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2016 (4) TMI 994 - ITAT AHMEDABAD

2016 (4) TMI 994 - ITAT AHMEDABAD - TMI - Disallowance of manufacturing loss - Held that:- The facts of the case discussed in the decision of co-ordinate bench in the case of Shukra Jewellery Ltd. vs. ACIT (2009 (4) TMI 949 - ITAT MUMBAI) are also similar to the facts of the case we are dealing in. We, therefore, respectfully following the decision of the co-ordinate bench referred above and also on the basis of our discussion made above, including wastage norms set by the Handbook of Procedures .....

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assessee - Held that:- Looking to the fact that assessee has been maintaining method of accounting consistently and no change has been made in the opening stock by the Assessing Officer, weighted average cost has been calculated as per accounting standard issued by ICAI and even if the comparative working of valuation of stock on FIFO basis and weighted cost on average basis as given by the Assessing Officer during assessment proceedings then also the result will be in negative and nothing can .....

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erefore, in our view this addition for suppression of closing stock is uncalled for and needs to be deleted. - Decided in favour of assessee

Disallowance on account of office expenses - Held that:- CIT(A) has rightly deleted the addition because such kind of ad hoc disallowance are normally uncalled for in the case of assessees who are regularly maintaining books of account which are audited u/s 44AB of the Act and all the documents relating to expenses incurred are verified by the au .....

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- Dated:- 18-3-2016 - Shri Rajpal Yadav, JM, & Shri Manish Borad, AM. For The Appellant : Shri S. N. Soparkar, AR For The Respondent : Smt. Sonia Kumar, Sr.DR ORDER PER Manish Borad, Accountant Member. These cross appeals for Asst. Year 2007-08 and Asst. Year 2009-10 are directed against the orders of CIT(A), Valsad dated 30/- 03/2011 for Asst. Year 2007-08 and dated 25.9.2012 for asst. year 2009-10 passed against orders u/s 143(3) of the IT Act, 1961 (in short the Act) dated 30th December .....

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arned A.O. erred in adding ₹ 45,08,042/- by disallowing genuine manufacturing loss claimed in the process of manufacturing of high class diamond studded gold jewellery by overlooking the wastage norms stipulated for Gems and Jewellery Industry as per Foreign Trade Policy 2004-2009, cited before him & also overlooking the typical nature of the Appellant' s business and thereby adopting arbitrary percentage of 0.5 to 1 % without citing any comparable instance and without rejecting bo .....

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08 was filed on 29.10.2007 declaring total income at ₹ 11,01,717/- accompanied by Tax Audit Report u/s 44AB of the Act. The case was selected for scrutiny assessment and notice u/s 143(2) of the Act was issued on 8.9.2008 and served upon the assessee on 11.9.2008 followed by notice u/s 142(1) of the Act was issued on 31.07.2009 and served on the assessee along with questionnaire. The case was discussed and necessary details as required by ld. Assessing Officer were furnished and discussion .....

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, assessee went in appeal before ld. CIT(A) who partly allowed the appeal by deleting the disallowance for suppression of stock value at ₹ 35,61,135/-, deleted the disallowance of ₹ 50,000/- on account of office expenses and sustaining the disallowance of ₹ 45,08,042/- on account of manufacturing loss. 4. Aggrieved, assessee is now in appeal before the Tribunal against the confirmation of disallowance made by ld. CIT(A) of ₹ 45,08,042/-. During the course of assessment pr .....

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g process of making gold ornaments of 18 kt., made a disallowance of ₹ 45,08,042/- by allowing shortage at 1% at the place of 10.59% claimed by the assessee. Further during the course of appellate proceedings before ld. CIT(A), submissions were made by assessee with respect to Exim Policy Guidelines which refers to the percentage of wastage on gold studded jewellery in between 9% -10% but the same could not convince ld. CIT(A) who dismissed the ground of assessee by observing as under :- 6 .....

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gold jewellery, but the making loss recorded is abnormal. The jewellery is manufactured on conditions environments such as outside interference of air, moisture, dust, light, noise etc. are well controlled. The accumulated gold dusts are condensed and retrieved. The superior tools used allows bare minimum wastage during the making. The workers are never allowed wastage % in excess of accepted norms. Enquiry from the trade circles (both big and small) unanimously stated that the rate of making lo .....

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(l8Kt) 0.06%. Then how the making loss for the Gold jewellery (i8Kt) recorded by the appellant was 10.59%'s not explained. Normally the making loss in actual term neutralizes due to the impurities added to convert 18kt. from 22 kts./24 kts for making jewellery. In this circumstances, I am in complete agreement with the findings of the AO that the appellant had claimed excess making loss and the estimate of making loss adopted by the AO is upheld. Hence this ground of appeal is dismissed. 5. .....

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nable human efforts. 6. Ld. AR further submitted that wastage standard exhibited in gems and jewellery industries in special export economic promotion zone is around 9-10% and in support he referred to page 47 - 49 of the paper book where wastage norms for gems and jewellery industries as per Foreign Trade Policy 2004-09 has been placed. Ld. AR also submitted that in the earlier years also they have incurred shortage loss at 9% for Asst. Year 2005-06 and at 11.05% for Asst. Year 2006-07 and asse .....

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olitary issue in this appeal is against the disallowance of ₹ 45,08,042/- sustained by ld. CIT(A). 9. During the course of assessment proceedings all quantitative details, relating to purchase, sale, stock in hand, in relation to raw material and finished goods were produced before the assessing authority and no error has been pointed out in the audited quantitative records which have been regularly maintained by the assessee since last many years and the only reason generated in the mind .....

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in column 4A-2 which reads - the wastage or manufacturing loss on gold/silver/platinum jewellery articles thereof is normally around 9%. From going through the manufacturing process submitted by the assessee we find that it is also involved in the manufacturing of gold studded jewellery 18 kt. and the manufacturing loss shown by assessee is at 10.59% which shows that there is no major variation between the wastage norms of 9% depicted by the Handbook of Procedures (Vol.I) 1st September 2004 - 31 .....

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assessee at 9% and 11.05% accepted by the Revenue. This fact reveals that assessee has been consistently showing shortage loss in manufacturing process in between 9 - 11% since last many years and in the preceding year no addition has been made on this account and in the year under appeal no specific defect in the books of account has been revealed by the Assessing Officer including the quantitative details. 11. We also find that co-ordinate bench, Mumbai in the case of Shukra Jewellery Ltd. vs. .....

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n record, we find that the assessee deserves to succeed in its appeal. It is noted that the assessment for asst. yr. 2002-03 was completed under s. 143(3), In asst. yr. 2002-03, the assessee shown loss of 21.75 per cent and the same has been accepted by the AO. The assessment order for asst. yr. 2002-03 is placed at p. 91 of the paper books. It is seen that net loss of ₹ 5.54 crores was accepted by the AO. The method of accounting adopted by the assessee is the same method of accounting ad .....

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epartment that the assessee is showing purchase on higher rates and selling the same on lesser rate to reduce the profit. There are heavy losses suffered by the assessee in earlier year. The losses have been shown on account of valuation of closing stock on the basis of market price or purchase price. Therefore, it cannot be said that the assessee had shown loss mala fidely. It is further seen -that the closing stock prepared by the assessee for immediately preceding year has been accepted by th .....

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the facts of the immediately preceding year. The assessee has explained the closing stock of the immediately preceding year, the assessment of which has also been completed under s. 143(3). Therefore, closing stock of the immediately preceding year has to be taken into consideration. It has been categorically stated that in view of consistent method of valuation, loss is incurred on account of valuation of closing stock only. Neither the valuation of the current year was examined by the AO nor a .....

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tems. Various reasons have been explained before the AO. However, the AO did not accept the contentions of the assessee. By merely saving that the explanation is not acceptable and without bringing any other material, in our considered view, the rejection of books of account was not justified at the end of the authorities below. 6.1 We have also noted that there was a loss in trading activity for asst. yr. 2001-02 also and the assessment for that year was computed under s. 143(3). Books of accou .....

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nd purchase and sale have been filed. The AO drew an inference against the assessee that the two parties out of 4 parties to whom summons was issued have not complied with the summons issued under s. 131. There may be so many reasons in not receiving or complying with the notices. There may be changes of address also. The assessee has discharged its burden for filing the details of purchase from those parties and has given their complete addresses available with the assessee. If by any reason, t .....

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cent. The entire loss has been disallowed without assigning any reason and thereafter, 1 per cent gross profit on the total turnover has been adopted again without assigning any reason, therefore, as stated above, both the authorities were not justified in rejecting the books of account and not allowing claim of loss of the assessee. Accordingly, we set aside the orders of the authorities below and the AO is directed to allow the claim of the assessee as claimed. 7. In the result, the appeal of .....

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try, Department of Commerce, Government of India and also following consistent principle of manufacturing process by the assessee duly supported by audited financial statements and complete quantitative records, we are of the view that no disallowance is called for in manufacturing loss at ₹ 45,08,042/-. We delete the same. Accordingly the appeal of assessee is allowed. 13. Ground No.3 is consequential. 14. Now we take up Revenue s appeal in ITA No.1743/Ahd/2011 for asst. year 2007-08 wher .....

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de the order passed by the CIT(A) and that of the order passed by the AO be restored. [4] The appellant craves leave to add, alter or amend any grounds of appeal. 15. Addition on account of suppression of valuation of closing stock at ₹ 35,61,135/- made by Assessing Officer on the basis of his finding that assessee has shown valuation of closing stock at lower cost of and market value and cost is calculated on weighted method. On being asked about the weighted cost method to the assessee i .....

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ssion of closing stock. 16. Revenue is now in appeal before the Tribunal. 17. Ld. DR relied on the order of Assessing Officer whereas ld. AR relied on the decision of ld. CIT(A) and reiterated the submissions made before lower authorities and also relied on the decision of coordinate bench in the case of DCIT vs. Shri Chimanlal H. Soni in ITA No.1663/Ahd/2009 vide order dated 31.5.2012. 18. We have heard rival contentions and perused the material on record. The issue in this appeal raised by Rev .....

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eas assessee has calculated the weighted average on the basis of purchases of 12 months . Apart from this calculation, wherein purchases of two months have been taken as a basis of calculating average cost by Assessing Officer, but there is no other observations in relation to any defect in the regular books of account maintained by the assessee. 20. Ld. CIT(A) has deleted the addition by observing as under :- DECISION : I have carefully perused the submission made by the Id. AR and the findings .....

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007 to arrive at the closing stock. The defence of the id. R has the following approaches; i. Method of accounting consistently followed since inception of the business and the department had accepted in the earlier years. ii Opening stock not changed by Assessing Officer :-It is submitted that merely changing the method of valuation of closing stock without changing the method of valuation of opening stock would totally distort the income of-the Appellant. , iii AS-2 recognizes weighted average .....

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y and March 2007 to arrive at-valuation of closing stock. ; vi Comparative working of valuation of stock on FIFO basis and Weighted Average cost basis was given to the AO during the assessment proceeding. The result was (-) ₹ 62,861/- thereby the appellant had not derived undue advantage by adopting Weighted Average cost method. 5.3 The factual matrix of the case suggest that the contention of the Id. AR has a force. The approach of the AO that the Stock should be valued on FIFO basis by a .....

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8377; 62,86i/ thereby the appellant had not derived undue advantage by adopting Weighted Average cost method. The Id.AR also supported his argument with relevant case laws. In this circumstances, in my view, the AO is not correct to thrust upon the appellant the FIFO method- of valuation of stock without bringing any materials evidence showing that the appellant has derived benefit by adopting Weighted Average method for valuation of Stock. The AO ought not to have rejected the plea of the appel .....

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the co-ordinate bench is reproduced below :- 8. We have heard the rival contentions, perused the material on records, it is an undisputed fact that the assessee has valued the stock at weighted average cost in the current year and the same method was followed by assessee in earlier years and it was accepted by the Department while finalizing the assessment u/s. 143(3). The assessee has also adopted the same method for arriving at the "cost of goods sold". The method of valuation is als .....

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he value of purchase and sale has also been refJected in the weighted average cost. He has accordingly held that the rate of ₹ 658.64 per gm. applied by assessee to value its stock of 22 ct. new ornaments was correctly determined. The Ld. CIT (A) has further given a finding that the -rate of ₹ 764/- gm is also not weighted average rate computed after considering all periodical transactions. He 'further gave a finding that the basis of ad-hoc addition of ₹ 10 lac is not know .....

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artment while making the assessment though the principle of res-judicata does not apply to Income tax proceedings. Nevertheless, whatever the settled law is applicable in respect of valuation of closing stock but the pecularity of this case is that the A.O. has started to value the stock at close intervals of each month but finally that was not made the basis of addition. The A.O. has left that observation/calculation without drawing a conclusion however finalized the valuation on an add-hoc bas .....

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are similar to the facts adjudicated in the decision of the co-ordinate bench, Ahmedabad in the case of DCIT vs. Shri Chimanlal H. Soni (supra) and also looking to the fact that assessee has been maintaining method of accounting consistently and no change has been made in the opening stock by the Assessing Officer, weighted average cost has been calculated as per accounting standard issued by ICAI and even if the comparative working of valuation of stock on FIFO basis and weighted cost on averag .....

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osing stock by applying his own formula of weighted average cost without applying it to the opening stock of the assessee and, therefore, in our view this addition for suppression of closing stock is uncalled for and needs to be deleted. Therefore, we find no reason to interfere with the order of ld. CIT(A) and uphold the same. In the result, this ground relating to suppression of valuation of closing stock is dismissed. 23. As far as ground of Revenue relating to disallowance of ₹ 50,000/ .....

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l vouchers. The appellant contended that such ad-hoc addition cannot be made without finding discrepancy in y of the expenses verified by him. The Id. Id. AR also relied on various case laws to support his case. I have carefully considered the findings of the AO and the submission made by the Id. AR. What is clear is that the addition made by the AO is ad-hoc and without any basis. For ad-hoc addition he ought to have pinpointed the nature of expenditure and the discrepancy in the bills/vouchers .....

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f ad hoc disallowance are normally uncalled for in the case of assessees who are regularly maintaining books of account which are audited u/s 44AB of the Act and all the documents relating to expenses incurred are verified by the auditors and also looking to the magnitude of the turnover of the assessee which in this year is ₹ 17.36 crores, expenses incurred on account of office expenses, office maintenance, miscellaneous expenditure, printing & stationery expenditure aggregating to &# .....

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been raised :- 1 On the facts and in the circumstances of the case and in law the Honorable CIT (A), Valsad has erred in confirming the addition made by the Ld. A.O. of ₹ 54,59,500/-, disallowing genuine manufacturing loss claimed in the process of manufacturing of high class diamond studded gold jewellery as per the specification of the customers. 2 On the facts and in the circumstances of the case and in law the addition stated above deserves to be deleted, hence, it is prayed to your h .....

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