Income Tax Appellate Tribunal - Ahmedabad
National Lamination Industries,, ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL,
AHMEDABAD "A" BENCH,
BEFORE SHRI BHAVNESH SAINI, J.M.
AND SHRI A. N. PAHUJA, A.M.
ITA No.129/AHD/2009
A. Y.:2005-06
M/s. National Lamination V/s The A. C. I. T, Vapi Circle
Industries, Plot No.H/1-2 & Aayakar Bhavan,
G-3, Mahatma Gandhi Valsad
Industrial Estate, Dabhel,
Daman
PA No. AACFN 4402D
(Appellant) (Respondent)
ITA No. 16 /AHD/2009
A.Y.:2005-06
V/s M/s. National Lamination
The A. C. I. T, Vapi Circle Industries, Plot No.H/1-2
Aayakar Bhavan, & G-3, Mahatma Gandhi
Valsad Industrial Estate, Dabhel,
Daman
PA No. AACFN 4402D
(Appellant) (Respondent)
For Assessee: Shri Keshav Prasad and Smt. P. Bansal, AR
For Department: Shri Rajeev Agrawal, DR
ORDER
PER SHRI BHAVNESH SAINI, J.M.: These cross appeals by
assessee and the Revenue are directed against order of learned Commissioner of Income Tax (Appeals), Valsad dated 22nd October, 2008 for assessment year 2005-06.
22. We have heard learned Representatives of both the parties, perused the findings of authorities below and considered the material available on record.
ITA No.129/Ahd/2009 (Assessee's appeal)3. Ground Nos. 1 and 2 of the appeal of the assessee reads as under:
"1. The learned CIT (A) has grossly erred in law and on facts in confirming action of the A O in disallowing Rs.19,80,500/- claimed as bad debts written off. Both the lower authorities have not appreciated the fact that the appellant has written off the amount after making extensive efforts to recover the same and ultimately realizing that no further recovery could be made from the purchasers. Under the facts and the circumstances of the case, ld. CIT (A) ought to have allowed the claim of the bad debts made that was written off in the books of the accounts as irrecoverable.
2. The learned CIT (A) has erred in not adjudicating the alternate claim of the appellant to allow the sum of Rs.19,80,500/- as business loss u/s 28 of the Act since the same has arisen in the due course of business activity carried out by the appellant. Ld. CIT (A) ought to have alternatively allowed the amount written off as a business loss."
4. The assessee has claimed bad debts of Rs.19,80,500/- in respect of two customers namely Telsa Transformers Ltd. and V.T. Switchgears. The claim of the assessee has however, been rejected by the Assessing Officer on the reasons that (1) the sale on which the debt is claimed was booked in earlier years i.e. in Assessment Year 2000-01 and 2002-03 wherein the assessee was entitled for deduction u/s 80 IB @100% on profit & gains of industrial undertaking and no tax was paid on profit element of such sale, (2) the year under consideration is the 6th year of the operation of the undertaking and hence the assessee is eligible for deduction u/s 80 IB @25%. The assessee could have claimed the bad debts in earlier years rather waiting till 6th year form which it is eligible for deduction 3 u/s 80IB of the Act and (3) the profit on the sale (which has been claimed as bad debts during the year) has claimed as exempt u/s 80 IB in the years in which the sales were booked i.e. in the Assessment Year 2000-01 and 2002-03. Hence allowance of deduction of amount of bad debts on the same sales during the year would amount to double deduction. The addition was challenged before learned CIT (A) and it was briefly submitted that A O has accepted the claim of bad debts in principle but claim was not allowed that it should be made in the earlier assessment year and not in the 6th year i.e. the year under appeal and that since assessee claimed exemption u/s 80 IB of the IT Act, therefore, it would amount to double deduction. It was further claimed that in respect of Tesla Transformers Ltd., assessee made sales during September 2002 to June 2003 amounting to Rs.11,81,050/- in the Assessment Year 2003-04 and 2004-05. The buyer disputed the quality of the goods supplied to them stating that losses were too much. The assessee made efforts to convince the buyer for release of the payment but assessee could not succeed. Since the assessee was no longer able to recover the due amount, the assessee decided to write off the outstanding amount in the name of the above buyer as bad debts. In the case of V. T. Switchgears, the assessee made sales in the Assessment Year 2000-01 amounting to Rs.32,48,696/-. The assessee was able to recover the part amount but as on 31st March 2003 there was outstanding balance of Rs.10,00,000/-. Despite best efforts by the assessee, the assessee could not recover the remaining amount. The balance amount was therefore, written off as bad debts in the Assessment Year under appeal. It was explained that the amount was not written off in the books of account in earlier years because assessee was making efforts for recovery of the outstanding amount. When the assessee practically failed in its efforts and it was finally realised that assessee will no longer be able to recover the outstanding amount from the buyer, the assessee written off the 4 amount as irrecoverable in the accounts of the assessee in the Assessment Year under appeal. The assessee is, therefore, entitled for deduction on account of bad debts. It was also explained that bad debts would not be double deduction because deduction u/s 80 IB is allowed for setting up the unit in backward area and deduction of bad debt is allowable u/s 36 (1) (vii) of the IT Act and the conditions of the same are materially different. Since the conditions of section 36(1)
(vii) are satisfied in the case of the assessee, therefore, assessee is entitled for deduction. In alternate contention it was claimed as business loss. The assessee relied upon decision of ITAT Mumbai Special Bench in the case of DCIT Vs Oman International Bank SAOG 100 ITD 285 (SB) in which it was held that "Now coming to the expression "bad debt" in section 36(1) (vii), it may be pointed out that strict proof of establishing the debt to have become bad is necessary if we were to look to the plain meaning of the term "bad debt". According to Chambers 20th Century Dictionary "a bad debt" means a debt that cannot be recovered. According to Mitra's Legal & Commercial Dictionary a debt becomes bad when the creditor has no reasonable change of recovering it from the debtor. In The Law Lexicon, the definition is that a debt that is not reasonably collected, a debt about which there is no reasonable expectation of recovery, a debt believed to be unrecoverable. It is within the personal knowledge of the businessman whether a debt has become bad or not. His decision as long as it is bona fide cannot be disputed by demanding from him a demonstrative proof to establish that the debt has actually become bad. The write off of a bad debt, according to us, is a prima facie evidence, on the part of the assessee with whom the information rests, and is a sufficient requirement of the amended provision". It was further submitted that no prudent businessman would manufacture and sell the goods with an intention to claim deduction of bad debt. It should be 5 accepted that action of the writing off dues recoverable from a buyer will be the last step and the last option. Therefore, it should be allowed as deduction in the year in which the bad debt is written off. The learned CIT (A) however, did not accept the claim of the assessee and dismissed the appeal of the assessee. His findings in Para 92 are reproduced as under"
"92. I have perused the findings of the assessing officer and the submission made before me by the appellant. The appellants, by making elaborate submissions, have tried to justify their claim for bad debts written off and have, inter alia, stressed on the fact that the Assessing Officer, in principle has accepted their claim for bad debts.
92.1 In this connection, after considering the facts of the case and the submissions made by the appellants, I find that the entire efforts of the appellants are misdirected. The issue raised in the Assessing Order was not whether the claim for bad debts are admissible, u/s 36 of the Act. The issue for consideration was whether the appellants were justified in writing off the bad debts in the particular Assessment Year under consideration. Therefore, the appellants' arguments on the acceptance of their claim for bad debts in principle are devoid of any merits.
92.3 I find that nowhere the appellants have disputed that the bad debts actually pertains to the earlier assessment years. When the bad debts were pertaining to the earlier assessment years, I fail to understand as to how an assessee can claim the deduction of the same in a year as convenient to them, without any proper justification. The appellants have tried to justify writing off the bad debts in the Assessment Year under consideration, submitting that in the said year they finally arrived at the conclusion that they will not be able to recover the amount from their buyers. However, I find that except mere statements made by them, they have not adduced any evidences in support of their claim that in the particular Assessment Year they realized that they will no longer be able to recover the said amount from their buyers.
92.4 Therefore, I do not find any reason to interfere with the findings of the Assessing Officer in this regard, holding that the appellants" ought to have written off the bad debts in the earlier Assessment Years and claimed deduction and claiming of 6 deduction in this particular year is not justified. This ground of appeal is accordingly dismissed."
5. The learned Counsel for the assessee reiterated the same submissions made before the authorities and referred to account/ledger of both the parties, copies of the same are filed at PB 87 to 90. He has submitted that when the assessee written off the amount irrecoverable in the accounts as per section 36(1) (vii) of the IT Act, the deduction should be allowed accordingly. On the other hand, learned Departmental Representative relied upon the orders of authorities below.
6. We have considered the rival submissions and material available on record. Section 36(1) (vii) of the IT Act provides that the deduction provided in this clause shall be allowed in respect of the matters dealt with therein in computing the income referred to in section 28 - subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year. Hon'ble Supreme Court in the recent decision in the case of T. R. F. Ltd. Vs CIT, Civil Appeal NO.5293/2003 dated 9-02-2010 considering the above provisions has held "This position in law is well-settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from Sundry Debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts 7 of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above- mentioned aspect only and that too only to the extent of the write off."
6.1 Considering the facts and circumstances of the case as noted above in the light of the above provisions and the decision of the Special Bench of the Tribunal and the Hon'ble Supreme Court (supra), it is clear that the assessee made claim of deduction in accordance with provisions of section 36(1) (vii) of the IT Act. It is not in dispute that the assessee has written off the amount of bad debt as irrecoverable in the accounts of the assessee for the previous year. The orders of the authorities below thus cannot be sustained in law. We may also note here that the provisions of section 36(1) (vii) of the IT Act would not be dependent on deduction ultimately allowed u/s 80 IB of the IT Act. The business profit shall have to be computed as per the books of accounts of the assessee. The bad debt is to be taken into consideration while preparing the book result of the assessee by notifying the same in the profit & loss account. The deduction u/s 80 IB of the IT Act would be considered on the income of the assessee as per profit & loss account. Therefore, if the deduction is allowed u/s 36(1) (vii) of the IT Act, it would not amount to double deduction as observed by the authorities below. Since the assessee was making efforts for recovery of the outstanding amount after the sales made to the buyer and the bad debt is written off as irrecoverable in the Assessment Year under appeal, no fault would be found with the method adopted by the assessee. In view of the above discussions, we do not find any justification to sustain the orders of the authorities below. We accordingly set aside the orders of authorities below and delete the entire addition. As a result, these grounds of appeal of the assessee are allowed.
87. Ground No.3 of the appeal of the assessee reads as under:
"3. The learned CIT (A) has erred in law and on facts of the case in confirming addition of Rs.9,20,02,495/- made by the A O on account of understating of Closing Stock . Ld. CIT (A) has further erred in confirming the addition without independently evaluating and appreciating the issue and confirming the view taken by A O. Both the lower authorities have not fully appreciated the documentary evidence in respect of quantitative details, various submissions and explanations forwarded by the appellant. The Ld. CIT (A) ought to have deleted the addition made by A O and accepted the valuation of raw materials in closing stock as worked out by the appellant."
8. The assessee submitted before the learned CIT (A) that the Assessing Officer has wrongly made an addition of Rs.9,02,02,495/- on account of understating of closing stock value. It is their submission that the figures of the quantity reproduced by the Assessing Officer, on page No.17 of the assessment order, are not correct. The quantity reproduced by the Assessing Officer and the actual quantity as per audit report are as under.
Raw Material Quantity (in kgs.) as Actual as per audit
reproduced in A. O. report
Opening stock 2,60,630 2,60,630
Purchases 1,33,95,408 89,48,532
Consumption 1,33,57,408 89,10,532
Closing stock 2,98,630 2,98,630
Finished goods
(including scrap)
Opening stock 41,66,246 41,86,246
Purchase of finished NIL NIL
goods 1,33,57,408 89,10,532
Mfg. during the year 90,45,952 90,45,952
Sales during the year 3,80,002
Shortage 4,02,657 36,70,824
Closing stock
Bifurcation as per
audit report
A) Finished Not taken note of 39,494
Goods Not taken note of 36,31,330
9
B) Scrap ___________
36,70,824
===========
Total of A & B
The assessee submitted that from the above comparative figures of the quantitative details, it is clear that the Assessing Officer has erred while taking into consideration the figures of stock, purchase, and production, therefore, the conclusion reached based on the same is miss-leading, factually wrong and erroneous. The Assessing Officer has stated that the assessee has undervalued the closing stock as on 31.3.2005 by 1,166,952 M. Tons and applying the valuation rate of raw material as valued by the assessee as on 31-02-2005 of Rs.78,840 per M.T. the Assessing Officer has made an addition of Rs.9,20,02,495/-. The assessee submitted that the above quantity of 1166.952 M. T. is arrived by the Assessing Officer as under:
Quantity as per A. O. Goods purchased/received in the month of March 2005 1498.695 Goods sent for processing before 01.03.2005 147.420 And received in March 2005 after reprocessing ---------------
1646.115 Less: Finished goods produced & scrap Generated in March 2005.
Finished goods 363.279
387.904 751.183
894.932
Add: Goods sent for processing & lying with
Third Party for job work and received
After 31.03.2005 570.380
------------
Total M. T. 1465.312
Less: Closing stock of raw material as on
31.03.2005 298.360
10
Understated closing stock of raw material
As per A. O. MTS 1166.952
=======
In this regard the assessee submitted that the quantity of raw material received in the month of March 2005 as derived by the Assessing Officer is 1498.695 M. T. The bifurcation of above quantity is as under:-
Actual purchases for March 2005 994.620
(as submitted by the assessee to A O)
Purchase of February 2005 claimed for
Modvat in excise record in March 2005 504.075
------------
Goods taken as purchased/received
In March 2005 by the A. O. 1498.695
=======
The actual quantity received in February, 2005 297.035
A) Copy of L. R. is enclosed
B) The modvat on the same, however is
Claimed in March 2005 207.040
------------
Total M. T. 504.075
======
Thus, it is submitted by the assessee that out of total quantity of 504.075 M.T., 297.035 M. T. of raw material was actually received and available for production in the month of February 2005 and not in March as erroneously assumed and worked out by the Assessing Officer. The balance quantity of 207.040 M. T. of raw material though received in March 2005 and available for production in March 2005 does not any way affect the quantity produced in February and March 2005 of the goods actually sold in February and March 2005.
The assessee attached a statement showing actual raw material received, quantity produced, actual goods sold and closing sock of the month of February and March 2005. The assessee submitted that their central excise records were not available with the assessee, 11 since the same were lying with the Central Excise Department. However, when the month wise quantitative details prepared on the basis of book records maintained by the assessee, the quantity of 207.040 M. T. purchased in February 2005 was shown as produced and lying as closing stock of finished goods in February 2005 since the excise records were not available at the time of furnishing the month wise quantitative details to the Assessing Officer. Subsequently, on the insistence of the Assessing Officer, the assessee procured Xerox copies of the excise records from the Excise Department and submitted the same to the Assessing Officer in the last week of December, 2007. However, as it appears since the time available with the Assessing Officer was short, he did not call for further clarification and proceeded further with passing of the order with factually wrong figures, without giving any opportunity to the assessee to clarify the actual position with reference to the figures arrived by him. Since the Assessing Officer did not call for further clarification as the case was time bared, such anomalies remained. Therefore, it was submitted by the assessee that in the light of the submissions made above, the quantity of 504.075 M.T. is not liable to be considered for understatement of closing sock as on 31.03.2005. As far as the observations made by the Assessing Officer regarding the balance quantity of 570.380 M. T. of goods sent for processing before February 2005 but received after 31.03.2005 is concerned, the assessee submitted that this quantity of 570.380 M. T. which was sent for processing was wrongly punched by the accounts department in the column of scrap instead of raw material lying on hand. Hence, this quantity of 570.380 M. T. which was sent for processing was wrongly valued by the assessee as scrap at the value of Rs.10,000/ per MT instead of raw material lying with third party for processing as on 31.03.2005, which the Assessing Officer has rightly valued it as raw materials at Rs.78840 per MT. However, the value of quantity of 570.380 MT, wrongly included in scrap stock 12 and valued at Rs.10,000/- per MT, be reduced from Rs.78,840 per MT and be accordingly valued at Rs.68,840 per MT. Hence, the assessee requested to treat only the quantity of 570.380 M. T. as under valuation of raw material in stock and may be valued as under:
Rs.
As valued by Assessing Officer 78,840 per MT
As valued and wrongly shown in the books
By the assessee as scrap stock 10,000 per MT
------------------
Hence quantity of 570.380 MY may be valued at 68,840 PMT ========== Which amounts to Rs.3,92,64,959/-
9. That the learned CIT (A), however, confirmed the addition and noted that the reasons put forth by the assessee in its support does not appear to have been advanced before the Assessing Officer. No documentary evidence is filed in support of the same. Addition was therefore, confirmed.
10. Learned Counsel for the assessee reiterated the submission made before authorities below. He has submitted that under Income Tax Act purchase bills to be entered when purchase bills are received. It is entered in the records of excise in March 2005, whereas entries were made in January/February, 2005 in the books of the assessee. Statement showing quantitative raw material purchased before 01-03-2005 are filed. PB - 119 to 125A are the details of purchases made month wise which are also reflected in the excise registers. PB -94 onward are the audited accounts. PB -121 is the synopsis of details showing quantity of raw material purchased before 01-03-2005 in books but taken in the excise record in the month of March, 2005 and as such Assessing Officer has inadvertently taken as purchase of March, 2005. The assessee by mistake has taken raw material of the quantity of 570.380 MT as scrap. Therefore, there was shortage to that extent only for which assessee has already made a surrender before learned 13 Commissioner of Income Tax (Appeals) which is recorded at page 94 of the order in Para 93.10. Every purchase, production are recorded in the books as well as in the excise record. He has submitted that purchases are recorded in the books which are verified and later on same are recorded in the excise record. Therefore, both register would not tally because entries are made at the relevant time. PB - 122 is the RG-23 A register for the month of March, 2005 relied upon by Assessing Officer. Copy of Rule 57 of Excise Rules is filed at WS -
13. Purpose of RG -23 A is to pay the duty and get the modvat credit.
In PB - 122, the Assessing Officer took the first figure of 2nd March, 2005 as goods received but failed to note 21st February, 2005 as B/E date. Assessing Officer omitted to take into consideration the second date. Purchases made in January and February, 2005 available to the assessee in March, 2005 for production and actually used in March, 2005. Learned Counsel for the assessee on the same chart demonstrated on several bills of purchases that the goods were available to the assessee prior to the production. These are also clarified in chart A and B filed in WS. The above details are supported by purchase bills, custom receipts, bill of clearing agent and the chits. PB - 126 to 140 are the supporting details of purchase register. As per the above details all the goods have been consumed in production so no goods were available in excess with the assessee. He has submitted that all entries in the books of accounts are maintained properly and accounts are audited in which no defects have been pointed out by the Assessing Officer. The Assessing Officer did not disturb the quantity of consumption in the earlier months. The Assessing Officer has ignored the opening balance of the stock in the beginning of March, 2005 and assuming it to be NIL. The details of the same are mentioned at page 5 of the WS to explain that there is no difference in the figures of the purchases/stock. He has submitted that figures given by the Assessing Officer are not correct. The learned Counsel for the 14 assessee in the written submission has explained that the differences are duly reconciled with the accounts book maintained by the assessee consistently from year to year. The difference as explained is reproduced as under:
"1 The first difference 54.923 MT relates to the opening stock as on 1.3.05. From the reconciliation and the stock as worked out by the assessee, it is apparent that the Assessing Officer has not considered the opening stock as on 1st March, 2005 but assumed it to be nil. This has to be adjusted.
2. The second difference of 504.075 MT relates to the purchase made in January and February, 2005 assumed by the Assessing Officer as if these purchases related to March, 2005. The assessee had shown purchases during the month of March, 2005 at 994.620 MT (as per stock statement [page 119 of PB] which also tallies with the details placed at pages 135 - 140 of the PB. As against the above purchases taken by the assessee for working out closing stock (page 119 PB), the Assessing Officer has taken the figures of 1498.695 MT as shown receipt in excise register for claiming cenvat/modvat under rule 57A (4) of the excise rules in March (page 125 of PB). The above figure of 1498.695 MT adopted by the Assessing Officer also includes the purchases of 504.075 MT which were made prior to March, 2005 i.e. in the month of January and February, 2005 and had been duly accounted for in the purchase book during these months as is apparent from the purchase book. The copy of the purchase book showing these purchases is available at pages 128 to 135 of the PB.
These purchases consist of following two categories of items:
A. Actual Quantity purchased in
in February, 2005 (modvat claimed
15
in March, 2005) (Details pages
120/121,122,123,132,133,134 & 135 297.035
B. Goods shown purchased in January
& February, 2005 (but taken in Excise
in March) (Ref. pages- 120/121 read
with 128, 133, 134, 123, 124 & 125) 207.040
504.075
Charts marked as "A" & "B" indicating such purchases inter alia disclosing the date of purchase mentioned in the Purchase Register with pages no. of paper book containing the copy of purchase register at pages 128 - 135 of the PB and also giving the reference of the excise register (pages 122 to 125 of the PB containing copy of excise register) in respect of each of the purchase bill along with the bill date, bill no., name of t he party and quantity are enclosed herewith along with the serial no. marked as "1,2,3,4 .....13" for your convenience. From this, it would be clear that purchases weighing 504.075 MT (pages 120/121) have been wrongly treated by the Assessing Officer as purchases in the month of March, 2005. We are enclosing herewith the copy of bills of these purchases, transport receipt etc. Such purchases are already accounted for by the Assessee in its total purchases for the month of February, 2005 and January, 2005 (pages 128 - 135). If these purchases already accounted for prior to March, are again taken as purchases in March, it would increase the figures of purchases and will consequently increase the closing stock as per the formula given herein above. If the purchases of March are to be increased, correspondingly the consumption should be increased as per the excise register as these are shown issued in excise register in March, 2005. It may further be submitted at the cost of repetition that the A O has adopted figures of consumption as adopted by the assessee which has been certified by the auditors. Thus on one hand, he is 16 adopting figures of purchase on basis of receipt shown in Excise Register in March for cenvat/modvat credit. On the other hand, he is adopting the figures of consumption on the basis of figures adopted by assessee as per page 120. Mixing of figures from two different registers maintained for different purposes i.e. receipt as purchases from excise register and consumption from financial books will therefore e not give the clear picture of stock of raw materials. This pick and choose approach of the Assessing Officer is totally wrong and cannot work out the correct stock.
3. The third mistake committed by the A O due to which difference has arisen relate to 147.420 MT. It is evident from page 19 of his order. At item 3 he mentions "Goods sent for processing before 1st March 2005 and received in the month of March 2005 after reprocessing 147.420 MT". This item cannot be the stock of raw material once it has been received after reprocessing. It will become part of the finished goods and not of raw materials. This figure cannot be added as it is inbuilt in the finished goods produced in the month of March and scrap.
4. The fourth reason for the difference is 570.380 MT. So far as 570.380 MT is concerned the assessee has already accepted the mistake that this being raw material sent for processing not received till 31st March, wrongly entered as scrap and has been valued at the rate of scrap @ Rs.10/- per kg. instead of @ Rs.78.84 per Kg. Accordingly assessee request your honour to direct the A O to value 570.380 MT @ 78.84/- per kg. and addition to that extent be sustained which will be Rs.32964959/- (570.380 X Rs.68840/- per MT)".
17The learned Counsel for the assessee by referring to the above submitted that the findings of the authorities below are, therefore, incorrect and liable to be set aside.
11. On the other hand, learned Departmental Representative relied upon orders of authorities below. The learned Departmental Representative submitted that excise record is correct. PB -122 is the copy of the excise record. Prior to that it was not in use because this paper says issued for use or in relation to the manufacture of final product. By referring the same paper, learned Departmental Representative submitted that first date therein is 2nd March, 2005 and was available to the assessee but the assessee produced the excise record at the fag end of assessment. The excise record would not verify purchases unless used for production. Excise do not verify about production of goods. They check an entry to be made when goods are moved out of the relevant zone. He has referred to page 18 of the assessment order and submitted that the findings of the Assessing Officer are correct. PB - 118 is the quantitative details of closing stock by the auditor. But the Excise Department did not verify purchases of the production. PB -120 is the quantitative details of closing stock. But Excise Department did not check. He has submitted that Assessing Officer has specifically noted that in the year under consideration assessee has shown gross profit margin at 6.8% as compared to 14.7% which would show that valuation of the closing stock was not correct. It would also show purchases came to factory of the assessee but sold outside the books or used somewhere. Some purchases of March, 2005 not entered in but received in April 2005. RG -23A register would show goods entered in bonded area but it is not clear who will verify the same. The chit would prove the case of the Assessing Officer. Assessing Officer did not doubt purchases but availability of the raw material was seen for the purpose of production. Learned Departmental Representative 18 also filed written submission explaining therein that the department's case is largely dependent on the proof that certain material was there in stock as per excise record after 01-03-2005. Learned Departmental Representative explained that when assessee claimed that raw material purchased in January and February, 2005 were utilised for production is not possible because the goods were actually received at the Port and cleared by Customs in March, 2005. The assessee is not challenging the quantity of finished goods and scrap. No benefit of enhanced closing stock should be given to the assessee in the next year. The difference in closing stock as proved by the Assessing Officer is due to quantity of raw material taken less. The part difference accepted by the Assessing Officer would prove that there was excess raw material in closing stock over and above what was shown by the assessee. Learned Departmental Representative accordingly submitted that appeal of the assessee may be dismissed.
12. We have considered rival submissions and perused the material on record and also taken into consideration the written submissions filed by both the parties. The Assessing Officer made the addition by re-computing the closing stock of raw materials on the basis of details from the excise register RG-23A for the month of March, 2005. The Assessing Officer did not dispute the similar figures noted by the assessee in the earlier 11 months in the books of account and the excise record. The figures adopted by the Assessing Officer read in the following manner:
1. Goods sent for processing up to February 2005 but received after 31st March 2005 (As per Annexure IV of Excise Records) 570.380 tons
2. Goods purchased/received in the month of March, 2005 (As per Excise record -R.G.23-A(Part-I) 1498.695 tons 19
3. Goods sent for processing before 1st March ,2005 and received in the month of March, 2005 after processing (As per Annexure IV of excise record) 147.4230 tons Total Quantitative available for production in The month of March, 2005 1646.115 tons.
Less:
Finished goods produced in the month Of March 2005 & scrap generated in The month of March,2005 (363.279 + 387.904 Tons) as per excise records Closing stock available with assessee firm as on 31-03-05 751.183 tons 894.932 tons Add:
Goods lying with the third parties For job work 570.380 tons Total 1465.312 tons Less:
Showen in the books of accounts As on 31-03-05 298.360 tons Understated closing stock of raw Material as on 31-03-05 1166.952 tons Value of understated closing stock (1166.952 @ 78,840 per Ton) Rs.9,20,02,495.68.
12.1 We may note here that the assessee has submitted the following reconciliation of the stock of the raw materials:
Difference of stock of raw material as taken by the A O (Page 20 of 1166.952 MT Assessment Order.
Add:- Opening stock of March being
Closing stock of Feb.,05 page PB-120
(taken nil by A O) 54.923 MT
1221.875 MT
20
Less:
a. Raw material of 504.075 MT
double counted by A O although
already included in January and
February,2005 purchased as per
statement at page PB-121 read
with pages 128 to 135 of PB
representing copy of purchase
Book 504.075 MT
b. Goods sent for processing before
1st March,2005 received in March
already converted into finished
goods part of 751.183 MT
(Assessment Order -
Page 19) 147.420 MT
c. Mistake of scrap accepted by the
assessee for raw material sent for
processing to third parties but taken
as scrap 570.380 MT 1221.875 MT
Difference Nil
12.2 The assessee has filed month wise quantitative details of closing stock for the year ended 31st March, 2005 at page 120 of the Paper Book showing the closing stock at 298630.00 (298.360 MT).
Further details in this quantitative details are noted as under:
Stock of raw material as on 1-03-2005 54.923 MT (PB-120) Add:
Purchases made during March, 2005 as per purchase book (details PB -135 to 140) 994.620 MT (PB-120) Total 1049.543 MT Less:
Finished goods including scrap produced in
March,2005 (363.279 plus 387.904) 751.183 MT
(PB-120)
Closing Stock as per record 298.360 MT
Closing stock certified by auditor(PB-118-119)298.360 MT 21 12.3 PB-122 to 125 is RG-23A (Part-I) register for the month of March, 2005 relied upon by the Assessing Officer. Purpose of RG-
23A register is to pay the duty and get modvat credit. In PB-122, it is clarified that Assessing Officer took 2nd March,2005 being the first date of item No.1 goods received but failed to note 21-02-2005 as B/E date. The Assessing Officer omitted to taken into consideration the second date. Purchases made in January and February, 2005 available in March, 2005 for production and use in manufacturing of final product in March, 2005. The learned Counsel for the assessee demonstrated during the course of argument through material on record that all the entries contained in the same register are genuine and correct and supported by bills, custom clearance and chit etc. PB
-126 to 140 are the details of purchase register. PB/WS -15 and 16 are chart A and B would prove the above statements regarding material entered in purchases by the assessee prior to March but taken in excise record in March due to modvat canvet. The learned Counsel for the assessee also demonstrated that bills, custom clearance and chits on record would prove the above facts and on verification of the same we found the above statements to be correct and tally with the statements of the assessee filed at PB-121 with chart A and B above. It would prove that the assessee purchased goods in advance and were consumed in March,2005 for manufacture of final products. The Learned Departmental Representative also did not dispute the excise record as is also not disputed by the Assessing Officer. We accordingly, note that the Assessing Officer while recasting the closing stock of the raw material has taken into consideration the receipts shown by the assessee of the raw materials in the month of March,2005 in excise register to be the purchases of raw material by the assessee during the month of March,2005 which fact is incorrect. The Assessing Officer accordingly increased the purchases of the raw material of March, 2005 by 504.07 MT, despite the fact the same purchases 22 have been duly accounted for as purchases in the months of January and February, 2005 (PB-121). The figures given at PB - 118 and 119 are of opening stock, purchases, consumption, sales and closing stock certified by the auditor. PB -120 is the quantitative details month wise as noted above and PB-121 is the statement showing quantity of raw material purchased before 1st March, 2005 in books but taken in excise record in the month of March,2005 and as such the Assessing Officer has inadvertently taken as purchases of March,2005. In excise register it is noted that raw material of 504.075 MT was shown as receipt in the month of March, 2005 but in the purchase register the same material is shown as purchased in January and February, 2005. Same material is consumed in March, 2005 as per the excise register. If the Assessing Officer wanted to increase the purchase for the month of March, 2005 by 504.075 MT, he should have also increased the consumption for this month by 504.075 MT. If the consumption is also increased to the above figure, the effect will be that the difference worked out by the Assessing Officer should be reduced. We agree with submission of learned Counsel for the assessee that according to Rule 57 A (4) of the Excise Rules, the assessee has shown the receipt of raw material when he claimed credit of modvat/canvet i.e. only at the time of consumption of the raw material. It is also done so that the consumption of the raw material may be matched with the receipt of the material and the assessee may not be able to claim double credit under the excise rules. The difference as worked out by the Assessing Officer by 504.075 MT is therefore, stands explained and shall have to be reduced.
12.4 We may also note here that the Assessing Officer has taken the opening stock for the month of March, 2005 as Nil without any reason despite the fact that at the end of February, 2005 the assessee was having closing stock of 54.923 MT. The difference 23 would increase by this figure. The Assessing Officer has increased the stock of raw material by 147.420 MT by mentioning that goods sent for processing before 1-03-2005 and received in the month of March, 2005. Once the goods is received after re-processing it will no more remain raw material and shall have to be considered part of the finished stock. The Assessing Officer has already taken the finished goods as scrap in the month of March, 2005 at 751.183 MT and this stock has been impliedly included in the finished goods in the month of March, 2005 as well as scrap generated. Therefore, it cannot be separately added so as to increase the quantum of closing stock of the raw material. The figures quoted by the Assessing Officer are, therefore, not correct. The quantity of raw material and finished goods shown by the assessee tallied with the records maintained by the assessee and as per excise records which is not disputed by the Assessing Officer (PB - 118). It is also relevant to note that on the same system of accounting, details recorded by the assessee in the books of accounts and excise records for the remaining 11 months have not been disputed by the Assessing Officer. No specific defects have been pointed out in the maintenance of books of account by the assessee. Evidences of availability of the raw material before consumption are filed on record. PB -121 also shows that some goods cleared by customs authorities on 9th and 10th March, 2005 would thus be available to the assessee for consumption. The Assessing Officer on assumption of irrelevant facts noted that assessee has shown closing stock as on March, 2005 substantially lower than it should have been, since raw material cannot be issued for production without actual receipt of the raw material. The assessee however, has furnished complete details party wise of purchases which were received on time and issued for production which are supported by bills, custom clearance and chits etc. and details mentioned in excise register which are also verified by the excise authorities without any objection. It would show the findings of 24 authorities below are clearly unjustified. Additions are therefore, liable to be deleted because there is no difference in the stock. We accordingly set aside the orders of the authorities below and delete the addition on account of difference in stock.
12.5 The last item relates to quantity of 570.380 MT on which assessee agreed before the learned Commissioner of Income Tax (Appeals) that it was a mistake accepted by the assessee that this being raw material sent for processing wrongly entered as scrap and has been valued at the rate of scrap instead of purchase value. Assessee agreed for the addition to the extent of Rs.3,92,64,959/- (Page 94 of C IT (A) order). Learned Counsel for the assessee during the course of argument also agreed to the above addition. We accordingly, sustain the above addition. It is settled law that closing stock of the year will become opening stock in the next year. Since the value of the closing stock of the raw material has to be increased to the above extent, as part addition admitted by the assessee, the Assessing Officer is accordingly directed to give consequential effect in respect of the addition made in the value of the closing stock of the raw material in the succeeding assessment year where the value of the opening stock will also be increased correspondingly.
12.6 In view of the above discussions and findings given above on ground No.3, we restrict the addition on this ground to Rs.3,92,64,959/- and delete the remaining addition. As a result, ground No.3 of the appeal of the assessee is allowed partly.
13. Ground No.4 of the appeal of the assessee reads as under:
"4. The learned CIT (A) has erred in law and on facts in confirming addition of Rs.3,55,21,139/- made by A O by treating the quantity of shortage of Scrap shown in the audited accounts as sales made outside the books of accounts. Both the lower authorities have failed to appreciate the peculiar nature of the business of the 25 appellant and have ignored the explanations, submissions and evidence produced by the appellant. The ld. CIT (A) ought to have deleted the addition made by A O on account of suppressed sales and ought to have considered the alternative submissions of the appellant that the shortage of Scrap be treated as sale of Scrap rather than that of finished goods."
14. The facts as regards the addition regarding suppressed sale the Assessing Officer has made an addition of Rs.3,55,21,139/- assuming that the quantity of shortage of scrap shown in the accounts and audit report amounting to 380.02 MT is nothing but sale of finished goods out of books. In this regard the assessee has submitted that the Assessing Officer has grossly erred in making addition of the said amount based on erroneous assumption and the addition made is factually and legally untenable. In support of its contention, the assessee furnished the year wise details of finished goods, scraps generated and closing stock of finished goods and scrap, as per the chart produced below, as appearing in the final accounts and also reported in the audit report by auditor:
31.03.2002 31.03.2003 31.03.2004 31.03.2005 Finished goods 43,35,150 55,63,542 65,24,407 60,02,916 produced during the year Generation of total 22,58,004 12,49,322 36,26,060 29,07,616 scrap during the year ended Closing stock of 64,718 53,680 1,32,000 39,494 finished goods Closing stock of 26,41,774 22,41,026 40,54,246 36,31,330 scrap The assessee submitted that from the above chart it is quite evident that the assessee was maintaining huge quantity of scrap stock (on an average of 3142 M.T.) Due to very nature of being bulky, it is practically not possible to ascertain the actual weight of the scrap lying in stock and therefore normally at the end of the year the weight 26 of scrap was ascertained on the basis of book records. However, during the financial year 2004-05 the assessee had ascertained the actual weight of scrap. The assessee submitted that when the actual physical verification of closing stock was taken in last week of October, 2004, it was noticed that there was a shortage of 380.02 M.T. of scrap stock as compared to the book records. In spite of overall control and adequate security measures the shortage has occurred. This shortage of scrap may be attributed to the following reasons:
1) Being of bulky nature, practically it was not possible to physically weigh the scrap and therefore the same was considered on the basis of book records.
2) This shortage may be due to small thefts in the factory over the period of time.
3) Shortage may be due to overloading in the truck by the subordinate staff when scrap is sold.
4) Sale of scrap is not monitored by partners or manager, but usually it is left to subordinate staff because of its bulky nature and very low in value as compared to finished goods.
5) Due to heavy quantity of scrap stock during the last few years.
It is true that the above shortage was never shown in the past in previous five years. However, it is also true that the shortage is generated not in a day or in one year only but the same is sum total of differences over a period of time and in such cases the same is accounted for as and when the same is actually ascertained and become known. The table reproduced hereinabove makes it clear that the assessee was maintaining huge stocks of scrap for past few years. It is because of this that the assessee could not detect the pilferages in the scrap stock. The assessee submitted that the 27 average scrap stock over the past few years with the assessee, including the year under consideration, is 3142.094 M.T. Thus it is submitted that this shortage of 380.002 M.T. is only 12% of the average stock of scrap maintained by the assessee. The assessee also submitted that the Assessing Officer has assumed that this shortage shown in the accounts is a suppressed sale of finished goods. It is submitted that the observation by the Assessing Officer that the shortage is nothing but the sale of finished goods out of books is out of context. Shortage of scrap stock has not occurred in one year, and the same is cumulative effect of shortage generated in the last few years, particularly on account of huge inventory of scrap on hand carried on by the assessee. On physical verification of stock when the fact of the shortage was noted the assessee accounted for the same and it is shown in the accounts accordingly. The assessee also submitted that in the absence of any evidences in support of the allegation, it is not proper on the part of the Assessing Officer to allege and arrive at the assumption that the shortage in quantity is nothing but sale of finished goods out of books. The Assessing Officer has no material on records to come to a conclusion that the shortage of goods was only shortage of finished goods and that they have engaged in unaccounted sales. In this regard the assessee stated that the goods manufactured by the assessee are excisable since inception of the firm. The sales are effected only to reputed customers and limited companies, availing Cenvat Credit. Sale of finished goods can not be effected without cover of Central Excise invoices. In view of the above factual position practically it is neither possible for the assessee to remove their finished goods out of books without preparing invoices, nor their buyers will even think of buying the same without proper Central Excise invoices. Therefore, the question of sale of assessee's finished goods out of books is totally ruled out. The assessee referred to the observations made by the Assessing Officer that "the Assessee has reduced the shortage 28 occurred during the year from opening stock of Scrap. It means that the Assessee is showing the bifurcation of finished goods and scrap as per their convenience." In this regard it is submitted that the assessee had disclosed the quantitative details of stock of raw material purchased, finished goods and scrap produced and sold since its inception, hence the remarks of the Assessing Officer to say that the Assessee is showing bifurcation of finished goods and scrap according to their convenience is factually incorrect and untenable. Without prejudice to the above submissions, the assessee submitted that at the most it may be assumed that this shortage of scrap shown in the accounts was sale of scrap, but in no way it can be concluded that it was a sale of finished goods. In the light of the submissions made as above the assessee prayed that the addition made by the Assessing Officer in this regard may also be deleted.
15. The learned Commissioner of Income Tax (Appeals) however, dismissed this ground of appeal because no convincing reasons are given.
16. Learned Counsel for the assessee reiterated the submissions made before authorities below. He has submitted that the assessee has shown shortage of scrap during the year on the basis of physical verification of the stock carried out on 25-10-2004 (PB-143). The nature of the goods produced by the assessee generates the scrap. The very nature of the scrap is bulky which is apparent from photographs filed at PB-144 - 146. The actual weight of the scrap is not taken at the end of the year but ascertained on the basis of books each year. In the earlier year also scrap is generated, the details of which are filed at PB - 141 and 142. Due to shortage of scrap, assessee wrote off the same in the books. The Assessing Officer has however, treated the same to be goods manufactured and sold outside the books. The generation of the scrap vary up to 31.72% and same has been accepted in earlier year also. No addition shall 29 be made on account of generation of scrap in earlier year. The auditor has also clarified the same in the accounts of the assessee (PB-118). The shortage may be due to theft in the factory, due to overloading in the truck by the subordinate staff when scrap was sold. The sale of scrap is not monitored by the partner of the assessee. On physical verification carried out, all entries were made in the accounts writing off the same shortage. The finished goods produced by the assessee are subjected to central excise and sales tax and goods cannot be moved outside the factory without excise and sales tax supervision. There was no objection from the excise department and all finished goods were supervised by the excise department. No evidence of manufacturing of goods or sale has been brought on record. Shortage was accounted in this year only. It was, therefore, suspicion of the Assessing Officer that scrap has produced the goods which is sold outside the books. The suspicion cannot take place of proof. The nature of the scrap cannot exceed to manufacturing of the goods. If scrap is stated sale of finished goods, it would raise gross profit abnormally. No addition could be made on account of sale of finished goods outside the books on generation and shortage of scrap. The assessee relied upon following decisions:
(1) Motipur Sugar Factory Pvt. Ltd. Vs CIT 95 ITR 401(Pat) (2) CIT Vs J.K.Synthetics Ltd. 296 ITR 501(All.) (3) M. D. Umar Vs CIT (1975) CTR (Pat) 13 (4) Pondy Metal & Rolling Mills Vs DCIT 107 TTJ 336 (5) ITO Vs Himalaya Drug Co. 17 TTJ 9 (6) ACIT Vs Kambhatta Family Trust 67 TTJ 411 (7) Chatisgarh Steel Castings Pvt. Ltd. Vs ACIT 8 DTR(Bilaspur) 14 The assessee is a regular assessee for the several years and no allegations have been made in earlier and in subsequent year. In earlier years and in subsequent year assessments have been made 30 u/s 143(3) and no similar addition has been made. Addition is, therefore, without any basis. In the alternate contention, learned Counsel for the assessee submitted that if the Assessing Officer is not satisfied with the shortage of the scrap which is about 11% of the average stock of the scrap maintained by the assessee, the limited addition could be made to the value of the sale of scrap subject to allowability of the deduction u/s 80IB of the IT Act.
17. The learned Departmental Representative relied upon orders of authorities below. The learned Departmental Representative referred to PB -142 which is statement of the production and scrap year wise and submitted that generation of scrap is higher. He has submitted that purchases of March not entered in the books but taken in April, 2005 (PB-138). The assessee did not take any action for shortage of the scrap and made entry in the books writing off the scrap, thereby claiming huge scrap loss. The conduct of the assessee is abnormal in not taking action in the matter. Learned Departmental Representative relied upon decisions of Hon'ble Supreme Court in the cases of Sumati Dayal 214 ITR 801(SC) and Durga Prashad More 82 ITR 540(SC). No benefit can be given in the next year. He has referred to PB-80/81 to show that physical verification is made in this year only. Learned Departmental Representative submitted that no fact is proved that there was any theft or pilferage in the factory of the assessee. Learned Departmental Representative submitted that assessee is ignoring the fact that excise department is only concerned about the bonded area i.e. purchases which enter the area after entry in RG-23A Register and the material which go out after entry in RG-1 Register etc. PB-142 shows that yield was 67.37% as against 81.66% for the assessment year 2003-04. Therefore, there is a probability that assessee showing scrap produced finished goods.
3118. We have considered rival submissions and material on record. The assessee has filed details of the scrap generated year to year not only in the assessment year in question but in earlier and subsequent year also. As per the records of the assessee, assessee maintained huge quantity of scrap stock. The details noted at each year i. e in earlier year and subsequent year has not been disputed. The nature of goods produced by the assessee admittedly generates scraps. In the earlier year also scrap was generated, details of the same are filed at PB -141 and 142. No addition has been made on account of generation of scrap in earlier years. If the scrap is treated to be sale of finished goods, it would give rise to gross profit abnormally. Therefore, the contention of the assessee is acceptable that shortage is not generated in a day or in one year but over a different period of time. Since huge stock of scrap was generated therefore, probably the assessee could not have detected the pilferage of the scrap stock. The data given by the assessee about generation of the scrap is not disputed by the authorities below. The assumption of the Assessing Officer that shortage of scrap was suppressed sale of finished goods is without any basis. No evidence of manufacture of goods out of scrap and sales outside the books of account has been brought on record. The production of the assessee is subject to excise rules and the sales tax rules and it is highly unbelievable that the scrap is converted into finished goods and sold outside the books of account without knowledge of the excise and sales tax departments. The inventory and accounts prepared by the assessee have not been disputed by the excise and sales tax authorities. It is also unbelievable that out of the scrap assessee would have manufactured the goods for sale. It is not in dispute that scrap was generated year to year. In the absence of material evidence on record, it is unbelievable that the assessee manufactured the goods out of the scrap. It is settled law that the suspicion howsoever may be grave cannot take place of legal proof.
32Even, such an assumption of the Assessing Officer could not be taken as suspicion. The conclusion of the Assessing Officer in the assessment order that shortage of the scrap was only shortage of the finished goods and sales outside the books is merely based upon surmises and conjectures. Therefore, the question of the finished goods sold outside the books is totally ruled out. In the case of Motipur Sugar Factory Pvt. Ltd. (supra) it was held that the Tribunal and ITO cannot draw an adverse inference and reject the books as the same is subject to supervision of excise authorities. In the case of J. K. Synthetics Ltd. (supra) it was held that the assessee has duly accounted for wastage by weight in its account books, unit of the assessee was inspected by officials of Excise Department, there was no material on record justifying rejection of the books results. In the case of Pondy Metal & Rolling Mills Pvt. Ltd. (supra) considering the Board Circular, it was held that reasonableness of the expenditure has to be judged having regard to the fair market value of the goods, services or facilities for which payment is made, the legitimate need of business and profession and the benefit derived by or accruing to the tax payer from the expenditure. The findings of the authorities below are without any basis and are accordingly set aside. The entire addition so made by Assessing Officer is accordingly deleted.
18.1 The question now left for consideration is as to what reasonable addition would be made on account of the scrap claimed to be short. The assessee filed the details of the shortage of the stock for the assessment year in question along with the preceding three assessment years. Details are noted above and the same details are also given at PB - 141 along with next assessment years. The assessee claimed that scrap was valued in the assessment year in question only. It would prove that assessee claimed the shortage of the scrap for the four years i.e. assessment year in question and the preceding three assessment years. The assessee did not made 33 claim of the shortage of the scrap in the preceding three assessment years. Therefore, such a claim cannot be made in the assessment year in question. The Assessing Officer noted that assessee firm has shown shortage of 380002 kgs of scrap. The details are mentioned at PB - 118 and the rate of the scrap is shown at Rs.10/- (PB -119). The details of the shortage of scrap and sale value at Rs.10/- has not been disputed by the Assessing Officer. It would therefore, prove that assessee made claim of shortage of the scrap for the last three assessment years in the assessment year in question without doing actual measurement therefore on estimate basis 3 / 4th claim of the assessee should have been disallowed in the assessment year in question. Hon'ble Gujarat High Court in the case of Jyoti Ltd. 321 ITR 135(Guj) held that sale of scrap outside books on estimate basis is justified. The Assessing Officer therefore, shall disallow the claim of shortage of scrap of the assessee for the preceding three assessment years by applying the rate of Rs.10/- as per claim of the assessee and shall made the reasonable addition. However, this addition would ultimately enhance the profit of the assessee on account of sale of the scrap, therefore, assessee would be entitled to deduction u/s 80IB of the IT Act. We accordingly direct the Assessing Officer that in the event of reasonable addition on this issue, the assessee may be granted benefit u/s 80 IB of the IT Act as is granted in the case of the assessee in earlier years. The details of the orders would be mentioned while deciding the departmental appeal on which the Revenue raised the identical issue on account of allowing relief on scrap sales. Assessing Officer is accordingly directed to do the needful as per observation given in this order by giving reasonable sufficient opportunity to the assessee. Subject to the above observations, this ground of appeal of the assessee is allowed.
19. Ground No.5 of the appeal of t he assessee reads as under:
34"5. The learned CIT (A) has erred in law and on facts in not admitting additional ground raised by the appellant in respect of disallowance of Rs.54,43,852/- made by the A O on account of late payment of TDS by observing that the appellant is not entitled to raise the same at a later stage when it was not relating to the grounds already raised by the appellant. Ld. CIT (A) ought to have admitted the additional ground since the rules of Natural Justice entitles the appellant to raise contention against any part of the assessment order and the appellate authority ought to adjudicate on the same".
20. The assessee raised the above ground as additional ground of appeal before learned CIT (A). The assessee requested that since it is legal in nature and the statement showing the payments/credits of the taxes for the month of March,2005, therefore, A O may be directed to allow the expenses relating to the month of March , 2005 in view of amendment to Section 40 (a) (ia) of the IT Act. The Assessing Officer has disallowed certain expenditures on account of late payment of TDS. These payments pertain to the month of January, 2005, February, 2005 and March, 2005, the TDS in respect of which is paid in April 2005. The assessee submitted that there is an amendment to section 40 (a) (ia) by Finance Act, 2008 with retrospective effect from A. Y. 2005-06 as follows:
"(ia) any interest commission or brokerage ....... on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or after deduction, has not been paid -
A) in case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-
section (1) of section 139; or B) in any other case, on or before the last day of previous year"
As per this amendment, no disallowances should be made for all payments pertaining to March, if the TDS on the same are paid before the due date of filing the returns. The assessee submitted a 35 statement showing the total disallowances and a statement showing the payments/credits for the month of March, 2005, with a prayer to issue directions to the Assessing Officer, to allow the expenses relating to the month of March, 2005 in view of the amendment to section 40 (a) (ia). The learned CIT (A) however, did not admit the above additional ground for hearing on the reasons that it was not contested before A O and that additional ground can be permitted at the discretion of the appellate authority. The assessee is delaying the appeal which is not permissible and that no justification or compelling reasons are given for seeking such permission.
21. Learned Counsel for the assessee reiterated the submissions made before authority below and submitted that the assessment order was passed on 28-12-2007. The amendment in section 40(a) (ia) is introduced by Finance Act 2008 with retrospective effect with effect from 01-04-2005 that is assessment year 2005-06 which is under appeal. He has submitted that it is a legal issue and all facts of date of payment, date of deduction of TDS and the TDS paid are available on record. Therefore, it being a legal issue, raised at the earliest opportunity before the learned CIT (A) (PB-83 and 84). The payments made before the due date of filing of the return in April 2005 have to be allowed as deduction and assessee would get benefit of Rs.35,01,126/- on which TDS of Rs.77,470/- is paid in April 2005. The details of same are also filed at PB -150 and 151. On the other hand, learned Departmental Representative relied upon order of the learned CIT (A).
22. We have considered rival submissions and material available on record. It is not in dispute that the assessment order is passed on 28-12-2007. The amendment in section 40 (a) (ia) of the IT Act is made by substituting the earlier clause by Finance Act 2008 with effect from 01-04-2005. The amendment as noted above is applicable to the assessment year under appeal. As per earlier 36 provisions the assessee would not be entitled for relief because the taxes were not paid as per section 200(1) of the IT Act. However, by retrospective amendment the taxes deducted during the last month of the previous year if paid on or before due date specified in sub- section (1) of section 139, no disallowance could be made. The assessee filed the details at PB -150 and 151 to show that in the month of March, 2005 the amount paid to various contractors was Rs.35,01,126/- on which TDS of Rs.77,470/- was deducted and paid in the month of April, 2005. Since the amended provisions were not there in the Statute when the assessment order was passed, there were no reason for the assessee to make any claim of the above deduction. The assessee raised the additional ground at the earliest before learned CIT (A), therefore, there was no delay. Since amended provisions were not there at the time of passing of the assessment order, this itself was justification and compelling reasons for the assessee to raise the issue for the first time before the learned CIT (A). The details given show that assessee is entitled for deduction to the extent the amount of TDS is deducted in March, 2005 and paid in April, 2005. Hon'ble Supreme Court in the case of National Thermal Power Com. Ltd. 229 ITR 383 held that when legal plea is raised, it should be allowed to be admitted as additional ground. Power of the Tribunal is widest. It may pass any order to assess the taxable correct income. If facts show though not taken before authorities below, legal plea, it could be admitted and decided by the Tribunal. Hon'ble Gauhati High Court in the case of Assam Company (India) Ltd. 256 ITR 423 considering power of the Tribunal held that the Tribunal may consider any new ground if facts are available on record. Hon'ble Delhi High Court in the case of S. M. C. C. Construction (India) considering the above provisions held that deduction is available in the year in which tax is paid. Hon'ble M. P. High Court in the case of Tolaram Hassomal 298 ITR 22 held that if additional ground is admitted, it should be remanded to CIT (A) to 37 pass the order on merit. Considering the above discussion, we are of the view learned CIT (A) was not justified in refusing to admit the additional ground. It was a legal issue and facts were available on record, therefore, learned CIT (A) considering retrospective amendment in section 40 (a) (ia) of the IT Act should have admitted the additional ground for hearing and should have decided the same on merits. We accordingly, set aside the order of the learned CIT (A) on this ground and admit the additional ground of appeal for hearing and direct the learned CIT (A) to decide the above additional ground of appeal on merit by giving reasonable sufficient opportunity of being heard to the assessee. As a result, this ground of appeal of assessee is allowed for statistical purposes.
23. Ground No. 6 of the appeal reads as under:
"6. The learned CIT (A) has erred in law and on facts in confirming the action of the A O that interest income of Rs.15,68,187/- being not eligible for deduction u/s 80 IB of the act. The Ld CIT (A) has further erred in not allowing the alternate plea of the appellant to allow the claim of deduction u/s 80IB on netting off of interest income. Ld. CIT (A) ought to have considered the view taken by the various judicial authorities replied upon by the appellant and allowed the claim of deduction u/s 80 IB on the interest income."
24. The above ground was also raised as additional ground of appeal before learned CIT (A) claiming deduction u/s 80 IB on the interest income to the tune of Rs.15,68,187/-. It was interest income on deposit of the securities. The assessee claimed that the interest should not be constituted as income from other source. In alternate contention it was prayed that principle of netting may be applied in this case. The learned CIT (A) held that interest income cannot be said to be profit or gains derived from industrial undertaking activities. Claim of deduction u/s 80 IB cannot be allowed. As far as netting of interest is concerned, the learned CIT (A) declined the claim of the 38 assessee by following order of ITAT Ahmedabad Bench in the case of Nepture Steel Processor and Auro Stamping Pvt. Ltd. This ground of appeal was accordingly dismissed.
25. Learned Counsel for the assessee did not dispute finding of the learned CIT (A) that interest income cannot be treated as profits derived from industrial activities. However, he has submitted that netting of the interest could be considered as per decision of Hon'ble Delhi High Court in the case of CIT Vs Shriram Honda Power Equip 289 ITR 475 (Del) . He has also relied upon some other orders of ITAT in the case of Gujarat P. Engineering Co. Ltd. On the other hand, learned Departmental Representative relied upon the order of the learned CIT (A).
26. On consideration of the rival submissions we are of the view that the matter requires reconsideration at the level of learned CIT (A) because the learned CIT (A) decided the issue against the assessee by following order of the Tribunal. However, learned Counsel for the assessee relied upon decision of Hon'ble Delhi High Court as above and another order of the Tribunal in his favour which have not been taken into consideration by the learned CIT (A) while deciding the issue of netting of interest. Considering the above, we maintain the finding of the learned CIT (A) in refusing to grant deduction u/s 80 IB of the IT Act. However, as regards netting of interest, we set aside his order partly and restore this issue to his file with direction to re-decide this issue in the light of the decisions relied upon by the learned Counsel for the assessee. Learned CIT (A) may also taken into considerations another decisions if any, on the issue while deciding the issue of netting of the interest. As a result, this ground of appeal of assessee is partly allowed for statistical purposes.
27. As a result, appeal of the assessee is partly allowed.
39 ITA No.16/Ahd/2009 (Departmental appeal)28. On ground Nos. 1 to 4, Revenue challenged the order of the learned Commissioner of Income Tax (Appeals) in deleting the disallowance made of Rs.58,59,086/- by denying the deduction u/s 80 IB of the Act. On ground No.5 order of the learned Commissioner of Income Tax (Appeals) is challenged in holding that the income from scrap sales of Rs.29,50,530/- is eligible for deduction u/s 80 IB of the IT Act.
29. The Learned Commissioner of Income Tax (Appeals) considering the submission of the assessee and material on record gave a detailed finding in the impugned order holding that assessee is eligible for deduction u/s 80 IB of the Act on both the issues.
30. Learned Counsel for the assessee at the outset submitted that issue is now covered by the decision of ITAT Ahmedabad Bench (T M) in the case of the assessee for assessment year 2001-02 in ITA NO.3372/Ahd/2004 and 3373/Ahd/2004 dated 15-06-2007 in which in Para 54, the Tribunal held that the assessee is an eligible undertaking u/s 80 IB of the Act. Copy of the order is filed. He has also submitted that the same order is followed by ITAT Ahmedabad Bench in the case of the same assessee for assessment year 2000- 01, 2002-03 and 2004-05 in ITA No.3098, 3099 and 3100/Ahd/2007 and the departmental appeals have been dismissed vide order dated 28-09-2007. Copy of the order filed. Against the decision of the Tribunal for assessment year 2001-02, the Revenue went in appeal before the Hon'ble Gujarat High Court in Tax Appeal NO.715/2008 and the Hon'ble Gujarat High Court vide order dated 30-03-2009 dismissed the departmental appeal. He has further submitted that Hon'ble Supreme Court dismissed the SLP of the department vide order dated 6-01-2010. Copies of the orders are filed on record.
40Learned Counsel for the assessee also submitted that in assessment year 2004-05 in ITA No.3100/Ahd/2007, the Revenue has raised similar grounds of appeal and this departmental appeal has been dismissed. Copies of the grounds of appeal are also filed. He has further submitted that Hon'ble Gujarat High Court in the case of Harjivandas Juthabhai Zaveri 258 ITR 785 (Guj) held that amount received towards sale of empty soda ash "bardana", empty barrel qualify for deduction u/s 80 IA of the IT Act. He has also relied upon order of ITAT Ahmedabad Bench in the case of Aarti Industries 95 TTJ 14 in which it was held that the profit on sale of scrap is entitled for deduction u/s 80 I of the IT Act. The learned Counsel for the assessee, therefore, submitted that the issue is covered in favour of the assessee. The learned Departmental Representative conceded that the issue is now settled in favour of the assessee by the above orders in the case of the same assessee.
31. On consideration of the above facts, we are of the view that the issue is covered in favour of the assessee by the order of the Tribunal in the case of the same assessee which is ultimately confirmed by the Hon'ble High Court and the Hon'ble Supreme Court. There is no merit in the departmental appeal. The same is accordingly dismissed.
32. As a result, departmental appeal is dismissed.
33. In view of the above findings, appeal of the assessee is partly allowed. Departmental appeal is dismissed.
Order pronounced in the open court on 21-05-2010.
Sd/- Sd/-
(A. N. Pahuja) (Bhavnesh Saini)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date : 21-05-2010
Lakshmikant/-
41
Copy of the order f orwarded to:
1. The Respondent
2. The DCIT, (Appellant).
3. The CIT concerned
4. The CIT(A)-III, Ahmedabad.
5. The DR, ITAT,
6. Guard File
BY ORDER
ूित //True Copy//
DY.R/AR, ITAT, AHMEDABAD