2016 (2) TMI 394 - AT - Income Tax

Valuation of closing stock on the basis of average rate of the purchase for the entire year - CIT(A) calculated the value of closing stock on the basis of FIFO Method (First In First Out) - Held that - 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 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. Addition made by estimating the Gross Profit @ 20% on sales per meter of finished cloth - Held that - The assessee has shown the Gross Profit @ 5.93%. The Assessing Officer worked out the Gross Profit from the average per meter rate @ 24.33% for finished goods and @ 8.7% for grey. On seeing the book result and closing stock assessed, the Assessing Officer arrived at this conclusion that the book result is not correct therefore estimated Gross Profit rate should be @ 20% by considering rate of similar industry The Ruby Mills Ltd. wherein Gross Profit has been shown @ 33% for A.Y. 2007-08 on turnover of ₹ 108,68,01,077/-. Accordingly, the Assessing Officer assessed the value of cloths. When the matter came before the First Appellate Authority then the First Appellate Authority arrived at this conclusion that the Assessing Officer compared the Gross Profit rate with the Ruby Mills Ltd. which was manufacturing of the ladies dress material whereas the appellant was in manufacturing of suiting and shirting material. Learned CIT(A) also held that both the cases are not comparable. Therefore, the learned CIT(A) has deleted the said contentions. Even before us nothing was argued that any kind of material was purchased to which it can be estimated that the estimation of Gross Profit @ 20% was quite justifiable. No example of comparable industry of any kind was given before us to justify the estimated Gross Profit @ 20% per meter on finished cloths. Therefore in the said circumstances finding no material on record to interfere with the finding of the learned CIT(A). Hence issue in favour of the assessee and against the revenue.

Summary

Issues Involved:
1. Deletion of addition on account of valuation of closing stock.
2. Deletion of addition made by estimating the gross profit at 20% on sales per meter of finished cloth.

Issue-wise Detailed Analysis:

Issue No. 1 & 2: Deletion of Addition on Account of Valuation of Closing Stock

The core issue revolves around the deletion of the addition of Rs. 90,60,853/- on account of the valuation of closing stock. The Assessing Officer (AO) had assessed the value of the closing stock based on the average rate of purchase for the entire year, which included yarn, grey, and finished cloth. The AO noted discrepancies in the valuation of the closing stock and concluded that the stock was undervalued to reduce profits or that production and sales quantities were suppressed. The AO rejected the book results under section 145(3) of the Income Tax Act, 1961, and estimated the gross profit rate at 20% based on industry comparisons.

The learned Commissioner of Income Tax (Appeals) [CIT(A)] deleted the additions by adopting the FIFO (First In First Out) method. The CIT(A) found that the AO's calculations were based on incorrect assumptions, particularly the average rate of purchase for the whole year instead of the last three months as per the FIFO method. The CIT(A) concluded that the AO's approach did not account for the fluctuating rates of materials and failed to consider the specific circumstances of the assessee's business, which involved manufacturing textile fabrics with varying thicknesses and processing costs. The CIT(A) emphasized that the AO did not find any defects in the assessee's books of accounts and that the manufacturing process was subject to Excise Department supervision, which did not report any discrepancies.

The Tribunal upheld the CIT(A)'s findings, agreeing that the FIFO method was more appropriate given the fluctuating rates and the nature of the business. The Tribunal found no convincing reasons to interfere with the CIT(A)'s order, thus deciding the issue in favor of the assessee and against the revenue.

Issue No. 3: Deletion of Addition Made by Estimating the Gross Profit at 20% on Sales per Meter of Finished Cloth

The AO estimated the gross profit rate at 20%, comparing it to a similar industry, "The Ruby Mills Ltd.," which showed a gross profit rate of 33% for the assessment year 2007-08. The AO justified the estimation based on discrepancies in the book results and closing stock valuation.

The CIT(A) found that the AO's comparison was flawed as "The Ruby Mills Ltd." was involved in manufacturing ladies' dress material, whereas the assessee was manufacturing suiting and shirting material. The CIT(A) held that the two businesses were not comparable and that the AO's estimation was not justified.

The Tribunal upheld the CIT(A)'s decision, noting that no evidence or comparable industry examples were provided to support the AO's estimated gross profit rate of 20%. The Tribunal found no material on record to justify interfering with the CIT(A)'s findings, thus deciding the issue in favor of the assessee and against the revenue.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s deletion of additions on both the valuation of closing stock and the estimation of gross profit. The Tribunal found the CIT(A)'s method and conclusions to be judicious and correct, with no convincing reasons to interfere with the order. The judgment was pronounced in the open court on 23rd December 2015.