ASST CIT CEN CIR 23, MUMBAI vs. ZAMKUDI GARMENTS P.LTD, MUMBAI

We heard the parties and perused the record. The assessee belongs go Zamkudi Group and is engaged in the business of selling readymade garments. The group was subjected to search and seizure operations u/s 132 of the Act on 09.10.2010. The assessee has claimed to have engaged in trading activities only, i.e., purchase and sale of readymade garments. During the course of search operations, certain materials were seized which indicated that the assessee is also involved in manufacturing of readymade garments. In the statement taken from one of the directors of the company Shri Rajesh Dedhia at the time of search, he admitted that the assessee is also manufacturing readymade garments. Subsequently the above said person retracted from the above said confession in another statement taken on 03-12-2010. The AO did not accept the retraction. The AO noticed that the value of goods manufactured by the assessee as per A-4 to A-16 worked out to Rs.81,49,357/-. The AO further noticed that the average cost of manufacture of goods per piece of various items worked out to Rs.1,775/-, which was sold at a whole sale price of Rs.2,210/-. The MRP of those items were shown at Rs.4430/-. The AO compared the cost of manufacture of Rs.1,775/- against the MRP of Rs.4430/- and came to the conclusion that the assessee is having Gross profit margin of 59.93%. Accordingly he worked out the Gross sales value of the goods having cost of Rs.81,49,357/- at Rs.2,03,37,801/-. Accordingly he arrived at a profit of Rs.1,21,88,444/- and assessed the same.

The AO also took the view that the assessee must be holding stock of goods under production. The seized records A-4 to A-16 were for a period of six months, which showed the cost of manufacture of goods at Rs.81,49,357/- Accordingly, the AO held that the assessee must be holding one month’s stock and accordingly computed the 3 M/s. Zamkudi Garments Pvt. Ltd.

In the appellate proceedings, the Ld CIT(A) upheld the view of the AO that the assessee is also involved in manufacturing of readymade garments outside the books of accounts. The assessee also did not dispute the same. There was also no dispute that the value of goods manufactured as per seized records A-4 to A-16 worked out to Rs.81,49,357/-. The Ld CIT(A), however, did not accept the G.P. rate of 59.90% worked out by the AO, since the same has been worked on the MRP value and the Ld CIT(A) observed that the assessee would be selling goods at Whole sale price. The Ld CIT(A) noticed that the G.P rate on Whole sale price works out to about 20%. It was noticed that the average G P Rate disclosed by the assessee in the past worked out to 23.51%. He also noticed that in the case of a sister concern named M/s Ultimate, the AO had adopted a GP rate of 26%, though the rate was initially proposed at 27.60%. Accordingly the Ld CIT(A) held that the G.P. rate of 26% should be adopted in the instant case also. Accordingly, by adopting the G.P. rate at 26%, the Ld CIT(A) restricted the addition to Rs.28,63,288/- as against the addition of Rs.1,21,88,444/- made by the AO.

With regard to the addition of unaccounted stock, the Ld CIT(A) held that the same is liable to be deleted, since the assessee has already surrendered a sum of Rs.6,34,027/- towards unexplained stock.

The revenue is aggrieved by the decision rendered by Ld CIT(A) on both the issues. Since the assessee did not challenge the order passed by Ld CIT(A), the finding of the Ld CIT(A) that the assessee has been engaging in manufacturing of shirts has attained finality.

The first issue relates to estimation of profit on the undisclosed sales. We notice that the AO has computed the G.P. rate by taking the MRP as the selling price. The chart extracted by the AO at page 20 of the assessment order would show that the Whole sale price of all items was Rs.2210/- and the MRP at Rs.4430/-. The cost price of all items was shown Rs.1775/- (fabrics), Rs.1840/- (fabric + margin) and Rs.1885/- (Average cost). The Ld CIT(A) has taken view that the assessee would be selling the goods at wholesale price and the MRP was mentioned therein for the use of retailers. Accordingly he has held that the GP rate on the wholesale price works out about 20%. Thereafter the Ld CIT(A) has taken into consideration the average GP rate disclosed by the assessee (23.26%) and the G.P rate adopted in a group concern (26%). Accordingly he has arrived at an average GP rate of 26% and accordingly computed the addition to be made in the hands of the assessee.

But the fact remains that the assessee has been contending all through that it has been purchasing the goods and selling them on retail basis. It is also noticed that the assessee has been selling goods of a particular brand. No material was seized during the course of search that the assessee was selling goods at wholesale rate to other retailers, meaning thereby the assessee was manufacturing the readymade goods for its own purpose. Hence we are of the view that the goods manufactured by the assessee should be presumed to have been sold by the assessee itself on retail basis. Hence we are of the view that the Ld CIT(A) was not justified in observing that the assessee would be selling only on wholesale basis. 10. At the same time, it is well known fact that the goods are not always sold on MRP rate particularly in the case of shirts, since the 5 M/s. Zamkudi Garments Pvt. Ltd.

The next issue relates to the addition of Rs.33,87,097/- relating to average unaccounted stock. We have earlier noticed that the Ld CIT(A) has deleted this addition by holding that the surrender of Rs.6,34,027/- would be sufficient. However we notice that the surrender made by the assessee was towards stocks that were physically available, whereas the addition made by the AO pertains to the stock/sales that were not disclosed by the assessee. We have noticed that the assessing officer has taken one month stock, but he has computed the value of undisclosed stock at selling rate. We agree with the view taken by the AO that one month stock would be normally available with a manufacturer. However, the stock is generally valued at cost or market price whichever is lower. We have noticed that the value of unaccounted manufactured goods was taken at Rs.81,49,357/-, which represented six months production. Accordingly the value of one month production would work out to Rs.13,58,000/-. Hence the same should be adopted as value of undisclosed stock. Since the assessee has already surrendered a sum of Rs.6,34,027/-, in our view, the difference of Rs.7,24,000/- (rounded) needs to be 6 M/s. Zamkudi Garments Pvt. Ltd.