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M/s. Visakha Wire Ropes Ltd. Versus ACIT, Range-4, Visakhapatnam and M/s. Visakha Wire Ropes Ltd. Versus DCIT, Circle-4 (1) , Visakhapatnam

2016 (11) TMI 1357 - ITAT VISAKHAPATNAM

Additions towards alleged short valuation of closing stock - Held that:- On verification of the details furnished by the assessee, we find that while analyzing the closing stock details, the A.O. has taken raw materials issued for production and goods manufactured for the particular month without considering brought forward stock available at shop floor, which is the reason for arriving at a shortage/excess production loss on monthly basis. Therefore, we are of the opinion that when the books of .....

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he A.O. to delete additions made towards short valuation of closing stock. - Additions towards alleged excess production loss - A.O. made additions towards excess production loss by stating that the assessee has claimed excessive production loss when compared to previous financial year - Held that:- Though the A.O. analysed raw materials consumption according to his own method, the method followed by the A.O. is inconsistent with the accepted principles of calculation of production loss, the .....

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instead, proceeded with estimation of production loss based on certain articles published in some magazine which is not a binding nature, ignoring the stock registers furnished by the assessee which are approved by another authority of the revenue department and also certified by a certified accountant under the provisions of Income Tax Act, 1961. Therefore, we are of the view that the production loss estimated by the A.O. is not correct and accordingly, we direct the A.O. to delete additions m .....

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e assessee are consistent with the stock registers maintained in accordance with the Central Excise rules. Therefore, we are of the considered view that the A.O. was erred in estimating the gross profit. Hence, we direct the A.O. to delete additions made towards alleged low gross profit. - I.T.A.No.179/Vizag/2014, I.T.A.No.180/Vizag/2014 - Dated:- 16-9-2016 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER For The Appellant : Shri G.V.N. Hari, AR For The Respondent : .....

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n the business of manufacture of steel wire, stranded wire and wire rope, filed its return of income for the assessment year 2007-08 on 29.10.2007 declaring total income of ₹ 1,57,62,430/-. The return was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter called as 'the Act'). Subsequently, the case has been selected for scrutiny and accordingly, notices u/s 143(2) & 142(1) of the Act were issued. In response to notices, the authorized representative of the assessee .....

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along with Central Excise records. As per the information furnished by the assessee, the assessee has disclosed closing stock of steel wire rope of 1,196.79 MT which was valued at ₹ 2,89,54,890/-. The assessee has adopted cost method to value raw material, stores, spares and consumables net of excise duty, and finished goods/work in progress are valued at factory cost. Similarly, finished good is valued at lower of estimated cost or not realizable value exclusive of excise duty. The A.O. .....

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wire rope was done through introduction of mechanical de-scaling process of wire ropes which involved many process including de-scaling, borex cutting, wire drawing, wind stranding and rope closing. In the process of manufacture, invisible and irrecoverable losses is high which cannot be collected as scrap as like in the earlier process of manual de-scaling of wire ropes. In the mechanical process of de-scaling of wire ropes, there are some invisible and irrecoverable losses, particularly in the .....

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, USA which says that the amount of loss on these rods may be approximately 1% or more by weight. Therefore, the production loss claimed by the assessee is within the prescribed norms and also supported by stock registers cannot be disturbed. 4. Similarly, the A.O. observed that gross profit declared by the assessee for the year under consideration is substantially less than the gross profit declared for the previous financial year. The A.O. further observed that the assessee has declared gross .....

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n in gross profit. The assessee further submitted that percentage of gross profit depends upon various factors such as cost of input raw materials, type of products manufactured, product mix and selling price. It has maintained books of accounts along with stock registers, which was submitted to the Central Excise Department on quarterly basis and the Central Excise Department has not pointed out any discrepancy in the stock registers, therefore, there is no reason for doubting gross profit decl .....

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stock of steel wire rope. The A.O. further observed that the assessee has not furnished closing stock details of raw materials item-wise and rate-wise and also failed to take physical inventory of closing stock at the end of the financial year. Therefore, opined that the stock register maintained by the assessee are not giving true and correct position of quantitative details and valuation of closing stocks, and hence, rejected valuation of closing stock determined by the assessee and re-worked .....

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at stock register maintained by the assessee are not depicting correct position of closing stock of the assessee for the year under consideration. The A.O. further observed that stock register maintained by the assessee is having lot of discrepancies. As per the stock registers, on analysis of month wise production loss, the assessee has declared huge production loss of 1 to 10% in few months and in some of the months, the assessee s production losses is negative. In some of the months, the prod .....

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industry is varying from 1% or more by weight. Since, the stock register maintained by the assessee are not susceptible for verification, rejected production loss claimed by the assessee and estimated production loss of 1% on total raw material consumed and arrived at a production loss of 130.058 MT, as against the production loss claimed by the assessee of 192.144 MT and quantified difference of 62.09 MT of production loss which works out to ₹ 17,80,230/- which was added back to the total .....

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e reduction in gross profit with necessary evidences. Since, the stock register maintained by the assessee are not showing true and correct position of movement of stocks and also the assessee has failed to take physical inventory of closing stock at the end of the year, the correct gross profit cannot be determined based on such books of accounts, with these observations, rejected books of accounts and estimated gross profit by taking into account average gross profit of 3 financial years which .....

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,15,16,933/- has been added to the total income of the assessee towards difference in gross profit. 7. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee reiterated the submissions made before the A.O. As regards additions towards valuation of closing stock, the assessee submitted that the A.O. was erred in working out closing stock of raw materials by taking into account average price of raw materials purchased for the month of .....

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tained by the assessee. The assessee further submitted that the A.O. has analyzed month-wise consumption of raw materials without taking into account work in progress available at shop floor which is the reason for excess/shortage of production losses in few months. The fact is that the assessee is maintaining stock registers as per the Central Excise rules, which was produced before the Central Excise authorities on quarterly basis and the stock registers maintained by the assessee is not havin .....

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gross profit of 3 financial years. The assessee further submitted that the A.O. was erred in estimation of gross profit, as the books of accounts of the assessee are audited by an accountant under the provisions of section 44AB of the Act and the auditor issued tax audit report with nil comments on stock books maintained by the assessee which clearly shows that the books of accounts maintained by the assessee are true and correct and the A.O. has no reasons to doubt the books of accounts maintai .....

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ssee has not demonstrated with evidences the value adopted by the A.O. is wrong. The A.O. has adopted average price of March purchases to value the closing stock of raw materials. The assessee has failed to furnish breakup details of closing stock of raw materials with reference to rates to justify adopting differential rates. Since the assessee has failed to furnish breakup of raw materials, the A.O. was right in taking average price of raw materials purchased for the month of March to value th .....

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he production process has been switched over from manual to mechanical, normally the production loss should come down. However, the assessee claims higher production loss due to switching over to mechanical process of manufacturing which is quite opposite to normal precedent of reduction in production loss, therefore, the reason given by the assessee is not acceptable. The CIT(A) further observed that the A.O. has pointed out various discrepancies in the books of accounts maintained by the asses .....

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nst the additions made by the A.O. of ₹ 17,80,230/-. 9. As regards the additions towards gross profit, the CIT(A) observed that the assessee has failed to explain reduction in gross profit with necessary evidences. The stock register maintained by the assessee are not giving true and correct position of movement of stock and valuation of closing stock. The A.O. has pointed out number of discrepancies in the books of accounts maintained by the assessee, as per which the assessee s productio .....

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6, but the financial statement showed such position to be nil as on 31.3.2006. Similarly, the assessee has claimed stock at the shop floor to the tune of 168.864 MT for the month of March, 2007 but has not admitted any closing stock of work in progress in the financial statements. No such entry for stock in shop floor was found recorded in the stock register for any of the months. With these observations, hold that the A.O. has rightly estimated gross profit on an average of 12.59% taking the gr .....

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by the CIT(A) order, the assessee is in appeal before us. 10. The assessee has filed common grounds for both the assessment years. From these grounds of appeal, the assessee has agitated 3 issues i.e. (1) additions towards alleged short valuation of closing stock (2) additions towards disallowance of excess production loss of ₹ 17,80,230/- (3) additions towards alleged low gross profit admitted by the assessee. 11. The first issue that came up for our consideration is additions towards al .....

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y the assessee. The A.O. has analyzed monthwise consumption of raw materials and production of finished goods. According to the A.O., the assessee s stock registers are not showing true and correct position of movement of stock and valuation of closing stock. It is the contention of the assessee that it has maintained stock registers in accordance with the Central Excise Rules, which was audited by an auditor and the auditor has not pointed out any discrepancies in the books of accounts, therefo .....

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als which is not correct. We find force in the arguments of the assessee for the reason that the A.O. has not pointed out any discrepancies in the books of accounts, except stating that there is a variance in production loss in few months and in few months the production loss is even more than the raw materials issued for production. On verification of the details furnished by the assessee, we find that while analyzing the closing stock details, the A.O. has taken raw materials issued for produc .....

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we are of the view that the A.O. was completely erred in adopting average price method to determine the closing stock as against the consistent method of accounting followed by the assessee i.e. cost price method to determine the closing stock. Hence, we direct the A.O. to delete additions made towards short valuation of closing stock. 12. The next issue that came up for our consideration is additions towards alleged excess production loss. The A.O. made additions of ₹ 17,18,230/- towards .....

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in some of the months the production loss is 1.69% to 11.91% and in some of the months, the production is excess production than the material used for production. The A.O. analyzed month-wise consumption of raw materials and production of finished goods to arrive at a conclusion that production loss claimed by the assessee is inconsistent with the production loss ultimately arrived at the end of the financial year, therefore, was of the opinion that the stock books are not depicting true and co .....

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asis and the Central Excise authorities have accepted quantitative details without any modification. The assessee further contended that its books of accounts were audited under the provisions of section 44AB of the Act. The auditor audited the books of accounts issued tax audit report in form no.3CB & 3CD without any comments on the books of accounts or stock registers maintained by the assessee. The assessee has furnished complete details of quantitative details of raw materials purchased, .....

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for the reason that the assessee has maintained stock registers in accordance with the provisions of Central Excise rules and furnished such stock registers on quarterly basis to the Central Excise authorities which were accepted without any modifications. We further noticed that the books of accounts of the assessee were audited under the provisions of section 44AB of the Act and the quantitative details as required by clause 28(b) of form no.3CD regarding raw materials and finished goods were .....

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consumption according to his own method, the method followed by the A.O. is inconsistent with the accepted principles of calculation of production loss, therefore, in our considered view, the A.O. has completely erred in coming to the conclusion that the stock registers maintained by the assessee are not showing true and correct pictures, when the assessee has clearly demonstrated with necessary evidence that the stock figures declared in the financial statements are tallied with the stock regis .....

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1961. Therefore, we are of the view that the production loss estimated by the A.O. is not correct and accordingly, we direct the A.O. to delete additions made towards production loss. 15. The next issue that came up for our consideration is addition towards alleged low gross profit. The A.O. made addition of ₹ 1,15,16,933/- towards low gross profit by taking into account average gross profit of last 3 financial years and applied on the total turnover of the assessee for the current financ .....

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of raw materials and processing expenditure, reduction in the price of finished products and also change in the production pattern of the assessee. The assessee further contented that during the current financial year there were substantial increase in the prices of wire ropes, which is the major raw materials used for production of finished products, therefore, this is one of the reasons for slight reduction in gross profit for the current financial year. The assessee further submitted that ac .....

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en increased about 15% when compared to the previous financial year. The aforesaid relevant factors have been totally ignored by the A.O. and proceed with estimation of gross profit by taking into average gross profit of last 3 financial years, which is totally arbitrary and unwarranted. It is further submitted that the assessing officer has accepted cost of raw materials and expenses shown and nothing contrary has been brought on record either by way of inflation of purchases or expenditure to .....

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registers maintained by the assessee are not showing true and correct movement of stock and valuation of closing stock. The A.O. has analyzed month wise consumption of raw materials and production of finished goods. According to the A.O., the production loss declared by the assessee varies from month to month from 1.59% to 11.61% which is contrary to the standard production loss declared by the wire manufacturer s association inc.,. As per the association bulletin, the production loss in this in .....

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nts are depicting true and correct financial position of the assessee. The assessee further contended that it has furnished quantitative details of raw materials consumed and production of furnished goods as required under clause 28(b) of form no.3CD which is consistent with the stock register maintained in accordance with the Central Excise rules. Therefore, the A.O. is incorrect in rejection of books of accounts and estimation of gross profit by taking into average of gross profit of last 3 ye .....

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by the assessee or in the stock registers to arrive at a conclusion that the stock register maintained by the assessee are not showing true and correct position of closing stock or consumption of raw materials. The basis for the A.O. to arrive at a conclusion to reject the books of accounts is that he had analyzed consumption of raw materials and production of finished goods on monthly basis in his own wisdom and quantified production loss which is more in few months. Based on such analysis of .....

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onsumption of raw materials, failed to come to the conclusion that what is the exact amount of production loss when compared to the production loss declared by the assessee, which is supported by stock registers. On the other hand, the assessee clearly demonstrated before the authorities with necessary evidence, such as stock records maintained in accordance with Central Excise rules and clarified that the closing stock details declared in its financial statements are consistent with the stock r .....

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ial position of the assessee for the relevant period. The assessee also explained the reasons for reduction in gross profit before the A.O. that during the current financial year there is increase in cost of raw materials, which is one of the reasons for slight reduction in gross profit. 19. The fall in the gross profit ratio could be for various reasons such as increase in the cost of raw materials, decrease in the market price of finished products, increase in the cost of processing by the ass .....

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was shown in the account books. There was no finding that the assessee had made any such sale of the finished products which was not reflected in the books of accounts. There was no finding by the A.O. that the finished products were sold by the assessee at a price higher than what was declared in the account books. Unless the A.O. point outs any of these aspects in his verification, cannot come to the conclusion on the basis of incorrect estimation of facts ignoring evidences filed by the asses .....

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r, she filed a return declaring gross profit at the rate of 1.4 per cent against gross profit rate of 5.91 per cent for the preceding year. On being asked, the assessee attributed the fall in gross profit rate to the increase in the purchase price. The Assessing Officer rejected the explanation given by the assessee on the ground that no supporting evidence was produced to show increase in the purchase price and decrease in sales. He also noticed that the weight of finished products declared by .....

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ng the gross profit rate of the preceding assessment year. On appeal, the Commissioner (Appeals) noted that the assessee had furnished complete details, including comparative details in respect of purchase of raw materials and manufacture of copper wires as well as in respect of sale during the year in question as compared to the earlier years. He also took note of the. fact that the assessee was duly registered under the Central Excise Act and was maintaining proper quantitative details in the .....

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t have been rejected and no addition could Section 145(3) provides for assessment in the manner prescribed in section 144 where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee or where either the method of accounting provided in sub-section (1) or the accounting standards as notified under sub-section (2) has been regularly followed by the assessee. It was not the case of the revenue that the assessee had not followed either cash or me .....

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e assessee that her account books were duly audited under section 44AB of the Central Excise Act and the quantitative details as required by clause 28(b) of Form No. 3CD regarding raw material and finished products (i.e., opening stock of raw material, raw material issued to production department, raw material consumed and closing stock of raw material, opening stock of finished goods, finished goods produced during the year, finished goods sold and closing stock of finished goods) were prepared .....

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re and sale of the finished products. In those circumstances, the accounts maintained by the assessee could not have been said to be incomplete or inaccurate. In fact, the Assessing Officer had no material before him to treat the accounts of the assessee as defective or incomplete. [Para 6] As regards the marginal increase in the weight of the finished product, the explanation given by the assessee had been accepted not only by the Commissioner (Appeals) but also by the Tribunal. The Assessing O .....

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tly, could not have been a ground to reject the accounts by invoking section 145(3). [Para 8] The fall in the gross profit ratio could be for various reasons such as increase in the cost of raw material, decrease in the market price of finished product, increase in the cost of processing by the assessee, etc. There was no finding that the actual cost of the raw material purchased by the assessee was less than what was declared in the account books. There was no finding that the actual cost of pr .....

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e was no finding by the Assessing Officer that the finished products were sold by the assessee at a price higher than what was declared in the account books. In those circumstances, the Commissioner (Appeals) and the Tribunal were justified in holding that the Assessing Officer could not have increased the gross profit ratio merely because it was low as compared to the gross profit ratio of the preceding year. [Para 9] The revenue contended that the assessee was not maintaining the daily stock r .....

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g the assessee to maintain the daily stock register. Hence, even if no such register was being maintained by the assessee, that; by itself, would not lead to the inference that it was not possible to deduce the true income of the assessee from the accounts maintained by her; nor the accounts could be said to be defective or incomplete for that reason alone. If the stock register is not maintained by the assessee, that may put the Assessing Officer on guard against the falsity of the return made .....

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