DCIT, CIR-5, KOLKATA, KOLKATA vs. M/S KESORAM INDUSTRIES LTD, KOLKATA

Per M.Balaganesh, AM

2 ITA No.1293/Kol/2014 Kesoram Industries Ltd. A.Yr.07-08 limestone in Schedule 14 of the Annual Report, it appears that raising cost was aggregated to Rs 49,09,43,935/- instead of Rs 51,69,44,787/-. Hence the excess expenditure of Rs 2,60,00,852/- was disallowed and added to the total income of the assessee.

2.2. Before the ld CITA, the assessee reiterated the submissions and furnished again the entire details of cost of raising lime stone and linked the same with what is already mentioned in the annual report of the assessee company. The ld CITA on appreciating the details already available on record deleted the addition made in the sum of Rs 2,60,00,852/- towards excess expenditure by observing as under:- “4.2. On perusal of the material on record, the contention of the appellant appears to be correct. The list of ‘limestone raising cost’ referred to by the assessing officer with total of Rs. 49,09,43,935/- was not an exhaustive list but an inclusive one. This list was prepared to meet the requirements of clause-3(x) of Part-II of Schedule-VI of Company Act and had mentioned that ‘limestone raising cost included’(emphasis added). This was not and not even supposed to be an exhaustive list of all items constituting limestone raising cost. The appellant has clarified, that, apart from the items listed in the said disclosure, there were certain other constituents of ‘limestone raising cost’ viz. contractors, transport and others, limestone purchase and other stores. The total of these items come to Rs. 2,60,00,852/- which was also to be considered as part of ‘raising cost of limestone’. If these costs are added to the items mentioned in the disclosure clause, the aggregate will come to Rs. 51,69,44,787/- which tallies with the amount debited in the profit and loss account. Thus, there was no excess expenditure which was required to be disallowed. This contention was duly made before the assessing officer in the reassessment proceedings but he had summarily rejected the same without pointing out any defect or shortcomings. Considering this, the disallowance of Rs. 2,60,00,852/- is not sustainable and the same is deleted”.

2.3. Aggrieved, the revenue is in appeal before us on the following ground:- 1. That on the facts and circumstances of the case, the CIT(A) erred on facts as well as in law in holding that excess expenditure of Rs. 2,60,00,852/- was not warranted as it was attributable to contractors, transporters and others for raising cost of limestone, ignoring the facts that the assessee could not furnish any evidence in support of expenditure of Rs. 2,60,00,852/- before the A.O. and as such, the CIT(A) violated the provisions of Rule 46A by accepting additional evidences.

3 ITA No.1293/Kol/2014 Kesoram Industries Ltd. A.Yr.07-08 2.4. We have heard the rival submissions and perused the materials available on record including the detailed paper book filed by the assessee. We find that the assessee had stated in his annual report in page 55 of the paper book in Schedule 14 to the financial statements as under:-

SCHEDULE 14 RAW MATERIALS AND FINISHED GOODS Raw Materials Consumed

Opening Stock 1,18,73,08,168 Add: Purchases (a) 9,66,97,35,105 ---------------------- 10,85,70,43,273 Less: Closing Stock 2,01,34,10,362 ---------------------- 8,84,36,32,911

Raising cost of limestone (b) 51,69,44,787

(Increase) / Decrease in Work in Process, Finished Goods

Opening Stock Work in Process 22,14,93,533 Finished Goods 51,77,55,286 --------------------- 73,92,48,819 Purchases (c ) 12,93,49,077 --------------------- 86,85,97,896 Add: Processed (11,475 MT) / Semi- Processed items at the end of trial run (Note 17 on Schedule 17) 11,62,01,403 -------------------- 98,47,99,299 Less: Closing Stock Work in Process 25,48,31,133 Finished Goods 85,67,32,564 --------------------- 3

4 ITA No.1293/Kol/2014 Kesoram Industries Ltd. A.Yr.07-08 (12,67,64,398) Less: Transferred to Capital Jobs 2,39,77,622 --------------------- (15,07,42,020) ----------------------- 9,20,98,35,678 ----------------------

(a) Purchase of Raw Materials is net of sale value 6,52,934

(b) Limestone Raising Cost include: Salaries, Wages , Bonus etc 3,73,25,677 Contribution to Provident and other Funds 28,27,645 Workmen and Staff Welfare 19,06,325 Dead rent, Royalty etc. 18,68,59,775 Power and Fuel 19,27,326 Stores Consumed 19,57,28,780 Machinery repairs 6,08,33,178 Other repairs 31,15,162 Rates and taxes 27,989 Insurance 3,92,078 ------------------- 49,09,43,435 -------------------

(c ) Purchase of finished goods include : Tyres Nos. 7,082 Tubes Nos. 7,082 Flaps Nos. 3,26,838 Market Fittings Nos. 14,125

2.4.1. We also find from page 148 of the Paper book of the assessee that the break of Raising cost of limestone is as under:-

Salaries, Wages , Bonus etc 3,73,25,676.89 Contribution to Provident and other Funds 28,27,645.00 Workmen and Staff Welfare 19,06,324.99 Dead rent, Royalty etc. 18,68,59,775.00 Power and Fuel 19,27,326.00 Stores Consumed 19,57,28,780.00 4

5 ITA No.1293/Kol/2014 Kesoram Industries Ltd. A.Yr.07-08 Machinery repairs 6,08,33,177.92 Other repairs 31,15,161.95 Contractors, Transports & Others 1,93,05,618.53 Lime Stone Purchase 13,98,728.00 Misc. Other than Stores 52,96,505.71 Rates and taxes 27,989.00 Insurance 3,92,078.00 ---------------------- 51,69,44,786.99 ----------------------

2.4.2. We find that the aforesaid details were much available before the ld AO and had been duly filed before the ld AO itself which was not appreciated by the ld AO. Infact the ld AO without giving any finding or reasoning sought to make this disallowance which is not at all warranted in the facts and circumstances of the case. We find that the ld CITA had categorically observed in para 4.2. of his order as reiterated supra that no fresh details were filed before him and all the details were already available on record before the ld AO. This finding has not been controverted by the revenue before us. Hence we are not inclined to accept the ground raised by the assessee for violation of Rule 46A of the Rules as admittedly no fresh materials were filed by the assessee before the ld CITA. The entire addition has been made without any basis or reasoning and without appreciating the facts and requirements of law. We find that the ld CITA had duly appreciated the same and hence we do not find any infirmity in the order of the ld CITA in this regard. Accordingly the Ground No. 1 raised by the revenue is dismissed. 3. The second issue to be decided in this appeal is as to whether the ld CITA was justified in deleting the addition made towards Excise Duty on Closing Stock of finished goods amounting to Rs 5,40,34,736/- in the facts and circumstances of the case.

3.1. The brief facts of this issue is that during the financial year, miscellaneous expenses of Rs. 56,19,67,441/- was debited to the profit and loss accounts [schedule-17(14)] under the head “Manufacturing, Selling and Administrative expenses” included excise duty of Rs. 4,87,67,368/- related to the difference between the closing stock and 5

6 ITA No.1293/Kol/2014 Kesoram Industries Ltd. A.Yr.07-08 opening stock. According to the accounts of the assessee company inserted in clause 12(b) of form 3CD (Appendix-II) and schedule 18(2) of notes on account it is apparent that opening and closing stock of finished foods included excise duty. From the appendix-XI of Clause 21(B) of form 3CD it is evident that excise duty was routed through profit and loss account which supports the above statement also. In the assessee’s computation of income an amount of Rs. 2,15,24,269/- was added being excise duty on opening stock of finished goods of this year as already claimed in the computation of income vide closing stock in assessment year 06-07 and an amount of Rs. 5,40,34,736/- was deducted from total income being excise duty on closing stock of finished goods as being unclaimed for the year. This resulted in claiming of deduction on account of excise duty doubly on arriving at the closing of finished goods which was irregular. Therefore, such deduction on account of excise duty is disallowed and added to the total income of the assessee. 3.2. It was submitted that the assessee had since the insertion of section 145A of the Act had accounted for Excise Duty element in the valuation of closing stock of finished goods. The principle of the liability is determined by the Hon’ble Supreme Court in the case of Ujagar Prints vs Union of India reported in 38 ELT 535 (SC) that such liability to pay excise duty arises upon manufacture of goods although the obligation to discharge such liability arises only upon clearance of goods from the factory gate. Due to the accrual system of accounting and amendment in section 145A of the act, the assessee is bound to account for the liability of finished goods in stock pending dispatch by debiting the amount of duty in the profit and loss account. While ascertaining the value of closing stock of finished goods, pending dispatch, the same amount of excise duty is also included in the value of closing stock i.e in other words credited to the profit and loss account. Thus this will again neutralize its impact in the profit and loss account. The assessee tried to explain the same by way of accounting entries as under:-

Excise Duty A/c (Profit and Loss Account) Dr xxxxx 6

7 ITA No.1293/Kol/2014 Kesoram Industries Ltd. A.Yr.07-08 To Excise Duty Payable A/c (Liability) Cr xxxxx (Being the amount of excise duty payable on the finished goods lying at closing stock pending dispatch)

Inventory – Finished Goods Dr xxxxx To Excise Duty A/c (Profit and Loss Account) Cr xxxxx (Being Excise duty element of finished goods lying in stock pending dispatch now included in the value of closing stock) .

It was explained that the aforesaid entries neutralizes the impact of excise duty in the profit and loss account. 3.2.1. It was also submitted that this liability of excise duty was also hit by the provisions of section 43B of the Act and was subsequently paid before the due date of filing the return of income and hence in any case, the same is allowable as deduction in the year under appeal. Since the liability of excise duty arises on manufacture, the assessee had provided for such liability under the mercantile system and thereafter paid such duty before filing the return in order to claim deduction. It was submitted that from perusal of the tax audit report, it would be evident that the said excise duty aggregating to Rs 5,36,14,329/- was duly paid within the date prescribed u/s 139(1) of the Act. It was further submitted that the assessee company claimed the amount of Rs 5,40,34,736/- and duly offered the unpaid amount of Rs 4,20,407 ( 5,40,34,736 – 5,36,14,329) in the computation of total income for Asst Year 2007-08 (i.e the year under appeal). It was further pleaded that the issue under dispute is further settled in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of Berger Paints India Limited vs CIT reported in 266 ITR 99 (SC). Similar view was also endorsed by the Hon’ble Jurisdictional High Court in the case of Paharpur Cooling Towers Limited vs CIT reported in 2011-TIOL-440-HC-KOL-IT. It was stated that on a consistent basis, the assessee was claiming excise duty on closing stock 7

8 ITA No.1293/Kol/2014 Kesoram Industries Ltd. A.Yr.07-08 separately and disallowing the excise duty claimed in the previous year. This neutralizes the tax effect. It was submitted that the instant tax treatment has been done on the basis of principles laid down by the Hon’ble Supreme Court as well as Hon’ble Jurisdictional High Court. Accordingly, it was pleaded that the said sum of Rs 5,40,34,736/- is allowable as deduction while computing the business profits of the Asst Year 2007-08 (i.e the year under appeal) since Rs 4,20,407/- being unpaid duty had already been disallowed in the same computation with a corresponding disallowance being made while computing the business profits of the subsequent assessment year i.e Asst Year 2008-09.

3.2.2. The ld CITA deleted the addition by observing as under:- “I have carefully considered the relevant facts. It is seen that the appellant is consistently following the aforesaid method of accounting for excise duty on stock and claim of deduction thereof over the years. It credits sales net of excise duty to its trading account and includes excise duty in valuation of stock (opening and closing) in accordance with Section 154A of the I.T. Act, 1961. Since, the closing stock is cleared in the subsequent year prior to due date of filing of return of income, it claims deduction for excise duty on the same as per proviso of section 43B of the IT Act, 1961. As and when it filed return of income for the subsequent year, it adds back excise duty on (the then) closing stock. I do not see as to how the same can be called claiming deduction doubly. In fact the entire exercise is revenue neutral over the period of a few years. Even for a single year, the method appears to be in conformity with well accepted principle of accounting as well as the provision of section 145A and section 43B of the Income Tax Act, 1961. The issue came up for consideration before tribunal in the case of DCIT, Circle-1, Kolkata vs. Exide Industries Ltd. I.T.A. No. 1491/Kol/2007, where the assessee was following a similar system of accounting. In its decision in the said appeal, it has been held by Hon’ble tribunal that the accounting system being followed by the assessee did not account to claiming double deduction. While delivering this decision, Hon’ble Tribunal also referred to the decision of Supreme Court in the case of Berger Paints (I) LTd. 266 ITR 99. The ratio squarely applies on the appellant’s case. Moreover, though the appellant has been following the same system consistently, no such addition has been made in the earlier years and the department has also accepted the same. Further, in the scrutiny assessment of the subsequent year i.e. assessment year 2010-11 which was also completed around same time as the impugned order, no addition on the issue of excise duty on closing stock is stated to be made. Thus, the assessing officer has in the preceding as well as subsequent year accepted the system followed by the appellant. Therefore, following the principle of consistency and taking into consideration the decision of Apex Court in the case of CIT vs. Radhasoami Satsang [193 ITR 321 (SC), I am of the view that there was 8

9 ITA No.1293/Kol/2014 Kesoram Industries Ltd. A.Yr.07-08 hardly any justification for disturbing the consistent and well-founded system of accounting followed by the appellant. Even otherwise, in view of the ratio give by jurisdictional bench of Hon’ble Tribunal in the case of Exide Industries Ltd. (supra), it is to be held that there is no infirmity in the appellant’s treatment of excise duty and the same does not result in double deduction. The addition of Rs. 5,40,34,736/- is, therefore, deleted. Part-(b) of the ground raised by the appellant is without prejudice of part-(a) which has been allowed. Therefore, part-(b of the ground becomes infructuous”.

3.3. Aggrieved, the revenue is in appeal before us on the following ground:- 2. That on the facts and circumstances of the case, the CIT(A) erred in holding that addition of Rs. 5,40,34,736/- on account of excise duty included in closing stock was not correct, ignoring the fact that the appellant had not considered excised duty in its closing stock as per provisions of section 145 and accounting standard prescribed.

3.4. We have heard the rival submissions and perused the materials available on record including the detailed paper book filed by the assessee. We find that this addition had been made without appreciating the accounting treatment and the tax treatment given by the assessee in the computation of total income . We find that the addition made is without any basis and without appreciating the facts and requirements of law. We find that the ld CITA had duly appreciated the same and hence we do not find any infirmity in the order of the ld CITA in this regard. Accordingly the Ground No. 2 raised by the revenue is dismissed. 4. The last issue to be included in this appeal is as to whether the ld CITA was justified in deleting the addition made towards closing stock on account of processed and semi- processed goods produced in trial run amounting to Rs 11,62,01,403/- , in the facts and circumstances of the case. 4.1. The brief facts of this issue is that the ld AO observed that in the computation of income, Cement Sales (39685 MT) amounting to Rs. 12,49,95,728/- (net of excise duty of Rs. 1,61,91,031/-) out of the cement produced during trial run of new cement unit-III under Vasavadatta Cement Unit at Sedam was added to the total income as not credited to profit and loss account for the year and expenses incurred during trial run amounting 9

10 ITA No.1293/Kol/2014 Kesoram Industries Ltd. A.Yr.07-08 to Rs. 8,44,35,826/- was deducted from total income as not charged to profit and loss accounts. From the accounts, it is found that during trial run 51160MT cements were produced (as per TAR) out of which 39685MT cements were sold for Rs. 12,42,95,728/- (not debited to profit and loss accounts but added to total income in the computation of income) and 11475MT cements in the form of processed/semi- processed goods valued Rs. 116201403/- were added to opening stock of finished goods (as per schedule-14) to arrive at an increase in stock of Rs. 15,07,42,020/-. As neither Sales nor Closing Stock included any items produced during trial run, the processed/semi-processed goods (11475MT) valued at Rs. 11,62,01,403/- was not added to the closing stock, such amount was added to the total income of the assessee on account of increase in closing stock. 4.2. It was submitted that during the concerned assessment year, the assessee undertook trial run of new cement unit – III under Vasavadatta Cement Unit at Sedam. During trial run, 51160 MT cements were produced out of which 39685 MT cements sold for Rs 12,42,95,728/- which was not credited to profit and loss account and hence added to total income separately in the computation of total income. Similarly the assessee claimed total expenditure incurred for trial run separately in computation of total income. The allegation of the ld AO was that the closing stock of 11475 MT cements in form of processed / semi-processed goods valued at Rs 11,62,01,403/- were added to opening stock of finished goods as per schedule 14 of annual report to arrive at increase in stock of Rs 15,07,42,020/- but neither sales nor closing stock included any items produced during trial run, the processed / semi-processed goods of 11475 MT was not included in closing stock. This resulted in under valuation of closing stock to the tune of Rs 11,62,01,403/-. It was stated in this connection that the above stock of 11475 MT of trial run has been routed through the inventory accounted vide schedule 14 of annual report i.e added to the opening stock and purchases and hence has become part of the regular production process. Subsequently this 11475 MT cement was sold as a part of normal inventory and included in sale amount in profit and loss account. The total sold 10

11 ITA No.1293/Kol/2014 Kesoram Industries Ltd. A.Yr.07-08 quantity of 2407787 MT of Sedam Unit as per Point 2 of Schedule 18 includes sale of 11475 MT also. Accordingly , it was not included in closing stock. The closing stock of 45763 MT is matching with excise records wherein production of trial run for 51160 MT and sale of trial run for 39685 MT was considered. Meaning thereby, closing stock as per excise record is after considering impact of total production and sale relating to trial run and there is no occasion that impact of difference of 11475 MT is not considered. Following reconciliation will further justify that 11475 MT has been included in normal production of 2432292 MT mentioned in schedule 18 :- Production as per excise records 2473130 MT Less: Shortage & Damage quantity 1154 MT Less: Trial Production included in above 51160 MT ---------------------- 2420816 MT ---------------------- Production as per schedule 18 (2420817 + 11475) 2432292 MT Alternatively, the above reconciliation can be explained more specifically with the help of the following table :

Particulars MT MT Opening Stock 36,439.00 Production 2,420,817.00 Add: closing stock of trial run 11,475.00 2,432,292.00 transferred to normal inventory (closing stock of 11475 MT included as it became part of normal inventory) Less: Sale (2,407,787.00) (includes sale of 11475MT as normal Finished Goods) Less: Internal consumption (15,181.00) Closing Stock 45,763.00 (Opening+Production-Sale)

It was stated from the above table, it could be appreciated that the closing stock was derived only after considering impact of 11475 MT. It was further submitted that any 11

12 ITA No.1293/Kol/2014 Kesoram Industries Ltd. A.Yr.07-08 material included in the production process through inventory is used in the regular production to become either work in progress or finished goods, which is sold or held in stock. Since 11475 MT trial stock was transferred to production, it could be appreciated that the same got automatically routed to the sales or closing stock ,otherwise the double entry system of accounting will not work. Hence it was pleaded that the assessee had correctly done the accounting treatment and there had been no understatement of stock or income and accordingly prayed for deletion of the addition thereon in the sum of Rs 11,62,01,403/-. 4.3. The ld CITA sought for a remand report from the ld AO with regard to the aforesaid submissions wherein the ld AO accepted the treatment given by the assessee with regard to the impugned issue after going through the reconciliation thereon. The ld CITA deleted the addition by observing as under:- “6.4. It is clear that the contention and the supporting evidence produced by the appellant has been verified by the assessing officer and he had not found any discrepancy per se. He has only pointed out that presentation of the appellant in the balance sheet was not very clear. Be as it may, it is no longer disputed that the production of processed/semi-processed material for the trial run has been duly accounted for in the sale/stock of the appellant. This being the position, the addition of Rs. 11,62,01,403/- cannot be sustained. The same is accordingly deleted”.

4.4. Aggrieved, the revenue is in appeal before us on the following ground:- 3. That on the facts and circumstances of the case, the CIT(A) erred in holding that addition of Rs. 11,62,01,403/- in closing stock on account of processed and semi- processed goods produced in trial run was not correct, ignoring the fact that the goods produced in trial run was not considered in the closing stock as per details of account produced at the time of assessment proceedings. 4.5. We have heard the rival submissions and perused the materials available on record including the detailed paper book filed by the assessee. We find that the ld CITA had observed that the ld AO had not drawn any adverse inference on the reconciliation filed by the assessee in his remand report vide his letter No. DIT/Cir-5/Kol/Remand Report /2013-14 dated 7.10.2013. We are convinced with the explanation given by the

13 ITA No.1293/Kol/2014 Kesoram Industries Ltd. A.Yr.07-08 assessee before the ld CITA which has been duly considered by the ld AO also in his remand report. We find that the categorical findings given in this regard by the ld CITA in his order had not been controverted by the ld DR before us and hence we do not find any justifiable reason to interfere with the order of the ld CITA in this regard. Accordingly the Ground No. 3 raised by the revenue is dismissed. 5. In the result, the appeal of the revenue is dismissed.

Order pronounced in the Court on 14.07.2017

Sd/- Sd/- [A.T.Varkey] [ M.Balaganesh ] Judicial Member Accountant Member

Dated : 24.07.2017 SB, Sr. PS

Copy of the order forwarded to: