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TMI Blog2022 (9) TMI 1545X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT(A). Addition on account of closing stock and finished goods viz., MPB Quinalphos - reply of assessee was not accepted by Assessing Officer by taking view that assessee has not furnished the used stock of work-in-progress of MPB as also Quinalphos have been valued, work-in progress of MPB has been furnished as on 31.03.2014 - AO on perusal of details in respect of opening stock and closing stock summary of work-in-progress of finished products, this finished stock was valued less than that of opening stock - HELD THAT:- We find that the assessee is consistently changing their stand with regard to valuation of opening and closing stock of finished goods viz; MPB and Quinalphos. While making submission before us, the ld AR for the assessee submits that the details given in her written submissions are final and she is ready to explain before the assessing officer that there is no inconsistency in the stand of the assessee on the opening and closing stock of finished goods viz; MPB and Quinalphos. We find that there is variation in the stand of the assessee, therefore, we restore this issue of opening and closing stock of finished goods i.e. MPB and Quinalphos to the file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to prove that the replaced items are independent machine which could be used independently. The ld CIT(A) concluded that finding of the assessing officer is not based on any material or evidence and are general in nature, thus he is not correct in treating such expenditure as capital in place of revenue. - SHRI PAWAN SINGH, JUDICIAL MEMBER AND DR. ARJUN LAL SAINI, ACCOUNTANT MEMBER For the Assessee : Ms. Arti N. Shah, AR For the Revenue : Shri Ritesh Mishra, CIT-DR Ms. Anupma Singla and Sh Vinod Kumar Sr-DR ORDER UNDER SECTION 254(1) OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER: 1. This is set of three appeals, out of which two cross-appeal for Assessment Year (AY) 2011-12 and one appeal by Revenue for AY 2012-13 are directed against the separate orders of ld. Commissioner of Income tax (Appeals)-3, Baroda [ CIT(A) for short] dated 01.09.2016 29.07.2016, which in turn arise against assessment order under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) vide dated 28.03.2014 20.02.2015 respectively. In all three appeals, the parties have raised certain common grounds of appeal; facts in both the years are al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer while passing assessment order made disallowance of interest and financial charges of Rs. 2.143 crores by taking view that assessee has diverted its interest bearing fund for non-business purposes. The assessee has shown receivable from Garda Chemicals Ltd., which is holding-company of assessee falling within the provision of section 40(A)(2)(b) and the assessee has parked its fund with Gharda Chemicals Ltd., without interest. Further there is outstanding loan of Rs. 2.50 crores against Gharda Chemicals Ltd., which is also related party on which no interest is chargeable. Therefore, whole of the interest and financial charges of Rs. 2.143 crores is disallowed. The Assessing Officer on perusal of details of opening stock closing stock summary of work-in-progress and finished products noted that finished stock valued less than its work-in-progress in respect of two items MPB and Quinalphos. The assessee was issued show cause notice and directed to furnish opening stock and closing stock summary of work-in-progress of finished products. The assessee filed its reply dated 29.01.2014 and furnished required details. In addition to furnishing required details, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct position of work-in-progress which is for two products namely Quinalphos of Rs. 11,65,953/- and MPB of Rs. 56,86,465/- for raw material and processing cost to the extent of process completed which are charged in work-in progress batches and certain progress carried out are valued in the revised statement. The assessee furnished the following statement: - particulars average rate of finished goods (Rs) Quantity (Kg) Value (Rs) MPB finished goods 227 6,025 13,67,746/- MPB-Work-inprocess* - - - - 56,86,465/- Total - - 70,54,211/- *As on 31 March 2010, the product MPB was under production and certain raw materials were charged in the process. Some process has been carried out on these materials. Since the finished products is manufactured therefore no quantity is reflected in the WIP but only value of the material and processing cost to the extent of process completed, in process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee is not supported by documentary evidence which is totally baseless and without any logic. On the contention of assessee, that finished product is not manufactured, therefore no quantity is reflected in work-in progress but only value of material and processing cost to the extent for process completed in process has to be reflected of MPB and Quinalphos have been valued at Rs. 58,07,035/- and Rs. 11,65,953/- respectively indicate the stock of work-in progress is taken at nil and valued overhead expense at Rs. 58,07,035/- and Rs. 11,65,953/- respectively is devoid beyond understanding of merit. The assessee again served show cause notice as recorded in para-5.26 in assessment order. The assessee again filed its explanation vide letter dated 21.03.2014. The assessee explained its following: - with reference to the discussion we had with you during the hearing on 18 March 2014, wherein most of the quarries were discussed in length and proper justifications were provided for. During the discussion in respect of Quary No.10, 11 and 12 of your Letter No. BRC/DCIT./Que/SC/GIL/2013-14, dated 07 January 2014 and in response to it, the submission made to you vide our letter No.GI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Qty. Value (Rs) Ref.page Raw materials Kg/Ltr 107206 5177616 706 Utilities Fuel Scm 4015 53410 708 Electricity Kwh 52392 324269 708 Water KL 1961 37858 708 Labour cost 70629 709 Stores 9781 710 Transportation RM 12902 711 Total cost of Work-inprocess as on 31-03-2001 5686465 705 Work-in-process of Quinalphos as on 31-03-2010 Particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpense is taken at Rs. 6,96,722/- kg i.e., raw material per kg is considered at Rs. 54.82/- only against the finished stock of MPB is re-work at Rs. 288/- per kg which is totally not convincing. The Assessing Officer also given certain other instances as recorded in two pages 18 19 of the assessment order and worked out suppression of valuation of stock of Rs. 16,40,988/- for MPB and Rs. 15,31,168/- for Quinalphos respectively. 7. The assessing officer on perusal of details in respect of opening stock and closing stock summary of work-in-progress of finished products, this finished stock was valued less than that of opening stock. Accordingly, show cause notice dated 07.11.2014 was issued to assessee with detailed queries as recorded in para-5.3 at pages 20 to 23 of the assessment order. The assessee filed its reply dated 29.01.2014 and explained as follows:- 3. As regard Query No.14 to 29, we state as under:- Kindly refer item 1 above, regarding the valuation of finished goods and Traded goods AS per the Accounting policy, these items are valued at lower of cost or net realisable value. The stocks are valued at lower of cost / net realisable value where the item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of saleable quantity is valued at Rs. 144/- per ltr. ARMY is 8,915 Ltrs of which 1,906 Ltrs are damaged of near expiry and therefore, 1,906 ltrs are valued at 5% of the cost and therefore, the average cost is Rs. 310/- per Ltr. The value of saleable quantity is valued at Rs. 390/- per ltrs. GILFEN is 5,865 ltrs. of which 2,659 ltrs are damaged of near expiry and therefore 2,659 ltrs arte valued at 5% of the costs and therefore, the average cost is Rs. 100/- per ltrs. The value of saleable quantity is valued at Rs176/- per ltr. SANGRAM TOLL is 29,361 Ltrs. of which 4,404 ltrs are damaged of near expiry and therefore 4,404 ltrs are valued at 5% of the cost and therefore, the average cost is Rs. 210/- per ltr. The value of saleable quantity 9 is valued at Rs. 245/- per ltrs. YODHA is 30,009 Ltrs of which 4,014 ltrs are damaged of near expiry and therefore 4,014 ltrs are valued at 5% of the cost and therefore, the average cost is Rs. 279/- per ltrs. the value of saleable quantity is valued at Rs. 320/- per Ltr. GILRON is 7,508 of which 3,638 Ltrs are damaged of near expiry and therefore 3,638 Ltrs are valued at 5% of the cost and therefore, the average cost is Rs. 133/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal calculation to fabricate the figures to back its claim convincingly as no document is furnished by assessee. On the other item being Indoxa , the Assessing Officer noted that damaged goods in the opening stock inventory of 117.1 kg which is 1.58% of the total opening stock of 7422 kg. However, in the closing stock of damaged goods is 1625 kg out of total stock of 21996 kg which was served to 7.37% which is almost five times more as compared to opening stock which indicate that there has been more production loss in the year under consideration as compared to preceding year without shaking the production people to question and tap such damages. Thus, the assessee indulged in drawing fabricating figures by mathematical aid. The Assessing Officer made a details of quantity of its opening stock, quantity of damaged goods in opening stock, percentage of damaged goods, quantity of closing stock, quantity of damaged goods in opening stock, percentage of damaged good to finished goods in opening, quantity in closing stock, quantity of damaged goods in opening stock and percentage of damaged goods in closing stock in respect of 17 items, was prepared as mentioned in para-5.36 of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imagination is considered as loan to Gharda Chemicals Ltd., and therefore the question of charging interest thereon does not arise at all. The assessee specifically contended that similar issue was raised in AY 2001-02, 2002-03 and 2003-04 to 2006-07 and on appeal before Hon'ble Tribunal, the similar disallowances were deleted in order dated 31.05.2011 and 27.03.2012 respectively. The assessee pleaded that in AY 2009-10 the same issue is decided by Tribunal in favour of assessee. 10. The Ld. CIT(A) after considering the submission of assessee allowed the relief to the assessee by taking view that similar issue related to disallowance of interest on the ground that assessee had transferred / diverted the borrowed funds to the holding Co. and allowed undue credit to it. The issue is covered in favour of assessee in assessees own case for AY 2009-10 in ITA No.556 675/AHD/2013 dated 19.07.2013. 11. On the disallowance of valuation of opening stock and closing stock of finished goods, the assessee made similar submission as made before the Assessing Officer. Similarly, for addition on account of valuation of closing stock, the assessee reiterated similar submission as submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) concluded that it cannot be said that finished products are not manufactured and therefore no quantity reflected in work-in-progress but only value of material and processing stock to the extent process completed in process has to be reflected. The Assessing Officer has rightly pointed out the anomaly in the valuation of opening stock and closing stock of MPB and Quinalphos after proper appreciation of the facts of the case and dismissed corresponding grounds of appeal. 13. On the addition of under-valuation of closing stock, the assessee submitted similar contention as contended before Assessing Officer. The explanation of assessee is recorded by Ld. CIT(A) in para-4.2 by the order of Ld. CIT(A). 14. The Ld. CIT(A) after considering the submission of assessee held that each item of closing stock as mentioned in the chart has been valued by Assessing Officer at the rate on which the opening stock has been valued and the addition against each of the items as mentioned in the show cause notice has been made by Assessing Officer. The Assessing Officer worked out the addition in respect of each of the items of closing stock and worked out as figure of disallowance of Rs. 2.22 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and surplus of Rs. 9,40,36,000/- during the same period as against which the interest free loan given to Gharda Foundation was Rs. 2,50,0000/-. The aforesaid facts reveal that there was sufficient fund available with the company in the form of reserves and surplus. Further nothing has been brought on record by Revenue to prove that interest bearing loans taken by the Assessee for the purpose of own business has been diverted for non business purposes or for lending to Gharda Foundation. No direct nexus has been proved either by Assessing Officer or by CIT(A) between the interest bearing loans taken and the interest free loans granted. The Hon. Bombay High Court in the case of CIT vs. Reliance Utilities (supra) has held that if there are funds available both interest free and over draft and or loans taken than a presumption would arise that investment would be out of interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investment. 11. In the case of CIT vs. Raghuvir Synthetics (supra), The Hon. Gujarat High Court has held as under: Head note: INTEREST ON BORROWED CAPITAL - INTEREST-FREE LOANS TO SISTER CONCERNS- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantity of stock of MPB. In fact, the total quantity of 6300 kg (4525 kg. + 1775 kg.) was in respect of finished goods and WIP quantity was NIL The correct details were as follows: Particulars Quantity (in kg) Rate per Kg Amount Rs A MPB WIP Nil Nil 58,07,035 Finished stock 6300 288 17,74,372 Total 70,54,211 23. The ld. AR of the assessee submits that on 31/03/2011 MPB was under production and certain raw material was used in the process. Since finished products was not manufactured therefore no quantity is reflected in WIP. However, value of material and processing cost to the extent the process is completed has been reflected and valued at Rs 58,07,035A as stated above. Particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of Ld. CIT(A). In the alternative submissions, the ld Sr DR for the revenue submits that the assessee in its submissions has given different figure and facts, which was not submitted to the lower authorities and cannot be allowed to take different stand at this stage. The ld SR DR for revenue submits that in case the Hon ble Bench consider that the fresh fact as submitted deserve consideration, the issue may be restored to the file of assessing officer to verify such facts and to pass order afresh. 26. In the rejoinder submissions, the ld AR for the assessee submits that she has no objection in restoring the issue to the file of assessing officer and she is ready to explain the facts before assessing officer. 27. We have considered the rival submission of both the parties and have gone through the order of authorities below carefully. We find that the assessee is consistently changing their stand with regard to valuation of opening and closing stock of finished goods viz; MPB and Quinalphos. While making submission before us, the ld AR for the assessee submits that the details given in her written submissions are final and she is ready to explain before the assessing offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red pesticides cannot be sold but need to be disposed of as per the Insecticides Act referred above. The ld. AR of the assessee submits as per the accounting policy of ICAI followed by the Appellant, the stocks are valued at lower cost or net realizable value where the items are not in saleable condition i.e. they are in damaged condition of near expiry. The items which are damaged or near expiry shall not realize the same value in the market, and therefore, they are valued at 5% of the cost. Ld. AR of the assessee submits that it may kindly be noted that the above policy has been consistently followed by the company since inception and the same has duly been accepted by the Department while finalizing the assessment every year. The very reason for valuing the damaged material at 5% of the cost, is to maintain quantitative records of such material till they arc disposed off. Ld. AR of the assessee submits that since the material is not saleable, the realizable value estimated at 5% of the value of closing stock. The supporting documents for one of such items viz. Paramveer, as a sample case for closing stock of saleable / un-saleable or damaged material at various locations was sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assesse has presented fabricated figures only to make believe its stand that stock of finished goods consist of damaged goods which was valued at 5% of value of finished goods. The assessee has not separately shown in his original submissions. The assessing officer prepared summery of 17 items and on the basis of figures provided by assessees worked the percentage as recorded in para5.3.2 of assessment order. And on the basis of such working, worked out disallowances of Rs. 2.227 Crore. The ld CIT(A) upheld the addition by taking view that in each item, the damage goods in closing stock has increased substantially and not marginally as compared to the damaged goods in opening stock. The ld CIT(A) has recorded certain example wherein increase is more than 65% or 75% in case of SANGRAM and NIDAN respectively. Similarly, in many cases it is very high. The ld CIT(A) also noted that as per the working of assessing officer damaged goods in the stock of 17 items as per the chart is 7.5% to 28%, which is about four-time rise, which is unusual. The ld CIT(A) also recorded the valuation of certain items, like Indoxica was valued at Rs. 1740/- per kilograms which is less than the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain percentage of cost of damaged product. However, we find that the assessee has not provided the quantity of such damaged or unsaleable product and valued it without justifying with the comparable cases. Similarly, we also find that the assessing officer has also not brought any contrary evidence on record to disbelieve the contention of the assessee. Therefore, to avoid the possibility of revenue leakage, we are of the view that the disallowance to the extents of 25% (25% of 2.227 Crore), on account of undervaluation of closing stock would be sufficient to meet the end of justice. Thus, remaining disallowance is deleted. The assessing officer is directed accordingly. 36. In the result, this ground of appeal is partly allowed. 37. In the result, the appeal of the assessee is ITA No. 3053/Ahd/2016 is partly allowed. ITA No. 2519/Ahd/2016 (by revenue for AY 2012-13) 38. The revenue has raised following grounds of appeals; 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) erred in deleting the disallowance of Rs. 2,40,58,000/- made by the Assessing Officer being interest free credit granted to the holding company M/s Ghard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atment was either allowed by ld CIT(A) or by Tribunal in assessees own case in earlier years, the details of which was given to the ld CIT(A) as recorded in page 24 of his order. The assessee also relied on the decision of various Higher Courts. The ld CIT(A) after considering the submissions of the assessee held that the contention of the assessee is convincible. The assessing officer has not brought any material on record to prove that some of those items are independent machine or apparatus which can be used independently for manufacturing activities. The assessing officer has not explained the technical aspect of the items to prove that the replaced items are independent machine which could be used independently. The finding of the assessing officer is not based on any material or evidence and are general in nature, thus he is not correct in treating such expenditure as capital in place of revenue and deleted the treatment. Aggrieved by the order of ld CIT(A) the revenue has raised this ground of appeal while filing this appeal before Tribunal. 42. We have heard the submissions of the ld. Sr DR for the revenue and the ld AR for the assessee and have gone through the orders o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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