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2016 (8) TMI 1526 - AT - Income TaxValuation of closing stock - assessee was valuing the closing stock at the cost or realizable value whichever is less - HELD THAT - This Bench of the Tribunal in the case of M/s Rm.K. Visvanatha Pillai Sons 2016 (6) TMI 1415 - ITAT CHENNAI has examined this issue elaborately and found that the assessee was valuing the closing stock at the cost or realizable value whichever is less regularly. If the stock was remained unsold for one year the assessee estimated the realizable value at 25% of the cost and the if the same was remained unsold for two years the asse estimated the realizable value at 50% of the cost. In case the stock remained unsold for more than three years the assessee estimated the same at 100/- or the net realizable value whichever is less. It is not in dispute that the assessee is engaged in the business of readymade garments and textiles. Admittedly fashion in textile is changing day by day in the textile industry and the assessee is required to keep the stock in tune with the changing fashion and technology. If the fashion is changed old fashion may not be liked by the customers who are coming to the showroom. Tribunal disbelieved the claim of the assessee on the ground that the reduction of value method was not followed year by year. This Tribunal found that there is no consistency method followed by the assessee for valuing the closing stock. This Tribunal has not taken into consideration the change in fashion and technology in the textile industry. The method of valuation adopted by the assessee continuously for years together was also not brought to the notice of the Bench. When the nature of business and change of fashion were not considered this Tribunal is of the considered opinion that the finding of the Tribunal in the case of Shri N. Viswanath 2015 (9) TMI 907 - ITAT CHENNAI may not be applicable to the facts of this case. In the case of M/s Rm. K. Visvanatha Pillai Sons this Tribunal examined the facts elaborately with regard to the nature of the business and the method of accounting followed by the assessee and found that the assessee has rightly valued the closing stock. Therefore by following the order of this Tribunal in the case of M/s Rm. K.Visvanatha Pillai Sons(supra) the addition made by the Assessing Officer towards valuation of closing stock is deleted. Disallowance of contribution towards LIC gratuity fund - HELD THAT - The contribution was made to gratuity fund of LIC. It is not in dispute that the amount paid cannot be got back by the assessee.The money has gone out of the hands irrecoverably. Therefore as held by the Apex Court in the case of Textool Company Ltd. 2009 (9) TMI 66 - SUPREME COURT the claim made by the assessee is allowable since admittedly the payment was made by the assessee. Therefore the orders of the lower authorities are set aside and the addition made by the Assessing Officer is deleted. Disallowance of depreciation on additions to fixed assets - HELD THAT - When the assessee filed the details of the plant and machinery this Tribunal is of the considered opinion that there is no reason for disallowing the claim of depreciation. It is not in dispute that the plant and machinery air conditioner electrical equipment are eligible for depreciation. The assessee claimed depreciation only @ 7.5%. The rate of depreciation claimed by the assessee is not in dispute. In those circumstances disallowing the claim of the assessee is not justified. Accordingly the orders of the lower authorities are set aside and the addition made by the Assessing Officer is deleted. Addition on account of purchases included in closing stock but not accounted - assessee has not received the original invoices from the vendors. Therefore the same was not accounted in the purchase account as on 31.3.2008. After receipt of invoices from the vendors the same were accounted in the subsequent year - When the assessee came to know this defect a revised return was filed immediately including the entire purchases made in the assessment year 2008-09. Consequently the purchases accounted for assessment year 2009-10 were also reduced - HELD THAT - When the assessee has entered the purchases in the books of account and placed material evidence for receipt of goods physically this Tribunal is of the considered opinion that the Assessing Officer is not justified in rejecting the claim of the assessee on the basis of the gross profit ratio. Gross profit cannot be a fixed figure for every year. The gross profit may vary depending upon various circumstances. When the assessee was maintaining books of account this Tribunal is of the considered opinion that the gross profit reflected in the books of account has to be taken into consideration. If the gross profit goes down after considering the purchases to the extent of 1, 11, 30, 290/- this Tribunal is of the considered opinion that merely because the gross profit gone down that cannot be a reason for making the addition. It is normal practice in textile business that the goods will be dispatched immediately on placing orders and the invoices will be set subsequently. When the assessee received the invoices subsequently the same ought to have been entered in the books of account during the year under consideration. Unfortunately that was not done. However after realizing the mistake the assessee has recorded the same in the books of account and filed a revised return. Consequently the assessee has also made a claim in assessment year 2009-10 to reduce the so called purchases which were wrongly entered. When this is the position this Tribunal is of the considered opinion that the Assessing Officer ought to have accepted the revised return filed by the assessee. In view of the above we are unable to uphold he orders of the authorities below. Accordingly the orders of the lower authorities are set aside and the addition made by the Assessing Officer is deleted. Disallowance of lease commitment charges and donations - HELD THAT - As relying on case of M/s Rm.K. Visvanatha Pillai Sons 2016 (6) TMI 1415 - ITAT CHENNAI both lease commitment charges and donations is to be allowed as revenue expenditure. Addition on account of stock discrepancy - HELD THAT - AO appears to have found that the items could not be verified due to various factors but has not pointed out any single fact which prevented him from verifying or tracking the system to find out how the stock purchased by the assessee travelled from the date of purchase till the date of sale. Moreover the unsold stock for more than one year two years and three years as the case may be is available in the stock which was not reflected in the physical inventory taken by the Revenue authorities. The Assessing Officer himself admits that he could not identify the stock with reference to by number provided by the assessee. If the Assessing Officer could not identify the stock with reference to by-number allotted by the assessee this Tribunal is of the considered opinion that the inventory taken by the Revenue may not reflect the correct position of closing stock. When the assessee is maintaining stocks systematically by allocating by-number and also providing a system of tracking through the computer this Tribunal is of the considered opinion that the authorities below ought to have examined the method adopted by the assessee in a detailed manner and an opportunity shall be given to the assessee to explain how the method works. However without considering all these factors the Assessing Officer simply came to the conclusion that there was a discrepancy. This Tribunal is of the considered opinion that the discrepancy was due to stocks remain unsold for more than one year and the assessee valued the same at the net realizable value or cost whichever is less therefore the CIT(A) is not justified in confirming the addition made by the Assessing Officer. Disallowance of expenses towards renovation of the building - assessee incurred the expenditure for interior decoration temporary wooden partition flooring etc. - HELD THAT - On identical set of facts in the case of assessee s group concern M/s Rm. K. Visvanatha Pillai Sons 2016 (6) TMI 1415 - ITAT CHENNAI found that the similar expenditure is revenue in nature. Assessee appeal allowed.
Issues Involved:
1. Valuation of closing stock. 2. Disallowance of contribution towards LIC gratuity fund. 3. Disallowance of depreciation on additions to fixed assets. 4. Addition on account of purchases included in closing stock but not accounted. 5. Disallowance of expenditure. 6. Disallowance of lease commitment charges and donations. 7. Addition on account of stock discrepancy. 8. Disallowance towards renovation of the building. Issue-wise Detailed Analysis: 1. Valuation of Closing Stock: The primary issue in all assessee's appeals revolves around the valuation of closing stock. The assessee, engaged in the textile business, valued the closing stock at cost or market/realizable value, whichever was less. This method was consistently followed, considering the rapid changes in fashion and technology in the textile industry. The Tribunal, referencing a similar case (M/s Rm.K. Visvanatha Pillai & Sons), found that the assessee's method of valuing unsold stock at reduced percentages based on the duration of unsold status was justified. Consequently, the Tribunal directed the deletion of additions made by the Assessing Officer for the assessment years 2007-08, 2008-09, and 2009-10. 2. Disallowance of Contribution towards LIC Gratuity Fund: The assessee's contribution to the LIC gratuity fund, which was not approved by the CIT during the relevant years, was disallowed. However, relying on the Supreme Court judgment in M/s Textool Company Ltd., the Tribunal held that since the payment was irrecoverable, the claim should be allowed. Thus, the disallowance was deleted for the assessment years 2007-08, 2008-09, and 2009-10. 3. Disallowance of Depreciation on Additions to Fixed Assets: The assessee claimed depreciation on additions to fixed assets, which was partly disallowed by the Assessing Officer due to insufficient substantiation. The Tribunal noted that the details of plant and machinery were provided and eligible for depreciation. Therefore, the disallowance for the assessment years 2008-09 and 2009-10 was deemed unjustified and was deleted. 4. Addition on Account of Purchases Included in Closing Stock but Not Accounted: The assessee faced an addition due to unaccounted purchases included in the closing stock. The Tribunal observed that the purchases, though received physically, were not recorded due to delayed invoices. The assessee filed a revised return to rectify this. The Tribunal found the revised return justified and directed the deletion of the addition for the assessment year 2008-09. 5. Disallowance of Expenditure: The assessee did not press this ground, and the Tribunal dismissed the ground regarding the disallowance of expenditure amounting to Rs. 9,19,923/- for the assessment year 2008-09 as not pressed. 6. Disallowance of Lease Commitment Charges and Donations: The assessee's lease commitment charges and donations were disallowed by the Assessing Officer, treating them as donations. However, the Tribunal, referencing a similar case (M/s Rm. K. Visvanatha Pillai & Sons), found that the payments were made as per the HR&CE's direction for business purposes. Thus, the disallowance was deleted for the assessment year 2009-10. 7. Addition on Account of Stock Discrepancy: The discrepancy in stock valuation during a search operation led to an addition. The Tribunal noted that the assessee's method of tracking stock through unique by-numbers was not adequately considered by the Assessing Officer. The Tribunal found the discrepancy due to unsold stock valuation justified and directed the deletion of the addition for the assessment year 2009-10. 8. Disallowance towards Renovation of the Building: The Revenue's appeal contested the allowance of renovation expenses as revenue expenditure. The Tribunal, referencing earlier decisions and the nature of the expenses (interior decoration, flooring, etc.), upheld the CIT(A)'s decision to treat the expenses as revenue in nature, thus dismissing the Revenue's appeal for the assessment year 2009-10. Conclusion: The Tribunal allowed the assessee's appeals for the assessment years 2007-08, 2008-09, and 2009-10, either wholly or partly, and dismissed the Revenue's appeal for the assessment year 2009-10. The decisions were pronounced in open court on 5th August 2016, at Chennai.
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