Income Tax Appellate Tribunal - Ahmedabad
M/S. P.Patel Ship Breaking Co.,, ... vs The Jt.Cit, Range-2,, Bhavnagar on 31 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "C" BENCH AHMEDABAD
BEFORE, SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER
AND SHRI S. S. GODARA, JUDICIAL MEMBER
ITA No. 2102/Ahd/2014
(Assessment Year: 2010-11)
M/s. P. Patel Ship Breaking Co.,
203/B, Leela Effce, Waghawadi
Road, Bhavnagar - 364001 Appellant
Vs.
The JCIT,
Range 2, Bhavnagar Respondent
&
ITA No. 2276/Ahd/2014
(Assessment Year: 2010-11)
ACIT,
Circl-2, Bhavnagar Appellant
Vs.
M/s. P. Patel Ship Breaking Co.,
203/B, Leela Effce, Waghawadi
Road, Bhavnagar - 364001 Respondent
PAN: AACFP5853A
आवेदक क ओर से/By Assessee : Shri T. P. Hemani, A.R.
राज व क ओर से/By Revenue : Shri Prasoon Kabra, Sr. D.R
सन
ु वाई क तार ख/Date of Hearing : 16.11.2017
घोषणा क तार ख/Date of
Pronouncement : 31.01.2018
ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.]
A.Y. 2010-11 -2-
ORDER
PER S. S. GODARA, JUDICIAL MEMBER
The assessee and Revenue have filed their instant cross appeals for assessment year 2010-2011 against the CIT(A)-XX, Ahmedabad's order dated 02.05.2014, in case no. CIT(A) -XX/47/13-14, in proceedings u/s. 143(3) of the Income Tax Act, 1961; in short "the Act".
Heard both sides. Case files perused.
2. We come to assessee's appeal ITA No.2102/Ahd/2014 suffering from 11 days delay in filing. The assessee has placed on record its Accountant's condonation affidavit dated 08.05.2017 solemnly averring therein that he could not pass on the lower appellate order to the arguing counsel due to inadvertence. Learned Departmental Representative is fair enough in not disputing correctness thereof during the course of hearing. We therefore condone the impugned delay of 11days in filing of assessee's appeal ITA No.2102/Ahd/2014. The same is now taken up for adjudication on merits.
3. The assessee appears to have pleaded three substantive grounds in its instant appeal inter alia challenging the CIT(A)'s order upholding Assessing Officer's action rejecting its books u/s.145 of the Act as well as partly affirming his assessment action making unaccounted machinery/DG sets/engine set of Rs.55lacs to the extent of Rs.10lacs on lump sum basis as well as in partly concurring with unaccounted oil sale of Rs.10,57,240/- to the extent of Rs.1lac only; respectively. The Revenue's appeal ITA No.2276/Ahd/2014 on the other hand raises only the latter two issues hereinabove in seeking to revive the original unaccounted addition figures of Rs.55lacs and Rs.10,57,240/- (supra); respectively in entirety.
4. We now advert to assessee's first grievance of rejection of books of accounts by lower authorities after invoking Section 145 of the Act. The assessee ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 -3- admittedly is engaged in ship breaking business. The Assessing Officer rejected its books after considering average purchase price of ships average production cost, average sale price, average purchase price etc. in assessment order dated 14.03.2013. He was inter alia of the view that he had not been maintain the books of accounts showing accurate consumption of raw materials, finished goods, remaining stock/shortage since it disclosed only the finished goods, it had not placed on record day to day consumption of raw material, shortage details had not been disclosed since the same was taken balancing figure only. It had merely estimated uncut ships etc. all these reasoning resulted in rejection of assessee's books u/s.145 of the Act.
5. The CIT(A) confirms Assessing Officer's action as follows:
"Decision:
4.3. I have considered the facts of the case and submission made by the appellant. The AO has invoked the provisions of Section 145(1) of I.T. Act by observing that the appellant has not maintained the accounts which may show the correct position of consumption of the raw material and production of finished goods. Further no details of the day-to-day consumption of the raw material and production of goods have been maintained. No day-to-day details of the shortage occurred in production has been maintained. Further, the production of the finished goods is only disclosed in the accounts when it was sold. The shortage is taken as balancing figure. The stock of remaining raw material i.e. un-cut ship piece is shown on estimate basis etc. 4.4. While the appellant has submitted that it is engaged in ship breaking industry whereby old and used vessels are cut into the plates/scrap etc. The old ships are purchased only for dismantling them. Ships are purchased on weight basis which was taken always at the time of the manufacturing and subsequently changes made therein. These records are maintained in the trim and stability book of the vessel. Though the ships are purchased on original weight basis but it is not possible to weigh the ships before or while taking the delivery thereof. After beaching of the ship those are dis-mantled in large chunks with the help of gas cutters. These chunks are then pulled towards the plot with the help of winch.
Later on these large chunks are dismantled into small pieces. Thus considering the complicacy of the trade, it is not possible to maintain records of the daily consumption of the raw material. Once the dismantling of the ship is started the recovery of the total weight can be ascertained only after the goods weighed and sold. Likewise, it is impossible to arrive at the daily shortages occurred in the manufacturing process because neither the chunks of broken ships could be weighed nor the production derived there from could be measured. Further, the goods are subject to the watch of the Central excise Authorities and VAT ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 -4- authorities of the state government also. It was also argued by the appellant that in the past the book results in the cases of ship breakers have never been disturbed for the reasons as attributed by the A.O. The ld. A.O. ought to have considered these factors in its right and true spirit considering the overall factors and circumstances affecting to the ship breaking activity.
4.5. It is true that considering the nature of the ship breaking industry it is difficult to maintain the day-to-day consumption and shortage records because of the volume and various coincidences in measuring the same. Even the purchases made at the specified weight of the ship is also un-measurable because of the practical difficulties. But at the same time, it is also not possible to check the veracity of the book results shown by the appellant. The shortages are also shown on estimate basis. There is no check or control over the consumption/production and shortage shown in the books of accounts. Thus, the possibilities for leakage of the revenue cannot be ruled out. Thus, the AO's action for rejecting the book results by invoking the provisions of Section 145(1) is correct and justified and the same is confirmed."
6. Heard both the parties. Case file perused. Learned counsel representing assessee seeks to quote various peculiarities in ship breaking business so as to challenge the impugned rejection of books of accounts. He also quotes case law CIT vs. Smt. Poonam Rai 326 ITR 223 (Delhi) as well as ITO vs. Mansi Prints Pvt. Ltd. ITA Nos. 498 & 872/Ahd/2009 for pleading that non maintenance of day to day stock register does not form a valid ground to rejection of books of accounts. His case therefore is that the assessee had not been maintaining all the relevant details. Mr. Hemani seeks to justify the fall in assessee's NP @ 2.65% in the relevant previous year from preceding assessment year NP rate of 5.8% involving corresponding sales figures of Rs.28,80,68,611/- & Rs.3,33,60,971/-; respectively. Learned counsel however fails to rebut both the lower authorities' multiple reasoning supporting rejection of assessee's books u/s.145 of the Act after quoting various shortages forming hallmark of ship breaking business. We therefore see no reason to accept assessee's instant substantive grievance that both the lower authorities have erred in law as well as on facts in rejecting its books. The assessee's instant first substantive ground is therefore declined.
7. We now proceed to unaccounted sales of machineries/DG sets, engines addition issue amounting to Rs.55lacs made in assessment order as restricted to Rs.10lacs only in course of the lower appellate proceedings as follows:
ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 -5-
"5.6. I have carefully considered the facts on record and the arguments of the Ld. AR. I find from the assessment records that the AO has annexed certain bills of other assessees' in the same line of business and these bills indicate that these assessees have in fact sold engines/DG set recovered from ships dismantled by them. On perusal of these bills, it is seen that there is absolutely no technical detail not even HP of any engine which is the most elementary technical character associated with these types of items are mentioned. These bills also do not indicate the name of ship from which the same have been recovered and sold; therefore there is no clue as to whether the ship from which it was recovered was a war-ship or a small fishing-trawler. Be that as it may, it certainly indicates that the engine / DG set are capable of being sold as such. This is further to be inferred from the fact that when the ship came for dismantling, it came on its own i.e. without being towed. It is therefore to be presumed that though the engine / DG set may be old, still they are in running condition.
5.7. The AR has, on his part, contended that it is generally not possible to sell engine of a broken ship as such and in such situation, the assessee has to dismantle the engine also and sell machinery parts. It is further stated by him that the AO has not dealt with the above issue in the light of detailed clarification given by the assessee at the time of hearing. The AR has vehemently argued that AO's belief of sale of the engines and D G Sets and further belief of unrecorded receipt of Rs.55,005000/- is not based upon any evidences.
5.8. I have considered the facts of the case and submission made by the appellant. The appellant has submitted that the AO failed to address himself about the peculiar nature of business in which it is difficult to maintain quantitative details in the desired manner. This is largely because of the fact that when a ship is purchased, its actual weight at the time of purchase is not at all either taken physically or otherwise correctly ascertainable, The Appellant has pointed out that it is the international standard practice to show the weight of the ship to be dismantled as the one as mentioned in the ship registry document and it refers to the actual weight when the ship was built, mostly 3 to 4 decades back. The ship registry papers show this weight and the ship breaker agrees to purchase such ship for dismantling and the figure of tonnage shown in such registered document is not actually relevant with the actual weight of the ship. It is a matter of common knowledge that during the operational life of 3 to 4 decades, there would be huge corrosion of the outer surface of the ship and therefore the actual weight of the ship, after such long period, would be less. The Appellant has pointed out that a detailed study was made by group of Metallurgical and Engineering Consultants formed by the Ferrous Scrap Committee of Ministry of Steels, Government of India. The report of the consultants known as "MECON Report" is available on the net. In Para 2.4 of the said report, range of shortage in respect of different types of ships coming for breaking is mentioned. The same is as under:
"Table 2.4: Percentage of items obtained on breaking different types of ships:
Sl. Type of vessel Weight Loss
No. (%)
1. General Cargo 9-15
ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 -6-
2. Bulk carriers 10-16
3. Ore carriers 10-15
4. Passenger ships 11-17
5. Oil Tankers 10-12
6. Ore Bulk Ore 10-13 Carriers
7. Naval Ships 15-22
8. Container Vessels 10-13
9. Fishing 12-18 Trawler/Fish Factory The values are approximate as the percentage varies with size of the ships. Of the weight loss shown above, it may be noted that the weight loss at yard is only 2-3%. The rest is the weight loss due to corrosion in 20-25 years of the ship's active life. "
5.9. The appellant has relied upon the decision of Hon'ble Mumbai IT AT 'H' Bench in ITA No.7522/Mumbai/2007 dtd, 7.8.2013 in the case of Aapee Ship Breakers Pvt. Ltd. Vs. CIT(A) Central XXVII and Dy.CIT, Circle-3(l) whereby the shortage came upto 15% was held to be reasonable. Likewise the Hon'ble IT AT Mumbai Bench in -the case of Goyal Traders, Mumbai Vs. AO in ITA No.4431/Mumbai/2010 and CO 63 of 2011 has observed that the shortage claim varies from 10% to 20% in ship breaking business. Similar view has also been taken by the Hon'ble IT AT Mumbai Bench in the case of Anupama Steel Ltd. in ITA No.2949/Mum/2004 dtd. 12.9.2007 and in the case of Hariyana Steel Co. in ITA No.l861/Mum/1998 dtd. 26.7.2004.
5.10. It has been submitted that as per the MOU for purchase of one vessel MV WINDSOR RUBY the vessel has 1150 permanent ballast which consisted of Pig Iron and Cement Concrete. The quantity of cement concrete was of 460 MT which was part of the total purchased tonnage. If the cement concrete weight is reduced from the shortage then the shortage would be worked out to 11.11% as compared to the shortage shown at 13.42%.
In view of the above discussion, considering the claim of shortage by the appellant is found reasonable as per the expert committee report (supra) and also in view the various decisions of the authorities cited above.
5.11. It is pertinent to note that the AO was initially of the view that the gross profit and net profit of the assessee was considerably lower as compared to earlier years. It has been noticed that the appellant has shown the G.P. rate of 5.95% on total sales of Rs.28,80,68,611/- in the year under consideration as against the G.P. rate of 24.18% on total sales of Rs.3,33,60,971/- in the immediately preceding year. Similarly the N.P. rate shown in the year under consideration was at 2.65% as against the N.P. rate of 5.82% in the immediately preceding year. So there was fall in the G.P. rate as well as in the N.P. rate in the year under consideration.
ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 -7- 5.12. The appellant submitted that there was substantial increase in the turnover during the year under consideration which was about 8.63 times as compared to the immediately preceding year.' The appellant further submitted in the assessment proceedings and also in the appellate proceedings that there was in total 1150 MT permanent ballast of which 460 MT was cement concrete. The cement concrete does not fetch a penny and huge amount of cost is involved in removing and disposing the same which has adversely impacted the G.P. and N.P. rates. It was further submitted that the G.P. rate in the ship breaking business has never been constant. The appellant has submitted that in the following cases the assessments u/s.143(3) of the I.T. Act have been completed by the AO although the G.P. rate and N.P. rate in each of the cases was widely varying for the A.Y. 2010-11 and also in the preceding years.
MADHAV STEEL
A.Y. 2008-09 2009-10 2010-11
G.P 27.54 5.61 4.07
N.P 37.63 6.74 2.80
Burning Loss 13.11 12.10 12.67
SACHDEVA STEEL PRODUCAT (SBD)
A.Y. 2008-09 2009-10 2010-11
G.P 8.10 1.20 7.90
N.P 4.48 0.20 5.31
Burning 5.03 5.58 12.07
Loss
SHIVSHIP BREAKING CO.
A.Y. 2008-09 2009-10 2010-11
G.P 82.39 LOSS LOSS
N.P 8.85 LOSS LOSS
Burning Loss
SHETH SHIP EREAKIG CORP
A.Y. 2008-09 2009-10 2010-11
G.P 6.21 6.58 14.44
N.P 27.64 0.97 3.48
Burning Loss 0.0 0.0 0.0
P.PATEL SHIP BREAKING CO.
A.Y. 2008-09 2009-10 2010-11
G.P No business 24.18 5.95
N.P 05.82 2.65
Burning Loss 9.00 13.42
ALANG SHIP BREAKING CORP.
A.Y. 2008-09 2009-10 2010-11
G.P No business 7.52 6.28
N.P 2.18 2.77
Burning Loss 9.00 12.11
MAHADEVSHIP BREAKING CO.
ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 -8-
A.Y. 2008-09 2009-10 2010-11
G.P No business 1.24 1.07
N.P 0.81 2.56
Burning Loss 9.25 10.00
It has been contended that there were some ship breakers who incurred heavy losses in the year under consideration and also in other cases the G.P. rate ranged between 1% to 14%.
5.13. Further, it was also observed that during the year under consideration the average purchase price of the ship was Rs.13,382/- per M.T. as against the average purchase price at Rs. 13,132/- in the immediately preceding year. Thus, there was increase in the average purchase price by Rs.250/- per M.T. which was about 1.90% of the purchase price. This single reason has reduced the gross profit by Rs.43,34,850/- for the total weight of 17339.399 MT.
5.14. Similarly the average sale price during the year under consideration was at Rs. 16,697/- per M.T. as against Rs. 19,916/- in the immediately preceding year. Thus, there was heavy fall in the average sale price of Rs.3,219/- per M.T. (Rs. 19,916/- (-) Rs. 16,697/-) which has resulted into the reduction of the total sale proceeds and thereby the gross profits by Rs.5,55,34,188/- on total sales of 17252.379 MT. Thus, the appellant's contention with regard to fall in G.P. rate and N.P. rate are found convincing.
5.15. It has been argued that the AO has made the addition of Rs.55 lakhs on account of sale of DG Sets Engine and other machineries but as per the details submitted it has already shown the sales thereof by scraping them totaling to Rs.58.72 lakhs. So, the appellant has shown more sale proceeds under various heads as what the A.O. has estimated on this account.
5.16. The appellant has relied upon certain case laws as below which are on unaccounted sale of various movables, cranes, generator sets, spare propeller which are similar in nature to the addition in the present case whereby the authorities have deleted the additions so made.
- In the case of ACIT(Inv.) Cir.2, Bhavanagar Vs. M/s.Malvi Ship Breaking Company, Bhavnagar in ITA No.91/RJT/1996 dtd. 24.1.2005 has observed as under.-
"20. With regard to sale of movables the Assessing Officer observed that the assessee firm has not shown any sales of movables and also not shown any closing stock under this head. The Assessing Officer accordingly raised a query. After having considered the assessee's reply the Assessing Officer held that in absence of item-wise verification of movables from miscellaneous sales declared by the assessee, the assessee must have sold the movable outside the books. He accordingly took the cost of movables sold outside the books at Rs.8,66,933/- that is as shown in the inventory made by the customs authorities and presuming GP of 20% worked out the sales of such movables at Rs.10,40,322/-. ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 -9-
21. By the impugned order, the CIT(A) deleted the addition by observing as under:
"There is no denying the fact that the items such as furniture and appliances have outlived their utility period. At the time of taking inventory, the items are valued as per their identity i.e. air- conditioner, washing machine, etc., and not as per their actual condition. Under the circumstances it is rightly pointed out by the AR that the valuation shown in the inventory cannot be an indicator to the amount to be realized on sales of these items. I ' am, therefore, in agreement with the decision taken in the above referred appellate order. Considering, therefore the totality of the facts, the Assessing Officer is directed to delete the addition. "
22. We have considered rival contentions and find from the records that the firm's business of ship breaking and its sales are mostly of iron and steel scraps. Only items found in fact and in good condition are sold in their own identity. It is practically impossible to co-relate the sales with reference to each entry in inventory e.g. sales are made of electrical goods, scrap of motors, scrap of machineries, scrap of engine parts, timber in lot also and therefore such items cannot be compared with entries in inventory, However, there are bills of sales of chain, electrical equipment, life boat, empty gas cylinder, steel bunker, air tanks, electric motors, films, engine parts, timber, TV, furniture, etc., which are included in inventories and the Assessing Officer has even not given credit for such sales recorded by the assessee.
23. The learned AR cited the decision of co-ordinate Bench in the case of M/s. Western Ship Breaking Corporation (supra) wherein under similar circumstances, deletion of addition was confirmed by the Tribunal with the following observation:
"We have considered the rival submissions of the parties, looking to the facts and circumstances of the case, we find that the CIT(A) has verified the sales made by the assessee during the year under consideration. The assessee has shown the major sales of goods as items shown in the inventory prepared by the Custom department. The assessee has also shown the sale of furniture, electrical goods, life boats etc. and Id.DR could not bring any evidence to show that the assessee has sold any goods outside the books of account".
24. In view of the above discussion, we do not find any reason to interfere in the order of the C1T(A) for deleting the addition of Rs.10,40,322/-."
- In the case of Aapee Ship Breakers Pvt. Ltd. Mumbia Vs. CIT(Central)-XXVII and DCIT, Cir.3(1) in ITA No.7522/Mumbai/2007 dtd. 7,8.2013 has observed as under:-
ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 - 10 -
" 3.2.Next ground of appeal is in respect of addition of suppressed sales of non ferrous metal of 124,743 MT, valued at Rs. 1,75,15,601@of Rs.L40lacs per MT.As per the AO, the assessee had shown sale of 97.987 MT non ferrous metal whereas as per he should have sold 192.73 MT. Assessee-company preferred an appeal before the FAA. After considering the assessment order along with the annexure-1 and annexure~2,he found that recovery and sale of the non ferrous metal was about 208 MT(1.3% of the LDT), that according to Government High Power Committee recovery has to be taken between the .5% to 1% of LDT, that Tribunal had taken .8% recovery as normal. Considering the above, he held that recovery and sale in the case under consideration was within the parameter generally accepted in the industry, that there was no material available on the record to show that appellant had diverted any part of the recovery of non ferrous metal outside the books of accounts. Finally, he directed the AO to delete the entire addition amounting to Rs. 1.75 Crores.
3.2.a.Before us, DR supported the order of the AO and AR relied upon the order of the FAA. We have heard the rival submissions and perused the material before us. We find that FAA has, while deciding the issue, taken into consideration the findings of High Power Committee on ship breaking industry established by Government of India as well as report of leading international surveyors. He has also considered the order of the Tribunal in the case of Haryana Steel Company (supra). We find that AO has not taken into consideration sale of 81.925 MT non ferrous metal which was sold by the assessee company and that finds place in Annexure- 2 prepared by the AO himself. We find that AO has not brought anything on record to prove that recovery of non ferrous metal by the assessee was more than shown in the books of accounts. Therefore, we are of the opinion that such a huge addition should have been made by the AO without bringing some positive evidence on record.
Upholding the order of the FAA, we decide ground no.3.1 against the AO.
3.3.Next ground of appeal is about sale of main engines amounting to Rs. 15 lacs. While finalising the order, AO has mentioned that the sale of the main engines of the ships; which were heavy machineries; had not been reflected at all by the assessee in its books of accounts. In the appellant proceedings, FAA found that assessee had sold the engines, that Annexure-2 of the assessment order and the description therein given by the AO proved the fact of sale of engines. He deleted the addition made by the AO.
3.3.a.We find that FAA has given categorical finding of fact about the sale of engines based on the annexure prepared by the AO himself. In these circumstances, in our opinion, there is no need to disturb the finding of the FAA.
Ground No. 3.2 is decided against the AO.
ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 - 11 -
3.4.Ground no.3.3. is about sale of Cranes amounting to Rs. 40 lacs. On page 7 of the assessment order, AO has mentioned that no sale of any Cranes had been reflected in the books of the assessee, though the it had received many Cranes in the ships. He estimated that assessee had 17 Cranes on the ships and made an addition of Rs.50 lacs on alleged sale of the Cranes. In the appellant proceedings FAA held that there was no basis for estimating the number of Cranes at 17, that after being used for 20-25 years in salty weather on sea it was not possible to realise/ recover substantial amount from sale of the Cranes, that Cranes had to be sold as scrap of Iron and Steel.
3.4.a.Before us, DR and the AR supported the orders of the AO and the FAA respectively. We find that while making the addition AO has estimated the number of cranes of 17 but has not given any basis for such estimation. He has not mentioned any basis for calculating the sale price of the Cranes at Rs. 40 lacs.
In these circumstances, upholding the order of the FAA we decide ground no. 3.3 against the AO.
- The Hon'ble IT AT, Rajkot Bench in the case of M/s Western Ship Breaking Corporation vs. ACIT in ITA No. 1741/Ahd/1997 and 2267/Ahd/1997 whereby the similar addition of Rs. 8 lakhs was reduced to Rs.50,0007-. The observation of Hon'ble ITAT at para 15 are reproduced below:
"We have considered the rival contentions, gone through the orders of authorities below and found from the record that the AO has not found any item being sold out of books of account. He has just assumed that these items are generally found at the ship, which was just based on estimation. Keeping in view the totality of the facts and circumstances of the case, we direct the AO to retain the addition of Rs.50,000/- in place of addition of Rs. 1.50 lakhs retained by the CIT(A)."
5.17. I have carefully considered the facts on record and the submissions of the assessee made before the AO as well as before me and I am not fully convinced with the same. While, on one hand, the sale bills appended with the assessment order do not contain any details, in the same way, the purported sale of spare parts from alleged dismantled ships by the appellant also does not contain any specific detail. In this background of what is discussed above, when engine / DG set of ship finally broken was in working condition, though may be very old, it does not make any commercial sense to dismantle such engine and sell the same by weight as scrap. The details furnished also do not indicate the nature of sale of important spare parts retrieved from alleged breaking of engine. In such circumstances, I am not fully inclined to accept the claim of the Ld. AR that the engines were also dismantled and sold as scrap. The sale price shown in the sale bills appended to the assessment order is not of any help because the name of ship from which it was retrieved is not even mentioned much less any technical details or at least the HP of such engine. The appellant has specifically failed to demonstrate from the books of accounts that in what manner the sale proceeds of the engines, D.G. Sets/other machineries either without cut or by cutting them in ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 - 12 -
pieces as scrap has been shown or lying in the closing stock. On totality of the facts and circumstances, I partly agree with the AO's observation but not with the estimate of sale proceeds as done by him which is without any basis at all and hence I confirm the lumpsum amount of Rs. 10,00,000/- which would take care of the possible leakage of revenue in respect of above items and meet the end of justice. I therefore sustain addition of Rs.10,00,000,/- on this account. Thus, the ground of the appellant is partly allowed."
8. Mr. Hemani vehemently argues that both the lower authorities have committed error in law as well as facts in making the impugned addition of unaccounted sale of machineries /DG sets and engines. He reiterates assessee's stand adopted throughout that the assessee had merely some non functional ship parts only.
9. His arguments fail to rebut the fact the relevant machinery parts in question were very much functional since the assessee had purchased the ships concerned containing very much functional engine part before being taken to the ship breaking yards on their own. We thus express our concurrence with learned CIT(A)'s detailed discussion as extracted hereinabove in principle. The assessee's corresponding arguments qua this former limb of its grievance are therefore rejected.
10. Now comes to equally important latter question as to whether the CIT(A) ought to have affirmed the impugned disallowance of Rs.55lacs in entirety or to the tune of lump sum figure of Rs.10lacs only. The Revenue's case is that it is entire disallowance amount which should have been confirmed in lower appellate proceedings whereas the assessee seeks to add only GP component therein. We find in this backdrop that a co-ordinate bench order in M/s. Madhav Steels vs JCIT ITA Nos. 1963 & 2274/Ahd/2014 has restricted an identical disallowance of unaccounted sales of machinery/engine sets to the extent of profit element embedded therein only than the entire amount. We accordingly support there from to reject Revenue's grievance in supporting Assessing Officer's action adding the entire sum of estimate sale price. Mr. Hemani highlights assessee's NP in the impugned assessment year @2.65% only. We find no substance in the instant appeal for the reason that profit element in account and unaccounted sales ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 - 13 -
figures may not be uniform on presumption basis. We therefore direct the Assessing Officer to compute the impugned addition by taking NP @4.5% qua the addition amount of Rs.55lacs. The assessee gets part relief in its second substantive ground.
11. This leaves us with the last common issue of unaccounted sales of oil addition of Rs.10,57,240/- made in course of assessment as affirmed to the extent of Rs.1lac only in CIT(A) detailed findings reading as under:
"6.3. I have considered the facts of the case and submission made by the appellant. I have considered the facts of the case and submission made by the appellant. This ground pertains to addition of Rs.l0,57,240/- on account of unaccounted sales of oil. The AO has discussed the relevant facts in the assessment order. The assessee's reply is also reproduced in the assessment order. It is the case of the assessee that prior to beaching of the ship for dismantling, an inspection of the same is carried out by the Customs officials in the high-seas where the ship is delivered and anchored. The quantity of oil can only be estimated as such oil is lying in tanks. There has to be some consumption of oil when the ship is brought from high sea to the plot for breaking .However, when the ship is in the process of dismantling, there is no guarantee that the assessee will get the same quantity of oil mainly because there was no actual weighment done by the customs officials while inspecting the ship. I also agree with the fact that there will be consumption of oil when finally the ship is brought from high seas to the plot for beaching and breaking. It has specifically pointed out by the appellant that during the year it has purchased three ships on different dates. First of all they had to obtained the survey report from the surveyor and thereafter the ship is beached according to the tide time. Further survey is carried out in the presence of Custom Authorities at outrage and anchorage which is about 12 K.M. away from beaching point. Ship is waiting for their beaching permission from custom authorities and subsequently beached according to the tide time schedule. Thus, the permission for beaching of vessel is followed after the survey report obtained. The appellant submitted that all the ships were beached with 5 to 7 days delay after the date of survey report. The date of survey and the permission for beaching the ship are as under:-
Sr. Name of vessel. Date of Survey Report Date of permission for No. beaching.
1 M.V. Durban star 21-05-2009 28-05-2009 2 M.V. Windsur 18-11-2009 22-11-2009 3 M.V. Icon 15-01-2009 20-01-2009 As per the technical report when ship is at anchorage it may consume fuel oil of between 2 to 6 Tons per day and considering the delay in beaching because of the wait of the beaching permission, it has consumed approximately 25 tone of the fuel oil for the delay of 5 to 7 days and the consumption of the 2 to 3 tons of oil ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 - 14 -
per day which is a genuine reason for shortage in the actual availability of oil on the ship. Further there was no adverse view on the output of the oil from the VAT department, as no discrepancy about such unaccounted sales as alleged by the A.O has been pointed out by them.
6.4. It has been contended by the appellant that the AO has proceeded on the assumption that actual quantity of oil in tank of vessels was as mentioned in the bunker report. While preparing the bunker report at the anchorage point, quantity of oil in tank is measured through a measuring rode by taking depth on estimated basis and there is always variation in quantity actually found. When the measurement is taken through measuring rode there is scope for variation in quantity of actual stock available in the bank. Besides while taking measurement by a measuring rode quantity of frozen waste at the bottom of the tanker is not being considered. Ships purchased by ship breakers are very old and always there remains substantial frozen waste at the bottom of tank. The quantity of oil and other items are being inventorised as soon as the ship reaches anchorage point for duty purpose. Ships remain at anchorage point waiting for permission for beaching. Thus it remains at the anchorage for four-five days depending on availability of a berth and other climatic condition at beaching point. It consumes oil during these days. Such consumption is dependent upon weight Weather etc. this aspect has not been appreciated by the A.O. at all. The AO has not considered loss due to leakages and spillage, which is inevitable in this line of business as the oil, is taken out from the tanker by installing temporary pipe fittings. The appellant is engaged in business of ship breaking and its attention is mainly on breaking of ship and sale of scrap obtained. Sale of oil and other items is not their main job. The AO has not pinpointed any unaccounted sale. He has totally disregarded the fact that at Alang ship breaking yard there is 24 hours Excise barrier and not a single item can be taken out from such barrier without a valid gate pass. Appellant's all sales are supported by bills and passes.
6.5. The appellant has relied upon various case laws briefly as under whereby the authorities have held that in such circumstances no addition of unaccounted sale of oil is warranted when there is nothing on record showing unaccounted sales and also considering the various reasons for the short fall in oil output from the ship.
- In the case of ACIT(Inv.) Cir.2, Bhavanagar Vs. M/s.Malvi Ship Breaking Company, Bhavnagar in ITA No.91/RJT/1996 dtd. 24.1.2005 has observed as under:-
"15. With regard to addition made on account of unrecorded sales of oil we find that the Assessing Officer has computed the oil available in the three ships purchased by the assessee during the year under consideration on the basis of bunker report. He has accordingly computed the total oil available in the ships at 149,673 Itrs. Since the assessee had shown sales of only 95,260 Itrs. Of oil, after discounting 20% of oil available for the purpose of anchoring and beaching, the Assessing Officer held that 43,530 Itrs. Was sold by the assessee outside the books. He accordingly calculated the value of 43,530 ltrs. Oil at Rs. 1,7,602/- and added the same to the income declared by the assessee. The assessee at the time of assessment proceedings had given detailed reply substantiating the actual ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 - 15 -
availability of oil in the ships and emphasizing the act that the figures arrived at by the Assessing Officer for availability of oil at the time of purchase of the ships in question was subject to various conditions and was therefore, not the actual figure of oil available in the ships purchased.
16. By the impugned order, the CIT(A) deleted the addition by observing that consumption rate of oil and frozen waste was reasonable and the Assessing Officer has no material for coming to the conclusion that the assessee has undertaken any sale without receding sale in its books of account.
17. We have considered rival contentions and find from the records that the addition was made by the Assessing Officer on certain assumptions which is not fully supported by facts and figures. The oil available in the three ships was 106,343 Itrs. And not 149,673 liters as computed by the Assessing officer. We also found that the basis of alleged consumption of oil adopted by the Assessing Officer between the date of anchorage and date of beaching is also not known. We also found that M V Kota Wangi and M V Don pertained at anchorage for 13 days and 9 days respectively. During these days the vessels must have consumed oil and thereafter, during the voyage from the point *of anchorage to the beaching point also oil must have been consumed. It was clarified to the Assessing officer that the bunker report was prepared on the date of anchoring. The said report never considers the frozen "waste at the bottom of the tanks. While making the addition, the AO has failed to appreciate the fact that substantial oil being consumed from the date of arrival of ship at anchorage to the date of beaching which depends upon various factors such as life of ship, type of engine/generator and weather, etc. Further depth of the frozen waste varies from ship to ship. Further, since the reading shown in the bunker report is always inclusive of the frozen waste, in reality the actual available oil is even less than -what is shown in the bunker report. As far as the consumption of oil during the anchorage is concerned, the same depends on BHP of the ship.
18. The learned AR has cited a decision of co-ordinate Bench in the case of in IT A No,4651/Ahd/1995 & 46521 AMI 199 6 M/s. Western Ship Breaking Corporation wherein under similar facts and circumstances the deletion of addition made by the CIT(A) was confirmed by the Tribunal after having the following observation:
"We have considered rival submissions of both the parties, looking to the facts and circumstances of the case, we find that the CIT(A) has relied upon the technical report regarding the consumption of oil. Before ship comes into the ship doc-yards, the same is cleared by the Custom Authorities. The maser of ship prepares the inventory of the ship including oil and there is no any exact formula how much oil was in the ship. Before the ships come to dock yards the oil consumes in large quantity. Therefore, on coming to the conclusion for excess oil, there is no exact formula. It is to be estimated only. In the instant case, the AO has not ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 - 16 -
pointed out any evidence to show that the assessee has sold any oil outside the ship. Therefore, we are of the view that the CIT(A) is justified in deleting the same and our interference is not required."
19. In view of the above, we do not find any reason to interfere with the order of the CIT(A) in deleting the impugned addition of Rs. 1,77,602/- made on account of oil. "
- In the case of Aapee Ship Breakers Pvt. Ltd. Mumbia Vs. CIT(Central)-XXVII and DCIT, Cir.3(1) in ITA No.7522/Mumbai/2007 dtd. 7,8.2013 has observed as under:-
"2.1 The first ground of appeal is about addition made on account of suppressed sale of oil. As per the AO from the bills of entry prepared by the custom authorities, the ships were having 301 MT oil and same was valued at Rs. 39,73,120/-.As per the AO no sale of oil was shown by the assessee. Therefore, he held that assessee has suppressed sale value of the oil and he added Rs. 43.7 lakhs to the income of the assessee, as stated earlier.
2.2. Assessee preferred an appeal before the First Appellate Authority(FAA).After considering the submissions of the assessee, he held that there an apparent mistake was committed by the AO while giving narration of the items sold, that while accounting for sale of oil (per barrel) AO mentioned the narration furniture instead of furnace oil, that oil was also required for operating equipments like cranes, that home consumption by the assessee in respect of oil could not be ignored, that assessee has sold 224 MT furnace oils, that details of sale of oil was available in the paper book, that details supplied by the assessee contained bill number, date of bill, parties' names, description of oil, quantity, unit and value of oil sold.
2.3. Before us, Departmental Representative (DR) relied upon the order of the AO. Authorised Representative submitted that the AO had committed mistake while passing the assessment order, that out of 301 MT oil, 224 MT oil was sold by the assessee and information about the sale of the oil was made available to the AO, that balance 76 MT oil was used by the assessee. He referred to page no. 22 to 24 of the paper book.
2.4. We have heard the rival submissions and perused the material before us. We find that while passing the order AO had not considered the details of oil sold, as pointed out by the FAA. Page no.1 of annexure-2 of the assessment order speaks about the item sold by the assessee company. We find that he has mentioned the sale of oil sold (in barrel),but in the narration he has mentioned furniture in place of furnace oil.FAA has verified the sale bills along with the details of purchasers and quantity of oil sold. In these circumstances, we are of the opinion that order of the FAA does not need any interference from our side.
ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 - 17 -
Ground No.1 is decided against the AO.
In the case of Goyal Traders Mumbai, the Hon'ble IT AT 'G' Bench of Mumbai in ITA No.4431/Mumbai and CO 63 of 2011 dtd. 15.2.2012 has observed as under:-
"The learned CIT(A), on the facts and circumstances of the case and in law, erred in deleting the addition of Rs. 10,35,095/- on sale of furnace and lubricant oils without appreciating the fact that the addition was made on the basis of authenticated documents like bill of entries etc. 4.1. The Assessing Officer discussed the issue vide Para 8 of the order and came to conclusion that the assessee could have sold lubricant oil and furnace oil outside the .books of account and made an addition of Rs.10,35,095/- calculated as per Para 8.4 of the order. It was submitted by the assessee before the CIT(A) that the above addition has been made without appreciating that whatever oil is recovered is sold and duly accounted for. Also the figures for grease, oil, thinner etc mentioned in the bill of entry are indicative-based upon the survey report determined on the tank calculation book available on the board and not physically verified. The ship breakers do not dispute such figures to avoid delay in beaching of the ship. The oil available includes various impurities accumulated over a period of time. The appellant is not in the trade of sale of oil and is only a scrap dealer. Customs duty levies it at international price of pure oil, whereas these are used or contaminated oil with impurities. The details show that grease is worth only Rs.21,463/- from 2 ships and nothing from the third ship. This grease if recovered is used in own process of cutting in machinery employed such as which, cranes or generator. Regarding lubricating oil, these are sold as lube oil and included in total sale of oil-copies of sale bills are duly entered. Regarding paint, thinol and chemicals-they are not recoverable and they either get destroyed in the dismantling process qr used for cleaning purposes. Thus, the above addition deserves to be deleted, in view of the decision of the Hon'ble IT AT 'H' Bench Mumbai in the case of M/s. Anupama Steel Ltd, A.Y. 1998-99.
4.2. After considering the assessee's submission, the CIT(A) deleted the addition by stating as under:-
4.2. I have considered the submission of the learned Counsel and it is seen that the above addition has been made on the basis of certain calculations taken from the bill of entries and as held by the Hon'ble ITAT 'H' Bench Mumbai in the case of M/s. Anupama Steel Ltd. A.Y. 1998-99 (ITA No.5136/Mum/2002, the same cannot be added back merely on the basis of the bill of entries as it cannot be presumed that sale has also been made at higher price. Thus, this addition of Rs. 10,35,095/- is hereby deleted. "
4.3. After considering the rival submissions, we are of the opinion that there is no need to disturb the findings of the CIT(A) as there is no basis for making the addition by the Assessing Officer and further the CIT(A) ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 - 18 -
followed the Coordinate Bench decision where similar issue was considered. Accordingly the ground is rejected. "
- In the case of M/s. Western Ship Breaking Corporation, Bhavnagar the Hon'ble ITAT, Rajkot Bench in ITA No.4651/Ahd/1995 vide order dtd. 01.09.2004 has made the observations as under:-
"We have considered rival submission of both the parties, looking to the facts and circumstances of the case, we find that the CIT(A) has relied upon the technical report regarding the consumption of oil. Before ship comes to the ship doc yards, the same is cleared by the Custom Authorities, The master of ship prepares the inventory of the ship including oil and there is no exact formula how much oil was in the ship. Before the ships come to dockyards the oil consumes in large quantity. Therefore, on coming to the conclusion for excess oil, there is no exact formula. It is to be estimated only. In the instance case, the AO has not pointed out any evidence to show that the assessee has sold any oil outside the ship. Therefore, we are of the view that the CIT(A) is justified in deleting the same and our interference is not required. "
Similarly addition made more or less on the same ground in the case of M/s Vijay Ship Breaking Corporation, Bhavnagar for A.Y. 1994-95 was deleted by Hon'ble CIT(A) has been upheld by Hon 'ble IT AT, 'A' Bench in ITA No. 258/RJT/1999 vide order dated 31.07.2009.
6.6 After careful consideration of the above facts, various decisions of the ITAT's briefly discussed above, and keeping in view the detailed submission of the Appellant, the AO's observation about the suppression of oil in production/output of fuel oil, MGO and Lubricant oil and consequently to arrive at the suppression of sales is not a reasonable view for various reasons discussed above. The type of the three ships, their year of manufacturing were different to each other and hence their consumption of oil during the period from the date of survey to the date of bleaching is obviously different. Thus the formula of consumption of oil of a particular ship cannot be applied to arrive at the consumption of oil of the another ships. It has been an undisputed fact that the quantity shown in ship records as per the survey report cannot be the actual quantity of the oil available in the ship. Further, there is sludge deposited in the bottom of the oil tank which could never been estimated and the same reduces the actual quantity of oil. So considering various factors, the actual availability of oil in the tank is impossible to be measured. Further, no evidences/ details in respect of any unaccounted sales of the oil by the appellant have been brought on record by the A.O. Merely having the suspicion of the sales out of books cannot be the basis for making the addition. But at the same time, the possibilities for leakage of revenue cannot be ruled out and therefore I confirm the estimated unrecorded sales of Rs.1 lakhs in lumpsum on ad-hoc basis for want of verification which would be sufficient. Thus, the ground of the appellant is partly allowed."
ITA Nos. 2102 & 2276/Ahd/2014 [M/s. P. Patel Ship Breaking Co.] A.Y. 2010-11 - 19 -
12. Heard rival submissions reiterating both parties' respective stands. The Assessing Officer admittedly made the impugned addition after holding that the assessee had sold oil in ship's engines after they were taken to its ship breaking yard. We find at this stage that neither the assessee has discharged its onus that none of the ships concerned had oil in its fuel tank nor Revenue has proved the exact quantity thereof since the Assessing Officer chose to make the impugned addition on estimation basis. We accordingly see no reason to interfere with learned CIT(A)'s conclusion restricting the impugned addition to a lump sum amount of Rs.1lac only. Both assessee's as well as Revenue's substantive ground(s) fail accordingly.
13. We quote our above detailed discussion to partly accept assessee's appeal ITA No.2102/Ahd/2014. The Revenue's cross appeal ITA No.2276/Ahd/2014 is dismissed.
[Pronounced in the open Court on this the 31st day of January, 2018.] Sd/- Sd/-
(N. K. BILLAIYA) (S. S. GODARA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad: Dated 31/01/2018
True Copy
S.K.SINHA
आदे श क त ल
प अ े
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1. राज व / Revenue
2. आवेदक / Assessee
3. संबं धत आयकर आयु!त / Concerned CIT
4. आयकर आयु!त- अपील / CIT (A)
5. )वभागीय ,-त-न ध, आयकर अपील य अ धकरण, अहमदाबाद /
DR, ITAT, Ahmedabad
6. गाड3 फाइल / Guard file.
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आयकर अपील य अ धकरण, अहमदाबाद ।