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TMI Blog2013 (3) TMI 171X X X X Extracts X X X X X X X X Extracts X X X X ..... RDER PER G S PANNU, AM: Since the cross appeals by the assessee and the Revenue pertain to same assessee and involve common facts, the captioned three appeals were heard together and are being disposed of by a consolidated order for the sake of convenience and brevity. 2. The appeal of assessee, vide ITA No 1389/PN/06 and Revenue s appeal, vide ITA No 55/PN/07 arise out of the same order of the Commissioner of Income-tax (Appeals)-II, Pune dated 3.10.2006, which in turn emanate from the order dated 2.3.2006 passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 (in short the Act ), pertaining to the assessment year 2003-04. 3. The assessee is in appeal against the sustenance of addition of Rs 19,28,259/- in respect of non-moving stock, whereas the Revenue is in appeal against the relief of Rs 25,47,211/- granted by the Commissioner of Incometax (Appeals) out of total addition of Rs 44,75,470/- made by the Assessing Officer. The relevant facts are that the assessee is in the business of manufacturing air pollution control equipments, size reduction equipments, pneumatic handling system etc. The facts as emerging from the orders of the authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyed due to flooding and the same were not in readable condition. The assessee submitted that the principle of valuing slow moving/obsolete items at lower than cost was also judiciously acceptable. As regards the disclosure of facts in the return, it was submitted that the same was backed by the Auditor s report. The Commissioner of Income-tax (Appeals) was not fully convinced with the submissions of the assessee. According to him, it was clear that there was non-disclosure of the method of valuation of closing stock in the statutory audit as also in the report in Form 3CD under section 44AB of the Act. As per the Commissioner of Income-tax (Appeals), the quality, quantity or the nature of the items termed as slow/non-moving was entirely at the discretion of the assessee. In the view of the Commissioner of Income-tax (Appeals), under the garb of non/slow moving items, the assessee cannot be allowed to value the closing stock at 5% of the purchase even for items purchased during the year, especially when there was a non-disclosure of the method of valuation of closing stock followed by the assessee. Ultimately, out of the total addition of Rs 44,75,470/- made by the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 875,470/- which shows that there are items purchased since the year 1994-95 onwards. It was pointed out that with regard to the non- moving item of Rs 2,63,524/- which have been purchased during the year itself the assessee had purchased such items for a particular project which has not been so used and, therefore, the same has been classified and valued as non-moving. In sum and substance, it is pointed out that the claim of the assessee for valuing its non-moving inventory at 5% of its purchase cost is fair and proper and is in accordance with generally accepted commercial principles and in this regard, placed was placed on the following judgments: (i) Alfa Laval India Ltd. v. DCIT 186 CTR 390 (Bom); (ii) CIT v Wolkem India Ltd 315 ITR 211(Raj); (iii) CIT v Hotline Teletube Components Ltd. 175 Taxman 286 (Del), and (iv) Milton Cycle Industries Ltd. V. DCIT 54 TTJ 380 (Del) (Trib). It is further pointed out that even the Auditors have pointed out that the basis of the stock valuation is fair and proper and is in accordance with the normally accepted principles. It has been submitted that the Auditors have reported that the assessee has procedure of determinin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... classified as non-moving items. The assessee is a Company which is engaged in the business of manufacturing of Air Pollution Control Equipments, Size Reduction Equipments, Pneumatic Handling System etc. It has been explained that the machines/equipments manufactured by the assessee are used in cement, pharmaceutical and chemical industries etc. The claim of the assessee is that the major production is of air pollution control systems which require a lot of raw materials, like steel plates, bought-out items like motors, panels, etc. It is also explained that the products manufactured by the assessee are customer specific and are tailor-made to suit the specific requirements of individual customers. It has also been explained that in the manufacturing of such specialized equipments, large number of components are required wherein lot of bought-out components are also involved. The assessee explained that on account of the production being linked to the specific requirements of the customers it undertakes procurement of specific components meeting with the requirements of the particular customer. However, for various reasons which have been enumerated in detail in the assessment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration, if required to be made, ought to be such amount which is relevant for the year under consideration Therefore, in our view, the relief granted by the Commissioner of Income-tax (Appeals) is quite justified and, therefore, appeal of the Revenue on this aspect is liable to be dismissed. 10. Now, in so far as the position made out by the Assessing Officer and which has been approved by the Commissioner of Income-tax (Appeals) to the effect that the method of valuation of determination and valuation of slow/nonmoving stock of the assessee is unacceptable. On this aspect, we have carefully considered the rival submissions. It is a settled proposition that in order to compute income from business, an assessee is required to value its inventory in accordance with generally recognized methods of accounting. In other words, if the method of valuation adopted by the assessee is a recognized method, the same cannot be disregarded on mere technicalities. In the present case, the assessee contends that it has determined items of stock which are slow/non-moving and has accordingly valued the same at 5% of its cost of purchase. Such estimate of its value being lower than the actual co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion because the same were at Roha (at its factory premises) and due to heavy rains in the Konkan area, such record was damaged due to flooding and was not in a readable condition. The assessee produced all the related vouchers for the period after April 2000 for verification before the Assessing Officer. Even with regard to the period 1995 to 2000, the assessee produced Goods Receipt Report (GRR), as the same were available in its computer back-up which depicted the rates applied for the valuation of inventory as also the date of purchase of the relevant material. In our considered opinion, in the face of the aforesaid position, the Assessing Officer was not justified in denying the claim on account of non-production of records. In any case, the CIT(A) has rightly observed thayt the diminution in value claimed as deduction during the year is only to the extent of Rs 19,28.259/- comprised in Rs 44,75,470- and, therefore, it is only to that extent the Assessing Officer could have examined/verified the case of the assessee. 12. Another point made out by the Assessing Officer is that the aforesaid methodology has not been disclosed by the assessee in the financial statements and tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year, assessee has carried out similar exercise. Therefore consistency in the method applied by the assessee is fairly emerging. Further, with regard to the stand of the Revenue that only items which have not been sold or utilized for 5 years be considered as non-moving items, we find that the assessee claims to have adopted a period of 2 to 3 period of non-use as the basis. It is further pointed out that the actual purchase date of such items sometimes relate back to 2 to 3 years, prior to its date of last use and in-fact, such items are 5-6 years old. In our considered opinion, the threshold of 2 to 3 years of non-use claimed by the assessee is fair and reasonable considering the nature of the assessee s business, wherein the products are manufactured primarily specific to the requirements of each customer. In fact, even the aspect of valuing the same at 5% of the original purchase cost can also not be said to be an under-estimation because the assessee has illustrated that sales made in subsequent period of some of the items have fetched prices which is near about 5% of its original cost. In fact, in the case before the Hon ble High Court of Rajasthan in the case of Wolkem I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achine Works 290 ITR 667 (SC) in favour of the assessee. In view of this settled legal position, we affirm the order of the Commissioner of Income-tax (Appeals) that the Sales-tax and Excise duty be excluded from the total turnover. This Ground of appeal of the Revenue fails. 17. In the result, appeal of the assessee, vide ITA No 1389/PN/06 is allowed for statistical purposes, whereas appeal of the Revenue vide ITA No 55/PN/07 is dismissed. 18. We shall now take up assessee s appeal, vide ITA No 157/PN/2010, which is directed against the order of the Commissioner of Income-tax (Appeals) confirming the penalty of Rs 7,08,635/- levied by the Assessing Officer under section 271(1)(c) of the Act for the assessment year 2003-04. The facts leading to the levy of penalty have already been narrated above in the quantum proceedings. 19. By our above order, we have set aside the issue relating to addition of Rs 19,28,259/- to the file of the Assessing Officer to adjudicate the issue afresh with certain directions. The impugned penalty has been levied by the Assessing Officer with reference to this amount of Rs 19,28,259/-. Since the issue relating to the addition of Rs. 19,28,259/- has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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