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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI G.S. PANNU, HONBLE & SHRI C.N. PRASAD, HONBLE
PER C.N. PRASAD (JM) 1. These two appeals are filed by the assessee and Revenue against the order of the Learned Commissioner of Income Tax (Appeals)–26, Mumbai dated 20.10.2010 for the Assessment Year 2007-08.
The first issue in the appeal of the assessee is regarding confirmation of addition of ₹.32,82,400/- made on alleged suppression of sales.
Facts of the case are that assessee is engaged in manufacturing and trading in metals, filed return of income on 30.10.2007 declaring loss of ₹.1,78,90,942/-. The assessment was completed u/s. 143(3) on 29.12.2009 determining the net taxable income at ₹.4,44,64,022/-. While completing the assessment the Assessing Officer made addition of ₹.32,82,400/- towards suppression of sales. It is observed by the Assessing Officer that there was a search in the office premises of the assessee on 27.11.2006 by the Central Exercise Authorities, Mumbai and Panchanama was drawn by the authorities wherein it revealed that the assessee was engaged in certain misdoings and seized incriminating documents for further investigation. It was also observed by the Assessing Officer that on 01.12.2006 there was another search by the 3 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries Central Exercise Authorities in the assessee’s factory premises, the Panchanama drawn revealed that while scrutinizing the loose papers found, sales invoice bearing No.425 dated 04.11.2006 for sale of copper ingots weighing 9520 Kgs valued at ₹.32,82,400/- to M/s. Mittal Appliances Ltd. did not contain the details of lorry receipt number and the vehicle number was left blank and this was confronted to the Authorized Signatory and also Assistant Accounts Manager of the assessee. The Authorities on further verification found that similar sales invoice No. 425 dated 02.11.2006 was issued in the name of M/s. Bhagwandas Scrapwala showing dispatch of Iron and Steel weighing 5105 Kgs valued at ₹.15,315/- bearing the vehicle number DN 098833. Therefore, due to such discrepancy found by the authorities and since Sanjay Chaturvedi the Authorized Signatory in the presence of panchas confessed that the goods were dispatched without paying the legitimate duty/tax, the assessee agreed to pay the duty of ₹.5,36,040/-. The Assessing Officer further observed that this clandestine sale of ₹.32,82,400/- has not been accounted as sales in the regular Books of Accounts by the assessee nor the same has been reflected in the stock register of the assessee. Thus, the Assessing Officer added this amount to the sales and consequential to the income of the assessee. On appeal the Ld.CIT(A) sustained the addition made by the Assessing Officer.
4 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries 4. Before us, the Learned Counsel for the assessee submitted that the invoice was incomplete as no details of lorry receipt number and no vehicle number was mentioned on the invoice. There was no discrepancy as far as the stocks are concerned, more particularly the finished goods and hence deriving any adverse inference about sale of finished goods off the books in untenable. It was further submitted that in fact there was a sale of copper ingots to M/s. Mittal Appliances Ltd., but on 06.11.2006 vide invoice No. 429, valued at ₹.34,23,123/- and this proves that the sales were under negotiations and accordingly the invoice must have been kept ready in apprehension of the sale taking place on 04.11.2006 but for some reason the transaction could not be completed on 04.11.2006 and instead the transaction took place on 06.11.2006. Learned Counsel for the assessee further submitted that assessee is eligible for full tax exemption u/s. 80IB(4) in the year of this appeal and there remains no temptation to indulge itself in clandestine sales.
Ld. DR referring to Assessment Order submitted that the Authorized Signatory and the Assistant Accounts Manager of the assessee indeed confessed in the presence of panchas that the goods were dispatched/sold clandestinely without paying the legitimate duty/tax and it was agreed to pay duty of ₹.5,36,040/- on such suppressed sales, therefore the finding of the Assessing Officer was that the sales was not 5 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries accounted for in the regular Books of Accounts. Therefore, the Ld. DR submitted that the addition was rightly made by the Assessing Officer and sustained by the Ld.CIT(A).
We have heard the rival submissions, perused the orders of the authorities below. In the course of search by the Central Exercise Authorities, it was found that sales invoice bearing No. 425 dated 04.01.2006 mentioning the dispatch of copper ingots weighing 9520 Kg valued at ₹.32,82,400/- was made to M/s. Mittal Appliances Ltd. without any details of lorry receipts Nos. and vehicle number. This was confronted by the authorities with Sanjay Chaturvedi, Authorized Signatory to the invoice and the Assistant Accounts Manager of the assessee to show the central exercise records and on verification of such records it was found that the same sale invoice No. 425 dated 02.11.2006 was issued in the name of M/s. Bhagwandas Scrapwala showing dispatch of iron and steel weighing 5105 Kg valued at ₹.15,315/- bearing the Vehicle No. DN098833. We find that due to such discrepancy Sanjay Chaturvedi in the presence of Panchas confessed that the goods were dispatched/sold without paying the legitimate duty/tax. It is also the finding of the Assessing Officer that the sale was not recorded in the regular Books of Accounts. The findings of the Assessing Officer are that the tax audited report has been furnished without vowing and verifying the 6 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries bills/manufacturing records/stock records. We find that in the course of Assessment Proceedings assessee was asked to produce the manufacturing records, stock records. However, it was stated that all the documents are lying with the DRI/Exercise Authorities and they have not obtained copy of such seized materials. In view of the confession made by the Authorized Signatory and the Assistant Accounts Manager of the assessee that they have dispatched/sold these goods without paying legitimate duty/tax the contention of the assessee that the sale was under negotiations and accordingly the invoice must have kept ready in apprehension of sale taking place on 04.11.2006 appears to be not credible and an afterthought for the reason that the assessee has recorded sales of iron and steel on the very same invoice No. 425 to M/s. Bhagwandas Scrapwala and this invoice contains the lorry Number through which the material was dispatched. In the circumstances, we do not find any infirmity in the order of the Ld.CIT(A) in sustaining the addition made by the Assessing Officer.
The second issue in the appeal of the assessee is regarding confirmation of the addition of ₹.1,44,50,000/- made u/s. 68 of the Act in respect of unsecured loans.
7 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries 8. The Assessing Officer while completing the assessment and on perusal of the balance sheet noticed that assessee has shown unsecured loans as on 31.03.2006 at ₹.1,74,34,062/- as against the unsecured loan as on 31.03.2006 was ₹.3,96,39,627/-. Therefore, the assessee was asked to prove by providing loan confirmations for the new loans credited in the Books of Accounts during this Assessment Year. Assessing Officer also issued notice u/s. 133(6) notice to the loan creditors to provide the copy of balance sheet, bank statements, ledger account and Income tax return acknowledgement etc., Out of 39 creditors the notices sent to 7 creditors were returned unserved with an endorsement that parties were not known or left the places. An opportunity was given to the assessee to produce the parties. However, assessee was unable to produce the parties before the Assessing Officer. The Assessing Officer observed that identity of the creditors is not proved as the loan creditors did not appear before him for furnishing the necessary details called for. It was also observed by the Assessing Officer that instead of producing the loan creditors assessee simply filed confirmation letters on 24.12.2009 which is on the fag end of the Assessment Proceedings leaving no room for further verification. The Assessing Officer also observed that some of the creditors filed copy of income, bank pass-book and copy of confirmation letters on 24.12.2009 in tapal, and on going through the computation of 8 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries income, bank statements of the loan creditors he noticed that the loan creditors are of small means showing meagre income but lending huge sum to the assessee and thus according to the Assessing Officer the creditors have no capacity to lend. Assessing Officer also observed that their bank accounts show that on the date of advancing loan, a credit entry from other saving accounts and in some cases in cash, deposits were appearing. Therefore, he concluded that having very small credit balances in the account till the date of advancing the loan and a sudden credit entry in the bank account show that these entries were fabricated by the assessee himself or through his agents in order to show credit in the assessee’s Books of Accounts. Thus the Assessing Officer treated ₹.1,44,50,000/- shown as credits in the names of the creditors mentioned in Sl.No.2 to 38 at Page No.10 of the Assessment Order, except M/s. Prakash Mehta and M/s. Pankaj shipping & Transport Co., as unexplained credits u/s. 68 of the Act.
On appeal the Ld.CIT(A) sustained the addition observing that though assessee was asked to furnish the confirmations from the new creditors, assessee had not submitted any such confirmations and further more notices u/s. 133(6) sent by the Assessing Officer were returned unserved as the parties are not available in the given address. He also observed that in the course of Assessment Proceedings assessee could
9 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries not be able to prove beyond doubt as to how all these parties having real capacity to advance such loan and there is a genuine transaction. Therefore, the Ld.CIT(A) concluded that the creditors unexplained cash credits were not proved to be genuine transactions, credit worthiness was not proved and therefore sustained the addition.
Before us Learned Counsel for the assessee submitted that assessee has produced bank statements of the creditors, Income Tax Returns filed by the creditors, confirmations from the creditors and therefore he submitted that the assessee proved the genuineness of the transactions, identity of the creditors and credit worthiness of the creditors and therefore there is no justification in treating the creditors as unexplained cash credits.
Ld. DR referring to Para 14 at Page No. 18 of the Ld.CIT(A) order submitted that assessee did not produce parties for verification therefore the genuineness of the transactions could not be established. Ld. DR further submitted that the credit worthiness of the creditors was also not proved by the assessee especially in the light of the observations made by the Assessing Officer that creditors have only meager income and there were deposits in cash on the day when the loans were advanced which suggest that the assessee himself arranged the transactions.
10 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries Therefore, Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions, perused the orders of the authorities below. On a perusal of the Assessment Order, we find that the assessee was asked to produce loan confirmations from the new loan creditors vide notice dated 21.07.2009. We also observe from the Assessment Order since the confirmation letters were not coming from the assessee, the Assessing Officer issued notices u/s. 133(6) to the loan creditors to provide various details. We also observed that the letters u/s. 133(6) sent to 7 parties mentioned in the Page No.11 of the Assessment Order were returned unserved. Assessee was asked to produce the creditors for verification. However, the assessee unable to produce the parties. Assessing Officer once again requested the assessee on 21.12.2009 to produce loan depositors for verification on or before 28.12.2009. We observe from the Assessment Order that assessee filed confirmation letters on 24.12.2009 in Tapal. We also observe that the Assessing Officer stated that even the computation of income, bank statements of the loan creditors show that the creditors are only having meagre income to lend huge sum to the assessee and this indicates that there is no capacity to lend to the creditors. It is also the observation of the Assessing Officer that as on the date of advancing loan either credit
11 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries entry from other savings account or cash deposits were made in the creditors accounts and this shows that entries are fabricated by the assessee himself or through his agents in order to show credit in the assessee’s Books of Accounts. These findings of the Assessing Officer were not rebutted by the assessee before the Ld.CIT(A) or even before us by establishing the credit worthiness of the creditors. It is the finding of the Ld.CIT(A) that assessee did not prove beyond doubt as to how all the creditors are having real capacity to advance such loan and there is a genuine transaction. We have perused the confirmations filed and find that all these confirmations are stereo typed and prepared by the assessee himself reflecting the status of the creditor’s account in the assessee’s Books of Account and obtained the signatures on such account/statement. The letters produced by the assessee are mere confirmations of balances showing income in the name of the creditors in the books of the assessee and nothing else. The creditors have not submitted confirmations letters on their own confirming the loan transactions. The assessee could not explain the genuineness of the transactions, could not show the credit worthiness of the creditors by producing their financial statements and could not explain that the creditors have sufficient means to lend monies to the assessee. None of the findings of the lower authorities have been rebutted by the assessee.
12 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries The assessee has not discharged the onus to prove the genuineness of the transactions, identity of the creditors and credit worthiness of the creditors. Since assessee did not produce the creditors for verification by the Assessing Officer nor expressed his inability to produce the creditors for verification it is not known whether the signatures obtained on the account statements are from the real creditors whose address is given on the confirmations. The burden of proving the cash credits as genuine, the identity and credit worthiness of the creditors is not discharged by the assessee in this case. In the circumstances we uphold the order of the Ld.CIT(A) as well as the Assessing Officer by sustaining the addition. This ground of appeal is dismissed.
13. The third issue in the appeal of the assessee is regarding confirming the addition of ₹.7,60,000/- made u/s. 40A(3) of the Act.
14. The Assessing Officer while completing the assessment noticed that the assessee has made certain cash payments to M/s. Pankaj shipping & Transport Co. towards clearing and forwarding charges. Since M/s. Pankaj Shipping & Transport Co. is the proprietary concern of one of the partners of the assessee firm namely Rajeshwar Prasad Dubey, the Assessing Officer invoking the provisions of section 40A(3) disallowed
13 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries ₹.7,60,000/- being 20% of the cash paid to M/s. Pankaj Shipping & Transport Co.. On appeal Ld.CIT(A) sustained the disallowance.
Before us Learned Counsel for the assessee submitted that the cash payment was made to proprietary concern namely M/s. Pankaj Shipping & Transport Co. which is the proprietary concern of one of the partners Shri Rajeswar Prasad Dubey. Learned Counsel for the assessee further submitted that as per Rule 6DD(l) payments made to partners are not attracted any disallowance u/s 40A(3) of the Act. Therefore, he submitted that the disallowance be deleted.
Ld.DR vehemently supported the orders of the Ld.CIT(A).
We have heard the rival submissions, perused the orders of the authorities below. This aspect of the matter has been considered by the Ld.CIT(A) with reference to Rule 6DD(l) and held as under: -
“20. I have considered the submission made for the appellant and the assessment order. Though the payment is made in cash to the proprietary concern of one of the partners of the appellant but it cannot be held to be made to a partner. The payments relate to having made to a service provider i.e. M/s Pankaj Shipping & Transport Co. who are providing services such as Transportation and Clearing Agent. Thus the AO is justified in applying provisions of section 40A(3). As can be seen from the above chart that Appellant has shown cash payment to M/s Pankaj Shipping & Transport Co. which cannot be presumed to be covered U/R 6DD. It is very obvious that Appellant has made payment in contravention of suppression of law u/s 40A(3) as Appellant has made cash payment exceeding Rs.20,000/-. Therefore, it is found beyond doubt that Ld. AO has rightly disallowed 20% of such expenditure and has added an amount of Rs.7,60,000/- to the total income of the Appellant.”
14 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries 18. As could be seen form the above the reason given by the Ld.CIT(A) is that the payment made to the proprietary concern of one of the partner’s in the partnership firm cannot be treated as payment made to the partner himself and therefore Rule 6DD have no application. We agree with this reasoning of the Ld.CIT(A) and confirmation of the addition sustained by the Ld.CIT(A). This ground of appeal is dismissed.
19. Last issue in the appeal of the assessee is regarding confirmation of the addition of ₹.12,86,732/- being the interest received by the assessee.
20. While completing the assessment the Assessing Officer noticed that as per AIR data assessee received interest of ₹.52,540/- from M/s. Endurance Technologies Pvt Ltd. and ₹.12,34,192/- from M/s. Anurag Engg Co. Pvt. Ltd., amounting to ₹.12,86,732/-and this was brought to the notice of the Assessee. However, assessee denied receipt of this interest. Assessing Officer wrote letters to the above companies and since no reply has been received from the two companies the Assessing Officer treated the said interest of ₹.12,86,732/- as income of the assessee with the observation that a rectification will be carried if necessary on receipt of clarification from the above two companies. On appeal Ld.CIT(A) sustained the addition.
15 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries 21. Before us Learned Counsel for the assessee submitted that the amount of discount availed by the two concerns i.e. M/s Endurance Technology Pvt. Ltd. and M/s Anurag Engg. Co Pvt Ltd. was shown as payment of interest which reflected in AIR data, but since this was not interest no TDS was deducted on these alleged payments. It was clearly explained at both the stages that the assessee would allow credit term to these parties and in turn would get the bills discounted from the bank for early cash flow. Learned Counsel for the assessee further submitted that the cost of funds for early encashment would be shown by the assessee as vatav (discount) in its books of accounts and on other hand the parties would show the same as interest. Learned Counsel for the assessee further submits that since these entries are simply named as interest no TDS is deducted. Learned Counsel for the assessee further submitted that, had this actually been entries for payment or provision of interest TDS would have been deducted by those parties, which is not the case here.
Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions, perused the orders of the authorities below. In the light of the above submissions of the Ld. Counsel for the assessee, we are of the view that this issue has to be examined by 16 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries the Assessing Officer afresh in accordance with law. Hence we set-aside this issue to the file of the Assessing Officer for fresh examination and decide in accordance with law after providing adequate opportunity of being heard. This ground is allowed for statistical purpose.
ITA.No 9161/Mum/2010 24. Coming to Revenue’s appeal the first ground of appeal is in respect of deletion addition of ₹.1,16,69,355/- made on account of High Sea Sales.
25. The Assessing Officer while completing the assessment and on verification of the invoices of High Sea Sales containing 27 pages impounded in the course of survey proceedings and also after examination of the ledger account of the parties noticed that the assessee made sales to M/s. AVI Enterprises from 15.07.2006 to 17.07.2006 out of these invoices assessee did not record three invoices which were raised on 17.07.2006 for ₹.38,60,667/-, ₹.38,98,647/-and ₹.39,10,041/- amounting to ₹.1,16,69,355/- in the ledger account of the party namely M/s. AVI Enterprises. Therefore, Assessing Officer required the assessee to explain why this should not be taken as suppressed sale. Assessee vide letter dated 21.12.2009 submitted that the bills referred by the Assessing Officer i.e. HSS/17, HSS/18 and HSS/19 are actually cancelled
17 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries bills and no sales have been affected. It was also submitted that this fact can also be ascertained by calling for necessary information from the parties and also requested for supply of copy of bills. However, though the Assessing Officer provided the copy of the bills to the assessee the submission of the assessee was not accepted for the reason that the bill of entry was mentioned in those invoices. Therefore, Assessing Officer concluded that High Sea Sales were affected by assessee and they were not recorded in the Books of Accounts and thus treated them as suppressed sales. On appeal Ld.CIT(A) deleted the addition considering the submissions of the assessee and the evidences produced before him in the form of ledger copy of M/s. Remet Trading F.Z.E., U.A.E from where the assessee proposed to purchase goods and to be meant for sale to M/s. AVI Enterprises. It was the submission that due to commercial reason these sales did not go through and hence had to be aborted. The ledger copy of the M/s. Remet Trading has been produced before the Ld.CIT(A) showing reversal entries made marking return of the impugned three consignments. Assessee also furnished bills of Clearing House Agent to demonstrate that the same consignments were cleared on behalf of M/s. Surbhi Impex, Delhi showing that the consignments were identified by the ‘Bill of lading number’ which were also mentioned in the impounded invoices. Assessee also furnished photo copy of bill of entries counter
18 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries signed by Custom Authorities to show that the seller of goods is M/s. Remet Trading and the buyer M/s. Surbhi Impex, Delhi. In view of all these evidences Ld.CIT(A) deleted the addition.
Before us Ld. DR strongly placed reliance on the order of the Assessing Officer and submitted that, as these sales were not recorded in the Books of Accounts by the assessee though the invoices were raised, the Assessing Officer rightly treated as suppressed sales. On the other hand, Ld. Counsel for the assessee vehemently supported the order of the Ld.CIT(A).
We have heard the rival submissions, perused the orders of the authorities below. The assessee has produced various documents before the Ld.CIT(A) and demonstrated that due to commercial reasons the sale purported to be made to M/s. AVI Enterprises did not go through and had to be cancelled. Assessee stated that ultimately the sale transaction took place between M/s. Remet Trading and M/s. Surbhi Impex, Delhi on the High Seas and to substantiate this the assessee produced bills of Clearing House Agent and demonstrated that the same consignments were cleared on behalf of one M/s. Surbhi Impex, Delhi and the consignments were identified by the ‘Bill of lading number’ which are mentioned on the impounding invoices. Assessee also furnished photocopies of bill of 19 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries entries which were counter signed by the Customs Authorities wherein ‘Bill of lading numbers’ as was printed by the impounding invoices were same. With these documents assessee demonstrated that the seller of goods is M/s. Remet Trading and the buyer is M/s. Surbhi Impex, Delhi and the transaction never happened at the hands of the assessee. Considering all the evidences the Ld.CIT(A) deleted the addition which in our view has rightly done so. Ld.CIT(A) also observed that Assessing Officer has not made any enquiry from the Customs Department or has analyzed the goods so purchased and sold through High Sea Sales procedure and Assessing Officer has simply gone by the invoices found and the ledger account of the parties without making any sort of enquiry and ignoring the submissions of the assessee. The findings of the Ld.CIT(A) were not rebutted by the Revenue. In the circumstances, we uphold the order of the Ld.CIT(A) in deleting the alleged suppressed High Sea Sales. This ground of Revenue is dismissed.
The second ground of appeal is in respect of deletion of addition of ₹.51,01,133/- made by the Assessing Officer on account of suppression of sales found due to discrepancies in debtors.
The Assessing Officer in the course of completion of assessment required the assessee to file details of sales exceeding ₹.20,000/- made
20 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries to M/s. Endurance Technologies P. Ltd., [ETPL]. He noticed that assessee recorded total sales against this party at ₹.3,04,57,678/-. Assessing Officer issued notice u/s.133(6) of the Act to the party and the party wrote a letter and provided ledger account of the assessee in their Books of Accounts according to which assessee made total sales of ₹.8,34,28,951/- for the year with a difference of ₹.5,29,71,273/-. The assessee was asked to reconcile the difference. Assessee submitted that it is maintaining separate ledger accounts for the two separate branches of M/s. Endurance Technologies Pvt. Ltd. i.e. Aurangabad and Waluj and whereas ETPL has shown the combined account of the assessee firm. It is submitted that if both the ledger accounts of both Aurangabad and Waluj branches are taken into consideration there is no difference in ledger account submitted by ETPL with that of the assessee and therefore there is no difference in the accounts of the party and the assessee and no addition is warranted. The explanation of the assessee was not accepted by the Assessing Officer and stated that it is an afterthought and M/s. Endurance Systems (India) Pvt. Ltd [ESIPL], Waluj Industrial Area, Aurangabad denied the transactions between them and assessee during the Financial Year 2006-07. In view of the above the Assessing Officer concluded that since the assessee made corresponding purchases in the form of traded and raw material for manufacturing of goods, the Assessing
21 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries Officer estimated the Gross Profit at 9.63% which is the profit percentage for the immediately preceding Assessment Year since assessee incurred loss during this Assessment Year. The Ld.CIT(A) deleted the addition observing that Assessing Officer has not re-scrutinized the records of the assessee or made consequential enquiry from the respective parties to crystalize the issue under appeal.
Before us Ld. DR vehemently supported the order of the Assessing Officer. On the other hand, Ld. Counsel for the assessee strongly placed reliance on the order of the Ld.CIT(A) and also reiterated the submissions made before him.
We have heard the rival submissions, perused the orders of the authorities below. On a perusal of the Ld.CIT(A) order, we find that assessee submitted ledger copies of ESIPL and ETPL along with the ledger copy supplied by ETPL directly to the Assessing Officer and explained that there is no difference in the sales shown by the assessee in its Books of Accounts in two different names but to the same group companies i.e, ledger supplied by ETPL. The findings of the Ld.CIT(A) have not been rebutted with evidences by the Revenue that there exists difference in sales between assessee and ETPL and ESIPL. In the circumstances, we do not find any infirmity in the order of the Ld.CIT(A) in 22 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries deleting the addition. Hence we sustain the order of the Ld.CIT(A). This ground of Revenue is dismissed.
The next ground of appeal of the Revenue is in respect of deletion of addition of ₹.7,81,000/- made towards Gross Profit on suppression of sales on account of discrepancies found with the Bankers.
33. Assessing Officer while completing the assessment found that the copy of stock statement for the month of December 2006 submitted to State Bank of India, Cuffe Parade, Mumbai by the assessee wherein total sales were related till December 2006 at ₹.56,00,15,861/- and whereas the sales shown in the statement furnished by the assessee was only ₹.46,72,67,679/-. Based on this Assessing Officer called for the stock statement for the month of March 2007 where total sales were declared as ₹.59,92,14,157/- as against audited figure of ₹.52,31,90,052/-. Therefore, the difference of ₹.7,60,24,105/- was held to be unaccounted sales and accordingly Gross Profit was estimated at ₹.7,81,000/- on such difference and treated as undisclosed income. On appeal the Ld.CIT(A) deleted the addition observing that Assessing Officer made addition very vaguely in an ambiguous way and there is no substance in the findings of Assessing Officer that there is a discrepancy in stock statement as compared to audited accounts.
23 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries 34. Ld. DR vehemently supported the order of the Assessing Officer. On the other hand, Ld. Counsel for the assessee strongly placed reliance on the order of the Ld.CIT(A).
We have heard the rival submissions, perused the orders of the authorities below. This aspect of the matter has been elaborately dealt with by the Ld.CIT(A) with reference to the statements submitted by the assessee and the explanation given before him and concluded that there is no substance in the finding of the Assessing Officer that there are discrepancies in stock statement as compared to audited accounts observing as under: -
“11.2 Before me, the appellant submitted that the difference in Sales figures in between the audited accounts and the one shown in the monthly Stock Statement submitted to Bank is due to the netting of Sales in the Audited Accounts as per the standard accounting practice. The Sales figure declared in the monthly Stock Statement is gross sales which inter-alia includes the value of Taxes whereas the audited sales figure is after removing the tax elements from it. In support of its contention the AR of the appellant has submitted the copy of monthly Stock Statement for the month of March, 2007 before me in which it demonstrated that the Debtors increased with the same amount in the month of March, 2007 in which the Sales for this month increased. The debtors obviously will stand at gross sales amount whereas in the audited sales the tax elements are removed from the sales. It has also been submitted before me that showing higher figures of Sales, Debtors & Stock, etc. to Bank to have the benefit of higher DP (drawing power) in CC account, is a common practice and hence the correctness of the Audited figure should not be doubted on such flimsy grounds. It has further been submitted before me further that the Audited sales of the appellant firm is at Rs.52,31,90,052/- which inter alia includes High Sea Sales where no taxes are charged. The firm charges 16 % C. Ex. on its sales, 2% Education Cess on C. Ex. and 4% VAT on local Sales (local sales are very negligible as they are only for scraps & wastes). The sales shown to the Bank is at Rs. 59,92,14,157/- which is approx. 14.55 % 24 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries higher. This clarifies the issue as to the fact of Gross sales and Net sales. The AR of the appellant also emphasizes on the aspect of tax exemption the appellant enjoys in the year under this appeal u/s 80- IB (4) of the income tax act.
12. I have considered the submission made for the appellant and the assessment order and I find merit in the submissions of the appellant. It is evident from the Stock Statement submitted before me for the month of March, 2007 that the Sales declared to the Bank is gross sales which cannot be considered to be sales for the purpose of taxation. It is pertinent to note here that Ld. AO has not analyzed properly the discrepancy of bank statement appearing in page No.44 of impounded file marked as 'A'-file. The description appearing in stock statement submitted to the bank on 19.01.2007, as contended by Ld. AR, is gross figure including Sundry Debtors which is not to be presumed as not sales. Ld. AO has not exactly pointed out as to how on 31.12.2006 sale figure shown by the Appellant is different than appearing in audited accounts. The contention of the Ld. AR is found convincing-one. The audited accounts reveal the sales of Rs.52,31,90,052/- which inter-alia includes High Sea Sales and more so there is an element of Central Excise tax @ 16%, 2% education cess and 4% VAT of local sales. If this element is taken into account the percentage of tax matches with gap of figure as gross sales shown to the bank in the statement is at Rs.59,92,14,157/-. This gap is nearer to 14.55% whereas, the element of tax is more than 20%. Therefore, such generalized approach of Ld. AO cannot be approved unless every item of the statement and every element of tax component is taken into account and after comparing, some discrepancy is noticed. Here Ld. AO has made this addition of Rs.7,81,000/- very vaguely, in ambiguous way, therefore, I do not find any substance in the finding of the Ld. AO that there is a discrepancy in stock in statement as compared to audited accounts. This aspect of the issue get corroborated that upto March, 2007 the net sale of the Appellant is only of Rs.59,92,14,157/-. Therefore, in the month of December there cannot be such figure as in the month of January, February and March, there has been selling of Alluminium Ingots. In addition to other selling of Rs.3,04,86,721/-; Rs.86,33,883/- and Rs.45,313/-. As such, the finding of the Ld. AO is not on sound footing, therefore addition of Rs.7,81,000/- is deleted.”
On a perusal of the Ld.CIT(A) order, we find that that the assessee has properly explained that there is no difference and the reasoning of the Ld.CIT(A) in deleting the addition need not be interfered for the elaborate
25 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries reasons given by him, hence the view of the Ld.CIT(A) is sustained. The ground of the Revenue is dismissed.
The last ground of appeal of the Revenue is in respect of deletion of addition of ₹.2,50,33,344/- made by the Assessing Officer relating to unaccounted sale of waste products.
38. The Assessing Officer while completing the assessment on verification of records pertaining to stocks and production found that the production loss in this year is all time high. He observed that there is an abnormal loss in production during this Assessment Year as compared to the earlier two years. He also observed that assessee is using imported raw materials of high quality for production and therefore there cannot be such a huge loss on production. For this reason, the Assessing Officer came to the conclusion that there is a suppression of production and proposed to restrict the loss to the average loss of the earlier two years and disallowed the balance loss and accordingly he restricted the loss to 13.9% and disallowed 12.52% as suppressed production and the same was brought to tax at the average price of the closing stock. On appeal the Ld.CIT(A) deleted the addition of disallowance after considering the submissions of the assessee.
26 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries 39. Before us, Ld. DR vehemently supported the order of the Assessing Officer and submitted that there is a huge production loss during this year which resulted in suppression of production. Therefore, the Assessing Officer has rightly treated the production loss as income of the assessee. On the other hand, Ld. Counsel for the assessee strongly placed reliance on the order of the Ld.CIT(A).
We have heard the rival submissions, perused the orders of the authorities below. The assessee contended before the First Appellate Authority that the Assessing Officer estimated that assessee firm had suppressed its production by showing higher production loss. It was contended that the investigating agencies of Government of India i.e. Central Excise Authorities etc., no one has pointed out any irregularities in the production records of the assessee firm. It is submitted that the assessee is maintaining the stock records in the prescribed registers and recorded its consumption and production on daily basis and then on what basis the Assessing Officer is suspecting flaw in production without any information and valid basis. It was also further contended that one cannot overlook the factual position applicable to the assessee firm that it is enjoying the shelter of 100% exemption of its profit under provisions of section 80IB (4) of the Act for the year under appeal. Therefore, there remains no good reason for the assessee to generate unaccounted
27 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries income. It was therefore contended that there is no merit in the assumption of the Ld. Assessing Officer that the assessee firm had suppressed its production by showing higher production loss and hence addition made on such surmises becomes totally unfounded and deserves to be rejected. The Ld.CIT(A) considering the submissions of the assessee, concluded that there is no valid basis for holding that there is suppression of production and deleted the addition observing as under:-
“16. Before me the appellate submitted that there was no suppression in production and it placed emphasis on the findings of the Central Excise authorities who never found any discrepancy in the stocks. The submission of the appellant is reproduced here below: "In the initial reading of the paras under this addition one cannot make out that exactly what is in mind of the Ld. A.O., Finally on fine reading it becomes clear that the addition has been made on assumption that the appellant firm has suppressed its production by showing higher production losses. Interestingly, during the visits of the other investigating agencies of 'Govt. of India no one has pointed out about the irregularity in the production records of the appellant firm. The appellant is maintaining the records of its stocks in the prescribed registers and recording its consumption and production records on daily basis than on what basis the A.O. is suspecting flaw in productions. The unstable mind of the Ld. A.O. while dealing with this addition clearly proves the point that he was hell bent upon making additions whether logical or not or whether it is lawful or not. In the process the Ld. A.O. seems to have forgotten his role of assessing officer and assumed the role of the dictator. Also, if one looks at the method of costing adopted by the Id. A.O. to derive the cost of Opening Stock, cost of production and unit cost of finished goods one tends to forget all the costing principals it must have studied while perusing the course of chartered accountancy. Taking a simple 28 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries average of the items having large variation in market value is a unique way of doing costing which the undersigned is probably seeing for the first time. The market value of Aluminum Ash is around one rupee a kg. whereas the copper ingot may value at around Rs. 350/- a kg. In this kind of variation how one can take the simple average. Production loss depends on the quality of raw materials and it has already been submitted in the initial paras itself that the overseas suppliers made lot of bad supplies to the appellant during the year under this appeal in the name of economical supplies. The yield indeed was poor which can only be determined on the shop floor when you actually convert the raw-materials into finished goods. The Ld. A.O. is looking for some kind of evidence (as mentioned in para 11.6 (e) of the assessment order) to substantiate the claim of the appellant that the imported materials were of inferior quality but what better evidence one could produce than the verifiable production records which are under continuous monitoring of the C. Ex. Authorities as the appellant firm is required to file monthly return in Form ER- 1 to C. Ex. Authorities giving complete details of its production, consumption, sales, etc. But if one is bent upon not appreciating the factual position of the case than how one can help it. Most importantly, one cannot overlook the factual position applicable to the appellant firm that it is enjoying the shelter of 100 % exemption of its profit under the provisions of section 80-IB (4) of the income tax act for the year under this appeal and hence there remains no good reason for the appellant firm to generate unaccounted income. There is no merit in the assumption of the Ld. A.O. that the appellant firm has suppressed its production by showing higher production loss and hence addition made on such surmises becomes totally unfounded and hence deserves to be rejected."
17. I have considered the submission made for the appellant and the assessment order. On one hand I find that the assumption of the AO about the suppression of production is without any basis and is purely on conjecture and on the other hand there is force in the argument put up by the AR of the appellant that the investigating authorities, such as Central Excise & DRI, who visited the factory premises of the appellant twice in this year, had never pointed any finger of any flaw in the production records of the appellant. The finding of the Assessing Officer is only with reference to some doubt and discrepancy but Ld. AO has not been able to as to how 29 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries shortage @ 26.41% is not correct. Merely on the basis of above, no such addition can be made unless any such discrepancy of the record is substantiated with other facts or evidences relevant over the issue. It is worthwhile to mention that when Appellant is entitled for deduction u/s 80IB of the Income Tax Act, 1961, there is no reason whatsoever with the Appellant to suppress any such production or claim excess shortage. It can be seen in A.Y. 2006-07, the same Ld. Assessing Officer Shri V.V. Lakshaman has allowed 100% deduction of Industrial undertaking of the Appellant to the extent of Rs. 1,83,79,4407-, therefore, there is no propriety to presume that there is a suppression of production and excessive claim of consumption. Contrary to the belief of the AO, if for a while it is presumed that there is a suppression of production in that circumstances Appellant would be losing it 100% deduction based on profit. No prudence business man can do such thing which comes against his interest or against the interest of business. Therefore, from this point of view also I do not see any substance in the finding of the Ld. AO that in reality there has been suppression of production. It is also worthwhile to mention that the average selling price of Aluminum Ingots has been 115.19 which is very reasonable. In the background of this also, I do not see any reasonable ground whatsoever to presume that there is a suppression of production. Had this fact been there, the Assessing Officer would have not accepted the production of A.Y. 2006-07 as percentage of loss in that year was 15.19% as compared to A.Y. 2005-06 of 12.60%. Therefore, such baseless and unsubstantiated addition is directed to be deleted from the assessment.”
On a reading of the above observation and findings of the Ld.CIT(A) and in view of what is discussed above, we do not find any infirmity in the order passed by the Ld.CIT(A) in deleting the addition which has been made merely on assumptions and surmises. It is also not in dispute that the assessee is entitled for deduction u/s. 80IB of the Act on its entire income generated from the production and in such circumstances there is no necessity for the assessee to incur production loss deliberately. We also agree with the view of the Ld.CIT(A) that, if for a while it is presumed that there is suppression of production in that circumstances assessee would be losing its 100% deduction which is otherwise eligible on its 30 ITA.No. 8858 & 9161/MUM/2010 (A.Y: 2007-08) M/s. Sainath Industries products and no prudent businessman could do such thing which goes against its interest. Therefore, we find that the order of the Ld.CIT(A) is well reasoned and does not call for any interference. Accordingly, we sustain the order of the Ld.CIT(A) on this issues. This ground of Revenue is dismissed.
In the result, appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed.
Order pronounced in the open court on the 20th June, 2018.