PRINCIPAL COMMISSIONER OF INCOME TAX - 7 vs. PADMINI VNA MECHANTRONICS PVT. LTD.

ITA 1150/2017 Pa g e 1 $~42 * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 1150/2017 PRINCIPAL COMMISSIONER OF INCOME TAX – 7 .... Appellant Through Mr. Sanjay Kumar with Mr. Rahul Chaudhary, Advocates. versus PADMINI VNA MECHANTRONICS PVT. LTD. ..... Respondent Through None. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE A.K. CHAWLA O R D E R % 18.12.2017 1. The Revenue’s appeal under Section 260A of the Income Tax Act, 1961 (hereafter referred to as ‘the Act’) in this case for the Assessment Year 2009-10 urges two grounds. Firstly, that the ITAT fell into error in holding that the disallowance made under Section 14A of the Act was erroneous. Secondly, it is urged that the NIL treatment given to the raw material in the Closing Stock Statement produced with the returns, that was disallowed by the AO, was done correctly and the Tribunal fell into error in confirming the CIT (A)’s finding. 2. To consider the second aspect first, the assessee, which is engaged in the manufacture of automobile spares, had an inventory of raw material/stock valued at Rs.1,46,65,041/-. The same amount was reflected as closing stock and treating this to be a part of the closing stock is incorrect. The assessee valued it at NIL. The AO considered this to be a devise and held against the assessee, principally on the

ITA 1150/2017 Pa g e 2 basis that in the subsequent year, the same stock was utilized for servicing export orders. Both the CIT(A) and the ITAT, after elaborately examining the facts held that the assessee spent considerable amounts, i.e. over Rs.20,00,000/- in (AY 2010-11, the later assessment year) while servicing the export orders. 3. Having regard to these facts, it was held by both the Appellate Authorities that the AO’s treatment of this part of the closing stock was not in consonance with law. 4. The CIT (A)’s findings are as follows:- “5.2. I have carefully exam ined this issue. There were seven item s ofraw m aterial whichwere purchased by the assessee partly inearlieryearsand partly inA .Y.2009 - 2010forRs. 1,46,65,041/-. The assessee valued the sam e at N IL inthe closing stock inventoryin31.03.2009.Twom ainreasonshave beenassigned for valuing the sam e at N IL . The first one being that these item s got rusted and were therefore,not considered tobe useable.Itwas sosince,these were the raw m aterials for m anufacturing autom obile parts. This autom obile part was exclusively for export to Spainto M /S. Valeo Term ico M otor,where it was used as aninput for m anufacturing autom obile vehicles.A ny m aterial whichisnot absolutely upto the m ark could not have been used for m anufacturing the item s for export since,it m ight have resulted intorejectionofgoodsorrejectionofvehicle by the custom ers bringing a big financial lossand reputationloss as well as fear of losing the custom ers. The other reason being that there was a big recessioninthe autom obile m arkets. There were noexportorders from the said Spain C om pany after Septem ber 2008. There was also no expectationof getting orders inthe near future. The said raw m aterial wasnotuseable forany otherm anufacturing. H ence,itwasconsidered thatthese item s,now being notof

ITA 1150/2017 Pa g e 3 required quality and since, m ay not be required for m anufacturing on account of no orders; therefore, its valuation was considered at N IL as on 31.03.2009. The appellantagaingotorderfrom the said Spaincom pany inthe m onth of June 2009. A t that tim e,those item s were re – exam ined and aftergetting the job - work polishing etc.done thereonfora costofRs.20,11,200/- ionA .Y.2010- 2011,the sam e were found useable for m anufacturing the autom obile part. These item s were againused for m anufacturing the autom obile parts whichwere sold indue course. A tthe tim e oftaking back these item s for m anufacturing,the input cost for these item s has beentakenat N IL i.e. no cost has been booked for the use of these item s for "m anufacturing the relevant autom obile part. The appellant has also supported hiscontentionsby furnishing variousdocum entslike evidence showing the receiptofexportorderinthe m onthofJune 2009 after a long gap,the evidence ofjob - work expenses ofRs. 20,11,200/- inA .Y. 2010 - 2011 onthose item s,the details showing the issuance ofsaid raw m aterial for m anufacturing inA .Y.2010- 2011,2011 - 2012& 2012- 2013,stock ledger alc. of these individual item s for A .Y. 2009 -20 10,2010 - 2011,2011 - 2012& 2012- 2013 showing iuse ofthese item s for m anufacturing in these years,evidence of reversal of C EN VA T credit,the evidence showing the benefitofC EN VA T credit being taken subsequently in the years of re-use of m anufacturing,auditreportby excise D eptt.,the lettersentby the Excise D eptt. to A O dtd. 22.12.2011 confirm ing the reversal of C EN VA T credit. The A O has doubted the genuinenety ofthe claim for the reasonthatthese item s have been used in subsequent years. This factor has been considered adversely by him inthe sense that if the item s could had been used in subsequent period,there was no reasonforvaluing the sam e atN IL .H owever,underthe facts, I am ofthe considered opinionthatthe findings ofthe A O in thisregard cannotbe sustained.” 5. After considering the grounds urged in support of the appeal, this Court is of the opinion that the Revenue’s case on this aspect is

ITA 1150/2017 Pa g e 4 not substantial. The AO clearly took note of the subsequent facts to determine whether in truth a NIL treatment was correct and that the assessee chose to retain the goods (which perhaps it felt presented the possibility of use later) cannot ipsofactobe prejudicial circumstance. The assessee’s judgment, as a prudent commercial venture, cannot be ordinarily questioned in these circumstances. No substantial question of law arises. This question is therefore answered against the Revenue. 6. As far as disallowance under Section 14A goes, both the Appellate Authorities have ruled concurrently that the satisfaction to reject the assessee’s determination, was in accordance with law. The Revenue has urged to the contrary stressing that the AO had clearly given convincing reasons. Since these are essentially findings of facts, which the Court, in the third appeal, cannot go into. 7. No substantial question of law arises. 8. The appeal is, therefore, dismissed. S. RAVINDRA BHAT, J A.K. CHAWLA, J DECEMBER 18, 2017 st