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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI A.K. GARODIA
PER A. K. GARODIA, A.M.: This is an assessee’s appeal directed against the order of CIT (Appeals)-VI, Bangalore dated 25.08.2014 for the assessment year 2009-10.
The grounds raised
by the assessee are as under:- “1. The order of the learned Commissioner of Income Tax (Appeals) in upholding the impugned assessment order u/s.143 (3) of the Act is opposed to law, facts and circumstances of the case.
2. The Learned CIT (A) erred in upholding the addition on valuation of stock of Rs.15,30,23,182/- on the ground that the assessee has to value the closing stock on a consistent basis.
3. The Learned CIT(A) failed to consider and appreciate that the method of valuation of stock has not changed and in the face of the undisputed fact that the closing stock consisted of only raw stock lying in Page 2 of 8 mining sites and does not consist of components like screening, crushing, transportation and incidental direct costs and valuation being highly technical, the Learned A.O and the Learned CIT(A) cannot form any opinion without an expert opinion and should have accepted the valuation as reported by the Appellant.
4. The finding that the Appellant has not consistently followed the same method of valuation is perverse and not supported by any evidence.
5. The Learned CIT(A) has erred in upholding the disallowance of JD Plot Rent of Rs.2,66,91,497/- on the ground that it is not used in the business of the Appellant and used by one of the sister concerns of the Appellant.
6. The Learned authorities failed to appreciate that the stock of the Appellant was dumped in the yard and because the Appellant did not have requisite license to export, the same was exported by Obulapuram Mining Company Pvt. Ltd., after its formal purchase from the Appellant and the same amounted to user for the purpose of the business of the Appellant.
The Appellant seeks your leave to add, alter, amend or delete any of the grounds urged at the time of hearing and all the grounds are without prejudice to each other ground.
8. For these and other grounds that may be urged at the time of actual hearing, it is prayed that the Honorable ITAT may be pleased to cancel the assessment order in the interest of equity and justice.”
Ground No.1 is general in nature. Regarding ground Nos. 2, 3 & 4, it is submitted by the learned counsel of the assessee that on pages 2 to 8 of paperbook (PB) is the tax audit report for the AY 2008-09. In particular, our attention was drawn to page 3 of PB and it was pointed out that it was reported by the auditors in Form 3CD that method of valuation of closing stock employed by the assessee is purchase cost plus other direct cost on FIFO basis. Thereafter, he drew our attention to the tax audit report for the present year available at pages 12 & 13 of PB. In particular, our attention was drawn page 13 of PB and it was pointed out that in this year also, the auditors have reported that closing stock is valued at purchase cost plus other direct cost or market value, whichever is lower.
Thereafter, he submitted that on pages 35 & 36 of PB is the computation of value of closing stock as on 31.3.2008 and 31.3.2009 and it was pointed out that same method of valuation is adopted by the assessee in both the years and therefore, the addition made by the AO is not justified.
As against this, the ld. DR of revenue supported the orders of authorities below on this issue.
We have considered the rival submissions. Regarding this issue i.e., addition made by the AO for alleged under-valuation of closing stock, we find that in para 3.2 of the assessment order, the AO has stated that the method followed by the assessee for valuation of closing stock has to be consistent. There is no quarrel on this proposition. Thereafter, the AO has stated in the same para of assessment order that the assessee in earlier years has valued the closing stock based on the cost of production. But as per page 35 of PB, it is seen that for the year ending 31.3.2008, closing stock of 59,863 M.T. was valued @ Rs.679.20 per M.T. and this amount of value per M.T. was arrived at by including Purchase Cost Rs.515, Shifting charges Rs.43.25, Screening & Crushing Rs.45.90, Other Expenses i.e., shifting charges, labour charges, supervision charges etc., Rs.75.04 per M.T. For the present year, i.e., for the year ending 31.3.2009, computation of closing stock is available at page 36 of PB and in this year closing stock of 662,352 M.T. was valued @ Rs.147.25 per M.T. and this value of Rs.147.25 per M.T. has been arrived at by including extraction & excavation cost of Rs.81.25, Permit charges Rs.16 per M.T. and other direct cost Rs.50 per M.T. It is true that in the present year, no amount has been added towards screening & crushing charges, other expenses i.e., shifting charges, labour charges, supervision charges etc. but in this regard, explanation was submitted by the assessee before the AO which are reproduced by the AO on page 3 of the assessment order and it was explained that as on 31.3.2009, the entire quantity of stock was unfinished product and it was only extracted and meant for shifting to stock plots. It was also submitted that shifting charges was incurred by the assessee on this stock in the next year and therefore, in the present year, the closing stock cannot be valued at production cost appearing in the profit & loss account, as has been done by the AO. It was also submitted that screening & crushing expenditure was also incurred in the next year and therefore, no cost was included on that account also. This explanation of assessee was rejected by the AO, but in view of this factual position that in the tax audit report for the year ending 31.3.2008, it was reported by the auditors that assessee is valuing its closing stock at cost on FIFO basis, it has to be accepted that if closing stock at the end of the present year is without any processing such as screening, crushing etc. and without shifting; the screening, crushing and shifting charges cannot be added to the valuation of closing stock in the present year and therefore, if the total amount of cost of production in the present year after excluding plot rent is considered, it will amount to valuation of closing stock at a cost including such charges also i.e., screening, crushing and shifting charges, whereas the closing stock was without screening, crushing and shifting. Hence, we are of the considered opinion that in the facts and circumstances of the present case as discussed above, the addition made by the AO in valuation of closing stock is not proper and justified and hence we delete the same. Accordingly, ground Nos. 2 to 4 are allowed.
7. Regarding ground Nos.5 & 6 i.e. regarding disallowance of JD Plot rent, it was submitted by the ld. AR of assessee that as per para 4.3 of the assessment order, the objection of the AO is this that the assessee has never put to use the plot for which it is paying rent. The AO has further noted that plot has been used by one of the assessee’s group concerns for its exports. On this basis, he disallowed this expenditure. Thereafter, he submitted that on page 39 to 45 of PB is a copy of license agreement between assessee and Chennai Port Trust [“CPT”] as per which, the assessee is required to export minimum 2 lakh tons at the end of license period by using this plot. Thereafter, he submitted that the premises was used for business purpose of the assessee because the said plot was used to store the business stock of the assessee company and this fact has not been disputed by the department because the AO is also saying that the plot in question was used by sister concern, M/s. Obulapuram Mining Co. Pvt. Ltd. and this was the explanation of the assessee through out that assessee had sold its stock to its sister concern, M/s. Obulapuram Mining Company Pvt. Ltd. which used to export the stocks sold by the assessee and in this manner, the assessee was acting as a deemed exporter. He further submitted that the rent paid for the plot was on account of commercial expediency and merely because the incidental benefit has also accrued to the third party, it does not lead to the inference that assessee had not used the plot for its own business purpose. Reliance was placed upon the Hon’ble Apex Court judgment in the case of S.A. Builders v. CIT, 288 ITR 1 (SC) and it was submitted that the judgment is in the context of section 37 and section 36(1) (iii) wherein it was held by the Hon’ble Apex Court that expenditure for the purpose of business includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also benefits thereby. He submitted that under these facts, the disallowance made by the AO and upheld by the CIT(Appeals) should be deleted.
As against this, the ld. DR of revenue supported the orders of authorities below and also submitted that as per the license agreement between the assessee and CPT available at pages 39 to 45 of PB, the plot was allotted to the assessee for the purpose of storage and export of iron ore lumps/pellets and since the admitted position is that the assessee did not export iron ore, the expenditure incurred on land of such plot is not allowable. In this regard, he drew our attention to clause 4(d) and 4(e) of the said agreement available at page 40 of PB as per which it was specified that minimum 2 lakh tonnes of iron ore has to be exported before the end of license period and since this has not been done by the assessee, the expenditure is not allowable.
We have considered the rival submissions. We find that this is the objection of the AO that as per license agreement between assessee and CPT, the assessee was required to make exports for using this plot of about 2 lakh tonnes of iron ore before the end of license period and since the assessee has not made any export, the plot in question was not used by the assessee for business purpose and therefore, expenditure on account of rent of plot is not allowable. In this regard, we find force in the submissions of the ld. AR of assessee that since the assessee has used this plot for storage of its product which was sold by assessee to its sister concern, M/s. Obulapuram Mining Co. Pvt. Ltd., and that company has in turn made the exports, it has to be accepted that the plot was used for business purpose of assessee. Whether the assessee has fulfilled the condition of export or not is not relevant for the purpose of allowability of this deduction once it is found that rent was paid and the plot was used for business purpose. If the conditions of agreement are not fulfilled, CPT may not allow any extension or may levy penalty if leviable as per the agreement but that cannot lead to disallowance of rent. This we can understand by an example. If a flat is taken on rent by an assessee for office or for residence of its employees but it was used for storage of business stock, it cannot be said that the Page 7 of 8 rent is not an allowable expenditure. It may be that the owner of the flat can terminate the rental agreement for use by the assessee for storage of goods instead of office or residence. Since in the present case, the AO himself has accepted that the plot was used for the purpose of sister concern M/s. Obulapuram Mining Co., and goods are in fact sold by the assessee to this sister concern and delivery at this plot was an important aspect for affecting this sale as per the assessee. Hence, the facts are not in dispute and under these facts, the judgment of the Hon’ble Apex Court rendered in the case of S.A. Builders (supra) is applicable as per which, if the expense has incurred expenses for business expediency and third party also gets some benefit in the process, then also, the expenditure is allowable. Respectfully following the judgment of the Hon’ble Apex Court and considering the facts of the present case as discussed above, we are of the considered opinion that the expenses incurred by the assessee on account of rent of the plot in question is an allowable business expenditure and therefore, we delete this disallowance and accordingly grounds No.5 & 6 are also allowed.
Ground No.7 is general in nature.
In the result, the appeal of assessee is allowed.
Pronounced in the open court on this 17th day of October, 2016.