Income Tax Appellate Tribunal - Indore
Gei, Hamon Industries Ltd., Bhopal vs Assessee on 30 April, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
INDORE BENCH, INDORE
BEFORE SHRI JOGINDER SINGH, J.M. AND SHRI R.C.SHARMA, A.M.
PAN NO. : AABCG1403B
I.T.(SS).A.Nos. 34 to 40/Ind/2011
A.Ys. : 2001-02 to 2007-08
ACIT, M/s.GEI, Hamon
1(1), Industries Limited,
Bhopal. Bhopal.
vs
Appellant Respondent
PAN NO. : AABCG1403B
C.O.Nos.44 to 50/Ind/2011
(Arising out of I.T.(SS).A.Nos. 34 to 40/Ind/2011
A.Ys. : 2001-02 to 2007-08
M/s.GEI, Hamon ACIT,
Industries Limited, vs 1(1),
Bhopal. Bhopal.
Appellant Respondent
Department by : Shri Keshave Saxena, CIT DR
Respondent by : S/Shri H.P.Verma, Adv.,Vipin
Gupta and Shri Ashish Goyal,
CAs
Date of Hearing : 30.04.2012
Date of : 07.05.2012
pronouncement
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ORDER
PER R. C. SHARMA, A.M.
These are the appeals filed by the Revenue and cross objections filed by the assessee for the assessment years 2001- 02 to 2007-08.
2. Common grievance of the assessee and Revenue in all the years relate to part deletion of addition by the learned CIT(A) which was made by the Assessing Officer on account of difference worked out between generation of scrap and average rate of scrap sale.
3. The Revenue is also aggrieved for deletion of disallowance made by the Assessing Officer on account of salary paid to Irene Valentine u/s 40A(2)(b) of the Income-tax Act, 1961.
4. Facts in brief are that there was search at assessee's business premises on 15.11.2006. During course of search, the physical inventory was taken in respect of raw material, work in progress, finished goods and scrap. Valuation was carried out by the Departmental Valuer and addition was made on account of difference so worked out. The Assessing 2
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Officer rejected the books of account by invoking provisions of Section 145(3) on the plea that method of valuation of closing stock as adopted by the assessee was not within the accepted principle of account. The Assessing Officer also stated that the assessee was generating huge value of scrap out of manufacturing process, which were not properly reflected in the books of account. The Assessing Officer also observed that the assessee was engaged in sale of such scrap outside the books of account thus suppressed the actual profit. The Assessing Officer also stated that the assessee does not maintain the stock register to control over the position of the stock. Accordingly, the addition was made by the Assessing Officer in different years on account of difference worked out between generation of scrap and average rate of scrap sale. The Assessing Officer also disallowed salary paid to Irene Valentine by invoking provisions of Section 40A(2)(b) of the Act.
5. By the impugned order, the ld. CIT(A) held that the Assessing Officer, was not justified in invoking provisions of Section 145(3) in the case of the assessee. The ld. CIT(A) 3
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observed that in the assessment order, the Assessing Officer has not specified any material defects in the books of account of the assessee.
6. The ld. CIT(A) also deleted the part of the addition made by the Assessing Officer on account of scrap sales after having the detailed observations mentioned hereinbelow.
7. He further observed that findings /conclusions of the Assessing Officer are based on the valuation report of the Departmental Valuer without taking into consideration mis- classification and discrepancies therein as pointed out by the assessee. The detailed findings of the CIT(A) in this regard was as under :-
"I have carefully considered the submissions of the Ld. AO in this regard. I have also perused the observations and findings of the AO mentioned in the assessment order. After due consideration of the matter, I hold that on the facts and as per law, the AO was not justified in invoking the provisions of section 145 (3) of the I.T Act in the case of the appellant. I find from the assessment order that the 4
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AO has not specified or pointed out any material defect in the books of account of the appellant company. It is seen that the findings/ conclusions of the AO are based on the valuation report of Department Valuer without taking into consideration misc1assification and discrepancies therein as pointed out by the appellant. It is evident that as per system of accounting, the appellant maintains the stock of raw materials in the form of bin cards. There is no stock register maintained for work in progress and finished goods as the appellant manufactures equipments on specific order from customers. The raw materials are issued from stores only on the basis bills of materials initially drawn up as per the bid made. There is no specific finished goods in stock in the case of the appellant as once the equipments are ready, they are despatched. I find force in Ld. AR's submission that the records of materials purchased, consumed and stock in hand are 5
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maintained by the appellant by way of bin cards. As regards, the scrap material that is not usable in any particular work as mentioned in sheets of finished material, copper etc. I find that in the appellant's business, every material not usable left in that particular work cannot be termed as scrap as explained by the appellant that it may be usable in other operations. Any material can not be classified as scrap till it loses its utility in shape or size to be unfit for use in any work. I find force in ld. Authorized Representative's contentions that it is not possible to keep records of surplus/off cut material at one production workshop which is used in another workshop. I also find from the facts of the appellant's case that excise records are required to be maintained not only for raw materials purchased and finished goods sold but also for sale of scrap. The sale of scrap does attract sales tax and excise duty. It is also pertinent to note that the accounting policy of not accounting 6
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scrap at the year end but recognizing income at the time of scrap sale is being regularly foI1owed by the appellant since beginning and I do not find any reason to disturb the same as no infirmity or irregularity has been noticed by the AO during the assessment or during the search and seizure action. There is no material/ evidence with the Department to suggest that there has been any scrap sales outside books of account and not accounted for by the appellant. That the appellant Company is maintaining excise records, filing excise returns and these are subject to periodic checking and audit by the Central Excise Department. The notes to account forming part of audited financial statements as well as tax audit report give quantitative details of stock maintained by the appellant. The Income Tax law does not prescribe any maintenance of particular type of scrap records. I rely on the decision of the Hon'ble I T A T Chandigarh Bench in the case of Avon cycles 7
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Pvt. Ltd. Vs. IAC, 47 ITD 23 wherein it was held that it is practically impossible to maintain stock records for scrap generated. The Method of accounting followed by assessee in respect of earlier years has been consistently accepted by revenue. It was also observed by the Hon'ble ITAT that non-maintenance of stock record for scrap though a defect but it is impossible of execution. The scrap is generated almost daily and it depends upon several factors like the workmen's efficiency, the fatigue of the machines, the quality of the material used, the purpose for which it is used, the filings, cuttings, rejection, breakage, and several other factors. These factors can never be uniform. They vary from circumstance to circumstance, day to day and year to year. The sales of the scrap also depend upon the utility to the buyer. In a factory of the magnitude of the assessee, though theoretically it is possible "to expect a stock record for the scrap generated, on the practical side, it may not be 8
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possible to accurately maintain it. This aspect should not be missed and, therefore, should not have been insisted upon to verify the accuracy of the accounts. The previous practice followed regularly and consistently and in none of the previous years, any addition was made on account of sales of the scrap even though it was varying from year to year. The mere variation in the sales, therefore, cannot be a reason to suppose that a lower amount of sales is a result of manipulation of accounts.
The Hon'ble I T A T also observed that there is nothing that prohibits an assessee following mercantile system of account to have an exception about a particular item to have it bonafide and follow it regularly In this case, the fact that this system of accounting for the sale of scrap followed by the assessee was bonafide is borne out by the factum of its acceptance by the 9
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revenue in the earlier years. Therefore, there is no reason why it should be disturbed, when the assessee has given reasons which are cogent and acceptable.
On comparison of valuation of inventories as valued by the DVO and the appellant the following facts emerge :-
Particulars As per DVO As per Adopted by
appellant Assessing
Officer
Valuation of 1,65,60,565 4,58,40,223 4,58,40,223
Raw material
Valuation of 10,00,74,074 17,74,08,000 17,79,08,000
WIP
Valuation of 17,83,488 25,58,2000 25,58,2000
Finished
Goods
Valuation of 19,28,505 - Different
scrap values
computed by
Assessing
Officer in
each
assessment
year.
Valuation of - 29,39,000 29,39,000
stores
It is seen that valuation of inventory done by the DVO is much less than the valuation done by the 10
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appellant. Even the Assessing Officer, has accepted the appellant's valuation. Therefore, it is clear that the valuation report of DVO suffered from inconsistency, misclassification, defects and discrepancies and cannot be completely relied upon both in respect of quantity and values adopted for valuation. No inventory of copper or other bought out items have been included in the DVO's report. The Ld. AR in his detailed submissions has elaborately pointed out discrepancies, defects in the valuation done by the DVO. The Ld. AR has also in his submissions highlighted the discrepancy in adoption of valuation rates of various materials including scrap arbitrarily adopted by the DVO. It is also seen that during the scrutiny assessments in the past done in the case of the appellant, no defect in the books of account was found. It is seen that the AO himself has not adopted the valuation of items of inventory done by the DVO but invoked 11
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provisions of section 145(3) in the case of the appellant which under any circumstances cannot be justified. It is also seen that the Ld. AR has categorically rebutted the observations made by the DVO and accepted by the AO in making assessment particularly relating to scrap and maintenance of bin cards. I find that the appellant which is a public limited company has disclosed its accounting policies with respect to inventories in its annual audited accounts and the said valuation method is consistently followed. I find that the AO was not correct in computing ratio between value of consumption of raw materials and value of sale of scrap. I find force in the Ld. AR's contentions that there are various bought out items forming part of raw materials where there is no scrap generation as these purchased parts are straight away fitted into the equipments manufactured by the appellant. Moreover, the quantities of materials 12
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are weighed in kgs. Meters, numbers etc. but the same are taken compositely by the AO is erroneous. I find that the AO did not properly appreciate the business process of the appellant and drew incorrect conclusions. The AO made the addition on unaccounted scrap sale by adopting an arbitrary flat 1 % rate of scrap generation of the value of materials consumed as against scrap generation shown by the appellant at 0.41 % (Approx) in all these assessment years. I also hold that the sale price of scrap taken at Rs.40/- per kg. by the AO is not at all justified. It is seen from the sale of scrap declared by the appellant in all these years that the price ranged between Rs.5 to Rs.l8/- per kg. Even the DVO has valued the scrap at Rs.12 to Rs. 15/- per kg. I find force in the appellant's submissions that inventory of scrap taken and valued by the DVO at Rs.l9,28,505/- does contain part of raw materials and that the same has been taken and 13
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valued by the appellant in the valuation of raw materials. It is evident that during the search proceedings, no document or paper has been found by the AO to indicate any scrap sale outside the books by the appellant. It is also evident that addition made by the AO on account of unaccounted sale of scrap in the assessment order in all the assessment not only based on estimate but also without any corroborative evidence. Moreover, no addition has been made by the AO in the case of the appellant in earlier. However, on the facts and in the circumstances of the appellant's case, there is no denial that scrap is generated out of the manufacturing process which is sold by the appellant. The appellant has no doubt declared scrap sale in all the assessment years but looking at the totality of the picture, the Assessing Officer's observations, nature of the appellant's business, past history of the appellant and appellant 's submissions, in my opinion it would be fair and reasonable if following additions are sustained which would 14
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also meet the ends of justice in the appellant's case taking into account quantity of scrap generated and the rate at which the same is sold.
S. A.Y. Addition made Addition Relief
No. by the AO Sustained Allowed
1 2001-2002 6,95,402 75,000 6,20,402
2 2002-2003 7,54,602 75,000 6,79,602
3 2003-2004 4,67,970 50,000 4,17,970
4 2004-2005 10,00,041 1,00,000 9,00,041
5 2005-2006 12,37,334 1,00,000 11,37,334
6 2006-2007 20,05,652 1,25,000 18,80,652
7 2007-2008 24,78,660 1,25,000 23,53,660
Thus the above grounds of appeals are partly allowed. "
8. With regard to disallowance of salary paid to Irene Valentine, Director of the assessee company by invoking provisions of Section 40A(2)(b) of the Act, the ld. CIT(A) observed as under :-
"In the conclusion the AO has held that "It can logically be held that for the purposes of capital formation". The appellant on the other hand has contended that this conclusion deserves only to be ignored, as none of the reasons given by the AO for the disallowance are tenable as established above. The AO has not brought on record any evidence in support of his "claim" of the alleged capital formation. "
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9. After considering assessee's submission as given at page 34, the ld. CIT(A) deleted the disallowance made u/s 40A(2)(b) after having following observations :-
"I have gone through the observations and findings of the AO mentioned in the assessment order. I have also considered the submissions of the appellant. I find that on the facts and. in the circumstances of the case, the AO was not at all justified in making disallowance of salary payment to Ms. Irene Valentine during A.Ys. 2001-02 and 2002-03. I find that the appointment and remuneration fixation of Ms. Irene Valentine was made in annual general meeting of the appellant company which is a public limited company. The contention of the AO that salary has been paid to Ms. Irene Valentine for capital formation and inflating the expenditure in the company is devoid merit as she has been paid salary after deduction of TDS and the said income has been offered by her in the income tax returns filed alongwith other income at the same tax rate. I find force in the arguments made by the Ld. AR that the reasons given by the AO for making the disallowance are not tenable and correct. Ms. Irene Valentine is a qualified engineer with experience in business and total salary paid to her to the extent of Rs.9.50 lacs in two years commensurate with her qualification, experience and service provided to the appellant company. I find that salary has been 16
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paid only upto past of A. Y. 2002-03 and not thereafter. Therefore, disallowance of salary payments to Ms. Irene Valentine of Rs. 6,00,000/- and Rs. 3,50,000/- in A.Y. 2001-02 and 2002-03 respectively are not justified and therefore, deleted. This ground of appeal is decided in favour of the appellant. "
10. Against the above order of CIT(A), the Revenue is in appeal before us and the assessee has also filed cross objections for the additions retained by him on account of scrap sale.
11. Rival contentions have been considered and records perused. From the record, we found that assessee was engaged in manufacturing of tailor made heat exchangers and fined tubes there was search at business premises of the assessee on 15.11.2006. During the course of search, no incriminating documents were found. The Department has taken the stock lying at assessee's premises with respect to raw material, work in progress, finished goods and scrap. Departmental Valuer valued the stock and thereafter on estimate basis, the Assessing Officer made addition on 17
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account of difference worked out between generation of scrap and average rate of scrap sale by rejecting the books of account u/s 145(3) of the Income-tax Act, 1961. As the Revenue has not taken any ground with regard to the CIT(A)'s action for holding that the Assessing Officer was not justified in invoking the provisions of Section 145(3), the issue of non- application of Section 145(3) has become settled. The relevant question asked during the course of search and the respective reply given by the Director of the assessee are as under :
(a) During search, statements of Shri C.E.Fernandes, CMD and Shri S. C. Tiwari, Production-in-charge, were recorded. In response to question numbers 7,8, 11 &
12 Shri Fernandes stated as under :-
Q.7. Can you please state the various raw materials used, finished goods produced and scrap produced if any ?
Ans. Various raw materials used are steel plates and structurals, steel tubes, fin materials of aluminium and bought out components like motors, fans, vibration switches, belts and pullies etc. Finished 18
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goods produced are - Air cooled heat exchangers and air cooled steam condensers. We are generally buying raw materials to suit the required sized to ensure minimum scrap generation. Despite this purchase precaution, if scrap does get generated, there are possibility of usage in smaller companies. After all avenues of scrap utilization have been exhausted we sell the remaining scrap to the scrap-dealers. Q.8. Could you please quantify the scrap generated in a year ?
Ans. : It is not very significant but I will produce the statement tomorrow.
____________________________ ___________________________ Q.11. Can you please state at what rates scrap is sold out ?
Ans. Scrap varies from type to type. Heavy scrap rate is Rs. 11000/- to Rs. 12000/- per ton. 19
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Light scrap like turning and boring rate is Rs. 6000/- to Rs. 7000/- per ton.
Q.12. Please furnish the list of parties to whom you sell scrap ?
Ans. I will furnish the written list tomorrow.
Shri Tiwari stated in response to question no.10.
Q.10. Production dh process esa fdruk scrap generate gksrk gS ?
Ans : gekjh ges"kk dksf"k"k gksrh gS fd scrap de ls de generate gks otherwise our production will become non competitive, total material purchases accounting dk dkQh de fgLlk scrap esa ifjofrZr gksrk gSA Production esa Process (Steel fabrication) djhc 0.2 ls 0.5 rd dk scrap generation gksrk gS A
12. However, no addition was made by Assessing Officer on account of raw materials, semi finished or finished goods.
Only addition was made on account of scrap generated during course of manufacturing. In an appeal before the CIT(A), the 20
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CIT(A) found that no discrepancy was found in the books of account, therefore, the Assessing Officer was not justified in rejecting books of account. Thereafter, CIT(A) proceeded to decide the addition made by the Assessing Officer on account of scrap generation and its consequent sale. After giving detailed reasoning with regard to the quantum of scrap generated and the value for which it can be sold vis-à-vis valuation arrived at by the DVO, after recording detailed finding, as reproduced hereinabove, the ld. CIT(A) deleted the substantial part of the addition on account of scrap sale. From the record, we found that the assessee is engaged in business of manufacturing and fabrication of engineering items on the basis of specific orders from its customers. Variety of raw materials were used by the assessee. There are twenty types of material, which was used in manufacturing process, but all the items do not yield scrap. We found that Cupru Nickle tubes, Brass plates/tubes, S. S. Tubes/pipes, Impeller, Motors, Bearing, Belts and pully, Solder wire/sticks, Vibration switches, C. S. Seamless tubes, M. S. Gratings, Forge Flanges/plugs, Mother Hollow, M. S. Tubes, Hot rolled non 21
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alloy and other misc. items were in number and meters and used after cutting according to the required length/size, there is no generation of any scrap out of these sixteen types of raw materials. The scrap was generated only out of the raw material consisting of Copper wife, strips/rods, Aluminium strips/tubes, M. S. Plates/sheets/angles, B. Q. Plates, S. S. Plates and C. S. Plates.
13. We found that the Assessing Officer has wrongly taken scrap generation from all the 22 items by disregarding the fact that only six items out of 22 items were generating scraps. We found that out of total weight of 22 items at 33,64,406 kgs. items weighing 28,00,335 kgs. generated scrap. However, the Assessing Officer has taken randomly 1 % as scrap generation out of all the 22 items and determined scrap at 33,644 kgs. without any basis and after applying value of scrap sale at Rs. 40/- per kg.,he arrived at the value of estimated scrap at Rs. 33,45,760/-. We found that scrap generating items used in manufacturing was weighing 28,00,335 kgs. only and if we apply the estimates as made by the Assessing Officer, it shall have weight of 28,003 kgs. only. 22
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However, the assessee himself has shown weight of scrap generation at 46,478 kgs., which was sold for Rs. 6,50,358/- giving an average rate of Rs. 14/- per kg. We found that sales of the assessee was fully verifiable and no sales was found outside the books of account. Generation and sale of scrap was subject to Central Excise Control and there was no concealment of sale of scrap. Without any basis, the Assessing Officer has stated that there was huge generation of scrap. We found that whatever scrap was generated has duly been sold and the sale value has been incorporated as income in the manufacturing and trading account. The scrap mentioned in registers BH2 and BH3 included the unusable and waste scrap. On verification of valuer's report, we found so many discrepancies. Even the raw materials was valued by the DVO at Rs. 1,65,60,565/- as against the actual value of Rs. 4,58,40,223/-. Even during course of assessment, the Assessing Officer by disregarding the valuation arrived at by the DVO taken the value of raw materials as per assessee's record at Rs. 4,58,40,223/-. Similar is the position with regard to work in progress, which was value by the DVO at Rs. 23
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10,00,74,074/- in place of actual value as per assessee at Rs. 17,74,08,000/-. We also found that finished goods was value by the DVO at Rs. 17,83,488/- as against the actual value arrived at by the assessee at Rs. 25,82,000/-. Thus, it is clear that the valuation of the inventory done by the DVO was much less than the valuation done by the assessee . Even the Assessing Officer has accepted the assessee's valuation, which clearly show that DVO's report suffers from inconsistency, mis-classification and defects and discrepancies. Even during course of valuation and assessment proceedings, the assessee has highlighted discrepancies in adoption of valuation rates of various materials including scrap by the DVO, but the same was not taken care of. When no defect was pointed out in the books of account even during the course of scrutiny assessment and when the valuer's report was not accepted by the Assessing Officer, there was no reason for rejection of books of account u/s 145(3) and the CIT(A) has correctly observed that the Assessing Officer was not justified in rejecting the books of account u/s 145(3). Even with regard to the accounting policy, the assessee, which is a Public Limited 24
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Company has properly disclosed its accounting policy with respect to the inventories in its annual audited account and the said valuation method is consistently followed. After verifying all the documents, the ld. CIT(A) has recorded a finding to the effect that the Assessing Officer has not correctly computed ratio between the value of consumption of raw material and value of sale of scrap. Furthermore, since most of the part of the raw material were directly used as it is and having no scrap generation, the Assessing Officer was not justified in taking percentage of scrap of all types of raw material. Undisputedly, the assessee was engaged in manufacturing of order based equipment, where specific raw materials to be needed therein did not generate any wastage, the Assessing Officer was not justified in even taking scrap generation out of these raw materials, which were specifically pointed out by the assessee during the course of assessment also. We also found that sale price of the scrap ranges between Rs. 5/- to Rs. 18/- per kg. and even the DVO has valued the scrap at Rs. 12/- to Rs. 15/- per kg., whereas the Assessing Officer has taken the value of scrap at Rs. 40/- per kg, which 25
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was not at all justified. Even during the course of search, no documents or papers were found by the Assessing Officer to indicate that there was any scrap sale outside the books of account, whereas addition has been made by the Assessing Officer in all the assessment years under consideration on account of unaccounted sale of scrap, which is not only based on the estimate but also without any corroborative evidence. We also found that even in earlier years, during scrutiny assessment, no addition was made on account of such generation of scrap and sale outside books of account. It is not a case where assessee has denied generation of scrap out of its manufacturing process, but at the same time whatever scrap has been generated have been declared and sale value of which was also taken into account while computing its income. In all the assessment years under consideration, the assessee has declared scrap sale. From the record, we also found that periodically when the waste material accumulates, it is sorted out by the shop floor technical persons and segregated. If there is no possibility of using it that material is segregated and entered in the excise register after such 26
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segregation and then only it is sold to the scrap dealer. The price varies from item to item as well as material to material. There is a difference in selling price of stainless steel (SS) scrap, mild steel (MS) scrap, copper scrap, tube scrap etc.
14. From the record, we also found that the assessee has shown year-wise sales of scrap as under :-
A.Y. Scrap Value Percentage of value
Amount (Rs.) of actual sale of
scrap to the
consumption of raw
material
2001-02 6,50,358 0.41 %
2002-03 2,93,518 0.24 %
2003-04 6,03,150 0.27 %
2004-05 2,70,279 0.09%
2005-06 1,58,266 0.05 %
2006-07 1,36,388 0.04 %
2007-08 2,67,340 0.04 %
Average 0.163 % each year
15. By taking into consideration all these evidences on record and after giving detailed finding the CIT(A) has retained part of the addition on account of scrap sale to meet end of justice. The detailed finding recorded by the ld.CIT(A) has not been controverted by the Department by brining any positive material on record, accordingly, we do not find any reason to 27
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interfere in the finding and conclusion of the CIT(A), which is based on material placed on record.
16. In the result, the ground taken both by the Revenue and assessee with regard to addition made on account of scrap sale is dismissed.
17. With regard to disallowance of salary u/s 40A(2)(b), we found that the assessee is a Public Limited Company. The appointment and remuneration of Mrs. Irena Valentine was made in annual general meeting of the assessee company. Not only TDS has been deducted out of the payment of remuneration but the income has been offered by Mrs. Irena Valentine in her return of income. The Assessing Officer has disallowed the remuneration by invoking provisions of Section 40A(2)(b). As per provisions of Section 40A(2)(a), where the assessee incurs any expenditure in respect of which payment has been made to a person referred to in clause (b) of Section 40A(2) and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which payment is made or the legitimate needs of the business of the 28
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assessee or the benefits derived by him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. The onus is on the Revenue to show that payment so made are not as per legitimate needs of the business or the benefits derived from such payment, is not according to the services so rendered. In the instant case, the Assessing Officer has disallowed the payment by observing that services rendered by Mrs. Irene Valentine was not substantially proved alongwith the documentary evidence. Nowhere the Assessing Officer has stated that Mrs. Irene Valentine has not rendered any services, nor that the qualification and experience of Irene was not commensurate with the services provided to the assessee company. Had it been the case of Assessing Officer that no services were rendered, then the action of the Assessing Officer to disallow the entire payment to Mrs. Irene Valentine was justified. However, the Assessing Officer has just stated that assessee has not substantially proved alongwith the documentary evidence for the services so rendered. However, we also found that while deleting disallowance of 29
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remuneration, the ld. CIT(A) has categorically recorded a finding to the effect that Mrs. Irene Valentine is a qualified engineer and experience in business and salary paid to her was commensurate with qualification and the services provided to the assessee company. It means as per findings of the learned CIT(A), neither there was excessive payment nor unreasonable payment was made to Irena Valentine looking to her qualification, experience and services so provided to the assessee company. Keeping in to view these findings of CIT(A) vis-à-vis observation of the Assessing Officer, we direct to restrict disallowance of salary to the extent of 50% of the remuneration so paid to Mrs. Irene Valentine.
18. Now we shall take up the cross objection filed by the assessee in all the years pertaining to the addition retained by the learned CIT(A) on account of difference worked out between generation of scrap and average rate of scrap sales. We have discussed in detail while dealing with the revenue's appeal that the additions have been made by the AO on account of scrap generation. However, the AO has applied the estimated rate of scrap on all types of raw materials used out 30
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of which most were not generating any scrap. We find that out of the total 22 types of raw material being used by the assessee in their manufacturing process, only six items were generating scrap. We also find that the departmental Valuer has not properly valued the scrap by applying the rates at which the scrap was being sold and even accepted by the AO. The learned CIT(A), considering all the factual position with regard to the quantum of scrap generated and the value for which it can be sold vis-à-vis the valuation arrived at by the DVO, upheld the part addition made on account of scrap. After narrating the findings of the learned CIT(A) at pages 4 to 15 of this order, we find that the learned CIT(A) has very reasonably retained part of the addition on account of scrap generated and sold. Accordingly, we do not find any reason to interfere with the findings recorded by the learned CIT(A) in retaining the addition on account of scrap generation and its sales.
19. In the result, the cross appeals filed by the assessee in all the years under consideration are dismissed. 31
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20. In the result, the appeals of the Revenue are allowed in part, whereas all the cross objections filed by the assessee in all the years are dismissed.
This order has been pronounced in the open court on _7th May, 2012.
sd/- sd/-
(JOGINDER SINGH) ( R.C.SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated :_7th May, 2012.
CPU*
304.5
32