2010 (5) TMI 858 - AT - Income Tax

Addition on Work in progress - defective method of accounting - business of Dyeing and printing of cloth - job work basis - During assessment proceedings AO noticed that assessee has not shown work-in-progress in the closing stock as on 31-03-2003. AO held that assessee had claimed all the expenses made during the year under consideration on un-dispatched gray cloth laying at different stages of processing which should have been shown as work-in-progress as on 31-03- 2003. AO accordingly calculated work-in-progress. The Ld. CIT(A) deleted the addition on the ground that assessee is engaged in processing of material for outside parties and does not have stock of its own. Further assessee is following the same method of accounting year-after-year. There is no justification in disturbing this method. HELD THAT - we are of the view that issue is now covered in favour of the assessee by the decision of Tribunal in the case of Pratik Processors Pvt. Ltd. wherein Tribunal has held that there cannot be any work in- progress in a case where business of Dyeing and printing of cloth is done on job work basis. He referred to para from that order as under - At the time of hearing both the Representatives agreed the similar issue arose in an appeal by the revenue in the case of Vipul Industries Pvt. Ltd. V/s ACIT 1996 (1) TMI 144 - ITAT AHMEDABAD-C held that the assessee which is engaged in the business of dyeing and printing of cloth on job work basis and where the assessee had not shown any work-in-progress at the year end the same was estimated to be 50% of the job receipt of the likely stock remaining in process. However was deleted by the learned CIT(A).deletion was confirmed by the Tribunal. Disallowance of 25% on purchase price - purchases from Min Chemicals - HELD THAT - In our considered view there is no case for interference in the order of Ld. CIT(Appeals). In the case of first two purchases Ld. CIT(A) has given finding that goods have actually come but from other parties but bills are procured from first two parties. This finding is not controverted. We also hold that assessee has obtained goods from other parties but to what extent is not known. The quantity and quality of the goods purchased from other parties and what price was paid is also not known. Therefore there is no co-relation of quality and quantity of goods brought by the assessee for which payment was made. In view of this we confirm the order of Ld. CIT(A) in disallowing 25% of purchase price. In respect of purchases from Min Chemicals it was not even established that any goods had actually come in respect of which the assessee had procured bills from this party. In view of this disallowance of purchase from this party is also confirmed. As a result we confirm the order of Ld. CIT(A) and dismiss appeal filed by Revenue and that of CO filed by assessee.

Summary

Issues Involved:
1. Deletion of addition made on account of work-in-progress.
2. Restriction of disallowance on unproved purchases.
3. Sustaining addition on purchases of color chemicals from specific suppliers.

Detailed Analysis:

1. Deletion of Addition on Account of Work-in-Progress:
The Revenue appealed against the deletion of Rs. 6,34,217/- made on account of work-in-progress. The Assessing Officer (AO) had added this amount, arguing that the assessee did not show work-in-progress in the closing stock, which was necessary due to the expenses claimed for un-dispatched gray cloth. However, the CIT(A) deleted this addition, noting that the assessee, engaged in dyeing and printing of cloth on a job-work basis, consistently followed an accounting method that did not include such work-in-progress. The Tribunal upheld this deletion, referencing a similar case (Pratik Processors Pvt. Ltd. v. DCIT) where it was held that there cannot be work-in-progress for businesses processing materials for outside parties. The Tribunal confirmed that the method of accounting followed by the assessee was in accordance with Accounting Standards (AS-2 and AS-9) laid down by the ICAI.

2. Restriction of Disallowance on Unproved Purchases:
The AO had made a disallowance of Rs. 22,70,756/- on account of unproved purchases, which the CIT(A) restricted to 25%, i.e., Rs. 5,08,089/-. The Tribunal noted that the CIT(A) had found evidence of goods being received in the factory premises for purchases from M/s. Pooja Dye Chem and M/s. Abhi Dyes but not from M/s. Min Chemicals. The CIT(A) thus applied a rate of 25% disallowance for the first two suppliers and sustained the entire disallowance for Min Chemicals. The Tribunal upheld this decision, agreeing that while goods were received, the procurement was from other parties, and the quality, quantity, and price correlation were not established. Consequently, the Tribunal confirmed the CIT(A)'s order, maintaining the 25% disallowance and the complete disallowance for Min Chemicals.

3. Sustaining Addition on Purchases from Specific Suppliers:
The assessee had declared purchases of color and chemicals from three suppliers: M/s. Pooja Dye Chem, M/s. Abhi Dyes, and M/s. Min Chemicals. The AO found discrepancies such as lack of trading activity, non-disclosure of bank accounts, and immediate cash withdrawals after cheque deposits. For M/s. Min Chemicals, the AO found no supporting evidence for the material received. The CIT(A) observed that goods were received for the first two suppliers, leading to a partial disallowance, but upheld the full disallowance for Min Chemicals due to lack of evidence. The Tribunal found no reason to interfere with the CIT(A)'s findings and confirmed the disallowance percentages, thereby dismissing both the Revenue's appeal and the assessee's cross-objection.

Conclusion:
The Tribunal dismissed the Revenue's appeal and the assessee's cross-objection, confirming the CIT(A)'s decisions on all counts. The deletion of the addition on account of work-in-progress was upheld, the disallowance on unproved purchases was restricted to 25% for two suppliers and fully sustained for one, and the additions on purchases from specific suppliers were maintained. The judgment emphasized the consistency in the assessee's accounting methods and the necessity of evidence for claimed purchases.