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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: SHRI PRADIP KUMAR KEDIA&
PER Ms. MADHUMITA ROY - JM:
The instant appeal filed by the Revenue and the Cross Objection filed by the assessee are directed against order dated 30.01.2017 passed by the Ld. CIT(A)-6, Ahmedabad arising out of the order dated 15.02.2015 passed by the Ld. ACIT, Circle-1, Bhavnagar passed under Section 143(3)
ITA No.844/Ahd/2017 & CO No. 67/Ahd/2017 DCIT vs. M/s. Kiran Ship Breaking Company Asst.Year –2012-13 of the Income Tax Act, 1961 (hereinafter referred as to “the Act”) for the Assessment Year (A.Y.) 2012-13. ITA No. 844/Ahd/2017 (A.Y. 2012-13):-
The Revenue has challenged the deletion of addition of Rs. 2,50,98,362/- on account of excess stock surrendered during the course of survey as undisclosed income.
The assessee engaged in the manufacturing ship breaking activity and following the mercantile system on accounting filed its return of income on 27.07.2012 declaring total income at Rs. 1,50,15,270/-.
The fact culled out from the order passed by the Ld. AO is this that a survey was conducted in the case of the assessee on 23.09.2011. During the course of survey statement on oath of Shri Ramakrishna Jain, the partner of the assessee company was recorded wherein he admitted that they keep stock on estimate basis. The Ld. AO was of the view that the additional stock though found from the survey the same was not added in its books of account of the firm. The excess stock of 435MT valued at Rs. 2,50,98,362/- though has been admitted by the partner of the company as his undisclosed income, such undisclosed income has not been offered by the assessee in the return of income filed for A.Y. 2012-13 as was the case of the Revenue and ultimately the same has been added to the total income of the assessee which was in turn deleted by the Ld. CIT(A). Hence, the instant appeal before us.
ITA No.844/Ahd/2017 & CO No. 67/Ahd/2017 DCIT vs. M/s. Kiran Ship Breaking Company Asst.Year –2012-13
We have heard the rival submissions made by the respective parties, we have also perused the relevant materials available on record.
It appears from the assessment order that the Ld. AO has accepted the purchases, sales and stock position, neither has rejected the books of accounts and therefore, it appears that he has also accepted the closing stock as on 31.03.2012 and the sales shown out of excess stock from 24.09.2011 to 31.03.2012. Thus, the books of accounts and entries made thereunder were accepted by the Ld. AO. In that view of the matter further addition of Rs. 2,50,98,362/- as per the assessment order tantamounts to double addition as also the case made out by the assessee.
The assessee submitted the following before the Revenue in support of its case:- “3. The addition of Rs. 2,50,98,362/- in respect of excess stock found during the course of survey operation and surrendered by the appellant firm is not justified in the facts and circumstances of this case because of the following reasons:- (A) A ship breaking unit works under different set of parameters compared to a manufacturing unit. In a normal manufacturing industry, a 'unit' is created and on the other hand in a ship breaking industry a 'unit' is dismantled. There are various kinds of ships which are used for ferrying passengers and carrying goods like bulkers, container carriers, oil tankers, gas tankers, car carriers and passenger carriers, etc. Each ship is built to serve its specific needs. When these ship's life are over they are sold to be dismantled so that iron & steel, machineries and other parts can be extracted and sold as scrap. (B) The old ships are purchased on xas it is where it is' basis and they may be lying in any part of the world. The decision to purchase any ship is made on the basis of details provided in media or newspapers, and no physical verification of the ship is possible before making the purchases at times. These ships are bought and thereafter iron and steel plates, metal scrap, machinery and machinery parts, non- ferrous metals, wooden structures, cabins, oils etc are extracted from it to be sold in the market. For taxation purposes this activity of dismantling of ships has also been termed as an industrial activity.
ITA No.844/Ahd/2017 & CO No. 67/Ahd/2017 DCIT vs. M/s. Kiran Ship Breaking Company Asst.Year –2012-13 (C) Due to the sheer mass of the ship it is impossible to physically measure the weight of the ship. Therefore, it is referred to in terms of 'Light Displacement Tonnage' i.e. LDT in shore One LDT is equal to 1.016 MT, Weight of the ship is also provided in the Trim and Stability book (T&S Book) which is always available on- board. The weight of the ship further varies on various factors viz. type and kind of ship, its life, nautical miles covered, etc. besides due to addition, removal or alteration of items on-board. Further with passage of time, i.e. in course of 25 to 30 years, due to corrosion during voyages and other environmental factors there is further loss- of weight. Moreover, the recovery out of dismantled ship is also uncertain and varies depending upon many factors viz. nature and kind of ship, comprising materials etc. In view of this particular nature of business, no fixed norms have been prescribed for calculating 'wastage' in ship breaking activities. (D) Due to the above reasons it is not feasible to maintain physical stock in ship breaking activity. Hence, in the industry of ship breaking, the normal procedure followed to maintain the books of accounts are that the opening stock is added by MT in respect of purchase of ship less removal of goods, less estimated weight loss on the basis of past experience in dealing with similar types of ships and balance being taken as closing stock. The valuation of closing stock is taken at cost i.e. cost of purchase of ship comprising of custom duty, port charges, L/C charges etc. divided by the weight converted in MT and thus one can get cost per Ton. After multiplying the per MT cost with the closing stock in MT, one can arrive at the valuation of closing stock. The appellant firm is also following the above method and the same is duly (E) mentioned in the "Notes forming Part of Balance Sheet & Proit& Loss A/c" attached to the audited Balance Sheet and Profit & Loss Account. (F) The appellant firm had honoured the commitment of surrender of excess stock made by its partner Shri Ram Krishan jain vide his statement dated 23rd September, 2011, a copy of the above statement is enclosed herewith vide Annexure- "C" to these submissions. Accordingly, the alleged excess stock was credited to the Profit & Loss Account. As submitted earlier, this alleged excess stock is not on the basis of out of books purchases but because of estimation and as stock does not result in income till it is sold hence instead of income the stock is rightly credited in Profit & Loss Account. The appellant firm had divided its Profit & Loss Account in two parts i.e. before Survey and after Survey. The Gross Profit Ratio of before Survey period is 12.45%, while after Survey Period G.P. is 12.30%. Thus the G.P. ratio is maintained for both the periods. A copy of the above Profit & Loss Account is enclosed herewith as Annexpre- "D". (G) During the assessment proceedings, the appellant firm had explained the plausible reasons for lower net profit even after offering the excess stock amounting to Rs.2,50,98,362/- vide its letter furnished on 13th January, 2015. A copy of the above letter is enclosed herewith vide Annexure- "E". It was mentioned with facts and figures that due to adverse fluctuation of foreign exchange rate the liability in terms of US$ substantially increased resulting into loss of Rs.4,30,58,422/-. A sum of Rs.4,41,43,245/- has been debited in the audited accounts. The Id. A.O. without
ITA No.844/Ahd/2017 & CO No. 67/Ahd/2017 DCIT vs. M/s. Kiran Ship Breaking Company Asst.Year –2012-13 questioning the above amount and controverting the explanation went ahead in making on addition of Rs,2,50,98,362/- which is a tantamount to double addition and not permissible under the law. (H) It may be appreciated (as submitted above) that as per the industry practice prevalent in the ship breaking industry ‘stock' is always measured on estimate basis. Moreover, the quantum of 'wastage' varies from 10% to 15% depending upon the kind and nature of ship and other factors. In order to purchase peace of mind and cooperate with the Department, the partners of the appellant firm had admitted the quantum of excess stock and offered the same in the Profit& Loss Account. Admittedly this excess stock was due to fact of'estimation' only and it is not the case of the Department that there was purchases out of books. Not an iota of evidence was found indicating that the appellant firm had indulged in out of books purchases even after extensive survey operations. Thus the excess stock is part of the business of the appellant firm only and. therefore rightly added to the Profit & Loss Account. This stock cannot be added under deeming provisions of section 69, 69A, 69B or 69C of the Income Tax Act, 1961 as held by the Hon'ble ITAT, Ahmedabad in the case of M/s Fashion World v/s ACIT (ITA No.1634/Ahd/2006 dated 12th February, 2010, a copy of order enclosed herewith). As 'stock' itself do not yield income unless same is converted through sale, the appellant firm had shown excess stock in the profit & Loss Account rightly. Moreover, it is settled position of the low that statement recorded ;"luring survey proceedings .u/s 133A does not have evidentiary value. In this connection reliance is placed in the cases of Paul Mathews v/s CIT 263 ITR 101 (Ker) and CIT Ws S. larder Khan Son 300 ITR 1571 Mad). (I) The Id. A.O. had accepted the purchases, sales and stock position and he had not rejected the books of account hence he had also accepted the closing stock as on 31et March, 2012 as well as sales shown out of excess stock from 24th September, 2011 to 31st March, 2012. It means books of account and entries made there under were accepted by the Id. A.O. Thus further addition of Rs. 2,50,98,362/- as per the assessment order is tantamount to double addition: (J) For the above submissions, reliance is placed on the judgement of Hon'ble Delhi High Court rendered in the case of CIT v/s Paramount Communications Limited (ITA No. 287/2010 dated 3rd August, 2010). A copy of the above judgment is enclosed herewith vide Annexure- "F".”
Further that the case of the assessee before Revenue is this that there was foreign exchange fluctuation due to which there was excess loss of Rs. 4,41,43,245/- which was debited in the account after the post survey period and due to this abnormal loss the excess stock was found during survey. In fact from the records being the copies of foreign exchange variation account for the Assessment Years 2011-12 and 2012-13 it appears that for A.Y.
ITA No.844/Ahd/2017 & CO No. 67/Ahd/2017 DCIT vs. M/s. Kiran Ship Breaking Company Asst.Year –2012-13 2011-12 there was over all foreign exchange variation gain amounting to Rs. 15,38,977/- which was offered for taxation while filing the return of income by the assessee. Similarly there was total loss of Rs. 3,58,06,942/- due to foreign exchange variation for A.Y. 2013-14 which was allowed by the same AO in scrutiny assessment.
While deleting the addition the Ld. CIT(A) observed as follows:- “5.4 I have carefully considered the assessment order and the submission of the appellant. The brief fact of the case is that a survey was conducted in the case of the appellant, M/s. Kiran Ship Breaking Company on 23-09-2011. During the survey, partner given a statement on oath and admitted that stock was kept on estimated basis however physical stock of the raw-material/ship remains was found excess.
Therefore the partner offered excess stock of 435 MT having value of Rs. 2,50,98,362/- as undisclosed income of the year.
5 However, the AO noted that while filing return of income, the appellant has not offered additional income of Rs. 2,50,98,362/- in the return of income on account of excess stock found during the survey. The AO issued show cause to the appellant and the appellant filed working and explanation before the AO. The AO held that the appellant has not offered additional stock found during the survey in the return of income and has not increased income from the additional stock found of Rs. 2,50,98,362/- therefore the same is undisclosed income of the appellant. The appellant submitted that the AO has wrongly mentioned the fact as the additional stock found during the survey was included in the closing stock of the firm. The appellant further submitted that the excess stock was calculated on the basis of estimation only though there was no other incriminating material was found. The appellant also submitted the pre-survey and post survey bifurcation of all expenses which shows that there is no abnormal increase in the expenses.
6 However it is noticed from the details filed by the appellant that the foreign exchange fluctuation excess loss of Rs. 4,41,43,245/- was debited in the account after the post survey period and due to this abnormal loss, the effect of excess stock found during the survey has been adjusted. The AO has not examined the above aspect and did not held that the foreign exchange loss was not genuine. The appellant further submitted that in earlier year due to the foreign exchange fluctuation the appellant has earned profit of Rs. 15,38,977/- and the same was offered for taxation while filing the return of income. Therefore on similar line foreign exchange fluctuation loss should be allowed in the year under consideration. it is found from the accounts submitted by the appellant that the excess stock found during the survey has already been included in the closing stock thus closing stock in books of accounts has been increased by Rs. 2,50,98,362/- in view of the above the contention of the appellant found tenable that the addition of Rs. 2,50,98,362/- will be amount to double taxation. The AO has not brought any evidence and material on record and merely
ITA No.844/Ahd/2017 & CO No. 67/Ahd/2017 DCIT vs. M/s. Kiran Ship Breaking Company Asst.Year –2012-13 on adhock basis made the addition. In view of the above, the contention of the AO that the appellant has not offered the additional stock found during the survey for taxation, is found factually wrong and not tenable therefore the addition of Rs. 2,50,98,962/- on account of excess stock found during the survey is deleted. The ground is allowed.”
Thus, from the above it appears that the Ld. CIT(A) took into consideration of this particular fact that the loss of Rs. 4,41,43,245/- as a result of foreign exchange fluctuation, was debited in the account after the post survey period and due to this abnormal loss excess stock found during the survey had been adjusted. It is relevant to mention that such foreign exchange loss was not found to be genuine by the Ld. AO. When the profit earned due to foreign exchange fluctuation in the earlier year was offered to tax while filing return by the appellant, the foreign exchange loss in the year under consideration should also be allowed on the same analogy has also been considered by the Ld. CIT(A). In fact, the Ld. CIT(A) observed that the excess stock found during the survey has already been included in the closing stock and thereby the closing stock in the books of accounts has been increased by Rs. 2,50,98,362/-. The said fact is also emanated from the records filed before us. In that view of the matter the contention of the appellant that the addition of Rs. 2,50,98,362/- tantamounts to double taxation is in fact justiciable. Over all the decision of addition on the observation that the appellant has not offered the additional stock found during the survey as made by the Ld. AO is under the present facts and circumstances of the Act not sustainable which has rightly been taken into consideration by the Ld. CIT(A) while deleting addition without any ambiguity so as to warrant interference. Hence, the appeal filed by the Revenue is found to be devoid of any merit and, thus, dismissed.
ITA No.844/Ahd/2017 & CO No. 67/Ahd/2017 DCIT vs. M/s. Kiran Ship Breaking Company Asst.Year –2012-13 C.O. 67/Ahd/2017(A.Y.2012-13):-
First Ground:- This ground relates to disallowance of Rs. 4,66,795/- out of stores and spares expenses.
During the course of assessment proceeding in reply to the show- cause issued to the assessee as to why the purchases made between the period 10.03.2012 to 31.03.2012 in the store & spares account should not be disallowed and added to the total income of the assessee, the assessee replied that the said expenditure were incurred and the items purchased are mostly gas cutting stores and spares which were purchased and used as and when required as per the requirement for smooth conduct of ship cutting operations and hence those are routine business revenue expenditure incurred for the day to day manufacturing process which cannot be treated as capital expenditure. The Ld. AO disallowed the same as he was of the opinion that no such frequent expenditure was debited in stores & spares account in support of the contention made by the assessee.
Before the First Appellate Authority it was placed on record by the appellant that the firm had incurred a sum of Rs. 10,65,726/- during the previous year and in that case not a single penny was disallowed out of stores & spares account. However, the Ld. CIT(A) reiterated the stand taken by the Ld. AO that the period between 10.03.2012 to 31.03.2012 the appellant though has shown purchase of stores & spares of Rs. 4,66,795/- the same has not been debited to the stores & spares account and ultimately disallowed the same.
ITA No.844/Ahd/2017 & CO No. 67/Ahd/2017 DCIT vs. M/s. Kiran Ship Breaking Company Asst.Year –2012-13 However, upon perusal of the record particularly the ledger account of stores and spares of the firm, we find that it is specifically demonstrates the expenses in question which has further been debited in the books of accounts. Moreover, similar expenses have also been allowed in the previous year. Thus, the view taken by the Ld. CIT(A) is found to be contradictory and we do not find any rational in such decision made by the Ld. CIT(A) when the primary onus on the part of the assessee is discharged and no evidence is found that purchase has been used for non-business purposes. Thus, we do not find any justification in disallowing the said expenses out of stores and spares account in the present facts and circumstances of the case taking into consideration the assessee line of business and hence we allow the same. Thus, this ground taken in the Cross Objection filed by the assessee is allowed.
Ground No.2:- The Ld. Counsel for the assessee has submitted that assessee does not want to press this ground. Accordingly, this ground of appeal is dismissed as not pressed.
In the combined results, the appeal preferred by the Revenue is dismissed and C.O. preferred by the assessee is partly allowed. This Order pronounced in Open Court on 18/08/2021 (PRADIP KUMAR KEDIA) (Ms. MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 18/08/2021TANMAY, Sr. PS
ITA No.844/Ahd/2017 & CO No. 67/Ahd/2017 DCIT vs. M/s. Kiran Ship Breaking Company Asst.Year –2012-13 आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant
""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त(अपील) / The CIT(A)-
"वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड" फाईल / Guard file. आदेशानुसार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt.