Sankalp International , Jaipur vs Department Of Income Tax

Jh vkj-ih-rksykuh] U;kf;d lnL; ,oa Jh Vh-vkj-ehuk] ys[kk lnL; ds le{k BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM

vk;dj vihy la-@ITA No. 714/JP/2012 fu/kZkj.k o"kZ@Assessment Year : 2009-10

Assistant Commissioner of cuke M/s Sankalp International, Income Tax, Circle-4, Vs. Jaipur. Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAKFS 4376 D vihykFkhZ@Appellant izR;FkhZ@Respondent

jktLo dh vksj ls@ Revenue by : Mrs. Neena Jeph (JCIT) fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal (C.A.)

lquokbZ dh rkjh[k@ Date of Hearing : 18/03/2015 ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 10/04/2015

vkns'k@ ORDER

PER: T.R. MEENA, A.M.

This is an appeal filed by the revenue against the order dated

16/05/2012 passed by the learned CIT(A)-II, Jaipur for A.Y. 2009-10

Respective grounds of appeal are as under:-

"On the facts and in the circumstances of the case and in law the Ld. CIT(Appeals) has erred in:-

"(i) Deleting the addition of Rs. 88,57,732/- made by the A.O. on account of under valuation of closing stock.

2 ITA 714/JP/2012_ ACIT Vs. Sankalp International

(ii) Deleting the addition of Rs. 26,24,549/- made by the A.O. by rejecting the claim of assessee regarding exemptions U/s 10BA".

2. The first ground of appeal is against deleting the addition of Rs.

88,57,732/- made by the Assessing Officer on account of under

valuation of closing stock. The Ld. Assessing Officer observed that the

assessee firm is engaged in the business of manufacturing and trading

of wooden furniture and handicraft items and wind power plant. The

assessee filed its return of income on 29/9/2009 declaring a total

income of Rs. 3,89,52,800/- alongwith audit report. This case was

scrutinized U/s 143(3) of the Income Tax Act, 1961 (hereinafter

referred as the Act). The Assessing Officer observed that the assessee

had disclosed closing stock on the basis of physical verification done by

the partners of the firm. No goods had been disclosed by the assessee

in transit, therefore, the ld. Assessing Officer asked to give the details

of sale bill alongwith goods exported. It found that the assessee

exported goods up to 31/3/2009. Some goods were in transit and

exported in the subsequent year. The assessee submitted before the

Assessing Officer that the closing stock was valued on the basis of sale

bill issued, therefore he gave the reasonable opportunity of being heard

as to why goods in transit has not been included in the closing stock.

The appellant had furnished the details of date of invoices, freight 3 ITA 714/JP/2012_ ACIT Vs. Sankalp International

expenses, terminal handling charges, fumigation charges etc. It is

noticed that fumigation charges at the port for export of the goods

worth Rs. 88,57,732/- had been charged on the same date of invoice.

In other words, the goods had already been removed from the business

premises of the assessee and were lying at the port for shipment.

Fumigation can be claimed only after the goods have reached the port.

The Assessing Officer reproduced the fumigation charges in schedule on

page 8 of the assessment order. It has been held that goods worth Rs.

88,57,732/- were not present at the business premises of the assessee

and as such they could not be physically available for stock taking by

the partners on 31/3/2009. Thus, these goods were not the part of the

closing stock as declared by the assessee. He further held that the

assessee had not been able to furnish any cogent reply in this regard

and his stand that these had been taken in the closing stock as on

31/3/2009 was not acceptable. Thus, from the above discussion, the

following facts have been emerged.

(a) Firstly, the Audit report of the assessee for the year under

consideration reveals that no stock has been declared either to be lying

in transit or to be lying for clearance of customs.

4 ITA 714/JP/2012_ ACIT Vs. Sankalp International

(b) Secondly, as it is an admitted fact that the inventory was

valued on the basis of the physical verification made by the partners on

estimate basis whereas the goods were not physically present for stock

taking.

Therefore, he made addition of Rs. 88,57,732/- in the income of

the assessee.

3. Being aggrieved by the order of the Assessing Officer, the

assessee carried the matter before the learned CIT(A), who had allowed

the appeal by observing that it was a consistent practice of the

assessee firm to include the goods lying at the port in the closing stock

at the end of the year. In the current year also, the closing stock of Rs.

2,65,09,500/- as on 31/03/2009 included the stock lying at the port.

However, such stock was valued after deducting GP from the invoice

value. Thus, after excluding GP from the invoice value of Rs.

88,57,732/-, these goods were valued at Rs. 66,82,273/- in the closing

stock. The goods lying the port and not exported, were verifiable from

the invoiced issued by the assessee firm and it was not necessary to

carry out physical inspection of these goods. Further the fumigation was

carried at the factory premises of the assessee firm at the time of

loading of goods in the container and not at the port. The entire 5 ITA 714/JP/2012_ ACIT Vs. Sankalp International

container was sealed off at the factory premises itself after the

fumigation. There is no necessity as per accounting standard to show

the goods in transit separately in the books of account. The assessee

had claimed total freight expenses, terminal handling expense and

fumigation charges of Rs. 3,28,034/- for the period 21/3/2009 to

31/3/2009 when these goods were dispatched to the port. Out of total

amount of Rs. 3,28,034/- an amount of Rs. 1,86,906/- was paid during

the year itself and the remaining amount was paid in the next year. And

outstanding amount of Rs. 1,86,906/- was not claimed as an

expenditure in the books of account and instead of it, it has been

shown prepaid expenditure. Alternatively, the assessee's claim before

the CIT(A) was that if the Assessing Officer increased the closing stock,

it automatically increases the opening stock of the subsequent year,

therefore, there is no revenue loss. The firm has disclosed closing stock

of goods lying at the port in the year ending on 31/3/2008 at Rs.

6,83,253/-, & Rs. 40,71,281 as on 31/3/2007 after reducing G.P..

Consistently this year also, the assessee has shown closing stock of

goods lying at port at Rs. 66,82,273/- in the closing stock. Therefore,

he deleted the addition of Rs. 88,57,732/- made by the Assessing

Officer.

6 ITA 714/JP/2012_ ACIT Vs. Sankalp International

4. Now the Revenue is in appeal before us. The learned D.R.

vehemently supported the order of the Ld. Assessing Officer. At the

outset, the Ld. AR for the assessee has reiterated the submissions made

before the Ld. CIT(A) and supported his order and relied upon the

various case laws as under:-

(i) CIT Vs. Excel Industries Ltd. 358 ITR 295.

(ii) CIT Vs. Satish Estate Pvt. Ltd. (2014) 226 Taxman 11.

He further argued that the additions were made on different footings by

the Assessing Officer in preceding years, which has been deleted by the

Hon'ble ITAT. Therefore, he prayed to dismiss the appeal filed by the

revenue.

5. We have heard the rival contentions of both the parties and

perused the material available on record. The assessee had followed the

consistent method of valuation of closing stock lying at the port. It

verified the closing stock on the basis of last sale bills no shipment had

been made during the year. It reduces the G.P. on the sale bills after

following this method consistently. The appellant had included net

amount of goods in the closing stock. The Ld. CIT(A) had analysed all

the facts of the case including the case laws referred by the assessee in

detail, accordingly we uphold the order of the ld CIT(A).

7 ITA 714/JP/2012_ ACIT Vs. Sankalp International

6. The second ground of appeal is against deleting the addition of

Rs. 26,24,549/- made by the Assessing Officer by rejecting the claim of

assessee regarding exemptions U/s 10BA of the Act. The Ld. Assessing

Officer observed that the assessee had claimed deduction U/s 10BA of

the Act at Rs. 26,24,549/-. The Assessing Officer gave reasonable

opportunity of being heard on this issue and asked to furnish the details

of eligible manufacturing items on which it claimed exemption U/s 10BA

of the Act. The assessee's reply has been reproduced by the Assessing

Officer at page 3 of the assessment order. The ld. Assessing Officer

further gave opportunity on audit report not furnished U/s 56H, Auditor

had not certified whether the assessee had received the convertible

foreign exchange within the period, eligible article or things had not

been specified and details of manufacturing and trade items. The

assessee also had not maintained itemwise details of goods

manufactured. It has been submitted by the assessee that no stock

inventory or any detail of such eligible article or thing were being

maintained by the assessee. It is not possible for that, since the goods

are mixed with other goods, which had been purchased by it as finished

goods. The assessee purchased raw material to the extent of Rs.

2,37,06,530/- and had manufactured eligible goods out of which he

made export. All their export had been realized. It is further held by the 8 ITA 714/JP/2012_ ACIT Vs. Sankalp International

Assessing Officer that the year under consideration, the assessee

claimed deduction U/s 10BA of the Act on estimate basis, which was

9% of total turnover compared to preceding year, it was 5% of total

turnover. The percentage to determine the eligible article or thing was

only imaginary method. The C.A. has himself furnished the certificate

only on the basis of estimate. The copy of bills produced by the

assessee also revealed that the goods had been purchased from

outside, which is contrary to the provisions of Section 10BA. Thus, there

is no evidence and justification for producing and manufacturing of

eligible goods. Accordingly, the ld Assessing Officer disallowed the claim

of Rs. 26,24,549/-.

7. Being aggrieved by the order of the Assessing Officer, the

assessee carried the matter before the ld CIT(A), who had allowed the

appeal by observing that the appellant is engaged in business of

exports of thousands of items such as frames, mirror frames, mirror

dressing, window mirrors, blanket boxes, bedside, bed head, coffee

tables, T.V. cabinets, cab tall, side board, lamp tables, console tables,

bed, dinning, TV/VCD unit, writing desk, carving chairs, wardrobe, file

boxes, candle holders, wine racks, read stools, CD racks, dresser, key

boxes, lid trunk, dish racks, book shelf, round tables etc. Further all

these items were sold in different sizes, different carving work and with 9 ITA 714/JP/2012_ ACIT Vs. Sankalp International

different attachments. Each and every item being unique, therefore,

maintenance of the day to day stock register was not feasible. Majority

of goods exported by the assessee firm were purchased out rightly from

the market however, a small portion of exports comprised of

manufactured goods also. The C.A. had specified in Annexure-A that

convertible foreign exchange of Rs. 3,45,57,460/- was received as

against total export turnover of Rs. 38,23,27,376/- within a period of 6

months from the end of the previous year. The C.A. also given basis for

computation of exemption U/s 10BA i.e. the cost of raw material

purchased for manufacturing was approximately 9% of the total

turnover. No exemption U/s 10BA was claimed in relation to export of

traded goods. By applying GP rate of 24.56% on export of

manufactured goods, the profits were worked out at Rs. 84,85,820/-.

After reducing proportionate expenses of Rs. 58,61,271/- from the

eligible profits, the exemption U/s 10BA was claimed at Rs. 26,24,549/-.

Therefore, he found the Assessing Officer observation that the auditors

had not given the basis of calculation for exemption U/s 10BA was

totally erroneous and not borne out from the relevant records. The

eligible articles or things exported by the assessee firm were itself

specified in the export invoices, thereafter assessee's claim U/s 10BA of

the Act was on the basis of scientific method and on the basis of facts 10 ITA 714/JP/2012_ ACIT Vs. Sankalp International

and figures. The ld Assessing Officer also relied upon the Hon'ble ITAT

decision in ITA No. 815/JP/2007 order dated 20/06/2008 in the case of

M/s Mangalam Arts for A.Y. 2004-05 on liberal interpretation of the

provisions of encourage of export wherein the Hon'ble ITAT also

considered the Hon'ble Supreme Court decision in the case of Mysore

Minerals Ltd. Vs. CIT 239 ITR 775 and Bajaj Tempo Ltd. Vs. CIT 196

ITR 188. Therefore, he allowed the deduction claimed by the assessee

U/s 10BA of the Act at Rs. 26,24,549/-.

8. Now the revenue is in appeal before us. The ld DR vehemently

supported the order of the Assessing Officer. At the outset, the ld AR

for the assessee submitted as under:-

1. The assessee is engaged in export of manufactured as well as trade items. Majority of the items sold are trading items. Only few items are manufactured. Therefore, the assessee, considering the quantum of raw material purchased and other manufacturing expenses incurred thereon, estimated the ratio of trade goods exported and manufactured goods exported as 91: 9. The auditor also on the basis of these estimated bifurcations given his report on the claim of exemption u/s 10BA.

2. There is no denial of the fact assessee has purchased raw material of Rs.2.37 crores. This raw material has been used by the assessee in the manufacturing of eligible article/thing. This is only a small fraction of the total cost of goods sold. Therefore 11 ITA 714/JP/2012_ ACIT Vs. Sankalp International

assessee has claimed deduction u/s 10BA on the proportionate basis. In last year also the assessee has claimed the deduction on the similar basis which has been allowed in the assessment framed u/s 143(3). All these facts has not been appreciated by the AO in the correct prospective. He made various observations which are irrelevant or incorrect as can be noted from the following:-

(i) In last year assessee considered the turnover of eligible article or thing as 5% of the total turnover since the cost of the raw material purchased was approximately 5% of the total purchase. During the year the cost of raw material purchased is approximately 9% of the total purchase and therefore the value of the eligible article or thing is considered as 9% of the total turnover.

(ii) The finding of the AO that the copy of the bills reveal that goods are purchased from outside which is contradictory to the provisions of section 10BA is irrelevant. The assessee has purchased the goods from outside both in respect of the semi finished items and the raw material. Copy of sample bills of raw material which are used for manufacturing of eligible article or things are at. These raw material is used for manufacturing of the eligible goods as is evident from the accounts in as much as in schedule 12 on the raw material purchases assessee has incurred expenditure on seasonings charges, seasoning material, wages and labour etc..

12 ITA 714/JP/2012_ ACIT Vs. Sankalp International

(iii) Of course the assessee has not maintained bifurcation of manufacturing and trade items dealt by him, therefore on a reasonable and conservative basis it has claimed deduction u/s 10BA based on the ratio of raw material purchased to the traded goods purchased. In fact assessee has not considered the expenditure on manufacturing in working out this ratio to be on a conservative side, otherwise the ratio would have been more as can be perceived from the following table:-

Statement indicating working of % of manufacturing activity in total activity Particulars 31/03/09 Sales 382327376 Less: Gross profit 93883079 Cost of Goods Sold 288444298 Details of Expenses incurred on manufacturing:

(a) Raw Material Purchases 23706530 (b) Seasoning Charges 214114 (c) Seasoning Material 310873

(d) Wages and Labour Charges (estimated at 10% of Raw Material) 2370653

(e) Freight Inwards (based on % of raw material on total purchases )

105459

(f) Finishing Charges (Estimated at 15% of Raw Material) 3555979.5

(g) Finishing Material (estimated at 20% of the raw material ) 4741306 Total cost of goods manufactured 35004914.5

Percentage of total cost of goods manufactured based on total cost of the goos sold 12.14% Percentage of total cost of goods manufactured based on total sales 9.16%

(iv) The CIT(A) has appreciated the finding of AO that the auditor has not given the basis of calculation for

13 ITA 714/JP/2012_ ACIT Vs. Sankalp International

exemption u/s 10BA is totally erroneous and not borne out from the relevant records. The fact that the goods were manufactured and exported is not denied. The claim of exemption u/s 10BA on proportionate basis is reasonable and therefore he rightly directed the AO that assessee is entitled to exemption u/s 10BA.

In view of the above the order of the CIT(A) be upheld by dismissing the ground of the department.

9. We have heard the rival contentions of both the parties and

perused the material available on the record. The Ld. CIT(A) had

verified the calculation made by the C.A. for claiming exemption U/s

10BA of the Act with reference to goods manufactured and goods

traded. The percentage of income for deduction U/s 10BA was

calculated on the basis of raw material purchased and goods traded

during the year under consideration, which was 9% of total export. The

appellant had realized foreign exchange to the tune of Rs.

3,45,57,460/- as against total turnover of Rs. 38,23,27,376/- within 6

months from the end of the previous year. The ld CIT(A) on the basis of

GP rate of 24.56% on export manufactured goods and profits were

worked out at Rs. 84,85,820/-. After reducing proportionate expenses

of Rs. 58,61,271/-, the ld CIT(A) allowed the deduction U/s 10BA of the

Act on Rs. 26,24,549/- after verifying the facts and figures. Similar 14 ITA 714/JP/2012_ ACIT Vs. Sankalp International

deductions were claimed by the appellant in preceding year, which has

been allowed by the Assessing Officer himself in scrutiny assessment

made U/s 143(3) of the Act. Accordingly, we uphold the order of the ld

CIT(A).

10. In the result, the revenue's appeal is dismissed.

Order pronounced in the open court on 10/04/2015.

Sd/- Sd/- ¼vkj-ih-rksykuh½ ¼Vh-vkj-ehuk½ (R.P.Tolani) (T.R. Meena) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Tk;iqj@Jaipur fnukad@Dated 10th April, 2015 *Ranjan

vkns'k dh izfrfyfi vxzsf'kr@Copy of the Order forwarded to:

1. vihykFkhZ@The Appellant- The ACIT, Circle-4, Jaipur.

2. izR;FkhZ@ The Respondent- M/s Sankalp International, Jaipur.

3. vk;dj vk;qDr@ CIT

4. vk;dj vk;qDr@ vk;dj vk;qDr¼vihy½@The CIT(A)

5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur

6. xkMZ QkbZy@ Guard File (ITA No. 714/JP/2012).

vkns'kkuqlkj@ By order,

lgk;d iathdkj@Asst. Registrar