TMI Blog2011 (10) TMI 523X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee is a private limited company and 100 percent exporter of sandstone. The assessee maintains regular books of account including cash book, bank book, ledgers, journals, sales register, purchase register, stock register and miscellaneous books which are duly supported by bills and vouchers. The accounts of the assessee are audited as per section 44AB of the Act. The return declaring income of Rs. 46,55,550 was filed on November 15, 2007. Details required by the Assessing Officer during the assessment proceedings were filed. During the assessment proceedings, the Assessing Officer noticed that closing stock has been valued using average FIFO method. However, during the recording of statement by the Assessing Officer, the director of the company Shri B. L. Gupta stated that stock was valued by using average cost method. From this, the Assessing Officer inferred that it is clear that assessee has not followed the widely accepted FIFO method. In this back ground the Assessing Officer adopted the average cost of all purchases during the year and added the average cost of direct expenses to arrive at "true average cost at Rs. 269.92 and used this to arrive at the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting Standard 2). For instance, item 5 of AS2 (revised 1999) stipulates, "Inventories should be valued at the lower of cost and net realisable value" and the net realisable value has been defined at item 3:"Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated cost necessary to make the sale". Further, the AS2 prescribes that cost of inventories should include cost of purchases and cost of conversion and other costs "incurred in bringing the inventory to their present location and condition". In this view of things, in my opinion there is merit in claim of the assessee that direct selling costs should not have been included for the purposes of "true average cost". The Assessing Officer also failed to give reasons for ignoring observations in the tax audit report to the effect that there was no change in the method of accounting applied in the earlier years and that in this year too the closing stock valued at "cost or market value whichever is lower", as certified by the management (Item 12(a) of Form 3CD). The Assessing Officer also failed to elaborate reasons for not following the method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in case of the appellant. In given facts and circumstances, the addition of Rs. 50,64,037 is not confirmed. Ground 2 of the appeal is accepted." The learned Departmental representative placed reliance on the order of the Assessing Officer. On the other hand, learned counsel for the assessee placed reliance on the order of the learned Commissioner of Income-tax (Appeals). After considering the submissions and perusing the material on record, we find no infirmity in the finding of the learned Commissioner of Incometax (Appeals). The Assessing Officer has disturbed the valuation of closing stock without assigning any cogent reason. The assessee has maintained complete books of account. All the purchases have been entered in the purchase register and sales have also been entered in the sales register. At the end of the year on physical verification, the valuation of closing stock has been made on the basis of the method adopted in the past which has been accepted by the Department itself. Therefore, in our considered view, there was no reasoning to disturb the valuation of closing stock by the Assessing Officer. Neither the Assessing Officer has given effect to the method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. British Paints India Ltd. [1991] 188 ITR 44 (SC). Through letter dated February 4, 2010, the appellant claimed that higher breakage in this year was due to several reasons consisting of need to maintain high quality in export, being first year of in-house manufacturing/processing, a large portion of work was got done manually because all machines were not put to use and breakage was high due to lack of experience at processing and use of rough stone purchased from unregistered dealers. The appellant also objected to conclusion of the Assessing Officer that goods exported this year were of inferior quality and breakage claim should have been lower. It was explained that average sale price was lower because the appellant had operated at lower margin due to severe competition in the export market." Thereafter, the learned Commissioner of Income-tax (Appeals) deleted the addition by observing as under : "It is seen that the decision of the Assessing Officer is based on stock phases such as breakage was 'much more than normally expected breakage trade'. He did not explain 'how much more ?' and with reference to what ? His use of the expression 'export trade' indicates tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payment of Rs. 6,31,036 by invoking section 40(a)(ia) of the Income-tax Act, 1961. It was submitted before the learned Commissioner of Income-tax (Appeals) that the case of the assessee is that it did not have a contract with any of the five truck owners, a condition necessary for invoking section 194C of the Income-tax Act, 1961. The assessee asserted that the fact that there was no long-term contract is evident from the fact that payment to the same truck were different trips spread over time were made at different rates It was explained that as a routine, the available truck was utilised for transporting the goods. it was only coincidences that in the same year some trucks were used more than once, resulting in total payments exceeding Rs. 50,000 to truck in one year. To begin with, there is no evidence that the assessee had entered into a contract with any of the five truck owners to carry its goods throughout the year. Further, there is merit in contention of the assessee that use of available truck was dictated by commercial expediency. The advisory of the Assessing Officer that "a professionally managed company should make such big payments only to such persons for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edict or quantify these items in advance. Notwithstanding, the Assessing Officer went on to hold, as if there was a contract between the assessee-company and the agent to get the works done on behalf of the assessee-company. In the process of arriving to this decision he ignored the fact that Rs. 3,90,092 related to certain purchases and were a part of respective purchase bill issued by the firm, owned by a director of the company, and Rs. 1,16,903 consisted of crane charges, not incurred through the clearing agent." Thereafter the learned Commissioner of Income-tax (Appeals) by observing as under deleted the disallowance made by the Assessing Officer : "To sum up, in my view, the Assessing Officer has failed to appreciate, the difference in two types of payments made to the clearing agents, one for the services rendered to the appellant, and second in the nature of reimbursement of sundry expenses incurred on behalf of the appellant. There is no basis for his assumption that reimbursement of sundry expenses was done, 'as if there was a contract between the assessee-company and the agent to get the works done' on its behalf. The law, in my view, does not recognise, 'as if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company on which no TDS was required in terms of approval from the Assistant Commissioner of Income-tax, TDS-3(2), Mumbai. It was also mentioned that this fact was brought to the notice of the Assessing Officer as well. The assessee also stated that the balance of Rs. 13,04,132 was paid to the agents of non-resident shipping companies and evidence was submitted before the Assessing Officer to the effect that these were not agents of the assessee as they had collected their commission from the respective nonresident shipping company. Thereafter, the learned Commissioner of Income-tax (Appeals) after considering the order of the Assessing Officer and contention of the assessee observed and held as under : "A perusal of the assessment order shows that the Assessing Officer had indeed ignored the fact that payment of Rs. 4,04,041 pertained to SCI, on which no TDS was required. The certificates from four shipping agents, copies of which were also made available to the Assessing Officer in the course of assessment proceedings, show that in such certificates Sai Shipping Services, Chinubhai Kalidass Bros. and other, had categorically stated that they acted as agents or respecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Assessing Officer restricted the claim of depreciation to Rs. 3,78,878 and disallowed Rs. 1,56,202 because he noticed that "both directors and auditors are in agreement regarding nil use of assets acquired during the year and therefore, there could be no claim for depreciation on such assets". Before the learned Commissioner of Income-tax (Appeals) it was submitted that in course of appeal proceedings, by letter dated February 4, 2010, it was submitted, "in the computation of total income . . . depreciation on plant and machinery acquired during the year in the amount of Rs. 21,92,055 and on electric installation of Rs. 7,97,031 has not been charged" and explained "depreciation of Rs. 5,35,081 on 15 percent block has been charged only on opening balance of Rs. 25,25,854 and additions up to October 3, 2006 of Rs. 9,22,081 and after October 3, 2006, in the amount of Rs. 2,38,540. The Assessing Officer apparently misread Schedule 11 of the audit report (notes on accounts), for as claimed by both directors and the auditor no depreciation was claimed on assets purchased during the year but not put to use. After considering the submissions, the learned Commissioner of Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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