THE ACIT, CIRCLE-4,, BARODA vs. M/S. RATNAVEER STAINLESS PRODUCTS PVT. LTD., VADODARA

आदेश/O R D E R PER RAJPAL YADAV, VICE PRESIDENT :-

DCIT Vs. Ratnaveer Stainless Products Pvt Ltd AY : 2008-09 2 Steel Precision Fabrication Equipments. The case of the assessee was selected for scrutiny assessment and a notice under Section 143(2) of the Income-tax Act was issued and served upon the assessee. On an analysis of the record, learned Assessing Officer formed an opinion that in the manufacturing activity of the assessee scrap is being generated. He visualized the generation of scrap starting from the month of April 2007 upto 31st March 2008. The Assessing Officer found that the sale of scrap for the month of February and March 2008 is quite low in comparison to the finished goods; therefore, he estimated the generation of scrap by taking into consideration the percentage of scrap generated in earlier months and held that the assessee must have sold the scrap out of books. On this analysis, he worked out the value of scrap which ought to have been generated by the assessee and not available in the closing stock. Accordingly an addition of Rs.2,90,41,625/- was made. Similarly, on account of undervaluation of the finished goods, an addition of Rs.4,81,596/- was also made. The Assessing Officer has thus determined the taxable income of the assessee at Rs.3,73,27,211/- as against the disclosed income of Rs.78,03,990/-.

“4.4. I have considered the facts of the case, the AO's observations and the submission made by the AR of the appellant. For deciding this appeal, the facts relating to additions made in the original assessment order passed on 30/12/2010 is required to be considered. In the original assessment order, the AO had held that the percentage of scrap generation shown in the months of Feb and March were low as compared to that shown in the earlier months. The appellant had claimed before the AO that during this year, it had changed its manufacturing process. Earlier the generated scrap was sold in the market. But in the financial year 2007-08, the appellant started reprocessing the scrap into sheets which were again used for making finished products. It was only after the second cycle reuse was completed that the scrap was sold in the market. In the appellate proceedings relating to the DCIT Vs. Ratnaveer Stainless Products Pvt Ltd AY : 2008-09 4 original assessment order, the appellant claimed that this fact regarding reprocessing of the scrap had been totally ignored by the AO leading to the addition made by him of 120430 Kgs of Grade 304 and 71065 Kg of Grade 316 scraps valued at Rs.2,90,41,625/-. After considering original assessment order and the details submitted by the appellant in the appellate proceedings, the additions made by the AO were directed to be deleted by making following observation in the appellant order passed by CIT(A)-III, Baroda in appeal no. CAB/III-220/2010-11 dated 28/09/2011:-

"4.3 I have gone through the assessment order and the written submissions made by the appellant. It is seen that the appellant had submitted before the A.O, that a part of the scrap generated while making the finished goods from the raw material, in the first and second cycle of production is reused by converting it into sheet form and again using it for the production of finished goods. The appellant has submitted a copy of letter dated 22.12.2010 addressed to the A.O. in which this process has been explained as follows: a) First of all, we need to state that the company has changed its manufacturing process and accordingly the company has started reprocessing the scrap generated at the first as well as for second times. Thus, when there was a change in the manufacturing process from 2007. Thus, whatever the scrap generated at the end of first / second process, is treated as the part of work in progress up to and then only whatever scrap remains are also being divided into different category having different contents of Nickel. Thus, the scrap with higher Nickel contents are to be sold to specific customers at good price and scrap with lower contents of Nickel are sold to other customers having separate requirement where the realization is always lower. Thus whatever the scrap generated at the end of first / second process is shown as work in progress and thus, there was no stock of the scrap remaining with the company as at 31.03.2007 and accordingly no opening stock was shown by the company. It is pertinent to note that the company has sold the last scrap during F.Y. 2006-07 i.e. on 30.03.2007 and as the entire scrap was sold on 30.03.2007, no quantity was carried forward as opening stock for the financial year 2007-08. Thus, there was no scrap generated after the last invoice of 30.03.2007 and therefore no quantity was shown as opening stock, the last scrap safe bill is attached herewith as enclosure 2 (page No.4) b) As mentioned earlier, it is to be reiterated that because of the change in the process and commencement of re-utilization of the scrap generated at first and second process and convert the same in the sheet

DCIT Vs. Ratnaveer Stainless Products Pvt Ltd AY : 2008-09 5 form, the company is showing the scrap generated, if any, after the first / 2nd process as work in progress and not as scrap because certain processes are to be carried on the said scrap making them usable as raw material and ultimately the said raw material will be converted into finished goods. Thus this was never a scrap and therefore it is not shown accordingly. A statement showing the details of consumption of raw material after 12.03.2008 and finished goods manufactured and scrap generated is enclosed as enclosure 3 (Page No. 5). d) It is stated that the scrap generated was 8,94,206 Kg, which is the correct quantity. However, there was no opening stock because of the fact that the last scrap was sold by the company during FY 2006-07 only on 30.03.2007 and there was no opening stock which is also corroborated and confirmed by the details given at Para 3(a) above. More so, there was closing stock of scrap because of the fact that the entire scrap generated at first / second time are also being re-processed and they are shown as work in progress and not as scrap because it is also salable / usable at much higher value than the value of the scrap. Thus the question of any scrap which are generated outside the book does not arise. We need to reiterate that due to the change in the production process the scrap generated by the company are again converted into raw material and then into finished goods after re- process, when it is not feasible for the company to convert the scrap into the finished goods then only the same is being shown as scrap and sold in the market." 4.3.1 From the assessment order, it is seen that this factor of reuse of scrap by converting it into sheet form has been totally ignored by the A.O. while passing the assessment order. After the change in process of manufacturing by the appellant, the raw material at any point of time will be existing in following three forms (i) Raw material (ii) Raw material as part of work in progress which includes the raw material being used to produce finished products as well as scrap which is being converted/has been converted into sheet form for being used again for production of finished goods. (iii) Finished goods. 4.3.2 The A.O. in para 4.5 of his order has stated that there was not generation of scrap in the months of February and March 2008. But he has not considered the submission of the appellant that whatever scrap was generated during these months were again being reused for conversion into sheet form and hence such scraps were part of the work in progress. The total

DCIT Vs. Ratnaveer Stainless Products Pvt Ltd AY : 2008-09 6 disregard of quantity of scrap forming part of work in progress gives a distorted figure of raw material consumption, scraps generation and finished goods. The appellant has claimed the process loss of 2.55% which has not been adversely commented upon by the A.O. The appellant's books of account are audited and vide Annexure G quantitative details of principal items of raw material are given. A perusal of the same shows that the Auditor has given a note stating that the above quantity include the work in progress quantity of raw material. This Annexure is reproduced below: (Qty. in Kgs.) Sr. Particulars Opening Purchase Consumption Sales Closing stock 1. S.S. Sheet-304 286101 1958733 1815878 0 428956 2. S.S. Sheet-316 226013 1112013 840118 0 497908 Total 512114 3070746 2655996 0 926864 Note: The above Quantity include the Work in Progress Qty. of Raw material Annexure H of the Audit report, gives a statement of quantitative details of finished goods manufactured. The same Annexure is reproduced below:

Sr. Particulars Opening Manufacturing Sales Closing Stock 1. S.S. Washers -304 35823.00 1000721.27 1019799.56 16744.71 2. S. S. Washers -316 8192.18 640513.73 635920.44 12785.47 3. S.S. Sheet Metal 10953.00 90085.00 100980.00 58.00 Components 304 4. Brass Washers 36.00 0.00 0.00 36.00 Total 55004.18 1731320.00 1756700.00 29624.18 4.3.3 The appellant during the course of appellate proceedings has also submitted an inventory sheet showing stock in process for the F.Y. 2007-08 which has been made annexure 'A' to this order. 4.3.4 A perusal of these three shows that the appellant has been able to explain the quantitative details of raw material, scrap and finished goods. If the A.O. 's contentions are accepted, then there would be further production of scrap of 120430 kg. for grade 304 and 71065 kg of grade 316 valued at' 2,90,41,625/, which has been allegedly sold by the appellant in the market outside the books of account as per the A.O. If this amount is added to the sale of scrap shown by the appellant, then the balance shown above will become a negative factor and the quantitative details of raw material, scrap and finished goods would not match. For the argument sake even if it assumed that the process

DCIT Vs. Ratnaveer Stainless Products Pvt Ltd AY : 2008-09 7 loss of 32394 kgs., has not taken place, even then the balance figure will be a negative figure if the argument given by the A.O. is accepted.

4.3.4 The only other argument can be that though the appellant had sold off the scrap in market, it is still being shown as part of the work in progress. In such a case too, only the profit earned on such unaccounted sales can be added to the total income. But, owing to the fact that the appellant had changed its manufacturing process and is reusing the scrap generated by converting it into sheet form in order to manufacture finished goods and this change in manufacturing process has not been proved to be bogus or non-existent, this argument is also not admissible. 4.4 On the basis of all the facts discussed above, it is held that the addition made in the assessment order on account of sales of scrap outside the books of accounts is not based upon facts and is not sustainable. Accordingly, this addition is directed to be deleted." 4.4.1 The department filed an appeal before ITAT against the order of CIT(A). The ITAT held that Annexure ‘A' of appellate order had not been confronted to the AO and hence the issue was remanded back to the file of the AO with following observations:- “We have heard the rival submissions and perused the materials available on record. The only grievance of the Revenue is against the not non-granting of opportunity to the Assessing Officer to rebut the Annexure - A as no remand report was called for from the AO by Ld. CIT(A) in respect of the Annexure-'A' to the order of Ld. CIT(A). Admittedly, no details before the Tribunal has been filed in support of the Annexure-A to the order of Ld. CIT(A). It is also not disputed that the Annexure-A was not confronted with the AO by the Ld. CJT(A). Under these facts and circumstances, it would be interest of justice, this issue is remitted back to the fife of Assessing Officer to decide afresh after considering all the details and more particularly Annexure-A to the order of Ld. CIT(A). Needless to say that the AO would afford reasonable opportunity to the assessee for furnishing the details in support of its claim and this ground of Revenue's appeal is allowed for statistical purposes as indicated above."

4.4.2 The AO has again passed an assessment order on 05/02/2014 making the same additions as were made in the original assessment order. The submissions made by the appellant during the current appellate proceedings have already been reproduced above. From these submissions it is seen that the AO has made the same additions by observing that there were no stamps

DCIT Vs. Ratnaveer Stainless Products Pvt Ltd AY : 2008-09 8 of excise authorities on the challans, assessee did not submit a copy of transportation bill etc. in support of material received from one unit to another and no challans were submitted for receiving back the reprocessed material from Waghodiya Unit to Manjusar Unit. The AO has again held that Annexure 'A' prepared by the appellant was nothing but an eye wash which has been proved to be a sham. The AO has claimed that for arriving at this conclusion she had minutely examined each of the processes. She has also stated that the appellant had-sold the generated scrap out of the books and the annexure "A' is nothing but figurative adjustment submitted by the assessee on the basis of some managed figures. Annexure W and copies of challans and transportation ledger unit and copy of leave & license agreement for Waghodia have been made part of-the assessment order by the AO.

4.4.3 An examination of these documents reveals that the AO had used such harsh language without bothering to examine the documents submitted by the appellant before her, the observation made by the CIT(A) in the appellate order passed in relation to the original assessment proceedings and without examining different columns of annexure 'A', which she was bound to do as per the directions given by the ITAT. In fact, in the assessment order nothing has been stated as to what figures are managed in annexure 'A' and what is the basis of holding that this is nothing but figurative adjustment. The nature of annexure 'A' has been discussed in detail in the appellate order passed in relation to the original assessment order and has already been reproduced above.

4.4.3 Now as discussed hereafter, before this office the appellant has successfully controverted the findings of the AO to show that the claim made by the AO that the details were minutely examined during the assessment proceedings is not correct. As submitted by the appellant, the stamp of Excise Authority is not required on any gate pass or challans as per excise manual in force w.e.f F.Y 2005.

4.4.3.1 Secondly, the copies of challans submitted by the appellant to the AO, which have also been made part of the assessment order by the AO are in 02 parts: the upper part is relating to sending the material to Waghodia Unit from Manjusar Unit and the lower half is for the purpose of receiving back the reprocessed material from Waghodia Unit to Manjusar Unit. Thus, the evidence about receiving back the material from Waghodia Unit to Manjusar Unit is already a part of assessment order itself and hence the AO's observation that entire work has been done as Manjusar Unit itself is not correct. On the challans, the quantity of scrap sent from Manjusar Unit to Waghodia Unit and also the quantity of reprocessed material sent from Waghodia Unit to Manjusar Unit have also been recorded. The challans also DCIT Vs. Ratnaveer Stainless Products Pvt Ltd AY : 2008-09 9 mention the burning loss incurred during such reprocessing. The appellant has also submitted a copy of electricity bills of the Waghodia Unit to show that it was working during this period.

4.4.3.2 The other contention of the AO that the appellant did not submit copies of transport bill etc. is not based upon facts. The AO has herself mentioned in para 3.2 of her order that the assessee was specifically requested to submit the ledger of transportation/freight etc. for the month of Feb and Mar 2008. Thus, no transportation bills were asked to be submitted. The appellant had submitted the ledger as asked for. The AO has observed that in such ledgers, there is only three instances of transportation from Manjusar Unit to Waghodia Unit. The AO did not ask the appellant to explain this discrepancy and jumped to the conclusion that this means that there was no transportation of goods between these 2 units. Now, during the course of the current appellate proceedings, the appellant has submitted that one transportation bill included several different days of transportations made between these 02 places. It has also been submitted details of one such bill with and has also tallied quantities of materials transported in the bills with the quantities mentioned on the challans, which are already part of the assessment order. Hence, these observations of the AO are also not correct.

4.4.3.3 Now coming to annexure 'A', a copy of which has been made part of the assessment order, this annexure is nothing but the tally of quantitative details of materials used by the appellant, the scrap generated, the work in progress on account of reprocessing of such scraps and the process loss incurred during such process. In the remand proceedings, the AO has again examined this annexure ‘A' and has stated that the quantity of raw material and WIP mentioned in the annexure 'A' matches with quantity mentioned in the tax audit report (after ignoring the difference in figure of processing loss). The AO has further stated that the processing loss mentioned in annexure 'A' and as mentioned in annexure ‘7’ (Annexure for challan details) of the assessment order has not matched. As per the AO, the process loss as per annexure 'A' for months of Feb 2008 and March 2008 are 7779 Kgs whereas as per annexure ‘7’ this is 6749 Kgs. Thus, there is difference of 930kgs. The appellant had explained before the AO that this difference was on account of the fact that the loss mentioned in the annexure ‘7’ was only for reprocessing the scrap. There are 2 other processes after that in which the material loss takes place i.e Hot rolling process and cold rolling process and the explanation has been filed in rejoinder to the remand report also. A perusal of the challan shows that they mention clearly the burning loss in reprocessing of scrap, which is the substantive part of process losses. All the manufacturing process result into some losses. Hence, some loss is bound to take place in other processes also, as claimed by the appellant. Moreover, the DCIT Vs. Ratnaveer Stainless Products Pvt Ltd AY : 2008-09 10 loss of 930Kgs is quite insignificant as compared to the quantity of scrap being reprocessed by the appellant. Hence, the appellant's submissions in this regard is also acceptable.

4.4.4 Thus, the appellant has been able to authenticate the figures mentioned in the annexure 'A' which has also been accepted by the AO in the remand proceeding except the dispute about the small amount of Joss of 930Kgs. The appellant has also been able to prove the transportation of scrap from Manjusar Unit to Waghodia Unit and receiving back the reprocessed material from Waghodia Unit to Manjusar Unit. Besides, the fact remains that since the quantitative details as per the annexure 'A' are totally matching hence, under no circumstances there can be addition of the value of entire scrap generated by the appellant as sale outside the books of accounts as has been done by the AO in the original assessment order as well as in the current assessment order. If the AO was to make such additions, she should have also reduced the closing stock by the quantity of scrap allegedly sold outside the books of accounts, on account of which addition had been made by her. But since now the appellant has proved that the scrap generated by it in the months of Feb & March 2008 were part of the stock as work in progress, the entire addition made by the AO on this account is directed to be deleted.”

DCIT Vs. Ratnaveer Stainless Products Pvt Ltd AY : 2008-09 11 the addition. The order of the learned CIT(A) was set aside by the Tribunal simply for the reason that these materials were not confronted with the Assessing Officer; hence, an opportunity was given to the Assessing Officer to comment on these materials and to record the findings. In this background, we have perused the assessment order dated 05.02.2014. A perusal of the assessment order would indicate that it is running into 80 pages. In the first three pages, the Assessing Officer has narrated a brief history about how the addition was made, how the matter travelled upto the Tribunal in and how it came back to her. Thereafter, learned Assessing Officer has reproduced the material submitted by the assessee as Annexure-A, bills and vouchers, challans, lease deeds, accounting entries etc. To our mind, this is not the way to examine the details and pass an assessment order. From page Nos. 5 to 78, the learned Assessing Officer has just reproduced the copies of the books of accounts of the assessee in the shape of challans, bills and vouchers, lease deeds etc. There is no analysis and no investigation. Simply placing these documents as a part of the assessment order, the Assessing Officer again made the additions. When this assessment order went before the learned CIT(A) for re-appreciation, then learned First Appellate Authority has made an analysis of the details and observed that the Assessing Officer has not applied her mind while passing the assessment order. At the cost of repetition, we would like to again take note of the findings of the learned CIT(A) recorded in paragraph No.4.4.3 which read as under:-

“4.4.3 An examination of these documents reveals that the AO had used such harsh language without bothering to examine the documents submitted by the appellant before her, the observation made by the CIT(A) in the appellate order passed in relation to the original assessment proceedings and without examining different columns of annexure 'A', which she was bound to do as per the directions given by the ITAT. In fact, in the assessment order

DCIT Vs. Ratnaveer Stainless Products Pvt Ltd AY : 2008-09 12 nothing has been stated as to what figures are managed in annexure 'A' and what is the basis of holding that this is nothing but figurative adjustment. The nature of annexure 'A' has been discussed in detail in the appellate order passed in relation to the original assessment order and has already been reproduced above.”

Order pronounced in the Court on 11th March 2020 at Ahmedabad.