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TMI Blog2019 (5) TMI 1997X X X X Extracts X X X X X X X X Extracts X X X X ..... g the addition made on account of the alleged under-valuation of closing stock by showing finished goods of readymade garments as rejection. 2.2 Rs. 2,03,36,304/-: The ld. CIT(A) further erred in law as well as on the facts of the case in confirming the addition made on account of the alleged under-valuation of closing stock by showing finished goods of readymade garments as stock lying with job units. 3. The AO further erred in law as well as on the facts of the case in charging interest u/s 234A, 234B, 234C & 234D of the Act and as also in withdrawing interest u/s 244A of the Act. The assessee totally denies its liability of charging and withdrawal of any such interest. The interest so charged/withdrawn, being contrary to the provisions of law and facts, kindly be deleted in full. 4. The assessee prays your honour indulgences to add, amend or alter of or any of the grounds of the appeal on or before the date of hearing." 2. In this appeal, the assessee has also taken additional grounds, which reads as under: "1.1. The very action taken u/ s 147 r.w.s 148 is bad in law without jurisdiction and being void ab-initio, the same kindly be quashed. Consequently, the impugned as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), the assessee is in further appeal before the ITAT. 6. It was argued by the ld AR that the AO has wrongly assumed jurisdiction u/s 147 of the Act and the proceedings initiated there under are absolutely illegal & arbitrary in as much as there did not exist any reason at all much less reason to believe as contemplated under the law and in the light of judicial pronouncements cited at bar. As per the ld. AR, the reopening of the concluded assessments after the lapse of various years, has been seen by the Hon'ble Courts as a serious invasion over the rights of a citizen, which is having the effect of unsettling the issues which already stood settled long back between the parties. Some of the inbuilt safeguards so as to prevent the arbitrary exercise of the powers by the AO to fiddle with the completed assessment are provided in the Act viz. Recording of reasons, mandatory service of a notice u/s 148 of the Act, prior approval of the superior authority before issuing such notice and issuance of notice within the prescribed time limit. The Courts therefore, have repeatedly held that the fulfillment of the statutory requirement is substantive, mandatory and the failure thereof, is fat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is taken the requirements of the law should be satisfied.---" 9. The ld AR also argued that with regard to the valuation of finished goods, the only reason or/ justification provided to form an opinion as to income escaping assessment is that the assessee-company has undervalued the closing stock of raw material by applying average rate per meter @ Rs.89.62 as against the valuation by assessee-company @ Rs.70.43 per meter while valuing its closing stock "at cost" and hence, income to the extent of Rs.2,35,82,030/- is alleged to have escaped assessment. 10. It was further contended that a bare perusal of the above reasons, clearly reveals that the AO had proceeded on mere suspicion, surmises and conjectures rather than having any tangible material in his possession. The law is well settled that there must really exist at least some prima facie material so as to justify the formation of belief as alleged by the respondent to have a reason to believe. It should not be a mere pretence or allegation made by the AO based on suspicion, gossips & rumors. 11. Our attention was also invited by the ld AR to the observation of the A.O. that in the reasons that finished stock (in pieces) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in the light of this agreement and in view of these facts why even the said customer should buy the rejected/damaged goods. Thus, for the assessee-company it was a dump/wastage having no realizable value at all. Even then the assessee-company to be on a very fair side valued such rejected goods @ of Rs.25 per piece though was not at all required. 14. It was the further contention of the ld AR that the AO did not at all dealt with the above objections by merely observing that they are the subject matter of the assessment and shall be examined at that point of time. The AO completely failed to appreciate that the requirement of the law that there must be some material so as to invest the AO to have a prima facie reason to believe as to escaped assessment of income but in the light of the above objection it is evidentiary clearly that there was no material at all that even prima facie or remotely one could not have formed any formation of opinion. The AO completely failed to appreciate that any addition of income made by way of enhancing the value of the closing stock shall results in the enhancement of the valuation of the opening stock of the immediately next year by the same a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t give reasons for issuing a notice under s. 148. In other words he must have some prima facie grounds before him for taking action under s. 148. Further his report mentions: "Hence proper investigation regarding these loans is necessary." In other words his conclusion is that there is a case for investigating as to the truth of the alleged transactions. That is not the same thing as saying that there are reasons to issue notice under s. 148. Before issuing a notice under s. 148, the ITO must have either reasons to believe that ---------------income chargeable to tax has escaped assessment for that year or ----- the ITO has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. ------------ We are not satisfied that the ITO had any material before him which could satisfy the requirements of either cl. (a) or cl. (b) of s. 147. Therefore, he could not have issued a notice under s. 148.-----------The important safeguards provided is ss. 147 and 151 were lightly treated by the ITO as well as by the CIT. Both of them appear to have taken the duty imposed on them under these provisions as of little ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction no. 7/2014 dated 26.09.2014 for expanding the scope of scrutiny assessment. The clear direction given by the Add. CIT (though not mentioning the provisions of S.147), was otherwise visible, apparent and could be understood by any sensible person of a reasonable prudence in as much as the discretion given to take any action to the AO, could have permitted him either to proceed u/s 154-Rectification proceedings (which was not legally possible in the present case) or else to initiate proceedings u/s 147. Thus, in these circumstances, the Add. CIT directed the AO (to take action u/s 147) in which, the AO had no role to apply his mind. This clearly goes to suggest the AO merely acted at the behest of the clear direction of his superior officer and that there was no independent application of mind by the AO and therefore, it was a case of borrowed satisfaction. The AO had no reason to belief of his own but he was directed to take necessary action. The discussion made in the letter no.1198 dated 17.12.2016 clearly hinted the AO of the alleged undervaluation of the stocks. 17. In support of the above proposition, reliance was placed on the decision of Hon'ble Rajasthan High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely acting on the basis of a letter from another ITO who happened to assess assessee's wife conveying that she was a benami partner in a firm xxxxxxx There was no express statement of the ITO that he was forwarding the reopening proposal of the CIT on the ground of the letter from the ITO, "J" Ward, but from the facts and circumstances and from the fact that there is no specific statement indicating the source on which the ITO in the instant case had formed the belief as to the escapement of income and as to the omission or failure on the part of the assessee, it is apparent that he also acted merely on the letter of the ITO, "J" Ward. It is true that the letter of the ITO, "J" Ward, could have been a source of information upon which the ITO in this case could have independently formed his own belief. But it is not clear as to whether the ITO made any effort to form any independent belief but had merely acted on the suggestion of the ITO, "J" Ward. In the aforesaid view of the matter the said impugned notice must also be quashed.-Sitaram Jindal vs. ITO (1972) 84 ITR 162 (Cal) : TC51R.648 followed." CIT v/s Smt. Vyjayanthimala Bali (1985) 45 CTR 0191/155 ITR 0662 (Mum HC), w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been escapement of income or that income had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly the material facts for the assessment for that year." CIT vs. Abdul Kadar Ahamed (2006) 156 Taxman 206 (Ker), wherein it was held that reassessment proceeding at the instance of superior authority dictating the subordinate officer to act in particular manner thereby taking away the discretion vested in the subordinate. In the case of DCIT vs. Dharampal Satyapal Ltd., [2017] 82 taxmann.com 322 (Delhi - Trib.) (DPB 53-60) on this aspect it was held: 33. In the light of the facts and circumstances discussed above, we can see that only based on the "recommendation" of the ADIT (Inv.) dated 24.03.2011, the AO has initiated report for sanction u/s 151 and issued notice, which is nothing but "borrowed belief". It has been held by the Hon'ble Supreme Court in Anirudhsinhji Karansinhji Jadeja v. State of Gujarat [1995] 5 SCC 302, that "if a statutory authority has been vested with jurisdiction, he has to exercise it according to its own discretion. If discretion is exercised under the direction or in compliance with some hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at least the very basis for the grounds inspiring him to form a reasonable belief as to escapement must be present while making the addition in the assessment order. Hence, it can be said that the no additions were made on the issues on which re-opening was made and therefore, the AO cannot make any additions other than the one stated in the reasons. 20. In support of above proposition, reliance was placed on the decision of CIT v/s Jet Airways (I) Limited (2011) 52 DTR 71/331 ITR 236 (Mum HC) (DPB 23-30), the High Court interpreted the phrase "and also" as being conjunctive and cumulative and not being in the alternative. Thus, having held that the scope of S.148 includes not only such income for which the assessment was reopened but also any other income which comes to the notice of the AO subsequently in the course of reassessment proceedings. But the Hon'ble High Court held that if the original reason for which the assessment was reopened does not survive, then the AO cannot assess the income related to the other issues that came to notice during the reassessment proceedings. For better appreciation relevant part is reproduced here under: "22. We have approached the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt on pages 147 and 148 of in 336 ITR 136 are worth noting. 21. Reliance was also placed on the decision of Hon'ble Gujarat High Court in the case of CIT v/s Mohmed Juned Dadani (2013) 85 DTR 12/355 ITR 172 (Guj HC): Headnote: Reopening of Assessment - Jurisdiction of AO - Reasons for reopening - Notice was issued u/s 148 on grounds of wrong computation by assessee u/s 80HHC - Subsequently, no additions was made by AO on ground based upon which the assessment was reopened but rather additions were made on some other grounds which did not form part of the reasons recorded by AO - Assessee claimed that the AO had no jurisdiction to travel beyond the reasons for reopening the assessment - CIT(A) rejected claim of assessee - ITAT allowed assessee's appeal holding the action of AO without jurisdiction - Held: S. 147 gives vide power to the AO for reopening an assessment subject to fulfillment of certain conditions - For assuming jurisdiction to frame an assessment u/s 147 what is essential is a valid reopening of a previously closed assessment - Once foundation of the reopening is removed ,any further proceeding in respect to such assessment was not permissible - Thus dropping of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er on other ground that valuation report received subsequent to passing of the order disposing the objection the Assessing officer must consider the material and pass speaking order. Assessment quashed. However, in the present case, as per the ld AR, this mandatory precondition has not been fully and properly satisfied, in as much as, the ld. Add. CIT while granting approval has recorded his satisfaction as under: "Yes, I satisfied as the reasons recorded by the AO that it is a fit case for issuance of notice u/s 148." Recording of the satisfaction in such manner is nothing but recording of the satisfaction using the words "Yes" or "it is a fit case" or "Yes I am satisfied" and nothing more than that. The ld. Add. CIT, has not at all whispered a single word further referring to the material/information discussed in the reasons put before him by the AO that there is absolutely no new information/material stated in the reasons but it was nothing but a reappraisal/ second thought on the same set of facts and material which was already available while making the original assessment u/s 143(3). Thus, the entire subsequent proceedings are vitiated due to non-fulfillment of such a vita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Supreme Court in the case of Chhugamal Rajpal vs.S.P. Chaliha & Ors. (1971) 79 ITR 603 (SC) observed that the important safeguards provided in Sec. 147 and 151 were lightly treated by the ITO as well as the Commissioner. 11. In the light of the above mentioned reasons, in our considerate view, s. 147 and 148 are charter to the Revenue to reopen earlier assessments and are, therefore protected by safeguards against unnecessary harassment of the assessee. They are sword for the Revenue and shield for the assessee. Sec. 151 guards that the sword of Sec.147 may not be used unless a superior officer is satisfied that the Assessing Officer has good and adequate reasons to invoke the provisions of Sec. 147. The superior authority has to examine the reasons, material or grounds and to judge whether they are sufficient and adequate to the formation of the necessary belief on the part of the assessing officer. If, after applying his mind and also recording his reasons, howsoever briefly, the Commissioner is of the opinion that the Assessing Officer's belief is well reasoned and bonafide, he is to accord his sanction to the issue of notice under s. 148 of the Act. In the instant cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding sanction, the Joint Commissioner, Income Tax has only recorded so "Yes, I am satisfied". In the case of Arjun Singh (supra), the same question has been considered by a Coordinate Bench of this Court and the following principles are laid down:- 'The Commissioner acted, of course, mechanically in order to discharge his statutory obligation properly in the matter of recording sanction as he merely wrote on the format "Yes, I am satisfied" which indicates as if he was to sign only on the dotted line. Even otherwise also, the exercise is shown to have been performed in less than 24 hours of time which also goes to indicate that the Commissioner did not apply his mind at all while granting sanction. The satisfaction has to be with objectivity on objective material.' 8. If the case in hand is analysed on the basis of the aforesaid principle, the mechanical way of recording satisfaction by the Joint Commissioner, which accords sanction for issuing notice under section 148, is clearly unsustainable and we find that on such consideration both the appellate authorities have interfered into the matter. In doing so, no error has been committed warranting reconsideration." In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d about the correctness/completeness of the accounts (ii) where the method of accounting provided in Sub Sec. (1), is not followed or (iii) the Accounting Standards as notified u/s 145(2) have not been followed by the assessee. Hence, it is obligatory for the AO to have established all/any one of above conditions before invoking sec 145(3) and if he fails he would be acting without jurisdiction in making additions. In the present case however, there appears no dispute on any of the three conditions. In other words, the AO has completely failed to establish all/any of the grounds. On the contrary, his ground that the assessee has included the rejected goods and raw material (lying with job units) in Finished Goods as shown in the Balance Sheet, is not at all provided in sec 145. Otherwise also, it was a matter of mere presentation and that too in the final accounts but not in the regularly maintained accounts. The other allegation of undervaluation is completely misconceived and is not a goods basis. Further, it is not disputed that the assessee has maintained all the books of account and other subsidiary records i.e. financial and quantitative both, consisting of cash book, ledger, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business of the assessee since fabric was measured in metres and was thereafter stitched to make garments which had to be counted in pieces-As regards failure of the assessee to produce the persons to whom payments were made for fabrication, embroidery, dyeing, finishing etc., the AO was at liberty to summon all of them in case he wanted to verify the genuineness of the payments-Failure of the assessee to produce those persons could not have been a ground for rejecting accounts under s. 145-Both, the Tribunal as well as CIT(A) have accepted the explanation given by the assessee regarding fall in GP rate-No perversity is pointed out in the finding of the Tribunal-No substantial question of law arises" 27. The ld AR has further contended that showing the rejected goods and the raw material lying with the job units under the heading of finished goods in the audited annual statement of accounts, cannot be made a basis of the wholesome rejection of books of accounts. It was only an annual presentation of the accounts. The fact is not denied that the finished goods of Rs.5,30,39,350/- as shown in the Balance Sheet was bifurcated in different items like Finished Goods, Rejected Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders of the authorities below and contended that after completion of assessment U/s 143(3) of the Act, the A.O. found that the income of the assessee to the tune of Rs. 8,65,30,425/- has escaped assessment on account of under valuation of closing stock. Accordingly, after taking permission from the higher authorities, the assessment was reopened by issue of notice U/s 148 after recording reasons. As there was under valuation of closing stock in the form of rejected items included in the finished goods and the materials sent for job work, the A.O. has correctly reached to the conclusion that the income has escaped assessment and accordingly reopening was valid in terms of the reasons recorded and the approval given by the competent authority. He has further contended that even during the course of reassessment proceedings, the assessee failed to submit any proof regarding destruction of damaged goods. Thus, there was no basis for valuing the same at nominal price of 25 per piece. Moreover, the reduction shown by the assessee at 2.16% of production as compared to the normal reduction of only 0.5% to 1%, the A.O. was justified in valuing the finished goods @ Rs. 355 per piece in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tead of showing the same as finished goods of readymade garments and failed to submit any documentary evidence to prove the fact of stocks lying with job units and failed to provide any evidence for making valuation. Therefore, considering that these pcs consist of all variety of finished goods, the A.O. valued the same at Rs.355/- per pcs (Rs.2,13,51,494/- / 60139 Pcs) and added Rs.2,03,36,304/- (Rs.5,04,05,385/- estimated less Rs.3,00,69,081/- shown by the assessee) on account of the alleged under valuation of closing stock. Before us, the ld AR of the assessee has opposed the validity of reopening on the plea that there was no reason to believe nor any reason to suspect that there was under valuation of closing stock. It is contention of the ld AR that as per the law prevailed at the relevant point of time and till date, the bedrock condition or words, which still continue right since inception, in the statute, are "reason to believe" and not "reason to suspect". The word "believe" has to be understood in contradistinction of suspicion or opinion. The belief of the Assessing Officer as to escapement of income should not be a product of imagination or speculation. It is not the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the entire body of the said letter, there was absolutely no reference/whisper of any other new information or new material (which was not available at the time of the making of the original assessment u/s 143(3) before the AO). Pertinently at the end of the said letter, the Add. CIT even directed the AO to examine the record and take suitable action. A bare perusal of the reasons so recorded after the said letter of the Add. CIT, it is evidently clear that the AO almost reproduced the contents thereof, more or less in verbatim, as if these were the reasons to believe as entertained by the AO. The AO however, has not at all spelt out as to how the information contained in the said letter, has provided him any cause or justification to have a reason to believe as to escapement of some income. The Add. CIT thus, clearly hinted and rather directed the AO to take suitable action, thereby, directing the AO to act in a particular manner and thereby taking his own discretion (AO). This clearly goes to suggest the AO merely acted at the behest of the clear direction of his superior officer and that there was no independent application of mind by the AO and therefore, it was a case of bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submit any documentary evidence. (ii) The assessee failed to submit any documentary evidence regarding opening stock of 24,063/- rejection pieces. (iii) The assessee has not mentioned in final accounts/notes of accounts that finished goods also includes rejection. (iv) Assessee failed to provide any documentary evidence for making valuation of rejection @ Rs.25 per pcs. In the Remand Proceeding following additional grounds were taken by the AO. (i) The assessee failed to submit any proof regarding destruction of damaged goods. Not a single instance of such destruction has brought into the notice of the AO. (ii) Reported rejection is 2.16% of production whereas as per work sheet of inspection rejection is only 0.5% to 1%. Hence claim of assessee regarding rejection at 2.16% is without any basis. (iii) Shipment is of higher quantity in comparison to quantity ordered, this shows there is no specific mechanism and control over production of goods and export/sale thereof. Thus, books of accounts are not reliable and do not show the true picture of business affairs of the assessee. Therefore, AO rightly rejected books u/s 145(3). Accordingly, AO made addition by holding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are all the more highly quality conscious and even a slightest defect in the garment may render the whole lot or rather some time the whole consignment as rejection or scrap. Therefore, to avoid any unpleasant situation of being delisted or black listed or to lose the export business the assessee was required to meticulously maintain the high standards and the product being supplied has to be strictly in accordance with the requirements made by the importer-buyer. Therefore, the possibility of generation of the rejection goods on account of the defect or lacking of the quality is not something abnormal which, AO is unwarrantedly doubting. From the record we also found that the AO invariably accepted the fact that these goods are rejected goods and the assessee shall not have any right to sell any of these pieces as per the agreements with overseas clients. The sample copies of agreements with overseas clients were submitted before the AO, clearly mentioning the clause that these products shall not be sold. However, the AO did not accept such stipulation on the sole ground that if there is any rejection it had to be destroyed immediately and the assessee failed to produce any docum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has shown its finished goods as rejections and under valued the same, the A.O. failed to bring any instance that the assessee is selling goods in the open market which has been classified as rejected. If the A.O. had any doubt he could have made enquiries directly from the importers as complete stock details alongwith style, colour, garment composition, brand name etc. were filed before the A.O.. As per our considered view, selling such rejected goods in the open market would have invited serious legal action against the assessee, but nothing like this is reported. Moreover, we found that the declared sales has been accepted by the commercial department also, meaning thereby there was no sale of the rejected goods. From the record we also found that there were also quality audit reports in respect of export orders which has not been denied by the A.O. Since the assessee was having been regular internal control system to keep a check over the quality and permanently employed quality inspectors were regularly preparing quality audit report, which also placed before the A.O. and the same was not disputed by him. We also found that sometimes many quality audit reports was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. To account for the rejected goods/destructed goods in the financial account and for the purpose of internal controls only these goods were valued on a symbolic value of Rs.25/- per piece. The allegation of the AO that no documentary evidences were submitted to support this price is completely wrong on the facts. The assessee filed Quality Control Audit Report mentioning complete details of Goods in defect along with description of defects. Having admitted the binding agreement, its legal effect could not be ignored. 34. We also found that the A.O. has alleged that percentage of rejection claimed by the assessee at 2.16% of total production was on higher side, on the plea that as per the inspector reports, rejection ranged between 0.50% to 1% and only in very few cases it is more than 1%. In this regard, we observe that trend of rejection does not follow a strait jacket formula. The rejection percentage varies lot to lot and it depends upon various factors viz. complexity of design of garment, quality of fabric used in production, repetition of orders of particular design, color combination and washing effect on these colors and designs. The inspection reports submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2150 2166 2145 21 0.97 7942/7949 MWS0002060 7550 7599 7524 75 0.99 29937 44530808P001 2600 2607 2582 25 0.96 8063/7970 MW606BARS 6070 6103 6043 60 0.98 Moreover, we found that the assessee produced as high as 18,81,362 Pieces in the year and the Quality Report as per the chart so submitted was for the highest quantity produced of 12,200 pieces, meaning thereby large number of quality reports were prepared and therefore it was practically difficult to produce all of them before the AO. 35. In terms of nature of export business, the assessee was carrying on, the assessee used to produce/manufacture more than the ordered quantity so that the excess quantity can be substituted for the waster/rejection being found out at the time of such quality audit. In so far as there was destruction/prohibition clause and hence such excess quantities are taken to be rejected goods. Looking to the prevailing trade practice and industry norms and various documentary evidences as placed on record, we found that the average rejection percentage of 2.16% for the entire year is within the tolerance limit. We found that during the year the assessee manufactured 18,81,362 Units an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. The A.O. has also made addition by revaluing the fabric sent to job workers in job work units. From the record we found that at the year end, there were 1,41,987 pcs were lying with the job units. Since the assessee has been consistently valuing such stock at cost and since apart from the cost of the fabrics lying with the job units, the assessee did not incur any further cost thereon (except cost of fabrics) hence only such cost @ Rs.211.77 per piece was considered while valuing these pieces at Rs. 3,00,69,081/-. When asked, it was submitted that the stock lying at the job unit is only fabric and the assessee yet not incurred any cost thereon therefore the assessee considered only cost of fabric. The AO however, alleged that the assessee has undervalued its stocks lying with job units being 1,41,987 pcs @ Rs.211.77 per piece instead of showing the same as finished goods of readymade garments on the following grounds: (i) Assessee failed to submit any documentary evidence regarding lying of stock with job units (ii) The assessee has not mentioned in final accounts/notes of accounts that finished goods also includes rejection and stock of Raw Material (which is in fact separa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced in terms of the number of pieces to be manufactured by that job unit. The assessee is used to record the fabrics sent in terms of meters and the number of pieces of a particular design expected from the job unit, therefore it also records the fabric sent in terms of the pieces and the same is thereafter, compared and reconciled while receiving back the stitched/worked pieces from the job unit. Such fabric, so sent, is reduced from the raw material and then taken to the account of garment pieces lying with the job units in the stock books. It is also not in dispute that the assessee is a Pvt. Ltd. Company following Mercantile System of Accounting. The assessee has been sending its fabric to various job units for carrying out various processes thereon and the processing expenses are accounted for as and when expense have been incurred (whether by the assessee or by job units). The pieces which got completed during the year, were transferred to finished goods and the pieces on which no cost was incurred even till 31st March 2014 were shown as stock with job units but at the cost of fabric only because no cost was incurred on such pieces either by the assessee or reported by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate, Details in Meters and subsequent receipt of Pcs from Job Worker along with Job Worker Invoice Number, Invoice Date before the CIT(A) as additional evidence on which he duly obtained the remand report of the AO. 43. In view of the above we found that extensive details were filed before the lower authorities, accordingly, there is no doubt about the units lying with the job units. The further allegation of the AO that these units were not disclosed separately in financial accounts and not separately disclosed in Notes of Accounts is ill judged. No addition can be made merely because a separate disclosure has not been made in the notes of accounts. The financial Accounts are prepared according to some accounting conventions and in disclosure & presentation aspects, certain subjectivity exists. These units were neither Raw Material nor Finished Goods hence for sake of convenience and better presentation were Classified as Pcs. Lying with Job Units. The assessee, as per consistent past practice, when sent the fabrics to the job units, shifted the cost thereof to the ledger account head garments lying with job units which, is also a prevailing trade practice. But otherwise also, A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce is only a Unit of Measurement (UOM) and by applying appropriate conversion formula one could correctly value the goods. From the record we also found that even in the past the assessee has been consistently valuing the Raw Material- Fabric at cost including the current year. The Raw Material lying at the job units also therefore was valued following the same method. We had verified the sheets containing complete details of Fabric lying at Job Units. The Number of Piece have also been shown in the same sheet apart from showing the Raw Fabric in Meter which are expected to be prepared out of such Raw Fabric sent to these job units. Thus, whether it is number of pieces shown or fabric in meter is shown, the ultimate valuation shall remain the same and is not going to make any difference. However, this was not properly understood by the AO. Therefore, the allegation of avoidance of taxes is baseless, more particularly, when otherwise also any enhancement in the valuation of closing stock of this year will enhance the value of opening stock of the next year leaving a tax neutral effect. 46. As per our considered view in case of business of manufacturing of readymade garments, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IN Number, but then how the assessee is concerned with that. These job units are not required to get registration under Vat Laws hence they are not having TIN Numbers. 50. We also found that the assessee has given a full chart (PB-188) showing a reconciliation between what was sent in terms of meters and what was received back in terms of pieces and even after making a specific claim of the successful reconciliation before the CIT(A) at Page-13. The AO maintained a complete silence in his remand report. Thus, he is not disturbing the substantive findings but rather raising tiny issues, which is not expected of him. We also found that 89% of the Raw Fabric i.e. 1,27,258 Pieces (2,12,937.32 Meters) (out of those lying with the job units), were dispatched to the job units only at the fag-end of the financial year and majority of them were sent after 20th March, 2014, meaning thereby nobody could have expected the job units to have completed any work thereon before the year end so that the assessee could account for further cost while valuing the closing stock. This fact itself is sufficient to demolish the entire case made out by the AO. 51. In this regard it was also contended of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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