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TMI Blog2013 (12) TMI 1554X X X X Extracts X X X X X X X X Extracts X X X X ..... g officer to take the opening stock of ROM and screened fines for the assessment year 2007-08 in consequence of making an adjustment to the closing stock as on 31.3.2006 - Held that:- Value of the closing stock of the impugned assessment year will become the value of the opening stock of the succeeding assessment year. Since the appeal before us relate to the assessment year 2006-07 our jurisdiction are limited to give the finding in respect of the ground of appeal relating to the impugned assessment year we cannot decide the grievance of the assessee relating to the assessment year 2007-08. This issue can be taken by the assessee during the assessment year 2007-08 in accordance with the law before the appropriate authorities. As we have already confirmed the addition in the valuation of the closing stock for the A.Y 2006-07, we direct the assessing officer to take the same value of the opening stock as on 1.4.2006 for determining the profits and gains of the business of the assessee for computing the taxable income. - ITA NO. 206/PNJ/2013, ITA NO. 220/PNJ/2013, ITA NO. 207/PNJ/2013, & ITA NO. 221/PNJ/2013 - - - Dated:- 23-12-2013 - SHRI P.K. BANSAL, ACCOUNTANT MEMBER AND SH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal . The Assessee has taken the following effective grounds of appeal in A.Y.2006-07: 1. The learned CIT(A) erred in confirming the addition of ₹ 4,91,26,733 to the closing stock of ROM and Screened Fines, being the difference between the value of stock shown in the books of accounts as per the High Court order and the current cost of production, on the grounds that the price fixed by the High Court cannot be termed as market price. 2. The learned CIT(A) erred in holding that the appellant had incorrectly valued its stock, by not valuing it at cost or market value, whichever is lower and that since in the appellant s case, the cost was lower than the market value, the assessing officer had correctly adopted cost to value the stock of iron ore of the appellant. 3. The learned CIT(A) erred in making the following observations, which are contrary to the facts of the case and in law; a) The price fixed by the Hon'ble High Court cannot be termed as market price as market price is fixed by market forces depending upon the Demand-Supply quotient. b) The dispute was settled by the Hon'ble High Court in March 1990 and till d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2006-07 relates to the direction given by CIT(A) that the Assessee be allowed to reduce its closing stock by the amount of the stock returned to third party in the assessment year in which it is returned. The brief facts of this ground are that during the year ended there had been survey u/s 133(3A) in the case of the Assessee on 7.12.2005. The Assessee has included as per discussion with ACIT, Circle-2, Margao valued the stock of 286,365 tons of iron ore belonging to third party amounting to ₹ 4,69,86,769 in its total income with the condition that appropriate deduction shall be allowed to the Assessee from its total income in the year in which the aforesaid stock of iron ore belonging to third party is returned back. The AO added the said stock in the income of the Assessee but did not give direction as the declaration made by the Assessee was conditional. The Assessee went in appeal before CIT(A). CIT(A) gave appropriate direction to the AO in this regard. 3.1 We have heard the rival submissions and carefully considered the same. We do not find any illegality or infirmity in the order of CIT(A) giving the direction in this regard. The fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58,52,133/- without deducting any tax thereon. On the basis of the certificate issued by the C.A, the Assessee has remitted the money. The AO disallowed the aforesaid money holding that unless Assessee obtains certificate u/s 195 from the AO, deduction of the tax is mandatory. The Assessee went in appeal before CIT(A). Before CIT(A) the assessee took the plea that only if the income is chargeable to tax in respect of which payment is made, Sec. 195 will apply. If the payment does not contain element of income, the payer cannot be made liable for tax. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre P. Ltd. (327 ITR 456) and that of Transmission Corporation of A.P. Ltd. and Anr. vs. CIT, 239 ITR 587 (SC). The Assessee took the plea that the services rendered by Marriott are neither in nature of royalty nor in the nature of fees for technical services as provision of international sales and marketing services neither involve transfer of all or any rights nor does it involve rendering of any managerial, technical or consultancy services. Even since Marriott International is non-resident, it is entitled to claim benefit und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et formula or process or trade mark or similar property and the transfer of all or any rights in respect of any copyright, literary, artistic or scientific work as well as consideration for rendering of any services in connection with the activities referred to in sub-clauses (i) to (v) to Explanation 2 to Sec. 9(1)(vi). In view of the aforesaid definition, the sales and marketing services rendered outside India cannot be regarded to be Royalty. 5.3.2 Fees for technical services is also defined u/s 9(1)(vii) to inter alia mean any consideration for rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel). The services rendered by Marriott International does not involve rendering of any managerial, technical or consultancy services rendered in India and therefore it cannot be regarded to be fees for technical services. In view of this, the income received by Marriott International cannot be deemed to accrue and arise in India. Under the Indo-US DTAA as per Article 12, fees for includes services is defined to inter alia mean payment of any kind to any person in consideration for rendering of any techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferred to third party has not remained the same but the quantity has been maintained over a period of time with constant replenishment at the cost as incurred by the Assessee year after year. Therefore, the Assessee cannot claim that the closing stock figure should not be disturbed as the ore has to be sold at a particular rate and that such rate is its net realizable value. The AO, therefore, re-valued the stock and made the addition of ₹ 4,91,26,733/-. The Assessee went in appeal before the CIT(A). Before the CIT(A), the Assessee submitted that during the course of survey proceedings, issue relating to the value of closing stock was discussed. One of the issue pertains to valuation of the stock in pursuance of High Court order dt. 14.3.1990 and accordingly submitted that part of the ROM and part of the Screened Fines which are to be sold to Salgaocar Mining Industries Ltd. has been valued @ ₹ 38.66 per ton. The other part of ROM which are to be sold to Salitho Ores Ltd. have been valued @ ₹ 53.35 per ton. The Assessee also submitted that he is consistently following the accounting policy of valuing the stock of iron ore at cost or market price, whichever is l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intended towards equitable family settlement. The court divided the assets of the family, the net worth among the successors and in that division, they divided the stock of iron ore at that point of time as well. The dispute was settled by the Hon ble High Court in March 1990 and till date, even after 23 years, the assessee company has not Honoured the decision of the High court on this issue. The liability arising on account of High Court order is not a business liability of the appellant company as this liability has not occurred during the course of business. It is a settlement and distribution of properties between families. The liability arising on account of this settlement is purely personal in nature and not a business liability for allowing it as expenditure. The Honourable High court has nowhere decreed that this is to be allowed as expenditure in the hands of the appellant company in computing business income under the provision of I.T. Act. By no stretch of imagination, the Honourable court intended to decide as to how these companies will carry out their business in times to come. In essence, what the court divided among successors was the capital, and not the mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing stock in respect of items which are to be sold by the Assessee to the various parties at the pre-determined rate as per order of the Hon'ble High Court dt. 14.3.1990. In the case of the Assessee there had been a family litigation among the members of the promoters of the company. Ultimately, a petition for oppression and mismanagement was filed u/s 397 398 of the Companies Act. Subsequently, a compromise decree was passed by the Hon'ble Bombay High Court, Goa Bench vide order dt. 14.3.1990. As per the said order, the Assessee has to sell the aggregate quantity of 334127 MT of iron ore at an aggregate price of ₹ 1,29,17,000/- to Respondent no. 14 being M/s. Salgaoncar Mining Industries Ltd. The Assessee is also required to sell 2,99,880 MT of ROM at an aggregate price of ₹ 1,60,00,000/- to Respondent no. 29, M/s. Salitho Ores Ltd. The Assessee has sold 160900 MT iron ore for a sum of ₹ 62,20,225/- to M/s. Salgaoncar Mining Industries Ltd. to which the balance quantity of 1,73,227 MT are to be sold at the stipulated price which has not been lifted so far by the purchaser. Similarly, in the case of M/s. Salitho Ores Ltd., the Assessee has sold 1,08,559 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss than the cost price as the Assessee has to sell 60% of the sugar manufactured by him at the levy price. Reliance was also placed on the decision of Sanjeev Woolen Mills vs. CIT, 279 ITR 434 in which it was held that no principle can justify the valuation of the closing stock at a market rate higher than the cost. Valuation of the closing stock at market rate is permissible only if the market value of the stock is lower than the cost of the stock. Attention was also drawn to pg. 437 for the facts of the case and to pg. 441 442 for the proposition of law that the Assessee may employ whichever basis of valuation of the stock in hand. It must adhere to that consistently year after year. Casual departure of the valuation of the trading stock in hand at cost or market value is not permissible. Regular method of accounting adopted cannot be rejected by the AO merely on the basis of profit earned or loss suffered by the Assessee in a particular year. But that can be certainly a reason for the AO to make deeper probe of the accounts to find out whether the accounts reflects the real income, Profit Loss of the Assessee. Attention was also drawn towards the decision of the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mopeds India Ltd., 173 ITR 347(AP) Kantilal Chandulal Dharia vs. CIT, 104 ITR 487 (Bom) 6.3 We have heard the rival submissions and carefully considered the same alongwith the order of the tax authorities below. We have also gone through the various decisions which were cited before us. As per AS-2 as has been announced by the Institute of Chartered Accountants of India (ICAI), stock has to be valued at cost or market value, whichever is less. U/s 145 of the Income Tax Act income chargeable under the head profit gains of business and profession has to be computed in accordance with either cash or mercantile system of accounting regularly employed by the Assessee. There is no dispute that the Assessee was following mercantile system of accounting. Sec. 145(2) empowers the Central Government to notify in the Official Gazette from time to time the Accounting Standards to be followed by any class of Assessee or in respect of any class of income. These Accounting Standards are mandatory to be followed in view of the provisions of Sec. 145(3). In exercise of the powers given u/s 145(2), the Central Government notified two Accounting Standards; first Accounting Standard deals wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year s trading. As pointed out in paragraph 8 of the Report of the Committee on Financial Risks attaching to the holding of Trading Stocks, 1919. As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased, which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure . From this rigid doctrine, one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein it was held that on no principle can one justify the valuation of the closing stock at market rate higher than the cost. Permissibility of the valuation of the stock on market value would be only if the market value of the stock is lower than the cost of the stock. No doubt, choice of the method of the accounting lies with the Assessee, but the Assessee is required to show that he has followed the chosen method regularly and the method adopted by the Assessee is in accordance with the law. The Assessee in the case before us claims that he has valued the stock in respect of iron ore at the net realizable value, part of which has been determined in accordance with the order of the Goa Bench of the Hon'ble Bombay High court dt. 14.3.1990. 6.3.3 Now, the question before us is whether the value adopted by the Assessee for part of the stock in accordance with the order of the Hon'ble Bombay High Court can be regarded to be the market value. The Assessee also claims that the Assessee is valuing that part of the stock consistently at the rate at which that stock is to be sold by the Assessee as per the order of the Hon'ble Bombay High Court. In our opinion, if the meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63,300 metric tonnes Lumpy Ore 32,200 Fines 16,600 This ore shall continue to be retained by Respondent No. 8 and shall be dealt with as directed hereinbelow. 88. Ordered and Decreed that Resppondent No. 8. shall sell 299,880 Metric tonnes of ROM to Respondnent No.29 at an aggregate price of ₹ 1,60,00,000/-. The ore shall be sold and delivered at Vagus in convenient lots against payment of price in respect of each such lot as may be determined by Respondent No.8. We noted that in Schedule XXIII forming part of the audited Balance sheet and Profit Loss account of the Assessee for the impugned assessment year the Assessee has given following notes : 10.a) As per the Order dated 14th March,1990, the Company is required to sell aggregate quantity of 334,127 tons of iron ore at an aggregate price of ₹ 12,917,000 subject to the conditions stipulated in the Order. Out of the said quantity 160,900 tons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SCREENED FINES a) Loaned to M/s. Salgaocar Min. Ind. Ltd.-Rs.156.22+Rs.7.86+Rs.58.22+Rs.19.64 -do- 49,159 241.94 11,893,528.46 b) Loaned to M/s. Salgaocar Min. Ind. Ltd.-Rs.156.22+Rs.7.86+Rs.58.22+Rs.19.64 -do- 29,880 241.94 7,229,167.20 c) Loaned to others Rs.156.22+Rs.7.86+Rs.58.22+Rs.19.64 -do- 10,052 241.94 2,431,980.88 6. LUMPY Loaned to Others ₹ 156.22+Rs.7.86+Rs.58.22+Rs.19.64 -do- 2,303 241.94 557,187.82 7. SCREENED FINES ₹ 156.22+Rs.7.86+Rs.58.22+Rs.19.64+Rs.57.50 Berth No. 9 40,400 299.44 12,097,376.00 8. LUMPY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Assessee is not maintaining the same category of the iron ore in each of the year for selling to M/s. Salgaoncar Mining Industries Ltd. The Assessee is supposed to sell lumpy ore (93387 tons) but the Assessee has valued the ROM 93387 tons @ ₹ 38.66. The Assessee is not having the stock in respect of the lumpy ore to the extent of 93387 tons. The stock of lumpy ore is only 2303 tons which has also been loaned by the Assessee to others although at Berth no. 9 the Assessee has shown lumpy ore of 4000 which was valued at ₹ 299.44. We have also noted from para 87(d) of the Hon'ble Bombay High Court order that the Assessee was having in his possession the following categories of iron ore :- ROM - 63300 tons Lumpy ore - 32200 tons Fines - 16600 tons As per para 88 of the order of the Hon'ble Bombay High Court, Assessee has to sell and deliver ROM measuring 299880 MT to M/s. Salitho Ores Ltd. at a price of ₹ 1,60,00,000/-. In note no. 10(b) to the Schedule XXIII we noted that the Assessee has already sold 108559 MT of ROM to M/s. Salitho Ores Ltd. and the balance quantity of 191321 MT has to be sold by the Assessee to the said company. Thus, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e demand and supply. The Hon'ble Bombay High Court passed the order in pursuance of the dispute arising out of the family arrangement/settlement. The various issues taken before the Hon'ble Bombay High Court was towards the division of the assets and liabilities belonging to the undivided family and it is indisputably for making equitable family settlement. The assets of the family are divided among the various family members. Even the stock of iron ore at that time was also divided. The liability arising due to the order of the Hon'ble Bombay High Court, in our opinion, cannot be a business liability as the price realized by the Assessee can also not be the market price but the price put by the Hon'ble Bombay High Court is for the purpose of settling the dispute mutually among the family members and distribute the various assets and liabilities by putting certain value to them. It cannot be regarded to be sale at the open market. If any loss is incurred by the Assessee, that cannot be regarded to have been incurred during the course of the business. 7. Now coming to the alternate plea of the assessee that opening stock of the impugned assessment year should also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised by the assessee for the first time before the tribunal even if it has not been taken before the authorities below. We therefore, in the interest of the justice and fair play to both the parties restore the issue relating to ground no.4 before the CIT(A) with the direction that the CIT(A) will decide this issue after considering the submissions made by both the parties in accordance with the law and case laws as may be cited by both the parties. Our aforesaid view is duly supported by the decision of the M.P High Court in the case of CIT vs Tollaram Hassomal, 298 ITR 22 (MP). 9. We accordingly dismiss the ground no. 1 to 3 and allow ground no.4 statistically. 10. Ground No. 5 relate to the direction to be given to the assessing officer to take the opening stock of ROM and screened fines for the assessment year 2007-08 in consequence of making an adjustment to the closing stock as on 31.3.2006. 11. We heard the rival submissions and carefully considered the same. We agree with the ld. Sr. Counsel that the value of the closing stock of the impugned assessment year will become the value of the opening stock of the succeeding assessment year. Since the appeal before us ..... X X X X Extracts X X X X X X X X Extracts X X X X
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