Income Tax Appellate Tribunal - Raipur
M/S Bhagwati Power & Steel Ltd,, Raipur vs Deputy Commissioner Of Income Tax ... on 9 May, 2024
आयकर अपीलीय अिधकरण, रायपुर यायपीठ, रायपुर
IN THE INCOME TAX APPELLATE TRIBUNAL RAIPUR BENCH, RAIPUR
ी र वश सूद, याियक सद य एवं ी अ ण खोड़ पया, लेखा सद य के सम ।
BEFORE SHRI RAVISH SOOD, JM & SHRI ARUN KHODPIA, AM
(ITA No.162/RPR/2022)
(Assessment Year:2011-12)
Dy. Commissioner of Income Tax V M/s Bhagwati Power & Steel Limited,
(Central Circle-2), s D-22, Sector-5, Devendra Nagar,
Raipur, C.G. Raipur, (C.G.)
PAN: AACCB4646A
Cross Objection No. 11/RPR/2022
(Assessment Year: 2011-12)
Arising out of ITA No. 162/RPR/2022
M/s Bhagwati Power & Steel Limited, V Dy. Commissioner of Income Tax
D-22, Sector-5, Devendra Nagar, s (Central Circle-2),
Raipur, (C.G.) Raipur, C.G.
PAN: AACCB4646A
(अपीलाथ /Applicant) : ( यथ / Respondent)
िनधा रती क ओर से /Assessee by : Shri R.B. Doshi, CA
राज व क ओर से /Revenue by : Shri Satya Prakash Sharma, Sr. DR
सुनवाई क तार ख / Date of Hearing : 24.04.2 024
घोषणा क तार ख/Date of Pronouncement : 09.05.2 024
आदे श / O R D E R
Per Arun Khodpia, AM:
The captioned appeal is filed by the revenue and cross-objection by the assessee against the order of Commissioner of Income Tax (Appeals)- 3, Bhopal, (In Short CIT(A)), dated 24.06.2022, which in turn arises from the order of Additional Commissioner of Income Tax, Range-1, Raipur, C.G. u/s 143(3) dated 28.02.2014 for the assessment year 2011-12. 2 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited
2. The Grounds of Appeal raised by the department are as under:
1. Deletion of disallowance of interest expenses for diversion of borrowed funds without any commercial expediency aggregating to Rs.47,47,368/- u/s 36(1)(iii)/37(1) of the Act 1961 ignoring the detailed findings of AO in the assessment order.
2. Deletion of disallowance of interest expense on account of diversion of borrowed funds aggregating to Rs. 12,81,000/-
relatable to advances to M/s Cathar Vessels Pvt Ltd & M/s Triveni Engg. Industries without any actual purchase of goods, made by AO u/s 36(1)(iii)/37(1) of the Act, 1961.
3. Giving relief of Rs .64,074/- in respect of addition of Rs. 3,20,798/-
made by AO on account of interest free loan to directors, considering the interest rate @12% whereas the prevalent market interest rate is 15%.
4. Disallowance of Rs. 36,768/- made by AO on account of post due date/delayed payment of employee's contribution to the PF/ESI u/s 2(24)(x) r.w.s. 36(1)(va) of the Income-Tax Act, 1961 misinterpreting that the amendment to Finance bill 2019 (no 13 of 2021) in section 43B has prospective effect.
5. Disallowance of expenditure claimed by way of remuneration to directors amounting to Rs. 18,00,000/- u/s 40A(2)(a) of the Income-Tax Act, 1961.
6. Addition of Rs. 1,51,53,355/- made to the manufacturing & trading account of the appellant being undisclosed gross profit on undisclosed sales and also ignoring the fact that the assessee failed to submit separate manufacturing and P/L account for pre- survey and post period showing the undisclosed income admitted during the survey proceedings as requisition.
3 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited
3. The Grounds of Cross Objection filed by the assessee are as under:
1. Ld. CIT(A) erred in confirming the disallowance to the extent of Rs.
4,42,841/- out of disallowance of Rs. 51,90,209/- made by AO on account of interest u/s 36(1)(iii)/37. The disallowance made by AO and confirmed by Ld. CIT(A) is arbitrary and not justified.
2. Ld. CIT(A) erred in confirming the disallowance to the extent of Rs.
2,56,297/- made by AO on account of interest free advance. The disallowance made by AO and confirmed by Ld. CIT(A) is arbitrary and not justified.
3. The cross objector reserves the right to add, amend or alter any of the grounds of cross objection.
3. Brief facts of the case culled out from the records are that the assessee is engaged in Manufacture & Sale of Sponge Iron. The return of income was filed electronically for the A.Y. 2011-12 on 29.09.2011 declaring total income of Rs. 3,01,26,794/-, book profit for MAT purposes was shown at Rs. 3,56,27,120/- on which the tax liability was worked out to be less than the tax payable under the normal provisions. The case was selected for scrutiny and the first notice u/s 143(2) dated 28.09.2012 was issued by ACIT-1(2), Raipur, which was duly served on the assessee on 28.09.2012. In response to the said notice, a written request dated 05.10.2012 was filed by the assessee seeking adjournment which was granted. Further a notice u/s 142(1) of the I.T. Act a/w detailed questionnaire was issued on 21.08.2013 following further notices on 1.11.2013 & 7.1.2014. Authorized representatives of the assessee had 4 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited attended the assessment proceedings from time to time and filed return submissions and produced details and books of accounts etc. Various issues were discussed by the Ld. AO, explanations and submissions of the assessee were considered, however dissatisfied with the explanations of the assessee certain disallowances have been made by the Ld. AO for Rs.2,37,82,130/-, thereby the assessed income of the assessee have been escalated to Rs.5,39,08,930/-.
4. Aggrieved by the aforesaid additions by Ld. AO, the assessee has preferred an appeal before the Ld. CIT(A), Bhopal, wherein the appeal of the assessee is partly allowed.
5. To challenge the decision of Ld. CIT(A) providing relief in terms of deleting the disallowances/ additions made by the Ld. AO, the aggrieved revenue is now in appeal before us, whereas the assessee has also filed a cross objection challenging the decision of Ld. CIT(A), pertaining to the issues wherein the disallowances were confirmed by the Ld. CIT(A).
6. First, we are taking up the grounds of appeal of the revenue for our deliberation and adjudication:
7. Ground no. 1, 2 & 3: Deleting the disallowance of interest u/s 36(1)(iii)/37(1) of the Act.
5 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 7.1 At the very inception of the hearing Ld. Sr. DR drew our attention to the observations of Ld. AO on the issue wherein it is observed that there were advanced against capital goods of Rs.4,38,04,724/- and advanced against supply of Raw material of Rs.3,67,29,366/- for which details were sought from the assessee. In reply it is submitted by the assessee that a sum of Rs. 51,90,500/- was advanced to Vikruti infrastructure Pvt. Ltd. and Rs. 62,51,819/- to M/s Harsha Rice Mills Pvt. Ltd. towards the purchase of capital goods, apart from that an amount of Rs. 2,75,00,000/- was also advanced to M/s Aliza International Pvt. Ltd. for the purchase of Raw Material. After examining the information submitted by the assessee Ld. AO had observed that the assessee has failed to discharge its onus of proving that the advances in the form of the loans (so called advances against capital goods/raw material) was either out of commercial expediency or was not out of the interest-bearing borrowed funds. Ld. AO, therefore, has worked out the amount of interest on such funds provided by the assessee to the aforesaid 3 parties @15% & accordingly, had made an addition of Rs.51,90,209/- u/s 36(1)(iii)/37(1) of the Act.
7.2 Before Ld. CIT(A) the assessee has again raised the argument that advance to Vikruti infrastructure Pvt. Ltd. and M/s Harsha Rice Mills Pvt. Ltd. were provided towards the purchase of capital goods, also the assessee has advanced additional argument that sufficient interest free funds were available in the form of share capital and reserves and 6 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited surplus amounting to Rs.25.36 crores as on 31.03.2010. The findings of the Ld. CIT(A) on all such issues have been recorded at para 3.1.6, 3.1.7, 3.1.8 & 3.1.9 of his order. Ld. Sr. DR read and discussed the findings of Ld. CIT(A), however for the sake of clarity the findings of Ld. CIT(A) are extracted as under:
3.1.6 I have considered the facts of the case, plea raised by the appellant and findings of the AO. On perusal of written submission filed y the appellant, it has been claimed by the appellant that the advance against capital goods given to M/s Virukti Infrastructure Pvt Ltd and M/s Harsha Rice Mills Pvt Ltd has given for purchase of capital goods and the same has been given out of interest free funds available with the appellant in the form of share capital and reserves & surplus amounting to Rs. 25,35,90,983/- as on 31.03.2010. It has also been claimed by the appellant that there was mixed pool of funds, i.e. interest free and interest-bearing funds, however, the appellant by placing reliance on the decision of Hon'ble Bombay High Court in the case of CIT vs Reliance Utilities & Power Ltd (2009) 313 ITR 340 (Bom) has claimed that the advance has been given out of interest free funds. The appellant during appellate proceeding has also established that interest free funds by way of realization from debtors were received before the amounts were given as advance to said parties. In support appellant has filed copy of ledger account of the bank containing mixed pool of funds. On perusal of the said ledger account, the following has been observed: - 7 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited M/s Vikruti Infrastructure Pvt Ltd.: -
Date of Amount Dates of Amount Payments made other Funds available for Interest free
advance realization of realized than to Vikruti advance to Vikruti funds
payment amounts from Infrastructure P Ltd Infrastructure P Ltd available with the
debtors appellant
17.05.2010 1300000 13.05.2010 to 4421765 2137607 2284157 2284157
15.05.2010
18.05.2010 3800000
27.05.2010 166000 26.05.2010 4000000 3300296 699704 699704
03.11.2010 874500 01.112010 & 1746309 5058251 -3311942 0
02.11.2010
04.12.2010 550000 01.12.2010 & 899977 57890 842087 842087
03.12.2010
M/s Harsha Rice Mill Pvt
Ltd.: -
Date of Amount Dates of Amount Pay Funds available Interest free
realized me on
advance Realization of nts funds
payment amounts from Harsh Harsha Rice available with
a
debtors Mill Mill Pvt Ltd the appellant
Pvt
Ltd
12.07.2010 1300000 08.07.2010 to 3391926 1924 1467016 1467016
909
10.07.2010
31.12.2010 1400000 23.12.2010 1982721 6922 1913494 1913494
7.
29.03.2011 4001819 28.03.2011 5884768 9205 4964209 4964209
59
From the above, it is evident that the appellant has sufficient interest free funds to advance the same to M/s Harsha Rice Mill Pvt Ltd, however, in the case of M/s Vikruti Infrastructure Pvt Ltd the appellant has utilized interest bearing funds to the tune of Rs. 28,15,843/- (Rs. 51,00,000/- - Rs. 22,84,157/-) on 18.05.2010 and Rs. 8,74,500/- on 03.11.2010. Therefore, the AO was fully justified in disallowing interest for diversion of funds, as mentioned above. Further, the appellant has strongly contended that the bank has charged interest @ 11%, and the ld. AO has disallowed interest expenses @ 15% which is on the basis of sheer presumption. I find the plea of the appellant genuine and reasonable, and the rate adopted by the AO is on higher side as compared to prevailing lending rates. Therefore, in 8 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited the interest of natural justice the interest rate is adopted @ 12% p.a. Therefore, the AO is hereby directed to disallow interest expenses by adopting rate of interest @ 12% on sum of Rs.36,90,343/- (Rs. 28,15,843/- + Rs. 8,74,500/-), as discussed herein above.
3.1.7 With regard to advance give to M/s Aliza International Pvt Ltd, it has been claimed by the appellant that the said advance has been given for purchase of raw material i.e. iron ore and therefore, the advance was given for business purpose only The appellant has further claimed that M/s Aliza international Pvt Ltd is a sister concern and trading firm of mine owners M/s Serajuddin & Co. Kolkata. The appellant has advanced sum of Rs.
2,75,00,000/- till 31.03.2011 and Rs. 3,29,28,000/- till 09.08.2011. However, on directions from M/s Serajuddin & Co the amount of advance given to M/s Aliza International Pvt Ltd was transferred to M/s Serajuddin & Co and the same was adjusted against supply of iron ore. In support appellant has filed copies of relevant ledger account. The appellant in support has filed copy of communication received from M/s Aliza International Pvt Ltd, inspection report of government authorities and copy of delivery challan against advanced amount.
On perusal of documentary evidences filed by the appellant, it has been transpired that appellant has received a letter form M/s Aliza International Pvt Ltd stating that to whom the delivery order has been issued by M/s Serajuddin & Co on behalf of M/s Aliza International Pvt Ltd shall deposit their balance amount till 10.08.2011 for getting required permission in their names, if not done so the delivery order will be cancelled for non- payment within due dates. Further, on perusal of Inspection report by Task Force-II in the case of M/s Serajuddin & Co, it has been observed that the said concern has stopped mining activities since 18.06.2010. however, mining activities were resumed, and appellant received delivery order vide letter dated 21.07.2011 and thereafter, various order have been received by appellant and as on 30.12.2012 the appellant has to pay sum of Rs. 5,34,72,857/- against goods received which has been adjusted with the advance amount given to M/s Aliza International Pvt Ltd amounting to Rs. 3,29,28,000/- which includes amount of advance of Rs. 2,75,00,000/- given during the year under consideration. Thus, the advance given during the year has been towards purchase of iron ore and the same has been adjusted in 9 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited subsequent years. The delay in adjustment has been attributed due to pause in mining activities by the seller. Thus, the AO was not justified in disallowing the interest expenses by treating the same as diversion of borrowed funds. Hence, addition made on this account is directed to be deleted. 3.1.8 With regard to advance given to M/s Cethar Vessels P Ltd (Rs. 55,40,000/-) and M/s Triveni Engineering & Industries Ltd (Rs. 30,00,000/-), the appellant has strongly contended that the impugned advance was given for purchase of Boiler and Steam Turbine Generator Set. In support appellant has filed copy of letter of intent mentioning the said order: However, the goods were not delivered and appellant vide correspondence with both the companies dated 30.09.2006 & 26.12.2006 requested them to refund the advance amount, however, the advance was not returned. Therefore, the appellant filed a Civil Suit in the Court of District Judge, Raipur. In support appellant has filed various documentary evidence in support of its claim. On perusal of evidences on record, it has been observed that the appellant has issued a Letter Of Intent - (LOI) dated 17.06.2006 to M/s Triveni Engineering & Industries Ltd for purchase of '10MW Steam Turbine Generator Set'. The letter of intent also mentions the reference of series of communication between the appellant and the seller. The total cost as per LOI was determined at Rs. 627.51 Lakhs, including supply of equipment and Erection & Commissioning and the appellant as a advance amount was required to pay 5% of the supply order value. The appellant therefore, as per payment schedule made advance payment of Rs. 30,00,000/-. However, due to some modification in sponge iron plant, the appellant vide letter dated 30.09.2006 requested the seller to put on hold the supply of equipment and refund the advanced amount. The appellant again vide letter dated 26.12.2006, the appellant mentioned that the power project is kept in abeyance due to paucity of funds and requested the seller to refund the advance amount. Similarly, the appellant has issued a Letter of Intent (LOI) dated 29.06.2006 to M/s Cethar Vessels Pvt Ltd for purchase of ' boiler and heat recovery boiler'. The letter of intent also mentions the reference of series of communication between the appellant and the seller. The total cost as per LOT was determined at Rs. 1145 Lakhs, including supply of equipment, Erection & Commissioning and transportation and the appellant as a advance amount was required to pay 5% of the supply order value. The appellant therefore, as 10 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited per payment schedule made advance payment of Rs. 55,40,000/-. However, due to some modification in sponge iron plant, the appellant vide letter dated 30.09.2006 requested the seller to put on hold the supply of equipment and refund the advanced amount. The appellant again vide letter dated 26.12.2006, the appellant mentioned that the power project is kept in abeyance due to paucity of funds and requested the seller to refund the advance amount.
Since, both the parties failed to refund the advanced amount, the appellant filed a civil suit in the Court of District Judge, Raipur against both the parties. The appellant has also mentioned about the said lawsuit in its audited books, of account under Schedule- U, clause 22. Considering the evidences on record, the appellant has advanced the amounts for commissioning its power plant, however, the same did not work and the seller became hostile and did not refund the advanced amount, which is not in control of the appellant. Since, the advance was given for business purpose, therefore, the AO was not justified in disallowed proportionate interest expenses by invoking provisions of section 36(1)(iii)/37(1) of the Act. Thus, the upward adjustment made by the AO on this account is directed to be deleted. 3.1.9 With regard to disallowance of interest on account of interest free advances given to director of the appellant company, the appellant has claimed that Shri Rajkumar Kejriwal has to travel for business purpose to different places and it requires money. Further, he is looking after day-to-day commercial operations of the company and for that reason also advance was given for business purpose. The appellant by taking alternate plea has contended that the advances have been given out of interest free funds available in the form of share capital and reserves and premium amounting to Rs. 27,70,06,774/- as on 31.03.2010. Further, the AO has disallowed proportionate interest by applying rate @ 15%, however, the bank has changed interest @ 11%. After considering plea of the appellant, I am of the considered opinion that the appellant has failed to explain why huge amounts were advanced to director, Shri Rajkumar Kejriwal for travelling purpose. The appellant did not submit any details. regarding travel made by the director, details of business deal for which travelling was done etc., Further, it is apparent from balance sheet of the appellant that it is having interest free funds in the form of share capital and reserves and surplus, however, the same were not available in bank account. These interest free funds have already been applied in the business of the appellant and therefore, the appellant has taken cash credit limit from bank on which interest have been paid. It is also not the case of mixed 11 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited pool of funds i.e. interest bearing and interest free funds. Thus, I find no infirmity in findings of the AO that interest bearing funds have been diverted as interest free funds to director. Further, the appellant has strongly contended that the bank has charged interest @ 11%, and the Id AO has disallowed interest expenses @ 15% which is on the basis of sheer presumption. I find the plea of the appellant genuine and reasonable, and the rate adopted by the AO is on higher side as compared to prevailing lending rates. Therefore, in the interest of natural justice, the interest rate is adopted @ 12% p.a. Therefore, the disallowance made by the AO amounting to Rs.2,56,297/- is confirmed and appellant gets relief of Rs. 64,074/-. 7.3 In view of the aforesaid findings of Ld. CIT(A), it is submitted by Ld. Sr. DR that the perception of Ld. CIT(A) was not logical, wherein the contention of the assessee has been accepted qua availability of interest free funds, the observations are ignoring the detailed findings of the AO, wherein it is categorically mentioned that there is diversion of borrowed funds without any commercial expediency. Under such facts and circumstances Ld. Sr. DR requested to repeal the order of ld. CIT(A) and the additions made by the Ld. AO on the basis of logical analysis of the facts should be restored and sustained.
7.4 Ld. AR of the assessee, refuted against the submission of the Ld. Sr. DR that the assessee company has interest free funds of more than 25.35 crore at the opening of the year and 27.70 crore at the end of the year i.e., 31.03.2011. Copy of Balance sheet for the year ended 31.03.2010 was furnished in the PB, also copy of Balance sheet for the year ended 31.03.2011 was placed before us. Ld. AR has submitted a written submission in this regard the same is extracted as under: 12 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited Ground No. 1 AO : Page No. 2 to 10, para no. 2.1 CIT(A): Page no. 17 to 21, Para No. 3.1.6 to 3.1.8 Submission of assessee
1. Sufficient interest free funds There were interest free funds of more than Rs.25.35 crore at the opening of year and Rs. 27.70 crore as at 31.03.201 1. Balance sheet as on 31 .()3.2010 at PN 66 of PB. Reliance on: -
i) CIT vs Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom.), PN 191 to 196 of PB. Relevant finding at PN 195 of PB, para no. 10. --
Presumption that investment was from interest free funds.
ii) ACIT vs Madhu Fertilisers Encl., PN 197 to 203 of PB, relevant finding at PN 202, tenth line from bottom.
iii) JCIT vs Beekay Engineering Corporation (2010) ITR 384, 388 (Chhattisgarh), PN 204 to 207 of PB, relevant finding at PN 207 of I) B, para no. 1 l .
2. Major part of disallowance is attributable to advance given to Aliza International P. Ltd. The amount was given for purchase of raw material i.e. iron ore.
i) Aliza International P. Ltd. is sister concern of mine owners Serajuddin & Co., Kolkata to whom Rs. 2,75,00,000/- was advanced on 08.04.2010 for supply of iron ore.
ii) This payment transferred from the account of this company to M/S Serajuddin & Co. as per their instructions.
iii) Assessee purchasing iron ore from M/S Serajuddin & Co. and so the advance of Rs. 2,75,00,000/- was adjusted against supply of iron ore by M/S Serajuddin & Co.
iv) Copy of account of MIS Scraiuddin & Co. at PN 51 & 52 of PB, substantiating regular purchase from them.
v) Copy of account of Aliza International P. Ltd. showing transfer entries at PN 53 & 54 of PB.
vi) M/S Serajuddin & Co. was closed for some time due to mining issues.
Report of inspection by government authorities certifying temporary closure of M/S Serajuddin & co. at PN 55 of PB.
13 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited
vii) Letter of Aliza International P. Ltd. at PN 56 of P B. Sale cum delivery order issued by M/S Serajuddin & co. at PN 57 to 60 of PB.
3. Advance given to Vikruti Infrastructure P. Ltd. & Harsha Rice Mills Pvt. Ltd. -- Assessee had enough interest free resources, working whereof is at PN 4 of PB
4. Ld. CIT(A) referred to the availability of funds on the relevant dates (PN 17 of appellate order), which is not justified. When the funds are mixed, both interest bearing and interest free, overall view is to be taken and each entry could not have been considered separately by the Id. CIT(A).
Ground no. 2
AO :Page no. 10 to 13, para no 2.2
CIT(A):Page no. 20 & 21, para no. 3.1.8
Submission of the assessee
l . Advance given for purchase of boiler & steam turbine generator set. Both are opening balance.
2. LOI issued to both suppliers
i) Letter of intent (LOI) to Cethar Vesels for boiler at PN 127 to 130 of PB.
Order value Rs. 1,108 lakhs (excluding transportation), 5% advance payment with LOI (PN 128 of PB) paid, amounting to Rs. 55.40 lakhs.
ii) LOI to Triveni Engineering for turbine generator set at PN 131 to 135 of P B. Order value Rs. 627.51 lakhs, 5% advance payment with LOI (PN 133 of PB) paid, amounting to Rs. 30 lakhs.
3. Project kept in abeyance, advance requested to be refunded Due to some modification in sponge iron plant & fund crisis, procurement was kept on hold and the power project was kept in abeyance and so refund was requested.
Letters addressed by assessee to suppliers to refund the amount, which was not returned by them. Letters at PN 136 & 137 of PB.
4. Civil suit for recovery of advance
i) Assessee filed civil suit, at PN 138 to 145 of PB (Cethar Vessels) and PN 147 to 155 of PB (Triveni Engineering).
14 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited
ii) Such litigation was mentioned in the audited accounts in clause no. 22 in Schedule U (PN 160 of PB).
5. Advance established to be given for business purpose. Disallowance not justified.
Ground no. 3
AO : Page no. 13 to 15ypara no. 2.3
CIT(A): Page No. 21 & 22, Para no. 3.1.9
Submission of the assessee
1. Assessee possessed interest free funds to the extent of Rs. 25.35 crore as on 31.03.2010 & Rs. 27.70 crore as on 31.03.2011 .
2. Advance to director is covered by interest free 7.5 With the aforesaid submissions Ld. AR submitted that the assessee has sufficient interest free funds in the form of share capital and reserves and surplus, moreover, the advances were extended for commercial expediency of the business of the assessee therefore, addition u/s 36(1)(iii) is uncalled-for and therefore, the same deserves to be vacated.
7.6 We have considered the rival submissions, perused the material available on record and the judicial pronouncements relied upon. In the present case there were additions u/s 36(1)(iii)/37(1) pertaining to advances made to different parties, having different transactions. We have deliberated upon the issue in terms of facts of each party in the ensuing para's:
15 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 7.7 Advance to M/s Vikruti Infrastructure Pvt. Ltd. and M/s Harsa Rice Mills Pvt. Ltd., these two parties have been provided with advance of Rs.51,90,500/- and Rs.62,51,819/-, which during the assessment proceedings have been explained as advance made towards capital goods, therefore, the advance made is in the nature of commercial expediency of the business of the assessee, however, such contention by the assessee could not be substantiate with corroborative evidence, thus, the assessee has added another contention that the advances were made out of interest free funds available with the appellant. On this aspect Ld. CIT(A) have examined the copy of ledger account of cash credit maintain with OBC, Raipur and has arrived at a conclusion that the assessee has received certain funds from certain parties during a particular time range and the same has been utilized by the assessee for advances to be extended to the aforesaid impugned creditors. On perusal of copy of cash credit account placed before us at page no. 71 to 124 of the Assessee's PB (though not supported with copy of bank statement of the bank), we have noted that the opening balance as on 01.05.2010 of the said account was in credit by Rs.59.58 Lacs and similarly the closing balance as on 31.12.2010 is also in credit by Rs.129.56 Lacs, accordingly the assessee is regularly having credit balance in the cash credit account, so has consistently utilized the credit facility of the bank, thus, have no interest free funds to be advanced.
Such facts are duly recognized by the Ld. CIT(A) also while dealing with the advances were extended to director of the company Mr. Rajkumar 16 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited Kejriwal towards travel for business purposes for which a disallowance of Rs.3,20,798/- was made by the Ld. AO. The observation of Ld. CIT(A) is very clear w.r.t. interest free funds wherein it is noted by him that:
" Further, it is apparent from balance sheet of the appellant that it is having interest free funds in the form of share capital and reserves and surplus, however, the same were not available in bank account. These interest free funds have already been applied in the business of the appellant and therefore, the appellant has taken cash credit limit from bank on which interest have been paid. It is also not the case of mixed pool of funds i.e. interest bearing and interest free funds. Thus, I find no infirmity in findings of the AO that interest bearing funds have been diverted as interest free funds to director."
7.8 Such categorical finding of Ld. CIT(A) shows that the assessee has utilized the funds from cash credit limit availed from the bank on which regularly interest is also paid, therefore, the concept of mixed pool of funds utilized by the assessee for the advances made to parties cannot be acceded to, the observation of Ld. CIT(A) on the basis of realization of amounts from the debtors within a particular time range debited to cash credit account but are not adequate enough to turn the balance of cash credit account into debit, thus, in case of impugned parties the conclusion of Ld. CIT(A) found to be contradictory to his own finding in the case of advance to director. In view of such observations, we are convinced with the view taken by the Ld. CIT(A) with relation to the advance extended to the director of the company, that the advances made was from interest bearing funds with no commercial expediency and therefore, the disallowance u/s 36(1)(iii) is directed to be confirmed, yet the rate of 17 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited interest @15% p.a. adopted by Ld. AO on presumptive basis found to be excessive, therefore, the reasonable rate adopted by Ld. CIT(A) i.e., @12% p.a. should be applied. The ratio of our decision shall be mutatis mutandis applicable on the following advances:
Sr. Name of Party Amount
no. Advanced (INR)
1. M/s Vikruti Infrastructure Pvt. Ltd. 51,90,500/-
2. M/s Harsha Mills Pvt. Ltd. 62,51,819/-
3. Mr. Rajkumar Kejriwal As per Para 2.3
of the
Assessment
order
7.9 Regarding advance to M/s Aliza International Pvt. Ltd. & M/s Cethar Pvt. Ltd. & M/s Triveni Engineering and industries Ltd., Ld. CIT(A) has comprehensively dealt with the issue, examined and deliberated upon the facts thereby the assessee succeeds in its contentions that those advances were made for the business purpose of the assessee and, therefore, the addition made was within the space of commercial expediency, delay in transactions for which such advances made were beyond the control of the assessee has been duly explained with supporting evidences. We, therefore, in concurrence with the findings of Ld. CIT(A) (as extracted supra) in deleting the additions made by Ld. AO towards the advances made to M/s Aliza International Pvt. Ltd., M/s Cethar Vessels Pvt. Ltd. & M/s Triveni Engineering and Industries Ltd., in absence of any clinching submission or clarification by the revenue, observed no deformity in the order of Ld. CIT(A), thus, refrain ourselves to interfere with the same.
18 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 7.10 In the result, ground no. 1 of the department is partly allowed for statistical purposes, ground no. 2 & 3 of the department are dismissed in terms of our observations as above.
8. Ground no. 4: Disallowance on account of delayed payment of employee contribution of PF/ESI.
8.1 On this ground Ld. CIT(A) have discussed various decisions of Hon'ble Apex Court, Hon'ble High Courts, and coordinate bench of the tribunal. Having decisions in favor of the assessee and against the assessee, taking a liberal view, the issue is decided in favor of the assessee.
8.2 Since this issue is no more res integra on which the position is settled by Hon'ble Apex Court in the case of Checkmate Services Pvt ltd Vs CIT- I, dated 12.10.2022, and accordingly the delay in payment of employee's contributions PF & ESI cannot be claimed as allowable expenditure.
8.3 On this issue, during course of hearing Ld. AR conceded with the ground raised by the revenue, therefore, Ground No. 4 of the revenue is allowed in favour of the department.
19 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited
9. Ground no. 5: Disallowance of expenditure 40A(2)(a) 9.1 The brief facts of the issue are that during the course of assessment proceedings, Ld. AO has raised a query to justify with evidence and detail computation regarding the payments made to persons specify in section 45A(2)(b) of Income Tax Act. While responding to the query of Ld. AO, assessee submitted that the director's remuneration paid during the year is strictly in accordance with computation as per Section 349 of the Companies Act, 1956. Such response of the assessee was considered as limited answer to the query with regard to computation of the remuneration under the companies act. Further, Ld. AR denoted the statement of Shri Rajkumar Kejriwal Director of the Company recorded during survey u/s 133A of the I.T. Act, dated 06.07.2010, wherein he has stated as under:
Q: " आपके ारा बताये गए कंपनी के और दो डायरे टर या काम दे ख ते है ?
Ans: " ीमती सरोज केजर वाल जो क मेर प ी है basically housewife है जो क कंपनी का थोडा बहुत काम दे खती है . ी क यप केजर वाल जो क मेरा पु है जो क अभी puna म रह कह पढाई कर रहा है जो क कंपनी का थोडा बहुत काम दे ख ता है . "
9.2 Apropos, aforesaid answer of the Director of Company, the Ld. AO required the assessee to explain the actual service provided by the 20 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited specified persons in justification of remuneration paid to them. In reply the assessee failed to substantiate that the relative directors have actually worked for the business of the company. Ld. AO further observed that the assessee company has not provided any specific detail pertaining to the services rendered by such directors. According to Ld. AO, the onus of justification of payment to specified persons was on the assessee but the assessee company has miserably failed to demonstrate the same. With such observations Ld. AO has made the addition of Rs.18 lacs under the provisions of section 40A(2)(a). While dealing with this issue Ld. CIT(A) had decided the issue in favor of the assessee observing that the assessee in its written submissions has clarified that Smt. Saroj Kejriwal is involved in supervision of staff, follow- up of work assigned to staff and monitoring of routine revenue expenditures, besides that she has also attended the board meetings, which is apparent from attendance sheet of the board meeting and voucher of revenue expenditure duly signed by Smt. Saroj Kejriwal. Shri Kashyap Kejriwal is pursuing CA course at Pune and is looking after the technical aspects, finance, and certain policy matters of the company. He has been involved in recovery from debtors, scheduling of various payments etc., he also had attended the board meetings of the company. Which such observations Ld. CIT(A) has deleted the addition invoked by the Ld. AO.21 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 9.3 Ld. Sr. DR on the issue of disallowance u/s 40A(2)(b) has vehemently relied upon the order of Ld. AO and requested to set aside the decision of Ld. CIT(A) by restoring the addition made by the Ld. AO. 9.4 Ld. AR of the assessee, contradicting the submissions of the revenue has submitted a written submissions towards the Ground No. 5 of the appeal of revenue, the same is extracted as under:
Ground no. 5
AO : Page no. 19 & 20
CIT(A) : Page no. 44 to 46ypara no. 3.3. 1 to 3.3. A
Submission of the assessec
1. Conditions for invoking sec. 40A(2)(b) not satisfied. Initial burden on the AO to demonstrate that expenditure claimed is excessive or unreasonable. For this, AO was required to bring on record material in support of fair value of services rendered & comparison thereof with remuneration paid. In absence of any exercise, disallowance was not permissible. Reliance on:
- Nat steel Equipment (P.) Ltd. vs DCIT (2018) 171 ITT) 482 (Mum.)
- Motilal Laxmichand Sanghavi vs ACIT (2019) 178 IT D 710 (Mum.)
- IKEA Trading (India) 1 ,td. vs DCIT (2021) 186 ITT) 473 (Del.)
- Kimaya Impex (P) Ltd. vs ITC) (2022) 1 9 3 1'll) 710(Mum.)
2. Smt. Saroj Kejriwal looked after administrative work of the company while Kashyap Kejriwal looked after finance, recovery from debtors etc.
3. Attendance sheet of meeting of Board of Directors (PN 164 to 174 of P B), minutes book of AGM (PN 175 & 176 of P B) shows that Snot. Saroj Kejriwal & Kashyap Kejriwal have attended all meeting of BOD & AGM. 22 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited
4. Copy of some of the vouchers of expenses at PN 1 77 to 1 8.3 of PB shows involvement of Smt. Saroj Kejriwal, her indulgence in administrative and managing of business.
5. Shri Kashyap Kejriwal completed B.Com in the year 2009 and pursuing CA course during the relevant time. Due to family background and his studies, he contributed substantially towards business activity. 9.5. Ld. AR extending the arguments further, has submitted that the initial burden to demonstrate that the expenditure claimed are excessive or unreasonable was on AO to bring on record material in support of fair value service rendered & comparison thereof with remuneration paid. In absence of such exercise, disallowance is not permissible. in order to substantiate the Assessee's contentions, Ld AR drawn our attention to the copies of attendance sheet of board meetings affixed in the Assessee's PB (Page no. 164 to 174), extract of minutes of AGM (175-
176), copy of some expense vouchers bearing signatures of directors (177-183), accordingly it is submitted that both the directors were working for the company and have reasonably paid therefore, disallowance u/s 40A(2)(a) is uncalled for.
9.6. We have considered the rival submissions, perused the material available on record and the case laws relied upon by the Ld. AR. In the present case as per order of Ld. AO and the statement of Managing Director of the company stating the fact that his son Shri Kashyap Kejriwal was studying in a college at Pune during the relevant period, his wife Smt. Saroj Kejriwal is basically a housewife and looking after certain works of the company. On perusal of the evidence relied upon by the 23 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited assessee which were deliberated upon by the Ld. CIT(A) viz attendance sheet of board meetings, extract of minutes of AGM, copy of some expense vouchers bearing signatures of directors and the relief was granted to the assessee, we have observed that the signature of Smt. Saroj Kejriwal on attendance sheet of board meeting is not identical or matching with the signatures on copies of expense vouchers furnished. Even the copies of some of expenditures vouchers furnished before us were not legible, therefore, the conclusion of Ld. CIT(A), utterly based on such documents or Assessee's submission de hors any cogent evidence regarding the involvement of relative directors, in complete disregard of the statement of Managing Director of the company during the survey proceedings, is incomprehensible and cannot be subscribed to. The assertion of the assessee, that Ld. AO has not brought on record any comparative case to extricate the claim of the assessee is not appropriate since the services rendered by the relative directors have not been properly communicated by the assessee. Under such facts and circumstances, considering the aforesaid observations, we are of the view that on this issue the assessee as well as the revenue authorities have failed to discharge the respective onus cast upon them. Accordingly, in the interest of substantial justice, we set aside this issue to the files of AO for fresh adjudication considering the explanations of the assessee. Ld. AO is directed to afford reasonable opportunity of being heard to the assessee. The assessee is directed to assist the Ld. AO with utmost compliances, failing which the Ld. AO would be at liberty 24 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited to decide the issue in accordance with law. In the result Ground No. 5 of the revenue is partly allowed for statistical purpose.
10. Ground no. 6: Addition on account of profit on undisclosed sale 10.1 Briefly stated the facts of the addition on account of profit on undisclosed sale are that, during the course of survey u/s 133A on physical verification of stock, the stock of Iron Ore Fines was found at 1557.88 MT as compared to stock of 462.30 MT in books of accounts. The excess stock of Iron Ore Fines was determined for Rs.25,20,000/-, which was admitted as undisclosed income by the assessee. Further, stock of coal was found in excess by 301.84 MT valued at Rs.12,17,000/- which was also admitted as undisclosed income by the assessee. Furthermore, excess stock of spare and consumables was valued at Rs.2,55,260/- which too was admitted as undisclosed income. These undisclosed incomes have been offered to tax while filing return of income. Subsequently, during the course of assessment proceedings Ld. AO has observed that there was a regular fall in gross profit of the assessee company as compared to earlier years. An explanation regarding the fall and profit is show caused to the assessee company, in reply to the assessee has stated that the reduction in net profit rate is attributed due to increased price of raw material. Ld. AO also requested the assessee to prepare separate manufacturing and P & L Account for the pre survey and post-survey period showing undisclosed income 25 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited during the survey separately. Further queries in this regard have been raised by the Ld. AO which were responded by the assessee. The reply of assessee which were considered and examined by the Ld. AO, but was not convinced with the same, who thereafter have made certain observations, rejecting the books of the assessee invoking provisions of section 145(3) and finally an addition of Rs. 1,51,53,000/- on account of undisclosed gross profit on undisclosed sale was made. The observations of Ld. AO including replies of assessee while making such addition are extracted hereunder for the sake of completeness of facts: 26 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 27 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 28 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 29 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 30 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 10.2 Since the submissions of the assessee have not found favour with the Ld. AO regarding addition on account of undisclosed gross profit, the assessee preferred an appeal before the Ld. CIT(A), wherein this ground of the appeal of the assessee has been allowed by the Ld. CIT(A) by deleting the said addition. The relevant observations of the Ld. CIT(A) are culled out as under:31 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 32 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 33 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 34 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 35 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 36 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 37 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 38 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 10.3 Based on aforesaid facts, Ld. Sr. DR on the issue of addition on account of undisclosed gross profit has furnished a written submission, prepared by the DCIT Central Circle-2, Raipur, the same is extracted as under:39 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 40 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 41 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 42 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 43 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 44 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 45 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 46 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 47 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 48 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 49 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 50 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 10.4 Backed by aforesaid submission, it was the submission of Ld. Sr DR that since the assessee was miserably failed in submitting the necessary information and clarification regarding the excess stock of Iron Ore Fines found during the survey action, the Ld. AO had correctly worked out the estimated production on the basis of the unrecorded physical quantity of Iron Ore Fines (residual of production of Iron Ores) found in the premises of the assessee. Ld. CIT(A) have deleted the addition without any further inquiry on the issue, either by himself or through the Ld. AO for which Ld. CIT(A) passed empowered having concurrent powers equal to that of an Ld. AO under the provisions of Act. Ld. CIT(A) was not justified in deleting the addition without any plausible explanation by the assessee which is evident that assessee was unable to furnish necessary details before the Ld. AO as well as before the Ld. CIT(A). Under such facts and circumstances, it was the prayer of Ld. Sr DR that the addition made by Ld. AO was with due application of mind and on the basis of logical observations and conclusions, thus, deserves to be upheld.
10.5 Ld. AR of the assessee in rebuttal have submitted a written synopsis, which is extracted as under:
Ground no. 6 AO : Page no. 23 CIT(A): Page no. 57 to 63, para no. 3.4.5 to 3.4.7 Submission of the assessee l. AO invoked sec. 145(3). Rejection of books not justified: 51 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited
i) Books can be termed to be incomplete/ incorrect, if major transactions/ sales/ purchases/expenses are omitted from books. No such instance brought on record. Allegation leveled only on the basis of presumption/inference and there is no material on record.
ii) No finding recorded by AO that any records/ evidences/ documents in respect of allegations were found.
iii) Sec. 145(3) cannot be invoked under presumption and assumption.
Nothing brought on record to establish that assessee actually obtained any clandestine production.
iv) If any unrecorded production was obtained, some evidence of (a) unrecorded purchase of iron ore (b) unrecorded payments made/ to be made of such purchase (c) unrecorded production having been obtained (d) unrecorded sales made to some party (e) unrecorded receipts against sales
(f) excess cash/ other assets like debtors etc. arising out of alleged unrecorded transactions must have been found during survey.
v) Stock of raw material 10111st have been found short during survey, if there was any clandestine production.
vi) Books rejected not on the basis of any defects but on presumption. Reliance on St. Teresa's Oil Mills vs State of Kerala (1970) 76 ITR 365 (Ker.) and International Forest co. vs CIT (1975) 101 ITR 721 (J & K).
2. Addition based on inference
i) Inference drawn by that excess stock of iron ore fines and coal must have resulted into unrecorded production i.e. excess stock as generated out of unaccounted consumption of iron ore.
ii) Whatever excess stock was found during survey, same taxed u/s 69B as income of assessee. Hence, it was accepted that excess stock came out of income of assessee and not out of consumption of iron ore etc.
3. Presumption drawn observing that generation of iron ore fines has direct co-
relation with production of sponge iron.
Due to practical difficulties, it is not possible to physically and precisely weigh raw material at the time of charging it to kiln. Consumption recorded on estimated basis. Excess stock could have resulted out of incorrect estimate made in the past years.
Regular audit of excise authorities; no discrepancies found Regular excise audit conducted and till date, excise authorities have not charged the assessee with having obtained unrecorded production any time. Copy of audit memo at PN 184 to 190 of PB.
52 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited
5. Addition made extrapolating findings
i) Addition made on the basis of defects found on the date of survey (06.07.2010), in the first 96 days of year and extrapolating it for rest of the year.
ii) AO worked out discrepancy considering 365 working days whereas no manufacturing unit actually works for more than 275 days.
iii) No evidence on record in support of allegation of AO.
iv) Extrapolation in post survey period is an assumption without there being anything on record. There cannot be any presumption for post survey period. No material/evidence on record.
6. Since survey had taken place in the middle of the year and transactions were voluminous, it was practically not possible to prepare correct manufacturing and profit & loss a/c of pre and post survey period.
7. Reason for fall in GP Fall in GP was due to increased cost of raw material without corresponding increase in selling rate. Figures supporting this argument al PN 19 of PB in the table at para no. (xv).
8. Yield increased Yield increased to 58%, more than that of the past two years.
9. Excess stock of coal does not result into any unrecorded production. Wrong inference drawn by AO.
10. AO rejected books u/s 145(3) and thereafter fell back on the figures recorded in books. He charges assessee for clandestine production but relies upon book figure of production.
53 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 10.6 Ld. AR further submitted before us the following details while explaining the aforesaid written submissions to justify the claim of the assessee that the addition made by the Ld. AO was based on inferences that the generation of Iron Ore Fines has direct Co-relation with production of Sponge Iron. The submission of Ld. AR was also on rejection of books of accounts with a stress on the plausible reasons to be looked into for rejection of books of accounts under the provisions of Section 145(3). It was the submission that there was no defect in the books of accounts which could be brought on record by the Ld. AO, therefore, the rejection of books of accounts was without any basis but only on the foundation of presumptions of the Ld. AO. It is further submitted that the assessee's books of accounts are being regularly audited by excise authorities and no discrepancies were found by them. It is also contended by the Ld. AR that the addition made was on the basis of extrapolating the figures of excess stock found on 06.07.2010 treating the same for first 96 days of the year which further scaled-up for 365 days, whereas the manufacturing units are generally not work for more than 275 days. It was the submission that the contention of Ld. AO also fails on the test that if there was clandestine production then the stock of raw material must have been found sought during the survey which was not the fact in the present case. Ld. AR further advanced his argument that if there was any unrecorded production, there should be some unrecorded purchases, unrecorded payments, unrecorded sales, unrecorded receipts, or excess cash / other assets like debtors etc. arising out of such alleged unrecorded transactions, however, no such evidence or findings are transpired during the survey proceedings. It is also submitted by the Ld. AR that the fall in GP for the year under consideration was 54 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited on account of increased cost of raw material. Also, the yield of the company was increased to 58% which is more than the yield in the earlier years, such details are demonstrated by way of a chart titled as "INPUT OUTPUT RATIO OF SPONGE IRON UNIT", the same is extracted herein below. 10.7 In terms of aforesaid submissions, it was the prayer by Ld. AR, that the addition on account of undisclosed gross profit was totally a perverse and presumptive observation of the Ld. AO, which was well construed and appreciated by the Ld. CIT(A) by rightly rejecting the same and have very judiciously vacated the disallowance, therefore, the decision of Ld. CIT(A) merits approval. 10.8 We have considered the rival submissions, perused the material available on record and the judicial pronouncements relied upon. The addition on account of undisclosed gross profit on undisclosed sale have been made by the Ld. AO considering the fact that during the survey u/s 133A of the Act conducted at the premises of assessee, when the physical verification of stock of Iron Ore 55 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited Fines was carried out, it is revealed that the physical stock of Iron Ore Fines was 1557.88 MT, which was 3.37 times of the recorded stock of 462.30 MT, accordingly, there was an excess stock of Iron Ore Fines to the tune of 1095.58 MT. The fact that there was excess stock of Irone Ore Fines have been undisputedly accepted by the assessee and have surrendered Rs. 25,20,000/- towards such excess stock. Similarly, excess stock of coal and spare and consumables have also been admitted and surrendered by the assessee for Rs. 12,17,000/- and 2,55,260/- respectively. During the assessment proceedings, Ld. AO has observed that the GP ratio (GPR) in terms of percentage for the FY 2010- 11 was only 15.44 %, which is much less than the GPR of 18.61% and 21.34% in the preceding FY's 2009-10 and 2008-09, respectively. Ld. AO has rightly notice that there was a significant fall in GPR of the assessee, accordingly, the assessee was requested to submit separate manufacturing and P & L for the pre- survey and post-survey period showing the undisclosed income admitted during the survey. Before Ld. AO, it was the submission of assessee that generation of Fines in Iron Ore is based on reasonable estimate which might change is actually yield on the material. Assessee also admitted that the quantity of stock of Irone Ore Fines recorded in the books of accounts is based on estimates which is highly inaccurate. Ld. AO further observed that the quantities of raw material of Iron Ore Fines as per Statutory Excise Register was also 462.32 MT is not accurate as per the assessee then the stock of raw material is recorded in the books of assessee is also inaccurate. Again, there was an observation regarding quantity of a stock of coal which is also on the basis of estimates and thus the same is also inaccurate. All such reasons recorded by the Ld. AO, strengthen is belief that the 56 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited manufacturing and trading account of the assessee is not reflecting the true and correct picture of the state of affairs of the business of the assessee, therefore, the Gross Profit deduced based on such records cannot be considered as correct. Which such assertions, Ld. AO invoked provisions of Sec. 145(3) and had recomputed the Gross Profit of the assessee Company. Ld. AO very meticulously, based on consumption of raw-material and production of Sponge Iron by the assessee itself during the relevant year, had worked out undisclosed consumption of Iron Ore of 4974.11 MT undisclosed production of Sponge Iron of 2680.32 MT during the pre-survey period of 96 days. Ld. AO further extrapolated the figures of undisclosed consumption of Iron Ore to 18910.00 MT undisclosed production of Sponge Iron of 10190.00 MT. Similar workings have been carried out on the basis of unaccounted stock of coal, thereby arriving at undisclosed production of Sponge Iron of 711.52 MT. With such methodical workings, Ld. AO reached on the conclusion that there was undisclosed sale of 5574 MT which in terms of turnover works out at Rs.9,81,43,495/-, consequently, undisclosed GP of Rs. 1,51,53,355/- @ GPR of 15.44% was worked out. When the matter was assailed before the Ld. CIT(A), the addition has been deleted with the observations that the entire addition has been made on assumption and presumption basis. It is the observation that the Ld. AO has drawn the analogy on the basis of imagination that the generation of stock of Iron Ore Fines was from the production of Sponge Iron, this analogy was to some extent, have been considered as genuine by the Ld. CIT(A), however he rejected the application same analogy on the excess stock of coal. Ld. CIT(A) also observed that the AO has missed the important aspect that there was inherent Iron Ore Fines when the quantity of Iron Ore is recorded, 57 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited it is practically impossible to separate them, Ld. CIT(A) also made his comment regarding extrapolation that the Ld. AO is not correct in estimating the future income without any documentary supporting evidence. Ld. CIT(A) further discussed the issue regarding undisclosed purchase/ sale that there was no documentary evidence found during the survey or could be brought on record by the revenue to establish such presumption of the Ld. AO, therefore, on this ground also Ld. AO failed in justifying the addition. Ld. CIT(A) also rejected the action of Ld. AO regarding rejection of books of accounts invoking provisions of Sec. 145(3), stating that the books results have been accepted by the Ld. AO and on the basis of such results the estimate has been made on undisclosed production of Sponge Iron. With such observations, Ld. CIT(A) deleted the addition made by the Ld. AO.
10.9 On a thoughtful consideration of the aforesaid facts, on a perusal of the findings by Ld. AO as well as by Ld. CIT(A) and the submissions by the Ld. AR during the course of hearings before us, it is transpired that, during the survey action excess stock of Iron Ore Fines and coal was found and the same was undisputedly admitted by the assessee. Regarding generation of Iron Ore Fines, Ld. AR of the assessee have submitted before us, certain quantitative details and also the process chart showing that how the Iron Ore Fines (By product) are being generated out of the production process of the Sponge Iron (Final Product). Since the recorded stock of Iron Ore Fines matching with Excise Register of 462.3 MT was not matched with the physical quantity at the time of survey conducted, there was a difference of 1095.48 MT excess Iron Ore Fines, which as correctly 58 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited envisaged by the Ld. AO, could only be on account of extra production, as evident from the flow chart that the Iron Ore Fines are generated during the production process carried out for Sponge Iron. The process chart submitted before us is extracted for the sake of clarity:
10.11 Ld. AR also submitted before us, the quantities of Iron Ore Fines generated during the year, the same is culled out as under: 59 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 10.12 On a perusal of the aforesaid chart produced before us, we observed that the figures of Iron Ore Fines generated during the year are not matching with the figures as per assessment order. For instance, the production of finished goods i.e., Sponge Iron in the aforesaid chart is shown as 35,859.00 MT, whereas the figure in the assessment order was considered at 33,859.00 MT, by the Ld. AO. Similarly, total Iron Ore Fines generated during the year, as per above chart are 12567.38 MT whereas before the Ld. AO as per assessment order, this figure was 13538.58 MT.
The closing stock for the month of June 2010 is 594.03 MT whereas on the date of survey on 06.07.2010, it was 462.3 MT as per books of accounts of the assessee and there was no transaction of sale during the month of June 2010 and July 2010. Such mis-matching figures, which are the genesis of the controversy before us, does not inspire any confidence to be relied upon and to reach at any logical conclusion.
10.13 Ld. AO has categorically recorded his dis-satisfaction with exhaustive reasons on the untrue and incorrect status of the manufacturing and trading account of the assessee and also the incorrectness of the Gross Profit, therefore, the observation of Ld. CIT(A) that there was no basis for Ld. AO to invoke provisions of Sec. 145(3) in rejecting the books of accounts of the assessee is found to be irrational, thus, the same cannot be accepted. 60 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 10.14 Regarding adoption of reverse analogy to work out the undisclosed production of Sponge Iron on the basis of excess stock of Iron Ore Fines, Ld. CIT(A), though rejected the working of Ld. AO but had also construed the same as genuine to some extent, such findings of Ld. CIT(A) are found to be deprived of any plausible reasonings, thus, cannot be concurred with. Our observation is on the basis of the fact that, there was sufficient cause for the Ld. AO to adopt the reverse analogy and to work out undisclosed production of Sponge Iron taking the basis from excess stock of Iron Ore Fines which obviously are being generated in the process of production of Sponge Iron, therefore, we approve the same with regard to undisclosed production of Sponge Iron to the extent it is worked out on the basis of excess stock of Iron Ore Fines physically found during the survey proceedings i.e., as on 06.07.2010 (for 96 days). However, Ld. AO had not investigated and adopted any reverse analogy w.r.t. utilization of undisclosed sources in terms of undisclosed purchases by the assessee for generation of undisclosed production of Sponge Iron, therefore, considering the mismatch in facts and figures produced before us, which are volatile, thus, are subject to verification, we find it appropriate to restore this issue back to the files of Ld. AO to re-adjudicate the same afresh in terms of the aforesaid observations.
10.15 The theory followed by the Ld. AO regarding production of undisclosed Iron Ore by utilizing the excess stock of coal has been rightly rejected by the Ld. CIT(A) and we too endorse the same in absence of any 61 ITA No.162/RPR/2022 Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited material finding by the Ld. AO. We also approve the observation of Ld. CIT(A) regarding rejecting the extrapolation of undisclosed production of Iron Ore and consequently, the addition on account of undisclosed Gross Profit, dehors any cogent evidence regarding generation of Iron Ore Fines in the Post Survey period, the extrapolation of figures by the Ld. AO are imaginary and guess work, thus, we direct to vacate the addition to the extent it relates to extrapolation of figures.
10.16 Under such facts and circumstances, considering various aspects involved in the issue, in terms of the observations as indicated above, the decision of Ld. CIT(A) is set aside, and the matter is restored to the files of Ld. AO for denovo adjudication. Needless to say, the assessee shall be afforded with reasonable opportunity of being heard, and liberty shall be granted to make necessary submissions and evidence in support of its contentions. Consequently, Ground No. 6 of the appeal of the revenue is partly allowed for statistical purposes.
11. Resultantly, the appeal of the revenue in ITA No. 162/RPR/2022 is partly allowed / partly allowed for statistical purposes.
12. Now, we shall be taking the Cross Objections of the assessee.
13. Ground No. 1: Regarding confirming the disallowance u/s 36(1)(iii) / 37 to the extent of Rs. 4,42,841/-.
62 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited 13.1 The aforesaid issue has been dealt with and deliberated upon by us in ground no. 1 of the revenue's appeal in ITA No. 162/RPR/2022 in the present order. Our decision in the said ground shall be mutatis mutandis applicable on the Ground No. 1 of the assessee's CO. Accordingly, Ground No.1 of the assessee's CO is partly allowed for statistical purposes.
14. Ground No. 2: Regarding confirming the disallowance to the extent of Rs. 2,56,297/- on account of interest free advances. 14.1 The aforesaid issue has been dealt with and deliberated upon by us in ground no. 3 of the revenue's appeal in ITA No. 162/RPR/2022 in the present order. Our decision in the said ground shall be mutatis mutandis applicable on the Ground No. 2 of the assessee's CO. Accordingly, Ground No.2 of the assessee's CO stands dismissed.
14.2 Resultantly, the CO of the assessee in CO No. 11/RPR/2022 is partly allowed for statistical purposes.
15. In combined result, the appeal of the revenue in ITA No. 162/RPR/2022 is partly allowed / partly allowed for statistical purposes and the CO of the assessee in CO No. 11/RPR/2022 is partly allowed for statistical purposes.
63 ITA No.162/RPR/2022
Cross Objection No. 11/RPR/2022 M/s Bhagwati Power & Steel Limited Order pronounced in the open court on 09/05/2024.
Sd/- Sd/-
(RAVISH SOOD) (ARUN KHODPIA)
याियक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
रायपुर/Raipur; दनांक Dated 09/05/2024
Vaibhav Shrivastav
आदे श क ितिल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant-
2. यथ / The Respondent-
3. आयकर आयु (अपील) / The CIT(A),
4. The Pr. CIT-1, Raipur (C.G.)
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, रायपुर/ DR, ITAT, Raipur
6. गाड फाईल / Guard file.
// स या पत ित True Copy // आदे शानुसार/ BY ORDER, (Assistant Registrar) आयकर अपीलीय अिधकरण, रायपुर/ITAT, Raipur