2016 (4) TMI 994 - AT - Income Tax

Disallowance of manufacturing loss - Held that - The facts of the case discussed in the decision of co-ordinate bench in the case of Shukra Jewellery Ltd. vs. ACIT (2009 (4) TMI 949 - ITAT MUMBAI) are also similar to the facts of the case we are dealing in. We, therefore, respectfully following the decision of the co-ordinate bench referred above and also on the basis of our discussion made above, including wastage norms set by the Handbook of Procedures (Vol.I) 1st September 2004 31st March, 2009 issued by Ministry of Commerce and Industry, Department of Commerce, Government of India and also following consistent principle of manufacturing process by the assessee duly supported by audited financial statements and complete quantitative records, we are of the view that no disallowance is called for in manufacturing loss. - Decided in favour of assessee Addition for suppression of closing stock - Stock valuation method adopted by the assessee - Held that - Looking to the fact that assessee has been maintaining method of accounting consistently and no change has been made in the opening stock by the Assessing Officer, weighted average cost has been calculated as per accounting standard issued by ICAI and even if the comparative working of valuation of stock on FIFO basis and weighted cost on average basis as given by the Assessing Officer during assessment proceedings then also the result will be in negative and nothing can be inferred that the appellant had derived any undue advantage. In these circumstances, we are of the view that stock valuation method adopted by the assessee in the year under appeal has been consistently followed since last many years, no defect in the books have been pointed out by the Assessing Officer nor books of account have been rejected and the valuation of closing stock by applying his own formula of weighted average cost without applying it to the opening stock of the assessee and, therefore, in our view this addition for suppression of closing stock is uncalled for and needs to be deleted. - Decided in favour of assessee Disallowance on account of office expenses - Held that - CIT(A) has rightly deleted the addition because such kind of ad hoc disallowance are normally uncalled for in the case of assessees who are regularly maintaining books of account which are audited u/s 44AB of the Act and all the documents relating to expenses incurred are verified by the auditors and also looking to the magnitude of the turnover of the assessee which in this year is ₹ 17.36 crores, expenses incurred on account of office expenses, office maintenance, miscellaneous expenditure, printing & stationery expenditure aggregating to ₹ 4,59,911/-, cannot be said as unreasonable. Therefore, ld. CIT(A) has rightly deleted the ad hoc addition - Decided in favour of assessee

Summary

Issues Involved:

1. Disallowance of manufacturing loss.
2. Suppression of valuation of closing stock.
3. Disallowance of office expenses.
4. Application of FIFO method versus weighted average method for stock valuation.
5. Levying of interest under section 234C.

Detailed Analysis:

1. Disallowance of Manufacturing Loss:

The primary issue was the disallowance of ?45,08,042/- claimed as manufacturing loss by the assessee. The Assessing Officer (AO) allowed only 1% of the claimed 10.59% manufacturing loss, deeming the rest excessive. The CIT(A) upheld this disallowance, referencing industry norms and guidelines from the Exim Policy, which the CIT(A) found not directly relevant. The Tribunal, however, found the assessee’s claim consistent with industry norms (9%-10% as per the Foreign Trade Policy) and past accepted assessments (9%-11.05% in previous years). The Tribunal referenced the ITAT Mumbai decision in Shukra Jewellery Ltd. vs. ACIT, which supported the assessee’s consistent method and found no specific defects in the books. Consequently, the Tribunal deleted the disallowance, allowing the appeal in favor of the assessee.

2. Suppression of Valuation of Closing Stock:

The AO added ?35,61,135/- for suppressing the valuation of closing stock, arguing that the weighted average cost should be calculated based on the last two months' purchases rather than the entire year. The CIT(A) deleted this addition, stating the assessee consistently followed the weighted average cost method, which was compliant with accounting standards and previously accepted by the department. The Tribunal upheld the CIT(A)’s decision, emphasizing the principle of consistency and the lack of defects in the books of accounts.

3. Disallowance of Office Expenses:

The AO made an ad-hoc disallowance of ?50,000/- from office expenses due to unverifiable vouchers. The CIT(A) deleted this disallowance, noting the lack of specific discrepancies and the regular maintenance of audited books. The Tribunal agreed, highlighting the unreasonableness of ad-hoc disallowances without pinpointed defects, especially given the magnitude of the assessee’s turnover.

4. Application of FIFO Method vs. Weighted Average Method for Stock Valuation:

For the assessment year 2009-10, the Revenue appealed against the CIT(A)’s deletion of an addition of ?8,99,199/- for closing stock valuation using the FIFO method instead of the weighted average method. The Tribunal dismissed this appeal, referencing the CBDT’s instructions prohibiting appeals where the tax effect is less than ?10 lakhs, applicable retrospectively.

5. Levying of Interest under Section 234C:

This issue was noted as consequential and not specifically adjudicated upon.

Conclusion:

The Tribunal's judgment favored the assessee on all major issues, emphasizing consistency in accounting methods, adherence to industry norms, and the necessity for specific findings to justify disallowances. The Revenue’s appeals were dismissed, and the assessee’s methods and claims were upheld. The Tribunal's detailed analysis and reliance on precedents reinforced the principles of consistency and proper accounting practices.