PR. COMMISSIONER OF INCOME TAX vs. M/S GOODWILL FABRICS PVT. LTD.

[2023:RJ-JP:32747-DB] HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 137/2019 Pr. Commissioner Of Income Tax, Ajmer ----Appellant Versus M/s. Goodwill Fabrics Pvt. Ltd., B-204, R.K. Colony, Bhilwara, 311001 ----Respondent For Appellant(s) : Mr. Shantanu Sharma, Advocate For Respondent(s) : Mr. Devang Gargieya, Advocate for Mr. Mahendra Gargieya, Advocate HON'BLE MR. JUSTICE MANINDRA MOHAN SHRIVASTAVA HON'BLE MR. JUSTICE PRAVEER BHATNAGAR Judgment / Order 12/09/2023 Heard on admission. Learned counsel for the revenue has proposed following substantial questions of law:- “1. Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT was justified in reversing the decision of the Ld. CIT(A) and deleting the addition of Rs.2,13,67,830/- made on account of under valuation of closing stock by way of showing rejection, without appreciating the fact that the assessee company did not have right to keep or sell rejected goods as per the copy of agreement placed on records and also shown the finished goods as rejected under the head “Finished Stock”? 2. Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT was justified in reversing the decision of the Ld. CIT(A) and deleting the addition of Rs.2,03,36,304/- made on account of under valuation of closing stock by way

[2023:RJ-JP:32747-DB] (2 of 5) [ITA-137/2019] of showing stock with job units, without appreciating the fact that the assessee company valued the goods in pieces and shown the same under the head “Finished Stock” instead of “Work in Progress”?” Learned counsel for the revenue would argue that though the Assessing Officer as well as The Commissioner of Income-Tax (Appeals), Ajmer (For short ‘CIT(A)’) both recorded concurrent finding insofar as addition on account of under valuation of closing stock by way of showing rejection as well as addition on account of under valuation of closing stock by way of showing stock with job units is concerned, the Appellate Tribunal interfered with the concurrent finding of facts on both the counts and deleted additions. Insofar as order deleting the addition made on account of under valuation of closing stock by way of showing rejection is concerned, it has been argued that learned Tribunal did not appreciate the fact that the Assessee Company did not have right to keep or sell rejected goods as per the agreement placed on records and also shown the finished goods as rejected under the head “Finished Stock”. Further submission is that the order of the Appellate Tribunal deleting the addition made on account of under valuation of closing stock by way of showing stock with job units is concerned, that was also done without appreciating the fact that the Assessee Company valued the goods in pieces and shown the same under the head “Finished Stock” instead of “Work in Progress”. We have gone through the order passed by the learned Tribunal. Learned Tribunal has examined the material on record and reappreciated while deleting addition made on account of under valuation of closing stock by way of showing rejection, in paragraphs 32 to 38 of the impugned order. In its detailed consideration and upon perusal of record, it was found that Assessing Officer was having no basis or reliable

[2023:RJ-JP:32747-DB] (3 of 5) [ITA-137/2019] material so as to draw an inference that the stock shown by the assessee under the head rejected goods was, in fact, finished goods and was not rejected goods. Appellate authority also took into consideration that the Assessee is an exporter and the entire sale proceeds from export of garment only (except a minor amount from the local sale) and further that to remain competitive in the international market with goodwill, there cannot be any compromise with the quality, rejection of goods sought to be exported is a matter of serious concern for exporters. It has also taken into consideration the goodwill of the Assessee as exporter, exporting clothes to various countries, Assessee would not be ignoring slightest defect in the garments, the possibility of there being rejection of goods on account of defect or lacking in the quality is not unusual and, therefore, doubt in this regard by the Assessing Officer was unwarranted. It was also discerned from the record that Assessing Officer accepted the fact that the stated goods were rejected goods and the Assessee shall not have any right to sell any of these pieces as per the agreement with overseas clients. The sample and copies of agreement with overseas clients submitted before the Assessing Officer were scrutinized and particular note was taken on the clause that such rejected products shall not be sold yet the Assessing Officer did not accept the stipulation on the ground that if there is any rejection, it had to be destroyed immediately and the assessee failed to produce any documentary evidence for such disposal. It also took note of the fact that in some cases there was condition of destruction but that was not shown in all the agreements. In the absence of there being any proof that the Assessee was selling rejected goods in the Grey market, only on the ground of non destruction, it could not be presumed and assumed that rejected goods are being sold.

[2023:RJ-JP:32747-DB] (4 of 5) [ITA-137/2019] Detailed consideration in this regard has been made by reappreciating the material on record to arrive at the conclusion that addition of the value of rejected goods was not proper. Similarly, in paragraphs 39 to 43, the Tribunal has considered in great detail that addition made on account of under valuation of closing stock by way of showing stock job units was not warranted. Learned Tribunal has taken into consideration material on record that the manufacturing unit was situated at Bangalore and as per prevailing trade practice in readymade garment business, some designs/works are to be outsourced inasmuch as Assessee itself is not having all the facilities, which is got done from different manufacturers known as job units. In this process, the principle manufacturer (Assessee) sends fabrics to the job units and order is placed in terms of the number of pieces to be manufactured by that job unit. It keeps records of fabric sent in terms of the pieces and the same is thereafter compared and reconciled while receiving back the stitched/worked pieces from the job unit. Such fabric is reduced from the raw material and then taken to the account of garment pieces lying with the job units in the stock books. The pieces which got completed during the year, were transferred to finished goods and the pieces on which no cost was incurred even till 30.03.2014, were shown as stock with job units but at the cost of fabric only because no cost was incurred on such pieces either by the Assessee or reported by the job units. Tribunal also scrutinized the records and found that the Assessee has produced complete quantitative details before the Assessing Officer which was wrongly rejected by the A.O. without any basis. The Tribunal noticed a detailed chart showing the name of the job worker, style name, date of issue, buyer, P.O. No., colour, quantity, quality of the finished goods/garments, quantity of material supplied and

[2023:RJ-JP:32747-DB] (5 of 5) [ITA-137/2019] lying with the job workers together with the rate applied and finally the amount arrived at towards number of pieces along with the copies of exemplary invoices submitted before the Assessing Officer Upon such consideration of the material, the Tribunal found that extensive details were filed before the lower authorities and there is no doubt about the units lying with the job units. Therefore, the finding of the Assessing Officer that these units were not disclosed separately in financial accounts and not separately disclosed in notes of accounts is improper and addition cannot be made merely because a separate disclosure has not been made in the notes of accounts as the financial accounts are prepared according to established accounting conventions. We are, therefore, of the view that the questions of law as proposed by the revenue that various aspects were not taken into consideration and appreciated before deleting the additions, is factually not correct. The conclusion drawn by the Appellate Tribunal turns on minute scrutiny of material on record. The Tribunal has recorded its own finding of fact and assigned reasons and traversed factual finding recorded by Assessing Officer and CIT(A). Therefore, in the absence of there being any perversity, violation of law or non consideration of material aspects as stated in the question of law, no substantial question of law arises for consideration. Appeal of the revenue, therefore, being without merit, is dismissed. (PRAVEER BHATNAGAR),J (MANINDRA MOHAN SHRIVASTAVA),J Mohita /50