Cube Mines & Minerals Pvt.Ltd., Baroda vs Department Of Income Tax

ITA No.1752/Ahd/2011 Asst. Year 2007-08 1

IN THE INCOME TAX APPELLATE TRIBUNAL ''A'' BENCH - AHMEDABAD

Before S/Shri Pramod Kumar, AM and S. S. Godara, JM

ITA No.1752/Ahd/2011 Asst. Year 2007-08

Income-tax Officer, Ward-1(1), Vs M/s Cube Mines & Minerals (P) Baroda. Ltd., 1, Chandramani Nagar, Vidyavihar School Lane, Subhanpura High Tension, Baroda. (Appellant) (Respondent) PA No.AACCC5761d

Appellant by Shri Dinesh Singh, Sr. DR Respondent by Shri S. N. Soparkar, AR

Date of hearing: 29/4/2015 Date of pronouncement: 9/6/2015

ORDER

PER S. S. Godara, Judicial Member.

This Revenue's appeal for AY 2007-08 arises from the order of

CIT(A)-I, Baroda, dated 29.4.2011, passed in the case No.CAB-I/199/09-

10, in proceedings under section 143(3) of the Income-tax Act, 1961 (in

short the Act).

2. The Revenue's source of substantive ground seeks to restore

addition of Rs.18,40,920/- arising from alleged difference in valuation of

closing stock . The assessee is a company in the business of ITA No.1752/Ahd/2011 Asst. Year 2007-08 2

purchasing manganese ore. The said mineral is sorted out in different

qualitative categories and sold. We find that the CIT(A)'s order

comprises AO's findings, assessee's submissions in the lower appellate

proceedings as well as the finding under challenge before us which are

as under :-

"3. Next ground Of appeal is regarding addition of Rs.18,40,920/- being difference in valuation of closing ;tock. Appellant company was in the business of purchasing Manganese Ore, sort it out in different quality and sell it accordingly. AO observe d that appellant had shown raw material stock at 35224.104 MT, value of which was shown at Rs.78,45,708/- in schedule-16 under the head material consumed. Value of stock of Rs.78,45,708/- was also shown in the audit report in schedule-7. As per AO, appellant had not shown any finished or sorted material stock in the return of income, it purchased 40375.33 MT during the year under consideration at Rs.1,11,03,218/- @ Rs.275/- from Gujarat Mineral Development Corporation Ltd and since only raw material stock was shown by the appellant, value of raw material stock should be at purchase price rate i.e. Rs.275/- per M.T. Appellant's reply to AO's show cause notice was that though it purchased raw material i.e. Manganese Ore waste dump at Rs.275/- per ton, after sorting out, it obtained different types of realizable products which were valued at lower of cost or market value. Appellant filed detailed valuation of closing stock and submitted that closing stock of 35224.104 tons included raw material without sorting and also waste material remaining after completion of sorting, due to which total quantity of 35224.104 tons could not be valued at cost price. Appellant submitted that sizeable quantity of material which remained after completion of analysis had realizable value of Rs.50-100 per MT or sometimes even zero, being dust only for which appellant had to pay for lifting the material from site. Appellant also filed certificate of valuation of stock by Lab Technician. The AO did not accept appellant's contention on the ground that earlier submissions made by the appellant did not reflect any sorted material or finished goods. AO proceeded to calculate value of entire closing stock as per purchase rate of Rs.275/- per MT and made addition of difference of Rs.18,40,920/- to the value of closing stock.

ITA No.1752/Ahd/2011 Asst. Year 2007-08 3 3.1 In appeal, submissions as under were made:-

"The learned assessing officer has added Rs 18, 40, 920 on account of difference in closing stock as shown in return of income and as computed by the Assessing officer. \

• Observation of the assessing officer:

The assessing officer has observed that the assessee has shown only the closing stock of raw material in the return of income filled by it. Since only the raw material stock is shown, the value of such stock should be the purchase price i.e. Rs 27 5/-. Hence the value of such stock should be computed at Rs 96, 86,628/- (275* 35224.104). The assessee has shown the value of closing stock at Rs 78, 45,708/-. Hence the difference of Rs 18, 40, 920 was added to the total income of the assessee.

• Appellant's Submission:

> Your appellant submits that it values the closing stock of raw material at lower of cost or net realizable value. This policy is in agreement with AS 2 issued by the Institute of Chartered Accountants of India.

The raw material i.e. Manganese Ore produces different realizable products after sorting. Hence the value of such stock of Manganese ore is taken at cost or market value, whichever is lower. Various realizable products obtained after sorting and their sale price range is as shown below:

Description of item Sale price Range (Rs)

1 7%-20% sorted manganese ore 500-600 dump

Mix waste churl of manganese duly 1600-1800 sorted

Ore waste 50-100

Manually sorted manganese ore 100-150 less than 15% ,

> The realizable products produced after the sorting process can fetch Rs 50- 100 per metric ton or sometimes more or nil value since they remain only dust and the assessee incurs charges to lif\ them from the site.

ITA No.1752/Ahd/2011 Asst. Year 2007-08 4 > Moreover, a certificate from a duly qualified lab technician employed by the assessee was produced before the assessing officer. He certifies that the stock of raw material and sorted material is as follows:

a) Raw Material:

Particulars Qty (Mts) Rate Total ( Rs;

Manganese Ore 12325.39 275 33894 77/- waste dump

Total(A) 12325.39 33894 77/-

b) Sorted Material:

Particulars Qty (Mts) Rate Total (Rs)

-12% 22464.59 180 4043 >27 Manganese

Manganese Ore 434.32 950 412614

Total (B) \ 22898.91 445623;

Total (A+B) 35224.104 7845708/-

The copy of above certificate is enclosed for your verification.

The stock shown by the appellant includes raw material quantity q, 12325.39 Mts valued at Rs 2 75 per ML It also includes sorted material like 12% manganese and Manganese ore dust which is valued at its realizable value since such value is lower of cost price.

We enclose the copy of the invoices raised by the assesee in subsequent years which justifies the manganese ore powder waste (dump) which is sold at a rate of Rs 50 per ton to different corporate.

ITA No.1752/Ahd/2011 Asst. Year 2007-08 5 The method of valuation of stock is very much prevalent in agricultural produce like tuvar dal manufacturer, tea industry where premium quality product is sold at higher price and thereafter ABC analysis of the products are made and accordingly sale prices are determined. The remaining lowest quality of product or raw material is sold at throw away price and accordingly at the end of the year valuation is made at a cost or market value whichever is lower.

In light of the above we request you to consider the valuation of stock made by the assessee at cost or market value whichever is lower as correct and delete the additions.

3.1.1 Further submissions as under were made:

"Further to our earlier submission we have been instructed to submit as under: ^

1) List of machinery used for the sorting process is as follows:

- Loader

- Tractor

- Submersible pump

- Electro Weight Machine

- Electric Motors \

-Hopper with conveyor 's Belt

- Jaw crusher

- Pilot Plant

2) Sorting process adopted by the company:

The manganese ore is collected from GMDC Ltd situated at Shivrajpur Tal. Halol Dist Panchmdhal. Manganese waste dump is lifted by trucks or tractors to the assessee 's premises and dumped at vibrating screen area. Vibrating screens separate big size particles and small size particles and dust. Then the machines separate the dump category wise and the laborers manually sort manganese contains depending on sizes like from Omm to 2mm, 20mm to 40mm, etc. and colour. After that they start manually jigging and wash the materials to remove impurities from it like sand. Depending upon the manganese contents material's are separated by ABC approach where good quality material fetches the highest price then B category fetches the medium rates and the remaining is C category which is waste which fetches Rs 50- 100 per metric ton because the same material is used for refilling the land. The materials are separated by magnetic separation system where manganese ore are separated. This magnetic separation system uses the normal sized magnets to separate the iron content from manganese.

We attach here with photographs showing the material i.e. waste dump purchased and stored in open, crushing, separating and the manual process of sorting and the different qualities manganese ore/dust lying in stock.

ITA No.1752/Ahd/2011 Asst. Year 2007-08 6 3) Further we submit that normally good rated stock is sold first as it fetches more revenue and requires less efforts to sale.

4) Substandard material is sold late as it requires more efforts to sale am yields less revenue.

5) There is no reason to disbelieve the stock taken by responsible staff/ engineer of the company and valued and certified by lab technician whici is consistently valued at lower of cost or market value which is prescribe< I by AS 2 issued by the ICAI.

6) Various invoices filed indicates that goods sold/lying in stock is different from goods purchased as it is sorted into different qualities hem e valuation of closing stock at purchase rate is incorrect since material in stock is not the same as material purchased.

Considering the above facts we request your honor to delete the additiot is made on account of valuation of closing stock. "

3.1.2 Besides appellant submitted gross profit working for 2007-08 to 2010-11 to contend that GP declared was highest in AY 2007-08 at 56.96% and the valuation of closing stock was therefore justified in AY 2007-08. Appellant also filed copies of bills for sale of waste at the rates Rs.50-100 per MT.

3.2 I have considered facts of the case and appellant's submissions. AO has not accepted appellant's valuation of closing stock only on the ground that sorted material or finished goods were not shown as closing stock in the return of income and the audit report. AO valued entire closing stock at the average purchase rate of material from GMDC i.e. Rs. 275 per MT. AO did not accept appellant's explanation that closing stock included unsorted material as we I as sorted material and valuation of closing stock was done after physical verification. During the year, appellant purchased 40,375.336 MT of Manganese Ore from GMDC Ltd at a price of Rs.111,03,218/- i.e. at average rate of Rs.275 per MT. Appellant carried out sorting of a portion of ore purchased as per the process explained and sold 5151.232 MTs of sorted good quality Manganese Ore as well as some Waste for Rs.1,15,23,157/- i.e. at average rate of Rs.2,237/- per MT. Appellant showed balance quantity of 35224.104 MT (i.e. 4037! .336 MT' less 5151.232 MT) as closing stock valued at Rs.78,45,708/- as per break up submitted to the AO. After sorting out 5151.232 MTs of high quality Manganese -Ore which ITA No.1752/Ahd/2011 Asst. Year 2007-08 7

was sold fetching a price much above the average purchase price, remaining material could very well be of lower realizable value than the average purchase price from GMDC of Rs.275 per MT. Partly sorted material categorized as raw material in Form 3CD report was valued below average cost of purchase of raw material from GMDC. As per Form 3CD, appellant's method of valuing closing stock is lower of cost or net realizable value. Appellant has valued the unprocessed/unsorted ore at cost, i.e. average purchase rate from GMDC of Rs.275 per MT and intermediate stage/partly sorted ore at net realizable value as assessed by its Mining Project Coordinators/Lab Technician after physical verification. AO has no:

brought any material on record to justify non-acceptance of closing stock valuation by the appellant. Addition of Rs. 18,40,9207- is deleted

4, In the result, the appeal is partly allowed.''

This leaves the Revenue aggrieved.

4. We have heard both the sides and perused the case file. The

Revenue's only argument is that the assessee company had not shown

any finished or sorted material in the return of income. The assessee

has placed a paper book containing its audited annual accounts, tax-

audit report, certified valuation of stock by expert Lab Technician,

invoices for the purchase of raw materials @ Rs.275/- per MT. Page 32

of the paper book describes sorting of manganese ore in four different

rate-wise categories. The assessee has also placed on record all details

of raw and sorted material at page 34 of the paper book with all due

certificates. There is also due matching of the quantity of the manganese

ore before and after being sorted out. The Revenue fails to dispute ITA No.1752/Ahd/2011 Asst. Year 2007-08 8

contents thereof. We draw support from the above said record and hold

that the assessee has placed overwhelming material in support of its

claim of sorting of the raw material quality wise and valuing the same at

cost or market price. We uphold the CIT(A)'s findings in these

circumstances and reject the Revenue's ground.

5. In the result Revenue's appeal is dismissed.

Order pronounced in the open Court on 9/6/15

Sd/- Sd/- (Pramod Kumar) (S. S. Godara) Accountant Member Judicial Member

Date of pronouncement 09/06/2015

Sd/-- Sd/ Sd/-- Sd/ N. S. Saini S. S. Godara Mahata/- A.M. J.M.

Copy of the order forwarded to: 1. The Appellant 2. The Respondent 3. The CIT concerned 4. The CIT(A) concerned 5. The DR, ITAT, Ahmedabad 6. Guard File BY ORDER

Dy. Registrar, ITAT, Ahmedabad ITA No.1752/Ahd/2011 Asst. Year 2007-08 9

1. Date of dictation: 19/5/2015

2. Date on which the typed draft is placed before the Dictating Member: 20/5/2015 other Member:

3. Date on which approved draft comes to the Sr. P. S./P.S.:

4. Date on which the fair order is placed before the Dictating Member for pronouncement: __________

5. Date on which the fair order comes back to the Sr. P.S./P.S.:

6. Date on which the file goes to the Bench Clerk: 9/6/2015

7. Date on which the file goes to the Head Clerk:

8. The date on which the file goes to the Assistant Registrar for signature on the order:

9. Date of Despatch of the Order: