M/S KHETAN TIMES PVT. LTD.,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4, JAIPUR

During the course of hearing, the ld AR submitted that the assessee company is engaged in manufacturing, trading and export of marble tiles & slabs. It valued its stock at cost or net realizable value estimated on the basis of quality/defects of stock, whichever is lower. During the year, out of closing stock of 6013.682 MT of marble block, it considered 50% of the stock as defective and valued it at 55% of the cost. All other stock was valued at actual cost. Accordingly, out of 6013.682 MT of marble block, 3006.841 MT was valued at cost of Rs.3567.62 per MT i.e. at Rs.1,07,27,284/- and the remaining 3006.841 MT was valued at Rs.1962.19 MT i.e. Rs.59,00,006/-. This resulted in reduction in the value of the stock of marble block by Rs.48,27,278/-.

It was submitted that during the course of assessment proceedings, the AO observed that assessee has claimed defective closing stock at 50% of the total quantity of closing stock and valued the same at 55% of the cost. It is not an accounting policy of the assessee. There is no basis of valuing stock as defective stock on lumpsum basis or on estimated basis. The assessee has been showing defective stock year after year ranging from 25% to 75% and valuing the same at 25% to 50%. On examination of the books, it is found that none of the stock has been sold at lower rate. Selling rates of all the stock are almost at static price. It means that the assessee is not selling defective stock. In stock register, no stock is mentioned as defective. Marble blocks are purchased after proper verification and rates are decided accordingly. Even imported marble blocks are shown as defective which can’t be believed. Further when all the defective stock was sold in the preceding year ended on 31-03-2014, than how it is possible that 50% of the stock become defective within the year. Accordingly, the AO made addition of Rs.48,27,278/- by treating the defective stock as non-defective. He further did not given direction to increase the value of the opening stock of the next year.

It was further submitted that on appeal, the Ld. CIT(A) held that assessee has not been able to justify the valuation of 50% of its stock at 55% of its value. There is absolutely no evidence to show that 50% of stock of assessee was defective. Also there is no justification for valuing such stock at 55% of its value. Accordingly, he confirmed the addition made by the AO. However, he directed the AO to adjust both the opening stock as well as closing stock of subsequent assessment year.

It was submitted by the ld AR that the assessee has been consistently valuing its closing stock at cost or realisable value whichever is lower after giving effect of defective goods. This is done on year to year basis. The percentage of defective stock and its valuation in different assessment years is as under:-

It was further submitted that in AY 2008-09 & 2009-10, the AO made addition by not accepting the claim of defective stock and reduction in its value. The Ld. CIT(A) after relying on the decision of ITAT in assessee’s own case for AY 2005-06 deleted the addition made by the AO. The order of Ld. CIT(A) was upheld by Hon’ble ITAT.

It was further submitted that in AY 2013-14, the AO again made the addition by not accepting the claim of defective stock in its valuation at the reduced rate and thus made an addition of Rs.41,84,495/-. The Ld. CIT(A) deleted the addition made by the AO. Against this order, the Department preferred an appeal before the ITAT who vide order dated 09-08-2017 set aside this issue to the CIT(A) to examine the matter afresh. The set aside proceeding are still pending before the Ld. CIT(A).

It was further submitted that in AY 2014-15, assessee has not claimed any defective closing stock and valued the entire stock at cost. This assessment was completed u/s 143(1) and therefore, the addition of Rs.41,84,495/- made in AY2013-14 is not considered in the opening stock of AY 2014-15 and thereby income for AY 2014-15 was assessed at an increased amount to this extent.

It was further submitted that during the year under consideration, the closing stock of marble block at factory is 6013.682 MT. The opening stock of marble block was at 6144.56 MT. The block extracted from mines/purchased during the year has been consumed/sold. Thus it is evident that the marble block in closing stock is coming from last year. This is because the blocks which are of better quality is either sold or consumed in production. Therefore, it is evident that the leftover stock contains the defective stock also. So far as imported marble blocks are concerned, no defective stock has been claimed and thus, the observation of AO in this regard is incorrect. The fact that the marble block which was purchased more than one year ago remained in the closing stock itself shows that these marble blocks were defective. The assessee on physical verification has determined 50% of the same as defective and considering its realizable value has valued at 55% of the cost. The marble blocks during the year has been sold at a rate ranging from Rs.300/- per MT to Rs.10,174/- per MT. In AY 2016-17 marble block has been sold at a lower rate ranging from Rs.250/- per MT to Rs.1,500/- per MT whereas good quality marble block has been sold at a range of Rs.10,000/- per MT to Rs.26,586/- per MT. This itself shows that certain marble blocks remained defective in the closing stock having a lower realizable value. Thus, assessee has correctly valued the closing stock of marble block as per the accounting policy consistently followed by it and therefore, addition of Rs.48,27,278/- made by the AO and confirmed by Ld. CIT(A) is uncalled for.

It was further submitted that the Ld. CIT(A) has directed the AO to increase the value of opening stock in the subsequent year but his direction to give effect only if the assessee accepts the order of Ld. CIT(A) is incorrect. His further direction that if the opening stock in increased, then closing stock should also be adjusted in the next year is incorrect as in AY 2016-17 AO has again made addition of Rs.74,01,921/- by not allowing the claim of defective marble stock in the closing stock of AY 2016-17. This has resulted into double addition and therefore, such direction of Ld. CIT(A) be expunged in case the ground of assessee is not allowed. In view of above, addition of Rs.48,27,278/- confirmed by Ld. CIT(A) be directed to be deleted.

The ld. DR is heard who has relied on the findings of the lower authorities.

We have heard the rival contentions and perused the material available on record. The ld CIT(A) has returned a finding that there is no evidence to show 50% of stock of marble block is defective and also there is no justification for valuing such stock at 55% of its value. In response, the ld AR has submitted that the assessee on physical verification has determined 50% of stock as defective and considering its realizable value has valued it at 55% of cost. The question is how the assessee demonstrates such physical verification and determination of realizable value. However, there is nothing on record which can demonstrate that such physical verification was carried out and defective stock was identified and categorized as such. The AO has returned a finding that even in the stock register, the assessee has not mentioned any stock as defective and no differentiation or marking was given in the stock register. Therefore, we find that the AO has carried out the necessary verification of stock register and such a finding of the AO has not been rebutted before us and thus attains finality. Further, how the assessee has arrived at net realizable value @ 55% of cost is not clear. The ld AR has referred to range of value at which marble blocks were sold during the year and in the subsequent financial year 2015-16, however, what is the percentage of realization or at what profit/loss margins, the blocks were sold has not been specified. In light of the same, we are of considered view that the assessee has failed to justify the quantum of defective stock of marble blocks and its realizable value, thereby the addition made by the Assessing officer is hereby confirmed. In the result, the ground of appeal is dismissed.

The ld. DR is heard who has relied on the findings of the lower authorities.

We have heard the rival contentions and perused the material available on record. It is noted that investment in shares of SBBJ has been made in the earlier years as is evident from the computation done by the AO wherein there is no change in the value of investment at the beginning of the year and at the close of the year. In AY 2013-14, the 9 M/s Khetan Tiles Pvt. Ltd. vs. DCIT ld CIT(A) has given a finding that interest free funds were more than investment made by the assessee and disallowance of interest was deleted which was subsequently upheld by the Coordinate Bench. However, disallowance on account of administrative expenses was sustained at Rs 13,414. Therefore, following the earlier year, the disallowance of administrative expenses of Rs 2,974 as made by the AO is upheld for the impugned assessment year. In the result, the ground of appeal is dismissed.