Shiv Kumar Sushil Kumar Tea Enterprise v. Assistant Commissioner Of Income Tax, Circle-1, Kota

COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 93 / 2016 Shiv Kumar Sushil Kumar Tea Enterprise Through Its DirectorPawan Kumar Hissaria, Aged About 58 Years, S/o Late Shiv KumarHissaria R/o A-49/R, R.K. Puram, Kota ----Appellant Versus Assistant Commissioner of Income Tax, Circle-1, Kota ----Respondent _____________________________________________________ For Appellant(s) : Mr. Prakul Khurana for Mr. Sanjay Jhanwar For Respondent(s) :Ms. Parinitoo Jain _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERIHON'BLE MR. JUSTICE VIJAY KUMAR VYASOrder 31/10/2017 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal haspartly allowed the appeal preferred by the department andreversing the order passed by the CIT(A). 2.This Court while admitting the appeal on 25.04.2017framed following substantial questions of law:- “iii. Whether on the facts and in thecircumstances of the case and in law the orderof the ld. Tribunal disallowing the claim ofRs.14,50,060/- on account of discount allowedto the distributors is not without authority oflaw? iv. Whether on the facts and in the circumstanceof the case and in law the ld. Tribunal has noterred in upholding the order of ld. AO of makingaddition of Rs.6,05,385/- on account ofundervaluation of closing stock?” 3.Counsel for the appellant has taken us to the order ofAO and contended that the AO while considering the matter hasobserved as under:- “ It is observed that percentage of increase inthe tea sold during the financial year 2008-09has jumped slightly when compared to thepreceding three years. The assessee was askedto produce the stock register, as maintained byit. The assessee produced the computerizedstock register on 28.11.2011 and on perusal ofthe same, it is seen that the quantity of tea is inkilograms and the corresponding value of theincoming goods and outgoing goods has beenmentioned. Though variety of the tea purchaseshas been indicated in the stock register, nodetails in respect of blending and sale ofvariety/quantity wise tea has been given. In theabsence of the relevant details, the stock registeris neither reliable nor trustworthy. Further, on examination of the details filed,it is observed that out of total purchasesreflected at Rs. 25,33,66,919/- in the teaaccount; the assessee has purchased tea worthRs. 22,63,71,942/- from it sister concern’s M/sPawan Trading Company, which comprises ofalmost 90% of total purchases made during theyear. As per details of closing stock declared at121076.89 kg valuing Rs. 1,35,47,421.00 as on31.03.2009, it is observed that stock purchasedduring the period 16.03.2009 to 30.03.2009 fromM/s Pawan Trading Company, Kota has beengrossly undervalued, as compared to teapurchased from M/s Aditya Tea Company Jaipurand M/s R.C. Bajaj Tea Company, Jaipur. Whiletea purchased from M/s Pawan Trading Company,Kota during the said period ranges between105.57 and Rs. 125.90, tea was purchased fromM/s Aditya Tea Company, Jaipur on 28.03.229 @Rs. 133.20. Hence, neither the stock register northe valuation of closing stock as on 31.03.2009 isconsidered to be reliable. Average rate ofvaluation of closing stock of tea shown at121076.89 kg comes to Rs. 111.89 per kg. Thewhole of closing stock shown in the balance sheetis on account of purchases made between theperiod 16.03.2009 to 31.03.2009. Consideringthe aforesaid facts, valuation of closing stocks isreasonably and justifiably increased by Rs. 5 perkg on an average. This means that valuation ofclosing stocks shown at Rs. 1,35,32,081/- would increase by Rs. 6,05,385/-. Hence, an addition ofRs. 6,05,385/- is made on account of undervaluation of closing stock and added to theassessee’s total income, which also meets withthe decline in GP and NP rates in this financialyear, as discussed above. -”(Addition of Rs. 6,05,385/) and also disallowed the brokerage and while considering thematter the AO has added Rs.5/- per kg of the closing stock. 3.1 He further contended that CIT (A) while considering the Ground No.2, has observed as under:- 4.2 Ground # 2 “Under the facts circumstances of the casethe Ld. AO has also erred in making addition ofRs. 605385/- on account of under valuation ofclosing Stock. 4.21 Assessee’s submissions on Ground No. 2 The assessee vide letter dated 27.08.2012submitted as under:- “That the appellant company has maintainedregular books of accounts as well as completequantitative details in respect of goods dealt byit & the same were got audited as perrequirement of the Companies Act, 1956 & I.T.Act, 1956 & I.T.Act, 1961 2. That the Ld A.O. has made addition of Rs.605385/- by increasing closing stock of121076.89 Kgs Tea @ Rs. 5/- per Kg. He hasgiven following observation/reasons:- a) The per Kg rate of O. Stock, Purchases, Sales& Closing Stock of Tea is as under:- O. Stock Rs. 89.68 Per Kg Purchases Rs. 104.39 Per Kg Sales Rs. 128.06 Per Kg C. Stock Rs. 111.89 Per Kg b) The Gross Profit rate as well as Net Profit rateduring the year under appeal has declined considerably. The figures of comparative G.P. &N.P. rates are as under:- Financial Turnover G.P. Rate N.P. Rate c) The Stock Register although contained detailsof variety wise quantitative details of Teapurchase but no details in respect of blending &sale of variety/quantitative wise has been givenso the same is not reliable. d)Stock of Tea purchased during the period16/3/09 to 30/3/09 from M/s Pawan Trading Co.,Kota (a sister concern) has been grosslyundervalued as compared to tea purchased fromM/s Aditya Tea Co. Jaipur & M/s R.C. Bajaj TeaCo., Jaipur. The rate of Tea purchase from M/sPawan Trading Co. Kota ranges between Rs.105.57 & Rs. 125.90 per Kg & the rate of teapurchased from Aditya tea Co., Jaipur on28/3/09 is Rs. 133.20 per Kg. 3. The observation/reasons given by the Ld A.O.is not proper in view of following: a) That the company has valued closing stock ofTea at Cost price following FIFO methods as perpast practice. The Details of closing stockvaluation as filed before the Ld A.O. vide letterat 1/9/2011 in reply to point No. 9 of his queryletter enclosed. ( P.B. Page 16) From the details it reveals thatthe value of closing stock has been taken givingfull particulars of Names of Supplier, Bill No,Date & Amount of purchase made during16/3/09 to 30/3/09 which remained in closingstock on 31/3/09. The Ld A.O. has not pointedout any mistake in the details furnished forvaluation of closing stock. But has increased thevalue by increasing the same by Rs. 5/- onadhoc basis. b) The Ld. A.O. can not deviate from the systemof valuation of closing stock I,e, at cost price on FIFO basis which is being followed by theappellant since the inception. c) The average purchase rate of Tea for the yearis Rs. 104.39 per Kg whereas the average valueof closing stock comes to Rs. 111.89 so there isno basis for adhoc increase of closing stock rateby Rs. 5/- per Kg. b) The Ld. A.O. can not deviate from the systemof valuation of closing stock I,e, at cost price on FIFO basis which is being followed by theappellant since the inception. c) The average purchase rate of Tea for the yearis Rs. 104.39 per Kg whereas the average valueof closing stock comes to Rs. 111.89 so there isno basis for adhoc increase of closing stock rateby Rs. 5/- per Kg. d) The Ld A.O. has no basis for denying thereasons given for decline in G.P. rate which wasdue to sharp rise in the purchase cost withoutcorresponding increase in sates price due tocompetition in the market. The averagepurchase price of Tea during the year appeal isRs. 81.70 per Kg as compared to Rs. 74.60 perKg, Rs. 72.30 per Kg & Rs. 73.63 per Kg inFinancial year 2007-08, 2006-07 & 2005-06. e) The G.P. rate valuation has no relevance inappellant’s case as the company has maintainedcomplete quantitative details in respect ofpurchases, sales & Stock of tea & the purchases& Sales are fully supported by Bills. In view of above the addition of Rs. 605385/-treating under valuation of closing stock of tea isnot proper & justified.” 4.22 Discussion and the Appellate Decisionon Ground No. 2 The Assessing Officer made the additionobserving as under: “As per details filed during the course ofassessment proceedings, the assessee hasshown quantitative and value wise details of teapurchased and sold by it during the year underconsideration, as under:- Quantity (kg)Value (kg)Rate (per kg)Opening stock1154201,03,51,014/-89.68Purchase242703825,33,66,919/-104.39Sales242138131,01,04,798/-128.06Closing Stock1210771,35,47,521/-111.89 The assessee has also filed comparative chart ofgross profit and net profit for the year underconsideration for the preceding three years, asunder:- Financial TurnoverGross ProfitGross Profit% on Net profit% on SalesSales2008-0933,05,29,059/-5,37,58,618/-16.26%8.07%2007-0827,65,32,244/-6,30,87,705/-22.81%10.15%2006-0723,67,19,678/-5,42,26,846/-22.91%11.03%2005-0621,74,22,466/-4,52,54,654/-20.81%10.98% From the above chart, it is observed that thereis considerable decline in the GP rate as well asnet profit during the year under consideration.When asked to explain the reasons for decreasein the GP rate, the assessee vide its reply filedon 22.11.2011, submitted as under:-is considerable decline in the GP rate as well asnet profit during the year under consideration.When asked to explain the reasons for decreasein the GP rate, the assessee vide its reply filedon 22.11.2011, submitted as under:- “The decline in GP rate is mainly because of theunexpected rise in the cost of tea. Thecomparative figure for new previous years andfew future years are given hereunder for yourkind perusal:- Financial YearTea SalesCost of tea sold% of Sales2005-06207658472/-152889400/-73.63%2006-07227078065/-161473198/-72.63%2007-08258659042/-192959508/-74.60%2008-09310104798/-328645045/-81.38%2010-11457525886/-378464790/-82.72% It is observed that percentage of increase in thecost of the tea sold during the financial year2008-09 has jumped slightly when compared tothe preceding three years. The assessee wasasked to produce the stock register, asmaintained by it. The assessee produced thecomputerized stock register on 28.11.2011 andon perusal of the same, it is seen that the quantity of tea is in kilograms and thecorresponding value of the incoming goods andoutgoing goods has been mentioned. Thoughvariety of the tea purchases has been indicatedin the stock register, no details in respect ofblending and sale of variety/quantity wise teahas been given in the absence of the relevantdetails, the stock register is neither reliable nortrustworthy. It is observed that percentage of increase in thecost of the tea sold during the financial year2008-09 has jumped slightly when compared tothe preceding three years. The assessee wasasked to produce the stock register, asmaintained by it. The assessee produced thecomputerized stock register on 28.11.2011 andon perusal of the same, it is seen that the quantity of tea is in kilograms and thecorresponding value of the incoming goods andoutgoing goods has been mentioned. Thoughvariety of the tea purchases has been indicatedin the stock register, no details in respect ofblending and sale of variety/quantity wise teahas been given in the absence of the relevantdetails, the stock register is neither reliable nortrustworthy. Further, on examination of the details filed, it isobserved that out of total purchases reflected atRs. 25,33,66,919/- in the tea account; theassessee has purchased tea worth Rs.22,63,71,942/- from it sister concern’s M/sPawan Trading Company, which comprises ofalmost 90% of total purchases made during theyear. As per details of closing stock declared at121076.89kg valuing Rs. 1,35,47,421.00 as on31.03.2009, it is observed that stock purchasedduring the period 16.03.2009 to 30.03.2009from M/s Pawan Trading Company Jaipur andM/s R.C. Bajaj Tea Company, Jaipur. While teapurchased from M/s Pawan Trading Company,Kota during the said period ranges between105.57 and Rs. 125.90, tea was purchased fromM/s Aditya Tea Company, Jaipur on 28.03.2009@ Rs. 133.20. Hence, neither the stock registernor the valuation of closing stock as on31/03.2009 is considered to reliable. Averagerate of valuation of closing stock of tea shown at121076.89 kg comes to Rs. 111.89 per kg. Thewhole of closing stock shown in the balancesheet is on account of purchases made betweenthe period 16.03.2009 to 31.03.2009.Considering the aforesaid facts, valuation ofclosing stocks is reasonably and justifiablyincreased by Rs. 5 per kg on an average. Thismeans that valuation of closing stocks shown atRs. 1,3532,081/- would increase by Rs.6,05,385/-. Hence, an addition of Rs. 6,05,385/-is made on account of under valuation of closingstock and added to the assessee’s total income,which also meets with the decline in GP and NPrates in this financial year, as discussed above.” I have gone through Assessing Officer’s findingsand assessee’s submissions. The assessee has maintained complete details ofStock. The purchases from sister concern is alsoat lower rate. So no disallowance was justified. The Assessing Officer is therefore directed todelete addition of Rs.6,05,385/-. This ground of appeal is, therefore, allowed. and also contended that Tribunal has seriously committed error inreversing the view taken by AO, wherein it has been observed asunder:- “ 8.3 We have heard the rival contentions andperused the material available on record. In ourview the basis of offering the discount to thedistributors is to promote the sales during thefinancial year and in our view, has rightlycontended by the assessee the basis of givingthe brokerage to 3 persons as mentioned hereinabove in ground No.3 is also for the purpose ofprocuring the order from the retailers for supplyof goods. Thus, in fact, under both the heads thebrokerages as well as the discounts are beingpaid for the purpose of procuring theorders/boostering the sales. In our view, eitherthe brokerage should be allowed or the discountto the distributors should be allowed. Theassessee cannot be permitted to have thebenefit of brokerage as well as of the discountoffered to the distributors. Both the factorsoperate in the same field, and are over-lappingin nature. Therefore, we allow the ground of therevenue and set aside the order passed by ld.CIT(A). 4.He has relied upon the decision of Supreme Court in case of S.A. Builders Ltd. vs. Commissioner of Income Tax 4.He has relied upon the decision of Supreme Court in case of S.A. Builders Ltd. vs. Commissioner of Income Tax (Appeals) and another, [2007] 288 ITR 1 (SC), wherein it has been observed as under: 35. We agree with the view taken by the DelhiHigh Court in CIT v. Dalmia Cement (Bhart) Ltd.[2002]254ITR377(Delhi) that once it isestablished that there was nexus between theexpenditure and the purpose of the business(which need not necessarily be the business ofthe assessee itself),the Revenue cannot-justifiably claim to put itself in the armchair ofthe businessman or in the position of the boardof directors and assume the role to decide howmuch is reasonable expenditure having regard tothe circumstances of the case. No businessman can be compelled to maximize its profit. Theincome tax authorities must put themselves inthe shoes of the assessee and see how a prudentbusinessman would act. The authorities must notlook at the matter from their own view point butthat of a prudent businessman. As already statedabove, we have to see the transfer of theborrowed funds to a sister concern from the pointof view of commercial expediency and not fromthe point of view whether the amount wasadvanced for earning profits.” and judgment of Supreme Court in case of Commissioner ofIncome Tax vs. Excel Industries Ltd., [2013] 38taxmann.com 100 (SC), wherein it has been observed as under: 32. Thirdly, the real question concerning us isthe year in which the Assessee is required to paytax. There is no dispute that in the subsequentaccounting year, the Assessee did make importsand did derive benefits under the advancelicence and the duty entitlement pass book andpaid tax thereon. Therefore, it is not as if theRevenue has been deprived of any tax. We aretold that the rate of tax remained the same inthe present assessment year as well as in thesubsequent assessment year. Therefore, thedispute raised by the Revenue is entirelyacademic or at best may have a minor taxeffect. There was, therefore, no need for theRevenue to continue with this litigation when itwas quite clear that not only was it fruitless (onmerits) but also that it may not have addedanything much to the public coffers. and Karnataka High Court in case Commissioner of Income Tax vs. Pandavapura Sahakara Sakkare Karkhane Ltd., (1992)60 CCH 0752 KarHC, wherein it has been observed as under: “7. Thus it is clear that the change in the modeof valuation was a bona fide change and in fact,this change brought out the real income. 8. Mr. Raghavendra Rao contended that,between 1958-59 to 1977-78, stocks were beingvalued by applying the "average value" method and the change has actually resulted in alteringthe valuation of the stocks held during thoseyears and, therefore, the difference arrived at bythe assessee during the current assessment yearis actually a difference attributable to theprevious years and if so, the difference shouldbe spread over during these years since theassessee has been following the mercantilesystem of accounting. 13. In the instant case before us, on facts, theCommissioner (Appeals) and the AppellateTribunal found that the true picture of theassessee's income is depicted by the method ofa valuation now adopted by the assessee. Infact, this method of valuing the stock is moreappropriate than the "average method" followedearlier; the present system reflected, more truly,the worth of the stock held, because thevaluation is now directly based on the value ofthe particular stock held, denuding the value ofthe said stock, of the effect of the cost incurredregarding other goods not actually held in stock. 13. In the instant case before us, on facts, theCommissioner (Appeals) and the AppellateTribunal found that the true picture of theassessee's income is depicted by the method ofa valuation now adopted by the assessee. Infact, this method of valuing the stock is moreappropriate than the "average method" followedearlier; the present system reflected, more truly,the worth of the stock held, because thevaluation is now directly based on the value ofthe particular stock held, denuding the value ofthe said stock, of the effect of the cost incurredregarding other goods not actually held in stock. 14. Assuming that section 145 is attracted to thefacts of the case, under which the Income TaxOfficer has power to determine the true income,this power is subject to scrutiny by the appellateauthority who has found the method followed bythe assessee quite reasonable in thecircumstances. The Appellate Tribunal has givena definite finding that the new method has beenderived for the purpose of reflecting the correctincome. In other words, the ultimate fact-findingauthority has found the method adopted by theassessee as resulting in disclosing the truepicture of the assessee's profits and loss.” and contended that the closing stock is absolutely on the basis of FIFO (First In First Out) system adopted and that has beenrecognized by the Karnataka High Court. However, counsel fordepartment has strongly contended that stock purchased during theperiod 16.03.2009 to 30.03.2009 from M/s Pawan Trading Company,Kota has been grossly undervalued, as compared to tea purchasedfrom M/s Aditya Tea Company Jaipur and M/s R.C. Bajaj TeaCompany, Jaipur. While tea purchased from M/s Pawan TradingCompany, Kota during the said period ranges between 105.57 and Rs. 125.90, tea was purchased from M/s Aditya Tea Company, Jaipuron 28.03.229 @ Rs. 133.20. In that view of the matter the AO wasjustified and Tribunal has rightly allowed the appeal. 5.We have heard counsel for both the parties. 6.The first issue of commission and discount of Rs.5/- per kgwas disallowed and discount claimed was allowed to the distributor. 7.In our considered opinion, the amount paid for procuring thestock and for selling the stock, both are on different transaction. Inthat view of the matter, the observations made by the Tribunalhaving allowed discount by way of commission and brokeragetherefore, since brokerage was allowed discount cannot be rejected.In our considered opinion the observations made by Supreme Courtin case of S.A. Builders (supra), it is for the assessee to decide howto run the business admissible. 8. In that view of the matter, the first issue is required to beanswered in favour of the assessee and the second issue regardingincreasing of price of Rs.5/-, in our considered opinion the closingstock even if it has taken as under valued as alleged, it will beopening stock of the next year. Therefore, revenue is not going toloose. In view of the observations made by the Supreme Court incase of Excel Industries Ltd. In para 3.2 as quoted hereinabove, thesecond issue is also required to be answered in favour of theassessee. 9.The appeal is allowed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J.