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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
The aforesaid appeals of the Department are directed against separate orders of the learned Commissioner (Appeals)–34, Mumbai, pertaining to assessment year 2007–08, 2008–09 and 2009–10. As the issue raised in these appeals is more or less common, as a matter of convenience, these appeals were heard together and are being disposed off by way of this consolidated order.
3 Shah Steel Corporation
ITA no.6060/Mum./2012
Grounds no.1 and 2, are on the issue of deletion of addition made by the learned Commissioner (Appeals) on account of undervaluation of closing stock.
Briefly stated the facts are, assessee a partnership firm is engaged in the business of purchase and sale of C.R. Coils, H.R. Coils, Sheets Slits, H.R. Plates, H.R. Scalps. For the assessment year under consideration, assessee filed its return of income on 30th July 2008, declaring total income of ` 1,29,53,130. During the assessment proceedings, the Assessing Officer noticed that the assessee has shown closing stock of ` 9,72,93,401 in the trading account. On going through the details of valuation of closing stock, the Assessing Officer noticed that all the items are valued at the same rate. On a comparison of the purchase register, he found that the rate per M.T. taken by the assessee is not correct. On verifying the details of purchases made by the assessee for the month of March 2007, he found, it has purchased 4606.440 M.T. for ` 15,04,95,352. The Assessing Officer was of the view that as per FIFO method of valuation followed by the assessee, the entire closing stock as on 31st March 2007, must be presumed to be out of purchases made in the month of 4 Shah Steel Corporation March 2007. He observed, as per the note of auditor, valuation of closing stock is done at the end of the year at lower of cost or net realizable value. Therefore, the substantial purchases made in last six days of the financial year lying in the closing stock cannot be having lesser value, than the purchase price. He observed, as per purchase register, assessee had purchased 3239.017 M.T. from 23rd March 2007 to 31st March 2007, for ` 10,58,97,587. Therefore, the closing stock has to be valued at minimum of ` 10,58,97,587, whereas the assessee had valued the same at ` 9,72,93,400. He, therefore, added back the differential amount of ` 86,04,187, to the income of the assessee. On further perusal of trading account, he found that assessee has debited various direct expenses which has not been included in the valuation of closing stock. In this context, he referred to cutting, loading and unloading charges of ` 1,67,78,293, labour charges of ` 74,52,458. He, therefore, opined that these expenditures have to be allocated to the value of closing stock of such items. He also observed, trading charges, weighment charges, service tax on labour charges also need to be allocated in the closing stock. On the aforesaid basis, the Assessing Officer worked out direct cost attributable to the closing stock at ` 17,79,451. Thus, the total addition made on account of valuation of closing stock aggregated to ` 1,03,83,638. Being
5 Shah Steel Corporation aggrieved of such addition, assessee preferred appeal before the learned Commissioner (Appeals).
In the course of hearing of appeal before the first appellate authority, assessee made detail submissions justifying valuation of closing stock made in the books of account and in support of such claim submitted certain additional evidences such as sample copy of invoice of purchase and sale in the month of March, copy of excise stock register and quantity remaining out of such purchases, copy of invoice raised by M/s Anmol Steel Processers Pvt. Ltd., circular issued by various other traders on the rate charged for cutting, comparative chart showing gross profit and net profit rate for the preceding and subsequent assessment years. On the basis of submissions made and additional evidence furnished by the assessee, the Assessing Officer directed the Assessing Officer to examine the same and submit his report. The Assessing Officer, after verifying the evidence submitted his remand report to the learned Commissioner (Appeals). The learned Commissioner (Appeals), after perusing the remand report of the Assessing Officer found, the Assessing Officer has accepted that the assessee has maintained quantitative details as per normal accounting standard and practice followed in the past and the closing stock valued by the assessee is in order. The learned Commissioner (Appeals)
6 Shah Steel Corporation further found average purchases made in the whole of the year comes to ` 29,869 per M.T. whereas, the assessee has valued the closing stock of ` 30,038 per M.T. He also observed, closing stock does not comprise of purchases made in the month of March but comprises of various items of steel purchased in the whole year. The learned Commissioner (Appeals), after verifying the details of purchases made by the assessee, found that the entire purchases made in March were sold in March itself and nothing remained as closing stock. Thus, on the basis of aforesaid factual finding, the learned Commissioner (Appeals) held that the addition made on account of closing stock cannot be sustained. The learned Commissioner (Appeals), while coming to such conclusion, relied upon various decisions. As far as addition to the closing stock on account of direct expenses, learned Commissioner (Appeals) on verifying the remand report submitted by the Assessing Officer found that the Assessing Officer has accepted assessee’s claim that cutting, loading and unloading charges weighment charges, were incurred at the time of effecting sales. As far as labour charges is concerned, learned Commissioner (Appeals) observed, service tax on laobur charges was also raised at the time of invoice. Accordingly, he concluded that a part of direct cost apportioned to the closing stock by the Assessing Officer cannot be 7 Shah Steel Corporation sustained. Accordingly, he deleted the addition made to the closing stock on account of direct cost attributed to the closing stock. Learned Commissioner (Appeals) also found merit in the contention of the assessee that proportionate amount out of the rebate and discount received on purchase should be reduced from the value of closing stock as the assessee has filed the documentary evidence by way of credit notes issued by J.S.W. Ispat Steel Ltd. Accordingly, he directed the Assessing Officer to reduce the amount of ` 9,52,154, from the value of closing stock.
Learned Departmental Representative relying upon the reasoning of the Assessing Officer submitted, as the assessee is following FIFO method of valuation of closing stock, the price of last invoice should form basis for valuation of closing stock.
Learned Authorised Representative strongly supporting the reasoning of learned Commissioner (Appeals) submitted, the first appellate authority having considered the facts in the correct perspective and found that there is no under valuation of closing stock, the addition made was rightly deleted. Learned Authorised Representative extensively referring to the remand report of the Assessing Officer submitted, even in the course of remand proceeding,
8 Shah Steel Corporation the Assessing Officer, after considering the relevant facts and evidences as well as quantitative details maintained by the assessee has admitted that the valuation of closing stock is in terms books of account maintained and accounting standard followed by the assessee in the past and thereby accepted that the valuation of closing stock made by the assessee is in order. He submitted, even otherwise also, the finding of fact recorded by the learned Commissioner (Appeals) being on proper appreciation of evidences brought on record, there is no need to interfere with the same.
We have considered the submissions of the parties and perused the material available on record. At the outset, we are constrained to observe, though the learned Commissioner (Appeals) had deleted the entire addition of ` 1,03,83,638, made by Assessing Officer to the value of closing stock, but in the present appeal, the Department has challenged two paltry amounts of ` 2,08,549 and ` 9,52,154, thereby accepting the major portion of the addition deleted by learned Commissioner (Appeals). This itself is suggestive of the fact that the addition made by the Assessing Officer on account of valuation of closing stock had no legs to stand. Having said so, we propose to deal with the specific issue relating to the relief granted by the assessee as raised in the grounds. As far as the amount of ` 2,08,549, concerning
9 Shah Steel Corporation cost incurred on account of labour charges, it is to be observed that in course of assessment proceedings, the Assessing Officer, while examining the valuation of closing stock noted that assessee had debited certain direct expenses without including them in valuation of closing stock. Such expenses included cutting, loading, unloading and labour charges. Thus, he was of the opinion that these expenditures are required to be allocated to the value of closing stock. Accordingly, out of the total direct expenditure claimed he added an amount of ` 17,79,451 as cost attributable to the closing stock. During the appellate proceedings, the learned Commissioner (Appeals) on the basis of submissions made and evidences produced by the assessee called for the remand report. As reiterated earlier, perusal of the remand report reveals that the Assessing Officer after examining the quantitative details as well as other evidences submitted by the assessee, categorically stated in the remand report that the valuation of closing stock by the assessee is as per the normal accounting standard and practice followed by the assessee in past, hence, is in order. Further, as far as the direct cost attributed to value of closing stock, the Assessing Officer gave a categorical finding that the cutting, loading, unloading and weighment charges were incurred at the time of effecting sales. That being the case, we do not find any infirmity in 10 Shah Steel Corporation the order of the learned Commissioner (Appeals) in deleting the amount of ` 2,08,549 being the direct expenditure attributable to the cost of closing stock. Similarly, as far as the amount of ` 9,52,154 being the discount received by the assessee which was reduced from closing stock, on a perusal of the remand report it is observed the Assessing Officer disallowed assessee’s claim for reduction of the said amount from value of closing stock merely for the reason that assessee did not bring on record relevant details. However, as could be seen from the observations of the learned Commissioner (Appeals) in Para–2.8 of his order, assessee furnished relevant details such as credit note issued by J.S.W. Ispat Steel Ltd. supported by working to show that amount of ` 9,52,152 being proportionate cost allocated to the total closing stock needs to be reduced. He has given further categorical finding after verifying the monthwise purchases that the rebates were for the period from 1st April 2006 to 31st March 2007. In the aforesaid facts and circumstances, we agree with the learned Commissioner (Appeals) that as the valuation is done on the basis of purchase price the discount / rebate has to be reduced from the purchase price for valuation of closing stock. Hence, we do not find any reason to interfere with the order of the learned Commissioner (Appeals). Consequently, grounds no.1 and 2, are dismissed.
11 Shah Steel Corporation
In ground no.3, Department has challenged deletion of addition of ` 83,89,147 on account of payment made to family concerns.
Briefly stated the facts are, during the assessment proceedings, the Assessing Officer after verifying details noticed that assessee has paid ` 1,67,78,293, towards cutting, loading and unloading charges to its sister concern M/s Anmol Steel Processers Pvt. Ltd. After calling for certain details and verifying the same, the Assessing Officer formed an opinion that the payment made by the assessee to its sister concern is high and excessive as compared to similar expenditure incurred in respect of other parties. Accordingly, he disallowed 50% out of the total payment made to M/s Anmol Steel Processers Pvt. Ltd., which worked out to ` 82,89,147, and added back to the income of the assessee. Being aggrieved of such addition made by the Assessing Officer, assessee challenged the same in appeal preferred before the learned Commissioner (Appeals).
The first appellate authority, considering the detail submissions made by the assessee in the context of facts and evidence brought on record found no reason to sustain the addition and accordingly deleted the same.
12 Shah Steel Corporation
Learned Departmental Representative primarily relying upon the reasoning of the Assessing Officer submitted that the Assessing Officer after making necessary enquiry found that payment made by the assessee to its sister concern towards cutting, loading and unloading charges is reasonably higher compared to similar payment made to other parties as well as the prevalent market rate, hence, the addition made is justified.
Learned Authorised Representative, on the other hand, strongly relying upon the findings of the learned Commissioner (Appeals) submitted, evidence brought on record by the assessee clearly demonstrate that the payment made by it to the sister concern is comparatively lower than similar payment made by the assessee to other parties as well as the prevalent market rate as per the circular issue by certain dealers engaged in similar like of business. He, therefore, submitted, learned Commissioner (Appeals) was justified in deleting the addition made.
We have considered the submissions of the parties and perused the material available on record. As seen from the assessment order, the Assessing Officer has disallowed 50% out of the payment made to 13 Shah Steel Corporation M/s Anmol Steel Processers Pvt. Ltd. on account of cutting, loading and unloading charges primarily for the following reasons
(i) Payment made to M/s Anmol Steel Processers Pvt. Ltd. is higher compared to similar payments made to other parties;
(ii) Invoices raised in case of M/s Anmol Steel Processers Pvt. Ltd. do not mention the detail of width, thickness of H.R. Coil; and (iii) Gross profit and net profit declared by the assessee is extremely low compared to other assessee in the same line of business.
However, it is evident that before the first appellate authority, the assessee had brought on record credible evidence to establish that the payment made by the assessee to its sister concern M/s Anmol Steel Processers Pvt. Ltd., is lower than the prevalent market rate as well as payment made to other parties. In this context, assessee has relied upon a circular issued by certain traders dealing with similar products as per which the rate of cutting, loading and unloading charges varies from ` 280 per M.T. to ` 750 per M.T. depending upon
14 Shah Steel Corporation thickness of steel. The said circular further specifies that on an average up to 5mm thickness, the cutting charges is around ` 300 whereas cutting charges towards thickness charges from 20mm to 35mm is ` 750 M.T. As against the aforesaid market rate, the assessee has got the work done through its sister concern M/s Anmol Steel Processers Pvt. Ltd., at a fixed rate of ` 200 per M.T. irrespective of thickness and size of the coil. Further, it has been proved on record by the assessee through cogent evidence that payment made towards cutting, loading and unloading charges to outside parties for similar kind of job work is much more than the payment made to sister concern. Though, the Assessing Officer has tried to deflect this fact by observing that the invoices raised in case of M/s Anmol Steel Processers Pvt. Ltd. do not specify the width and thickness, however, assessee’s explanation that there is no need to mention such details in the invoice as the sister concern has agreed to do the job work at the fixed rate of ` 200 per M.T. irrespective of the thickness of size of the coil appears to be a valid explanation. Moreover, the assessee has also proved on record that gross profit and net profit rate declared by it in the impugned assessment years is not only comparable to its own gross profit and net profit for the preceding and subsequent assessment year but also comparable to other assessee’s in similar
15 Shah Steel Corporation line of business. Learned Commissioner (Appeals) having examined all these evidences which were also sent for examination of the Assessing Officer on remand has found none of the reasons of the Assessing Officer for holding the payment made to be high & excessive as valid. The aforesaid factual finding of the learned Commissioner (Appeals) arrived on the basis of documentary evidences produced on record by the assessee have not been controverted by the Department by bringing on record any contrary evidence to justify the conclusion reached by the Assessing Officer. In the aforesaid circumstances, when the material brought on record clearly demonstrate that payment made by the assessee to its sister concern M/s Anmol Steel Processers Pvt. Ltd. is not in any way higher to similar payment made to third parties or even the prevalent market rate the decision of the learned Commissioner (Appeals) in deleting the addition made by the Assessing Officer by disallowing 50% out of the payment made to M/s Anmol Steel Processers Pvt. Ltd., in our view, does not call for any interference. Accordingly, upholding the decision of the learned Commissioner (Appeals), we dismiss ground no.3, raised by the Department.
In the result, Department’s appeal is dismissed.
16 Shah Steel Corporation ./2012 and ITA no.2540/Mum./2013
The common issue raised in these two appeals by the Department is in respect of disallowance made by the Assessing Officer out of the payment made to its sister concern which was deleted by the learned Commissioner (Appeals).
After hearing both the parties, we find that identical issue has been decided by us in Department’s appeal vide ground no.3, in ITA no.6060/Mum./2012, wherein we have dismissed the ground raised for the details reason given in Para–13 above. As such, following our own decision as aforesaid, we decline to interfere was the order of the learned Commissioner (Appeals). The Ground raised in both the appeals are dismissed.
The only other surviving issue in ITA no.6580/Mum./2012 relats to deletion of addition of ` 4,40,950 being proportionate interest towards utilisation of interest bearing fund for non business purpose.
It is the plea of the Department that learned Commissioner (Appeals) had deleted the addition by relying upon certain additional evidence without giving opportunity to the Assessing Officer to verify
17 Shah Steel Corporation the same and offer his comments thereby violating provisions of rule 46A. However, in course of hearing before us, the learned Departmental Representative, to a pertinent question from the bench, failed to bring to the notice of the bench the specific evidence considered by the learned Commissioner (Appeals) which can be termed as additional evidence. However, learned Departmental Representative was not able to satisfactorily answer the query by pointing out the so called additional evidences considered by the learned Commissioner (Appeals). In view of this, we do not find any merit in the ground raised by the Department and the same is hereby dismissed.
In the result, Department’s appeals are dismissed. Order pronounced in the open Court on 11.03.2016