ASSTT.COMMISSIONER OF INCOME-TAX -1(2), RAIPUR (CG) vs. M/S VIJAY TRANSMISSION PVT.LTD, RAIPUR (CG)

IN THE INCOME TAX APPELLATE TRIBUNAL, RAIPUR BENCH, RAIPUR

BEFORE S/SHRI N.S SAINI, ACCOUNTANT MEMBER AND PAVAN KUMAR GADALE, JUDICIAL MEMBER

ITA No.208/Rpr/2012 Assessment Year : 2009-2010

Asst. Commissioner of Vs. Vijay Transmission Pvt Ltd., Income Tax, Circle 1(2), Ring Road No.2, Vill Raipur. Gondwara, Raipur PAN/GIR No.AACCV 44676 B (Appellant) .. ( Respondent)

Assessee by : Shri Praveen Khandalwal, AR Revenue by : Mrs Shabana Parveen, DR

Date of Hearing : 09/01/ 2018 Date of Pronouncement : 11 /01/ 2018

O R D E R Per Pavan Kumar Gadale, JM

This is an appeal filed by the revenue against the order of the CIT(A)-

Raipur, dated 3.10.2012 for the assessment year 2009-2010.

“1. Whether in law and on facts & circumstances of the case, the CIT(A) has erred in deleting the additions of Rs.14,52,189/- made by the AO on account of undervaluation of raw material- Steel. 2. Whether in law and on facts & circumstances of the case, the CIT(A) has erred in deleting the additions of Rs.6628/- made by the AO on account of undervaluation of raw material-Zinc

2 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

company deriving income from fabrication and galvanization of power towers

and telecom towers. The return of income was filed on 30.9.2009 declaring

Nil income and profit under MAT was disclosed at Rs.44,88,353/-. The

Assessing Officer found that the assessee has undervalued the closing stock

of various items and has also concealed the value of closing stock of some

items and that out of the total closing stock, the assessee has furnished the

value of closing of following items alongwith basis as under:

Sl.No. Items Qnty.(MT) Value(Rs.) Average Cost price Sale cost per price unit 1. Steel 520.483 14921683 28668.92 31459**

Since the assessee is following FIFO method, the Assessing Officer observed

that the valuation at average cost per unit is not correct. The assessee also

failed to give all particulars to support valuation on FIFO basis, therefore,

the Assessing officer adopted the cost price of steel at Rs.31,459/- per M.T.

3 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

and after deducting the average cost therefrom and worked the

undervaluation of raw material of steel at Rs.14,52,189/-.

Further, in respect of zinc, the Assessing Officer valued at cost price

and the undervaluation is worked out after deducting the average cost from

the actual, which comes to Rs.6628/-.

Similarly, in respect of value of Tower (finished goods), the Assessing

Officer observed that for 11.700 MT of finished goods, the value was shown

at Rs.,4,77,711/- by applying the average cost price of Rs.40,830/-. The

selling price was shown at Rs.53,600/- per MT. Thus, the assessee has

undervalued the closing stock of finished goods. Therefore, after deducting

gross profit at 12.09% shown by the assessee, the cost price, including

manufacturing expenses and adopted the cost of finished goods at

Rs.,47,120/-. Accordingly, the under valuation in tower account was worked

at Rs.73,593/-. In view of above, the Assessing Officer worked the addition

of undervaluation of closing stock at Rsx.15,32,410/.

of stock valuation in comparison to last year. The method of stock valuation

adopted by the assessee is commensurate with the method prescribed u/s

I45A r.w.s 145 of the Act and Accounting Standard-2 "Valuation of

Inventories" issued by ICAI and notified by the Central Government. The

4 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

CIT(A) also found that the Auditor has not made any adverse remark as

regards undervaluation of stock. The methodology adopted by the assessee

for determination of cost based on FIFO method basically involves valuation

of cost with reference to the last purchases and the FIFO method of

valuation of closing stock under which the valuation is done on first in first

out (FIFO) basis and the closing stock is valued on the basis of last purchase

bills. The CIT(A) observed that the method applied by the Assessing Officer

is clearly misplaced.Hence, the CIT(A) was in agreement with the

submissions of the assessee that the valuation is to be made after

considering the cost on bill to bill basis applying FIFO methodology under

which the last purchases to the extent it covers the quantity of closing stock,

at the end of the financial year is to be considered for valuing the stock. In

view of above, the CIT(A) deleted the addition of Rs.14,52,189/- on account

of undervaluation of steel.

4.1 For the reasons given in regard to undervaluation of steel, the CIT(A)

also deleted the addition of Rs.6628/- made on account of undervaluation of

zinc.

4.2 In respect of addition on account of undervaluation of finished goods,

the CIT(A) observed that the Assessing Officer has valued the inventory of

finished goods by reducing the G.P. rate from the selling price. The CIT(A)

observed that it was incumbent upon the Assessing officer to point out

5 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

mistakes in the inventory valuation done by the assessee viz any particular

head of cost which ought to have considered in determining the cost of

production/manufacture but not included by the assessee. He observed that

the Assessing Officer without pointing out any such mistake in calculation of

cost, applied his own method without substantiating the same with reference

d to the facts. When there is variation in the selling rate and inputs/raw

materials, it is not correct on the part of the Assessing Officer to arrive at

the cost by reducing G.P. rate. Accordingly, he deleted the addition of

Rs.73,593/-.

revenue is in appeal before us.

deleting the additions and submitted that the assessee has undervalued the

closing stock of above items and concealed the value of closing stock.

Therefore, ld D.R. prayed to reverse the order of the CIT(A) and restore that

of the Assessing Officer.

lower authorities, find that ld D.R. could not point out any specific error in

the findings of the CIT(A). We also observe that there is no change in the

6 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

method of stock valuation adopted by the assessee in comparison to last

year, which is commensurate with the method prescribed u/s.145A and

Accounting Standard-2 “valuation of inventories” issued by ICAI. Therefore,

we are of the considered view that the CIT(A) is fully justified in deleting the

additions made by the Assessing Officer on the above three items. Hence,

we confirm the order of the CIT(A) and reject Ground Nos.1 to 3 of the

appeal of the revenue.

Rs.1,14,18,637/- made by the Assessing Officer on account of unaccounted

finished goods.

observed that the assessee has concealed major part of the closing stock

from valuation. The Assessing Officer required the assessee to furnish

details of shortages year wise, item wise giving particulars of such as

quantity of raw material consumed, quantity of finished goods, quantity of

shortages and percentage of yield. The assessee submitted the details as

required for. The Assessing Officer found that no shortages were reported

by the assessee and that the assessee has concealed the quantum of

finished products and that the assessee has consumed total quantity of Steel

and Zinc at 6335.141 MT (Steel: 6162.178 MT) (Zinc 172.963 MT) whereas

7 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

the finished products was shown at 6092.81. He further observed that the

assessee has not accounted for the value of finished goods of 242.331 MT.

which was lying with him as closing stock and that after taking the value of

finished goods of 242.331 MT at @ Rs.47,120/-per MT, the Assessing Officer

worked out to Rs. 1,14,18,6377- and added the same to total income of the

assessee.

“The appellant has submitted that the appellant during the year under consideration showed manufacturing loss of 242.331 Mts of raw material in manufacturing of finished goods; that in the course of assessment proceedings, the appellant while furnishing the details of losses incurred by it in manufacturing process mistakenly stated that no losses were incurred in the preceding year; that the nature of mistake committed by the appellant while replying to the query of the assessing authority was that the appellant mentioned the same quantity as input of raw material and quantity manufactured; that on the basis of this mistaken submission the assessing authority disallowed the loss claimed during the year under consideration concluding that the manufacturing process of the appellant does not fortifies any loss; that the tax audit report in Form 3CD specifically requires the auditor to certify the quantitative details of raw material and finished goods; that it is crystal clear that the appellant has incurred losses in the manufacturing process to the extent of 2.97% in the AY 2008- 09 and 3.83% in the AY 2009-10; that the finding of the AO that in the preceding year the appellant had not incurred any loss is factually incorrect; that the process of fabrication involves sizing of the raw steel to various sizes by using gas cutter machines and thereafter, welding the same as per the design approved by the customer; that this process of sizing, cutting and welding results in burning losses and also in generation of scrap as end tails and unusable sizes; that the sized steel is galvanized by passing it through molten zinc; that

8 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

being a labour oriented semi mechanical manufacturing process losses are bound to occur; that the manufacturing losses has increased from 2.97% to 3.84% for the reason that in the AY 2008-09, the appellant did not manufactured transmission towers and only manufactured poles and flats; that the losses d by the appellant in manufacturing the towers and poles are justified and within the limits ;trial average and therefore, acceptable; that the gross profit ratio of the appellant has improved from 4.13% to 12.09% due to change in the product mix of the finished goods and raw material; that the books of accounts of appellant is under scrutiny and audit of Central Excise Department and they have not pointed out any discrepancy in quantitative details of raw material and finished goods.’

the addition by observing as under:

1 have carefully gone through the assessment order, and submissions of the appellant. I have gone through the manufacturing process explained by the appellant. The process of fabrication and galvanization of transmission towers is a labour oriented semi mechanical process and manufacturing losses are bound to happen. On perusal of the Tax Audit Report in Form 3CD for the year under consideration and preceding year, it is found that the manufacturing loss for the A.Y 2009- 10 is 3.84% as against 2.97% incurred in AY 2008-09 though the book results i.e. gross profit ratio has improved drastically from 4.13% in the preceding year to 12.09% in the year under consideration. The A.O, instead of bringing on record any cogent and conclusive evidence to substantiate the addition, just relied on mistaken submission of the appellant and completely ignored the basic facts of the case and tax audit reports. Such addition, on the basis of incorrect interpretation of facts cannot be sustained. Hence, the addition is deleted.”

the assessee supported the order of the CIT(A).

9 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

authorities and materials available on record. The undisputed facts of the

case are that the assessee had shown manufacturing loss of Rs.242.331 Mts

of raw material in manufacturing of finished goods and during the

assessment proceedings, the assessee, mistakenly stated that no losses

were incurred in the preceding year. Admittedly, on perusal of tax audit

report in Form 3CD for the preceding year, it was found that the

manufacturing loss for assessment year 2009-10 was 3.84% as against

2.97% incurred in the assessment year 2008-09. Without considering the

past results of the assessee and on the basis of the submissions of the

assessee for the year under consideration, the Assessing Officer added the

cost price of finished goods of 242.331 MTs @ Rs.47,120/- per MT at

Rs.1,14,18,637/-. We find that the CIT(A) has properly appreciated the

facts and deleted the addition. No specific error was pointed out by ld D.R.

in the order of the CIT(A), which is hereby confirmed and Ground No.4 of

appeal of the revenue is dismissed.

CIT(A) erred in deleting addition of Rs.4,83,927/- made by the Assessing

Officer on account of payment of interest u/s.40A(2)(b) of the I.T.Act, 1961.

10 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

payment to related parties i.e. shareholders at Rs.11,29,165/- @ 21% PA.

He also noticed that the rate of interest paid is excessive and unreasonable

and that the rate of interest paid is certainly higher than the prevailing

market rate and, therefore, he restricted the interest rate to 12% and

disallowed Rs.4,84,927/- being balance 9% u/s 40A(2)(a) of the Act.

Rs.11,29,165/- is verifiable from the books of account of the assessee for

the year under consideration. The total interest paid by the assessee on

unsecured loan during the year under consideration is Rs.8,46,8727- as

stated at schedule "W" of the audited profit and loss account and the total

interest paid to specified person i.e. persons as defined under section

40A(2)(b) of the Act is Rs.5,00,274/-as stated by the tax auditor at para '18'

of the Form 3CD. It was submitted that the rate of interest in case of

unsecured loans from financial institutions and NBFC's is around 18% - 19%

and it also requires lot of documentation and personal guarantee's and that

in case of secured loan available at the rate of 14% - 16% from banks and

financial institutions, the entity is required to mortgage the primae property

and also mortgage collateral security apart from personal guarantee. The

assessee relied on following judicial pronouncements:-

11 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

(i) Subash Chancier & Co vs. 1TO (2009) 121 TTJ (Asr) 718; (ii) ITO vs. MM Textiles (2009) 122 ITD 435 (Mum); (iii)Cosmat Max Limited vs. DCIT (2009) 124 TTJ (Del) 86;

any loan transaction depends upon various factors and bargaining capacity

of the borrower and lender. The factors may include periodicity of

repayment, security offered, past track of the borrower, 'provision for penal

interest, relationship between borrower and lender etc. In the instant case,

the Assessing Officer has compared the rate of interest of unsecured loan

with secured loan. Therefore, the CIT(A) was of the opinion that the

Assessing Officer has made an incorrect comparison between the two unlike

things. It is not the case of the Assessing Officer that the rate of interest on

unsecured loan was increased during the year under consideration without

any reason. The ld CIT(A) relied on the decisions and observed that the

Assessing Officer has not brought on record any evidence or argument to

substantiate that the rate of interest was excessive in view of the terms of

loan. Therefore, he deleted the addition of Rs. Rs.4.83.927/-.

the assessee supported the order of the CIT(A).

12 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

available on record, we find that the Assessing Officer has compared the rate

of interest of unsecured loan with secured loan. We find force in the findings

of the CIT(A) that the rate of interest in any loan transaction depends upon

various factors and bargaining capacity of the borrower and lender. It is

upto the borrower to obtain loan from which financial institution depending

upon the factors and which is beneficial to him. In this case, the assessee

has taken a conscious decision to avail the loan in order to avoid providing

multiplicity of documentations and penal interest. Hence, we find no infirmity

in the findings of the CIT(A) and uphold the same. Ground No.5 of appeal of

the revenue is dismissed.

depreciation of Rs.29,18,682/- on account of ETP building.

assessee has shown cost of acquisition of ETP Building at Rs.64,85,959/-

and claimed depreciation thereon at 100%. The Assessing Officer found that

the ETP building was put to use for less than 180 days, it claimed 50% of

the amount and claimed Rs.32,42,979/- as depreciation. The Assessing

Officer also observed that as per the rates of depreciation applicable to

13 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

'Building', rate of 100% depreciation is allowable only in respect of buildings

acquired on or after 01.09.2002 for installing P&M forming part of water

supply project or water treatment system and put to use for the purpose of

providing infrastructure facilities u/s 80IA(4)(I) of the Act. Therefore, the

Assessing officer restricted the depreciation as applicable to buildings at

10% and 50% of the admissible amount of at Rs.3,24,2987- and disallowed

Rs.29,18,682/-.

“ The appellant has submitted that the AO disallowed expenses claimed on account of depreciation to the extent of Rs.29,18,682/- out of claim of Rs.32,42,979/- claimed on effluent treatment plant being a water pollution control system machinery; that the AO without enquiring from the appellant about the type and nature of asset and the reason for charging deprecation at the rate of 100% straight away disallowed the claim of appellant concluding that being a building the rate of depreciation allowable is 10%; that though the nomenclature of the asset is described as 'ETP Building' but factually it is a plant for treatment of waste and polluted water generated in the course of galvanizing process; that the plant comprises of machineries and equipments and it is not a building/factory building; that as per the Appendix T to IT Rules, the rate of deprecation prescribed for water pollution control equipment in entry no.III 3 (ix)(f) is 100%; that the plant installed by the appellant is a mechanically aerated activated sludge system and therefore, it qualifies for depreciation at the rate of 100%; that merely because the appellant inadvertently mentioned the word building in-front effluent treatment plant cannot deprive the appellant from its ate claim of depreciation; that the AO should have atleast afforded an opportunity to the appellant to explain its case before coming to conclusion on the basis of nomenclature of the fixed asset which otherwise did not reflect the correct nature and type of the asset, that the books of account of appellant were audited under section 44AB of the Act

14 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

and the auditor has after due verification of the details of fixed asset calculated and certified the claim of depreciation allowable to the appellant.”

CIT(A) deleted the disallowance on the ground that the depreciation is in

respect of effluent treatment plant i.e. pollution control equipment.

lower authorities, we find that the depreciation claimed by the assessee is in

respect of effluent treatment plan i.e. pollution control equipment. Before

us, it was not controverted by ld D.R that the assessee has claimed

depreciation for other plant and machinery. Therefore, we concur with the

view taken by the CIT(A) and dismiss this ground of appeal of the revenue.

additional evidence in violation of Rule 46A of I.T.Rules, 1962.

not given any opportunity to the Assessing Officer when he decided to

accept the assessee's case and that, therefore, it was in violation

of Rule 46A of the Income Tax Rules. He, therefore, submitted that the order

of the CIT(Appeals) on this issue should be set aside and the matter should

be sent back to him for complying with the requirements of Rule 46A.

15 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

authorities and materials available on record. From the above ground of

appeal, it is clear that the grievance of the Revenue is that the additional

documents/ evidences have been accepted by the ld. CIT(A) against the

provision of Rule 46A of Income tax rule. In this regard on specific query

from the Bench, the Ld. DR has not pointed out any specific document

amounting to as an additional evidence which was admitted by the Ld.

CIT(A) in contravention to the provision of Rule 46A of the Income Tax Rule,

1962. We find that the documents which were furnished before the CIT(A)

were also furnished before the Assessing Officer. Therefore, the order of the

CIT(Appeals) cannot be faulted on the ground of contravention of Rule 46A.

We, therefore, find no merit in the objection raised by the Revenue.

Accordingly, this ground is rejected.

Order pronounced on 11 /01/2018.

` SD/- SD/- (N.S Saini) (Pavan Kumar Gadale) ACCOUNTANT MEMBER JUDICIALMEMBER Raipur; Dated 11 /01/2018 B.K.Parida, SPS

16 ITA No.208/Rpr/2012 Assessment Year : 2009-2010

Copy of the Order forwarded to : 1. The Appellant : Asst. Commissioner of Income Tax, Circle 1(2), Raipur 2. The Respondent. Vijay Transmission Pvt Ltd., Ring Road No.2, Vill Gondwara, Raipur 3. The CIT(A)- rAIPUR 4. Pr.CIT- rAIPUR 5. DR, ITAT, Raipur 6. Guard file. //True Copy//

BY ORDER,

SR.PRIVATE SECRETARY ITAT, Raipur