Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, SURAT BENCH, SURAT
Before: SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM
Assessee by : Shri Tushar P Hemani, Sr. Advocate & Shri Parimal Sinh B Parmar, AR Respondent by : Ms Anupama Singhla, Sr. DR सुनवाईक�तार�ख/ Date of Hearing : 17/12/2020 घोषणाक�तार�ख/Date of Pronouncement : : 30/12/2020 आदेश / O R D E R PER Dr. A. L. SAINI, ACCOUNTANT MEMBER:
The captioned appeal filed by the assessee, pertaining to the Assessment Year (AY) 2010-11, is directed against the order passed by the ld. Commissioner of Income Tax (Appeals), Valsad [in short “the ld. CIT(A)”] in Appeal No. CIT(A)/VLS/125/12-13 dated 31.07.2014, which in turn arises out of an order passed by the Assessing Officer (AO) u/s.143(3) of the Income Tax Act, 1961 [hereinafter referred to as the “Act”]. The grievances raised by the assessee are as follows:
(1). Addition on Account of Under Valuation of Closing Stock of Raw materials of Rs.14,41,164/-.In the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals)erred in confirming addition by learned AO on account of under valuation of closing stock of scrap awaiting for reprocessing without appreciating the facts and circumstances of the case. (2). Non cognizance of corresponding adjustment in the Opening stock of succeeding year.In the facts and circumstances of the case the learned Commissioner of Income tax
Assessment Year. 2010-11 Ecoplast Limited (Appeals) erred in dismissing the ground that variation of closing stock necessarily enjoins the variation, on the same principle of the opening stock of succeeding previous year and directing the leaned AO to take the cognizance of similar adjustment by allowing corresponding increase in the value of opening stock for AY 2011-12 and allow deduction of Rs.14,41,164/- u/s 154 of the Income Tax Act. 1961 and re-compute the taxable income.”
Facts of the case which can be stated quite shortly, qua ground No.1, are as follows:The assessee filed its return of income on 10.09.2010 showing a total income of Rs.2,82,65,550/-. The assessee’s case was selected for scrutiny under section 143(2) of the Act. The assessee is a manufacturing company of Multi-layer Co-extruded plastic films for flexible packaging and other specialty application. The Assessing Officer after considering the various details filed by the assessee during the course of assessment proceedings noticed that assessee company did the undervaluation of closing stock of raw materials. On perusal of the month wise details of purchases, sales and closing stock, the assessing officer noted that the assessee company had valued its raw materials of recyclable materials as under: Month Item Quantity Rate Value March 2009 EP Grade 7011.400 31.91 223709 Loose LDPE old 66457.500 21.35 14,19,029 April2009 EP Grade 45884.700 23.78 10,91,185 Loose LDPE Old 5028 31.78 1,59,818 May 2009 EP Grade 47161.00 21.89 10,32,150 Loose LDPE Old 3856.200 31.14 1,20,072 June 2009 EP Grade 30101.800 37.80 11,37,711 Loose LDPE Old 7706 31.74 244616 July 2009 EP Grade 45969.400 32.79 15,07,531 Loose LDPE Old 8418.900 31.68 2,66,677 August 2009 EP Grade 67021.00 36.26 24,30,050 Loose LDPE Old 7545.00 31.89 2,40,632 Septmber2009 EP Grade 90217.00 34.36 30,99,818 Loose LDPE Old 11052.100 3.1.84 3,51889 Oct 2009 EP Grade 105,887 33.58 33,55,519 Loose LDPE Old 13088.00 31.79 4,16,060 Nov 2009 EP Grade 12434.00 28.51 35,45,186 Loose LDPE Old 10134.00 31.74 3,21,616 Dec 2009 EP Grade 97308 33.78 32,86,739 Loose LDPE Old 8070 31.46 2,53,916 Jan 20 10 EP Grade 82770 30.19 2498720 Loose LDPE Old 11074 31.52 3,49,092 Feb2010 EP Grade 95999 26.80 25,72,921 Loose LDPE Old 11651 31.30 3,64,660 March 2010 Scrap awaiting RPP 10,0921.800 13 13,11,983 Page | 2
Assessment Year. 2010-11 Ecoplast Limited Thus, it was noticed by the assessing officer that assessee company had valued raw materials of EP Grade and Loose LDPF at the rate of Rs. 13 as against average rate of Rs.27.28 in February 2010 as scrap awaiting RPP(Re-processing). Therefore, the assessee was asked to justify the valuation of raw material as on 31.03.2010 being scrap awaiting RPP-bases as compared to 28.02.2010.
3.In response, the assessee furnished explanation before the assessing officer stating that majority of process scrap is recycled and reused for the processing them through process of agglomeration by converting the scrap in to reprocessed granules. This is evident from yield of finished goods of 98.6%. In order to maximize the sales realizations assessee recycles the reprocessed material to manufacture the finished products by appropriate grading so that the chemical properties of the material not diluted. The assessee sales only those grade of scrap which cannot be easily recycled due to impurities and non-usability. This non- usability scrap is generally categorized as under:
(i).Lumps Scrap in solid form generated at the stage of startup / shutdown or abrupt shut down due to power failures. (ii).Black & White Scrap – This is generated in SPF plant which cannot be recycled to match it with its virgin qualify. (iii).Unusable RPP Granules due to discontinuation of the products/ obsolescence. (iv).Printed Scrap – This scrap cannot be sold due to the proprietary issue of the customer’s brand. (v).Adhesive Coated Scrap-This scrap cannot be recycled.
As per consistent method of valuation, the scrap for sale is valued at market price depending upon the conditions of scrap. At the close of the year, it is the practice of the assessee to accumulate all scrap in the factory in Recycle go-down and then further processed after its categorization in to usable and non-usable by process of reprocessing / agglomeration. Subsequent to the reprocessing, the reprocessed granules are reused in the production and their full value is realized upon its Page | 3
Assessment Year. 2010-11 Ecoplast Limited eventual sale. The sale rate of scrap depends upon its usable grades and market value in subsequent months and the prevailing market value is always realized in due course and accounted for as the part of the sales revenue. The year end valuation of scrap does not result in to permanent understatement of profit but it is realized in due course as per the operating cycle of the company's Business. Since assessee is a listed company, it has to publish the un-audited results within 30 days of the close of the year and therefore assessee has to estimate the sales value of the scrap at the prevailing rate on date of closing of books of accounts and assessee cannot wait to value it based on subsequent sale rate which may vary due to market conditions. The assessee also submitted before the assessing officer, the year end scrap stock, which is reproduced below: Nature of Scrap Quantity (Kgs) Value (Rs.) Remarks Black & White 33,749 4,38,736 Not Recyclable Printed 10,066 1,30,857 Not Recyclable
Lumps 9,725 1,26,424 Not Recyclable
Unusable Reprocessed 35,095 4,56,235 For Sale White op. Film Scrap 939 12,207 Not Recyclable Loose Material 11348 1,47,524 Not Salable in Open market Total 1,00,922 13,11,983 Therefore, assessee has valued the scrap at Rs.13 per kg, and during the assessment proceedings the assessee also submitted to assessing officer two sale instance of scrap for the month of March 2010 in support of its valuation rate.
However, the Assessing Officer rejected the contention of the assessee and observed that the two instances of Scrap Sale quoted by the assessee were of sale of "poly scrap- SPF coated -2900 kgs and "Poly Scrap uncoated" 1025 kgs. The assessing officer noticed that as per the assessee's own submissions, the assessee's by products were recyclable and thus the scrap is minimal. The yield of finished products is 98.76%. "EP Grade" material is recyclable i.e.re-process grade which is consistently being shown in the closing stock of raw materials, which in the Assessment Year. 2010-11 Ecoplast Limited beginning of the year as on 1st April 2009 was valued at an average rate of Rs.22.35 per Kg. The assessing officer also noted that assessee has consistently assessed the value of “EP grade” materials and “loose LDPE” at higher rates as compared to value adopted as on 31st March 2010 @ Rs.l3 per Kg. The total sale of unusable scraps was only 3,925 kgs @ Rs.13 per Kg, as against the closing stock quantity of 1,07,650kgs in February 2010.Thus, assessing officer was of the view that assessee's contention has no force in valuing the closing stock of 100921 kgs of “EP Grade” and “loose LDPE” old materials as on 28th February 2010 at rates of scrap sales at average rate of Rs.13 per Kg, as on 31st March, 2010. Therefore, the value of closing quantity of EP grade materials, as on 31st March 2010 was taken by the assessing officer at the average rate of the assessee in February 2010 i.e. Rs 27.28 for 100921.800kgs at Rs.27,53,147/- in place of assessee's valuation of Rs. 13,11,983/-. Therefore, assessing officer made addition to the tune of Rs 14,41,164/- (Rs.27,53,147 – Rs.13,11,983).
Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before ld. CIT(A), who has confirmed the addition made by the Assessing Officer. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.
We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. At the outset we noticed that there is a typographical error of Rs.2,000/- in the sum of addition made by the assessing officer at Rs.14,43,164/-, it should be at Rs 14,41,164/-, therefore, the addition so made by assessing officer should be read at Rs 14,41,164/-(Rs.27,53,147 – Rs.13,11,983). The Learned Counsel for the assessee vehemently submitted before the Bench that assessee’s books of accounts are not rejected. The assessee’s purchases and sales were not doubted by the assessing officer and assessee’s turnover during the assessment year under consideration is to the tune of Rs.2,82,65,550/- therefore the Page | 5
Assessment Year. 2010-11 Ecoplast Limited addition on account of undervaluation of closing stock to the tune of Rs.14,41,164/- is not even 5% of the total sales/turnover, hence genuineness of the closing stock should not be doubted. The Ld Counsel drew our attention on page no.11 of the paper book, wherein the item of “EP Grade” was valued in February, 2010 at the average rate of Rs.26.30 per kg, this is because one of the items which is taken for average purpose was valued at Rs.39/- per kg, which is not scrap item. For scrap the rate at Rs.39/- per kg. does not apply therefore, the assessing officer was not justified in taking the average rate of Rs.26.30 per kg. The Ld. Counsel also drew our attention on page no.190 of paper book wherein the quantity in kg of Poly Scrap Sales at 58,871.40 kg. was valued by the assessee at the rate of Rs. 13 per kg. Hence, learned counsel submitted that Assessing Officer has taken inconsistent figures to find out the undervaluation of closing stock, which is not justifiable on facts, as narrated above. The learned counsel further submitted that assessee-company is a listed company and its purchases and sales are subject to value added tax (VAT) and Excise duty. The Excise Authorities did not find any mistake in the sales/turnover of the assessee company, therefore, addition made by the assessing officer may be deleted.
On the other hand, Ms Anupama Singla, ld. Departmental Representative for the Revenue submits that Assessing Officer has worked out the undervaluation of closing stock by taking average price of the items of closing stock, therefore, there is no mistake in arriving at the figure of under valuation of closing stock, hence addition made by the assessing officer may be upheld.
We note that assessing officer has erroneously presumed that closing stock comprised of “EP Grade”; whereas as per assessee the closing stock comprised of “scrap”. When stock of March does not comprise of “EP Grade”, the question of adopting rate of “EP Grade” for valuing stock of March, which comprises of different categories of “scrap”, does not arise at all. Thus, the initial footing itself at the assessing officer’s end was erroneous.
Assessment Year. 2010-11 Ecoplast Limited Besides, it is a basic accounting principle that “closing stock” of a particular year becomes “opening stock” of immediately subsequent year. Hence, if closing stock is valued as per the valuation adopted by the assessing officer, then the value of “opening stock” of the “subsequent year” may be also be increased correspondingly. Moreover, the assessee under consideration is assessed to tax at the “same rate of tax” every year, therefore the entire exercise of making the impugned addition is revenue neutral. For that we rely on the judgment of the Hon'ble the Apex Court in case of CIT Vs. Excel Industries Ltd. -358 ITR 295 (SC), wherein it was held that since assessee is assessed to tax at the "same rate of tax" every year, the entire exercise of making the impugned addition is revenue neutral. The relevant para of the said judgment is reproduced below: “32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.”
The ld Counsel contended that as per bills the value of scrap is Rs.13/- per kg which is evident from the sale of such scrap material. The said scrap has been categorized in different categories but sold by assessee at the rate of Rs.13/- per Kg. The Ld Counsel also produced before the Bench the “Tax Audit Report” of the assessee for the assessment year under consideration wherein the "Method of valuation of closing stock employed in the previous year” is clearly stated that "scrap" is valued at "market value". The assessee also submitted quantitative details of stock before assessing officer as well as CIT(A) which are neither disputed by assessing officer nor CIT(A). Considering the facts, as narrated above, we are of the view that assessee has explained the genuineness of the closing stock, hence we are not inclined to accept the contention of the Assessing Officer in any manner and hence the addition of Rs.14,43,164/-, so made by assessing officer, is deleted. Hence this ground of the assessee is allowed. Page | 7
Assessment Year. 2010-11 Ecoplast Limited 10. Before parting, we state that since we have allowed the ground No.1 raised by the assessee, therefore, ground No.2 raised by the assessee becomes academic and infructuous.
In the result, the appeal filed by the assessee is allowed.