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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the Revenue challenging the impugned order dated 21/01/2019, passed under section 250, of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals)–40, Mumbai, [“learned CIT(A)”], for the assessment year 2013–14.
In its appeal, the Revenue has raised the following grounds:–
“1. On the fact and circumstances of the case the Ld. CIT(A) erred in holding that the books of account of the assessee were not required to be rejected on the ground that the same were not complete without appreciating the fact that there was a specific mistake in the books of account in the shape of excess of M/s. Zeemag Industries ITA no.2266/Mum./2019 Rs. 1,88,77,595/- duly admitted by the assessee which itself establish that books of account of the assessee were not complete.
2. On the fact and circumstances of the case the Ld. CIT(A) erred in deleting the addition on the ground that the addition on account of GP tantamount to double addition due to determination of WIP on account of sale value without appreciating the fact that there was no double addition on account of valuation of raw material and there was a fall in GP of 9.94% in the post survey period on the corresponding Sale of Rs. 4,87,22,965/- as compared to the average GP of immediately preceding two assessment year.
3. The appellant craves leave to add, to amend, alter, substitute or modify any of the above ground or add a fresh ground as and when found necessary either before or at the time of hearing.”
The grievance of the Revenue, in the present appeal, is against deletion of addition based on estimated additional gross profit.
The brief facts of the case as emanating from the record are: The assessee is a partnership firm engaged in the business of manufacturing engineering goods (EOT cranes and parts). For the year under consideration, the assessee filed its return of income on 29/09/2013, declaring a total income of Rs. 10,39,73,830. During the year, the assessee has shown income from the business. A survey under section 133A of the Act was conducted at the business premises of the assessee on 13/02/2013. During the survey, physical inventory of stock was taken but the same could not be verified with the books of accounts because the assessee had not maintained the purchases and sales register. Therefore, the assessee’s purchases and sales bills (70 box files) and stock register (5 nos.) were impounded. It was noticed that the stock physically found was in excess. During the survey proceedings, the statement of Mr. Manoj T Bijlani, one of the partners of the assessee, was recorded under section 131 of the Act. The aforesaid partner of the assessee admitted to the difference of Rs. 3,15,32,000, in the work in progress (WIP) as unaccounted Page | 2
M/s. Zeemag Industries ITA no.2266/Mum./2019 investment in stock of WIP of cranes. It was also admitted that the difference arising on the valuation of raw materials of Rs. 1,88,77,595, on the physical inventory of the stock during the survey, is unaccounted investment in stock of raw materials. The assessee also considered Rs. 3,59,68,280, as stock which was not yet been entered in the profit and loss account at the time of survey and declared a net profit of Rs 10,13,72,648 (i.e. Rs. 11,20,72,648 – Rs. 1,00,00,000). Accordingly, the assessee considered unaccounted stock in the final account of the firm and filed a return of income on 29/09/2013, declaring a total income of Rs. 10,29,73,830, and shown a gross profit of 27.38% and net profit of 23.36%. During the assessment proceedings, the assessee furnished a comparative chart of gross profit and non-profit for the assessment years 2011–12, 2012–13, and 2013–14. The Assessing Officer (‘AO’) vide order dated 30/03/2016 passed under section 143(3) of the Act held that as disclosure amount of Rs. 5,04,09,595 (i.e. Rs. 3,15,32,000 + Rs. 1,88,77,595) is unaccounted investment in stock, therefore, the same cannot be part of the regular income of the assessee firm. Accordingly, the AO computed the gross profit of the assessee at 16.86% after excluding the aforesaid disclosure amount. The AO also rejected the books of account of the assessee under section 145(3) of the Act as there was discrepancy in the stock, which was found during the survey proceedings. The AO on the basis of the difference in gross profit as compared to the preceding year made an addition of Rs. 2,09,64,740, to the income of the assessee as undisclosed profit.
The learned CIT(A) vide impugned order allowed the appeal filed by the assessee. Being aggrieved, the Revenue is in appeal before us.
M/s. Zeemag Industries ITA no.2266/Mum./2019
During the hearing, the learned DR vehemently relied upon the order passed by the AO. On the contrary, the learned AR by placing reliance upon the decision of CIT(A) submitted that profit was already added to the WIP and therefore further profit cannot be added.
We have considered the rival submissions and perused the material available on record. The AO recomputed the gross profit and net profit of the assessee, for the year under consideration, after reducing the amount disclosed during the survey as under:
Particulars Amount (in Rs.) Sales 47,97,42,348 Gross profit including disclosure 13,13,61,862 Less: disclosure 5,04,09,595 Gross profit of regular income 8,09,52,267 G.P.% of regular income 16.86%
The AO on the basis of the difference of gross profit @4.37% as compared to earlier year (i.e. 21.23% for AY 2012–13 - 16.86% for AY 2013– 14) made the addition of Rs. 2,09,54,740. It is the plea of the assessee that the unaccounted investment in stock of WIP of cranes amounting to Rs. 3,15,32,000, accepted by the partner of the assessee, was valued at sales price. In this regard, reliance was placed upon the statement recorded under section 131 of the Act, forming part of the paper book from pages 27–44, particularly to questions No. 9 and 10, which reads as under:
M/s. Zeemag Industries ITA no.2266/Mum./2019
“Q.9 In respect to above WIP, you are asked to give us the details of Sales Value of each crane and % of Completion stage in respect of each crane? Ans: The WIP is based on Sales Value and % of Completion including Labour and Overhead will be worked out as under:
Sr. Items Job Cost % of Total (Rs.) no. Com– pletion A. Work in Progress – Ambernath Steefo – Job 774 68,15,000 75% 51,11,250 Excel – Job 785 29,00,000 80% 23,20,000 GD Ferro – Job 798A 34,00,000 75% 25,50,000 GD Ferro – Job 798B 26,50,000 75% 19,92,500 GD Ferro – Job 798C 26,50,000 80% 21,26,000 Universal – Rail & DSL – Job 807 24,11,500 80% 19,29,200 MSM – Job 756C 42,00,000 80% 33,60,000 MSM – Job 756E 40,00,000 80% 32,00,000 Bhimeswari – Job 772A 42,00,000 80% 32,80,000 Bhimseswari – Job 772D 56,50,000 75% 42,42,500 MSM – Job 756A 41,00,000 75% 30,80,000 ARS – Job 801 19,00,000 70% 13,30,000 Hitech – Job 734B 51,67,500 75% 38,79,500 Hitech – Job 734D 41,34,000 75% 31,00,500 Western Ind. – Job 792A 67,00,000 75% 50,25,000 Dubai Manufacturing Co. – Job 44,10,000 50% 22,10,000 806A Apex Industries – Job 808 31,27,000 50% 15,63,500 Sub–Total 5,03,00,000 B. Work in Progress _ Mahape Bhimeshwari – Job 722C 41,00,000 80% 32,80,000 MSM – Job 756F 28,00,000 70% 19,60,000 A”IA – Job 800 22,00,000 80% 17,60,000 Sub–Total 70,00,000 Grand Total 5,73,00,000
M/s. Zeemag Industries ITA no.2266/Mum./2019
Q.10 It is noticed frees your reply to Q.6 above that you have valued your WIP at much lower at 257,68,000 thereby indicating that the % of Completion in respect of above cranes as mentioned to Reply to Q.7 is much higher as indicated above. Accordingly why WIP of Cranes as stated in Reply to Q.7 providing the aggregate value of the Cranes at Rs.73,00,000/ be adopted as your WIP on 13/02/2013 and the difference of Rs. 315,32,000/- not be treated as your unaccounted investments in stock of WIP of cranes. Ans: Sir, I understand that the value of WIP of the Cranes has been understated by me. However, I am aware that the Cranes are almost complete and as such the value should have been adopted at their actually completed WIP. However, I don't have much to say in this regard and wish to offer the difference of Rs.3,15,32,000/- as my unaccounted investment in stock of WIP of cranes.”
Thus, from the above, it is evident that the unaccounted investment in stock of WIP of cranes amounting to Rs. 3,15,32,000, is nothing but a difference of aggregated WIP of Rs. 5,73,00,000, based on sales value, and Rs. 2,57,68,000, i.e. the WIP as per the statement of stock submitted during the survey. Further, the amount of Rs. 5,04,09,595, wherein the WIP was computed on sales value, was offered to tax by the assessee in its return of income. The other component in the aforesaid amount of Rs. 5,04,09,595, is unaccounted investment in raw materials accepted by the assessee amounting to Rs. 1,88,77,595. In view of the aforesaid facts, the learned CIT(A) allowed the appeal filed by the assessee by observing as under:
“6. Decision: I have gone through the submissions made by the AR of the appellant as well as the assessment order passed by the AO carefully. In the course of survey and subsequent assessment proceeding, valuation of closing stock was different to arrive at a disclosure of income. However, the recognized method of valuation is cost or market rate whichever is lower. The Supreme Court in the case Sanjeev Woolen Mills v. C.I.T. 279 ITR 434 (SC) held that: “On no principle can one justify the valuation of Closing Stock at a Market rate higher than cost. Permissibility of valuation of the Stock at Market Value would be only if the market value of the Stock is lower than the cost of the Stock.” “Choice of the method of accounting lies with the assessee but the ass Assessee would be required to show that he has followed the chosen method regularly. Page | 6
M/s. Zeemag Industries ITA no.2266/Mum./2019
The Department is bound by the assessee’s choice of the method regularly employed unless by this method the true income or profits cannot be arrived at. The assessee’s regular method would not be rejected as improper merely because it gives him the benefit in certain years or because as per the Assessing Officer the other method would have been more preferable. The method of accounting cannot be substituted by the Assessing Officer merely because it is unsatisfactory. What is material for the purpose of Sec. 145 of the I.T. Act, 1961, is the method should be such that the real income, profits and gains can be properly deducted therefrom.” The Hon’ble Delhi High Court in the case of CIT v/s Jas Jack Elegance Exports (2010) 324 ITR 95 (Del.) held that if the accounts are not defective, book results cannot be rejected merely because there is fall in gross profits. It is seen in the instant appeal that the Survey party had valued the Work in Progress at the Sale Value. The Sale Value definitely includes the profit. Hence again excluding the declaration and estimating the gross profit was unwarranted. Even rejection of book results u/s 145(3) is also uncalled for. Besides, the Delhi High Court in the case of CIT v. Bindals Appearels (2011) 332 ITR 410 (Delhi) held that “Non maintenance of Day to Day Stock Register is not a reason to reject books”. The case is rather identical to the facts of the assessee’s case. However, in the case of the assessee, Purchase Register, Sales Registers and Stock Registers were impounded by the A.O. The A.O.’s statement that these registers are not maintained appears to be wrong. The Sales tax / VAT Assessment order is produced int eh paper book at Page 145 to 148 for the above period. The Dy. Commissioner of Sales Tax who carried out the assessment states that “The assessee produced books of accounts closed and adjusted.” (at p. 147 of the paper book). In view of the above said facts, I am of the opinion that the rejection of Bank results are unwarranted and the estimation additional gross profits are also uncalled for. Hence, the addition of Rs.2,09,64,740/– results in adding gross profit twice a component which has already been included int eh sale value of the work in progress which has been admitted by the appellant and accordingly honour the disclosure made during the course of survey and accordingly filed the return of income and paid entire amount of taxes thereon. Therefore, the additional gross profit worked out by the A.O. at Rs.2,09,64,740/– is directed to be deleted.”
Thus, when the sale value of the cranes, which was considered for computation of WIP, has already included the profit component, the addition made by the AO, by firstly excluding the amount declared by the assessee and estimating the gross profit thereafter, results in double addition. Further, the Revenue has not brought anything on record to controvert the findings of the learned CIT(A) that the Sales Tax/VAT assessment order has accepted the assessee’s books of account. Therefore, in view of the above, we find no M/s. Zeemag Industries ITA no.2266/Mum./2019 infirmity in the impugned order passed by the learned CIT(A). As a result, the grounds raised by the Revenue are dismissed.
In the result, the appeal by the Revenue is dismissed. Order pronounced in the open Court on 02/12/2022