2015 (10) TMI 471 - AT - Income Tax

Disallowance of shortage of 4349.35 kg. claimed by the assessee in the process of making hosiery goods out of grey cloth - Held that - The assessee has taken the stock at the end of the year and as duly supported for shortage of claim with the tax audit report dated 22.09.2009. The assessee has al so submitted the detail s of quantity of grey cloth received, quantity of processing as well as the shortage arising in the process. Copies of bills from various suppliers of grey cloth have been shown in support of the quantity-wise purchase details submitted by the assessee. The Assessing Officer was not justified in disallowing the claim of shortage of stock of 4349.35 kg. of raw material amounting ₹ 8,81,679/- without giving cognizance to the facts of the manufacturing process of such goods which has result of shortage/wastage which comes in the process of making grey cloth ready for making hosiery goods as well as cutting of grey cloth for making hosiery items. This fact has neither been taken care by the Assessing Officer and nor by the ld. CIT(Appeals) in their orders. Therefore, we delete the addition made by the lower authorities and allow the claim of the assessee. - Decided in favour of assessee.

Summary

Issues:
Condonation of delay in filing appeal before ITAT, Sustaining addition for shortage of raw material

Analysis:
1. Condonation of Delay: The appeal filed by the assessee was time-barred by 207 days, and a condonation petition was submitted citing health reasons. The assessee was bedridden due to a heart condition, supported by medical documents. The delay was condoned by the ITAT under section 253(5) of the Income Tax Act, 1961, and the appeal was admitted.

2. Sustaining Addition for Shortage of Raw Material: The primary issue in the appeal was the addition of Rs. 8,81,679 towards a shortage of 4349.35 kgs of raw material during the manufacturing process. The Assessing Officer disallowed the claim based on lack of documentary evidence and past records. The assessee argued that in the garment business, wastage is inherent, supported by submissions and tax audit reports.

3. Assessing Officer's Decision: The Assessing Officer based the disallowance on the absence of a stock register and past records showing no shortage. The CIT(Appeals) upheld the disallowance, questioning the lack of shortage in the previous year. However, the ITAT noted the technical aspects of manufacturing grey cloth and hosiery items, acknowledging the normalcy of wastage in the process.

4. ITAT's Decision: After considering technical articles and submissions, the ITAT found the disallowance unjustified. The ITAT emphasized the inherent wastage in manufacturing processes and the lack of consideration by lower authorities. The ITAT overturned the lower authorities' decision, deleting the addition and allowing the assessee's claim.

In conclusion, the ITAT allowed the appeal, emphasizing the normalcy of wastage in the manufacturing process and overturning the disallowance of the shortage claim.