M S Vrb Foods P Ltd New Delhi v. Dcit New Delhi

Page 1 Income Tax Appellate Tribunal Delhi Bench B New Delhi Before Shri Bhavnesh Saini Judicial Member And Shri Prashant Maharishi Accountant Member Ita No 2291 2292 Del 2015 Assessment Year 2010 11 And 2011 12 M S Vrb Foods P Ltd C O Dhingra Juneja Cas 13 82 Lgf Vikram Vihar Lajpat Nagar Iv New Delhi Pan Aaccv 2718 D Vs Dcit Circle 17 1 New Delhi Appellant Respondent Assessee By Dr Rakesh Gupta Adv Revenue By Shri Subhash Verma Sr Dr Date Of Hearing 10 10 2017 Date Of Pronouncement 2 9 1 2 2017 O R D E R Per Prashant Maharishi A M 1 These Are The Appeals Filed By The Assessee Against The Order Of The Ld Dcit Circle 17 1 New Delhi Dated 03 02 2015 For The Assessment Year 2010 11 And 2011 12 Ita No 2291 Del 2015 Assessment Year 2010 11 2 The Assessee Has Raised The Following Grounds Of Appeal For Assessment Year 2010 11 In Ita No 2291 Del 2015 1 That Having Regard To The Facts And Circumstances Of The Case Ld Cit A Has Erred In Law And On Facts In Confirming The Action Of Ld Ao In Rejecting The Books Of Accounts Of Assessee U S 145 Of Income Tax Act 1961 2 That Having Regard To The Facts And Circumstances Of The Case Ld Cit A Has Erred In Law And On Facts In Confirming The Action Of Ld Ao In Making Addition Of Rs 1 56 06 861 On Account Of Alleged Decline In Gross Profit Net Profit And That Too After Applying The Provisions Of Section 145 Of The Act Without Any Basi S Material Or Evidence And Impugned Addition Has Been Made By Recording Incorrect Facts And Findings And Without Giving Adequate Opportunity Of Hearing And Without Considering The Evidences And Submissions Of The Assessee And Without Following The Princip Les Of Natural Justice 3 That In Any Case And In Any View Of The Matter Action Of Ld Cit A In Confirming The Action Of Ld Ao In Rejecting The Books Of Accounts U S 145 And Making Addition Of Rs 1 56 06 861 On Account Of Alleged Decline In Gross Pr Ofit Net Profit Is Bad In Law And Against The Facts And Circumstances Of The Case M S Vrb Foods P Ltd Vs Dcit Ita No 2291 2292 Del 2015 Assessment Year 2010 11 And 2011 12 Page 2 4 That Having Regard To The Facts And Circumstances Of The Case Ld Cit A Has Erred In Law And On Facts In Confirming The Action Of Ld Ao In Not Allowing The Deduction U S 80 Ic As Claimed By The Appellant And Also In Respect Of Addition Made Without Prejudice 5 Without Prejudice To The Above Ground And Having Regard To The Facts And Circumstances Of The Case Ld Ctt At Has Erred In Law And On Facts In Confirming Th E Action Of The Ld Ao In Not Allowing The Deduction U S 80 Ic On The Amount Of Addition Made In The Impugned Assessment Order 6 That Having Regard To The Facts And Circumstances Of The Case Ld Cit A Has Erred In Law And On Facts In Confirming The Acti On Of Ld Ao In Rejecting The Books Of Accounts U S 145 And Making The Impugned Addition And Framing The Impugned Assessment In Violation Of Principles Of Natural Justice In As Much As Passing The Impugned Order By Recording Incorrect Facts And Findings An D Without Providing Opportunity Of Cross Examination And Without Confronting The Entire Adverse Material Used Against The Assessee And Without Providing Adequate Opportunity Of Hearing 7 That Having Regard To The Facts And Circumstances Of The Case Ld Cit A Has Erred In Law And On Facts In Not Reversing The Action Of Ld Ao In Charging Interest U S 234 A 234 B 234 C And 234 D Of The Income Tax Act 1961 3 The Appellant Assessee Is A Company Engaged In The Business Of Manufacturing And Sale Of Processed Food Products It Filed Is Return Of Income On 29 09 2010 For Rs 35713770 During The Course Of Assessment Proceedings The Ld Assessing Officer On The Basis Of Report Of The Statutory Auditor Noted That Auditor Is Unable To Comment On The Acc Uracy Of The Valuation Of The Inventories Of Finished Goods He Further Noted That Net Profit Ratio For The Year Is 10 72 Compared To 15 19 Hence Issued Show Cause Notice To The Assessee The Assessee Submitted That Company Maintains Excise Records And Note Made By The Ld Statutory Auditor Is Only With Respect To The Valuation Therefore Not Satisfied With The Reply Of The Assessee He Invo K Ed The Provisions Of Section 145 And Estimated The Net Profit 15 19 Of Previous Year And Made An Addition Of Rs 15606861 Consequently Assessment Order U S 143 3 Was Passed On 11 03 2013 At Rs 51320633 The Assessee Challenged The Same Before The Ld Cit A The Ld Cit A Based On His Order In Case Of The Assessee For Assessment Year 2011 12 Confirmed The Add Ition He Also Upheld The Applicability Of Section 145 3 Of The Act He Also Rejected The Certificate Given By The Auditor Of The Assessee Dated 06 01 2014 Assessee Being Aggrieved Has Preferred Appeal Before Us 4 The Ld Ar Submitted That As Per Ground N O 2 And 3 The Additions Are Challenged The Ground No 4 Is With Respect To The Deduction U S 80 Ic On The Addition Sustained By The Cit A Therefore His Argument Was That If Ground No 2 And 3 Assessee Succeeds The Ground No 4 Becomes Redundant And If Assessee Fails On Those Grounds Then Ground No 4 Is Covered In Favour Of The Assessee By The Circular Of Cbdt With Respect To Ground No 2 And 3 He M S Vrb Foods P Ltd Vs Dcit Ita No 2291 2292 Del 2015 Assessment Year 2010 11 And 2011 12 Page 3 Submitted That The Assessee Is Engaged In The Business Of Manufacturing Of The Foods Products And Valuatio N Has Been Done Of The Finished Products On The Basis Of Unit Costing Of Each Of The Product He Referred To Page No 95 To Show That In Valuation Of The Finished Goods The Quantum Of Raw Material Packing Over Heads Are Considered And Even Then There Is No Difference In Finished Goods Valuation He Further Referred To His Submission Dated 15 07 2014 Placed At Page No 103 To 125 Of The Paper Book To Support His Contention He Further Stated That Complete Valuation Details Are Available With The Assessing Officer He Also Referred To The Tax Audit Report To Show That Complete Quantitative Details Are Maintained By The Assessee And The Auditor Has Certified That Inventories Are Valued At Lower Of Cost Or Net Realizable Value Whichever Is Less And Includes A Ll The Cost Incurred To Bring Them To Their Present Location With Respect To The Manufactured Goods He Submitted That They Are Valued On The Retail Method Wherein From The Selling Price Gross Margin Is Reduced So That Valuation Of The Inventory Is Determ Ined He Further Referred To The Audit Report And Referred To The Audit Note And Submitted That Looking To The Nature Of The Business Of The Assessee It Is Not Possible To Maintain Product Wise Costing And Certain Overheads Are Required To Be Absorbed And Therefore Assessee Is Using The Retail Method He Submitted That The Above Method Is Permitted By The Accounting Standard 2 On Valuation Of Inventory He Further Submitted That Valuation Of Semi Finished Stock Is Also Made On The Basis Of Technical Evalua Tion He Submitted That This Method Is Adopted By The Assessee For Last Several Years And Also In Subsequent Years And Accepted By The Revenue He Further Referred To The Provisions Of Section 145 3 Of The Act To State That There Is No Error In The Accoun Ts Of The Assessee To Render It In Correctness And Its In Completeness He Further Submitted That This Method Of Valuation Is Regularly Followed By The Assessee And Further It Complied With The Accounting Standard In View Of This He Submitted That Provisio N Of Section 145 3 Of The Act Does Not Apply He Further Stated That Even Otherwise The Valuation Of Finished Goods Becomes The Opening Stock Of The Next Year And The Opening Stock Of The Year Is Also Required To Be Adjusted Hence It Become Tax Neutral He Submitted That The Ld Cit A Has Brushed Aside All These Arguments Of The Assessee He Submitted That The Issue Involved In The Appeal Is With Respect To The Addition To The Gross Profit Based On The Earlier Years Financial Results He Stated That Addition To The Gross Profit Cannot Be Made If The Ao Is Of The View That Valuation Of Sto Ck Is Not Proper Anyway He Submitted That Addition On Account Of Gross Profit Cannot Be Made When Complete Quantitative Details Subject To Verification By Excise Authorities And Where There Is No Defects In The Books Of Account M S Vrb Foods P Ltd Vs Dcit Ita No 2291 2292 Del 2015 Assessment Year 2010 11 And 2011 12 Page 4 5 The Ld Departmental Repre Sentative Vehemently Referred To The Orders Of The Lower Authorities And Supported Them 6 We Have Carefully Considered The Rival Contentions And Also Perused The Orders Of The Lower Authorities The Issue Involved In This Appeal Is Whether On The Basis Of Qualification By The Auditor Addition With Respect To The Gross Profit Can Be Made Or Not It Is Necessary To Go Through The Auditors Report Issued U S 227 4 A Of The Companies Act As Required Under Companies Auditors Report Order 2003 To Ascertain The Correctness Of Accounts Is Required To Be Examined Which Is As Under As Explained In Note 2 H Of The Schedule 15 Of The Financial Statements The Company Adopts The Retail Method For Determining The Value Of Its Manufactured Finished Goods Whereby The Cost Of The Inventory Is Determined By Reducing From The Sale Value Of The Inventory A Percentage Of Gross Margin Considered Appropriate By The Management As Per Accounting Standard 2 Valuation Of Inventory Retail Method Can Be Used As A Valuation T Echnique Only When It Approximates The Actual Cost Of Production For The Goods Manufactures By The Company However In Absence Of Adequate Product Wise Cost Records Having Been Made Available To Us We Are Unable To Comment On The Appropriateness Of The U Sage Of The Retail Method For Valuation Of Manufactured Finished Goods By The Company As A Result We Are Unable To Comment O The Accuracy Of Valuation Of Inventories Of Manufactured Finished Gods As At Year End And At The End Of The Previous Year Increa Se Decrease In Stock And Its Resultant Impact On The Profit For The Year Reserves And Surplus And The Related Disclosures Forming Part Of The Financial Statement Further The Company Has Not Made Available Detailed Records Regarding Consumption Of Ra W Material And Packing Materials Used In The Manufacture Of Finished Goods We Were Also Not Made Available The Computation Of Consumption Which Could Have Been Arrived On The Basis Of Bill Of Materials Of The Finished Goods Produced During The Year In A Bsence Of The Above Mentioned Details Records We Are Unable To Comment On The Accuracy Of The Amount Of Consumption Of Raw Material And Packing Materials As Reported As Its Resultant Impact On The Profits For The Year Vii The Company Is Valuing Its Inventory Of Semi Finished Goods On The Basis Of Technical Evaluation Of Their Costs However We Have Not Been Made Available The Computation Of The Value Of Such Semi Finished Goods In The Absence Of Such Computation We Are Unable To Comment On The Appr Opriateness Of The Valuation Method Followed Compliance With As 2 Valuation Of Inventory And Accuracy Of Value Of These Semi Finished Goods Work In Progress The Impact Of Which Is Not Quantifiable And 7 On Perusal Of The Auditors Report It Is Apparent That The Companys Inventory Are Valued At Lower Of Cost Or Net Reliable Value And Includes All Cost Incurred In Bringing The Goods To Their Present Location And Conditions There Is No Dispute About The Valuation Of Raw Material And Packin G Material The Issue Is With Respect To The Valuation Of Manufactured Goods Which Are Valued On The Basis Of Retail Method Wherein The Assessee Reduced The Gross Margin From The Selling Price Of The Goods To Derive At The Cost Of Goods Produced The Audi Tor Has Stated That M S Vrb Foods P Ltd Vs Dcit Ita No 2291 2292 Del 2015 Assessment Year 2010 11 And 2011 12 Page 5 Such Method Can Be Used When The Actual Cost Of Production Is Approximate As The Assessee Is In The Business Of Manufacturing And Selling Of Processed Foods Like Sauces Mayonnaise Spreads Di Ps Mustards Milk Shake Mixes Egg Less C Ake Mixes Peanut Butter And Culinary Powders Therefore It Is Apparent That In The Nature Of The Business Activities Carried On By The Assessee It Is Not Possible To Keep The Production Cost Of Each And Every Finished Products Therefore In Such Type O F Industry Certain Cost Are Used On Approximate Basis And They Are Then Spread Over The Goods Produced The Another Method Which Is Called The Retail Method Based On Which From The Selling Price Of The Goods The Gross Margin Of The Product Is Reduced Which Is Obviously The Actual Cost Of The Goods Produced By The Assessee In Case If There Is A Net Loss Then Such Finished Goods Are Valued At Selling Price As The Cost Price Is Higher Than The Sale Price The Auditor Has Also Stated That Such Method Can Be Us Ed As A Valuation Technique When The Actual Cost Of The Product Is Not Feasible To Be Ascertained According To The Para No 21 Of The Accounting Standard Where The Techniques For Measurement Of Cost Is Mentioned That Technique For The Measurement Of Cost Of The Inventories Such As The Standard Cost Method Or Retail Method May Be Used For Convenience If The Results Approximates The Cost In Para No 22 It Is Stated That Retail Method Is Often Used In Retail Industry Where Large Numbers Of Rapidly Changing Items With Similar Margins For Which It Is Im Practicable To Use Other Costing Methods In Such Circumstances The Cost Of The Inventory Is Determined By Reducing The Sales Value Of The Invent Ory By The Appropriate Percentage Of The Gross Margin An Average Percentage For Each Retail Department Is Often Used Therefore Looking At The Accounting Standard For Inventory Valuation We Do Not Find Any Infirmity In The Method Of Techniques Of Measure Ment Of Cost As Well As Cost Formula Used By The Assessee The Assessee In Fact Has Followed The Accounting Standard Only In View Of This We Find That Provision Of Section 145 3 Of The Act Are Incorrectly Invoked By The Ld Assessing Officer And Confirme D By The Ld Cit A Because The Valuation Method Is Correct And Therefore It Does Not Impact The Correctness Or Completeness Of The Account Of The Assessee In Fact It Makes The Accounts Of The Assessee Complete And Correct Furthermore The Ld Assessing O Fficer Has Applied The Past Year S Gross Profit Ratio In That Year Also The Valuation Of The Inventory Was On Similar Basis Therefore If Opinion Of The Ao Is Accepted Then It Cannot Be Said That Accounts Of Previous Year Were Correct And Complete The Met Hod Of Valuation Of Inventory Followed By The Assessee Is Year To Year Same Furthermore The Assessee Has Maintained Complete Quantitative Details Also No Defects Have Been Pointed Out By The Ao In The Books Of Account Other Than What Is Stated By The Au Ditor To Invoke Provisions Of Section 145 3 Of The Act It Is Necessary That Account S Of The Assessee Suffers M S Vrb Foods P Ltd Vs Dcit Ita No 2291 2292 Del 2015 Assessment Year 2010 11 And 2011 12 Page 6 From Latent Patent And Glaring Errors In The Present Case We Do Not Find Any Such Finding By The Ld Ao Further The Assessee Has Given Detail Ed Reason For The Down Fall In The Gross Profit Also Further The Details Of Valuation Of Closing Stock Of The Manufactured Goods As Per Retail Method Were Also Filed Before The Lower Authorities And No Infirmity Was Found In The Same In View Of This We Do Not Find Any Reason To Sustain The Orders Passed By The Lower Authorities With Respect To The Invocation Of Provisions Of Section 145 3 Of The Act And Consequently Making The Addition Of Rs 15606861 To The Total Income Of Assessee In The Result Ground No 1 To 3 Of The Appeal Are Allowed 8 Ground No 4 To 7 Of The Appeal Are Either General Or Consequential In Nature And Therefore They Are Dismissed 9 In The Result Ita No 2291 Del 2015 For Assessment Year 2010 11 Is Partly Allowed Ita No 2292 Del 2015 Assessment Year 2011 12 10 Now We Come To Ita No 2292 Del 2015 For The Assessment Year 2011 12 Wherein Following Grounds Of Appeal For Assessment Year 2011 12 1 That Having Regard To The Facts And Circumstances Of The Case Ld Cit A Has Erred In Law And On Facts In Confirming The Action Of Ld Ao In Rejecting The Books Of Accounts Of Assessee U S 145 Of Income Tax Act 1961 2 That Having Regard To The Facts And Circumstances Of The Case Ld Cit A Has Erred In Law And On Facts In Conf Irming The Action Of Ld Ao In Making Addition Of Rs 2 02 27 358 On Account Of Alleged Decline In Gross Profit Net Profit And That Too After Applying The Provisions Of Section 145 Of The Act Without Any Basis Material Or Evidence And Impugned Addition H As Been Made By Recording Incorrect Facts And Findings And Without Giving Adequate Opportunity Of Hearing And Without Considering The Evidences And Submissions Of The Assessee And Without Following The Principles Of Natural Justice 3 That In Any Case An D In Any View Of The Matter Action Of Ld Cit A In Confirming The Action Of Ld Ao In Rejecting The Books Of Accounts U S 145 And Making Addition Of Rs 2 02 27 358 On Account Of Alleged Decline In Gross Profit Net Profit Is Bad In Law And Against The F Acts And Circumstances Of The Case 4 That Having Regard To The Facts And Circumstances Of The Case Ld Cit A Has Erred In Law And On Facts In Confirming The Action Of Ld Ao In Not Allowing The Deduction U S 80 Ic As Claimed By The Appellant And Also I N Respect Of Addition Made Without Prejudice 5 Without Prejudice To The Above Ground And Having Regard To The Facts And Circumstances Of The Case Ld Cit A Has Erred In Law And On Facts In Not Allowing The Deduction U S 80 Ic On The Amount Of Additio N Made In The Impugned Assessment Order 6 That Having Regard To The Facts And Circumstances Of The Case Ld Cit A Has Erred In Law And On Facts In Confirming The Action Of Ld Ao In Rejecting The Books Of Accounts U S 145 And Making The Impugned Addit Ion And Framing The Impugned Assessment In Violation Of Principles Of Natural Justice In As Much As Passing The Impugned Order By Recording Incorrect Facts And Findings And Without Providing M S Vrb Foods P Ltd Vs Dcit Ita No 2291 2292 Del 2015 Assessment Year 2010 11 And 2011 12 Page 7 Opportunity Of Cross Examination And Without Confronting The Enti Re Adverse Material Used Against The Assessee And Without Providing Adequate Opportunity Of Hearing 7 That Having Regard To The Facts And Circumstances Of The Case Ld Cit A Has Erred In Law And On Facts In Not Reversing The Action Of Ld Ao In Chargi Ng Interest U S 234 A 234 B 234 C And 234 D Of The Income Tax Act 1961 11 Parties Submitted Before Us That Issue In This Appeal Is Identical To The Issues In Appeal Of The Assessee For Assessment Year 2010 11 Their Arguments And Pleadings Also Remains The Same And Facts Are Also Same Except Change In The Amount Of Addition 12 We Have Carefully Considered The Arguments Of The Parties And We Are Also Of The View That Facts Are Similar To The Appeal Of The Assessee In Assessment Year 2010 11 While Deciding The Appeal For Assessment Year 2010 11 We Have Already Held That There Is N O Infirmity In The Method Of Valuation Of Finished Goods In Case Of The Assessee And Hence Deleted The Addition Made For That Year Therefore For The Same Reasons We Also Reverse The Finding Of The Lower Authorities And Directs The Ld Assessing Officer T O Delete The Addition Of Rs 20227358 In The Result Ground Nos 1 To 3 Of The Appeal Is Allowed 13 Ground No 4 To 7 Are General Or Consequential In Nature And Therefore They Are Dismissed 14 In The Result The Appeal Of The Assessee For Ay 2011 12 Is P Artly Allowed Order Pronounced In The Open Court On 2 9 1 2 2017 S D S D Bhavnesh Saini Prashant Maharishi Judicial Member Accountant Member Dated 2 9 1 2 2017 A K Keot Copy Forwarded To 1 Applicant 2 Respondent 3 Cit 4 Cit A 5 Dr Itat Assistant Registrar Itat New Delhi