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Income Tax Appellate Tribunal, “ D ” BENCH, AHMEDABAD
Before: SHRI KUL BHARAT & SHRI PRADIP KUMAR KEDIA
आदेश / O R D E R
PER PRADIP KUMAR KEDIA - AM: The captioned appeals by the Revenue are directed against the separate orders of the Commissioner of Income Tax(Appeals)-II/5, Baroda [CIT(A) in short] dated 05/03/2014 and 28/11/2014 arising from the assessment orders passed under s.143(3) of the Income Tax
ITA Nos.1995/Ahd/2014 & 741/Ahd/2015 ACIT/DCIT vs. M/s.Plastichemix Industries Asst.Years – 2010-11 & 2011-12 - 2 - Act, 1961 (hereinafter referred to as "the Act") dated 24/01/2013 and 31/01/2014 respectively relevant to Assessment Years (AYs) 2010-11 & 2011-12.
Both the appeals of the Revenue concerns under-valuation of closing stock by the assessee. Therefore, both the appeals have been heard together and are being disposed of by this common order.
Facts concerning AY 2010-11 are noted herewith. The assessee is a partnership-firm engaged in the business of manufacturing of plastic master-batches etc. The return of income filed by the assessee was subjected to scrutiny assessment. The Assessing Officer (AO) in the course of scrutiny assessment, inter-alia examined quantity-wise details of raw-material purchases mainly comprising of Pigments, Polymers, Titanium Dioxide and Carbon Black and other raw-materials used in manufacturing process. The AO in a very detailed order comprehensively analyzed the valuation of closing stock of inventories and found that closing inventories have been undervalued by the assessee to the extent of Rs.2,74,40,704/- relevant to AY 2010-11 and accordingly added the same to the total income of the assessee. Similar undervaluation was found in AY 2011-12 also.
Aggrieved, the Assessee preferred an appeal before the CIT(A).
ITA Nos.1995/Ahd/2014 & 741/Ahd/2015 ACIT/DCIT vs. M/s.Plastichemix Industries Asst.Years – 2010-11 & 2011-12 - 3 - 5. The CIT(A) found merits in various justification given before it by the assessee and deleted the entire addition towards undervaluation of closing stock.
Aggrieved, the Revenue is in appeal before the Tribunal.
The Ld.DR for the Revenue relied upon the order of the AO.
The Senior Ld.Counsel Mr. S.N.Soparkar on behalf of the assessee, on the other hand, relied upon the order of the CIT(A) and submitted that while the assessee has adopted actual costs of the inventory or market value whichever is lower in respect of its inventory, the AO has applied the ‘average costs’ instead , which is not permissible.
We have carefully perused the assessment order as well the order of the CIT(A). The issue in controversy is towards valuation of closing inventories held by the assessee. The AO examined month-wise quantitative details of raw-material purchases for the Financial Year 2009-10 relevant to AY 2010-11 as well as month-wise cost of raw- material purchases of various items in terms of its value. The AO adopted the average costs of raw-material purchases for last month of the year for various inventories held as closing stock as reported in the tax Audit Report. It is the case on behalf of the assessee that assessee assigns values to each item of raw-material on the basis of its actual cost
ITA Nos.1995/Ahd/2014 & 741/Ahd/2015 ACIT/DCIT vs. M/s.Plastichemix Industries Asst.Years – 2010-11 & 2011-12 - 4 - of purchases on FIFO basis. The value of closing inventories thus represents actual cost of large variety of various raw-material or market value thereof whichever is lower. We notice here that the AO has taken note of various submissions given by the assessee in its defense before it and found several inconsistencies in the submissions of the assessee. For instance, the AO inter alia noted that while closing stock of certain semi- finished goods have been included as part of the raw-material for assigning closing stock quantity, the corresponding value of such raw- material has been stated to be included in the finished goods inventory. The AO could not find any support for such action of the assessee. The assessee, on one hand, has claimed that costs range of various varieties of the raw-material items viz. pigment etc. floats between Rs.100 to 5500 per kg, the AO noted serious defects in such claim. The AO demonstrated at page No.26 of the assessment order that the assessee has declared the value of semi-finished goods lesser than the cost of the principal raw-material itself. Likewise, the AO found deficiencies in the valuation vis-a-vis ‘let down ratio’ declared by the assessee. The AO further found that the consumption of pigments shown by the assessee is on higher side while determining the closing stock. The AO based on the detailed observations provided justification for adopting average valuation in the peculiar facts of the case as noted in the assessment order.
ITA Nos.1995/Ahd/2014 & 741/Ahd/2015 ACIT/DCIT vs. M/s.Plastichemix Industries Asst.Years – 2010-11 & 2011-12 - 5 - 9.1. The CIT(A), on the other hand, has accepted every statement of the assessee placed before it as sacrosanct discarding the objective analysis of facts carried out by the AO. Noticeably, the CIT(A) has not confronted the submissions and material placed before it to the AO. No remand report on the factual aspects showing wide variance in the facts involved has been called for. The CIT(A) has accepted the narrative propounded by the assessee that while the quantity of semi-finished goods have been included in the raw-material tally, corresponding value thereof has been included in the valuation of the finished goods. The reference to the stock register has been made at various places in the order of the CIT(A). However, it is not discernible as to whether the stock register was produced before the AO at all. No specific reference in this regard is found in the assessment order. The CIT(A) has accepted the closing stock of pigment as on the last day of the Financial Year i.e. on 31/03/2010 based on stock register at 60.10 metric ton in place of 281.69 metric ton placing reliance upon day-to-day stock records as observed in para 4.3.2 of its order.
9.2. The stock register is apparently very crucial for determination of the correctness of various assertions of the assessee towards valuation of stock. Therefore, relevant stock register is required to be verified both for quantity tally as well as adoption of the actual costs to ascertain the claim of assessee. The market value in place of actual value whenever lower also requires to be verified.
ITA Nos.1995/Ahd/2014 & 741/Ahd/2015 ACIT/DCIT vs. M/s.Plastichemix Industries Asst.Years – 2010-11 & 2011-12 - 6 -
9.3. The CIT(A), in our opinion, has summarily accepted the version of the assessee without giving fair opportunity to the revenue in this regard. Therefore, we are not in a position to accept or otherwise reject the conclusion drawn by the CIT(A). In our view, the circumstances existing in the case warrants setting aside of the order of the CIT(A) granting relief to the assessee on the aforesaid issue of undervaluation of stock. The aforesaid issue is therefore set aside and restored back to the file of AO for de novo examination of the factual aspects claimed by the assessee. Needless to say, the AO shall adopt ‘cost or market price whichever is lower’ for the purposes of valuation of inventories as per the generally accepted accounting practices. The cost for this purposes shall be actual costs as per FIFO method subject to verification of facts. For the purpose of determination of actual costs of the inventory as per FIFO method, the AO may adopt actual costs of purchase attributable to various inventories held if corroborated to his satisfaction, having regard to the record maintained for this purposes. However, it will be open to the AO to apply average costs where obscurity or opaqueness persists on facts. Consequently, the order of the CIT(A) on the issue is set aside and restored back to the file of AO for de novo determination of valuation of closing inventory after giving proper opportunity to the assessee in this regard. The issue being entirely factual in nature, we do not consider it necessary to make reference to judicial precedents put on record.
ITA Nos.1995/Ahd/2014 & 741/Ahd/2015 ACIT/DCIT vs. M/s.Plastichemix Industries Asst.Years – 2010-11 & 2011-12 - 7 -
In the result, appeal of the Revenue in ITA No.1995/Ahd/2014 for AY 2010-11 is allowed for statistical purposes.
For parity of reasons in ITA No.1995/Ahd/2014(supra), the issue regarding undervaluation of closing stock raised in ITA No.741/Ahd/2015 for AY 2011-12 is also set aside and restored to the file of AO for de novo determination after giving reasonable opportunity of being heard to the assessee.
In the result, appeal of the Revenue in ITA No.741/Ahd/2015 for AY 2011-12 is also allowed for statistical purposes.
In the combined result, both the appeals of the Revenue are allowed for statistical purposes. This Order pronounced in Open Court on 23 /11/2017
Sd/- Sd/- ( PRADIP KUMAR KEDIA ) ( KUL BHARAT ) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 23/ 11 /2017 ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS
ITA Nos.1995/Ahd/2014 & 741/Ahd/2015 ACIT/DCIT vs. M/s.Plastichemix Industries Asst.Years – 2010-11 & 2011-12 - 8 -
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-II, Baroda �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation .. 22.11.17(dictation-pad 18- pages attached at the end of this appeal-file) 2. Date on which the typed draft is placed before the Dictating Member … 22.11.17 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S…………….. 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S…….23.11.17 7. Date on which the file goes to the Bench Clerk…………………23.11.17 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order………………