Income Tax Appellate Tribunal - Ahmedabad
Rutvi Steel & Alloys Pvt.Ltd.,, ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "A"
Before Shri T.K.SHARMA, JUDICIAL MEMBER and
Shri N.S. SAINI, ACCOUNTANT MEMBER
Date of hearing:10.6.10 Drafted on:10.06.10
ITA No.3870/AHD/2007
Assessment Year : 2005-2006
ITO, Vs. Rutvi Steel & Alloys P. Ltd.
Ward 5(3), 20, Ashutosh Soc., Nr.
C.U.Shah College Bhairavnath Char Rasta,
Bldg., 2 n d Floor, Maninagar, Ahmedabad.
Ahmedabad.
PAN/GIR No. : AAACR 7103 E
(APPELLANT) .. (RESPONDENT)
Appellant by : Shri A.K.Khandelwal D.R.
Respondent by: Shri M.K.Patel, A.R.
ORDER
PER N.S.SAINI , ACCOUNTANT MEMBER :-
This is an appeal filed by the Revenue against the order of Learned Commissioner of Income Tax(Appeals)-XI, Ahmedabad dated 13.08.2007.
2. Ground Nos.1 and 2 of the appeal reads as under:-
"1. The Ld. Commissioner of Income Tax (A)-XI, Ahmedabad has erred in law and on facts in holding that rejection of books of account under section 145 of the income Tax Act, 1961 is not justified.
2. The Ld. Commissioner of Income Tax (A)-XI, Ahmedabad has erred in law and on facts in deleting the addition made of Rs.92,89,426/- on account of suppression of production."
3. The brief facts of the case are that the appellant is a Private Limited Company engaged in the business of manufacture of M. S -2- and CTD Bars. The Learned Assessing Officer observed that assessee had shown total production of 1736.535 MT. To Verify the same, the assessee was required to produce RG-1 Register and also to give month wise consumption of power in units vis-à-vis production. On verification of the details filed showing month wise production and electricity consumption, with those of RG-1 register. The Learned Assessing Officer observed that there was large variation in the electricity consumed for month and the correspondence produced in the month. He noticed that assessee has shown production of 133 MT against consumption of 82,847 units of electricity i.e. the assessee has shown production of 1 MT against the consumption of power of 622.9 units in the month of May 2004. Considering the fact that during the year, assessee has shown total consumption of power of 14,50,899 units and taking average production of 1 MT with 622.9 units of power as declared in the month of May 2004. The Learned Assessing Officer calculated the total production with the consumption of 14,50,899 units at 2329.264 MT as against 1736.535 MT shown by the assessee. Thus, the Learned Assessing Officer held that there is suppression of production of 592.729 MT. The Learned Assessing Officer further noted that during the year assessee has shown sales of 1748.675 MT. for Rs.3,92,52,302/- i.e. at an average sale price of Rs.22446.88 per MT. Considering the same, the sale value of suppressed production of 592.729 MT. was worked out at Rs.1,39,04,960/-.
4. The Assessee explained before the Learned Assessing Officer that the power consumption in this type of industry is not directly proportional to the quantity of finished goods produced. The consumption of power depends on a number of factors viz. quality and size of raw materials and the size of finished goods produced.
-3-Harder the quality and higher the size of raw material in terms of diameter, power consumption will be more. Likewise, thinner the size of finished goods produced more will be the power consumption as needs more pressing. For example, use of 16mm. scrap plate as raw material will consume more power as against use of 8mm.scrap plate.
5. The Learned Assessing Officer after considering the arguments of the assessee observed that the same are not acceptable for following reasons:-
a) With regard to variation in electricity expenses from Rs.3049 PMT to Rs.6633 PMT, no plausible reasons with detailed working about such drastic variation in electricity per month are furnished.
b) The argument that the reading is made between 18th and 25th of every month is not acceptable as the date of bill shown above indicates that the bills are usually as on last date of month and that appears to be the date of reading in absence of any information about the precise date of reading.
c) The issue raised is not the production in terms of different size of bars i.e. 6mm or 10mm bars but with reference to the production in MT. Further, it is not the case that different size of bars are produced in different months in each month, all type of production is considered and that is the reason why the production in Metric Ton is considered for working out the above difference. The assessee has give a routine reply by which it failed to substantiate its case for such an -4- alarming difference in the production in terms of MT.
However, to cover all adverse eventualities in the production process with reference to the consumption of power in Unit and considering the contention of the assessee that the production cannot be compared with consumption of power in toto. The suppressed production is estimated at 414.910 (i.e. 70% of 592.729 MT worked out in the show cause notice.) From the above, it is clear that the assessee has not cogent or documents to explain the discrepancies discussed. Therefore, the provisions of section 145(3) are invoked and the books of account are rejected.
6. Thereafter, the Learned Assessing Officer determined the value of suppressed production of 414.910MT. considering the average sale price of 12 months of Rs.22389 at Rs.92,89,426/- and made addition to the income of the assessee.
7. On appeal before the Learned Commissioner of Income Tax(Appeals), the assessee submitted that the learned A.O. has no basis for the rejection of books of accounts. As per Section 145(3) the books of accounts of on assessee can be rejected if:
"Where the Assessing Officer is not satisfied about correctness or completeness of the accounts of the assesses, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144"
In the case of assessee it has maintained proper books of accounts including purchase register, sales register, ledger, cash book, bank -5- book and journal. It had also maintained raw material and finished goods register. The accounts maintained by appellant are correct and complete in all respects. The accounts of the appellant have been audited by a Chartered Accountant under Companies Act as well as under Section 44AB of the Income Tax Act. The auditors have certified that the proper books of accounts are maintained by the appellant. The aforesaid accounts were produced before the A.O. and no defect, of whatsoever nature, has been found by him. Thus there is no reason for the A.O, to reject the books of accounts.
8. It was further argued that the assessee is a Private Limited Company engaged in the business of manufacture of M.S and CTD Bars. The accounts of the appellant are audited. In the assessment year, the learned A.O. has made the impugned addition on the ground that there is a variation in the electricity consumption per M.T. of finished goods from month to month. It is respectfully submitted that the Electricity consumption in this type of industry is not proportional to the quantum of production. It depends on number of factors viz. quality and size of raw materials used, the quality and size of finished goods. Harder the quality and higher the size of raw material (in terms of diameter) higher will be the power consumption. Likewise thinner the size of finished goods, produced more will be power consumption as it needs more pressing. For example, use of 16 mm scrap plates as raw material will consume more power as against use of 8 mm scrap plates. Similarly, production of 6 mm or 10 mm bars will consume more power than production of 20 mm or 25 mm bar. The electricity consumption also depends on other factors also like aging of machinery, labors productivity, incoming voltage, breakdown maintenance time and climatic conditions. In view of these facts and circumstances it clear that the electricity consumption is not sole -6- criterion for determining total production. Further, the Month wise figures of production and power consumption are not comparable by themselves as the production figures are for full calendar months whereas the consumption of power units are for broken months as the meter reading is taken during the month so the power consumption is shown upto that date only. It was further submitted that similar variation existed in preceding years also but no adverse inference was drawn in those years. The assessee has maintained regular books of accounts and all the sales and purchases were fully vouched, recorded end supported by raw material consumption register and production register and finished goods register. None of the purchase and sales were from any persons specified U/s 40A(2)(b) of Income Tax Act. The appellant has maintained quantity details of raw material and finished goods. There also no discrepancy is found. These records have been duly checked and verified by the excise authority. The excise authorities did not find any discrepancy during their audit and they have given a clean audit report. It is further submitted that mere variation in consumption of electricity can not be regarded as a ground to disregard declared version of the appellant.
9. It was further submitted that the ITAT Delhi on an identical facts in case of Pondy Metal & Rolling Mills (P) Ltd. v/s DY.C.I.T 107 TTJ 336 has decided in favour of the assessee relying on the following decisions of the High Court :-
i) In case of N. Raja Pullaiah v/s Dy.C.T.O. (1969) 73 ITR 224 (AP) wherein Hon'ble High Court has held thus :
"The assessing authority rejected the account books of the assesses, a groundnut oil miller, and estimated the turnover on the basis of consumption of electricity and the result of tests conducted in other mills. No test, -7- however, was conducted in that very mill to find out the rate of consumption of electricity for a definite quantity of seeds to be converted into oil. The assessee questioned the assessment in writ proceedings : Held, that all the mills cannot be said to be similarly circumstanced in all respects and as such the assessment based on the data of mills other than the assessee's mill is arbitrary,"
ii) To the case of Mahabir Prasad Jagdish Prasad v/s CST 27 STC 337 (All) wherein Hon'ble High Court has held thus :
"The account books of an assesses cannot be rejected on mere suspicion or conjecture unless the accounts are kept in such a way that reliance cannot be placed upon them. If the method of accounting followed by the assessee is so defective that there is a possibility of suppression and leakage, the accounts can be rejected without any further material. But, if the accounts are properly maintained with all the relevant details, it is necessary for the assessee authority to place on record some material to show that the accounts are not tenable. The fact that the consumption of electricity shown by the assesses was unduly high can give rise to a strong suspicion that the assesses might have suppressed its production and thereby might have understated its sales. But, suspicion, howsoever strong it may be cannot take the place of positive material. Even if the Sales Tax Officer is able to detect one instance where the assessee might have understand its sales he would be justified in rejecting the accounts and making an estimate of the escaped turnover. But, the high consumption of electricity alone cannot be held to be a material justifying the rejection of the accounts particularly when the assessee's accounts had once been accepted during the regular assessment proceedings. "
It was therefore prayed that the impugned additions made on the basis of variation in consumption of electricity is not legally sustainable.
10. The Learned Commissioner of Income Tax(Appeals) after considering the submissions of the assessee observed that the assessee has maintained books of account, purchase and sales -8- register, Bank account etc. as per the provisions of the Income Tax Act. The books of accounts are audited under Companies act as well as under the provisions of Income Tax Act under section 44AB. While rejecting the books of account, the Learned Assessing Officer has not brought on record any material evidence to show that the same are not maintained as per the provisions of the Income Tax Act. Accordingly, he held that in his view, the Learned Assessing Officer is not justified in rejecting the assessee's books of account under section 145 of the Act.
11. Further, the Learned Commissioner of Income Tax(Appeals) observed that the Learned Assessing Officer has made the above disallowance from the ground of rejection of books of account under section 145 as well as variation in consumption of electricity. However, while making the huge addition, the assessing officer has not brought on record any material evidences to indicate that the assessee had been indulging in unaccounted manufacturing and sales. There should have been at least unaccounted purchase of raw materials to manufacture unaccounted products. Nothing is ascertained by the A.O. The books of account of the appellant are also audited by tax auditors u/s. 44AB and they have not made any adverse comments with regard to the production. The records of the appellant have also been verified by the Excise authorities and they also did not find any discrepancies. Therefore, the Learned Commissioner of Income Tax(Appeals) agreed with the contentions put forth by the A.R. of the assessee and the reliance placed on the decision of Delhi ITAT in the case of Pondy Metal & Rolling Mills (P) Ltd. Keeping in view, the above facts and circumstances of the case as well as decisions, referred as above, relied upon by the A.R. of the assessee, he held that the assessing officer is not justified in making the above disallowance. Therefore, he deleted the addition made by the A.O. of Rs.92,89,426/-.
-9-12. The Learned Departmental Representative relied on the order of the Learned Assessing Officer whereas the Learned Authorised Representative of the assessee supported the order of the Learned Commissioner of Income Tax(Appeals).
13. We have heard the rival submissions and perused the materials available on record. In the instant case, the assessee is a Private Limited Company engaged in the business of manufacture of M. S and CTD Bars. The Learned Assessing Officer observed that there was huge variation between the production shown by the assessee and the units of electricity consumed in each month during the year held that the books of accounts are not reliable and rejected the same by invoking section 145 of the Income Tax Act, 1961. He thereafter, observed that in the month of May 2004, the assessee has shown production of 133MT against consumption of 82847 units of power. Thus, he held that for 1 MT of production, 622.9 units of power consumption has been declared by the assessee. He noted that 14,15,899 units of power was consumed by the assessee in the entire year and by taking the production rate as 1 MT against consumption of 622.9 units of power arrived at total production of 2329.264 MT. as against 1736.535 MT. and by adopting the average sale price of 22436.88 MT. shown by the assessee arrived at the value of suppressed production of 592.729 MT. at Rs.1,33,04,916/-. After allowing rebate for all adverse eventualities in the production process with reference to the consumption of power unit and also considering contention of the assessee that production cannot be compared with consumption of power only estimated 70% of Rs.1,33,04,916/- as suppressed production of the assessee which worked out to Rs.92,,89,426/- and made addition to the income of the assessee. In appeal, the Learned Commissioner of Income Tax(Appeals) held that rejection of
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book result was not justified by the Learned Assessing Officer for the reason that the assessee maintained books of account which were audited under the companies act and also under section 44AB of the Income Tax Act and the Learned Assessing Officer has brought no material to show that they are not maintained as per provisions of the Income Tax Act, 1961. Further, the Learned Commissioner of Income Tax(Appeals) observed that the Learned Assessing Officer has not brought on record any material evidences which indicates that the assessee was indulging in unaccounted manufacturing and sales and made unaccounted purchases of raw materials to manufacture unaccounted products. The Learned Commissioner of Income Tax(Appeals) has also observed that the excise authorities have verified the production records of the assessee and has found no discrepancies in them. He also observed that in the similar facts and circumstances, the Delhi Bench of the Tribunal in the case of Pondy Metal and Rolling Mills P. Ltd. (Supra) deleted the addition made on account of suppressed production and deleted the addition of Rs.92,82,426/-made in the instant case of the assessee. The Learned Departmental Representative has merely relied upon the order of the Learned Assessing Officer. He could not point out any error in the above finding of the Learned Commissioner of Income Tax(Appeals). The Learned Departmental Representative could not bring any material on record to show that the assessee has purchased raw materials outside the books of account for making unaccounted production. Further, the assessee has maintained books of account, purchase and sale register and no defects could be pointed out in the same by the Learned Assessing Officer. Further, no error could be pointed out in the submission of the assessee that it has maintained RG-1 register which is subject to verification by Excise Authorities and no defect has been pointed out by them on their inspection and that the accounts of the assessee are audited under the Companies Act and the Income Tax Act, 1961
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and no adverse comments were made by the auditors on the accounts of the assessee. Further, the Hon'ble Delhi Bench of the Tribunal in the case of Pondy Metal and Rolling Mills P. Ltd. (Supra) has held that where assessee is maintaining regular books of accounts and all the purchase and sales are duly vouched and supported by raw material register, production register and finished good register which ware subject to check by excise authorities no addition can be made on account of alleged suppression of production simply on the basis of consumption of electricity. We also find that the contention of the assessee that the variation in consumption of electricity may be caused due to various reasons such as break down of machinery, quality of raw materials, thickness of finished goods and frequency of power failure, etc. could not be controverted by the Learned Assessing Officer. Rather it is observed that the above argument of the assessee was accepted by the Learned Assessing Officer to the extent of 30% for which no basis could be cited. No material was brought on record to show that it was scientific to arrive at the quantity of production merely on the basis of consumption of units of electricity. Therefore, in our considered opinion merely on the basis of units of electricity consumption, it cannot be concluded that the assessee's books of account were not reliable or the assessee is engaged in producing finished goods outside the goods of account. Keeping in view the above facts and circumstances of the case, we do not find any good reason to interfere with the order of the Learned Commissioner of Income Tax(Appeals). It is confirmed and the ground of appeal of the revenue is dismissed.
14. Ground No.3 of the appeal reads as under:-
"3. The Ld. Commissioner of Income Tax (A)-XI, Ahmedabad has erred in law and on facts in deleting the
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addition made of Rs.55,000/- on account of disallowance of interest expenses."
15. The learned A.O. has disallowed Rs.55,000/- out of interest expenses on the ground that internet free loan of Rs.5,00,000/- is given to one party. It was submitted by the assessee before the Learned Commissioner of Income Tax(Appeals) that it has not used interest bearing loan for this purpose. The assessee had sufficient interest free funds at its disposal. The assessee has a share capital and free reserve to the extent of Rs.1,02,16,696/- as on 31.03.2005 on which no interest was paid. Further the assessee has also unsecured loans of Rs.38,86,415/- as on 31.03,2005 on which no interest was paid. Reliance was also placed on the decision of ITAT, Ahmedabad in case of Torrent Financials Ltd 73 TTJ 624 wherein it was held that if the entire interest-free funds including owner's own capital, accumulated profits and other interest-free creditors and loans, does not exceed total interest-free advances including debit balances of partners account then no interest is disallowable on account of utilisation of fund for non-business purposes.
16. The Learned Commissioner of Income Tax(Appeals) after considering the submissions made by the Assessee held that during the year under consideration, the assessee had sufficient interest free funds as well as share capital & interest free reserve fund to the extent of Rs.1,02,16,696/- on which no interest was paid by the assessee. The assessee has also unsecured loans to the extent of Rs.38,86,415/- and no interest was also paid on this amount. Therefore, the addition made by the A.O. is unwarranted and not justifiable.
17. The Learned Departmental Representative supported the order of the Learned Assessing Officer whereas the Learned Authorised
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Representative of the assessee supported the order of the Learned Commissioner of Income Tax(Appeals).
18. We have heard the rival submissions and perused the materials available on record. The assessee made interest free advance of Rs.5,00,000/- during the year under appeal. The Learned Assessing Officer disallowed interest @ 11% on the said amount which worked out to Rs.55,000/- on the ground that borrowed funds have been advanced for non business purposes without charging interest. The Learned Commissioner of Income Tax(Appeals) observing that the assessee had sufficient interest free funds available to advance Rs.5,00,000/- out of the same deleted the disallowance made by the Learned Assessing Officer. The Learned Departmental Representative could not point out any error in the above finding of the Learned Commissioner of Income-tax (Appeals) by bringing cogent and relevant material on record to show that the assessee had advanced Rs.5,00,000/- in question out of the interest bearing borrowed funds or to show that assessee could not have advance Rs.5,00,000/- out of the interest free funds available with it. In absence of any such evidence being brought on record, we do not find any good reason to interfere with the order of the Learned Commissioner of Income Tax(Appeals). We therefore, confirm the order of the Learned Commissioner of Income Tax(Appeals) and dismiss the ground of appeal of the revenue.
19. Ground No.4 of the appeal of the assessee reads as under:-
"4. The Ld. Commissioner of Income Tax (A)-XI, Ahmedabad has erred in law and on facts in deleting the addition made of Rs.33,000/- on account of disallowance of interest on cash balance."
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20. The assessing officer observed that the assessee was keeping cash in hand of Rs.3,00,000/- and inspite of this was withdrawing money from bank for its business purposes. Therefore, he disallowed of interest @ 11% on Rs.3,00,000/- and made addition to the income of the assessee. In appeal, the Learned Commissioner of Income Tax(Appeals) deleted the addition observing that the auditors of the company have not made any adverse comments on this issue. We find that it is not the case of the revenue that cash in hand was utilised by the assessee for non business purposes or cash in hand was kept for any purpose other than the business consideration by the assessee. In our considered opinion, how much cash should be maintained by a businessman is the prerogative of the businessman and the Learned Assessing Officer cannot lay down any guidelines in this regard. A businessman may make an imprudent decision but that by itself does not entitle the Assessing Authority to not to allow deduction for expenses incurred out of commercial expediency. Thus, we find that the addition of Rs.33,000/- was made on a wrong footing and the Learned Commissioner of Income Tax(Appeals) was fully justified in deleting the same. Therefore, this ground of appeal of the revenue is dismissed.
21. In the result, the appeal of the revenue is dismissed.
Order signed, dated and pronounced in the Court on 18th day of June, 2010.
Sd/- Sd/-
( T.K. SHARMA ) ( N.S. SAINI )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; On this 18th day of June, 2010
Paras
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Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT Concerned
4. The ld. CIT(Appeals)-XI, Ahmedabad.
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER,
स᭜यािपत ᮧित //True Copy//
(Dy./Asstt.Registrar), ITAT, Ahmedabad
Date Initials
1. Draft dictated on 10.06.2010 -------------------
2. Draft Placed before authority 11.06.2010 -------------------
3. Draft proposed & placed 11.06.2010 ------------------- JM
Before the Second Member
4. Draft discussed/approved 11.06.2010 ------------------- JM
By Second Member
5. Approved Draft comes to P.S 14.06.2010 --------------------
6. Kept for pronouncement on 18.06.2010 --------------------
7. File sent to the Bench Clerk 18.06.2010 --------------------
8. Date on which file goes to the ---------------- --------------------
9. Date of dispatch of Order ---------------- ---------------------