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Income Tax Appellate Tribunal, BANGALORE BENCHES “C”, BANGALORE
Before: Shri George George K, JM & Ms.Padmavathy S, AM
Before Shri George George K, JM & Ms.Padmavathy S, AM The Deputy Commissioner of M/s.Bellary Ispat Pvt. Ltd. Income-tax, Circle 1 Plot No.16, KIADB, IInd Phase v. Bellary. Mundaragi Industrial Area Bengalore Road Ballari – 583 103. PAN : AADCB1412F. (Appellant) (Respondent) Appellant by : Sri.Pradeep Kumar, CIT-DR Respondent by : Mrs.Ramya S.Nayak, CA Date of Pronouncement : 11.03.2022 Date of Hearing : 10.03.2022 O R D E R
Per George George K, JM :
This appeal at the instance of the Revenue is directed against CIT(A)’s order dated 25.02.2020. The relevant assessment year is 2016-2017.
2. The grounds raised read as follows:-
“1. The order of the learned commissioner of Income-tax (Appeal) is opposed to law and facts of the case.
2. In the facts and circumstances of the case, the Ld. CIT(A) erred in condoning the mistake in presentation of accounts on valuation of stocks, without the needed authority and without any verification of facts of the case with respect to the accounts of immediate earlier year with special reference to the quantities of Raw materials and finished goods.
3. The Ld CIT(A) erred in identifying the product under valuation i.e. Iron are fines, as Raw Material, instead of 'bye product' as repeatedly claimed by assessee during the assessment proceedings before the AO.
4. The Ld CIT(A) ought to have considered the fact that the assessee has not treated the Iron are fines, as finished goods, where by the cost of the product was undervalued without . M/s.Bellary Ispat Private Limited any regard to the accounting method, more particularly the cost accounting.
5. The Ld CIT(A) ought to have verified the full facts of the case, as to the correctness of accounts, nature and quantity of inventories, as reflected in books of account on consistent basis, with special reference to earlier years, through a detailed remand report from the AO instead of a report on dotted lines.
The Ld CIT(A) ought to have rejected the explanation of the assessee on the lines of explanation on the issue of explaining the liability of share application money, on the basis of allegation of furnishing of incorrect Financial Statements to Shareholders, the ROC, Income Tax Department as observed in the own words of CIT(A), in his order, instead of considering the same as an 'error' and condoning. Each of the above grounds is without prejudice to one another and the appellant craves to add, delete, amended or otherwise modify one or more of the above grounds either before or at the time of hearing of this appeal.”
The brief facts of the case are as follows: The assessee is a private limited company engaged in the business of manufacture of sponge iron. For the assessment year 2016-2017, the return of income was filed declaring a total loss of Rs.25,00,84,712. The return was selected for scrutiny and the assessment u/s 143(3) of the I.T.Act was completed vide order dated 26.12.2018. The Assessing Officer held that the assessee had disallowed the loss on stock of Rs.25,81,08,333 claiming the same to be closing stock which value has not reduced during the assessment year 2016- 2017, and hence, this amount is not an allowable expenditure.
4. Aggrieved by the disallowance, the assessee preferred an appeal to the first appellate authority. During the course of appellate proceedings, the CIT(A) called for a remand report
. M/s.Bellary Ispat Private Limited from the A.O. The A.O. submitted remand report on 14.10.2019. The CIT(A) after examining the submissions and evidences filed by the assessee (i.e., tax audit report and excise return ER-1 for March 2016), the remand report submitted by the A.O., the form No.AOC4 downloaded from the Registrar of Companies, etc., accepted the claim of the assessee and deleted the disallowance.
Aggrieved, the Revenue is in appeal before the Tribunal. The learned Departmental Representative has filed a brief written submission, which reads as follows:-
In the present case filed by the department, the Grounds of Appeal as raised by the revenue has been broadly categorised into the following headings for A.Y: 2016-17 and D.R. submissions thereon. (1) The Ld.CIT(A) erred in condoning the mistake in presentation of accounts on valuation of stocks, without the needed authority and without any verification of facts of the case with respect to the accounts of immediate earlier year with special reference to the treatment of iron ore fines as raw materials instead of finished goods. Submission: The Ld.CIT(A) examined the valuation of the closing stock by Valuer and also perused the assessment order, in which the AO had disallowed the valuation of stock adopted by the appellant on the ground that the same was of finished goods. The Ld.CIT(A) also perused various financial statements, Tax Audit report, Excise return of March 2016, remand report of the AO and other submissions of the appellant. The d.CIT(A) held that the valuation of stock was pertaining to raw materials and the appellant company valued the same in accordance with accounting standards for inventory valuation and condoned the mistake in presentation of accounts, without verification of facts of the case with respect to the accounts of immediate earlier year. In the course of assessment proceedings, the AO found out substantial increase in the value of closing stock as on 31.03.2016 with minimum change in quantity of opening and closing stock of raw materials. In view of the above, the AO disallowed the loss claimed by the assessee after taking into consideration an increase in the value of closing stock of raw material without much change in quantity compared to its opening stock. I agree with the assessment order of the AO and the same may be upheld and the order of the ld.CIT(A) on the issue may be reversed.
. M/s.Bellary Ispat Private Limited 6. The learned AR has also filed an elaborate written submission, which is as follows:-
“c. Submission: From the above, it can be noted that there is substantial reduction only in the value of Raw material- Iron ore fines d. Valuation of raw material- Iron ore fine: 1. As per the provisions of Section 145A of the Act: "Notwithstanding anything to the contrary contained in section 145,- (a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be- (i) accordance with the method o(accounting regularly employed by the assessee,. and (ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Explanation.-For the purposes of this section, any lax, duty, cess or fee (by whatever name called) under any law for the time being inforce, shall include all such payment notwithstanding any right arising as a consequence to such payment; "
The method of accounting regularly employed by the assessee is to value the inventory at cost or net realisable value whichever is lower.
3. The above method is in line with Accounting standard 2- Valuation of inventory.
Accordingly, for Iron ore fines, the net realisable value is considered as Rs. 800 and the amount is thus, shown at a written down value. 5. Basis for arriving at the net realisable value: * Ever since the ban of mining of iron are from mid of 2011, the entire sponge iron industry has suffered huge
. M/s.Bellary Ispat Private Limited losses and bank accounts have become NPA. Adding to the trouble, statutory authorities did not give permission to sell generated iron are fines leading to piling up of huge quantities of iron are fines stock. Our turnover reduced drastically over the years from 2011 and we had operated the plant with own funds to ensure machinery is in running condition. * Because our account was declared as NPA, there has been a pressure from the bank in terms of recovering the dues in all ways possible (by auctioning of properties and taking possession of the plant to realize stock). * During the course of bank's inspection, it has been brought to our notice that the piled up stock would not fetch the value as declared in stock statements/ financials of prior periods as the quality of the piled up stock had deteriorated. * During finalization of accounts for the year ending March 2016, we had taken advice from our auditor and valued the stock as per guidelines prescribed in accounting standards i.e. lower of cost or net realizable value. Because our net realizable value is less, accordingly we have ascertained the stock value for Mar 2016. * Supporting documents: Statement provided to the bank confirming the above valuation- Annexure 5 Auditors accepting the valuation in the audited financials statements While there are no sales of iron-ore shaft during the year, sales in fye 2015 and fye 2017 also for this item has been in the range of around Rs.750- 850- Refer Annexure 6 6. Judicial precedents to support the Company's claim: * CIT vs. Wolkem India Private Limited (315 lTR 211)( Raj HC) As per the provisions of s. 145A of the Act of 1.961, the income from business under the head "Profits and gains from business" has to be computed in accordance with method of accounting regularly employed by the assessee. Similarly, s. 145A of the Act of 1961 provides that the inventory shall be valued in accordance with . M/s.Bellary Ispat Private Limited the method of accounting employed by the assessee therefore, if the method of valuation adopted by the assessee is recognised method then the same cannot be rejected on the ground that the net realisable value /market value has been determined on the basis of certain estimate. (Para 9 of the judgement) * Commissioner of Income-tax vs. Carborandum Universal Ltd [1984] 16 Taxman 25 (Mads HC) So long as the method of valuation adopted by the assessee got recognition from the practising accountants and the commercial world, the adoption of that method could not be quashed by the revenue unless the adoption of that method, was found to be not bona fide or restricted for a particular year. The Tribunal's decision was thus, correct. - Para 15 of the decision * Emersons Process Management India (P.) Ltd. v. Additional Commissioner of Income-tax, Range 3(1), Mumbai (Mumbai ITAT) (47 SOT 157 In this case, the obsolescence of stock was allowed on the basis of consistent policy followed by assessee which had been accepted by revenue authorities all along.
7. Further, the above as also been considered as the opening stock of next year, and hence there is no loss of tax.
Based on the above submissions, the assessee claims that the order of the CIT(A) shall be accepted.”
We have heard rival submissions and perused the material on record. The assessee had admitted that an error in the financial Notes 16 and 17 and Note 10 of the balance sheet (this is enclosed as Annexure 4 along with the written submissions) had crept in, wherein the opening stock of raw material has been shown as opening stock of finished goods. The CIT(A) held that this is only an error of the assessee- company in reporting the closing stock inventory under the proper head and the same needs to be condoned. This fact
. M/s.Bellary Ispat Private Limited also has been noted by the A.O. in the remand report. The relevant finding of the CIT(A) reads as follows:-
The Ground No. 2.1 to 2.4 pertaining to Disallowance of loss on account of valuation of closing stock of Finished Goods - Rs.25,81,08,333f- is adjudicated as under: The submissions of the Appellant Company was examined vis a vis the Assessment order and it was' noticed that the valuation of closing stock needs proper clarity and accordingly Remand Report was sought form the AO and the same was received and examined. The Appellant company also submitted ER-1 (Excise Return for March 2016 ) , Stock Statement furnished to the Banker for March 2016. The findings of the remand report in respect of the valuation of the 'closing stock of Raw material and finished goods has given the following figures :
Closing stock of Raw material as on 31.03.2016 Material Quantity in MTS) Rate Value Remarks The Valuer had valued the closing stock of inventory which was examined and it was found that the AO in Assessment order disallowed the valuation of stock adopted by the Appellant on the ground that the valuation was of finished goods. I have perused the following.
. M/s.Bellary Ispat Private Limited a. The financial statements (which also finds mention and discussion in remand report] b. Tax Audit Report . c.ER-1 -March 2016 ,(excise return) d.Copy of the Stock Statement for March 2016 submitted by the Appellant company to the Banker e.Remand Report f. Submissions of the Appellant It is found that the valuation of stock was pertaining to Raw material and the appellant company valued the same in accordance with accounting standards for inventory valuation i.e. cost or net realizable value whichever is less which is also stated in the remand report. It is thus seen that there was only an error by the appellant company in reporting the closing stock of inventory under proper head and hence the same needs to be condoned. In view of the above and the addition on account of this to the tune of Rs.25,81,08,333/- is not sustainable and hence is deleted.”
7.1 The Revenue has not been able to dispel the above factual findings entered by the CIT(A) by placing any contra materials. Moreover, the closing stock for the relevant year is considered as opening stock of the next year. Therefore, there is no loss of tax and there is no prejudice caused to the revenue. For these reasons, we reject the contentions of the Revenue.