ADDITION TOWARDS UNDISCLOSED STOCK TOTAL SALES DURING THE YEAR AS PER THE BOOKS OF ACC OUNTS 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 R EVERSAL 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 W AS REVERSED. IT WAS ALSO SUBMITTED THAT SUCH SALES WE RE ACCOUNTED AGAIN IN APRIL/MAY 2004 I.E. NEXT F.Y. A.O. EXAMINED THIS CLAIM WITH REFERENCE TO THE BOO KS OF ACCOUNTS OF NEXT F.Y. THE FOLLOWING ARE THE SALIEN T POINTS NOTED. AS REVEALED FROM THE AUDIT REPORT FURNISHED U/S 44 AB ASSESSEE HAS NOT MAINTAINED ANY STOCK REGISTER NO QUANTITATIVE DETAILS OF RAW MATERIALS IS AVAILABLE AND FIGURES OF OPENING AND CLOSING STOCK WERE ADOPTED I N 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. ITA 1690/09 :- 10 - : 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 GET TING 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 WHI CH WILL TAKE FEW DAYS. CONSIDERING THE TIME TAKEN FOR ALL THESE PROCEDURES IT IS IMPOSSIBLE FOR THE ASSESSEE TO CONVERT THE YARN PURCHASED BY I T APRIL/MAY 2004 AND TO EXPORT THEM AS FABRICS AFTER PROCESSING AS PER THE SPECIFICATION OF THE EXPORTER IE. IKEA TRADING INDI A PVT. LTD. NEW DELHI IN APRIL 2004 ITSELF. THERE IS A FINDING IN THE ASSESSMENT ORDER THAT TH E CERTIFICATE OF INSPECTION BY THE HANDLOOM EXPORT PROMOTION COUNCIL REVEAL THAT CERTAIN GOODS WERE INSPECTED ON 31-03-2004 AND 06-06-2004 ITSELF. THI S CONTRADICTS THE CLAIM MADE BY ASSESSEE. THESE FACTS ARE NOT CONTROVERTED BY THE ASSESSEE BE FORE 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 TH AT THOUGH SALE INVOICES WERE RAISED DURING THE YEAR T HE ACTUAL SUPPLY TOOK PLACE ONLY IN THE SUBSEQUENT YEA R. ITA 1690/09 :- 11 - : 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 UPH ELD. 8. WE HAVE ALSO GONE THROUGH THE COPIES OF OTHER RECOR DS AVAILABLE BEFORE US BY BOTH THE PARTIES FOR AND AGAINST THE C LAIM 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 AM OUNT. THE SALE ENTRIES OF ` 2 41 43 400 BASED ON PROFORMA INVOICES PREPARED A ND SENT TO IKEA FOR APPROVAL AND FOR FURTHER DISPATCH WERE MADE BY THE ACCOUNTANT OF THE ASSESSEE. AS THE GOODS FOR THE E NTIRE 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 A PRIL 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 ITA 1690/09 :- 12 - : NOT POSSIBLE TO MAINTAIN STOCK DETAILS AND SO PHYSI CAL VERIFICATION IS DONE ON THE LAST DAY TO ASCERTAIN THE STOCK IN HAND . WE FIND THAT THE ASSESSEES 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 O F 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 CONTROVE RSIAL 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 PRODUC TION AND PURCHASES. THE STATEMENT SHOWING QUANTITATIVE DETA ILS 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 SUBMISSIO N OF THE ASSESSEE WITHOUT GIVING ANY REASONS. HE HAS BASED HIS FINDI NG ON PURCHASE VOUCHERS ONLY. IN OUR OPINION THE INFLOW IS ADEQU ATE TO MEET THE SALES. THE SALES TURNOVER IS INCLUSIVE OF GROSS PR OFIT WHICH FLUCTUATE DURING VARIOUS PERIODS OF THE YEAR AS HAS BEEN EXPL AINED BEFORE US BY THE LD.AR. IT WAS FOUND THAT DURING SOME PERIOD I T MAY BE MORE ON ACCOUNT OF THE LOWER PRICE OF INPUTS AND THE INCRE ASE IN PRICES WOULD ITA 1690/09 :- 13 - : RENDER IT IT WOULD FURTHER GET LOWERED. IN OUR OP INION 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 ASSES SING OFFICER HAS MENTIONED THAT IT TAKES 45 DAYS TO PRODUCE THE FINI SHED PRODUCT. THIS WAS CONTESTED BY THE LD.AR ON THE PREMISE THAT THE ASSESSING OFFICER HAS BASED HIS OPINION ON SIMPLY SURMISES AND CONJEC TURES. ON THE CONTRARY HE SUBMITTED THAT ONLY TWO WEEKS WOULD TA KE TO FINISH THE PRODUCT AND THIS CONTROVERSIAL STAND TAKEN BY THE A SSESSEE HAS TO BE ACCEPTED PARTICULARLY WHEN THE ASSESSING OFFICER HA S NOT SUBSTANTIATED HIS CONCLUSION WITH ANY DOCUMENTARY EVIDENCE. IKEA IS THE ONLY CUSTOMER OF THE ASSESSEE AND THE ASSESSEE HAD ENTER ED INTO A CONTRACT WITH THIS COMPANY IN THE YEAR 2002. THIS COMPANY H AD APPROVED THE SAMPLES WHICH THE ASSESSEE MANUFACTURES AT THE TIME OF CONTRACT ITSELF. IT HAS BEEN CLAIMED BY THE ASSESSEE THAT T HE 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 C ONSIDERED OPINION THE TIME OF 45 DAYS CAPITULATED FOR FINISHED PRODUC TION 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 ITA 1690/09 :- 14 - : AND AGREED STANDARDS. IT WAS EXPLAINED THAT THE AS SESSEE PURCHASES THE GOODS AS PER SPECIFICATIONS FROM VARIOUS CO-OPE RATIVE SOCIETIES AS WELL AS INDIVIDUALS WHO HAVE THEIR OWN STOCK AND KE EP THEM IN PRODUCTION AS PER THE SUPPLY NEEDED BY THE ASSESSEE . IT WAS STATED THAT CERTIFICATION OF HANDLOOM EXPORT PROMOTION COU NCIL (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 O F THE ASSESSING OFFICER THAT WHATEVER FEW ITEMS WERE INSPECTED BY T HE HEPC WERE RELATING TO THOSE ITEMS AND NOT ALL THE ITEMS SUPPL IED TO IKEA. IN RELATION TO CLEARANCE AT THE CUSTOMERS POINT IT W AS 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 ASSE SSEE BECAUSE THERE IS NO CONTRARY EVIDENCE AVAILABLE ON THE RECO RD 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) T O 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 EXPORT ED ONLY AFTER ITA 1690/09 :- 15 - : 1.4.2004 AS THIS FACT IS NOT DISPUTED AND HAS BEEN PROVED BY THE DISPATCH AND SHIPMENT DETAILS FILED BEFORE THE ASSE SSING 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 CONSIDERATIO N. REGARDING THE OTHER OBJECTION OF THE LD.DR THAT EVIDENCE OF LOADI NG OF THE FINISHED GOODS WAS NOT PRODUCED IT WAS FOUND THAT THE EVIDE NCE OF LOADING OF THE FINISHED GOODS WAS FILED BEFORE THE ASSESSING O FFICER AND THAT IS WHY HE DID NOT DISPUTE THE SAME. REGARDING THE INS PECTION 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 I S DATED 31.3.2004 AND THE OTHER IS 6.4.2004. IT WAS VEHEMENTLY ARGUE D 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 C ORRECT GOODS. THE VALUE OF THE ITEMS IN THESE 15 CARTONS WAS STATED T O BE ONLY ` 34 000/-. IT WAS ARGUED THAT THIS STOCK IS COVERED BY THE CLO SING STOCK DECLARED BY THE ASSESSEE. KEEPING THESE UNCONTROVERTED SUBM ISSIONS OF THE LD.AR WE ARE OF THE CONSIDERED OPINION THAT THE HU GE ADDITION MADE TOWARDS CLOSING STOCK IS UNWARRANTED. TO FURTHER JUSTIFY OUR ABOVE ITA 1690/09 :- 16 - : CONCLUSION THE TOTAL VALUE OF ITEMS WHICH WERE DIS PATCHED ON 4.4.2004 IS SHOWN AT ` 24 07 860/- VIDE INVOICE NO.1990 WHICH WAS FILED B EFORE 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 ASSESS EE 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 YEARS OPENING STOCK THE STO CK OF ` 21 67 074/- WOULD BE TAKEN AS THE EXPORTS HAVE BEEN MADE UTILI ZING THIS CLOSING STOCK. AS IS EVIDENT FROM THE QUANTITATIVE DETAILS FILED BEFORE THE LOWER AUTHORITIES AND ALSO BEFORE US THERE ARE SUFFICI ENT PURCHASES AND OWN PRODUCTION WHICH SHALL COVER THE EXPORTS MADE UNDE R THE CERTIFICATE DATED 6.4.2004 ISSUED BY HEPC. UNDER THESE CIRCUMS TANCES 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 YEARS 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 A LLOW 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 FO R DEDUCTION U/S ITA 1690/09 :- 17 - : 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 CAREFU LLY EXAMINED THE RECORD AVAILABLE BEFORE US. THE ISS UE IS THAT THE ASSESSEE BEING A SUPPORTING MANUFACTURER IS NOT E NTITLED TO RECEIVE ANY DUTY DRAWBACK AND ONLY THE EXPORTER IS ENTITLE D TO THE SAME. THE EXPORTER GIVES UP ITS RIGHTS AND GIVES A CERTIFICAT E FORGOING ITS CLAIM AND ASKING THE GOVERNMENT TO PAY THE SAID AMOUNT TO THE SUPPORTING MANUFACTURER. THIS AMOUNT WHEN RECEIVED BY THE ASSE SSEE IS ONLY AN ADDITIONAL SALE CONSIDERATION AND NOT DUTY DRAWBACK /DEPB AS IT COULD NOT IN VERY FIRST INSTANCE HAVE RECEIVED ANY DUTY D RAWBACK/DEPB. A COORDINATE BENCH OF THIS TRIBUNAL HAS CONSIDERED TH IS 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 DA TED 21.04.09 APPLIED THE PRINCIPLE LAID DOWN BY THE SUPREME COUR T 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 ITA 1690/09 :- 18 - : NOT BE REFUSED. THE ASSESSEE WAS A PARTY IN THAT D ECISION IN ITA NOS.1581 TO 1583/MDS/2008. THE FACTS BEING IDENTIC AL RESPECTFULLY FOLLOWING THE PRECEDENT WE DECIDE THIS ISSUE IN FAV OUR OF THE ASSESSEE AND AGAINST THE REVENUE. 13. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE STA NDS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 25.2.2011. SD/- SD/- (ABRAHAM P GEORGE) ACCOUNTANT MEMBER ( HARI OM MARATHA ) JUDICIAL MEMBER DATED: 25 TH FEBRUARY 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR