Krishna Art Silk Cloth Pvt.Ltd.,, Surat v. The Dy.CIT.,Circle-1,, Surat

ITA 4121/AHD/2007 | 2004-2005
Pronouncement Date: 21-01-2011 | Result: Allowed

Appeal Details

RSA Number 412120514 RSA 2007
Assessee PAN APRIL2004T
Bench Ahmedabad
Appeal Number ITA 4121/AHD/2007
Duration Of Justice 3 year(s) 2 month(s) 7 day(s)
Appellant Krishna Art Silk Cloth Pvt.Ltd.,, Surat
Respondent The Dy.CIT.,Circle-1,, Surat
Appeal Type Income Tax Appeal
Pronouncement Date 21-01-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted C
Tribunal Order Date 21-01-2011
Date Of Final Hearing 12-01-2011
Next Hearing Date 12-01-2011
Assessment Year 2004-2005
Appeal Filed On 13-11-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE SHRI N.S.SAINI ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH JUDICIAL MEMBER ITA NO.4121/AHD/2007 ASSESSMENT YEAR:2004-05 DATE OF HEARING:12.1.11 DRAFTED:18.1.11 KRISHNA ART SILK CLOTH PVT. LTD. 261-A GIDC PANDESARA SURAT PAN NO.AABCK1458N V/S . DY. COMMISSIONER OF INCOME-TAX CIRCLE-1 SURAT (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI HARDIK VORA AR RESPONDENT BY:- SHRI ROBIN RAWAL DR O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THIS APPEAL BY THE ASSESSEE IS ARISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-I SURAT IN APPEAL NO. CAS- I/337/06-07 DATED 01-10- 2007. THE ASSESSMENT WAS FRAMED BY DCIT CIRCLE-1 S URAT U/S143(3) OF THE INCOME TAX ACT 1961 (HEREINAFTER REFERRED TO AS T HE ACT) VIDE HIS ORDER DATED 28-12-2006 FOR ASSESSMENT YEAR 2004-05. 2. THE FIRST ISSUE IN THIS APPEAL OF ASSESSEE IS AG AINST THE ORDER OF CIT(A) IN CONFIRMING THE ACTION OF ASSESSING OFFICER IN RE JECTING BOOK RESULTS AND THEREBY MAKING ADDITION OF WORK-IN-PROGRESS TO CLOS ING STOCK. FOR THIS ASSESSEE HAS RAISED FOLLOWING GROUND NO.2 & 3 - 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS LAW ON THE SUBJECT THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ITA NO.4121/AHD/2007 A.Y 2004-05 KRISHNA ART SILK CLOTH PVT. LTD. V. DCIT CIR-1 SRT PAGE 2 ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFF ICER IN MAKING ADDITION OF RS.5 08 644/- ON ACCOUNT OF CLOSING ST OCK. 3. WITHOUT PREJUDICE ON THE FACTS AND IN CIRCUMSTA NCES OF THE CASE AS WELL AS LAW ON THE SUBJECT THE LEARNED COMMISSIONE R OF INCOME-TAX (APPEALS) HAS ERRED IN NOT GIVING THE DIRECTION TO ALLOW DEDUCTION OF VALUATION OF WORK IN PROGRESS AS OPENING STOCK IN T HE NEXT YEAR. 3. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF JOB WORK OF ART SILK CLO TH AND TRADING OF PRINTED SAREES. DURING THE YEAR UNDER CONSIDERATION ASSESS EE HAS SHOWN TURNOVER OF RS.8 16 61 705/- AND GROSS PROFIT AT RS.1 16 32 905 /- @ 14.20% AND FILED RETURN OF INCOME SHOWING TOTAL INCOME AT RS.11 33 7 90/- ALONG WITH AUDIT REPORT IN FORM NO.3CB AND 3CD U/S 44AB OF THE ACT O N 12-10-2004.THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT P ROCEEDINGS NOTED THAT THE ASSESSEE HAS NOT DISCLOSED IN THE CLOSING STOCK WOR K-IN-PROGRESS OF COLOUR AND CHEMICALS AND ALSO CLOTH. ACCORDING TO AO THERE IS A CYCLE OF FIVE DAY FOR CLOTH LYING IN MACHINE AND ACCORDINGLY HE WORKED OU T TAKING INTO CONSIDERATION 26 DAYS AS WORKING DAYS PER MONTH AND TOTAL WORKING DAYS IN A YEAR I.E. 312. THE AVERAGE PROCESS OF CLOTH AT 56 5 60 MT. LYING PER DAY AND ACCORDINGLY APPLYING FIVE DAY CYCLE THE TOTAL CLOT H LYING ON MACHINE WOULD BE 2 82 580 MT. AFTER APPLYING AVERAGE EXPENDITURE OF 3.60 PER MT. AS PROCESS CHARGE HE ADOPTED 50% OF PROCESS CHARGES AS COST OF WORK-IN-PROGRESS ON AVERAGE AND THEREFORE VALUED THE WORK-IN-PROGRESS A T RS.5 08 644/- AND MADE ADDITION TO THE TOTAL INCOME OF THE ASSESSEE. AGGRI EVED ASSESSEE PREFERRED APPEAL BEFORE CIT(A). THE CIT(A) ALSO CONFIRMED THE ACTION OF ASSESSING OFFICER BY GIVING FOLLOWING FINDINGS IN PARA-2.3 OF HIS APPELLATE ORDER:- 2.3. I HAVE CONSIDERED THE SUBMISSION MADE BY THE APPELLANT AND OBSERVATION OF THE AO. THE WORK IN PROGRESS HAS TO BE SHOWN WITHOUT WHICH CORRECT PROFITS CANNOT BE OBTAINED. THE HONB LE SUPREME COURT IN THE CASE OF BRITISH PAINTS INDIA LTD. [188 ITR 44] HAS STATED THAT THE VALUATION OF CLOSING STOCK IS VERY IMPORTANT AND UN LESS THE SAME IS VALUED PROPERLY THE CORRECT PROFITS CANNOT BE SHOWN . THEREFORE THE AO HAS RIGHTLY ADDED THE VALUE OF CLOSING STOCK OF WOR K IN PROGRESS. AS ITA NO.4121/AHD/2007 A.Y 2004-05 KRISHNA ART SILK CLOTH PVT. LTD. V. DCIT CIR-1 SRT PAGE 3 REGARDS THE WORKING IS CONCERNED DURING THE APPELL ATE PROCEEDINGS THE APPELLANT HAS STATED THAT AS PER THE FIGURES OF RG- 1 REGISTER FOR THE FIRST FIVE DAYS OF APRIL 2004 THE PRODUCTION IS 2 02 978 METRES. THE AO IS DIRECTED TO VERIFY THIS FIGURE FROM THE RG-1 REGIST ER AND THEN IF THIS FIGURE IS CORRECT AT THE RATE OF RS.5 08 644/-. IF THE FIG URE IS NOT VERIFIABLE FROM RG-1 REGISTER THEN THE FIGURE ADOPTED BY THE AO IS SUSTAINED. THIS GROUND OF APPEAL IS THEREFORE PARTLY ALLOWED AS DIS CUSSED ABOVE. 4. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. BEFORE US ASSESSEE CONTE NDED THAT IT HAS CONSISTENTLY ADOPTED THE POLICY FOR VALUING THE CLO SING STOCK WHICH ARE LYING UNUSED. ACCORDING TO ASSESSEE THE CLOSING STOCK WI LL BECOME OPENING IN THE NEXT YEAR AND IT HAD MAINTAINED ALL THE REGISTERS R EQUIRED UNDER EXCISE RULES AND AS PER RG-1 REGISTER THE TOTAL PRODUCTION UP T O 5 TH APRIL 2004 IS ONLY 2 02 978 MT. FOR THIS ASSESSEE RELIED ON THE DECIS ION OF THIS TRIBUNAL IN ITA NO 3635-3636/AHD/2008 IN THE CASE OF BAJAJ FASHIONS PVT. LTD. V. DCIT CIRCLE-1 SURAT FOR ASSESSMENT YEARS 2004-05 AND 2005-06 DATED 24- 07-2009 WHEREIN THE TRIBUNAL HAS ALLOWED THE CLAIM OF ASSES SEE VIDE PARA-10 & 11 AS UNDER:- 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. IN THE INSTANT CASE THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DY EING & PRINTING OF CLOTH ON JOB-WORK BASIS. FOR THE ABOVE JOB-WORK FA BRIC IS SUPPLIED BY THE PARTIES. THE UNDISPUTED FACTS ARE THAT THE ASSE SSEE WHILE FOLLOWING ITS CONSISTENT METHOD OF VALUATION OF CLOSING STOCK OF RAW-MATERIAL DOES NOT INCLUDE THE VALUE OF CHEMICALS CONSUMED IN RESP ECT OF THE FABRIC LYING ON THE MACHINE. THE ASSESSING OFFICER FINDING THE ABOVE ESTIMATED THE VALUE OF CHEMICALS AND COLOURS USED B Y THE ASSESSEE IN RESPECT OF FABRIC LYING ON THE MACHINE AS AT THE EN D OF THE YEAR AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. CONSE QUENTLY RS.5 38 976/- WAS ADDED TO THE INCOME OF THE ASSESS EE IN ASSESSMENT YEAR 2004-05 AND RS.6 29 355/- WAS ADDED TO THE INC OME OF THE ASSESSEE IN ASSESSMENT YEAR 2005-06. ON APPEAL THE LD. CIT(APPEALS) CONFORMED THE ADDITION OF RS.5 38 976/ - FOR ASSESSMENT YEAR 2004-05 AND ALSO CONFIRMED ADDITION OF RS.6 29 355/- ASSESSMENT YEAR 2005-06 BUT DIRECTED THE ASSESSING OFFICER TO ALLOW DEDUCTION OF RS.5 38 976/- AS OPENING WORK-IN-PROGRESS. THE MAIN CONTENTION RAISED BY THE ASSESSEE BEFORE US IS THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET VALUE WHICHEVER IS LESS. HE EXPLAINE D THAT THE COLOURS ITA NO.4121/AHD/2007 A.Y 2004-05 KRISHNA ART SILK CLOTH PVT. LTD. V. DCIT CIR-1 SRT PAGE 4 AND CHEMICALS IN RESPECT OF FABRIC ON MACHINE ARE A LREADY CONSUMED AND THE SAME IS NOT IN STOCK WITH HIM. THE FABRIC L YING ON MACHINE BELONGS TO OTHER PARTIES AND THE ASSESSEE IS NOT TH E OWNER OF THE SAME. FURTHER THE ASSESSEE HAS GOT ON RIGHT TO RECEIVE A NY JOB CHARGES IN RESPECT OF FABRIC LYING ON MACHINE AS THE JOB IS NO T COMPLETED AND TILL THE COMPLETION OF THE JOB NO RIGHT TO RECEIVE ANY AMOU NT ACCRUED TO THE ASSESSEE. FURTHER THE CHEMICALS AND COLOURS WHICH ARE ALREADY CONSUMED CANNOT HAVE ANY SEPARATE MARKET VALUE. IF THE ASSESSEE DOES NOT DO FURTHER PROCESSING IN THE NEXT YEAR TH E ASSESSEE WILL NOT RECEIVE EVEN A SINGLE RUPEE IN RESPECT OF FABRIC LY ING ON MACHINE WHICH BELONGS TO OTHERS. FOR THE ABOVE REASON THE ASSESS EE SUBMITTED THAT IT CONSISTENTLY DOES NOT INCLUDE ANY VALUE OF CHEMICAL S AND COLOURS WHICH ARE ALREADY CONSUMED IN RESPECT OF FABRIC LYING ON THE MACHINE AND THIS CONSISTENTLY FOLLOWED SYSTEM WAS ALWAYS ACCEPTED BY THE DEPARTMENT IN PAST IN HIS CASE. THEREFORE THERE WAS NO JUSTIFICA TION FOR MAKING AN ABRUPT CHANGE IN THE YEARS UNDER APPEAL ON ESTIMATE BASIS WITHOUT ACTUALLY POINTING OUT THAT SUCH COLOURS AND CHEMICA L HAD ANY MARKET VALUE AT THE END OF THE RELEVANT PREVIOUS YEAR. THE ASSESSEE ALTERNATIVELY ALSO SUBMITTED THAT INCOME OF THE ONE YEAR CANNOT BE ASSESSED IN THE OTHER YEA AND IF THE ASSESSING OFFI CER ASSUMED MARKET VALUE IN RESPECT OF CHEMICALS AND COLOURS CONSUMED ON FABRICS LYING ON MACHINES AT THE CLOSE OF THE YEARS THEN FOR THE SA ME REASON HE ALSO OUGHT TO HAVE TAKEN OPENING VALUE OF SIMILAR STOCK LYING ON A MACHINE AT THE BEGINNING OF THE YEAR. THE ASSESSEE PLACED RELI ANCE ON THE DECISION OF THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. EMA INDIA LTD. (2008) 296 ITR 510 (ALL.). WE FIND THAT THE REVENU E COULD NOT DISPUTE THE FACT THAT THE FABRICS WHICH WERE LYING ON MACHINE AT THE END OF THE RELEVANT PREVIOUS YEAR BELONGS TO OTHER PART IES. THE CHEMICALS AND COLOURS WHICH WERE USED IN RESPECT OF SUCH FABR IC WERE ALREADY CONSUMED AND COULD NOT BE SOLD OR MARKETED SEPARATE LY. THUS IT IS OBSERVED THAT THE REVENUE HAS NOT BEEN ABLE TO BRIN G ANY MATERIAL BEFORE US TO SHOW THAT SUCH CONSUMED CHEMICALS AND COLOURS HAD ANY MARKET VALUE AS AT THE END OF THE YEAR. FURTHER IT IS ALSO NOT IN DOUBT THAT NO RIGHT TO RECEIVE ANY PART OF JOB CHARGES AC CRUED TO THE ASSESSEE AT THE END OF THE RELEVANT YEAR. FURTHER IT IS OBS ERVED THAT THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. EMA INDIA LTD. (SUPRA) OBSERVED AS UNDER:- 7. WE DO NOT FIND ANY ERROR IN THE ORDER OF THE TR IBUNAL. IT IS SETTLED PRINCIPLE OF LAW THAT THE STOCK CAN BE VALU ED AT THE COST OR AT MARKET RATE. ADMITTEDLY THE ASSESSEE HAD BEEN MA NUFACTURING THE GOODS WHICH WERE TAILOR-MADE FOR SPECIFIC REQU IREMENTS OF ITS CUSTOMERS AND UNLESS THE WHOLE OF THE MACHINERY IS COMPLETE WORK-IN-PROGRESS BY ITSELF HAS NO OTHER UTILITY. AS SESSEE HAS VALUED THE WORK-IN-PROGRESS ON THE BASIS OF RAW MAT ERIAL CONSUMED AT COST PRICE. THIS METHOD HAS BEEN ADOPTE D SINCE LAST ITA NO.4121/AHD/2007 A.Y 2004-05 KRISHNA ART SILK CLOTH PVT. LTD. V. DCIT CIR-1 SRT PAGE 5 SEVEN YEARS AND ALSO IN SUBSEQUENT YEARS. NO OBJECT ION HAS BEEN RAISED BY THE REVENUE IN THE PREVIOUS YEAR FOR SUCH VALUATION. IT WAS FOUND THAT ASSESSEE-COMPANY WAS A PROGRESSIVE C OMPANY AND SHOWN OUT PROFITS ON PROGRESSIVE SCALE FROM YEA R TO YEAR AND CANNOT ESCAPE FROM THE CLUTCHES OF THE REVENUE. THE CLOSING STOCK OF THIS YEAR IS THE OPENING STOCK OF SUBSEQUE NT YEAR AND HENCE A CONSISTENT METHOD ADOPTED FOR VALUATION BY THE ASSESSEE SHOULD NOT BE DISTURBED. THEREFORE THE SA ME METHOD ADOPTED DIN THE YEAR UNDER CONSIDERATION FOR VALUIN G THE STOCK AS HAS BEEN ADOPTED IN THE PREVIOUS YEARS CANNOT BE S AID TO BE UNJUSTIFIED. 11. IN VIEW OF THE ABOVE DECISION IN OUR CONSIDERE D OPINION ON THE FACTS AND CIRCUMSTANCES MENTIONED ABOVE WE DO NO FIND AN Y ERROR IN THE CONSISTENTLY FOLLOWED SYSTEM OF VALUATION OF STOCK BY THE ASSESSEE. AS THE SAID SYSTEM WAS ACCEPTED BY THE DEPARTMENTAL AL SO IN PAST IN THE CASE OF THE ASSESSEE WE DO NOT FIND ANY GOOD REASO N FOR DEPARTURE FROM THE SAID ACCEPTED METHOD. THE CLOSING STOCK OF ONE YEAR IS THE OPENING STOCK OF THE NEXT YEAR AND HENCE A CONSIS TENT METHOD ADOPTED FOR VALUATION BY THE ASSESSEE SHOULD NOT BE DISTURBED WITHOUT GOOD REASONS. WE THEREFORE SET ASIDE THE ORDERS O F THE LOWER AUTHORITIES AND DELETE THE ADDITION(S) OF RS.5 38 9 76/- IN ASSESSMENT YEAR 2004-05 AND RS.90 379/- IN THE ASSESSMENT YEAR 2005-06. THUS THE GROUNDS OF APPEAL OF THE ASSESSEE ARE ALLOWED. ON THE OTHER HAND LD. DR SHRI ROBIN RAWAL RELIED ON THE ORDERS OF AUTHORITIES BELOW. 5. WE FIND THAT ASSESSEE HAS CONSISTENTLY ADOPTED T HE POLICY TO VALUE STOCK OF ONLY THOSE ITEMS WHICH ARE LYING COMPLETEL Y UNUSED. THIS METHOD OF VALUATION IS CONSISTENTLY FOLLOWED SINCE VARIOUS YE ARS AND THE SAME HAS BEEN ACCEPTED BY REVENUE. THE ASSESSEE-COMPANY HAS SHOWN INVENTORY OF RS.49 61 553/- AS ON 31-03-2004 WHICH COMPRISES OF COLOUR AND CHEMICALS OF RS.45 03 876/- COAL & LIGNITE OF RS.3 31 497/- DIE SEL AT RS.50 900/- AND DESIGN & PHOTOGRAPHY OF RS.75 280/-. IT WAS EXPLAIN ED IN THE CURSE OF ASSESSMENT PROCEEDINGS THAT ASSESSEE HAS NOT SHOWN CLOSING STOCK OF WORK- IN-PROGRESS AS THERE IS NO CLOSING STOCK OF WORK-IN -PROGRESS AND THERE WAS NO PRACTICE TO SHOW IT. THE ASSESSEE IS DOING JOB WORK OF DYEING & PRINTING OF GREY CLOTH AND IN THIS JOB WORK ACTIVITY THERE IS NO PR ACTICE TO SHOW WORK-IN- ITA NO.4121/AHD/2007 A.Y 2004-05 KRISHNA ART SILK CLOTH PVT. LTD. V. DCIT CIR-1 SRT PAGE 6 PROGRESS IS GENERALLY FOLLOWED IN INDUSTRY WHERE MA NUFACTURING AND SALE OF CLOTH IS INVOLVED AS COST OF CLOTH IS SIGNIFICANT C OMPARED TO OTHER ITEMS OF EXPENSES WHEREAS IN JOB WORK ACTIVITY AS GRAY CLO TH IS RECEIVED FROM VARIOUS PARTIES FOR PROCESSING PURPOSE THERE IS NO QUESTIO N OF SHOWING ANY WORK-IN- PROGRESS AS IT IS NOT PRACTICABLE TO SHOW WORK-IN-P ROGRESS STOCK IN RESPECT OF EXPENSES ON ACCOUNT OF COLOUR CHEMICALS LABOUR CH ARGES ETC. INCURRED ON PROCESSING OF CLOTH WHICH IS BELONGING TO THIRD PAR TY. AS PER THE ACCOUNTING PRINCIPLE VALUATION OF WORK-IN-PROGRESS COMPRISES OF RAW MATERIALS AND OTHER PRODUCTION OVERHEADS. THUS QUESTION OF VALUATION O F WORK-IN-PROGRESS ARISES IN INDUSTRIES WHERE RAW MATERIAL IS CONVERTED INTO FINISHED PRODUCT WHEREAS IN CASE OF JOB WORKER THERE IS NO CASE OF ANY CONVERS ION OF RAW MATERIAL INTO FINISHED PRODUCT AND THEREFORE ONCE EXPENDITURE ARE INCURRED ON PROCESSING OF CLOTH IT IS NOT PRACTICABLE TO SHOW WORK-IN-PROGRE SS IN RESPECT OF EXPENSES INCURRED ON CLOTH. THE MANUFACTURING OF WHICH IS NO T COMPLETE AS AT THE END OF THE YEAR. THUS CLOSING STOCK IS SHOWN IN RESPECT O F THOSE ITEMS OF COLOUR CHEMICALS AND OTHER MATERIALS WHICH ARE NOT USED IN MANUFACTURING PROCESS. THE ASSESSEE IS CARRYING OUT THE WORK AS PER THE DI RECTIONS OF PRINCIPLE AND HAS TO MAKE USE OF COLOUR CHEMICALS LABOUR ETC. TH US ONCE THE MATERIALS ARE UTILIZED IN CARING OUT THE JOB WORK ACTIVITY THE S AME HAS TO BE RECOGNIZED AS EXPENSE AS PER THE CONSERVATIVE PRINCIPLE OF ACCOUN TING. NOW SINCE VARIOUS PROCESSES ARE INVOLVED IN THE JOB WORK ACTIVITY OF ASSESSEE THE GOODS ARE DISPATCHED TO THE PRINCIPLE WHEN ALL THE PROCESSES ARE OVER AND THEREFORE AS ON 31STD DAY OF MARCH IT IS NOT POSSIBLE TO DISPAT CH ALL THE GOODS AND DELIVERY OF THE SAME COULD BE MADE ONLY IN SUBSEQUENT YEAR. AS REGARDS TO CALCULATION OF AVERAGE DAILY PRODUCTION WE ARE OF THE VIEW THA T LOWER AUTHORITIES ERRED IN COMPUTING AVERAGE DAILY PRODUCTION ON THE BASIS OF TOTAL PRODUCTION FOR ENTIRE YEAR AND CALCULATION CANNOT BE MADE ON YEARLY BASI S SINCE ASSESSEE IS A JOB WORKER AND THE QUANTITY OF JOB WORK PRODUCTION VARI ES ON MONTH-TO-MONTH BASIS DEPENDING UPON THE QUANTITY SUPPLIED BY VARIO US PARTIES. WE FIND FROM RECORDS THAT THE ASSESSEE HAS MAINTAINED ALL THE RE GISTERS REQUIRED TO BE MAINTAINED UNDER THE EXCISE RULES AND ON PERUSAL OF RG-1 REGISTER WHICH IS ITA NO.4121/AHD/2007 A.Y 2004-05 KRISHNA ART SILK CLOTH PVT. LTD. V. DCIT CIR-1 SRT PAGE 7 DAILY PRODUCTION REGISTER FOR THE MONTH OF APRIL04 . IN VIEW OF THE FACTS AND CIRCUMSTANCES MENTIONED ABOVE WE DO NO FIND ANY ER ROR IN THE CONSISTENTLY FOLLOWED SYSTEM OF VALUATION OF STOCK BY THE ASSESS EE. AS THE SAID SYSTEM WAS ACCEPTED BY THE DEPARTMENTAL ALSO IN PAST IN TH E CASE OF THE ASSESSEE WE DO NOT FIND ANY GOOD REASON FOR DEPARTURE FROM T HE SAID ACCEPTED METHOD. THE CLOSING STOCK OF ONE YEAR IS THE OPENING STOCK OF THE NEXT YEAR AND HENCE A CONSISTENT METHOD ADOPTED FOR VALUATION BY THE ASSESSEE SHOULD NOT BE DISTURBED WITHOUT GOOD REASONS. THIS GROUND OF A PPEAL OF THE ASSESSEE IS ALLOWED. 6. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IS AGA INST THE ORDER OF CIT(A) IN CONFIRMING THE ACTION OF ASSESSING OFFICER ENHA NCING NET PROFIT BY 1% OF TURNOVER. FOR THIS ASSESSEE HAS RAISED THE FOLLOWI NG GROUND NO.1 & 4:- 1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AS WELL AS LAW ON THE SUBJECT THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFF ICER IN REJECTING THE BOOK RESULTS OF ASSESSEE U/S.145(3) OF THE ACT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AS WELL AS LAW ON THE SUBJECT THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFF ICER IN MAKING ADDITION OF RS.8 16 617/- BY ENHANCING NET PROFIT B Y 1% OF TURNOVER. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT ASSESSING O FFICER DURING THE ASSESSMENT PROCEEDINGS REJECTED THE BOOKS OF ACCOUN T AND MADE ADDITION BY ENHANCING THE PROFIT AT 1% OF THE TOTAL TURNOVER. T HE AO REJECTED THE BOOK RESULTS ONLY ON ACCOUNT OF VARIATION IN VARIOUS EXP ENSES. AS PER THE TABLE GIVEN IN PARA-5.2 OF ASSESSMENT ORDER ACCORDING TO AO COLOUR AND CH EMICAL EXPENDITURE VARIED FROM AS LOW AS RS.1.32 PER MT. T O HIGH OF RS.2.99 PER MT. HE ALSO COMPARED WAGES WHICH VARIED FROM AS LOW AS RS.0.12 PER MT. TO AS HIGH AS RS.0.72 PER MT. ACCORDINGLY AO REJECTED BO OK RESULTS AND INCREASED THE PROFIT BY 1% AS GROSS PROFIT OF THE ASSESSEE W AS LOWER AT 14.2% IN THE ITA NO.4121/AHD/2007 A.Y 2004-05 KRISHNA ART SILK CLOTH PVT. LTD. V. DCIT CIR-1 SRT PAGE 8 PRESENT YEAR AS COMPARED TO LAST YEAR GROSS PROFIT OF 16.5%. AGGRIEVED AGAINST THE REJECTION OF BOOK RESULTS AND APPLICATI ON OF 1% PROFIT ASSESSEE PREFERRED APPEAL BEFORE CIT(A). THE CIT(A) ALSO CON FIRMED THE ACTION OF ASSESSING OFFICER BY GIVING FOLLOWING FINDINGS IN PARA-3.5 & 3.6 OF HIS APPELLATE ORDER:- 3.5 I HAVE CONSIDERED THE SUBMISSION MADE BY THE A PPELLANT AND OBSERVATION OF THE AO. ADMITTEDLY THE APPELLANT HA S NOT MAINTAINED STOCK REGISTER DAY TO DAY COLOUR AND CHEMICAL CONS UMPTION. THE APPELLANT HAS NOT BEEN ABLE TO EXPLAIN THE WIDE VAR IATION OF CONSUMPTION FIGURES OF VARIOUS RAW MATERIAL SHOWN I N THE TABLE IN PARA A5.2. IT IS SEEN THAT THE CONSUMPTION OF COLOUR AND CHEMICAL HAS VARIED FROM AS LOW AS RS.1.32 PER MONTH IN FEBRUARY 2004 T O AS HIGH AS RS.2.99 IN APRIL 2003. THE WAGES HAVE ALSO VARIED F ROM AS LOW AS RS.0.12 PER MONTH IN FEBRUARY 2004 AND JANUARY 2004 TO AS HIGH AS RS.0.72 AND APRIL 2003. SIMILARLY THE OTHER EXPENS ES HAVE VARIED SUBSTANTIALLY. NO EXPLANATION HAS BEEN GIVEN BY THE AO. IN VIEW OF THE DECISION OF SUPREME COURT IN THE CASE OF KACHWALA G EMS VS. JCIT [288 ITR 10] THE BOOKS OF ACCOUNTS HAVE BEEN RIGHTLY REJECTED BY THE AO. IN THIS CASE THE HONBLE SUPREME COURT HAS STAT ED AS UNDER:- IT IS WELL SETTLED THAT IN A BEST JUDGEMENT THERE IS A CERTAIN DEGREE OF GUESS WORK. NO DOUBT THE AUTHORITIES SHOULD TRY TO MAKE AN HONEST AND FAIR ESTIMATE OF THE INCOME EVEN IN A BE ST JUDGEMENT ASSESSMENT AND SHOULD NOT ACT TOTALLY ARBITRARILY BUT THERE IS NECESSARILY SOME AMOUNT OF GUESS WORK INVOLVED IN A BEST JUDGEMENT ASSESSMENT. THE AO RESORTED TO BEST JUDGEMENT OF THE ASSESSEE ON THE FOLLOWING GROUNDS:- I) THE ASSESSEE HAD NOT MAINTAINED QUANTITATIVE DET AILS/STOCK REGISTER; II) THERE WAS NO EVIDENCE TO VERIFY CLOSING STOCK; III) THE GENUINENESS OF PURCHASES WAS NOT PROVED WITHOUT ANY DOUBT. .THERE WAS NO ARBITRARINESS IN THIS CASE IN RESORT ING TO BEST JUDGEMENT ASSESSMENT. IT WAS THE ASSESSEE HIMSELF W HO WAS TO BLAME AS HE DID NOT SUBMIT PROPER ACCOUNTS. 3.6 SINCE THE ASSESSEE HAS NOT PREPARED STOCK REGIS TER AND DAY TO DAY CONSUMPTION REGISTER AND SINCE GP RATE IS LOW THE B OOKS OF ACCOUNT HAS BEEN RIGHTLY REJECTED. THE GP RATE IS LOW BY 2.3% T HAN THE LAST YEAR. HENCE ADDITION OF 1% OF THE TURNOVER IS REASONABLE. THEREFORE THESE GROUNDS OF APPEAL ARE DISMISSED. ITA NO.4121/AHD/2007 A.Y 2004-05 KRISHNA ART SILK CLOTH PVT. LTD. V. DCIT CIR-1 SRT PAGE 9 8. THE ASSESSEE BEFORE US CONTENDED THAT IT HAS MAI NTAINED STOCK REGISTER BOOKS OF ACCOUNT BILLS AND VOUCHERS DAY-TO-DAY CO NSUMPTION AND ALSO PRODUCED THE SAME. ACCORDING TO HIM AO HAS NOT MEN TIONED THAT WHICH REGISTER IS NOT MAINTAINED. NO DOUBT THE ASSESSEE HAS NOT MAINTAINED DAY-TO- DAY CONSUMPTION RECORD AND ONLY DUE TO THAT REASON COMPARISON OF WAGE SALARY AND CONSUMPTION IS NOT POSSIBLE. ACCORDING T O ASSESSEE THE ACCOUNTS CANNOT BE REJECTED AS IT IS PRACTICALLY NOT POSSIBL E TO MAINTAIN THE SAME AND AO FAILED TO CITE ANY SINGLE CASE WHERE SUCH REGIST ERS ARE MAINTAINED. IT WAS CLAIMED THAT HE CANNOT ASK ASSESSEE TO DO SOMETHING WHICH IS IMPOSSIBLE AND THEREFORE BOOK RESULTS CANNOT BE REJECTED ON SAID G ROUND THAT THE SAME WAS ON ACCOUNT OF RISE IN THE COST OF COLOUR AND CHEMIC AL EXPENSES. AS STATED ABOVE AS COMPLETE DETAILS RELATING TO COLOUR AND C HEMICAL EXPENSES WERE GIVEN AND ASSESSEE ALSO PRODUCED BILLS IN SUPPORT O F EXPENSES AND ALSO GAVE DETAILS OF PARTIES FROM WHERE PURCHASES WERE MADE. DESPITE STIFF COMPETITION IN MARKET ASSESSEE MANAGED TO INCREASE NOT ONLY TH E PRODUCTION BUT ALSO THE ABSOLUTE FIGURE OF NET PROFIT FOR THE YEAR UNDER CO NSIDERATION WHICH INCREASED SUBSTANTIALLY TO RS.80.389 LAKH FROM RS.46.19 LAKH IN LAST YEAR. NOW WHEN THERE IS SUCH AN INCREASE IN THE AMOUNT OF PROFIT THERE IS NO QUESTION OF DRAWING ANY ADVERSE INFERENCE ON THE GROUND THAT TH ERE IS REDUCTION IN GROSS PROFIT RATE AND THIS IS MORE SO WHEN AO IS UNABLE T O POINT OUT ANY SPECIFIC DEFECTS IN THE BOOKS OF ACCOUNT. THE AO ALSO FAILED TO BRING ANY EVIDENCE ON RECORD TO REBUT THE SUBMISSIONS OF ASSESSEE THAT RE DUCTION IN GROSS PROFIT RATE IS ON ACCOUNT OF RISE IN COST OF COLOUR AND CHEMICA L EXPENSES. THE ASSESSEE PRODUCED ALL THE BOOKS OF ACCOUNT TOGETHER WITH REL EVANT BILLS AND VOUCHERS BESIDES ASSESSEE FILED EXHAUSTIVE DETAILS RELATING TO VARIOUS ITEMS OF INCOME EXPENSES ASSETS AND LIABILITIES IN THE COURSE OF A SSESSMENT PROCEEDINGS IN COMPLIANCE TO ISSUE OF NOTICE U/S 142(1) OF THE ACT . THE BOOKS OF ACCOUNT ARE ALSO AUDITED AND AO FAILED TO POINT OUT ANY SIGNIFI CANT DEFECT IN THE BOOKS OF ACCOUNT AND OTHER DOCUMENTS PRODUCED BEFORE HIM. TH E BOOK RESULTS CANNOT BE REJECTED AND HENCE NO ESTIMATION CAN BE MADE. LD . COUNSEL FOR THE ITA NO.4121/AHD/2007 A.Y 2004-05 KRISHNA ART SILK CLOTH PVT. LTD. V. DCIT CIR-1 SRT PAGE 10 ASSESSEE RELIED ON THE TRIBUNALS ORDER IN ASSESSEE S OWN CASE IN ITA NO.1264/AHD/2010 DATED 21-08-2009 FOR ASSESSMENT YEAR 2007-08 WHER EIN THE TRIBUNAL HAS HELD IN PARA-7 AS UNDER:- 7. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT IS PERT INENT TO NOTE THAT THE ASSESSEE IS ENGAGED ID THE DYEING AND PRINTING OF G REY CLOTH ON JOB WORK BASIS. IT IS THE OBSERVATION OF THE AUTHORITIE S BELOW THAT THE ASSESSEE HAS NO QUANTITATIVE RECORDS IN RESPECT OF DAY TO DAY CONSUMPTION OF COLOUR AND CHEMICALS AND OTHER INPUT S WHICH ARE THE MAJOR RAW MATERIALS FOR THE ASSESSEE. TO THIS THE A SSESSEES EXPLANATION IS THAT KEEPING QUANTITATIVE RECORDS OF COLOUR AND CHEMICALS IS VERY DIFFICULT TO KEEP AS THE ITEMS ARE IN LIQUI D FORM AND THEREFORE THE STOCK OF COLOURS AND CHEMICALS IS PHYSICALLY TAKEN ON 31 ST MARCH BY THE MANAGEMENT AND THE SAME IS VALUED AT COST. THERE IS NO DISPUTE OF THE FACT THAT THE ASSESSEE HAS MAINTAINED THE DETAILS O F PURCHASES OF COLOURS AND CHEMICALS AND STEAM COAL. NO DEFECT COU LD BE POINTED OUT BY THE REVENUE IN THE SAID DETAILS. WHEN THE ASSESS EE HAS MAINTAINED THE DETAILS OF PURCHASES AND ALSO THE PHYSICAL STOC K AS ON 31ST MARCH VALUED AT COST FROM WHICH NO DEFECT WAS FOUND BY T HE REVENUE IN OUR CONSIDERED VIEW NON-MAINTENANCE OF DAY TO DAY CONS UMPTION RECORD OF THE INPUTS CANNOT BE A GROUND FOR REJECTION OF BOOK S OF ACCOUNTS. THE DECISIONS RELIED ON BY THE LEARNED CIT(A) IN SUPPOR T OF HIS ORDER CONFIRMING REJECTION OF BOOKS OF ACCOUNTS ARE ON DI STINGUISHED FACTS. IN THE CASE OF KACHWALA GEMS V. JCIT (288 ITR 10) THE ASSESSEE HAD NOT MAINTAINED QUANTITATIVE DETAILS/STOCK; REGISTER ; THERE WAS NO EVIDENCE TO VERIFY CLOSING STOCK THE GENUINENESS O F PURCHASES WAS NOT PROVED WITHOUT ANY DOUBT. BUT IN THE PRESENT CASE A T HAND THERE IS NO DISPUTE ABOUT THE PURCHASES OF COLOURS CHEMICALS STEAM COALS. ETC. NO DEFECT HAS BEEN POINTED OUT BY THE AUTHORITIES BELO W IN SUCH DETAILS OF PURCHASES. THE ASSESSEE HAS MAINTAINED CLOSING STOC K BY TAKING PHYSICAL STOCK AT THE END OF THE YEAR. IN THE CASE OF ABDUL RAUHMAN & BROTHERS V. CIT (210 ITR 406) AND IN THE CASE OF HARI SHANKAR GOPAL HARI V CIT (97 ITR 716) RELIED ON BY THE LEARNED CIT(A) IT H AS BEEN OBSERVED THAT WHETHER THE PRESENCE OR THE ABSENCE O F A STOCK REGISTER IS MATERIAL OR NOT WOULD DEPEND UPON THE TYPE OF TH E BUSINESS. IN THE INSTANT CASE THE ASSESSEE IS ENGAGED IN THE DYEING AND PRINTING OF GREY CLOTH ON JOB WORK BASIS. THE USE OF COLOUR AND CHEM ICALS DEPENDS UPON THE DESIGNS OF COLOUR TO BE PRINTED. IN CASE OF DAR K COLOURS THE USE OF COLOUR AND CHEMICALS IS HIGHER AND THEREFORE THE R ATIO OF CONSUMPTION OF COLOUR AND CHEMICALS CANNOT BE MAINTAINED IN PRO PORTION OF THE TURNOVER OF PROCESSED METERS OF CLOTH. CONSIDERING THE NATURE OF BUSINESS THERE IS NO DENIAL OF THE FACT THAT IN SU CH TYPE OF BUSINESS IT IS VERY DIFFICULT TO MAINTAIN DAY TODAY CONSUMPTION OF COLOUR CHEMICALS AND STEAM COAL ETC. TRUE IT IS THAT DURING THIS YEAR TH E ASSESSEE HAS SHOWN GP OF 5.66% IN ASSESSMENT YEAR 2002-03 AND 5.35% IN THE ASSESSMENT YEAR 2003-04 AND THUS THERE IS FALL IN T HE GP IN TERMS OF ITA NO.4121/AHD/2007 A.Y 2004-05 KRISHNA ART SILK CLOTH PVT. LTD. V. DCIT CIR-1 SRT PAGE 11 PERCENTAGE BY 0.86% IN COMPARISON TO LAST YEAR. MER E LOW GP ALONE CANNOT BE A GROUND FOR REJECTION OF BOOKS OF ACCOUN TS. THEREFORE CONSIDERING THE FACT AND CIRCUMSTANCES OF THE CASE IN ENTIRETY THE REJECTION OF BOOKS OF ACCOUNTS AND MAKING ADDITION BY WAY OF ESTIMATION OF GP IN OUR CONSIDERED VIEW IS NOT PROPER. THE A DDITION OF RS.2 27 389 MADE ON THIS COUNT IS DELETED. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES THE T RIBUNALS DECISION IN ASSESSEES OWN CASE AS DISCUSSED ABOVE WHICH IS EX ACTLY ON IDENTICAL FACTS RESPECTFULLY FOLLOWING THE SAME WE ALLOW THE CLAIM OF THE ASSESSEE AND ADDITION ON ACCOUNT OF ESTIMATION OF NET PROFIT IS DELETED. 9. IN THE RESULT ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 21/01/2011 SD/- SD/- (N.S.SAINI) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD DATED : 21/01/2011 *DKP COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)-I SURAT 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD