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DY. CIT - 22(2) 4th Floor, Tower No. 6 Vashi Rly. Stn. Complex Vashi, Navi Mumbai Vs. M/s. Machine Fabrik B-1, Arjun Centre, B.S. Devshi Marg, Govandi Mumbai 400088
March, 03rd 2015
                           "B" Bench, Mumbai

                Before Shri D. Manmohan, Vice President
              and Shri Chandra Poojari, Accountant Member

                          ITA No. 240/Mum/2011
                         (Assessment Year: 2006-07)

        DY. CIT - 22(2)                M/s. Machine Fabrik
        4th Floor, Tower No. 6         B-1, Arjun Centre,
        Vashi Rly. Stn. Complex        B.S. Devshi Marg, Govandi
        Vashi, Navi Mumbai             Mumbai 400088
                            PAN - AAAFM7543C
                Appellant                      Respondent

                   Appellant by:     Shri Vivek Batra
                   Respondent by:    None

                   Date of Hearing:       02.03.2015
                   Date of Pronouncement: 02.03.2015


Per D. Manmohan, V.P.

     This is an appeal filed at the instance of the Revenue and it pertains to
A.Y. 2006-07.

2.    Facts necessary for disposal of the appeal are stated in brief. Assessee
is a partnership firm engaged in the business of manufacturing of
pharmaceutical machinery and hospital products. In the year under
consideration it declared total income of `70,29,348/-. During the course of
scrutiny proceedings the AO noticed that the assessee maintained day to
day record of raw material consumed and while valuing its work-in-progress
assessee was taking only raw material cost into account, i.e. without
accounting for the labour and other manufacturing expenses while valuing
the closing stock. When show caused, assessee submitted that it was
following this method since inception of its business; In view of this policy,
determining proportionate part of manufacturing expenses and adding them
to closing W.I.P., without giving corresponding effect in opening W.I.P., will
give wrong financial results.
                                          2               ITA No. 240/Mum/2011
                                                             M/s. Machine Fabrik

3.     The AO did not accept the contention of the assessee. He observed
that as per the normal accounting practice closing stock has to be valued at
cost and cost includes raw material as well as other direct manufacturing
expenses. Therefore, closing W.I.P. of the assessee should be valued after
including manufacturing expenses. He also observed that adjustments made
to closing stock should not affect the opening stock value in the light of the
following decisions: -

i.     Melmould Corporation 202 ITR 789 (Bom)
ii.    Mopeds India Ltd. 173 ITR 347 (AP)
iii.   Trivedi Engineering Works Ltd. 167 ITR 742 (All)

In short, the case of the AO is that mistake cannot be rectified by raising
valuation of opening stock.

4.     Aggrieved, assessee contended before the learned CIT(A) that it was
consistently following the practice of valuing closing work-in-progress by
taking into account only cost of raw material while excluding the direct
manufacturing expenses. If at all any adjustments were to be made to the
closing stock the same are required to be made in the opening stock of the
same year.

5.     The learned CIT(A) followed the latest decision of the Hon'ble Bombay
High Court (Mahalaxmi Glass Works P. Ltd. ­ Income Tax Appeal No. 192 of
2009) wherein the court observed that when the closing stock valuation is
altered without making single alternation to the opening stock, real profit
cannot be depicted and adjustments have to be made both to the opening
stock as well as closing stock. Respectfully following the decision of the
Hon'ble Bombay High Court (supra) the AO was directed to ask for details of
direct expenses for the purpose of inclusion in opening stock and to add
only the net effect of the two figures.

6.     Aggrieved, Revenue is in appeal before us. At the time of hearing the
learned D.R. mainly relied upon the judgement of the Hon'ble Bombay High
Court in the case of Melmould Corporation (supra) but did not place the
case law before us. Though, in the ground of appeal the Revenue submits
that the CIT(A) erred in relying on the judgment in the case of Mahalaxmi
                                      3                   ITA No. 240/Mum/2011
                                                             M/s. Machine Fabrik

Glass Works (P) Ltd. 318 ITR 116 (Bom) the learned D.R. did not bring the
judgement to show as to how the case law is distinguishable on facts vis-a-
vis the facts and circumstances of this case. In fact he has not disputed that
the assessee has been consistently following the method of not including
cost of labour and manufacturing expenses in the closing work-in-progress.
If the closing work-in-progress is altered, in the light of the decision of the
Hon'ble Bombay High Court in the case of Mahalaxmi Glass Works P. Ltd.,
the opening work-in-progress should also be suitably altered. Except
reading the grounds of appeal the learned D.R. has not assisted the Bench
in any manner to show that the case law is distinguishable and the cases
which were relied upon by the AO will hold the field.

7.    We have heard the learned D.R. and carefully perused the record. The
learned CIT(A), who is superior to the AO in rank, has taken into
consideration the latter decision of the Hon'ble Bombay High Court to hold
that whenever the closing-work-in-progress is altered the opening-work-in-
progress should also be altered. In such a scenario the onus is on the
appellant, i.e. Revenue, to show that the latest decision of the Hon'ble
Bombay High Court is distinguishable on facts. Since the learned D.R., in
his inimitable style, has not even placed before us the earlier decision of the
Hon'ble Bombay High Court and the subsequent decision to make out a
case that AO is correct, we have no other alternative but to hold that the
order passed by the learned CIT(A), which is in consonance with the decision
taken by the Hon'ble Bombay High Court, does not call for any interference.

8.    In the result, the appeal filed by the Revenue is dismissed.

Order pronounced in the open court on 22nd March, 2015.

               Sd/-                                      Sd/-
         (Chandra Poojari)                         (D. Manmohan)
        Accountant Member                           Vice President

Mumbai, Dated: 22nd March, 2015
                                       4                  ITA No. 240/Mum/2011
                                                             M/s. Machine Fabrik

Copy to:

   1.   The   Appellant
   2.   The   Respondent
   3.   The   CIT(A) ­ 33, Mumbai
   4.   The   CIT­ 22, Mumbai City
   5.   The   DR, "B" Bench, ITAT, Mumbai

                                                      By Order

//True Copy//
                                                   Assistant Registrar
                                           ITAT, Mumbai Benches, Mumbai
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