DCIT, LUDHIANA vs. M/S JAIN UDHAY INTERNATIONAL PVT. LTD., LUDHIANA

आदेश/ORDER Per Annapurna Gupta, Accountant Member: The present appeal has been filed by the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals) -5, Ludhiana,(in short referred to as CIT(A), dt. 14/06/2016, passed u/s 250(6) of the Income Tax Act,1961 (hereinafter referred to as “Act”). The effective grounds raised by the Revenue read as under:

deleting the addition of Rs.1,05,39,243/- made by the Assessing Officer

on account of alleged under invoicing of sales of knitted cloth made by

the assessee during the month March, 2011.

effected sales of knitted cloth in the month of march at an average rate

which was below the average rate of purchases made in the said month

and the rate at which stock of the same was valued on the first day of

the month, when search was conducted on the assessee. The AO found

that the assessee had shown purchase of 476531 kgs of Knitted Cloth for

Rs.13,29,52,149/- during the month of March 2011 giving an average

purchase rate of Rs.279/- per Kg and further, on the date of search i.e.

on 01.03.2011, the inventory of Knitted Cloth weighing 35592 Kgs was

valued at Rs.1,36,35,965/-giving an average rate of Rs.383/- per Kg,

while the assessee had sold 455845 Kgs of Knitted Cloth for

Rs.12,02,80,637/- giving an average sale rate of Rs.264/- per Kg. As per

AO, thus there was under invoicing of sale of Knitted Cloth by Rs.119/-

(383-264) per Kg in respect of stock of cloth (35592 Kg) found on the

date of search and under invoicing of Rs.15/-(279-264) per Kg in respect

of balance quantity of stock of 420253Kg (= 455845 - 35592 Kg) of

Knitted Cloth which was sold out of purchases made during March,

2011. After considering the reply of the assessee and rejecting the books

of accounts, the A.O. made an addition of Rs.1,05,39,243/- (calculated

as Rs.119 x 35592 = 42,35,448/- plus Rs.15 x 420253 = 63,03,795/-) on

account of under invoicing of sale of Knitted Cloth during the month of

March, 2011. The matter was carried in appeal before the Ld.CIT(A) who

deleted the addition holding at para 3.1 of his order as under:

“3.1 The facts of the case, the basis of addition made by the A.O. and the submissions/arguments of the AR during the appellate proceedings have been considered. The AO has made the addition on the ground that the sales of Knitted Cloth during the March, 2011 have been shown at a rate lower than the purchases of Knitted Cloth made during March, 2011. On the other hand the AR has argued that there is no independent evidence with the AO to support his presumption that the assessee has resorted to under invoicing of sales. No such instance has come to notice either during the search or any post search inquiry conducted, if any, by the AO. The AO has totally ignored the fact that sales in the month of March 2011 have been made to identifiable customers which the AO could have verified before drawing any adverse inference. Secondly, while calculating the under-invoicing the AO is taking the quantity of knitted cloth as on 01.03.2011 at 35592 Kg. only and accordingly as per the presumption of the AO that the sale of 455845 Kgs in March was out of 35592 Kg found on 01.03.2011 and out of 476531 Kgs purchased during March 2011 then the quantity of balance Knitted Cloth as on 31.03.2011 should be 56278 Kg only. On the one hand while calculating the under valuation of closing stock, the AO is taking the quantity as 234429 Kgs as on 31-03-2011. Thus there is a contradiction in the stand of the AO while deciding the two issues. It was further submitted by the AR that calculation of under- invoicing on the basis of average cost of cloth as on 01.03.2011 and average price cost in the month of March 2011 is totally wrong in view of the fact also that the average per Kg cost of cloth purchased for the whole year including the opening stock of cloth is Rs. 255/- per Kg. Against this, the average sale rate of cloth for the year is Rs. 261/- per Kg and for the month of March, 2011 alone it is Rs. 264/- per Kg. Thus as per AR, there is average profit margin of Rs. 6 per Kg caIculated for the whole year figure. There is merit in the argument of the AR because if the quantity of the closing balance of the knitted cloth is taken at 234429 Kgs as on 31-03-2011 then the quantity as on 1-3-2011 comes to 213743 Kg (234429 Kgs Closing stock as on 31- 03-2011 + 455845 Kgs Sales of March 2011 - 476531 Kgs Purchases of March 2011). Thus, the two calculations of under-invoicing of sales and under-valuation of closing stock adopted by the AO are contradictory to each other. 3.1 Further a perusal of the assessment order shows that the AO has made the addition on the presumption that the sales cannot be at a rate less than the purchase made during March, 2011. However, no instance of any independent confirmation from the parties who have purchased goods from the assessee, about the under invoicing has been mentioned by the AO. The AR has rightly mentioned that the AO has not carried out any inquiries about the rate from the parties who purchased goods from the assessee during March, 2011 about the

price. Also there is no document mentioned by the AO which was found during the search indicating such a practice adopted by the assessee. The assessee has 125412 Kg of opening stock which was valued at Rs. 2,79,41,540/- giving the average price of Rs. 222.8/- per Kg and made purchases of 1462714 Kgs for Rs. 37,70,39,644/- giving the average purchase price of Rs. 257.8/- per Kg. There is no basis for the presumption that the sales during the March, 2011 were made out of the purchases made during the March, 2011 only. Since the addition has been made purely on presumption without any basis, therefore the addition made by the AO is not found sustainable and hence deleted. 4. Accordingly this ground of appeal is allowed.”

Ld.Counsel for the assessee on the other hand relied on the order of

the CIT(A) and further pointed out that identical addition was made

in a related concern of the assessee M/s Jain Udhay Fabrics Pvt.

Ltd., had been deleted by the ITAT vide its order in ITA

no.551/Chd/2015 dated 17-10-2017 and also in the case of M/s

Jain Udhay Apparels Pvt. Ltd. in ITA No. 111/Chd/2017 dated 24-

01-18.Copies of both the orders were placed before us.

of authorities below. We do not find any reason to interfere in the

order of the Ld.CIT(A). As rightly pointed out by the Ld.CIT(A), the

addition in the present case on account of under invoicing of sale

of knitted cloth to the extent of Rs.1,05,39,243/- is entirely based

on presumption and surmises and conjectures and there is

absolute lack of any direct evidence of any under invoicing. Also

the presumptions on which the A.O. has based his findings of

under invoicing have been reasonably controverted by the

assessee, as rightly noted by the Ld.CIT(A).

arrived at the conclusion that the assessee had under invoiced

his sales, by finding that the average rate at which sales were

made in the month of March was less than the average rate at

which the purchases were made in the said month and the

average rate of the value of the opening stock of that month.

of sale is not based on any direct evidence, when the fact of the

matter is that the sales were made to party which could have

been easily verified, as rightly pointed out by the Ld.CIT(A). The

finding of the Ld.CIT(A) that the addition has been made on

presumptions & without any basis is, therefore, wholly justified.

incorrectly calculated the average rate of opening stock of knitted

cloth, taking contradictory stand vis a vis stock of knitted cloth

as at the end of the year . The Ld.CIT(A) has noted that while the

AO has taken the closing stock ,as at the end of the year, of

knitted cloth at 234429 kgs, for the purpose of valuing the same,

the quantum of this stock comes to 56278 kgs if the opening

stock at the beginning of the month of March is taken at 35592

kgs, which the A.O. has taken for valuing the average rate of

opening stock of the month while making addition on account of

underinvoicing of sale of knitted cloth. The Ld. DR has been

unable to controvert this factual finding of the CIT(A).

price of opening stock of knitted cloth and the average price of

purchases made of the same during the year, there was no

underinvoicing of sale, since as noted by the CIT(A), the average

price of the opening stock for the year was at Rs.222.8 per kg.

and of the purchases made during the entire year was Rs.257.8

per kg., which was below the average sale rate in the month of

March of Rs.264 per kg. The Ld. DR has been unable to controvert

these factual findings of the Ld.CIT(A)

premises on which the AO had based his finding of underinvoicing

of sale in the month of March stood demolished .We therefore

agree with the Ld.CIT(A) that there was no reason at all to uphold

the addition. The order of the Ld.CIT(A) is, therefore, upheld. The

ground of appeal No.1 raised by the Revenue is, therefore,

dismissed.

2,69,59,335/- on account of alleged under valuation of closing

stock of Knitted Cloth as on 31.03.2011.

while the assessee had purchased knitted cloth in the month of

March 2011 at an average rate of Rs.279/-,it had valued closing

stock of the same at Rs.164/- per Kg .As per AO, thus there was

under valuation of stock by Rs.115/- per Kg which came to a total

figure of under valuation at Rs.2,69,59,335/-,considering the

quantity of the same of 234429 Kgs. After giving a show-cause to

the assessee and after considering the reply of the assessee, the

A.O. made an addition of Rs.2,69,59,335/- (calculated as Rs.115 x

234429 Kgs).

“The facts of the case, the basis of addition made by the A.O. and the submissions/arguments of the AR during the appellate proceedings have been considered. The AO has made the addition by taking the average price of Rs. 279/-per Kg for valuing the closing stock of Knitted Cloth of 234429 Kgs as against the average value of Rs. 164/- per Kg adopted by the assessee. The figure of Rs. 279/-was taken on the basis of the average purchase price of knitted cloth paid by the assessee during March, 2011. On the other hand the AR has argued that there is no basis with the AO for

adopting only the cost price of March 2011 and applying the same to the whole of the balance/closing stock as on 31.03.2011 which included the stock purchased during whole of the year and also the stock brought forward as on 01.04.2010. The AR has argued that the stock of cloth brought forward as on 01.04.2010 was 125412 Kgs valued at Rs. 2,79,41,540/- (giving an average rate of Rs. 222.80/- per Kg) and the purchases during the year was 1462714 Kg at Rs. 37,70,39,644/- giving an average purchase price of Rs. 257.76/-per Kg. The average sale price of cloth during F.Y. 2010-11 was Rs. 261.25/- Kg. 7. The AR has further argued that assessee purchases large variety of cloth of different quality, designs, colours at different rates for each purchase made during the year. Similarly, the sales are also made at different rates. In support of the same the AR enclosed copies of some sales and purchase accounts to show the variation in the rates during the month of March, 2011 both in respect of sales and purchases. On this basis the AR argued that the monthly average purchase cost cannot be compared with the monthly average sale rate to compute profitability or valuation on month to month basis. It is so because the cloth sold may be out of current purchases or out of old purchases or out of old brought forward stocks and thus the stock at the end of the year has a mix of brought forward stock and current purchases. Accordingly, as per AR the best method of valuation of stocks in this Hosiery industry, having varied purchases, is 'Weighted Average Method' which will cover and absorb both low and high price purchases. The weighted average cost of Knitted Cloth was worked out at Rs. 255/- per Kg in this case for the year under consideration. 7.1 Further, it was argued that the assessee has valued the Knitted Cloth stocks on 31.03.2011 at net realised price following the Accounting Standard 2 (Revised) of valuation of inventories issued by the Institute of Chartered Accountants of India (ICAI) which vide Para 5 and 22 states for valuation at lower of cost or net realisable value. Further the standards given by the accounting body of ICAI have binding force in view of the judgement of the Hon'ble Supreme Court in the case CIT Vs. Punjab Stainless Steel Industries (2014) 364 ITR 144 (SC). For this the assessee filed copy of sales made during April, 2011 to July, 2011 where majority of the old stock was sold at the rate of Rs. 55 per Kg, Rs. 62.61 per Kg, Rs. 40 per Kg and Rs. 50 per Kg respectively. Regarding the justification of sales at low rates in the next year, it was submitted that the assessee first decided to clear the old stocks of cloth at whatever possible rates it could sell because with the passage of time, the stocks go obsolete in designs with faded colours. Such stocks are sold in lots at much below the cost and the Assessing Officer has not doubted these sales made in next A.Y. 2012-13. The total sales shown in the month of April, 2011 are of 50711.5 Kgs at a rate of Rs. 50.18 per Kg. It is argued that the AO also did not alter the value of opening stock of cloth on the basis of under valuation of closing stock of cloth as on 31.03.2011 in the next year by Rs. 2,69,59,335/-. As per AR AO is otherwise duty bound to take the value of closing stocks of a year as the value of opening stock in the next year but in the assessee's case the AO did not make any adjustments which clearly shows that AO did accept the value of opening stock as such in the next year which is the value of closing stock of the year under consideration as per assessee's version.

Sr. No. Description Quantity Amount (Rs.) 1. Opening stock as on 125412 Kg 2,79,41,540/- 01.04.2010 2. Purchases during the year 1462714 Kg 37,70,39,644/- ending 31.03.2011 3. Total 1588126 Kg 40,49,81,184/- Average Cost Rs. 255 per Kg

The stock at the end of the year is out of either the opening stock or out of the purchases made during the year. Since the exact bifurcation/details of stock as on 31.03.2011 is not available, then in the circumstances of the case the best suited and appropriate method for valuation of the stock is the 'Weighted Average Cost’ as mentioned by the AR also in the written submission'. The weighted average cost as per the table above comes to Rs. 255/- per Kg. And accordingly the value of 234429 Kg of Knitted Cloth as on 31.03.2011 comes to Rs.5,97,79,395/- (234429 x 255) as against Rs. 3,85,29,423/- declared by the assessee (and Rs. 6,54,05,691/- taken by the AO). 9. Therefore, the value of closing stock of 234429 Kgs of Knitted Cloth as on 31.03.2011 should be taken at Rs.5,97,79,395/- as against Rs.3,85,29,423/-declared by the assessee. Accordingly, the addition to the extent of Rs.2,12,49,972/- (Rs.5,97,79,395 - Rs.3,85,29,423) only is sustained and the assessee gets a relief of the balance amount of Rs.57,09,363/- (Rs.2,69,59,335 – Rs.2,12,49,972). 10. Accordingly this ground of appeal is partly allowed.” 14. Before us Ld.DR relied on the order of the Assessing Officer.

Ld.Counsel for the assessee on the other hand relied on the order of

the CIT(A)

orders of the authorities below. We do not find any reason to

interfere with the order of the CIT(A), which we find is well-

reasoned and based on factual findings which have remained

uncontroverted before us.

under valuation of closing stock by the assessee since as per the

A.O., the stock ought to have been valued at the average purchase

rate for the month of March of Rs.279 per kg. as against the

valuation done by the assessee at Rs.164 per kg. resulting in

under valuation by Rs.115 per kg. The Ld.CIT(A), in turn,

calculated the weighted average cost of the knitted cloth for the

entire year at Rs.255 per kg. and accordingly, valued the closing

stock at the said rate. The Ld.CIT(A) adopted this method of

valuation agreeing with the assessee that since it dealt with in a

variety of cloths, purchasing and selling different quality,

designs, colours at different rates, this was the best method to

cover both low and high price purchases. The Ld. DR has been

unable to convince us as to why the method of valuation adopted

by the Ld.CIT(A) was wrong. It is not disputed that the assessee

purchased large variety of cloth of different quality, design and

colour at different rate during the year and the stock at the end

of the year was a mix of brought forward stock and current

purchases. In such circumstances, the weighted average method,

we agree, is the best method for valuation of stock since it would

cover and observe both the law and high purchase price. The

contention of the Revenue that the valuation should have been

done on the basis of the average purchase price for the month of

March is not tenable, since such basis of valuation would have

been appropriate only when the assessee was dealing in one type

and quality of item selling them on First in first out basis, which

is not the fact in the present case. The same is therefore

dismissed.

Order pronounced in the open court. Sd/- Sd/- संजय गग� अ�नपूणा� गु�ता (ANNAPURNA GUPTA) (SANJAY GARG ) �याय�क सद�य/ Judicial Member लेखा सद�य/ Accountant Member �दनांक /Dated: 08th January, 2019 AG आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :