DCIT 7(2), MUMBAI vs. ROLSON INDUSTRIES (I) LTD, MUMBAI

“I have carefully considered the facts of the case. The appellant was engaged in the business of manufacturing of textile fabrics. For this purpose the yarn was purchased, the yarn was changed and thereafter, the grey cloth was manufactured. There was no standardized thickness. The same was dependent on the order received. Manufacturing of grey cloth of different thickness required consumption of different yarn kg. per meter. Thereafter, the grey cloth was subject to the dyeing and processing. Ultimately, finished suiting and shirting and chindi material was manufactured. In the audit report as per requirements, appellant has given quantitative details of opening stock, consumption, finished products and shortage of yarn, grey cloth and finished products. The A.O. has re- produced such quantitative details in the assessment order. After analyzing the above quantitative details the A.O held that average rate of purchase of yarn was Rs.115.38. While working so the A.O. considered the total purchases of yarn during the year which' was divided by purchase amount giving average rate of Rs.115.38. However, the appellant was following FIFO method of accounting. In this method only the last purchases remained in stock were required to be considered. The appellant has given working of purchases of last three months which had claimed to have been remained in the closing stock. On the basis of this last three months purchases figures, the average rate works out to Rs. 95.95. Thus the starting base of the A.O. was not correct for working out further deficiency in appellant's production account.

In the said working the A.O. has concluded that consumption of per k.g. of yarn has given production of 2.25 mts. of grey.

In the said working the A.O. further concluded that in per meter of grey produced, yarn consumed was costing Rs. 51.3. While concluding so the A. O. has taken the figures of average cost of purchases of the whole year at Rs. 115.38. However, it has been explained that this figure was incorrect and the correct figure of average rate of purchase Assessment Year: 2007-08 that remain in closing stock was Rs. 95.95 on the basis of last 3 months purchases. Thus this mistake was consequential effect of adopting incorrect figures at first stage itself.

In the above working the A.O. adopted average rate of Rs. 53.89 of purchases of grey on the basis of total meters of grey purchased during the year divided by amount of purchase. On the basis of this average rate of Rs. 53.89 of purchases during the year of grey cloth, the A.O. has workout the value of closing stock of grey at Rs. 48,39,840/-. However, the appellant has explained that the purchase of grey from the market during the year had already been consumed in manufacturing of finished cloth and what was remained in the closing stock was grey manufactured by the appellant from yarn and not the readymade purchased from the market. In the manufacturing of grey, the cost of weaving of yarn and other manufacturing cost have also been included. The appellant's cost of manufactured grey cloth was less than the cost of which the finished grey cloth was purchased from the market. The A.O. has adopted average rate of Rs. 53.09 per meter of grey whereas the appellant's cost of manufacturing of grey was only at the average rate of Rs. 48.03. This difference has resulted in incorrect valuation of closing stock of grey cloth of the appellant by the A.O.

In the above working the A.O. has concluded that how the sale of Rs. 52.57 was less than purchase stock rate of Rs. 53.89 and opening stock rate of Rs. 55.50. However, as explained above the A.O. has adopted rate of opening stock by considering the entire quantity of opening stock which had already been consumed in the production. In case of purchase rate the A.O. considered the entire purchase during the year in place of purchases made during last 3 months as per FIFO method. Thus the appellant's manufacturing cost was Rs. 48.03 per meter and sales rate was Rs. 52.57 per meter which was higher than manufacturing cost. Thus there was no discrepancy on this issue as noted by A. O. In case of finished products the A. O. had given finding Assessment Year: 2007-08 that why the closing stock rate at Rs. 51.78 per meter was equal to yarn cost and less than grey purchased cost. The appellant has explained that the yarn and grey purchases were consumed in manufacturing of finished product and cost of finished product per meter was Rs. 41.66 adding therein processing charges the average rate of closing stock workout Rs. 51.77 per meter. Thus on the basis of these incorrect figures the A.O. incorrectly worked out under valuation of closing stock of finished goods at Rs. 15,13,984/-. Thus the appellant has satisfactorily explained that the working of A.O. in working the average rate of yarn, grey and finished product were incorrect. These incorrect figures led to further incorrect conclusion made by A.O. It is worth to mention here that the A.O. has worked out average rate by considering the figures of entire year whereas the same were required to be considering of the last 3 months only being FIFO method adopted by appellant. The rates of different goods were fluctuating from day to day and hour to hour and therefore a uniform average rate was not possible to be adopted. Further, at some places the A.O. has not considered the weaving and processing charges in working out the closing stock rate. The average rate of grey could not have been worked out, in view of the fact that different thickness of grey produced required different kinds/thickness of yarn. Consequently, the dying process was also different on different varieties wherein the process charges varied from Rs. 3 to 12 per meter. In the process of manufacturing, the wastage on account of shrinking, cutting, sampling etc. could not be ruled out resulting in reduction of quantity manufactured. Considering the entirety of facts and circumstances, the working made by A. O. could not have conclusively proved any under statement of yarn, grey and finished products of the appellant. Apart from the using various figures for reaching to a conclusion, the A.O. has not noticed any defect in appellant's books of account. Therefore, there was no base with the AO for rejecting appellant's books of accounts. It is' also worth noting that appellant's manufacturing activity/process was subjected to Excise Department supervision wherein the inputs Assessment Year: 2007-08 and output/ production details were required to be recorded in RG-1 register on daily basis. However, no discrepancy appears to have been noticed by Excise Department. In the facts & circumstances, the working made by A.O. was not proper and consequently different conclusion made on that basis were also not proper. The AO has worked out under valuation of Rs.90,60,853/- in closing stock of yarn, gray and finished product which was included in addition of gross profit. On the basis of discrepancies in average rate of yarn, gray and finished cloth, the AO has justified his action of rejecting books of account and estimating the G.P. rate of appellant .. However, as explained above, the conclusions reached by AO were on incorrect figures and assumptions. The addition made in. closing stock is therefore, deleted. The estimation of G.P. rate has been discussed in subsequent ground of appeal

. In the result, this ground of appeal is allowed.

5. The only difference which came into notice that the Assessing Officer assessed the value of the closing stock on the basis of average rate of the purchase for the entire year whereas the learned CIT(A) calculated the value of closing stock on the basis of FIFO Method (First In First Out). The learned CIT(A) considered the value on material of last 3 months and accordingly assessed the value of closing stock. The assessee company is engaged in the business of manufacturing and export of textile and fabrics. No doubt the assessee company has to purchase raw materials for the manufacturing of export fabrics. He has to purchase raw material initially from the beginning time of assessment year and up to the end of the assessment year. The assessment of the value of closing stock on the basis of average cost of material of the whole year does not seem justifiable. The value of the Assessment Year: 2007-08 closing stock is required to be assessed upon the value of the material purchased and cost of the last 3 months. On seeing the method of calculating the value of closing stock the method adopted by the learned CIT(A) is quite justifiable specifically in the circumstances when there is lot of fluctuating in the rates during the year. It is only a manner how to deal with the value of closing stock in the assessment. The learned Departmental Representative nowhere highlighted any ground which requires to be interfere with the findings of the learned CIT(A) under appeal. Therefore, finding no plausible and convincing reasons to interfere with the order passed by learned CIT(A). We are of the view that learned CIT(A) has passed the order on the specific issue judiciously and correctly which does not need to interfere at this stage accordingly this issue is decide in favour of the assessee and against the revenue.

ISSUE NO. 3:-