Pawan Kumar Kansal, New Delhi vs Assessee

Assistant Commissioner of Vs. Sh. Pawan Kumar Kansal, Income Tax, Circle-21(1), Prop. M/s Jagdamba Export, New Delhi A-7, Antriksh Apartment, Plot No. D-3, Sec.-14, Rohini, New Delhi (PAN: AHEPK0574C) (Appellant) (Respondent) And C.O. No. 233/Del/2013 (In ITA No. 3640/Del /2013) Assessment Year: 2009-10

Sh. Pawan Kumar Kansal, Vs. Assistant Commissioner of Prop. M/s Jagdamba Export, Income Tax, Circle-21(1), A-7, Antriksh Apartment, New Delhi Plot No. D-3, Sec.-14, Rohini, New Delhi (PAN: AHEPK0574C) (Appellant) (Respondent)

Department by : Sh. Vikram Sahay, Sr. DR Assessee by : S/sh. Ved Jain, Rano Jain & V. Mohan, CAs

Date of hearing: 08.04.2015 Date of pronouncement: 13.05.2015

ORDER

PER INTURI RAMA RAO, A.M.:

These are the cross appeals for the assessment year 2009-10 impugning

the order of learned CIT(A)-XXII, New Delhi, dated 30.03.2013. The Revenue

raised the following grounds of appeal:

2 ITA No. 3640/Del/2013

& C.O. No. 233/Del/2013 AY: 2009-10

i. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the action of the Assessing Officer in rejecting the books of accounts in view of the failure of the assessee in producing requisite details and documents before the then assessing officer to enable him to deduce the proper income of the assessee.

ii. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the 49% scrap. As claimed by the assessee, and deleting the total addition of Rs. 3,98,16,047/- on account of excess scrap allegedly generated by the assessee beyond 41.17% as fixed by the Excise authorities, but treated as sales outside the books of accounts by the Assessing Officer, by ignoring the facts and earlier financial results of the assessee, particularly in view of scrap percentage and gross profit declared by the assesee in the earlier years wherein the assessee has claimed and received back Refund of Excise-duty.

iii. The appellant craves leave to amend or alter all or any of the aforesaid grounds of appeal and amend, alter or add any other ground of appeal.

2. The assessee has raised the following cross objections:

i. On the facts and circumstances of the case, the learned Commissioner of Income Tax(Appeals) [CIT(A)] has erred, both on facts in law, in confirming addition of Rs. 99,54,630/- and further enhancing addition by Rs. 23,67,470/- in respect of valuation of the closing stock of the finished goods.

ii. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in taking gross profits rate at the rate of 4.63% while valuing the cost of the finished goods ignoring the fact by above said addition of Rs. 1,23,22,100/- the gross profit will get increased to Rs. 2,79,56,800/- and consequently the G.P. Rate will be 8.28% not 4.63% applied by the CIT(A).

iii. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in not allowing adjustment in the opening stock of Rs. 60,81,102/- being the addition made by the A.O. in the closing stock in the preceding assessment year and out of which addition of Rs. 15,49,576/- was confirmed by the CIT(A).

3 ITA No. 3640/Del/2013 & C.O. No. 233/Del/2013 AY: 2009-10

iv. That the appellant craves leave to add, amend or alter any of the grounds of cross objection

ITA No. 3640/Del /2013 for A.Y. 2009-10:

3. The facts of the case in brief are that the respondent assessee is an

individual engaged in the business of manufacturing and sale of stainless steel,

cutlery and utensils in the name of M/s Jagdamba Exports. For the assessment

year 2009-10, return of income was filed on 30th September, 2009, declaring

income of Rs. 1,17,54,720/-. The case was selected for scrutiny after issuance of

notice under Section 143(2) of the Income-tax Act, 1961 (for short "the Act").

Finally, the assessment was completed under Section 143(3) of the Act vide

order dated 27.12.2011 at a total income of Rs. 6,15,91,000/- after making the

additions of Rs. 3,98,16,047/- on account of sale outside books of account, Rs.

99,54,630/- on account of valuation of closing stock and Rs. 65,600/- on account

of income from un-disclosed sources. Being aggrieved by this order, an appeal

was preferred before the learned CIT(A), who vide impugned order dated

30.03.2013, deleted the addition made on account of generation of scrap.

However, on the addition of valuation of closing stock, addition was enhanced

by Rs. 23,67,470/-.The alleged non-genuine creditors of Rs. 65,600/- were

deleted by learned CIT(A). Aggrieved by this order, the Revenue has filed the

present appeal and the respondent assessee filed the cross objection impugning

that part of the CIT(A)'s order whereby the addition on account of closing stock 4 ITA No. 3640/Del/2013 & C.O. No. 233/Del/2013 AY: 2009-10

was enhanced by 23,67,470/-. Now, we shall deal with the appeal filed by the

Revenue.

4. Learned DR argued that the books of account are defective and the

learned CIT(A) should not have accepted the book results. As regards the

addition on account of generation of scrap, it was submitted that the findings of

the Assessing Officer should be confirmed, inasmuch as they are in conformity

with the norms prescribed by the Central Excise Authorities.

5. On the other hand, the learned Authorized Representative has quoted and

relied upon the order of the CIT(A) insofar as it relates to addition on account of

generation of scrap and also on the decision of this Tribunal in the assessee's

own case for the preceding assessment year i.e. 2008-09.

6. We have heard the rival parties and perused the material on record. The

first ground of appeal relates to the rejection of book results. We observe from

the assessment order that it is not the case of the Assessing Officer that the

respondent assessee failed to produce the information called for, nor is it the

case that the books of account are defective. The Assessing Officer failed to give

any specific reason for rejection of book results. It appears that the sole basis for

rejection of book results is the assessment order of the immediate preceding year

i.e. 2008-09 in which the books of account have been rejected by the Assessing

Officer. This Tribunal in the assessee's own case in ITA No. 1454/Del/2012, 5 ITA No. 3640/Del/2013 & C.O. No. 233/Del/2013 AY: 2009-10

vide order dated 29.10.2014 passed for the assessment year 2008-09, rejected

this ground of appeal raised by the Revenue, which reads as under:-

"5. In the Remand Report the contentions of the assessee that the AO was not justified in rejecting the books of accounts was accepted by the A.O. The A.O. also accepted the contention that he has not been able to point out any discrepancy in the books of account and stock record produced by the assessee before him. Thus, in our view, the First Appellant Authority had no other option but to reject the action of AO in rejecting the books of accounts. Hence, ground no. 1 of the Revenue is dismissed."

7. Following the above decision, this ground of appeal filed by Revenue is

dismissed.

8. The second ground of appeal relates to the deletion of addition on account

of generation of scrap. The learned CIT(A) has passed a very reasoned order

while deleting the addition vide paras 8.10 to 8.15 of his order, which reads as

under:

"8.10 The next ground on the basis of which the Books of Account has been rejected and the addition for sale outside Books of Account has been made is the Report of the Inspector who went on an onsite visit and inspection of the Assessee's premises, which is mentioned above in Para 8.3 of this order as point (B). Perusal of the Assessment Order Para 3 shows that a comparison for the Scrap generated for 5 items manufactured by the Assessee has been made by the Ld. Assessing Officer on the basis of the Inspector's Report. The chart comparing the Scrap generated for these 5 items has been given in Para 3 of the Assessment Order and is also reproduced below:

S. No. Name of the Item % of generation of % of generation of scrap as per the scrap as per the Department Assessee.

1. Table spoon 42.39% 47.99%

2. Serving Spoon 43.15% 48.00%

3. Table Fork 51.93% 54.99%

4. Knife 60.59% 59.00%

5. Pasta/Noodle-SM 56.42% 51.99% 6 ITA No. 3640/Del/2013 & C.O. No. 233/Del/2013 AY: 2009-10

8.11 Perusal of the above chart shows that out of these 5 items, the percentage of scrap generated mentioned as the percentage as per the Department, which are obviously the figures as per the Inspector's Report, is higher in case of 2 of the items and is lower in case of 3 of the items. It is seen that the Assessee makes more than 50 items, and though analysing the production and Scrap generation in the case of 5 items on a sample basis cannot be rejected as such, but this sample of 5 items does not give any clear evidence that the Assessee is inflating the claimed Scrap generation. It is seen that out of the 5 items, the Departmental figures for Scrap generation are much lower than the claim of the Assessee for 3 items, but for 2 of the items, i.e. 'Knife' and 'Pasta/Noodle-SM', mentioned at S. No. 4 and 5 of the chart made by the Assessing Officer, it is seen that the Departmental figures for Scrap generation were much higher as compared to the figures shown for the Assessee. If in case of 2 of the 5 items analysed, the Scrap generated as per the Department is much higher than that stated to be claimed by the Assessee, then it cannot at all be said, merely on this basis that the Assessee has inflated the claim of Scrap. If the Assessee was inflating the claim of Scrap, then either the Scrap generated as per the Department would have been lower in all the 5 cases, or in case the Appellant was resorting to such tactics for only some items, then the Departmental figures would have been equal to the Assessee's claims for some items and lower for other items. However, the above chart does not show any such trend, and out of 5 items, the Departmental figures are significantly lower in 3 cases, but significantly higher in 2 cases and thus merely on the basis of this study it cannot be concluded that the Appellant was inflating the claimed generation of Scrap.

8.12 It has been claimed by the Appellant in Para 9 of his written Submissions dated 22.01.2013, reproduced above in Para 7.1, that the figures of generation of Scrap mentioned in the Assessment Order to be that as per the Assessee's record are incorrect. The same claim has been made in Para 19.3 to 19.5 of his written Submissions dated 22.01.13 and it has been claimed in Para 19.4 that the AO has picked up and quoted some individual figures rather than taking the figure for the whole of the year and has in Para 19.4 submitted the following chart :-

S.No. Name of the Item % of generation of % of generation Correct scrap as per the of scrap as per figures as Department the Assessee. per the books.

1. Table Spoon 42.39% 47.99% 43.126

2. Serving spoon 43.15% 48.00% 52.232

3. Table Fork 51.93% 54.99% 49.576

4. Knife 60.59% 59.00% 57.452 7 ITA No. 3640/Del/2013 & C.O. No. 233/Del/2013 AY: 2009-10

5. Pasta/Noodle-SM 56.42% 51.99% 53.409

8.13 Perusal of the above chart shows that the claim for generation of Scrap as per the Books of Account is significantly lower, not just for items at S. No. 4 and 5 i.e. 'Knife' and 'Pasta/Noodle-SM', as mentioned in Para 8.10 above, but also in case of the item at S. No. 3, i.e. 'Table Fork', for which the Assessee claims that the actual figure of generation of Scrap as per Books was 49.576% and not 54.99% as shown the Assessment Order, as against the Departmental figure of Scrap generation of 51.93%. In such a situation, it is seen that the Departmental figure for Scrap generation would be significantly higher than the Assessee's claim for 3 items and lower for 2 items. In any case, no conclusion can be drawn from the Inspector's Report regarding inflation of claimed Scrap generation as no trend for inflation of Scrap is seen from the Inspector's Report and though there are variations between the Inspector's Report and the claim of the Assessee but no definite conclusion of inflation or suppression can be suppression can be drawn when for 3 items a different trend is seen and for the other 2 items a different trend is seen.

8.14 It is further seen that the Appellant in his written Submissions dated 22.01.2013 in Para 19.2 has claimed that the basis on which the percentage as per the Inspector's Report was computed has not be specified, and also that the Inspector's Report was never confronted to the Assessee. If the Inspector's Report was being used against the Assessee, then the Assessee should have been confronted with the Report and the explanation if any offered by the Assessee on the Report should have been discussed, and in case no explanation was offered then that fact should also have been mentioned in the Assessment Order.

However, it is seen that the Assessment Order is silent on this aspect, as to whether the Inspector's Report was confronted to the Appellant or not and what was his response, if any. In the absence of any such mention in the Assessment Order of the Inspector's Report being confronted to the Assessee, the Assessee's claim that the basis on which the percentages as per the Inspector's Report were computed was not specified and also that he was never confronted with the Inspector's Report cannot be brushed aside.

8.15 In any case, it is seen that the Inspector's Report cannot lead to any conclusion that the generation of Scrap was shown by the Assessee at any inflated figures and hence the ground (B) mentioned in Para 8.3 above, on which the Books of Account were rejected and addition for sale outside of Books of Account was made also fails, and is hereby rejected." 8 ITA No. 3640/Del/2013

& C.O. No. 233/Del/2013 AY: 2009-10

9. Moreover, similar issue has been dealt by this Tribunal in the assessee's

own case passed for assessment year 2008-09 in ITA No. 1454/Del/2012

wherein the Tribunal vide order dated 29.10.2014, rejected the ground raised by

the Revenue, which reads as under:

"7. Ground no. 3 is against the finding of the learned CIT(A), wherein he allowed 48.93% scrap, as claimed by the assessee. In the remand report the A.O. has, on the issue of generation of scrap, accepted the fact that the assessee has produced complete details of the scrap generated and scrap sold. The A.O. also obtained necessary confirmations from the parties to whom the scrap was sold. The A.O. also accepted the fact that the percentage of scrap fixed by the excise authorities was only, for the purposes of giving incentives to the assessee and has no effect on the actual facts of the case. The assessee had submitted various letters to the excise authorities for revision of the norms of scrap fixed by them. In view of the above observations by the AO in the remand report, we find no infirmity in the order of the First Appellant Authority and hence we dismiss ground no. 3 of the Revenue."

10. In view of the above discussion, we are of the considered opinion that the

order of learned CIT(A) is well reasoned and we do not intend to interfere.

Accordingly, this ground of appeal filed by the Revenue is dismissed.

C.O. No. 233/Del/2013 (In ITA No. 3640/Del /2013)

11. Now, we shall deal with the cross objections.

12. The cross objections filed by the respondent assessee relates to the

addition on account of closing stock of Rs. 99,54,630/- confirmed and further

enhanced by Rs. 23,67,470/- by the learned CIT(A). The Assessing Officer

made the addition in respect of closing stock by deducting the G.P. from the sale

price, works out to Rs. 226/- per kg. Whereas on appeal, the learned CIT(A)

finally held vide paras 9.8, 9.9, 9.10 and 9.11, apart from confirming the 9 ITA No. 3640/Del/2013 & C.O. No. 233/Del/2013 AY: 2009-10

addition made further enhancement of Rs. 23,67,470/-, which are reproduced

below:

"9.8 After examining the entire facts of the case and relevant documents it was found that there was a very heavy undervaluation of the Closing Stock of Finished Goods and though the Ld. Assessing Officer had made an addition towards the undervaluation of Finished Goods but that addition was inadequate to cover the entire undervaluation of the Closing Stock of Finished Goods. It was seen that not only the packing cost which had been claimed by the Appellant at Rs.19/- was worked out to Rs.16.74 per kg., but also that the Ld. Assessing Officer had taken the Gross Profit Rate at 14.93% which was allowed as a reduction from the average sale price to work out the cost of the Finished Goods in the Closing Stock, but actually the Gross Profit rate had been disclosed @ 4.63% as per column 32(a) of the Form No. 3CD for the relevant year i.e. A.Y. 2009-10. Accordingly, vide Order Sheet entry dated 13.03.2013 the Appellant was required to explain why an enhancement of the addition on account of valuation of Closing Stock of Finished Goods should not be made as per the provisions of Section 251 (2) of the Income Tax Act, 1961. The relevant part of the Orde Sheet entry dated 13.03.13 is reproduced below :-

"It was pointed out to the Ld. Counsel that the Gross Profit was 4.63% as per Column 32(a) of Form No. 3CD for A.Y. 2009-10 as per page 26 of Paper Book I filed by Appellant.

Please explain why this figure should not be taken as the base to work out the Rate per Kg. for Finished Goods, rather than 14.93% taken as Gross Profit Rate by the Assessing Officer.

Reducing the G.P. Rate of 4.63% from Average Rate of Sale and even after reducing Packing Cost, the Valuation of Closing Stock of Finished Goods would be much more than that determined by the A.O. at Rs.226/- per kg.

Please explain why the Closing Stock may not be Valued as above which will result in an enhancement in the Valuation of Closing Stock. This may be treated as an Opportunity u/s 251(2) of the I.T. Act, 1961."

9.9 Subsequently Sh. Himanshu Goyal, CA and Sh. Nikhil Kabra, CA the Ld. Counsels of the Appellant appeared, but could not explain why the proposed enhancement should not be made. Written Submissions dated 28.03.2013 were filed regarding the Order sheet entry dated 13.03.2013 regarding Valuation of 10 ITA No. 3640/Del/2013 & C.O. No. 233/Del/2013 AY: 2009-10

Closing Stock, which are reproduced above in Para 7.4 of this Order. In this reply it has basically been claimed that the value adopted by the AO for Valuation of Closing Stock has been reached by making reverse calculation which is based on estimate. It has also been claimed that the Assessee has valued its Stock at cost price and that any rate other than that taken by the Assessee for valuation of Closing Stock should not be adopted. However, it is noteworthy that the Assessee did not give exact and specific reply to each of the queries raised vide notice dated 22.02.2013, which is reproduced above in Para 9.4. Further, the detailed valuation for each specific item of Finished Goods included in Closing Stock was not given. In such a situation, a reasonable and logical estimate has to be made for which reverse calculation or any type of calculation can be used provided it is reasonable and logical. Accordingly it is held that the Appellant could not explain why the enhancement in the Valuation of Closing Stock of Finished Goods should not be made.

9.10 There is no dispute regarding the average Sale Price being Rs.266/- per kg. The Gross Profit rate of 4.63% which was proposed to be used for valuation of the Closing Stock of Finished Goods was taken from the Audited Form No. 3 CD for A.Y. 2009-10, a copy of which was filed by the Appellant in the Paper Book submitted by him alongwith written submissions dated 22.02.13. Further, the packing cost of Rs.16.74 per kg. was admitted by the Appellant and is obvious from the calculation given in Para 9.6 above, whose details were given by the Appellant himself. In such a situation there is no dispute regarding the figures involved and the calculation of the rate to be adopted for the valuation of the Closing Stock of Finished Goods is as under :-

S. No. Particulars Amount 1. Average Sale Price of Finished Goods Rs. 266.00 per kg. 2. Less Gross Profit @ 4.63% Rs. 12.32 3. Less Packing Charges Rs. 16.74 4. Valuation of Finished Goods in Closing Rs. 236.94 per kg. Stock

9.11 The value to be adopted for Valuation of Finished Goods in Closing Stock is Rs.236.94 per kg. as against only Rs.180/- per kg. adopted by the Assessee and Rs.226/- per kg. taken by the Assessing Officer. Thus the under valuation in the Finished Goods in the Closing Stock is of Rs.56.94 per kg. (Rs.236.94 minus Rs.l80/-). The Closing Stock of Finished Goods is of 2,16,405 kg. as on 31.03.2009 as per the Assessee. The under valuation of the Finished Goods amounting to Rs.56.94 per kg. would result in an addition of Rs.1,23,22,100/- to the value of Closing Stock (56.94 per kg. x 2,16,405 kg.). Accordingly it is held that the value of Closing Stock of Finished Goods is to be enhanced by 11 ITA No. 3640/Del/2013 & C.O. No. 233/Del/2013 AY: 2009-10

Rs.23,67,4701- as the Ld. Assessing Officer had made an addition of only Rs.99,54,630/- towards under valuation of Closing Stock of Finished Goods which is hereby confirmed and a further enhancement of Rs.23,67,470/- is made to the value of Closing Stock and to the Income.

(Confirmed: Rs.99,54,630/-) (Enhanced : Rs. 23,67,470/-)"

13. It was submitted that the assessee has incurred an expenditure of Rs.

1,84,00,220/- on packing. The total production during the year was 11,84,481

kgs. out of which quantity in stock was 2,16,405 kgs. Thus, the packing of

quantity of 9,68,076 kg., an expenditure of Rs. 1,84,00,220/- was incurred

giving an expenditure of Rs. 19/- per kg. on account of packing. The assessee

has valued the stock on the basis of actual stock including fresh as well as old

items. The assessee is in cutlery business where items of non moving nature are

not valued as fresh products. It was further submitted that the Assessing Officer

as well as the learned CIT(A) applied the G.P. rate which is not justified as the

same is made ignoring the valuation of stock, which is to be done at cost of

market price whichever is less.

14. It was further argued that the G.P. applied by learned CIT(A) @ 4.63% is

not correct, as the same has to be taken considering the sale of scrap also, while

valuing the finished goods. As the sale of scrap goes to reduce the cost of

production, scrap cannot be taken as sale. Accordingly, the G.P. was worked

out. The learned CIT(A) has taken G.P. rate at 4.63% while valuing the cost of

the finished goods. The learned CIT(A) ignored the fact that by the addition of 12 ITA No. 3640/Del/2013 & C.O. No. 233/Del/2013 AY: 2009-10

Rs. 1,23,22,100/- the gross profit increases to Rs. 2,79,56,800/- and

consequently the G.P. rate will be 8.28% not 4.63% applied by him. The

assessee has disclosed the G.P. rate at 14.93%.

15. We have heard the rival submissions and perused the material available

on record. It is settled principle of law that the closing stock should be valued at

lower cost of sale price. As submitted by the respondent assessee, the cost

should be arrived at after deletion of addition made in respect of sale of scrap.

Accordingly, the cross objections are allowed.

16. In the result, the appeal filed by the Revenue is dismissed and the Cross

Objection filed by the assessee is allowed.

The decision is pronounced in the open court on 13th May, 2015.

Sd/- Sd/- (G.C. GUPTA) (INTURI RAMA RAO) VICE PRESIDENT ACCOUNTANT MEMBER Dated: 13th May, 2015. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi