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Income Tax Appellate Tribunal, PUNE BENCH “C”, PUNE
Before: SHRI R.S. SYAL & SHRI PARTHA SARATHI CHAUDHURY
PER R.S.SYAL, VP : These two cross appeals – one by the assessee and the other by the Revenue arise out of the order passed by the Commissioner
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of Income-tax (Appeals) on 08-02-2013 in relation to the
assessment year 2009-10.
The first ground of the assessee’s appeal is against the
confirmation of disallowance amounting to Rs.28,18,584/- made
by the Assessing Officer (AO) u/s.40A(3) of the Income-tax Act,
1961 (hereinafter called ‘the Act’).
Briefly stated, the facts of the case are that the assessee is
engaged in the manufacturing of various types of PVC pipes and
fittings. During the course of assessment proceedings, the AO
observed that the assessee made payments to transporters in
violation of the provisions of section 40A(3) of the Act. On being
called upon to explain the reasons, the assessee submitted that his
case was covered under Rule 6DD(k) of Income-tax Rules, 1962
(hereinafter also called `the Rules’). The AO found that the
prescription of Rule 6DD(k) applies only where the payment is
made by any person to his agent who, in turn, is required to pay in
cash for goods or services on behalf of such principal. Since the
relationship between the assessee and the transporters was not that
of principal and agent, the AO made disallowance u/s.40A(3) of
the Act at Rs.28,18,584/-. The ld. CIT(A) confirmed the
3 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.
disallowance, against which the assessee has approached the
Tribunal.
We have heard the rival submissions and perused the
relevant material on record. The assessee admittedly made
payments of Rs.28,18,584/- in violation of section 40A(3) of the
Act. The only case of the assessee is that it is covered under rule
6DD(k) of the Rules and hence no disallowance is warranted.
Here it is relevant to note that rule 6DD considers certain cases
and circumstances in which a payment or aggregate payments
exceeding Rs.20,000/- may be made to a person in a day
otherwise than by an account payee cheque or an account payee
draft. This rule provides that no disallowance u/s.40A(3) shall be
made if the case is covered under any of the clauses (a) to (l) of
Rule 6DD. As the assessee has otherwise accepted the
application of section 40A(3) of the Act, but harped on it being
covered under rule 6DD(k) for non-disallowance, we reproduce
clause (k) of Rule 6DD, which provides: “where a payment is
made by any person to his agent who is required to make payment
in cash for goods or services on behalf of such person”. On going
through the mandate of this clause, it clearly emerges that if a
principal pays certain amount to his agent who, in turn, is required
to pay in cash for goods or services on behalf of the principal,
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then such payment made by the principal to the agent would not
be hit by section 40A(3) of the Act.
Adverting to the facts of the instant case, we find that the
assessee has made payments in violation of section 40A(3) to
certain transporters who are not his agents. The ld. AR canvassed
a view that since the transporters were representing the assessee
in supplying the goods, they assumed the character of agents. In
our considered opinion, such a contention is a farfetched
proposition. Delivering goods by a transporter on behalf of the
assessee to customers is one thing, which is entirely different
from paying freight by the assessee to such transporter. Further,
exception carved out in the Rule applies where the payment is
made by the assessee to his agent for making further payment in
cash and not for the self consumption by the agent. Since no
principal-agent relation exists between the assessee and
transporters to whom the assessee made payments in violation of
section 40A(3) of the Act, it is held that the assessee cannot get
shelter of clause (k) of Rule 6DD. We, therefore, uphold the
impugned order on this score.
The only other ground which has been raised by the assessee
in its appeal is against the confirmation of disallowance of
Rs.12,71,000/- made by the AO u/s.14A read with Rule 8D.
5 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.
The facts apropos this ground are that the assessee made
investment in shares. The AO observed that no disallowance was
offered u/s.14A of the Act. Invoking the provisions of Rule
8D(2)(iii), the AO computed disallowance amounting to
Rs.12,71,000/- at ½% of investments. The ld. CIT(A) sustained
the disallowance.
Having heard both the sides and gone through the relevant
material on record, we find it as an admitted position that the
assessee did not earn any exempt income during the year. The ld.
AR took us through the annual report of the assessee and it was
shown that no exempt dividend income was reflected. The ld. DR
also could not controvert this factual position.
The Hon'ble Delhi High Court in Cheminvest Ltd. vs. CIT
(2015) 378 ITR 33 (Del) has held that if there is no exempt
income, there can be no question of making any disallowance u/s
14A of the Act. Similar view has been taken by the Hon'ble Delhi
High Court in CIT vs. Holcim India P. Ltd. (2014) 90CCH 081-
Del-HC. No contrary decision has been brought to our notice by
the ld. DR. In view of the fact that the assessee did not earn any
exempt dividend income during the year, we hold that no
disallowance can be sustained u/s 14A of the Act. We, therefore,
6 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.
overturn the impugned order to this extent. This ground is, thus,
allowed.
All the grounds taken by the Revenue in its appeal are
against not accepting the rejection of books of account by the ld.
CIT(A) in addition to the deletion of addition of
Rs.11,31,54,083/- on account of extra profit on sale of goods
manufactured outside the books of account; and Rs.2,49,96,455/-
towards unexplained investment in such outside production.
The facts concerning these grounds are that the AO, on
perusal of stock statements given by the assessee to bank from
time to time, observed that there was a difference in stocks
declared. A chart has been made at page 10 of the order depicting
such variations. On being called upon to explain the reasons for
such a difference, the assessee submitted that there was difference
only in valuation whereas the quantity was same as per books and
that given to the bank from time to time. The AO further
observed that the power consumption by the assessee varied
throughout the year. He rejected the books of account. The
assessee was required to inform about the standard consumption
ratio of output with chemicals and calcium, which was given as
3.37 kg of chemicals and 8 kg of calcium for every 100 kg.
7 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.
Considering this as a benchmark, the AO worked out the
production as should have been through Annexures A to E. In
this way, he held that the production should have been
1,99,14,73,541 whereas the assessee company had shown it at
99,61,635. The differential production at 99,53,106 was held to
have been made outside the books of account. He converted it
into sale value at Rs.72,14,01,130/-. After allowing deduction
towards the Resin value and Chemical value, the AO calculated
extra profit from manufacturing of such sale outside the books of
account at Rs.11,31,54,083/-. In addition, it was further opined
that the assessee made unexplained investment in such undeclared
production at Rs.2,49,96,544/-. These two amounts of Rs.11.31
crore and odd and Rs.2.49 crore and odd were added by the AO.
The ld. CIT(A) concurred with the submissions advanced on
behalf of the assessee and overturned the action of the AO in
rejecting the books of account and as the sequitur, deleted both
the additions. The Revenue is aggrieved by such deletion of
additions.
Having heard both the sides and gone through the relevant
material on record, it is seen that the AO rejected books of
account mainly on the ground that value of stock submitted to
bank was higher than that reflected in the books of account; and
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consumption of more electricity justified carrying out
manufacturing activity outside books of account on the basis of
certain standards given by the assessee.
In so far as the figure of excess stock to the bank is
concerned, we first want to clarify that the assessee enjoyed the
credit facilities under hypothecation of stock and not on pledge.
The assessee is a manufacturing unit and is subjected to excise
duty. The ld. CIT(A) has recorded a categorical finding that all
the requisite quantitative records have been maintained by the
assessee, which has not been controverted by the ld. DR. It is
further seen as an admitted position that the assessee also
maintained stock registers and it is not the case of the AO that
quantitative figures as per such stock registers do not tally with
the quantity of stock declared by the assessee in the annual
accounts at the end of the year. The difference in the value of
stock as given to the banks and as per annual accounts is mainly
on account of valuation and not on account of quantity.
In so far as valuation aspect is concerned, the AO has not
controverted that the valuation of stock given by the assessee in
its balance sheet is as per the regular method of stock valuation
followed by the assessee. It, therefore, transpires that the
difference in the amounts of stocks as per bank and annual
9 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.
accounts has arisen because of valuation and not quantitative
details and further the value declared in the annual accounts is not
fallacious and is as per the regular method of valuation. Once the
value reflected by the assessee in its annual accounts has been
accepted by the AO, in our considered opinion, no addition can be
made simply on the ground that the assessee declared higher
value to the banks. Our view is fortified by the judgment of the
Hon’ble jurisdictional High Court in CIT Vs. Acrow India Ltd.
(2008) 298 ITR 448 (Bom.). Reliance of the ld. DR on V. Rajan
vs. CIT (1974) 96 ITR 64 (Mad) is inconsequential in as much as
in that case the explanation of the assessee was that stock in hand
was actually inflated for the purpose of getting a higher loan from
bank. Contrariwise, the case under consideration is that of
estimation of stock value by the assessee at the time of furnishing
statements to bank and not that of intentional inflation.
Now coming to the alleged excess manufacturing outside
the books of account on the basis of certain ratio given by the
assessee of some raw materials to final product, it is seen that the
assessee submitted that it was just a standard in a particular
situation which varied from situation to situation. We also concur
with the contention of the assessee that there cannot be any
10 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.
yardstick of ratio of raw material to output. Variation arises in
such standard ratio because of several reasons, such as, quality of
products required, normal wastage, abnormal wastage, disruption
in manufacturing process, seasonal reasons, at al. The thing
which is pertinent to note is that if the AO was coming to the
conclusion of the assessee having manufactured goods outside the
books of accounts, there should have been some material to
substantiate the same. The assessee has maintained proper stock
registers and is subjected to excise duty. There is nothing on
record that the Excise Department or Sales-tax Department, for
that purpose, did not accept the figures of manufacturing or sales
as tendered by the assessee. In case of Excise duty levy,
movement of goods is strictly monitored. No manufacturer can
remove the manufactured goods without paying excise duty, for
which entries in necessary registers are made. Here is a case in
which the assessee has maintained all the requisite registers.
Simply because consumption of electricity varied from month to
month or did not match with the manufacturing shown by the
assessee, cannot be a reason to infer that the assessee was
engaged in carrying out manufacturing activity outside books of
account.
11 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.
The Special Bench of the Tribunal in Shanker Rice
Company Vs. ITO 2000 72 ITD 139 (Amritsar)(SB) considered
almost similar situation in which addition was made by the AO on
the presumption of suppressed manufacturing. The Special Bench
of the Tribunal reversed the action of the AO in rejecting the
books of account on the ground that such books of account were
audited and the statutory registers were maintained which were
accepted by the Excise and Taxation Department etc. The facts of
the instant case are almost similar to those as considered by the
Special Bench of the Tribunal in Shanker Rice Company (supra).
Reliance of the ld. DR on the case of Honeywell Automation
India Ltd. VS. DCIT (2012) 21 taxmann.com 260 (Pune) is again
misplaced. That was a case in which the default was quantified at
Rs.1.24 crore, which is not the position as instantly prevailing.
Similar is the position regarding the judgment in the case of
National Plastics Industries VS. ITO (2009) 177 Taxman 139
(Bom). That was a case in which instances of various leakages of
revenue in books of account were found, which is not the case
under consideration.
In view of the foregoing discussion, we are of the
considered opinion that the ld. CIT(A) was justified in
overturning the view point of the AO in rejecting the books of
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account. Once the books of accounts are held to be properly
maintained, there cannot be any question of making addition on
the basis of suppressed production or undisclosed investment.
We, therefore, affirm the opinion of the ld. first appellate
authority in deleting both the additions amounting to Rs.11.31
and odd and Rs.2.49 crore and odd.
In the result, appeal of the Revenue is dismissed and that of
the assessee is partly allowed.
Order pronounced in the Open Court on 19th July, 2019.
Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 19th July, 2019 सतीश आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-II, Nashik 4. The CIT-II, Nashik िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “सी” / DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune
ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.
Date 1. Draft dictated on 18-07-2019 Sr.PS 2. Draft placed before author 18-07-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *