TMI Blog2019 (5) TMI 1997X X X X Extracts X X X X X X X X Extracts X X X X ..... ng approval has not recorded his satisfaction. Addition made by rejecting the valuation of closing stock in respect of rejected goods and also on account of goods sent and lying with the job work units at the end of year - AO picked up an agreement and considered the same to be universally applicable and drawn an inference that every rejected item shall be destructed and that too with immediate effect. It is a matter of record that the primary condition of every agreement is restriction on sale of rejected goods. Whether to destroy or not is a secondary requirement which will be based upon certain conditions and under certain circumstances. However, some agreements are having condition of destruction which was duly complied with. If a particular item has been classified as rejected and no further sale has been made of that item then conditions of agreement has been fulfilled. It is not the case that the assessee is selling these rejected goods in the grey market neither the AO nor the ld CIT(A) made any such allegation. Hence if a particular item has been classified as rejected and simply lying in the factory with no further sale then it is beyond any understanding that how wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were sold as Chindi. In view of the above facts and circumstances, we hold that the A.O. was not justified in making addition on account of under valuation of rejected goods which was included in the list of closing stock. Undervaluation of the stock lying with job units - We had verified the sheets containing complete details of Fabric lying at Job Units. The Number of Piece have also been shown in the same sheet apart from showing the Raw Fabric in Meter which are expected to be prepared out of such Raw Fabric sent to these job units. Thus, whether it is number of pieces shown or fabric in meter is shown, the ultimate valuation shall remain the same and is not going to make any difference. However, this was not properly understood by the AO. Therefore, the allegation of avoidance of taxes is baseless, more particularly, when otherwise also any enhancement in the valuation of closing stock of this year will enhance the value of opening stock of the next year leaving a tax neutral effect. As per our considered view in case of business of manufacturing of readymade garments, there are certain scientifically evolved conversion formula, based on which, one can ascertain the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Ajmer dated 29/10/2018 for the A.Y. 2014-15 in the matter of order passed U/s 143(3) read with Section 147 of the Income Tax Act, 1961 (in short the Act). Following grounds have been taken by the assessee: 1.1 The very action taken u/s 147 r.w.s 148 is bad in law without jurisdiction and being void ab-initio, the same kindly be quashed. Consequently, the impugned assessment framed u/s 143(3) r.w.s. 147 dated 31.12.2017 also kindly be quashed. 1.2 The impugned order u/s 143(3) r.w.s. 147 dated 31.12.2017 is bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be quashed. 2.1 Rs. 2,13,67,830/-: The Id. CIT(A) further erred in law as well as on the facts of the case in confirming the addition made on account of the alleged under-valuation of closing stock by showing finished goods of readymade garments as rejection. 2.2 Rs. 2,03,36,304/-: The ld. CIT(A) further erred in law as well as on the facts of the case in confirming the addition made on account of the alleged under-valuation of closing stock by showing finished goods of readymade garments as stock lying with job units. 3. The AO further erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in brief are that the assessee is a Limited Company incorporated under the provisions of Companies Act, 1956, engaged in the business of manufacturing and export of readymade garments etc. For the year under consideration, the assessee had e-filed its return of income electronically on 27.09.2014 showing total income of Rs.4,31,91,680/-. The assessment was completed vide order dated 16.12.2016 u/s 143(3) of the Act at an income of Rs. 4,34,48,500/-. Thereafter, the A.O. issued notice U/s 148 of the Act and alleged that there is an escapement of income to the extent of Rs.8,65,30,424/-. 5. By the impugned order, the ld. CIT(A) confirmed the action of the A.O. for initiation of proceedings U/s 147 as well as merit of the addition so made by the A.O. Against the order of the ld. CIT(A), the assessee is in further appeal before the ITAT. 6. It was argued by the ld AR that the AO has wrongly assumed jurisdiction u/s 147 of the Act and the proceedings initiated there under are absolutely illegal arbitrary in as much as there did not exist any reason at all much less reason to believe as contemplated under the law and in the light of judicial pronouncements cited at bar. As per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om assessment. ----------x---------x---------x-- The reason for the formation of the belief must be held in good faith and should not be a mere pretence . 12. The powers of the ITO to reopen assessment, though wide, are not plenary. The words of the statute are reason to believe and not reason to suspect . The reopening to the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. ------------ The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied.--- 9. The ld AR also argued that with regard to the valuation of finished goods, the only reason or/ justification provided to form an opinion as to income escaping assessment is that the assessee-company has undervalued the closing stock of raw material by applying average rate per meter @ Rs.89.62 as against the valuat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emplary invoices were submitted before the AO. 13. The ld AR has further argued that the closing stock consists of rejection garments of 64,751 pieces which were valued @ of Rs.25 per piece. It is pertinent to note that the assessee-company was manufacturing the export items of their clients on certain binding terms and conditions as per contract and one of the clauses prohibited the assessee-company manufacturer-supplier to sale in case, for any reason, the product is treated it to be considered to be of grade second, third or excess, the assessee-company-manufacturer-supplier couldn t be sale the same to any other party in the market except the said clients. Thus, the value of such rejected goods, was virtually nothing/nil so far as the assessee-manufacturer-supplier was concerned for the obvious reasons that in the light of this agreement and in view of these facts why even the said customer should buy the rejected/damaged goods. Thus, for the assessee-company it was a dump/wastage having no realizable value at all. Even then the assessee-company to be on a very fair side valued such rejected goods @ of Rs.25 per piece though was not at all required. 14. It was the further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny reason for coming to the conclusion that this is a fit case to issue notice under s. 148. The material that he had before him for issuing notice under s. 148 is not mentioned in the report. In this report he vaguely refers to certain communications received by him from the CIT, Bihar and Orissa. He does not mention the facts contained in those communications. All that he says is that from those communications it appears that these persons (alleged creditors) are name-lenders and the transactions are bogus. He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine transactions. He appears to have had only a vague feeling that they may be bogus transactions. Such a conclusion does not fulfil the requirements of s. 151(2). What that provision requires is that he must give reasons for issuing a notice under s. 148. In other words he must have some prima facie grounds before him for taking action under s. 148. Further his report mentions: Hence proper investigation regarding these loans is necessary. In other words his conclusion is that there is a case for investigating as to the truth of the alleged transactions. That is not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is also evident from the fact that in the said letter dated 17.12.2016, the Add. CIT returned back the assessment record to the AO in one volume, meaning thereby he did not have anything else/new information material in his possession. As a matter of fact, the AO was never of the opinion/mindset much less of a belief that there was a case of undervaluation in as much as he was the very person who completed the scrutiny assessment u/s 143(3) after going through books of accounts, subsidiary records, audited accounts, tax audit reports etc. and so on. (and must have also gone through the aspect of valuation of closing stock though not specifically stated in original assessment order). Had he been of such opinion/belief, he himself could have a sought permission of his superior i.e. the Add. CIT in the light of the CBDT instruction no. 7/2014 dated 26.09.2014 for expanding the scope of scrutiny assessment. The clear direction given by the Add. CIT (though not mentioning the provisions of S.147), was otherwise visible, apparent and could be understood by any sensible person of a reasonable prudence in as much as the discretion given to take any action to the AO, could have permitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd on the part of the assessing authority for reopening. The assessing authority cannot act on the dictates of the CIT, who had directed him to reopen the concluded assessment for the year 1991-92, as that, does not constitute an information within the scope of s. 147. Apart from this, the submission that the sanction itself was defective, for the reason that the sanction was from the CIT, whereas the authorized authority for sanction was only the Jt. CIT, particularly, as the CIT will have to act as the appellate authority against the orders passed by the assessing authority, is only reiterating the circumstance that the reopening was bad in law. (Paras 11 to 13) Also in Madanlal Jindal vs. ITO ORS. (1973) 92 ITR 0546 (Cal. HC), it was held as under: Reassessment under s. 147(a) ITO could not reopen the assessment of assessee merely acting on the basis of a letter from another ITO who happened to assess assessee s wife conveying that she was a benami partner in a firm xxxxxxx There was no express statement of the ITO that he was forwarding the reopening proposal of the CIT on the ground of the letter from the ITO, J Ward, but from the facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t must be held that the assumption of jurisdiction under s. 148 was bad for non-satisfaction of the conditions precedent. In the present case there was exchange of views between the CIT, Addl. CIT and the ITO concerned. It also appears that the ITO expressed his view that, in his opinion, the amount could not be brought under assessment. Addl. CIT held a view otherwise. It also appears that the ITO who had ultimately submitted a proposal under s. 147 also expressed his doubts and difficulties regarding taxability of the amount in question and asked for instructions. Thereafter, he received directions from the CIT to submit a proposal under s. 147 and in obedience to the aforesaid direction, he submitted a proposal for initiating the proceedings under s. 147. Therefore, it cannot be doubted that the concerned ITO never formed the requisite belief that there had been escapement of income or that income had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly the material facts for the assessment for that year. CIT vs. Abdul Kadar Ahamed (2006) 156 Taxman 206 (Ker), wherein it was held that reassessment proceeding at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire basis of making the addition in the impugned assessment order was completely changed, when compared with the grounds adapted in the reasons recorded for the formation of belief as to the escapement of income in much as in the reasons recorded he applied a cruel method of valuing the entire closing stock shown under the head finished goods, at cost, however, in the assessment order, he alleged under valuation of Rs.2,13,67,830/- (w.r.t rejection of goods) and of Rs.2,03,36,304/- (under the head stock lying at the job units), which was not at all a case made out in the reasons recorded even remotely. When the AO has formed a reason to believe keeping in mind some facts and the information available before him, he could not have completely changed the nature of the additions. No doubt, the escapement of income conceived in the reasons recorded may not be there but at least the very basis for the grounds inspiring him to form a reasonable belief as to escapement must be present while making the addition in the assessment order. Hence, it can be said that the no additions were made on the issues on which re-opening was made and therefore, the AO cannot make any additions other than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome other than the income in respect of which proceedings u/s 147 were initiated but he was not justified in doing so when the very reasons for initiation of those proceedings ceased to survive. Legislature could not be presumed to have intended to give blanket powers to the AO that on assuming jurisdiction u/s 147 regarding assessment or reassessment of escaped income, he would keep on making roving inquiries and thereby including different items of income, not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. It was further held that the Tribunal was right in holding that the AO had the jurisdiction to reassess issues other than the issues in respect of which proceedings were initiated but he was not so justified when the reasons for initiation of those proceedings ceased to survive. The observations of the Hon ble High Court on pages 147 and 148 of in 336 ITR 136 are worth noting. 21. Reliance was also placed on the decision of Hon ble Gujarat High Court in the case of CIT v/s Mohmed Juned Dadani (2013) 85 DTR 12/355 ITR 172 (Guj HC): Headnote: Reopening of Assessment - Jurisdiction of AO - Reasons for reopening - Notice wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e course of reassessment proceedings, which were found by him, to have escaped assessment - CIT v/s Shri Ram Singh (2008) 8 DTR 118/306 ITR 343(Raj HC). The other decisions taking the same view are CIT v/s Adhunik Niryat Ispat Ltd. (2011) 63 DTR 212 (DeI HC) and ACIT v/s Major Deepak Mehta (2012) 65 DTR 237/ 344 ITR 641 (Chhattisgarh HC). Also refer DCIT v/s Takshila Educational Society (2016) 284 CTR 306 (Pat HC) wherein it was held that AO having made no addition on issues which were subject matter of reason to believe for purpose of reopening, addition on other issues was without jurisdiction. In Hotel Regal International Anr. Vs. ITO (2010) 320 ITR 573 (CAL) wherein the Petitioner were called upon to file objection to the notice u/s. 148 proposing to reopen the assessment on ground that Rs. 73,219 had escaped asst. Now the authorities could not shift their stand and pass on order on other ground that valuation report received subsequent to passing of the order disposing the objection the Assessing officer must consider the material and pass speaking order. Assessment quashed. However, in the present case, as per the ld AR, this mandatory precondition has not been fully an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbai ITAT in the case of Hirachand Kanuga vs. DCIT (2015) 68 SOT 205 (Mum. ITAT), wherein it was held as under: 9. A simple reading of the provisions of Sec. 151(1) with the proviso clearly show that no such notice shall be issued unless the Addl. Commissioner is satisfied on the reasons recorded by the Assessing Officer that it is a fit case for the issue of notice which means that the satisfaction of the Commissioner is paramount for which the least that is expected from the Commissioner is application of mind and due diligence before according sanction to the reasons recorded by the Assessing Officer. 10. In the present case the letter which is placed on record shows that the Addl. Commissioner has simply sanctioned the proposal for initiating proceedings under s. 147 in group cases of beneficiaries of Mahasagar Securities P. Ltd. Nowhere the Addl. CIT has recorded his dissatisfaction. The Hon ble Supreme Court in the case of Chhugamal Rajpal vs.S.P. Chaliha Ors. (1971) 79 ITR 603 (SC) observed that the important safeguards provided in Sec. 147 and 151 were lightly treated by the ITO as well as the Commissioner. 11. In the light of the above mentioned reasons, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings initiated stands vitiated for want of specific sanction as is required under the proviso to s. 151(1). X X X X X 24. Since this Court finds that issuance of notice under s. 148 at the first instance itself was without a proper sanction as is required under the proviso to s. 151(1) of the IT Act. We need not go into the veracity and merits of the case any further at this stage. Leaving open the issue on merits, the present notice under s. 148 stands set aside/ quashed only on account of non-fulfillment of the condition precedent as is envisaged under the of the proviso to s. 151(1) of the IT Act. The writ petition stands allowed only on this ground alone. 24. Further reliance was placed on the decision of CIT vs S. Goyanka Lime Chemicals Ltd [2015] 56 taxmann.com 390 (MP), wherein it was held as under: 7. We have considered the rival contentions and we find that while according sanction, the Joint Commissioner, Income Tax has only recorded so Yes, I am satisfied . In the case of Arjun Singh (supra), the same question has been considered by a Coordinate Bench of this Court and the following principles are laid down: 'The Commissioner acted, of cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee. We are also of the opinion that the commissioner has mechanically accorded permission. If only he had read the report and seen the history of the original assessment, he would not have granted permission. The safeguard against reopening u/s 151 of the Act has been done by both the superior authorities very lightly and as held by the Hon'ble Supreme court in Chugamal Rajpal (supra), the authorities substituted form over substance. Thus, we hold that the sanction granted by the Commissioner u/s 151 is invalid and so, the notice of the AO dated 29.03.2011 is bad in law and has to be necessarily struck down . Hence the proceedings u/s 147 and the notice u/s 148 deserves to be quashed. 25. The ld AR further contended that the A.O. has wrongly invoked the provisions of Section 145(3) of the Act. The law u/s 145(3) provided three basis to invoke the same, viz (i) Where the AO is not satisfied about the correctness/completeness of the accounts (ii) where the method of accounting provided in Sub Sec. (1), is not followed or (iii) the Accounting Standards as notified u/s 145(2) have not been followed by the assessee. Hence, it is obligatory for the AO to have e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf be a ground to reject the accounts by invoking s. 145(3); CIT(A) and the Tribunal having accepted the explanation given by the assessee for the fall in GP rate and the finding of fact recorded by them having not been shown to be perverse in any manner, no substantial question of law arises for consideration. In CIT v/s Jacksons (2010) 39 DTR 212 (Del.) Assessee s books of accounts could not be rejected by invoking s. 145(3) when there is no specific defect pointed out in the books of account maintained by the assessee following a regular method of accounting and stock register was also maintained though not in the form expected by AO. In CIT v/s Jas Jack Elegance Exports (2010) 324 ITR 95 (Del.) Accounts Rejection Non maintenance of stock register and GP rate Tribunal noted that the AO had not found any defect in the books of accounts and maintenance of stock register was not feasible considering the nature of the business of the assessee since fabric was measured in metres and was thereafter stitched to make garments which had to be counted in pieces As regards failure of the assessee to produce the persons to whom payments were made for fabrication, embroid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference statutes, for different purposes but it is not the case of the AO that the accounts do not show a true and fair view of profit /losses or there is some qualification w.r.t. incorrectness or incompleteness nor on any of the grounds mentioned u/s 145(3). Alternatively, it was argued by the ld AR that minor irregularities, even assuming were there, cannot be made a basis of the rejection of the books of accounts or of trading addition. 28. He further argued that even on merits no addition was warranted. The assessee is having 64,751 pieces of readymade garments which were classified as rejected and not carrying any realizable value as per the terms of the contract between the assessee exporter and importer. However, for accounting purpose these items were valued at a Nominal Rate of Rs.25/- per piece and accordingly Rs.16,18,775/- were shown under the head finished stock. 29. On the other hand, the ld CIT-DR has relied on the orders of the authorities below and contended that after completion of assessment U/s 143(3) of the Act, the A.O. found that the income of the assessee to the tune of Rs. 8,65,30,425/- has escaped assessment on account of under valuation of closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was reopened by recording reasons that the assessee has under valued its stock of finished goods. In reply to notice U/s 148, the assessee filed objections vide letter dated 06.10.2017 against the initiation of proceedings u/s 147, however, rejecting the assessee`s objection, the AO framed the assessment. He alleged that the assessee has undervalued its stocks by showing finished goods of readymade garments as rejected goods being 64751 pcs @ Rs.25/- per pcs and failed to provide any documentary evidence for making valuation. Therefore, considering that these pcs consist of all variety of finished goods, he valued the same @ Rs.355/- per pcs (Rs.2,13,51,494/- / 60139 Pcs) and added Rs.2,13,67,830/- (Rs.2,29,86,605/- less Rs.16,18,775/- shown by the assessee) on account of the alleged under valuation of closing stock. The A.O. also alleged that the assessee has undervalued its stocks lying with job units being 1,41,987 pcs @ Rs. 211.77 instead of showing the same as finished goods of readymade garments and failed to submit any documentary evidence to prove the fact of stocks lying with job units and failed to provide any evidence for making valuation. Therefore, considering that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sdiction u/s 147 of the Act, the AO must form a reason to believe of his own and such a belief (or satisfaction) should not/cannot be borrowed from someone else. However, in the present case, on the official inspection carried out by the CA AR of the assessee-company namely Shri T.C. Choudhary, FCA, it was found that when the AO sought administrative approval before granting a refund from a superior officer, the ld. Add. CIT issued a letter no.1198 dated 17.12.2016. The ld. Add. CIT, however, instead of dealing with the issue of refund for which, the AO sought permission, made a detailed discussion with regard to the valuation of the closing stock referring to the same audited final accounts and the tax audit report and on a second thought, substituted his opinion that there appears an undervaluation of the closing stock of the raw material to the extent of Rs. 2.35 crore and finished goods of Rs. 6.29 crore, totaling to Rs. 8.65 crore. In the entire body of the said letter, there was absolutely no reference/whisper of any other new information or new material (which was not available at the time of the making of the original assessment u/s 143(3) before the AO). Pertinently at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d also on account of goods sent and lying with the job work units at the end of year. From the record we found that all these rejections were with respect to export order of readymade garments so procured by the assessee during the year under consideration. As per the terms of export order, the assessee was not authorized to sell any first/second/third rejection or excess quantity. From the record we also found that the assessee is having 64,751 pieces of readymade garments which were classified as rejected and not carrying any realizable value as per the terms of the contract between the assessee exporter and importer. However, for accounting purpose these items were valued by the assessee at a Nominal Rate of Rs.25/- per piece and accordingly Rs.16,18,775/- were shown under the head finished stock. The AO made addition on following grounds: (i) The assessee was required to destroy the rejected items immediately and the assessee failed to submit any documentary evidence. (ii) The assessee failed to submit any documentary evidence regarding opening stock of 24,063/- rejection pieces. (iii) The assessee has not mentioned in final accounts/notes of accounts that finished goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods and was not rejected goods therefore, it was undervalued i.e. valued @ Rs.25 per piece only as against Rs.355/- per piece. There is no dispute to the fact that the assessee is an exporter and the entire sale proceeds are from export of garment only (except a minor amount from the local sale). Also it is a matter of common knowledge that to remain continue in the international market with goodwill, there cannot be any compromises on quality. The rejection of the goods exported, is normally a matter of serious concern for all the exporter inasmuch as many a times, because of the rejection of only a few pieces, the whole/lot consignment is rejected and even the cost of taking such rejected goods back to India, costs so heavily that it not only eats up entire profit but rather could result into a heavy loss. It is not denied that the assessee has exported its goods i.e. stitched readymade garments to the countries like United States of America, United Kingdom which are all the more highly quality conscious and even a slightest defect in the garment may render the whole lot or rather some time the whole consignment as rejection or scrap. Therefore, to avoid any unpleasant situation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confining the word destruction to some form of burning only, which is nowhere included in the definition. The meaning of destruction in readymade garments is to make them unsaleable/unusable. The same was done with all the rejected pcs with cutting the rejected garments to make them unusable. The ld. CIT(A) has also recorded this fact at page Nos. 11 and 12 para I to j of his appellate order, the condition of agreement was to destroy these rejected items and provide the evidence to importer on request. Since no request was made by any importer hence the question of providing documentary evidence does not arise at all. In any case it was a matter to be solved by the assessee and the party placing import order. Merely because importer has not asked for any such certificate, cannot be made to reason to presume that such rejected goods had been sold in the market without bringing any positive materials on record. From the record we also found that while alleging that the assessee has shown its finished goods as rejections and under valued the same, the A.O. failed to bring any instance that the assessee is selling goods in the open market which has been classified as rejected. If the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions and one of the clauses prohibited the assessee manufacturer-supplier that in case, for any reason, the product is treated it to be considered to be of grade second, third or excess, the assessee-manufacturer-supplier couldn t sale the same to any other party in the market except the said clients. Thus, the value of such rejected goods, was virtually nothing/nil so far as the assessee-manufacturer-supplier was concerned for the obvious reasons that in the light of such export agreement and in view of these facts why even the said customer should buy the rejected/damaged goods. Thus, for the assessee it was a dump/wastage having no realizable value at all. Even then the assessee to be on a very fair side valued such rejected goods @ of Rs.25 per piece though was not at all required. Undisputedly, the assessee has no legal right to sell these rejected/destructed goods in the open market due to condition of agreement hence, the value of these goods was Nil for the assessee. To account for the rejected goods/destructed goods in the financial account and for the purpose of internal controls only these goods were valued on a symbolic value of Rs.25/- per piece. The allegation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2531 2458 73 2.88 17590 GS 111 7600 7852 7624 252 3.21 25396 44230818 1700 1782 1731 51 2.86 06671 KAP6580 L J133692 1350 1411 1370 41 2.91 7575 AM WSRV 4850 4907 4859 48 0.98 7574 AM WSNC 3800 3929 3815 114 2.90 512027 634213 3850 3917 3879 38 0.97 P220075/73/74 9531716 A/B 1900 1925 1906 19 0.99 99863/97451 CPA4AA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81 0.98 1005868 402502 550 560 552 8 1.43 7139490 ISHTC3T 9250 9268 9177 91 0.98 228071/69/70/72 62030203A 4100 4145 4104 41 0.99 402540 9100 9158 9068 90 0.98 BL 7154523 ITR0PU4 2150 2166 2145 21 0.97 7942/7949 MWS0002060 7550 7599 7524 75 0.99 29937 44530808P001 2600 2607 2582 25 0.96 8063/7970 MW606BARS 6070 610 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see before the A.O.. As per our considered view since the assessee has no right to sale these goods hence to minimize the losses reusable accessories (buttons, zips etc.) were extracted from these items. This extraction work is carried out in very rough and speedy manner and after this it is totally impossible to sale these items. After this operation they got converted into a scrap items (also known as Chindi) and this was sold on kilogram basis. The bills of Chindi items sold were also submitted before the lower authorities. The AO did not deny from this fact but merely suspected that it did not show the sale of chindi resulting from the rejection goods which however, was an impractical and almost impossible task. Further the regular labourer engaged by the assessee, was also engaged in the destruction of the rejection goods but to evidence such activity, was not humanly practical and possible. Hence there remains no doubt that the assessee had rejected items, which were not as such open for sale in the open market and to minimize the losses these were sold as Chindi. 38. In view of the above facts and circumstances, we hold that the A.O. was not justified in making addition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e valuation of closing stock made by the AO. I find no infirmity or incorrectness in the working made by the AO, after analyzing all the evidences available with him. I am of the considered view that the AO had rightly valued the closing stock of 64,751/- pcs. Of rejection (finished stock) at Rs.2,29,86,605/- and valuation of 1,41,987/- pcs. lying with job units at Rs.5,04,05,385/-. Hence, the undervaluation of closing stock worked out by the AO at Rs.2,13,67,830/- (Rs.2,29,86,605 Rs.16,18,775) and Rs.2,03,36,304/- (Rs.5,04,05,385-Rs.3,00,69,081) is held to be correct. Accordingly, the total addition of Rs.4,17,04,134/- (Rs.2,13,67,830+Rs.2,03,36,304) made by the AO on account of undervaluation of closing stock made by the assessee is hereby confirmed. 41. With regard to above addition we found from the record that the assessee is in the business of export of the readymade garments and its manufacturing unit is situated at Bangalore. As per the prevailing trade practice in the readymade garment business, some designs/work are to be outsourced in as much the assessee itself is not having all the facilities, which is got done from the different manufactures known as job units. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total closing stock valuation of Rs.3,00,69,081/-) towards 1,41,987 pieces along with the copies of exemplary invoices were submitted before the AO vide letter dated 06.10.2017. The A.O. has also observed this at page 4.1 of his order. In this regard we observe that the assessee sent 364.6 Meters of Fabric (Cotton Jqrd Sh-Reg 1650) by way of Challan dated 24.03.2014 to Job Units M/s Vinayak Garment costing Rs.72,920/-. The expected number of pieces to be produced out of this fabric were 432 (Fulton Men s Shorts). Hence Pieces lying with the Job Units were shown as 432 Units of Fulton Men s Shorts at Rs.72,920/- i.e. cost in meters. The assessee received these pieces from M/s Sri Vinayak Garments vide Invoices No.371 dated 07.04.2014 alongwith some other pieces and Job Charges were charged @ Rs.95 per piece. The AO asked for further details and documents related to job work in late hours of Saturday, 30.12.2017. The assessee s manufacturing unit is situated at Bangalore and production records are maintained there only hence it was not possible for the assessee to arrange these details in a very short span of time to be produced before the AO at Bhilwara, yet the assessee filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expected number of pieces and not fabrics in meters. It is only a misconception of the AO that the records maintained by the assessee is verifiable only when the goods sent and received both, are recorded in same units. Once he is not an expert of the field, he must have accepted the prevailing industry practice and what the assessee has done, as correct or else should have obtained independent opinion. Mere change in measurement method does not mean addition/deletion in the quantity manufactured or that an additional product must have been produced. The conversion of fabric into pieces has been done for internal control purpose using a very simple method of conversion Meters to Pieces method. Hence addition on this ground is completely unjustified. 45. We also found that the AO has also alleged that by using such practice, the assessee purportedly made undervaluation of closing stock to avoid tax. However, such an allegation is very strange on the face of it. The allegation of the change in measurement unit is with respect to the raw fabric lying at the job units. After the work is done, the stitched garment has to be valued in terms of pieces only as against meters. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ric to the job units so as to enhance the valuation from the mere cost of fabric to include some overheads. Admittedly no bills were raised by the job units up to the year-end so as to be taken into the account while valuing the closing stock. Therefore, such valuation was also highly imaginary without any evidence. 48. We found from the record that during the remand proceedings, the A.O. referred to an invoice no. 485 of dated 03.04.2014 and alleged that some other invoice bearing serial number 483 is dated 07.04.2014, which is contradictory. Since it was an invoice raised by some job unit and not by the assessee, it is difficult for the assessee to make any comment but if it was so, it was for the AO to have enquired from the concerned job unit and not to add it to the alleged defects. 49. Similarly, the AO in the remand report also alleged that one of the job units has invalid TIN No. Again, it was for the AO to have enquired from that particular job unit to show the correct position. But it will be pertinent to clarify here that the AO firstly, selected a wrong website and hence made this allegation but then, when asked, the assessee clarified and gave the correct website ..... 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