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TMI Blog2017 (8) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... SUPREME Court] we are reminded of the decision of the Hon'ble Supreme Court in case of Distributors of (Baroda) Pvt Ltd. Vs. Union of India (1985 (7) TMI 1 - SUPREME Court) wherein it has been held that to perpetuate an error is heroism to rectify it is the compulsion of judicial conscience. However, as on the issue of improper satisfaction recorded by the Assessing Officer we direct the ld Assessing Officer to delete the disallowance u/s 14A Valuation of closing stock of inventory - Held that:- As not controverted that in the next year the assessee has shown higher income because of the valuation and the tax rate in both the years are not same. The revenue also could not dispute with cogent evidence/ finding that value of the material was not nil but higher than that. In view of this we confirm the finding of the ld CIT(A) in deleting the disallowance on account of valuation of closing stock of inventory as at 31.03.2009. - ITA No.3592/Del/2014 - - - Dated:- 19-4-2017 - SHRI H.S.SIDHU, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Revenue : Sh. FR Meena, Sr. DR For The Assessee : Sh. Raj Kumar, CA ORDER PER PRASHANT MAHARISH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the argument of the assessee that no exempt income was earned cannot be accepted. It is further held by him that as common infrastructure, common personnel are used therefore, the argument of the assessee is not correct. Thereafter, he invoked the provisions Rule 8D holding that he is not satisfied with the correctness the claim of the assessee that no expenditure has been incurred by him in relation to exempt income. Accordingly he disallowed 0.5% of average value of investment amounting to ₹ 86029618/- u/s 14A of the Act. the ld CIT(A) deleted the disallowance holding that in the past year i.e. AY 2008-09 on identical facts and circumstances no disallowance was made and further, there is no finding of the AO as too why he is not satisfied with the claim of the assessee that there exists no expenditure incurred for earning exempt income. 5. The ld DR vehemently supported the order of the ld Assessing Officer and stated that AO has recorded the satisfaction which is objective and only 0.5% of the average value of investment has been disallowed u/s 14A of the Act. 6. The ld AR submitted that the assessee has not incurred any expenditure as dividend income directly credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lties have been used for the purpose of earning exempt and taxable income. The manner of recording the satisfaction is absolutely vague for the reason that had assessee maintained separate books of account for taxable income was well as exempt income the issue of applicability of Rule 8D would not have at all have arisen. Furthermore, which common facilities have been used and what is expenditure incurred for those common facilities are not stated by the ld Assessing Officer. The satisfaction has to be objective , specific and based on the facts as recorded in the books of accounts of the assessee and cannot be general in nature and vague.. In view of this we are not inclined to accept that ld Assessing Officer has recorded a satisfaction as required under the provisions of provisions of section 14A(2). Decisions cited by ld AR also support the above finding with respect to recording of satisfaction by the AO. We also have perused the order of the ld CIT(A) who deleted the disallowance also for the reason that no similar disallowance was made in AY 2008-09. We do not agree with this finding of the ld CIT(A) for the reason that on perusal of the order of the AY 2008-09 which is at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the ld CIT(A). in the nutshell his argument was that the issue is revenue neutral, the next year material was used and final goods are sold therefore the cost is not booked in the next year and consequently higher profits are shown. It was further contended that the valuation has been done according to the method of accounting regularly followed by the assessee. He also relied upon the same documents, which were relied before the ld CIT(A) and also took us through them in the paper book. 11. We have carefully considered the rival contentions. The ld CIT(A) has dealt with this issue in para No. 5 of his order considering the arguments of both the parties as under:- 5 . The third ground of appeal is against addition of Rs . 1,46,65,041 /- made for under - valuation of closing stock . On perusal of Schedule 7 of the Balance Sheet . , the AO noticed that the raw material costing Rs . 1 ,46,65, 041 /- was valued in the closing stock inventory at NIL . The AO asked the appellant to justify the valuation of said inventory at NIL . The Appellant submitted that such items of the raw material had become rusty and was not upto the mark . It was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny . Under no circumstances, any item containing imperfect inputs can be exported because the same will be rejected . Further, it has been explained that there was a slum in the automobile industry during that period . The said company also did not gave any order after September 2008 . There was no hope of getting a further order from the said company in near future . These raw material items could had been used only for manufacturing the automobile part for export to the same Spain company . Under these facts, a decision was taken to adopt it's valuation as on 31 . 03 . 2009 at NIL, since, these items were not expected to be of any value and use in future . However, subsequently in June 2009, the assessee got export order from the same Spain Company . At that time, those raw materials were re - examined and after getting job work done thereon for Rs . 20,11,2007 - in A . Y . 2010 - 2011, the same could be re - used . It has been claimed that the job - work expense on these items has been duly accepted in A . Y . 2010 - 2011, although u / s . 143 ( 1 ) and the sales made after using these raw material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits by Rs . 1,46,65,041 /-. The findings of the AO are legally as well as factually erroneous for the following submissions . A . The assessee valued the inventory of Rs . 1,46,65,041 /- at NIL as on 31 . 03 . 2009 . The reason thereof was clarified vide Para - 12 of letter did, 23 . 12 . 2011 . There were several reason for valuing the same at NIL . The first one being that all these items were made of iron steel . The same got rusty and in that condition they were not found useable . The assessee was not very sure as to that these can be again put back to a condition for making them re - useable . These items were used as input for manufacturing automobile parts which were to be exported only to one party namely M / s . Valeo Termico Motor, Spain, for manufacturing the four wheeler vehicles by them . Strict quality measures needs to be applied for manufacturing these items, therefore, even on finding a small defect / shortcoming, the use - ability of said items comes into doubt . It is for this reason that it was decided by the management to value these items at NIL The second and contributory reason, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011 . Details of items of raw material alongwith details of opening quantity, purchases during the year and closing quantity . Details of these items being used in manufacturing, year wise, i . e . in A . Y . 2010 - 11, 2011 - 12 2012 - 13 . Stock ledger a / c . of all individual items of this stock for A . Y . 2009 - 2010, 2010 - 2011, 2011 - 2012 2012 - 2013 showing it's issue for manufacturing . Reversal of CENVA T credit on account of taking it's valuation at NIL . Taking back the benefit of CENVAT credit on the items as and when the same were re - used for manufacturing . The clean audit report for F . Y . 2009 - 2010 2010 - 2011 of Excise Deptt . w . r . t . RG - 1 records . The letter sent by Central Excise Deptt . to AO dtd . 22 . 12 . 2011 confirming the grant of reversal of CENVAT credit for said items, which was asked for by the AO during Asstt . Proceedings . Ledger a / c . ofM / s . Valeo Termico Motor, Spain, for A . Y . 2009 - 10 . - do - A . Y . 2010 - 2011 . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to value its stock at a lesser value, since, he is not going to be financially benefited by that treatment . In other words, the result of the findings of the AO is absolutely tax neutral . G . That the Asstt . for A . Y . 2010 - 2011 stood completed u / s . 143 ( 1 ) by adopting the opening stock at the same value as was declared by the assessee as on 31 . 03 . 2009 . This proves that since, the pending stock of A . Y . 2010 - 2011 stands accepted, therefore, the closing stock of A . Y . 2009 - 2010 cannot be disturbed since these are corresponding figures which are taken as it is . H . Further, Asstt . of A . Y . 2011 - 2012 has already been completed u / s . 143 ( 3 ) on the basis of stock valuation as was done as on 31 . 03 . 2009 . This also proves that the action of disturbing the stock valuation as on 31 . 03 . 2009 is not justified . H . That very recently Hon'ble Delhi High Court in the case of CIT VS . Huges Communication India Ltd 215 TAXJvJ N - jM ( DEL ) , in Para - 7 of the judgment has elaborately discussed the issue of valuation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this decision squarely applies to the facts of present case . Further, some more relevant authorities on the issue under consideration are as under - CIT VS . Hotline Teletube COomponents Ltd 175 TAXMAN 286 ( DELHI ) Section 28 ( i ) , read with section 145, of the Income - tax Act, 1961 - Business loss / deductions - Allowable as - Whether provision made by assesses for diminution in value of stock available with it on account of stock having become obsolete and old could be allowed as business loss - Held, yes . Kopran Drugs LtdVS . ACIT 35 DTR ( MUMJ ( TRIB ) 380 Held that - Value of inventories was required to be shown at 'net realisable value' as on the close of the financial year same being less than actual cost and, therefore, claim for write off is allowable in the relevant year . J . Without prejudice, alternatively, in case, the above submissions do not find favour to your goodself for any reason whatsoever, then it is submitted that the AO should be directed to adopt the opening stock figure as on 01 . 04 . 2009 as increased by Rs . 1,46,65,0417 - which will result into reduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by furnishing various documents like evidence showing the receipt of export order in the month of June 2009 after a long gap, the evidence of job - work expenses of Rs . 20,11,2007 - in A . Y . 2010 - 2011 on those items, the details showing the issuance of said raw material for manufacturing in A . Y . / 2010 - 2011, 2011 - 2012 2012 - 2013, stock ledger a / c . of these individual items for A . Y . 2009 - 2010, 2010 - 2011, 2011 - 2012 2012 - 2013 showing use of these items for manufacturing in these years, evidence of reversal of CENVAT credit, the evidence showing the benefit of CENVAT credit being taken subsequently in the years of re - use of manufacturing, audit report by excise Deptt . , the letter sent by the Excise Deptt . to AO dtd . 22 . 12 . 2011 confirming the reversal of CENVAT credit . The AO has doubted the genuineness of the claim for the reason that these items have been used in subsequent years . This factor has been considered adversely by him in the sense that if the items could had been used in subsequent period, there was no reason for valuing the same at NIL . However, un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of closing stock as on the last day of the year . In this case, the appellant has given cogent reasons for valuing the said stock at NIL . The appellant has also proved the correctness of those reasons by producing the relevant documents which all remains un - disputed by the AO . Under these facts, I hold that the appellant has been justified, in valuing the said stock at NIL as on 31 . 03 . 2009 . The decision quoted by appellant in the case of CIT VS . Hughes Communication India Ltd ( Supra ) of Hon'ble Delhi High Court has held it the closing stock of one year becomes opening stock to succeeding year and any addition made to the valuation of closing stock to increase the profit for that year automatically gets neutralized when the same figure of closing stock is taken as the opening stock of succeeding year . What is therefore more important to be seen that whether the same method of valuation of stock is employed by the assessee . In the appellant case also, there is no dispute that the same method of valuation of stock is employed consistently . There is also no dispute that the closing stock as declared on 31 . 03 . 2009 has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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