2016 (9) TMI 1209 - AT - Income Tax

Valuation of material - addition on the account stock lying with the assessee u/s 28(iv) - ownership of the said stock was not vested with the assessee - During the subsequent years, assessee used such stock as raw material - Held that - We find that the assessee has taken a consistent plea during the all rounds of litigation that the material used by the assessee was taken at no cost and that the corresponding sales were offered for taxation. However, the Ld. CIT(A) has rejected the contention observing that the said fact could not be verified from the record. From the facts of the case, it is revealed that the assessee had not become the owner of the material in question. The third party/suppliers did not collect the excess material lying with the assessee though they had reimbursed/paid back the cost of material to the assessee. The excess material lying with the assessee was of no use to the assessee. Out of the total material imported worth ₹ 9,09,79,393/-, the assessee had reshipped the goods worth ₹ 7,18,25,299/-. Out of the remaining material worth ₹ 1,91,54,094/-, the Customs & SEEPZ Board Authorities have destroyed the material worth ₹ 1,58,33,067/-. So far as the remaining material of ₹ 33,25,027/- is concerned, the plea of the assessee is that the worth value of the material at the time of use was not that of invoice value. The material at the time of use had reduced to the scrap value which was used by the assessee for its manufacturing activity and the value of the material used was taken at zero cost. The profits from the corresponding sales have already been offered for taxation by the assessee. Under such circumstances, in our view, the Ld. CIT(A) was not justified in confirming the additions of ₹ 33,25,027/- at original bill value. Since the assessee has offered the profits from the sales of the goods and the raw material used has been taken at zero value, hence, in our view, the value of the material has already been taxed and adding the bill value of the goods at ₹ 33,25,027/- would amount not only to the excess addition but also to the double addition. We, therefore, direct the AO to verify whether the raw material worth ₹ 33,25,027/- (as per their original bill value) was used in the manufacturing activity at zero cost and if the corresponding profit from the sale of goods manufactured from the use of the said raw material has been offered for taxation, then no additions be made in respect of the said value of ₹ 33,25,027/-. The action of the Ld. CIT(A) in deleting the remaining additions is upheld.

Summary

Issues:
Cross appeals by Revenue and Assessee against the order dated 07.03.2011 of CIT(A) for assessment year 1997-98.

Analysis:
1. Facts and Background: The case involved a 100% export oriented unit manufacturing Switch Mode Power Supplies. The assessee imported raw materials worth &8377; 9,09,79,393/- against an export order, which was later cancelled. The assessee requested the suppliers to take back the unused raw materials, but as they did not, the assessee reshipped some goods and destroyed the rest under supervision of Customs Authorities.

2. AO's Decision: The Assessing Officer treated the unused raw materials as stock in trade and taxed it under Section 28(iv) of the Act.

3. Appeal before CIT(A): The assessee contended that the destroyed material should not be considered as stock and that the material used in production at zero cost had already been taxed through corresponding sales profits.

4. CIT(A) Decision: CIT(A) confirmed the addition of &8377; 33,25,027/- for the material used in production but deleted the remaining additions. He observed that the destroyed material did not warrant addition and that the material used at zero cost had been offered for taxation.

5. Appellate Tribunal's Decision: The Tribunal found that the assessee consistently maintained that the material used was at zero cost and corresponding sales profits were taxed. It directed the AO to verify if the material worth &8377; 33,25,027/- was used at zero cost and profits from sales were taxed. It upheld the deletion of remaining additions made by CIT(A).

6. Conclusion: The Tribunal allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal. The decision emphasized that if the raw material was used at zero cost and corresponding profits were taxed, no further additions should be made. The Tribunal directed the AO to verify this aspect.

This detailed analysis highlights the key facts, decisions, and arguments presented in the legal judgment involving cross appeals by the Revenue and the Assessee related to the treatment of unused raw materials and subsequent production activities for assessment year 1997-98.