ASSTT. COMMISSIONER OF INCOME TAX01(2), RAIPUR (CG) vs. M/S ISHWAR ISPAT INDUSTRIES 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.188/Rpr/2012 Assessment Year : 2009-2010

ACIT 1(2), Raipur. Vs. M/s. Iswar Ispat Industries Pvt Ltd. Plot No.168, Sector -6, Urla Industrial Area , Raipur PAN/GIR No.AABCI 4258 C (Appellant) .. ( Respondent)

Assessee by : None Revenue by : Mrs Shabna Parveen, DR

Date of Hearing : 09/01/ 2018 Date of Pronouncement : 15/01/ 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 30.7.2012 for the assessment year 2009-2010.

called for hearing. Therefore, we proceed to decide the appeal of the

revenue qua-respondent assessee on the basis of materials available on

record and after hearing ld D.R.

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Rs.83,78,135/-made by the Assessing Officer u/s 68 of the I.T.Act on

account of low yield percentage and impractical rate of burning loss.

company deriving income from manufacturing and sale of steel item. During

the course of assessment proceedings, the Assessing Officer found that the

yield of finished goods was shown at 96.66% as against 97.76% shown in

the preceding assessment year and 97.84% prior to the preceding

assessment year. The GP is shown at 2.52% as against 4.12% shown in the

preceding assessment year. The burning loss was shown at 3.34% which is

much higher than that shown at 2.24% in the preceding assessment year

and before that at 2.16% only. The assessee did not give particulars of

quality of raw material purchased during the year and also in the preceding

assessment year to establish his contention. The assessee has filed a chart

furnishing consumption of electricity units with reference to production,

which also shows fluctuation and the consumption power is found to be as

low as 63 /MT to as high as 69 units / MT, The Assessing Officer observed

that in the month of April 2008 , 1650.282 MT was put to production and per

MT electricity consumption was shown at 68 units and the furnace oil

consumption was shown at 5 Ltrs. per MT. In the month of December'2008

against finished products of 3521.367 / MT, the power consumption was 69

3 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

units per NT. The furnace oil consumption during the relevant period was 53

Ltrs. Per MT and that considering the past consistent record of burning loss

oscillating around 2.25%, the burning loss for this year is reasonably

accepted at 2.25% and balance 1% of claim of excess burning loss is

disallowed. Therefore, adopting the rate of closing stock of finished goods

i.e. @ Rs.26637/- per MT, the Assessing Officer worked out the quantum of

inflated burning loss at Rs. 83,78,135/-.

various factors and it cannot be constant. If the quality of ingots purchased

is not to the mark i.e. having more carbon content then the yield of steel

rolled product would be los and that the appearance of all ingots would be

same and one cannot judge the quality by appearance; that it is an accepted

position in trade that average burning loss varies between 2,5% to 4% and

such burning loss is considered reasonable. The Excise Department which is

more concerned with the production and removal of goods for the purpose of

levy of excise duty has accepted the production and burning loss shown by

the assessee. It was submitted that under central excise rules the assessee

is required to maintain register in Form No.IV Rule 173-G; that R.G. 1

register is also required to be maintained; that the Sales Tax Department

has also accepted the trading results and sales as declared by the assessee

4 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

company; that in assessment year 2007-08 the Assessing Officer had made

addition of Rs.5,00,000/- to the trading account on the grounds that G.P.

rate of 0.13% was very low and the consumption of furnace oil per metric

ton of finished goods was very high i.e. about 102 litres per MT. No defects

or discrepancy is found in the account books and that as compared to

assessment year 2007-08 the result in the present assessment year 2009-

10 are better. It was sub mitted tht the Assessing Officer was not jsutsified

in assuming that the burning loss should be only 2.25% and on that basis

disallowing burning loss to extent of 1% and further assuming the assessee

must have produced 314.530 MT (i.e. 1% of total sale of 31453 MT) over

and above what is declared and must have sold the same out of books and

that too for Rs.83,78,135/- and thereby the assessee suppressed the income

of Rs.83,78,135/- that this is day to day quantitative account of raw material

purchased, put to production, goods manufactured and finished products

sold and that there is no evidence or material about the suppression of

production or sale. The assessing Officer has made some observation about

the fluctuation of electric consumption and furnace oil consumption as

under:

Month Power consumption Oil Furnace consumption April April 2008 68 Units 55 litres December, 2008 69 units 53 litres March 2009 63 units 52 litres

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It was further submitted that the so called fluctuation is normal and within

reasonable limit and there is nothing abnormal about it. The power

consumption in assessment year 2007-08 has varied between 102 to 191

while in assessment year 2008-09 the same has varied between 70 to 103

units. The furnace oil consumption in assessment year 2007-08 has varied

between 97 to 113 Litres per ton while in assessment year 2008-09 the

same has varied between 45 to 50 litres per ton production as compared to

earlier years the variation is not that much fluctuating.

the addition by observing as under:

“ I have carefully gone through the assessment order, and submissions of the appellant. It is a matter on record that the appellant has maintained quantitative records of raw material consumed and finished product produced. The books of accounts were subject to tax audit which was produced before the A.O. together with bills and vouchers and the same was examined by lest check. The A.O. has not come across any material defect in account so as to hold that any profit has been suppressed. The appellant has satisfactorily explained the reasons for decrease in gross profit and the yield and also variation in consumption. The A.O. has not brought any material on record to disbelieve the book result shown by the appellant. If there is no suppression of material facts, the authority cannot embark upon a speculative assessment of notional profits. The assessment should be based on cogent facts and there should be no vindictiveness or arbitrariness in passing the assessment order, Before rejecting the books of accounts, the department has to prove that the accounts are unreliable, incorrect or incomplete. Accounts

6 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

regularly maintained in course of business, duly audited under provisions of the act and free from any qualification by auditors, should be taken as correct unless there are strong and sufficient reason to indicate that they are unreliable. The estimated addition made by the A.O. do not bear any relationship with the specific defects in books of accounts and the A.O. cannot be permitted to make arbitrary addition. I find that the books of accounts are audited. It is seen that the A.O has not pointed out any suppression of production based on any cogent and incriminating material against the appellant. The addition has been made merely on account of variation in percentage of burning loss, It is not the case of the A.O that the Excise Department or the Sales Tax Department has pointed out any suppression of production or sales by the appellant. The A.O has not brought on record any instance of undisclosed production. I am of the considered opinion that the variation in percentage of burning loss or consumption could be a ground for suspicion of the A.O, however, the same alone lacks evidentiary value to hold adversity against the appellant. 8. It is seen that the appellant had explained the reasons for variation in percentage of burning loss and consumption pattern. In my opinion, the reasons mentioned by the appellant are convincing and the same have not been proved as false by the A.O by bringing on record cogent and substantive evidences. 1 find that, the A.O 'has not pointed out any discrepancy in the books of a/cs, bills/vouchers, nor did the A.O opine that the books of accounts were incomplete. It is settled principle of law that no addition can be made on the ground of lower GP rate, until and unless, the books of accounts have been rejected by the A.O. by invoking the provisions of Section 145. after giving the appellant a reasonable opportunity of being heard. Further, it is equally settled legal position that the books of accounts cannot be rejected merely on the ground of low OP rate. Rather, the A.O has to bring on record specific defect in the books of accounts of the appellant as a result of which reasonable profits cannot be deduced. I find that the decision of the Hon'ble Kerala High

7 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

Court in the case of St. Teresa's Oil Mill Vs. State of Kerala (1970) 76 1TR 365 (Ker) is providing strength to the case of the appellant in which 'it has been held that strong and sufficient reasons must be given to indicate that they are unreliable-mere disparity in consumption of electricity in certain months cannot be the reason for rejection of accounts-such variation can be due to various factors beyond the control of assessee-rejection, therefore, not justified. The A.O examined the audited books of account but had not pointed out any specific discrepancy nor has he detected any suppression in sales or inflation in purchases/expenses. No evidence whatsoever was brought on record to prove that, the appellant, in fact, earned more than that returned as per the books of account kept in the regular course of business. The assessment order is evidence to the fact that there was no specific finding given by the A.O to the effect that the method employed by the appellant was such that correct profits could not be deduced there from. It is also not the case of the appellant that it has not followed the mercantile system of accounting. It is also not the case of the appellant that it has not followed any particular accounting standards which are notified by the Central Government. 9. It is also not in dispute that the appellant has maintained books of account regularly and these are duly audited u/s 44AB of the IT. Act and the quantitative details were prepared and were duly audited. The variation in percentage of burning loss, In the absence any cogent reasons could not. by itself, have been a ground to hold that proper income of the appellant cannot be deduced from the accounts maintained by it and consequently, could not have been a ground to reject the accounts invoking section 145(3) of the Act, There is no finding in the assessment order of the A.O that the actual cost of finished goods purchased by the appellant was less than what was declared in the account books, There is no finding by the A.O that actual quantity of finished goods sold by the appellant was more than what it was shown in the accounts books, There is no finding by the that the finished goods were sold by the appellant at a price higher than what was declared in the account books. From the Tax Audit Report, it is discernible that

8 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

the appellant' did maintain stock records and the A.O has not pointed out any incorrectness in the same.

10, As assessment has to be completed on the basis of records and material available before the AO and personal knowledge and excitement on events arid extraneous facts should nor lead the AO to a State of affairs where the salient/primary/direct evidences are overlooked and should not influence the AO for resorting to adhoc additions/disallowances. 11. In a case where the transactions of the appellant have been accounted, documented and supported by the material evidences for deriving logical conclusions, without proving falsity of the same, adhoc additions/disallowances should not be made by the AO in a routine manner merely on presumption, probabilities, suspicion and surmises since the same action of the AO degenerates the spirit for which the quality assessments were emphasized by the Board, (Mukesh R Marolia v. Add!. CIT [2006] 6 SOT 247 Mumbai).

9 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

10 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

of the other materials from-which the income could be deduced; was contrary to the proviso to section 145 unless there was a finding or opinion either that the records were incorrect and incomplete or that the method of accounting applied was such that the income could not be deduced from the accounts so maintained by the appellant. The ground that the item wise stock register was not maintained, and, therefore, the accounts were-sought to be rejected, was absolutely perverse and could not be sustained in the absence of any opinion expressed or any finding arrived at to the effect that the accounts maintained were incorrect or that the method of accounting plied was such that the income could not be deduced. In the absence any such finding, the account books could not be rejected merely on the ground that item wise stock was not maintained in the stock register. Thus, the rejection of account books was not justified. In ITO v. Bothra International (2008) 117 TTJ (Jd.) 672, it was held that where the A.O laid no material on record to suggest that there had been any suppression of income nor that the appellant carried any activity outside the hooks, merely because of decline in GP rate, books of account could not be rejected. In Delhi Securities Printers v. Dy. CIT [2007] 15 SOT 353 (Delhi) it was held that rejection of books of account merely because appellant has not maintained stock .register,, without pointing out any specific defects in books of account of any nature whatsoever, could not be said to be justified. Such adhoc addition is also unsustainable in view of the decision of the Hon'ble High Court of Gujarat in CIT Vs. Sanjay Oil Cake Industries (2005) 197 CTR (Guj) 520 wherein it was held that the A.O having not pointed out any specific omission or suppression in the assessee's books of account nor the excise or sales tax authorities having found any discrepancy or irregularity in the maintenance of stock and records, addition made on account of suppressed production and sales could not be sustained. Considering the facts and circumstances of the case, as also decisions relied upon by the appellant and those cited above, I am of the view that there was no finding to the extent

11 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

that the accounts were not correct and complete or that the A.O was of the opinion that the income could not be deduced from the_ accounts maintained by the appellant. In the absence of such conclusions, such estimated addition, particularly without bringing on record any instance of undervaluation of closing stock or suppression in sales or inflation in purchases or expenses, cannot be made to the income returned based on audited account, Hence, the estimated addition-being without any evidence- is deleted."

addition and submitted that since the assessee did not furnish any

particulars of quality of raw materials purchased during the year and also in

the preceding year, the claim of excess burning loss was rightly disallowed

by the Assessing Officer.

The undisputed facts of the case are that the Assessing Officer disallowed

the burning loss on the ground that the burning loss was shown at 3.34%

which is much higher than that shown in the preceding assessment year and

that the assessee did not give any particulars of quality of raw material

purchased during the year and also in the preceding assessment year. It was

explained by the assessee that yield depends on various factors and it

cannot be constant, The assessee has maintained quantitative records of raw

material consumed and finished product produced. The books of account

were subject to tax audit which was produced before the Assessing Officer.

12 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

The assessee has explained the reasons for variation in percentage of

burning loss and consumption pattern. The observation of the CIT(A) that

there is no finding by the Assessing Officer that the accounts were not

correct and complete or income could not be deduced from the accounts

maintained by the assessee was not controverted by the Id DR. In view of

above, we do not find any reason to interfere with the order of the CIT(A),

which is hereby confirmed and ground of appeal of revenue is dismissed.

made by the Assessing Office on account of commission paid on purchase.

of Rs.50,62,705/- as commission paid to different persons. Therefore, the

Assessing Officer required the assessee to explain the genuineness of the

claim alongwith basis on which the commission was worked out, details of

relation of the recipients, relatives, friends, employees and associates

concerns, complete address, copy of ledger account to whom the

commission was paid. The assessee only submitted that the expenditure was

incurred for the business purposes but did not submit the details to

substantiate the commission payment. From the details filed before the

Assessing Officer by the assessee, it was observed that most of the persons

are relatives of members/directors of the assessee company staying on the

same address and that the name of Shri Harish Chouhan, who happened to

13 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

be accountant of the company also appears in the list of purchase

commission receipts. It is also seen that the payment were paid in one go

and that though TDS was made allegedly on the date of payment, the same

was paid in the month of April.. In view of above, the Assessing Officer was

of the opinion that the payment of commission was conclusively

substantiated and, therefore, he disallowed Rs.50,62,705/- treating it as

colorable device.

the payments made to the parties and deposited the same through banking

channel. The Assessing Officer had doubted the payment of commission as

the most of the parties to whom the commission was paid were residing in

the same locality. They have filed their income tax returns in which they

have shown the commission payment as their income. Therefore, it is proved

that all such payments have been made for the services rendered by them.

submitted all bills issued by all such persons, wherein, it is abundantly clear

that the bills contained the name of the parties in respect of whom

commission was paid, quantity and rate. He also observed that the persons

had offered the commission income received from the assessee for taxation

in the return of income. Thus, the CIT(A) was convinced that there is no

14 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

such irregularities in payment of commission to the parties and, accordingly,

deleted the addition made by the Assessing Officer.

time before the CIT(A) and not produced before the Assessing Officer.

on record, find that the copies of bills which were furnished before the

CIT(A), were not furnished before the Assessing Officer to take a view that

the commission payment was actually paid to them. As regards to the

findings of the Assessing Officer that most of the parties were relatives to

the assessee, the CIT(A) was of the view that the Assessing Officer has not

properly enquired into the matter to prove that commission payment made

to the parties, ultimately flown to the assessee. Looking into the facts and

circumstances of the case, we set aside the order of the CIT(A) and restore

the matter back to the file of the Assessing Officer to re-adjudicate the

payment of commission after conducting a thorough enquiry into the matter.

The assessee is directed to produce all bills and documents to substantiate

its claim before the Assessing Officer, who will decide the matter after

affording proper opportunity of being heard to the assessee. This ground of

appeal of the revenue is allowed for statistical purposes.

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Rs.3,32,885/- made by the Assessing Officer u/s. 40A(3) of the Act.

payments to different parties exceeding Rs.20,0007- in a day. Therefore, by

invoking the provisions of section 40A(3) of the Act, the Assessing Officer

disallowed Rs,3,32,887- and added the same to the income of the assessee.

Account is for the preceding year. Freight Liability provided in the accounts

and paid during the year under consideration by debiting Freight Liability

Account. The payments are not expenditure for the year. The payments of

freight on raw materials are made bill wise or transaction wise and the

payments were separate. The freight advance is not expenditure for the

assessee company and the customer subsequently reimburses the freight

advance.

revealed that expenditure on account of freight did not exceed Rs.20,000/-in

a single case and the payment is an advance.

materials available on record, we find that the freight payment is an advance

which is subsequently reimbursed to the assessee company. Hence, the

provisions of section 40A(3) are not applicable in this case. Hence, we

16 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

confirm the order of the CIT(A) and dismiss this ground of appeal of the

revenue.

on account of under valuation of closing stock.

verification of the valuation of closing stock of finished goods and raw

material, found that the same were undervalued. The Assessing Officer

required the assessee to explain the same. The assessee submitted that

valuation of closing stock has been made at the cost or market price

whichever is less as per regular practice. In respect of finished products, it

was submitted that the market rate as on 31.3.2009 was Rs.24,100/- per

MT and per MT production cost was Rs.29,901/-. Therefore, the valuation of

finished goods was made on the basis of market rate. In support of market

price, the assessee has filed copy of sale invoice dated 1.4.2009. On

verification of the same, the Assessing Officer found that the sale rate was

worked out excluding excise duty, VAT, cess, etc, therefore, the valuation is

against the provisions of section 145A of the Act. After analyzing the

valuation of closing stock at the cost or market price, purchase value of raw

materials and closing stock of other consumables, the Assessing Officer

worked out the under valuation of finished goods, raw material and furnace

oil at Rs.27,05,756/- and added the same to the income of the assessee.

17 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

" I have carefully gone through the assessment order and submission of the appellant. I am of the considered opinion that liability to pay excise duty arises immediately after production of goods and not on sale of goods. Only for administrative purposes, the payment of excise duty is made subject to removal of goods. Thus, there is no merit in the argument of the appellant as regards incurrence of liability towards excise duty. Therefore, it was obligatory on the part of the appellant to include excise duty while valuing closing stock of finished goods. However, at the same time, the appellant was entitled to claim deduction in respect of provision for excise duty. Thus, I am of the considered opinion that the default on the part of the appellant is revenue neutral. Hence, no addition is warranted on account of non inclusion of excise duty in the value of inventory. Accordingly, the addition made by the AO is deleted.

It is seen that, the A.O has computed the value of inventory of raw materials and furnace oil based on average purchase cost. It is not the case of the A.O that the appellant has changed the method of valuation of inventory. As per Accounting Standard -2 "Valuation of Inventory" which has also been notified by the Central Government for the purposes of Section 145, inventory can be valued at lower of cost or net realizable value. It is the prerogative of the appellant to decide the method to be adopted for determination of cost. Furthermore, the method adopted by the appellant i.e. FIFO method is very much recognised under the said accounting standard. In the instant case, the appellant has valued the inventory at cost being lower than the net realizable value. It is equally settled that the A.O does not have the power to recompute the cost using any other method in disregard to the method adopted by the appellant which is not only recognised but also consistently followed by the appellant. It is not the case of the A.O that the appellant has undervalued the cost to reduce the value of closing stock. As the valuation has been made as per the prescribed norms, there is no merit in the addition made by the AO. Hence, the additions are deleted.

18 ITA No.188/Rpr/2012 Assessment Year : 2009-2010

gone through the findings of the CIT(A) on this issue. Before us, ld D.R.

could not bring any material on record to show any good reason to interfere

with the order of the CIT(A), which is hereby confirmed and ground of

appeal of revenue is dismissed.

purposes.

Order pronounced on 15/01/2018. Sd/- sd/- (N.S Saini) (Pavan Kumar Gadale) ACCOUNTANT MEMBER JUDICIALMEMBER Raipur; Dated 15 /01/2018 B.K.Parida, SPS Copy of the Order forwarded to : 1. The appellant: ACIT 1(2), Raipur. 2. The Respondent. M/s. Iswar Ispat Industries Pvt Ltd. Plot No.168, Sector -6, Urla Industrial Area , 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