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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI AMARJIT SINGH
Per Rajesh Kumar, Accountant Member:
The present appeal has been preferred by the assessee against the order dated 23.10.2013 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2000-01.
The grounds raised by the Revenue are as under: “1. The order of the learned C!T(A) is contrary to law and facts and circumstances of the case.
2.1 The CIT(A) erred in treating the interest paid at the time of purchase of securities (broken period interest) as revenue expenditure, holding the securities held by the bank stock-in-trade and not as investments.
2 M/s. Parag Engineering Products Pvt. Ltd. 2.2. The CIT(A) ought to have appreciated that disallowances of said interest was made on the ground that this interest was paid by the assessee at the time of purchase of securities which is indirectly an "added cost" of the securities.
2.3. The CIT(A) ought to have appreciated that the assessee during the assessment proceedings said that it has been showing the Govt. securities as stock-in-trade in the balance sheet. These securities shown as investment under capital account.
2.4. The CIT(A) ought to have appreciated that the assessee has not even followed the RBI guidelines in this regard. Since it has been proved that assessee has not been showing the securities as stock-in-trade, the same became a capital set and any interest paid on acquisition of the same will have to be capitalized.
3.1. The CST(A) erred in deleting the disallowance of depreciation arising in the valuation of securities held as stock-in-trade at the end of the accounting year.
3.2. The CIT(A) failed to appreciate that the assessee is providing only for the depreciation and not for appreciation. The assessee has taken the stand that he has provided for the appreciation as welt but same is not true as what appreciation has been provided for is in respect of only those securities where depreciation was earlier claimed. In other words, where there is no depreciation claimed and there is appreciation in the value of securities, the same has not been offered to tax.
4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and thst of the Assessing Officer restored.”
The issue raised in ground No.1 is against the deletion of addition of Rs.3,28,32,575/- by Ld. CIT(A) as made by the AO on account of unproved expenses.
The facts in brief are that during the course of assessment proceedings, the AO called for the information under section 133(6) of the Act from some parties with whom the assessee has entered into business transactions. The AO in some cases received replies while in some cases the notices were either not served or not responded. The details of the information gathered by the AO from 7 parties is given on page No.3 of the assessment order which was at variance to the details filed by the assessee and accordingly the assessee was asked to reconcile the said
3 M/s. Parag Engineering Products Pvt. Ltd. discrepancies with its the books of accounts. In response to the query of the AO the assessee submitted that out of 7 parties submissions from 4 parties have already been submitted on 09.03.2015 by the assessee. In respect of Charcore Petroleum the assessee submitted that the AO may take action against them and as regards Venus Petroleum the assessee submitted before the AO that a copy of the reply received from the said party may be provided so that the entries could be reconciled. Similarly, the account of Britannia Industry Ltd. was explained by the assessee by submitting that there are separate accounts in the books of assessee ,one is in respect of conversion charges of which has a credit balance of Rs.9,26,67,066/- and second account is in respect of the reimbursement of expenses which have been credited to the respective expenses account. The assessee also submitted that the discrepancies in the books of the assessee and the parties with whom transacted during the year may be on account of the fact that assessee might have accounted the bill in the current year and the party may have accounted for the transactions in the next year. The AO rejected the contentions of the assessee and even noted that assessee has claimed certain TDS in respect of which the corresponding income has not been offered. This discrepancy was as per the claim made by the assessee in the books of accounts and as per form 26AS. Finally, the AO added a sum of Rs.3,28,32,575/- which remains unproved as per details below: Sr Name of the Party Nature of Amount Rs No transactions
1 Shreekush machinery & Hygiene 17,10,639 spares Pvt. Ltd. Contract 3 Charkop Petroleum Oil & Fuel 1,10,81,002 4 Ronak Overseas Oil & Fuel 1,05,68,465 5 Ratna Machines Pvt. Ltd. Purchase 88,71,098 Total 3,28,32,575
In the appellate proceedings, the Ld. CIT(A) deleted the disallowance by observing and holding as under: “5.6 I have considered the facts on record and submissions carefully. It is seen from Para 4.1. of the assessment order that the assessing officer informed the appellant of non-service/no reply in respect of various creditors only vide letter dated 20.3.2015 and the assessment order was passed on 30.3.2015. Reply was filed vide letter dated 27.3.2015 which is reproduced in the assessment order in Para 4.2. The assessing officer has accepted that confirmations were filed in respect of four parties but has objected to it stating that supporting bills, vouchers , quantitative details , identity of persons signing the confirmations is not filed. While the assessee has stated that the confirmations were filed vide letter dated 9.3.2015, it is not clearly stated what else was called for since the notice dated 20.3.2015 does not make it clear as to what was already on record and what else was called for. As regards Charkop Petroleum, the assessee had stated before the assessing officer to take action as deemed fit in case they did not respond to its notice. As additional evidence, the confirmation from Charkop Petroleum has been filed. 5.7. At this stage it is noted that the onus lies on the person who makes the claims. The assessing officer had called for confirmations. If it can be shown that such claims are false, addition can be made. However, addition cannot be made for lack of response from the creditor/purchase party and more so when the goal posts are shifted by calling upon the assessee at the last minute to provide various details from the books of the suppliers over whom the assessee has no control. 5.8. There is merit in the submissions of the appellant that the assessing officer has not understood the nature of appellant's business while submitting the remand report. It does appear that the assessing officer has not discussed the issues/doubts with the appellant before sending the report. The appellant has explained that cleaning job for the factory was given to Shreekush Machinery and Spares Pvt. Ltd. and Virtual Cleaning Systems Pvt. Ltd. Oil and Fuel is purchased from Ronak Overseas and CharkopPetrloeum. The same is used to fire the burners in the baking process. Machinery is purchased from Ratna Machines P. Ltd. which is part of fixed assets. Copies of the bills for purchase are filed. It is clear that the in the remand proceedings, the assessing officer has not asked the appellant the nature and item of purchase and thereby speculated that oil and fuel purchase is excessive
5 M/s. Parag Engineering Products Pvt. Ltd. 5.9. Since the larger part of expenses were in respect of purchases from Ronak Overseas and Charkop Petrloeum, details of quantity and amount of purchase was called. The position is as follows.
FY 2012-13 Supplier FY 2011-12 FY 2013-14
Quantity Amount Quantity Amount Quantit Amount y 223,986 110,81,002 63000 29,15,762 2800 163,742 Charkop Petroleum 200000 105,68,465 10000 6,09,000 Ronak Overseas 32,31,033 67,062 Others 40000 1449 247,839 92,25,851 444,628 181.43.47 0 Mahanaga r 630,508 Gas Ltd. (installatio n charges) 255,11,008 128,17,67 5 183,07,21 2 Total
5.10. It is noted from the above that similar purchases have been made in subsequent years also. No such addition/disallowances are made in assessment orders for AY 2013-14 and AY 2014-15 as seen from the copies filed before me. In later years, the appellant has switched to gas as fuel instead of oil and fuel. Confirmations have been filed by all the parties. None of these parties are related to the appellant. Payments have been made by cheques. None of the expenses claimed have been proved to be non-genuine. If the parties have not given details such as their bank statements, copy of agreement etc. it does not mean that the expenses claimed are bogus. It is not necessary that there be a formal agreement in all cases. As per the Job Work Agreement between the appellant and BIL, the appellant is required to ensure that highest standard of cleanliness is maintained at the factory at all times. 5.11. In the facts of the case, and for the reasons narrated above, the disallowance made of Rs.3,28,32,575/- is deleted and ground of appeal no 2 is allowed.
The Ld. D.R. contended before the Bench that the said addition of Rs.3,28,32,575/- was deleted by Ld. CIT(A) without noticing the fact that the said amounts remained unverified during the course of assessment proceedings and came to light only when the AO issued notices under section 133(6) to the 6 M/s. Parag Engineering Products Pvt. Ltd. parties with whom assessee entered into business transactions during the year. The Ld. D.R. submitted that all these discrepancies were specifically confronted to the assessee during the course of assessment proceedings and only after the assessee failed to explain the said discrepancies, the same were added to the income of the assessee. The Ld. D.R. also submitted that even during the course of assessment proceedings, the AO reiterated his finding by stating that the assessee has not cooperated in the remand proceedings also. Therefore, the Ld. CIT(A)’s order in deleting the said addition is contrary to the facts on records and kindly may be set aside.
On the other hand, the Ld. A.R. relied heavily on the order of Ld. CIT(A) by submitting that Ld. CIT(A) has passed a very reasoned order after taking into account submissions of the assessee, details filed, the quantitative and qualitative tally of three parties beside explaining the modus operandi in the business of the assessee. The Ld. A.R. finally submitted that in view of the reasoned and speaking order by the Ld. CIT(A), the ground raised by the Revenue may be dismissed.
After hearing both the parties and perusing the material on record, we observe that the Ld. CIT(A) has considered all the aspects and dimensions of the issues including the detailed reconciliation and explanation by the assessee. The Ld. CIT(A) has specifically noted that the addition can not be made for lack of response from the creditors/purchase party and more so when the assessee was called upon to explain the balance standing in the credit of a party at the last moment by providing details and books of suppliers on whom the assessee has no 7 M/s. Parag Engineering Products Pvt. Ltd. control. Under these facts and circumstances, we are in agreement with the conclusion of Ld. CIT(A) that disallowance of Rs.3,28,32,575/- is uncalled for. Accordingly, we uphold the order of Ld. CIT(A) by dismissing the ground raised by the Revenue.
The issue raised in 2nd ground of appeal is against the deletion of Rs.2,02,64,475/- by Ld. CIT(A) as made by the AO on account of income representing unaccounted production.
The facts in brief are that the assessee is engaged in the business of production of bread for Britannia Industry Ltd. on contractual basis. The entire raw material is supplied by the Britannia Industry Ltd which go into the manufacturing processes. During the year, the assessee disclosed the receipt of conversation charges of Rs.9,16,00,806/- in the P&L account from Britannia Industry Ltd. According to the AO the said amount is not in agreement with the amount shown in 26AS and accordingly information was called for under section 133(6) from Britannia Industry Ltd. besides requiring the assessee to furnish the copy of agreement with the Britannia Industries Ltd. bills, vouchers, quantitative details, finished goods manufactured and raw materials consumed etc. which was replied by the assessee on 27.03.2015 explaining the query raised by the AO. Finally, the AO rejected the books of accounts of the assessee under section 145(3) of the Act on the ground that results as per books of accounts were not reliable as there was excess consumption of fuel of 24638 meters. Finally, the AO estimated unaccounted sales at Rs.2,02,64,478/- by 8 M/s. Parag Engineering Products Pvt. Ltd. observing as under and adding the same to the income of the assessee: “5.6. I have considered the facts on record and submissions carefully. It is seen from Para 4.1. of the assessment order that the assessing officer informed the appellant of non-service/no reply in respect of various creditors only vide letter dated 20.3.2015 and the assessment order was passed on 30.3.2015. Reply was filed vide letter dated 27.3.2015 which is reproduced in the assessment order in Para 4.2. The assessing officer has accepted that confirmations were filed in respect of four parties but has objected to it stating that supporting bills, vouchers, quantitative details , identity of persons signing the confirmations is not filed. While the assessee has stated that the confirmations were filed vide letter dated 9.3.2015, it is not clearly stated what else was called for since the notice dated 20.3.2015 does not make it clear as to what was already on record and what else was called for. As regards Charkop Petroleum, the assessee had stated before the assessing officer to take action as deemed fit in case they did not respond to its notice. As additional evidence, the confirmation from Charkop Petroleum has been filed.”
In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee by observing and holding as under: “6.3. In the remand report submitted by the AO, the AO merely reiterated the conclusion of the assessment order as regards the estimation of alleged unaccounted production without dealing with the contentions of the appellant. In the rejoinder the appellant also reiterated his submissions made in the appellate proceedings.
6.4. I have considered the facts on record and rival submissions. It is noted that the appellant does not manufacture/produce bread on its own account. It merely carries out job work and receives material from BIL and bakes bread for BIL for which it receives conversion charges as per the agreement with BIL. I agree with the contention of the appellant that the actual consumption of power and oil can vary from the estimated standard rates, and that the variance need not be an evidence of unaccounted production without any other corroborative evidence.”
The Ld. D.R. submitted before the Bench that the Ld. CIT(A) has deleted the addition on the ground that the assessee is engaged in the contract manufacturing for Britannia Industry Ltd. and was not involved in direct selling of the manufactured product. The Ld. D.R. submitted that there was excess use of power fuel to the tune of 24,638 liters which was not explained at all and consequently the said addition was made on the basis
9 M/s. Parag Engineering Products Pvt. Ltd. of not submitting any plausible explanation on excess consumption of oil in the manufacturing . Besides, the AO noticed several infirmities and anomalies in the books of accounts of the assessee. Similarly, there was short consumption of electric unit to the tune of 77,17 which was also not explained by the assessee. The Ld. D.R. submitted that in view of these facts the result as shown in the books of accounts were unreliable and AO was not in a position to assess the income correctly and therefore rightly rejected the books of accounts and estimated the unaccounted sales of the assessee. The Ld. D.R. therefore prayed that the order of Ld. CIT(A) may be set aside on this issue by allowing the appeal of the Revenue on this ground.
The Ld. A.R., on the other hand, relied heavily on the order of AO by submitting that the assessee was only carrying out contract work for Britannia Industry Ltd. under contractual obligation which provided that the entire factory was to be used exclusively for the manufacturing, packaging and storing of products for Britannia Industry Ltd. and production would be as per schedule given by Britannia Industry Ltd. The production processes were also subject to the inspection of Britannia Industry and sample test checking was also done. Therefore, there is no possibility of manufacturing the bread by the assessee on its own for selling directly in the market. The Ld. A.R. submitted that the Ld. CIT(A) has called for the comparison of actual and standard monthwise consumption for preceding and succeeding year and noted that the deviation/variances were normal and no addition was made on account of such 10 M/s. Parag Engineering Products Pvt. Ltd. variances in 2013-14 and 2014-15. The Ld. A.R. stressed upon the fact that the AO has calculated the estimated unaccounted sale on account of excess consumption of fuel of 24638 leters but ignored the short consumption of power of electricity of 77,179 unit. The Ld. A.R., therefore, submitted that all these variances were within the standard norms and the Ld. CIT(A) has rightly passed the speaking order directing the AO to delete the addition. The Ld. A.R. therefore prayed that the appeal on this ground of the Revenue may be dismissed.
We have heard the rival submissions of both the parties and perused the material on record. We observe that in this case the addition was primarily based upon the excess consumption of fuel to the extent of 24638 litters. We observe that the assessee was contract manufacturer of Britannia Industry Ltd. and was operating under the direct control and supervision of Britannia Industry Ltd. and was not allowed to do or manufactured bread for any other outside party. We also note that the excess consumption of fuel was within the standard norms as has been observed by Ld. CIT(A) by comparing the actual and standard consumption in the preceding and succeeding year and came to the conclusion that the estimation of unaccounted sale on the basis of excess consumption of fuel is wrong and against the provisions of the Act. We are quite convinced with the conclusion drawn by the Ld. CIT(A) on this issue as the AO has made addition on hypothetical basis not appreciating the facts in correct perspective. Accordingly, we are uphold the order of ld CIT(A) by dismissing the ground raised by the revenue.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 09.12.2019.