M/S SHRI SIDDHI VINAYAK INDUCTION P. LTD.,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-3, JAIPUR

per provision of section 145A of the Act the thus, it cannot be termed a business income or business expenses and in that set of facts the courts have taken a view that the provision of section 145A r.w.s.

These amendments will take effect from 1st April, 2018. Clause 45 of the Bill seeks to substitute new sections 145A and 145B for section 145A of the Income-tax Act relating to method of accounting in certain cases and taxability of certain income: The proposed new section 145A provides that for the purpose of determining the income chargeable under the head "Profits and gains of business or profession",— (i) the valuation of inventory shall be made at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation; (iii) the valuation of inventory being securities not listed on a recognised stock exchange; or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (iv) inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 and for this purpose the comparison of actual cost and net realisable value shall be done category-wise. It is also proposed to provide for an Explanation in the said section so as to provide that any tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment for the purposes of the said section. The proposed new section 145B provides that notwithstanding anything to the contrary contained in section 145, the interest received by an assessee on any compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. It is further proposed to provide that the claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved. It is also proposed to provide that income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year. These amendments will take effect retrospectively from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.

17.1 It is also necessary to see the provision of section 145A before amendment which is extracted here in below:

“Method of accounting in certain cases. 145A. Notwithstanding anything to the contrary contained in section 145,- (a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head Profits and gains of business or profession" shall be (i) in accordance with the method of accounting regularly employed by the assessee; and (ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Explanation-For the purposes of this section", any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment; (b) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.”

17.2 As it is evident that the above provision did not include valuation of services and thus the section 145A after amendment reads as under :

“[Method of accounting in certain cases 145A. For the purpose of determining the income chargeable under the head Profits and gains of business or profession’- (i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (ii) the valuation of purchase and sale of goods or services and a inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation; (iii) the inventory being securities not listed on a recognised stock change, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145;”

17.3 Ongoing through the above provisions of section 145A which is considered by the various high courts that since in the earlier provisions services were not included the assessee cannot be the legislative intentions allowed the view that since the assessee is under no obligation to considered the services while following the said old provision of section 145A and thus, the courts has vacated the disallowance of service tax under section 43B. Whereas in this case the assessee has to consider the VAT while computing the income and in accordance with the provision of section 145A of the Act the disallowance of unpaid VAT is very well attracted under the provision of section 43B of the Act and since all the decisions relied upon by the ld. AR are related to the service tax laws and ld. AR could not brought on record any judgement on the VAT laws we do not find force in the arguments of the ld. AR of the assessee and based on the above observations of the law the case law relied upon are also differentiated. Thus, considering the above set of findings and considering the detailed finding recorded by the ld. CIT(A) citing the judgement of the Honourable apex court in the case of Chowringhee Sale Bureau (P) Ltd Vs. CIT 87 ITR 542 we confirm the disallowance made by the AO. As regards the other disallowance made u/s. 43B such as PF, ESI, TDS since the ld. AR did not controvert the findings of the lower authority the same is also assessee.

are that the assessee is a private limited company. A survey action u/s 133A was carried out at its factory premises on 17.12.2014. During the course of survey, stock verification was done by survey team and it is alleged that there is shortage in physical stock when compared to stock recorded in books of accounts. Ld. AO has tabulated such stock as per physical verification and that recorded in books in Assessment order at page 11 para

7. However, after considering the objections raised by the assessee the stock of finished goods was revised by the ld. AO and accordingly the shortage was finally worked out at Rs. 3,80,55,100/- as against the shortage of stock worked out at Rs. 4,23,84,100/- at the time of survey (AO para 7.12 page 19 of the order). The statements of the concerned persons were also recorded. Thereafter, during the course of assessment response to which vide reply dt. 28.11.2016 (APB 51-109) detailed explanation and relevant extract of stock registers and bills were filed. However, ld. AO has not accepted the same and invoked the provisions of section 145(3) by alleging that assessee has made out of books sales of both raw material and finished goods to the extent of Rs.3,80,55,100/-. During the year which is solely based on the alleged shortage of stock worked out during the course of survey and made the addition of Rs.98,02,903/- by applying GP rate of 2.87% on total sales declared by the assessee and also on alleged unaccounted for sales of Rs.3,80,55,100/-.

20. In first appeal, addition made was upheld by ld. CIT(A) where in the observations of the ld. CIT(A) is extracted here in below :

17. I have perused the written submissions submitted by the ld. AR and the order of the AO. I have also gone through various judgements cited by the Ld. AR and those contained in the order so AO.

17.2 The Ld. A/R has contended that his stock was lying elsewhere and an attempt is made to reconcile the stock. I am NOT in agreement with the Ld. A/R. During the course of survey the appellant /his main accountant was asked multiple times, before and after taking of the inventory that whether the stock is lying else where. The person replied in negative. The detailed discussion in this regard can be seen in the para 7.4 to 7.6 of the AO order. The infirmity found are sound and based on investigations. The rejection of books and consequent estimation of profit is confirmed.” summary manner solely on the basis of statement of junior staff Sh.

Sunil Sain, and also on the observations of ld. AO upheld the addition. The ld. CIT(A) has completely disregarded the details furnished by the assessee in the shape of Audited Financial Statements, Excise Records and Statements of Director and rather relied upon statement of a junior level staff who, incidentally is the son of the factory supervisor and was not having overall authority nor fully aware with the stock and other related issues. The ld. AR of the assessee further submitted that assessee company is registered with Service Tax, Excise and VAT and maintains regular books of accounts along with stock records, excise records and also files regular returns of manufacturing, sales etc. as per the applicable Excise Law. The books of accounts of assessee are audited both under Companies Act 2013 as well as u/s 44AB of the Income Tax Act. It is further submitted that the assessee is a manufacturer of MS Billets which is an excisable product and is registered with the excise department. As per requirements of the Excise Rules and Regulations, it is mandatory for the assessee to record daily production and sales of the finished goods (MS Billets) in Excise Register. Accordingly, assessee is complying all the legal 15.12.2014 to 31.03.2015 was also submitted (APB 61-64). The ld. AR of the assessee further submitted that at page 61 of paper book, i.e. copy of such register where the opening stock of the Finished Goods as on 17.12.2014 is appearing at 1183 MT and production from 17.12.2014 to 31.03.2015 was only around 433 MT. As against this, sales during the period 17.12.2014 to 31.03.2015 is appearing at 1567 MT. There was no purchase of finished Goods (MS Billets) by the assessee during the FY 2014-15. Thus, it is evident that the assessee had sold the goods which were there in the stock as on 17.12.2014 in the subsequent period and a closing stock of around 50 MT as on 31.03.2015 was left out of the production made during the balance period of the subject AY 2015-

Thus, it is evident that the assessee had consumed the stocks of Raw Material which were there in the stock as on 17.12.2014 in the subsequent period and there was no major shortage of Raw Material of 275 MT as alleged by ld.AO. It is submitted that the excise records are frequently inspected and checked by Excise Range office, Excise Anti Vision and DGCE office. These are also inspected by Commercial Tax Authorities ( VAT – Range and Anti vision both) and there cannot be any substantial difference in the quantities of Raw Material and Finished Goods in such a tightly supervised regulatory environment as alleged in the show cause notice. It is further submitted that the stock of Raw Material comprises of Melting scrap, Sponge Iron, Silico Magnese, H. R.

Sheet Etc. which was lying as a large heap except for Silico Magnese which was there in Jute bags in the factory go-down. The density and weight of different type of raw material is different and the actual weight can be known only by actual weighment on weighbridge in some truck or other container. The survey was much of the stock available at different places at the factory premises [as is evident from the survey records (APB 111-114)] is humanly impossible task more particularly looking to the total number of three officials in the survey team out of which two were the ITO rank officer and only one inspector was present. During the course of assessment proceedings, it was contended that, on the date of survey, there was no physical counting and/or weighing of all the stocks of Raw Material and Finished Goods carried out by the Income Tax Officials. There is nothing on record which establishes any actual weighment of Raw Material Stock nor any proof was given to the assessee. However, such contention was rejected by ld.AO by simply stating that the stock was taken in the presence of the employees of the assessee company and director Shri Ashok Dharendra also not raised this issue when he was confronted with the same. In this regard it is submitted that at the residential premises of Shri Ashok Dharendra search action was carried out and he was under pressure and that pressure has made this assertion. It is submitted that later on he has retracted from his statements also, copy of the affidavit filed in this regard is at APB 36-38 which remained uncontroverted in the case of the assessee 16.12.2014, around 795 MT of Raw material was received in the factory out of which around 195 was local scrap and 600 MT was Imported scrap for which documentary evidence of clearance from Customs, CONCORE, and shipping companies, transportation of the material in closed containers from ICD Kanakpura to factory premises is available on record and the same is duly entered in the excise records too. Total consumption of Raw Material for manufacturing of Billets is only around 299 MT and thus raw material stock of over 500 Mt was very much there mostly comprising of the Imported scrap which by nature is heavier but will appear as small heap compared to the local scrap, visually. As already submitted that the Income Tax Officials have only estimated the quantity / weight of the raw material by visual inspection only. It may also be noted that there was stock of End Cuttings billets of 5 Mt appx. as on 17.12.2014 which was neither shown in the physical stock present nor shown as shortage whereas the officials had taken the excise records for End Cuttings too during the survey. Thus, it appears that the stock taking was done in a casual manner and there were shortcomings / errors in the process and recordings of the stocks. As submitted above, on 17.12.2014 the opening stock of to 31.03.2015 was only around 433 MT. Whereas the sales during the period 17.12.2014 to 31.03.2015 was 1567 MT and no purchases of Finished Goods were made during this period. This is evident from the excise record of the assessee. Out of these sales, around 810 MT was Interstate Sales which involves actual movement of Finished goods from factory to different state. If the stock of Finished Goods was not there with the assessee on 17.12.2014, with just 433 MT of production, how the sales of 1567 MT were made by the assessee. Another aspect worth noting in this case is that the assessee has already accounted for sales of the subject stock in the books of accounts and it is reflected in the Profit and Loss of the assessee for the AY 2015-16. How it can be shown again as out of the books sale again which effectively will mean double booking of the sale of material and thus not possible. Thus, although the assessee had submitted all the relevant details, quantitative figures reconciling the stock with the books, stock records, excise records, subsequent sales, purchases etc, the learned AO has not taken any cognizance and has rather concentrated on making high pitched order by rejecting the books of accounts all-together under section 145(3) of the IT Act, 1961. order, the Learned AO has taken altogether different view of taking basis of lower GP rate during the assessment year 2015-16 as compared to the earlier years as basis for rejecting the books of accounts and made lump sum addition on the basis of arbitrarily applying average GP rate of past four years not only to the whole turnover of the assessee for the AY 2015-16 but also on the alleged out of the books Sales of raw material and finished goods. This shows the casual approach of assessing officer.

22.2 The assessee had appraised the learned AO about the declining trend in the business and mounting losses during the assessment proceedings. She herself has mentioned in the assessment order that the profits are continuously declining since past three years, but has still made addition on the basis of average rate. It is also relevant to state that in the preceding assessment year the GP rate declared by the assessee was never doubted where the assessment was completed u/s 143(3). Incidentally assessment for AY 12-13 and 14-15 are also before the hon’ble bench wherein no such doubts were raised about the reasonableness of the gross profit rate declared by the assessee. accordance with the GP rate of past 4 assessment years as adopted which is evident from the table below:

AY Turnover Gross Profit GP % 2011-12 69,63,20,432/- 2,10,86,499/- 3.02 2012-13 74,71,14,618/- 3,44,82,706/- 4.62 2013-14 81,98,64,757/- 2,45,72,221/- 3.00 2014-15 41,19,58,844/- (83,32,850/-) (2.02)* * Assessee was in Gross loss

It was further submitted that average GP rate of past 4 years has been taken arbitrarily. The average GP rate of past 4 years actually comes to 2.15%, thus, it is seen that the AO has taken a casual approach. However, not admitting the above position, it is submitted that normally for estimating the profit by applying GP rate, average GP of last 3 years is taken as basis and this practice had been is broadly accepted / upheld by hon’ble ITAT benches/ hon’ble High courts, considering this proposition, the average GP of past 3 years comes to 1.86% .

His arguments that each and every purchase and sales is recorded in terms of value and quantity in the records maintained by the assessee is not disputed but once the team has taken the stock in the presence of the officer and the ld. AR except the general arguments unable to reconcile the figure. At the same time the various contentions raised by the assessee in the assessment CIT(A) has not given his detailed finding so as to deal with the contentions raised by the assessee in full. The order of CIT(A) is non speaking on these aspects. The ld. AR also brought to our notice that stock of finished goods was revised by the ld. AO and accordingly the shortage was finally worked out at Rs. 3,80,55,100/- as against the shortage of stock worked out at Rs. 4,23,84,100/- at the time of survey (AO para 7.12 page 19 of Assessment order ).

We found force in the alternative argument of the ld. AR of the assessee that since the department has alleged that there is a shortage of stock in the physical stock taking then in that case since the purchases are already recorded and if the allegation of the department considered true and disregarded the submission of the assessee on merits then in that case only profit can be added for these alleged out of books sales which is considered as shortage of stock. For this contention he relied on the decision of the coordinate bench in the case of Gunesh India Private Limited in and 21/JP/2021. The relevant extract is duly form part of the submission of the assessee. Being consistent on the finding given in that case that we considered that when the ld. AO has not disputed the purchases and only the shortage is to be considered as worked out @ 1.86% can be added considering the average of last 4 years on the corrected shortage worked out for Rs. 3,80,55,100/- which we considered that will end the justice in the present set of facts. Thus, ground no. 5 to 6.1 raised by the assessee are partly allowed.

ITA NO.116/JPR/2017 for A. Y. 2012-13 is dismissed and for A.Y. 2014-15 is also stands dismissed.

Order pronounced in the open court on 29/08/2022 Sd/- Sd/- ¼ Mk0 ,l- lhrky{eh ½ ¼ jkBksM deys'k t;UrHkkbZ½ (Dr. S. Seethalakshmi) (Rathod Kamlesh Jayantbhai) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 29/08/2022 *Ganesh Kumar आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. The Appellant- M/s Shree Siddhi Vinayak Induction Pvt. Ltd., Jaipur 2. izR;FkhZ@ The Respondent- DCIT, Central Circle-03, Jaipur DCIT, Circle-07, Jaipur 3. vk;dj vk;qDr@ The ld CIT 4. vk;dj vk;qDr¼vihy½@The ld CIT(A) विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. xkMZ QkbZy@ Guard File (ITA No. 01/JP/2021, 116/JP/2017 & 279/JP/2019) 6. vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत