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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: SHRI MAHAVIR PRASAD & SHRI WASEEM AHMED
आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Revenue against the order of the Learned Commissioner of Income Tax (Appeals), Jamnagar, dated 29/02/2016 arising in the matter of penalty order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2011-12.
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The assessee has raised the following grounds of appeal:
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in law and/or on facts in deleting the addition of Rs.2,28,68,440/- on account of under valuation of stock. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in law and/or on facts in restricting the addition on account of low GP to Rs.3,00,000/- as against total G.P. addition of Rs.36,34,633/- made by the A.O. 3. On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the A.O.
It is, therefore, prayed that the order of the CIT (A) be set aside and that of the A.O. be restored to the above extent.
The first issue raised by the Revenue is that the Ld. CIT(A) erred in deleting the addition made by the AO for Rs. 2,28,68,440/- on account of the undervaluation of stock.
The facts in brief are that the assessee is a partnership firm and engaged in the business of export activities. The assessee against the export of goods received a DEPB license. As per the AO the sale price shown by the assessee for the export of goods is not actually the correct sale price. As per the AO the assessee has taken into consideration the amount of DEPB received in deciding the sales price for the export of goods. Thus the AO was of the view the stock declared by the assessee should have also considered the amount of DEPB but the assessee has not done so. As such the assessee has shown closing stock in its books of accounts at Rs.22,846,84,400/- without considering the DEPB benefit received by it. Thus the AO increased the value of the closing stock by Rs. 22,86,84,400/- on account of the undervaluation of closing stock and added to the total income of the assessee
Aggrieved assessee preferred an appeal to the Ld. CIT(A) who deleted the addition made by the AO by observing as under: I, find substantial force in this argument. DEPB proceeds are credited to the P & L accounts, and this is to off-set the cost, in order to stand competitive in the international market. It would be too biased to hold that the value of DEPB increases the value of closing stock. The stock is valued at cost or market price whichever is less. If it is presumed that Page 2 of 6
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the market price vis-a-vis cost price is less due to the DEPB effect, then the stock has to be valued at market price and not cost price. Now, if this is done, then this finding is in favour of the appellant because the appellant has valued the stock at cost, which as per AO's logic, is higher than the market price. Therefore, there is no logic in the Finding of the AO. Secondly, one cannot randomly alter the valuation of closing stock, which is followed consistently year after year. The change in the valuation of closing stock, is only warranted when it is altered in order to reduce the profitability. No such practice has been followed by the appellant. The AO could not establish such a practice. Even the decision relied upon by the AO (British Paints Ltd) if ready contextually, warrants revaluation of closing stock, if it is altered by the assessee to reduce his tax liability. Therefore, taking the facts and circumstances of the case in totality, the addition made by the AO is directed to be deleted. In the result, this ground of appeal is allowed.
Being aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before us.
Both Ld. DR and Ld. AR before us vehemently supported the order of the authorities below as favorable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. In the present case, the addition has been made by the AO by increasing the cost of closing stock. The reason for doing so is that the sale price declared by the assessee was determined after considering the DEPB effect whereas the assessee has not considered the DEPB effect while calculating the closing stock. Thus the AO made the addition which was subsequently deleted by the Ld. CIT(A), on the reasoning that there was no nexus between the valuation of closing stock vis-à-vis the benefit received by the assessee in the DEPB.
8.1 There is no ambiguity to the fact that the assessee has adopted valuation of closing stock either at market price or cost whichever is less. To this effect, no doubt has been raised by the AO. As per the AO the amount of DEPB should have been factored while valuing the closing stock. The DEPB is given to the parties who are engaged in the export business. It is the incentive that is given to the parties in order to promote the export activities. Therefore the exporters generally take into consideration such incentive while determining the sales price of the export product.
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8.2 The Government is giving DEPB benefit to the parties so as to give them leverage to stand in the competitive international market. The DEPB has nothing to do with the cost of the closing stock. Accordingly to our understanding, the order passed by the AO is perverse. We also note that this Tribunal bearing ITA nos. 759 to 761/Rjt/2016 dated 12/09/2017 has decided the issue in favour of the assessee and against revenue. The relevant extract of the order is reproduced as under: 9. We have given a thoughtful consideration to the orders of the authorities below. A perusal of the assessment order shows that the A.O. has contradicted himself. On the one hand, the A.O. says that the effect of DEPB would be that the market price would be lower than the cost price. On the other hand, the A.O. has made the addition for undervaluation of is stock. 10.Assuming, yet not accepting, if the effect of DEPB is to make the market price lower than the cost price then the closing stock would be valued at market price as the method of accounting employed by the assessee is lower of cost or market price. 11.The A.O. further erred in stating that if the market price is computed taking into consideration, the DEPB gains the actual market price so computed would be more than the cost price. In fact, if the DEPB gains are considered then the market price would be less than the actual cost, 12.The undisputed fact is that the assessee has been consistently following the same method of accounting since past many years which has not been disturbed by the Department. Therefore, we do not find any logic in disturbing the well recognized method of valuation of closing stock adopted by the Assessee. We do not find any error or infirmity in the findings of the ld.CIT(A). 13. In the result, all these appeals are accordingly dismissed.
8.3 It is the established practice that the closing stock of one year becomes the opening stock of the subsequent year. Accordingly if the AO increases the value of closing stock for the year under consideration then it is the duty to give the corresponding effect in the opening value of the closing stock. Thus there will not be any impact on the income declared by the assessee except the increase in the amount of income in one year and decrease in the amount of income in the subsequent year. On this reasoning as well, we are also not convinced with the findings of the AO.
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8.4 In view of the above and after considering the fact in totality we are not inclined to interfere in the order of the Ld.CIT(A). Hence the ground of appeal of the Revenue is dismissed.
The next issue raised by the Revenue is that the Ld.CIT(A), erred in restricting the addition made by the AO for Rs. 36,34,633/- on account of lower gross profit. The AO during the assessment proceedings found that the assessee in the year under consideration has shown gross profit before depreciating at 7.35 percent whereas in the immediately preceding Assessment Year the gross profit declared by the assessee was at 10.06 percent. The AO also found that there was a decline in the yield of the different variety of fish purchased by the assessee in comparison to the earlier year. Thus, as per the AO the assessee has claimed more wastage in the process. However, the assessee has not maintained any record with respect to the wastage generated during the assessment proceedings. Accordingly, the AO has increased the gross profit declared by the assessee by 0.15% amounting to Rs. 36,34,633/- and added to the total income of the assessee.
9.1 Aggrieved assessee preferred an appeal before the Ld.CIT(A), who has restricted the addition to Rs. 3 lacs by observing as under: I have perused the above submission carefully. It is true that the AO could not adduce a single instance of irregularity to hold that the appellant had suppressed its profits which led him to estimate the GP of the appellant. The so called discrepancy of non-maintenance of gate pass does not warrant estimation of profit of the appellant. The AO has not brought any comparative instance to hold that the appellant’s GP was below industrial average. The AO has altered the book results without even rejecting the books of account and resorting to provisions of section 145 of the I T Act. Once when the books are accepted as such, then the book results also should have been accepted. No irregularity in purchase or sale was noticed during the assessment proceedings. It appears that, no efforts were also made to inquire on these issues. Therefore, in the absence of any specific instance, the estimation made by the AO is on arbitrary basis. So far as the finding of the AO that similar addition made in the preceding year got sustained in the first appeal is concerned, I find that the Id. CIT(A)-1 Rajkot has given a detailed finding on this issue. It is seen from the appellate order that, there were issues of low yield (drastic fall in yield during that year); certain unexplained credits, etc. Therefore, taking the overall facts and circumstances of the case, addition made by the AO in the immediate preceding year was sustained at 1.00 crore out of total addition of Rs 19.87 crores. Therefore, it cannot be said that the addition made by the AO in the immediate preceding year was sacrosanct. On the other hand, the Id. AR could not prove the nexus between the fluctuating exchange rate and the fall in GP. He also failed to fully convince the minor fall in yield during the year under consideration. Hence, considering these discrepancies and to plug the leakage of revenue, the addition
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made on account of fall in GP is restricted to Rs 3.00 lacs. The appellant therefore gets relief of Rs 33,34,633/-.
Being aggrieved by the order of the Ld.CIT(A) the Revenue is in appeal before us.
Both the Ld. DR and Ld. AR vehemently supported the order of authorities below as favorable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. In the instance case, the AO has increased the amount of gross profit by 0.15% on the reasoning that the assessee was not maintaining the record with respect to the wastage generated in the processing of materials. The gross profit depends on various facts such as sales price, cost of purchase and other direct expenses. In the given case the AO has not doubted either on the sales price or the purchases vis-à-vis stock maintained by the assessee. Therefore, in our considered view the amount of gross profit cannot be disturbed merely on the reasoning that there was a decline in the gross profit ratio in the year under consideration in comparison to the earlier year. Accordingly, we do not find any infirmity in the order passed by the Ld. CIT(A) and we, therefore, confirm the same. Hence, the ground of appeal of the Revenue is hereby dismissed.
In the result the appeal filed by the Revenue is dismissed.
Order pronounced in the Court on 23/03/2022 at Ahmedabad.
Sd/- Sd/- (MAHAVIR PRASAD) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 23/03/2022 Manish
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