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Rm. K.V. Textiles Versus Deputy Commissioner of Income Tax, Central Circle-IV (1) , Chennai

2016 (6) TMI 1229 - ITAT CHENNAI

Valuation of closing stock - identification of stock - Held that:- Inventory taken by the Revenue authorities could not be identified with the physical stock with reference to bynumbers. If the Assessing Officer could not identify the stocks with reference to by-numbers, it is not known how the Revenue authorities claim that the stock was taken properly on the day of search. This observation of the Assessing Officer clearly indicates that the stocks were not taken properly as claimed by the asse .....

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mmitment charges - nature of expenditure - revenue or capital expenditure - Held that:- As rightly contended by the Ld.counsel for the assessee, the HR&CE Department intervened and they directed the assessee to pay donation to various temples. In fact, the donations were paid to various temples as directed by HR&CE Department. Subsequently, the HR&CE Department directed the Executive Officers of the respective temples to execute lease deed in favour of the assessee. Therefore, it is obvious that .....

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manent structure over the land. In those circumstances, this Tribunal is of the considered opinion that the donation given to various tenants as per the direction of HR&CE Department has to be treated as revenue in nature in the hands of the assessee-firm. This Tribunal is of the considered opinion that the payment of donation is only for the purpose of carrying on the business effectively in the course of earning profit. Therefore, it cannot be treated as capital in nature. In view of the above .....

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to show that the difference is because the Revenue has not taken into consideration the items which were lying in the show room for sale. The assessee has claimed that the stocks were sold subsequent to search operation. In fact, the assessee has produced all the details to identify those goods which are sold subsequent to search. In view of these reasons, merely because the Assessing Officer could not verify that cannot be the reason to make addition. Therefore, this Tribunal is unable to uphol .....

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ncurred in interior decoration, flooring, painting and temporary partitions, etc. These expenditures cannot be retrieved by the assessee at the expiry of lease term. Therefore, such expenditure cannot be treated as capital in nature as found by Kerala High Court in Joyallukas India Pvt. Ltd. v. ACIT (2014 (6) TMI 80 - KERALA HIGH COURT). It has to be necessarily treated as revenue expenditure. Therefore, the CIT(Appeals) has rightly allowed the claim of the assessee. This Tribunal do not find an .....

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he Revenue s appeal for the assessment year 2009-10 are directed against the respective orders of the Commissioner of Income Tax (Appeals), Central-I, Chennai. Since common issue arises for consideration in all these appeals, we heard these appeals together and disposing of the same by this common order. 2. The first common issue arises for consideration is with regard to valuation of closing stock. 3. Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that the assessee is valuing .....

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respectively. If the stock continues for more than three years, then it was considered as very old stock and the same was valued at ₹ 100/- per item in order to prevent pilferage. The assessee, in fact, undertook this exercise from time to time at the end of the financial year. The value assigned for the old stock on the basis of the realizable market condition, was continuously valued year after year. The assessee has not changed the method of valuing the closing stock. The assessee s est .....

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e Ld. counsel, the realizable market value of the stock was based upon the assessee s perception which was gained over a period of time in the business. According to the Ld. counsel, valuation of closing stock at the realizable market value is one of the methods permitted under the provisions of Income-tax Act. 4. Referring to the assessment order for the assessment year 2009-10, more particularly at para 6 and 7, the Ld.counsel for the assessee submitted that the Assessing Officer himself admit .....

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idual stock identified with reference to by-numbers, according to the Ld. counsel, it is not possible for the Assessing Officer to examine the same. The Ld.counsel further submitted that the experience gained by the assessee over the period of time in the business cannot be just brushed aside by the Assessing Officer and determine value of closing stock. According to the Ld. counsel, unless the stocks were sold within four years period, the realizable value would be very less than the cost price .....

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s of the assessee on 17.02.2009. During the course of search operation, the closing stock valued as per the books of account as on 17.02.2009 was ₹ 20,15,05,458/-. However, the physical inventory for stock was found to be less as compared to the stock as per books of account to the extent of ₹ 1,27,64,281/- for the assessment year 2009-10. The managing partner Shri Shiva Kumar was examined by the Assessing Officer. He admitted that there was an error in the figure declared in the boo .....

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was also not included. The assessee claimed before the Assessing Officer that if the above claims are considered, the excess stock would come only to ₹ 35,96,618/-. The Assessing Officer, after examining the claim of the assessee, found that the veracity of claim made by the assessee cannot be tested at this point of time. Therefore, the explanation of the assessee is only an afterthought. Accordingly the Assessing Officer determined the deficit stock at ₹ 1,09,82,464/- at Chennai br .....

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ee at Chennai and Tirunelveli on 17.02.2009. The inventory taken by the Revenue was compared with the books of account and the Revenue authorities found that there was variation between the books of account and the physical inventory taken. At Chennai branch of the assessee, the inventory taken was ₹ 18,87,41,177/-. However, as per the books of account as on 17.02.2009 was ₹ 20,15,05,458/-. The Revenue authorities found that the physical stock was less than what was disclosed in the .....

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lso fast changing. If the assessee could not sell the product within 2-3 years, then in the fourth year there cannot be any value for the products at all. The assessee claimed before the authorities that in the second year, the value of the property was taken at 50% of stock and in third year, it was taken at 25% of stock. The assessee also explained before the Assessing Officer that they are valuing regularly cost or market value, which is less, as per the method approved by the law. From the m .....

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/- being the realizable market value of the stock. This claim of the assessee appears to have been rejected by the Assessing Officer on the ground that the assessee could not substantiate the claim. 7. In the textile market, the fashion in dress material is fast changing. If the assessee could not sell the products in the year it was purchased and introduced, the next year the value of the stock may be reduced and the assessee could not sell the products for the same price for which it was targe .....

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ion made. This Tribunal is of the considered opinion that the Assessing Officer is not an expert in textile business. The Assessing Officer unless otherwise has material to suggest that the valuation made by the assessee is not correct, he cannot dispute the valuation made by the assessee. If the textile material could not be sold in the second or third year, then the assessee has to realise the value as per the market condition prevailing at that point of time. Therefore, when the assessee esti .....

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the Assessing Officer has not made any such exercise. This Tribunal is of the considered opinion that the valuation of stock has to be necessarily made on the realizable market value on the basis of the experience in the business. When the assessee valued the old stocks on their past experience, the Assessing Officer cannot have any reason to doubt the same unless otherwise contrary materials are available on record. In this case, no such material is available on record. Therefore, this Tribunal .....

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cifically claimed that specific bynumbers inventorised as part of year end stock was not included in the inventory taken on the date of search. The stock which was lying unsold with specific by-numbers was also not included in the stock taken on the date of search. So, the assessee s claim before the authorities below that the stocks lying unsold on the date of search was not taken into consideration by the Revenue authorities. In fact, the Assessing Officer has observed as follows at page 16 of .....

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er at page 16 in the assessment order for the assessment year 2009-10, it is obvious that the inventory taken by the Revenue authorities could not be identified with the physical stock with reference to bynumbers. If the Assessing Officer could not identify the stocks with reference to by-numbers, it is not known how the Revenue authorities claim that the stock was taken properly on the day of search. This observation of the Assessing Officer clearly indicates that the stocks were not taken prop .....

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d of appeal is with regard to disallowance of lease commitment charges. This ground of appeal arises for consideration for assessment years 2008-09 and 2009-10. 9. Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that a piece of land, adjacent to the assessee s show room, was taken on lease for using the same as car park. According to the Ld. counsel, the land, in fact, belonged to Hindu Religious and Charitable Endowments Department. The tenants of the property agreed to transf .....

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, even though the tenants of the landed property agreed for transfer of tenancy in favour of the assessee, the Hindu Religious and Charitable Endowment Department intervened claiming that the tenants have no right to transfer the tenancy right in favour of the assessee. The Ld.counsel further submitted that the HR&CE Department further clarified that the assessee has to pay donation to the extent of ₹ 1 Crore to various temples for taking the property on lease. Having left with no othe .....

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temples in the form of donation was on the direction of HR&CE Department for acquiring the lease holding right over the landed property. According to the Ld. counsel, the assessee is not acquiring any title over the property. In fact, the payment was made for giving consent by the HR&CE Department to transfer the lease in favour of the assessee by the legal heirs of the erstwhile tenants of the landed property. The Ld.counsel further submitted that the land in question is agricultural l .....

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directed by HR&CE. Though this payment was in relation to taking the property on lease, the assessee has not acquired any right over the property. This is a payment made as donation to the temples which enabled the assessee to take the adjacent land as lease for using the same as parking area. Therefore, according to the Ld. counsel, this payment is only for the purpose of business of the assessee and no capital asset was acquired. The lease period was initially for two to three years. The a .....

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n to the extent of 69.2 cents was dedicated to the temples around Tirunelveli. The tenancy right was given to one Shri Gopal. On his death, the legal heirs of Shri Gopal transferred the tenancy right in favour of Shri K. Mahesh, who is none other than the partners of the assessee-firm, by a document dated 09.03.2007, for a consideration of ₹ 2,43,000/-. Similarly, 82 cents of land was owned by some temples around Tirunelveli and it was given on lease to one Shri Velu. On the death of Shri .....

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to the Ld. D.R., the lease rentals are to be paid in advance to temples. According to the Ld. D.R., the lease was obtained only by Shri Mahesh, partner of the assessee-firm and not by the assessee-firm itself. Therefore, the payment made by the assessee as donation to various temples cannot be allowed as business expenditure. Moreover, the tenancy right over the immovable property has to be construed as immovable property acquired by the assessee. Even if it is paid for acquisition of lease rig .....

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sessee claims that the adjacent land is required for assessee s business for using the same as car park for the customers who are visiting the show room. It is not in dispute that the assessee is engaged in the business of retail textile in the town of Tirunelveli. The adjacent land belonged to various temples and the same was under the control of HR&CE Department, Government of Tamil Nadu. The original tenants of the agricultural land expired and it appears that the assessee negotiated with .....

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erstwhile tenants of HR&CE Department. It is common knowledge that the tenants of agricultural land under HR&CE Department cannot transfer the land to any other person without the consent of HR&CE Department. Therefore, as rightly contended by the Ld.counsel for the assessee, the HR&CE Department intervened and they directed the assessee to pay donation to various temples. In fact, the donations were paid to various temples as directed by HR&CE Department. Subsequently, the .....

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egularizing the lease obtained from the legal heirs of the erstwhile tenants of HR&CE Department is capital in nature or revenue in nature? We have carefully gone through the conditions imposed by the HR&CE Department for giving the lease of the property, which were extracted at page 13 of the impugned order of the CIT(Appeals). One of the conditions is that the assessee should not sub-lease the land and assessee should use the land only for business. It is also a condition that no perma .....

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is with regard to sum of ₹ 1 Crore paid to the temples as donation. This Tribunal is of the considered opinion that the payment of ₹ 1 Crore as donation to various temples, as directed by the HR&CE Department, is only to regularize the lease obtained from respective legal heirs of erstwhile tenants of HR&CE Department. This payment of ₹ 1 Crore to various temples as donation is not for acquiring any interest over the immovable property. As it is clear from the orders o .....

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onsidered opinion that the payment of donation has to be necessarily treated as revenue in nature. Moreover, the land in question cannot be used for any other purpose other than the business. The assessee cannot put up any permanent structure over the land. In those circumstances, this Tribunal is of the considered opinion that the donation given to various tenants as per the direction of HR&CE Department has to be treated as revenue in nature in the hands of the assessee-firm. This Tribunal .....

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is with regard to addition towards stock discrepancy. 15. Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that during the course of search operation, the Revenue authorities found difference in the physical stock and stock as per the books of account. The assessee explained before the Assessing Officer that the difference in physical stock was due to valuation of closing stock. According to the Ld. counsel, when the textile goods cannot be sold for more than two to three years, .....

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t cost price. The fashion and design are changing very fast in textile industry. Therefore, if the assessee cannot sell the product in the shop within two years, the same cannot be sold at cost price. The assessee has to necessarily clear the stock by giving discount. When the very old stock are available, the same cannot be sold even after three years. The Ld.counsel further submitted that the entire stock could be identified by by-numbers given by the assessee. The Assessing Officer, even thou .....

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d that the value of inventory, during the course of search operation, was taken at ₹ 18,87,41,177/- The closing stock as per books of account was ₹ 20,15,05,458/- as on 17.02.2009. Therefore, the physical inventory/stock was found to be less than the stock as per the books of account. The Assessing Officer found that there was difference of ₹ 1,27,64,281/-. This difference could have come due to sale of stocks outside the books. Therefore, the CIT(Appeals), according to the Ld. .....

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was, in fact, forms part of Annexure-V to the impugned order of the Assessing Officer. The Ld. D.R. further submitted that there is no inventory of individual break-up of physical stock identified with reference to by-numbers made out on the date of search. Therefore, the Assessing Officer has stated in the assessment order that it is not possible for him at this point of time to verify with the stock with specific numbers claimed by the assessee form part of physical inventory on the date of s .....

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ot be proved conclusively. Since the Assessing Officer found that the claim made by the assessee with regard to sale of goods subsequent to the search could not be conclusively proved, the CIT(Appeals) has rightly confirmed the addition. 18. We have considered the rival submissions on either side and perused the relevant material available on record. Due to difference in stock between the books of account and the physical inventory taken on the date of search, an addition was made as deficient s .....

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ers to identify each and every item which was exhibited for sale in the show room. The Assessing Officer himself claims in the remand report that due to various factors, the list given by the assessee could not be verified. It is not the case of the Revenue that the details given by the assessee could not be verified because of any deficiency or negligence on the part of the assessee. The other factors, which prevented the Assessing Officer to go through the details given by the assessee, cannot .....

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ll the details to identify those goods which are sold subsequent to search. In view of these reasons, merely because the Assessing Officer could not verify that cannot be the reason to make addition. Therefore, this Tribunal is unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to delete the addition made on the stock discrepancy. 19. Now coming to Revenue s appeal for assessment year 2009- 10 .....

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ing to Explanation 1 to Section 32 of the Act, the Ld. D.R. submitted that the assessee at the best can claim depreciation and definitely it cannot be allowed as revenue expenditure. Therefore, according to the Ld. D.R., the CIT(Appeals) is not justified in allowing the claim of the assessee. 21. On the contrary, Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that the assessee has taken the building on lease for the purpose of establishing a new showroom. The assessee incurred .....

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g to the Ld. counsel for the assessee, the CIT(Appeals) has rightly allowed the claim of the assessee. 22. We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that the assessee took the building on lease and incurred expenditure on temporary wooden structure, false ceiling, flooring, painting, etc. The assessee claimed the same as revenue expenditure. The CIT(Appeals) by placing reliance on the order of this Tribunal .....

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