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2016 (5) TMI 524 - AT - Income TaxAddition of undervaluation in closing stock of work-in-progress - Held that - Assessee s books of account have not been rejected u/s 145 of the Act, no specific defect has been pointed out in the quantitative records maintained by the assessee and above all ld. Assessing Officer has made addition just on the estimate basis and also due to the fact that in the next Asst. Year 2010-11 no addition has been called for by the same Assessing Officer on this ground on valuation of work in progress, we are of the view that addition needs to be deleted and, we, therefore, set aside the order of ld. CIT(A) - Decided in favour of assessee.
Issues Involved:
1. Sustaining the addition of ?15,56,197/- alleging undervaluation of closing stock of work-in-progress. 2. Disallowance of ?50,000/- towards factory expenses. Detailed Analysis: 1. Sustaining the Addition of ?15,56,197/- Alleging Undervaluation of Closing Stock of Work-in-Progress: The appellant, a private limited company engaged in dyeing and printing of cloth on a job work basis, filed an appeal against the order of the CIT(A)-1, Surat, which sustained the addition of ?15,56,197/- made by the Assessing Officer (AO). The AO alleged that the closing stock of work-in-progress was undervalued. The AO observed that the appellant's closing stock of work-in-progress was shown at ?30,57,654/-, which he deemed to be on the lower side. Using his own methodology, he recalculated the work-in-progress at ?46,13,851/- and added the difference of ?15,56,197/- to the total income of the appellant. The appellant contended that the addition was made purely on an estimated basis without rejecting the books of account under section 145(3) of the IT Act, 1961. The appellant maintained regular books of account, which were not found defective by the AO. The appellant also argued that the GP rate had improved from 19.13% in the previous year to 20.28% in the year under appeal. The appellant followed consistent accounting principles for the valuation of work-in-progress as per Accounting Standard-1, and the physical inventory was calculated using a developed software. The Tribunal observed that the AO had resorted to a new methodology for estimating the work-in-progress without pointing out any specific defects in the appellant's records. The Tribunal noted that in the subsequent assessment year 2010-11, the same AO did not make any addition related to the estimation of work-in-progress, indicating that the valuation method was accepted. The Tribunal also referred to the decision of the co-ordinate bench in the case of Krishna Art Silk Cloth P. Ltd. vs. DCIT, where it was held that there cannot be any work-in-progress in a business of dyeing and printing of cloth on a job work basis. The Tribunal concluded that the addition of ?15,56,197/- was unwarranted and needed to be deleted. 2. Disallowance of ?50,000/- Towards Factory Expenses: The AO made a disallowance of ?50,000/- towards factory expenses. However, this issue was not specifically contested in the appeal, and the primary focus remained on the addition related to the undervaluation of closing stock of work-in-progress. Conclusion: The Tribunal allowed the appeal filed by the appellant, deleting the addition of ?15,56,197/- made on account of alleged undervaluation of closing stock of work-in-progress. The Tribunal's decision was based on the absence of specific defects in the appellant's records, the consistent accounting practices followed by the appellant, and the precedent set by the co-ordinate bench in similar cases. The disallowance of ?50,000/- towards factory expenses was not specifically addressed in the Tribunal's order. Order Pronounced: The order was pronounced in the open Court on 05/04/2016.
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