DCIT, CIR-12, KOLKATA, KOLKATA vs. M/S GANAGA RASAYANIE PVT. LTD., KOLKATA

The solitary common issue involved in these appeals relates to the addition of Rs.48,00,000/- made by the Assessing Officer on account of under-valuation of closing stock, which is sustained by the ld. CIT(Appeals) to the extent of Rs.13,72,363/- and the same is raised by both the sides by way of the following grounds:-

The assessee in the present case is a Company, which is engaged in the business of manufacturing and trading of chemical items. The return of income for the year under consideration was filed by it on 01.10.2010 declaring total income of Rs.2,09,57,326/-. During the course of assessment proceedings, the details of closing stock as on 31.03.2009 such as items, quantity, rate applied etc. were furnished by the assessee. On verification of the said details, it was noticed by the Assessing Officer that there was considerable difference in the rate applied by the assessee to arrive at the value of items of finished goods lying in the closing stock and the average sale price of the said items. The said difference as noticed by the Assessing Officer and pointed out in the tabular form was as under:-

The assessee was called upon by the Assessing Officer to explain the above difference in the valuation of closing stock of finished goods amounting to Rs.56,96,795/-. In reply, the following explanation was offered by the assessee in writing:-

The above explanation offered by the assessee was not found acceptable by the Assessing Officer as the same was not backed with any supporting evidence to show that the finished goods lying in the closing stock were of down-graded quality having less value. He, however, agreed that in order to arrive at the cost of finished goods lying in the closing stock, gross profit was required to be deducted from the sale price of the finished goods. Accordingly, after reducing the gross profit at the rate of 12% as declared by the assessee as well as the expenses of carriage inward at 4%, the difference in the value of closing stock of finished goods was worked out by him at Rs.48,00,000/- and an addition to that extent was made by him to the total income of the assessee in the assessment completed under section 143(3) vide an order dated 30.12.2011.

Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the ld. CIT(Appeals) and after considering elaborate submissions made by the assessee as well as the detailed workings filed in support, the ld. CIT(Appeals) restricted the addition of Rs.48,00,000/- made by the Assessing Officer on account of under-valuation of closing stock of finished goods to Rs.13,72,363/- after recording his observations and findings as under:- ./2014 Assessment year: 2009-2010 & I.T.A. No. 933/KOL./2014 Assessment year: 2009-2010 Page 5 of 9 “I have carefully considered the submissions put forth on behalf of the appellant along with the supporting details/documents furnished, perused the facts of the case including the findings of the Assessing Officer and other materials brought on record. It is noted that the AO has not accepted the explanation of the appellant that the stock of goods lying as on 31.03.2009 were off-grade quality as the appellant's claim was not substantiated with supporting documentary evidences. The AO further observed from the item wise selling rates furnished that though those products were sold during the year at much higher rates but the same item of goods have become downgraded or off- grade on the last date of the AY 2009-10 i.e. 31/03/09, which forced appellant to adopt less rate for the same items for the purpose of valuing the closing stock. Another observation of the AO is related to the method of accounting principle used to arrive at the GP. In the instant case, it was observed by the AO that the G.P ratio disclosed at 12.09%. Therefore, according to him, to arrive at the value of closing stock average rate of sale furnished should be deducted with the G.P ratio disclosed by the appellant. On calculation as appearing in the chart difference in the value of closing stock by considering the average rate of sale derived at RS.56,96,795/- which includes element of gross profit therein. To calculate the actual cost price of goods sold, element of gross profit is to be deducted from the difference. Hence, considering the G.P ratio of 12% difference in value closing of the aforesaid items comes to Rs.50,13,179/- (Rs.56,96,795/- - Rs.6,83,615/-). However, considering the expenses of carriage inward say 4% which carries approximately Rs.2,00,000/-, the difference in the value of closing stock of the items worked out to Rs.48,00,000/- approx. Hence, the AO has not accepted the explanation of the assesseee that the lower value of the said items was taken on the ground that the said items were of poor quality has no legs to stand since it is a general explanation with no supporting documents to substantiate the same. In this view of the matter and considering the facts, the AO has increased the value of closing stock as on 31/03/2009 by a sum of Rs.48,00,000/- and the same amount of Rs.48,00,000/- is added to the total income of the appellant company. However, the appellant's contention is that the appellant has always been valuing its closing stock following Accounting Standard 2. The stock has been valued at Cost Price or Net realizable value, whichever is lower. It is submitted that GR 2428, GR 2629, GR 2633 have been manufactured by processing Bonmax (a aliphatic feed stock supplied by BRPL, Government of India Undertaking). The appellant had purchased Bonmax in bulk quantity on Trial Basis for producing special aliphatic fractions which are import substitute. The appellant furnished a statement detail showing the calculation of average cost of fractions produced from Bonmax (GR 2428,26292633) and the basis of valuation of closing stock of those grades of items and contented that the closing stock value has been fairly valued on cost price. It is also argued that the A/O has wrongly valued the closing stock based on average selling price which is not as per standard practice. The appellant further contradicted the ./2014 Assessment year: 2009-2010 & I.T.A. No. 933/KOL./2014 Assessment year: 2009-2010 Page 6 of 9 calculation of average selling price arrived by the A/O by relying on the Table of Statement furnished narrating the reasons of such a contention. Vide submission dated 05-02-2014, the appellant further stated that earlier it was submitted that the average selling price (net of packing cost and freight and GP 12%) for GR 2428 was RsAO per Kg, GR 2629 was RsA1 per Kg, 2633 was RsA4 per Kg, Garosol 150 was RsA1 per Kg and Garosol 110 was Rs. 37 per Kg. which are based on the sales register maintained by the appellant, however it was not understood how the AO had derived at the average selling price for GR 2428 - RS.52 per kg, GR 2629 - RS.56 per Kg, GR 2633 - RS.54 per Kg, Garosol 150 - RsA7.21 per Kg and Garosol 110 – Rs40.50 per Kg. The AO has not relied on the generally accepted practice of valuation based on lower of cost price or market price whichever is lower; but instead relied on principle of deducting the GP from the average sale price. It is submitted that even if going with the principle followed by the AO, which is not the generally acceptable practice, there is huge difference in the valuation done by the AO and the valuation if done on the actual average selling rate. In support of this contention, the appellant furnished the under mentioned Table: Item Qty as on Rate Valuation Actual Valuation Difference 31.3.2009 adopted average by AO selling price GR 2633 59832 54 3230928 44 2632608 598320 GR 2629 215371 56 12060776 41 8830211 3220565 GR 2428 8533 52 443716 40 341320 102396 Garasol 50330 47.21 2376079.3 41 2063530 312549.3 150 Garasol 23029 40.5 932674.5 37 852073 80601.5 110 19044174 14719742 4324431.8

We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the difference in the valuation of closing ./2014 Assessment year: 2009-2010 & I.T.A. No. 933/KOL./2014 Assessment year: 2009-2010 Page 8 of 9 stock of finished goods as pointed out by the Assessing Officer during the course of assessment proceedings was explained by the assessee by submitting that the relevant finished goods lying in the closing stock were of inferior or off-grade quality. Since the said explanation offered by the assessee was not supported by any documentary evidence, the Assessing Officer rejected the same. During the course of appellate proceedings, an altogether different stand, however, was taken by the assessee by submitting that the stock of finished goods was valued at cost or net realisable value by following the Accounting Standard 2. The working of cost of some of the items of finished goods was also furnished by the assessee before the ld. CIT(Appeals) to show that the value adopted by it for some of the finished goods lying in the closing stock was at actual cost. It was further submitted on behalf of the assessee before the ld. CIT(Appeals) that the average selling price adopted by the Assessing Officer for working out the difference in the value of closing stock of finished goods was not correct. The working in this regard was also furnished by the assessee to show the average selling price of the corresponding items of finished goods lying in the opening stock on the basis of sales made in the month of March. In the working so furnished, the gross profit @ 12% was reduced by the assessee from the average selling price worked out by it to show that the net realisable value so determined was correctly taken for the purpose of valuation of closing stock of finished goods. As rightly contended by the ld. D.R., all these workings prepared and furnished by the assessee for the first time before the ld. CIT(Appeals) in support of an altogether new stand taken to explain the difference in the valuation of closing stock of finished goods was not forwarded by him to the Assessing Officer for giving an opportunity to verify the same, as required by Rule 46A of the Income Tax Rules, 1962 and there is thus a clear violation of the said Rule by the ld. CIT(Appeals) while giving relief to the assessee on this issue. When this position was confronted to the ld. counsel for the assessee and he was asked to offer his explanation in the matter, he has submitted that the relevant stock records are maintained by the assessee and it is possible to ascertain the exact cost of the relevant finished goods lying in the closing stock. The ld. representatives of both the sides have also agreed that if the actual cost of the relevant finished goods lying in the opening stock can be ascertained from the relevant stock records, the same has to be adopted for the purpose of valuation of closing stock unless the assessee is in a position to show that in case of certain items ./2014 Assessment year: 2009-2010 & I.T.A. No. 933/KOL./2014 Assessment year: 2009-2010 Page 9 of 9 of finished goods lying in the closing stock, the net realisation value is lower than the cost so ascertained. Keeping in view this submission made by both the sides, we set aside the impugned order of the ld. CIT(Appeals) on this issue and restore the matter to the file of the Assessing Officer for deciding the same afresh after verifying the actual cost of the relevant items of finished goods lying in the closing stock from the relevant stock record maintained by the assessee. Needless to observe that the Assessing Officer shall afford proper and sufficient opportunity of being heard to the assessee.

In the result, the appeal of the Revenue and that of the assessee both are treated as allowed for statistical purposes.