Ita/94/1999 Of Commissioner Of Income Tax Ludhaina v. M/S Nahar Exports Ltd

IN THE HIGH COURT OF PUNJAB AND HARYANA AT|CHANDIGARH ITA No.94 of 1999Date of decision: 3./7.2014 Commissioner of Income Tax (Central) Ludhiana ....-- Appe Vs, M/s Nahar Exports Limited, Ludhiana ..... Respond CORAM: HON’BLE MR. JUSTICEK AJAY KUMAR MITTAHON’ BLE MR. JUSTICE JASPAL SINGH Present:Mr. Rajesh Katoch, Advocate for the appellant. Mr. Sanjay Bansal, Sr. Advocate withMs. Rajni Pal, Advocate for the respondent, Ajay Kumar Mittal,J, inThis appeal has been preferred by the revenue under Section260A of the Income Tax Act, 1961 (in short, “‘the Act’) against the ordedated 4.3.1999, Annexure A.3, passed by the Income Tax AppellateTribunal, Chandigarh Bench, Chandigarh (in short, “the Tribunal’) in ITANo.968/Chandi/91, for the assessment year 1989-90, claiming followingsubstantial questions of law:- “T)|Whether on the facts and in the circumstances of the case,the learned Income Tax Appellate Tribunal was right indirecting to work out the value of finished goods lying at porton the basis of average cost? 2) Whether on the facts and in the circumstances of the case,the learned Income Tax Appellate Tribunal was right in holdingthat deduction under Section 80I 1s admissible on the DutyDraw back, the receipt of which is not attributable to conductof any manufacturing activities by the respondent? |Briefly, the facts necessary for adjudication of the controversyinvolved as narrated in the appeal may be noticed. The respondent companyis deriving income from manufacture, purchase and export of cotton hosierygoods. For the accounting year ending 31.3.1989 relevant to the assessmentyear 1989-90, a return declaring an income of<a69,870/- was filed on1.1.1990. It was noticed by the Assessing officer during the assessmentproceedings that the assessee had valued the yarn as well as ownmanutactured finished products at average cost and not on cost basis,Similarly, finished goods purchased from the market which were lying in theclosing stock were also found to be valued at average manutacturing costthough such products were purchased from the market at a much higherprice. Accordingly, the Assessing officer held that the respondent hadundervalued its stock in order to reduce book profits amounting to —=2,68,/12/-. The Assessing officer also noticed that the respondent hadclaimed deduction under Section 801 of the Act amounting to=a2,38,604/-in the computation chart filed with the return on the profits of L15,76,474/-.The Assessing officer held that the deduction was not admissible underSection 80] of the Act on the cash assistance received by the respondent onthe export of goods as it was not a receipt relatable to the manufacturingactivities of the respondent but it was instead a receipt on account of thepolicy of the Central government for boosting the exports. The Assessing IITA No.94 of 199 IITA No.94 of 199 officer thus allowed deduction of only |a1,04,825/- against a2,38,604/-which was claimed by the respondent. The assessment was completed atincome of.Lv3,89,380/- vide order dated 29.11.1990, Annexure A.1 underSection 143(3) of the Act. Aggrieved by the order, the assessee filed appealbefore the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide orderdated 4.3.1991, Annexure A.2, the CIT(A) partly allowed the appeal holdingthat the Assessing officer should value the acrylic yarn on actual cost basisand cotton yarn on the basis of weighted monthly cost instead of the costtaken by the Assessing officer at the time of assessment. As regards finishedgoods lying in the docks for shipment and contracted to be sold, it wasdirected that the same should be valued at contract rates (Invoice rates) plusIncentives Less Shipment Cost. The finished goods lying 1n the factory weredirected to be valued at cost inclusive of Overheads and Interest or NetRealisable Value, whichever was lower. With regard to deduction undersection 8QI of the Act, the CIT(A) allowed part relief and directed that dutydraw back should be bifurcated between manufacturing and_ tradingactivities for computing the deduction. Not satisfied with the order, both therevenue and the respondent filed appeals before the Tribunal. Vide orderdated 4.3.1999, Annexure A.3, the Tribunal dismissed the appeal of therevenue on the issue of value of closing stock of yarn and finished product.The Tribunal partly allowed the respondent's appeal. With reference to stockof finished pieces lying at port, 1t was directed by the Tribunal that theirvaluation should also be made on the basis of average cost. The Tribunalalso directed that the amount of duty draw back received by the respondent IITA No.94 of 199 had to be treated as part of profits and gains derived by it from the industrialundertaking. Hence the present appeal by the revenue. | 3]We have heard learned counsel for the parties and perused the record. 4Learned counsel for the appellant submitted that the Tribunalhad erred in accepting the determination of value of finished goods whichwere lying on the port on the basis of average cost. According to the learnedcounsel, the Assessing officer had rightly valued the finished goods lying atthe port on the basis of actual cost incurred by the assessee. Adverting tothe second question, learned counsel for the revenue on the strength of thejudgment of the Apex court 1n Liberty India vs. C1T» (2009) 317 ITR 218urged that the issue was concluded in favour of the revenue and that theTribunal had erred in allowing deduction under section 80] of the Act on theduty draw back which was not permissible. 4 On the other hand, learned counsel for the assessee submittedthat the Tribunal had categorically recorded a finding that the assessee hadbeen following average cost method which was a recognized method by theInstitute of Chartered Accountants and in view of the judgment of the ApexCourt JnCIT vs. British Paints India Limited,(1991) 188 ITR 44 and ofthis Court 1nCIT vs. Fazilka Cooperative Sugar Mills Limtted,(2002) 255ITR 411, the issue has been rightly decided in favour of the assessee.However, as regards question No.(2), it was fairly accepted that the issuestands concluded by the judgment of the Apex Court 1n |Liberty India’S Case(supra). 6. 6.After hearing learned counsel for the parties, we find that withregard to question No.(1), the Tribunal while accepting the plea of theassessee came to the conclusion as under:- 6. 6.After hearing learned counsel for the parties, we find that withregard to question No.(1), the Tribunal while accepting the plea of theassessee came to the conclusion as under:- "5. We have carefully considered the submissions made by boththe parties on this issue and have perused the orders of the taxauthorities. We have also perused the various documents placedin the paper book to which our attention was invited during thecourse of hearing. We have also seen the case law relied uponby both the parties. It 1s observed that the thrust of thesubmission made by the learned counsel 1s that the assessee hasthe right to choose the method of valuation of closing stock onthe basis of average cost, which is a recognized method ofvaluation. In this connection he has relied on the standards laiddown by the Institute of CAs — AS2, a copy whereof is placedat pages 1-7 of the paper book. In addition to the aforesaid caselaw, the learned DR has also relied on various decisionsmentioned above. A majority of the said decisions as reliedupon by the learned DR are distinguishable on facts. However,the Hon’ble Supreme court has clearly held that the AO 1s dutybound to examine as to whether the method of valuation asadopted by the assessee has been regularly followed or not andas to whether the correct profits and gains could be deducedfrom the accounts maintained by following the said method. Itis observed that in the present case, it 1s not disputed that theassessee has regularly followed the method of valuation ofstock on the basis of average cost. Further there 1s no specificfinding by the AO that the profits cannot be correctly deducedon the basis of the method of valuation followed by theassessee. The provisions of section 145 have not beenspecifically invoked in the present case. In view of theforegoing facts, we therefore feel that the learned CIT(A) hasrightly held in para 2.3 of the order that in the case of cotton yam average weighted cost of closing stock may be taken andthe valuation of closing stock should be worked out on thebasis of weighted monthly cost. It 1s also observed that the saidmethod of valuation of closing stock of raw material has beenaccepted by the assessee and it has been stated before us thatthe assessee 1s not aggrieved on this part of the valuation.” TiIn view of the aforesaid finding which has not been shown tobe erroneous or perverse 1n any manner by the learned counsel for revenue,no fault could be found in the approach adopted by the Tribunal.Accordingly, question No.1 1s decided against the revenue and 1n favour ofthe assessee. |In view of the fact that there 1s no dispute with regard to theissue arising in question No.2, between learned counsel for the parties, inview of the judgment of the Apex Court 1n Liberty India'scase (supra), theduty draw back would not form part of net profit and, therefore, nodeduction under Section SOI of the Act was admissible thereon. Thequestion 1s, thus, decided against the assessee and in favour of the revenue.| Q In view of the above, the appeal 1s disposed of in the mannerindicated above. (Ajay Kumar Mittal)Judge July 03, 2014 (Jaspal Singh) sudge|