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Dy. Commissioner of Income Tax 7 (2) Versus M/s. Rolson Industries (I) Ltd.

2016 (2) TMI 394 - ITAT MUMBAI

Valuation of closing stock on the basis of average rate of the purchase for the entire year - CIT(A) calculated the value of closing stock on the basis of FIFO Method (First In First Out) - Held that:- CIT(A) considered the value on material of last 3 months and accordingly assessed the value of closing stock. The assessee company is engaged in the business of manufacturing and export of textile and fabrics. No doubt the assessee company has to purchase raw materials for the manufacturing of exp .....

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T(A) is quite justifiable specifically in the circumstances when there is lot of fluctuating in the rates during the year. It is only a manner how to deal with the value of closing stock in the assessment. The learned Departmental Representative nowhere highlighted any ground which requires to be interfere with the findings of the learned CIT(A) under appeal. Therefore, finding no plausible and convincing reasons to interfere with the order passed by learned CIT(A). We are of the view that learn .....

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y. On seeing the book result and closing stock assessed, the Assessing Officer arrived at this conclusion that the book result is not correct therefore estimated Gross Profit rate should be @ 20% by considering rate of similar industry “The Ruby Mills Ltd.’ wherein Gross Profit has been shown @ 33% for A.Y. 2007-08 on turnover of ₹ 108,68,01,077/-. Accordingly, the Assessing Officer assessed the value of cloths. When the matter came before the First Appellate Authority then the First Appel .....

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timation of Gross Profit @ 20% was quite justifiable. No example of comparable industry of any kind was given before us to justify the estimated Gross Profit @ 20% per meter on finished cloths. Therefore in the said circumstances finding no material on record to interfere with the finding of the learned CIT(A). Hence issue in favour of the assessee and against the revenue. - I.T.A. No.4659/M/13 - Dated:- 23-12-2015 - SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER AND AMARJIT SINGH, JUDICIAL MEMBER For t .....

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turn was processed u/s.143(1) of the Income Tax Act, 1961( in short the Act ). Subsequently notice u/s. 142(1) of the Act dated 06.05.2009 was issued along with questionnaire and thereafter the return of income of assessee was processed and the Assessing Officer assessed the valuation of closing stock of ₹ 90,60,853/- on Yarn, Grey and Finished Cloth. The Assessing Officer also estimated Gross Profit @ 20% on sales per meter of Finished Cloths. Since the Assessing Officer has wrongly calcu .....

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e not liable to describe and discussed. i) The Learned CIT (A) has erred on facts and in law in deleting the addition of ₹ 90,60,853/- on account of valuation of closing stock, without properly appreciating the factual and legal matrix as clearly brought out by the Assessing Officer. ii) The Learned CIT(A) has erred on facts and in law in deleting the addition of ₹ 90,60,853/- on account of valuation of closing stock, without appreciating the fact that the valuation of stock shown by .....

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erred in deleting the addition of ₹ 90,60,853/- on account of valuation of closing stock. So far as the closing stock of the assessee is concerned, the same is not disputed but it is require to seen that in which manner the Assessing Officer assessed the value of closing stock to the tune of ₹ 90,60,853/-. The finding of the Assessing Officer in this regard is hereby reproduced as under:- The net profit is only 26,83,054/ -, it includes profit of commission received of 2.13 lakhs, ex .....

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d the cost of production. The production of grey per kgs of yarn is also low. The under valuation comes to about ₹ 90 lakhs. Further the GP is worked out per meter average purchase/sale rate of cloth is much higher than GP disclosed. This leads to two presumptions. (a) Either the stock is grossly undervalued to reduce profits. (b) Or the production and sales quantities are suppressed leading to higher cost of production/purchase per meter of cloth. In either case the book results are not c .....

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2 121174321 121.36705 SHORTAGE 1.68% 1 How justified? Give industry comparison from published data 2 It gives production of only 2.25 mts of grey per kgs of yarn (5399530/2401076) 3 How justified? Give industry comparison from published data 4 It gives yarn cost of ₹ 51.3 per mts of grey (115.38./2.25) Tax Audit report mentions kgs should be metres Mts AMOUNT AVG Grey OS 105284 5843262 55.5 PURCHASES 30902 1665340 53.89101 PRODUCTION 5398530 CONSUMPTION 442462 SALES 192880 10140313 52,57,3 .....

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00 CONSUMPTION SALES 4206085 287749158 68.412587 CLOSING STOCK 102504 5306398 51.767716 SHORTAGE 0.46% 10 How justified? Give industry comparison from published data. The CS rate is just equal to yam cost and less than grey purchase cost Mts produced Charges debited Avg Processing charge 4328400 54724388 12.643099 Undervaluation (53.89+12.64-51.76)* 102504 = 1513984 GP 5.93% As per Tax Audit report 11 If GP is calculated per mts by comparing sale rate and closing stock we get the following pictu .....

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aire. Therefore, it is presumed that the assessee has no explanation to offer in respect of above discrepancies. The assessee has not given any justification or industry norms regarding shortage claimed though specifically asked for, assessee has shown production of 2.25 mtrs. Of grey per kg. of yam which is very low and no industry compression given by the assessee. The assessee has admitted mistake in the closing stock quantity of grey and has stated that it is typing mistake. The assessee has .....

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own by 33% for A. Y. 07-08 on turnover of 108,68,01,077/-. In view of the above. GP is estimated @ 20%. Net profit is computed as under: GP Estimated @20% 96335656 Less: Expenses Administrative expenses 10402345 Int. & financial Charges 12830095 Selling & Promotion expenses 1940119 25172559 Profit before Depreciation 71163097 Less: Depreciation 707895 Net profit 70455202 The addition on account of under valuation of closing stock of ₹ 90,60,853/- (4839840.8 + 2707029.6 + 1513984) i .....

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have carefully considered the facts of the case. The appellant was engaged in the business of manufacturing of textile fabrics. For this purpose the yarn was purchased, the yarn was changed and thereafter, the grey cloth was manufactured. There was no standardized thickness. The same was dependent on the order received. Manufacturing of grey cloth of different thickness required consumption of different yarn kg. per meter. Thereafter, the grey cloth was subject to the dyeing and processing. Ulti .....

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al purchases of yarn during the year which' was divided by purchase amount giving average rate of ₹ 115.38. However, the appellant was following FIFO method of accounting. In this method only the last purchases remained in stock were required to be considered. The appellant has given working of purchases of last three months which had claimed to have been remained in the closing stock. On the basis of this last three months purchases figures, the average rate works out to ₹ 95.95 .....

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it has been explained that this figure was incorrect and the correct figure of average rate of purchase that remain in closing stock was ₹ 95.95 on the basis of last 3 months purchases. Thus this mistake was consequential effect of adopting incorrect figures at first stage itself. In the above working the A.O. adopted average rate of ₹ 53.89 of purchases of grey on the basis of total meters of grey purchased during the year divided by amount of purchase. On the basis of this average .....

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and other manufacturing cost have also been included. The appellant's cost of manufactured grey cloth was less than the cost of which the finished grey cloth was purchased from the market. The A.O. has adopted average rate of ₹ 53.09 per meter of grey whereas the appellant's cost of manufacturing of grey was only at the average rate of ₹ 48.03. This difference has resulted in incorrect valuation of closing stock of grey cloth of the appellant by the A.O. In the above working .....

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anufacturing cost was ₹ 48.03 per meter and sales rate was ₹ 52.57 per meter which was higher than manufacturing cost. Thus there was no discrepancy on this issue as noted by A. O. In case of finished products the A. O. had given finding that why the closing stock rate at ₹ 51.78 per meter was equal to yarn cost and less than grey purchased cost. The appellant has explained that the yarn and grey purchases were consumed in manufacturing of finished product and cost of finished .....

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made by A.O. It is worth to mention here that the A.O. has worked out average rate by considering the figures of entire year whereas the same were required to be considering of the last 3 months only being FIFO method adopted by appellant. The rates of different goods were fluctuating from day to day and hour to hour and therefore a uniform average rate was not possible to be adopted. Further, at some places the A.O. has not considered the weaving and processing charges in working out the closi .....

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entirety of facts and circumstances, the working made by A. O. could not have conclusively proved any under statement of yarn, grey and finished products of the appellant. Apart from the using various figures for reaching to a conclusion, the A.O. has not noticed any defect in appellant's books of account. Therefore, there was no base with the AO for rejecting appellant's books of accounts. It is' also worth noting that appellant's manufacturing activity/process was subjected to .....

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d in addition of gross profit. On the basis of discrepancies in average rate of yarn, gray and finished cloth, the AO has justified his action of rejecting books of account and estimating the G.P. rate of appellant .. However, as explained above, the conclusions reached by AO were on incorrect figures and assumptions. The addition made in. closing stock is therefore, deleted. The estimation of G.P. rate has been discussed in subsequent ground of appeal. In the result, this ground of appeal is al .....

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textile and fabrics. No doubt the assessee company has to purchase raw materials for the manufacturing of export fabrics. He has to purchase raw material initially from the beginning time of assessment year and up to the end of the assessment year. The assessment of the value of closing stock on the basis of average cost of material of the whole year does not seem justifiable. The value of the closing stock is required to be assessed upon the value of the material purchased and cost of the last .....

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ble and convincing reasons to interfere with the order passed by learned CIT(A). We are of the view that learned CIT(A) has passed the order on the specific issue judiciously and correctly which does not need to interfere at this stage accordingly this issue is decide in favour of the assessee and against the revenue. ISSUE NO. 3:- 6. According to this issue the Revenue has took the plea that the learned CIT(A) has erred in deleting the addition made by estimating the Gross Profit @ 20% on sales .....

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