ACIT, CIRCLE - 3, ASANSOL, ASANSOL vs. M/S. BHARAT HI TECH (CEMENT) PVT. LTD., PURULIA

This appeal of the revenue arises out of the order of the Learned CIT(A), Asansol in Appeal No. 218/C.I.T.(A)/Asl/Cir-3/Asl/10-11 dated 22.9.2011 against the order of assessment framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

2.1. The brief facts of this issue is that the assessee is engaged in the business of manufacture of cement and had declared the closing stock of finished goods i.e cement to the tune of Rs. 33,895 as on 31.3.2008 in its balance sheet. The Learned AO during the course of assessment proceedings found that the assessee had renewed its insurance policies for stocks and plant and machinery having sum assured to the tune

1 M/s. Bharat hi-Tech (Cement) Pvt. Ltd of Rs. 1,50,00,000/- and Rs. 2,64,00,000/- respectively. The Learned AO felt that the stock declared to the insurance company on 28.3.2008 represents stock of cement alone and compared the sum assured value of Rs. 1,50,00,000/- with stock of cement declared in the balance sheet and proceeded to make an addition of Rs. 1,49,66,105/- ( 1,50,00,000 – 33,895). It was explained that the insurance policy was taken by the bank directly to protect the working capital facilities given by the bank to the assessee. The Learned AO stated that the bank people generally evaluate the stock of a customer before sending any proposal to the insurance company for taking insurance of the stocks and other assets. The Learned AO inferred that the assessee has falsified its statements submitted to the bank and held that the value of stock shown in the insurance policy of Rs. 1,50,00,000/- has been submitted by the assessee to the bank as stock held on 28.3.2008. On first appeal, the assessee explained that the insurance policy was taken at the beginning of the financial year on an estimated basis and this estimation has no resemblance with the actual figure of closing stock. The assessee further explained that the value shown in the insurance policy incorporates stock of finished goods as well as raw materials. The Learned CIT(A) after appreciating the submissions made by the assessee deleted the addition. Aggrieved, the revenue is in appeal before us on the following ground:-

(i) That the Ld.CIT(A) has erred in deleting the addition made by the AO under the head suppression of closing stock of Rs. 1,49,66,105/- despite of material facts and circumstantial evidence brought by the AO on the assessment records.

2.2. The Learned DR argued that the letter dated 24.12.2010 furnished by the bank and which was placed before the Learned CIT(A) is not before the Learned AO and accordingly prayed for set aside to the file of the Learned AO. In response to this, the Learned AR argued that the stock records are maintained properly by the assessee and argued that there cannot be any addition based on the sum assured of stocks declared

2 M/s. Bharat hi-Tech (Cement) Pvt. Ltd in the insurance policy vis a vis declared in the audited accounts. He heavily relied on the order of the Learned CIT(A).

2.3. We have heard the rival submissions and perused the materials available on record. We find that this addition has been made without appreciating the basic fact that the stock statements submitted to the bank by the assessee towards raw materials and finished goods. It is not in dispute that the bank had taken the insurance policy of stocks and plant and machinery in order to protect its cash credit facility advanced to the assessee. In the insurance policy , it was mentioned that the property insured was ‘ on stock of cement manufacturing’. This is substantially different from the Learned AO’s statement that the insured value of cement was shown at Rs. 1,50,00,000/- . Before the Learned CIT(A), the assessee had submitted a clarificatory letter dated 24.12.2010 from the bank which states that the cash credit facility had been advanced to the assessee against hypothecation of stock of raw materials, finished goods and sundry debtors. It also states that as per details , inspection of policy document, it is seen that the stock of cement manufacturing includes both raw materials and finished goods. We are not in a position to accept to the argument of the Learned DR that this letter dated 24.12.2010 represents additional evidence and in such a case, the revenue should have raised a specific ground for violation of Rule 46A of the IT Rules. The Learned CIT(A) also found that if the Learned AO had doubts regarding the assessee’s statements submitted to the bank , then nothing prevented him from making direct enquiries and finding out what are the details of finished goods as on 28.3.2008. The Learned CIT(A) further found that the Learned AO had written a letter to the bank which was not replied to before the passing of the order. In that event, enquiries could have been conducted through an Inspector or summons to the bank manager could have been issued. The Learned CIT(A) reproduced relevant phrases of the Assessment Order from page 11 wherein the Learned AO has mentioned ‘Information collected u/s 133(6) from bank shows debtor on 31.3.2008 for Rs. 4,28,18,000/-‘. It, therefore, appears that information had been collected by the Learned AO from the bank. From 3 M/s. Bharat hi-Tech (Cement) Pvt. Ltd the copy of the stock statements and debtors statements submitted to the bank by the assessee, the Learned CIT(A) found that the sundry debtors tallies with the statement given. The Learned CIT(A) found that how on 28.3.2007, any assessee can submit the details of its stock, as on 28.3.2008 , to a bank and have it accepted. Accordingly, he held that the contention of the Learned AO that assessee has submitted false statements of its stock to the bank is not borne out by the records and hence the decision relied upon by the Learned AO in the case of Dansi Ram Agarwal reported in 201 ITR 192 (SC) is not applicable to the facts of the case. We find that none of these findings and observations were controverted by the revenue before us. We also find from the stock reconciliation statement submitted by the Learned AR which was filed based on the directions from the Bench to the Learned AR, that the stock statements contain both raw materials and finished goods and there was absolutely no quantity difference between what has been submitted to the bank vis- a- vis the audited balance sheet filed along with the return except in respect of Dried Slag of 520.6 MT which is a scrap item and which was omitted to be shown in the stock statement submitted to the bank but duly considered in the audited balance sheet. In view of this, we find that there is absolutely no scope for making any addition in the sum of Rs. 1,49,66,105/- towards suppression of closing stock. Accordingly, the ground no. 1 raised by the revenue is dismissed.

3.1. The brief facts of this issue is that the assessee paid a sum of Rs. 1,18,938/- and Rs. 90,050/- totaling to Rs. 2,08,988/- as penal interest due to non-fulfillment of certain conditions in the loan agreement. The Learned AO invoked the Explanation to section 37 of the Act and disallowed the same considering the same as penal in nature.

4 M/s. Bharat hi-Tech (Cement) Pvt. Ltd On first appeal, the Learned CITA deleted the addition. Aggrieved, the revenue is in appeal before us on the following ground:-

(ii) That the Ld.CIT(A) has erred in deleting the addition made by the AO under the head penal interest of Rs. 2,08,988/- despite of material facts and circumstantial evidence brought by the AO on the assessment records.

3.2. The Learned DR vehemently supported the order of the Learned AO. In response to this, the Learned AR relied on the order of the Learned CIT(A).

3.3. We have heard the rival submissions and we find that the assessee had merely paid penal interest for not fulfilling a stipulated condition in the loan agreement which is only compensatory in nature. The banks in such a case are entitled to charge extra rate of interest which would be reimbursed to the borrower (assessee) as and when the stipulated conditions are fulfilled. We hold that the assessee had not committed any offence prohibited by any law and hence does not come under the ambit of Explanation to section 37 of the Act. Accordingly, we find no infirmity in the order of the Learned CIT(A) in this regard and hence the ground no. 2 raised by the revenue is dismissed.

4.1. The brief facts of this issue is that the assessee had set up a cement manufacturing unit at Purulia, which is a backward district, being classified as “Group C District”, signifying most backward area, as per West Bengal Incentive Scheme, 2000. For setting up unit in backward area, the assessee was entitled to State Capital

5 M/s. Bharat hi-Tech (Cement) Pvt. Ltd Incentive Subsidy @ 25% of Fixed Capital Investment as per Para 8 of the Scheme. Accordingly the assessee was in receipt from Government of West Bengal , Directorate of Cottage & Small Scale Industries amounting to Rs. 27,76,460/- a capital subsidy towards incentive on Building and Pollution Control Devices set up by the assessee which were supplied by M/s Pronto Commercial Pvt Ltd, Barakar Road, P.O. Vivekananda Nagar, Purulia District .The Learned AO felt that no details were submitted evidencing the nature of receipt of subsidy and hence sought to treat the subsidy as a revenue receipt. On first appeal, the Learned CIT(A) deleted the addition. Aggrieved, the revenue is in appeal before us on the following ground:-

(iii) That the Ld.CIT(A) has erred in deleting the addition made by the AO under the head subsidy of Rs. 27,76,460/- despite of material facts and circumstantial evidence brought by the AO on the assessment records.

4.2. The Learned DR vehemently supported the order of the Learned AO. In response to this, the Learned AR relied on the order of the Learned CIT(A) and took us to the relevant pages of the paper book containing the relevant evidences proving the nature of receipt.

4.3. We have heard the rival submissions and perused the materials available on record including the detailed paper book submitted by the Learned AR. We find that the Government of West Bengal , Directorate of Cottage & Small Scale Industries had given a capital subsidy amounting to Rs. 27,76,460/- towards incentive on Building and Pollution Control Devices which were supplied by M/s Pronto Commercial Pvt Ltd, Barakar Road, P.O. Vivekananda Nagar, Purulia District, for setting up of a manufacturing unit in a backward district. There is no dispute as to whether the place in which the assessee had set up its cement manufacturing plant is a backward district or not. We also find from page 65 of the Paper Book submitted by the assessee a letter dated 2.5.2007 submitted by Directorate of Cottage & Small Scale Industries , Purulia

6 M/s. Bharat hi-Tech (Cement) Pvt. Ltd District addressed to The Branch Manager, Union Bank of India, Muri Branch, P.O. Muri, Jharkhand directing the bank to credit the subsidy of Rs. 27,76,460/- to the account of M/s Pronto Commercial Pvt Ltd , whose account is maintained with the same bank branch. This itself goes to prove that the subsidy was received only as an incentive on Building and Pollution Control Devices supplied by M/s Pronto Commercial Pvt Ltd and it was not meant for working capital purposes or for running the cement manufacturing unit. This subsidy of Rs . 27,76,460/- has gone to reduce the capital cost of the assessee which is in line with Explanation 10 to section 43(1) of the Act which states that “where as portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called) , then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee.”

We find that the Learned CIT(A) had rightly appreciated the facts and the documents available on record and had rightly applied the decision of the Hon’ble Apex Court in the case of CIT vs P.J. Chemicals Ltd reported in 210 ITR 830 (SC) and CIT vs Ponni Sugars and Chemicals Ltd reported in (2008) 306 ITR 392 (SC). We find that all the relevant documents have been duly filed before the Learned AO by the assessee and the Learned AO had not properly appreciated the same and accordingly the case laws relied upon by the Learned AO in Bombay Hardware Syndicate vs CIT (92 ITR 168 – Mad HC) is squarely distinguishable on facts. In that case, the assessee had not produced necessary material and evidences to prove the nature of the receipt, whereas in the instant case, all the relevant documents were duly produced before the Learned AO. In these circumstances, we hold that the subsidy received is capital in nature and accordingly, the ground no. 3 raised by the revenue is dismissed.

7 M/s. Bharat hi-Tech (Cement) Pvt. Ltd

5.1. The brief facts of this issue is that the assessee had submitted stock statements and debtors balances to the bank in connection with the cash credit facility availed by the assessee. The Learned AO obtained the said statement from the bank u/s 133(6) of the Act. In the said statement, the balance of debtors was shown at Rs. 4,28,18,000/- and whereas the debtors balance as per audited accounts was reflected at Rs. 4,26,46,492/- and the Learned AO brought to tax the difference in debtors of Rs. 1,71,508/- as unexplained. On first appeal, the Learned CIT(A) deleted the addition. Aggrieved, the revenue is in appeal before us on the following ground:-

(iv) That the Ld.CIT(A) has erred in deleting the addition made by the AO under the head difference in debtors of Rs. 1,71,508/- despite of material facts and circumstantial evidence brought by the AO on the assessment records.

5.2. The Learned DR vehemently supported the order of the Learned AO. In response to this, the Learned AR argued that the balance of debtors are submitted to the bank along with the stock statements to review the drawing power limits in the cash credit facility based on unaudited figures within 20 days from the end of the previous year. After completion of audit, it is quite natural that the debtors balances would undergo minor changes due to reconciliation and rectification entries passed pursuant to statutory audit. Accordingly the difference of Rs. 1,71,508/- arose. He further argued that there is no provision in the Act to bring to tax the difference of Rs. 1,71,508/- and prayed for deletion of the same.

5.3. We have heard the rival submissions. We find that the stock statements and debtors balances were submitted to the bank based on unaudited figures in order to 8 M/s. Bharat hi-Tech (Cement) Pvt. Ltd review the situation of availability of drawing power in cash credit facility availed from the bank by the assessee. We agree to the fact that the debtors balances are bound to undergo changes pursuant to the statutory audit conducted and the list of balances of debtors are not disputed by the revenue. If there is any doubt, the Learned AO could have obtained direct information from the concerned debtors u/s 133(6) or any other means provided in the Act. We hold that there is no scope for making this addition of Rs. 1,71,508/- in the facts of the case and hence we find no infirmity in the order of the Learned CITA in this regard. Accordingly, the ground no. 4 raised by the revenue is dismissed.

6.1. The brief facts of this issue is that the assessee was in receipt of share application monies during the asst year under appeal from M/s Reshman Finvest Pvt Ltd to the tune of Rs. 1,50,00,000/- and M/s Vairavi Electricals Pvt. Ltd to the tune of Rs. 25,00,000/-. The Learned AO examined the veracity of the same in the context of section 68 of the Act. In reply to show cause notice of the Learned AO, the assessee submitted the name of the share applicants, their address and their balance sheets for the relevant period. The assessee tried to explain from the balance sheets of share applicants that since their net worth is several times more than the amounts invested in the assessee company, the sources for investment have been proved beyond doubt. The Learned AO however observed that from the loans and advances column in the balance sheets of share applicants that share application money advanced to assessee is not reflected. The Learned AO recorded a finding that the copy of bank account had not been filed before him by the assessee and accordingly felt that the genuineness of transaction and creditworthiness of the parties are not proved and accordingly treated the receipt of share application monies as unexplained cash credit u/s 68 of the Act.

9 M/s. Bharat hi-Tech (Cement) Pvt. Ltd On first appeal, the Learned CIT(A) held that since the details regarding the share applicants , their balance sheets were submitted by the assessee before the Learned AO and payments were made by the share applicants by cheques to the assessee, there is no scope for invoking the provisions of section 68 of the Act and accordingly deleted the addition. Aggrieved, the revenue is in appeal before us on the following ground:- (v) That the Ld.CIT(A) has erred in deleting the addition made by the AO under the head Unexplained share application mnoney of Rs. 1,75,00,000/- despite of material facts and circumstantial evidence brought by the AO on the assessment records.

6.2. The Learned DR vehemently supported the order of the Learned AO. In response to this, the Learned AR argued that all the details of share applicants together with their details, addresses, PAN of share applicants, income tax particulars of share applicants, balance sheets and their bank statements were filed before the Learned AO and it is incorrect on the part of the Learned AO to state that bank statements have not been filed by assessee. He argued that the net worth of M/s Rashman Finvest Pvt Ltd and M/s Vairavi Electricals Pvt. Ltd for the year ending 31.3.2008 is much more than amounts advanced by them as share application money in assessee company and hence creditworthiness of the share applicants is proved beyond doubt. He accordingly prayed that the three ingredients namely identity of creditor, genuineness of transaction and creditworthiness of creditors are proved beyond doubt and hence there is no need to treat the share application money as unexplained.

6.3. We have heard the rival submissions and perused the materials available on record. We find from the paper book of the assessee that the entire details of the share applicants comprising of their addresses, their balance sheets and the relevant page of their bank statements are available on records. We find from the said bank statements of share applicants, the immediate source of credit appears to be some cheque realizations and not cash deposits. We also find from the break up of loans and advances given by the share applicants, the assessee’s name is reflected which is 10 M/s. Bharat hi-Tech (Cement) Pvt. Ltd evident from the ledger copy of “advance for share” filed in the paper book. Since the Learned AO had raised a preliminary objection that the bank statements and the break up details of loans and advances were not produced before him as claimed by the assessee, we deem it fit and appropriate, in the interest of justice and fairplay, to set aside this issue to the file of the Learned AO to decide this issue afresh in accordance with law after going through all the documents available on record. The assessee is given liberty to file fresh evidences and documents in support of its contentions before the Learned AO. Accordingly, the ground no. 5 raised by the revenue is allowed for statistical purposes.

7.1. The brief facts of this issue is that the Learned AO during the course of assessment proceedings called for the details of purchases from the assessee which were duly submitted by the assessee. From the said details, the Learned AO resorted to issue notices u/s 133(6) of the Act for several parties. The Learned AO observed that one of the letter issued to M/s Shakti Trading Company returned unserved with postal remarks ‘no such firm on this address’. Accordingly the Learned AO treated the purchases made from that party to the tune of Rs. 19,00,493/- as bogus purchases and disallowed the same in the assessment. On first appeal, the Learned CIT(A) deleted the addition. Aggrieved, the revenue is in appeal before us on the following ground:-

(vi) That the Ld.CIT(A) has erred in deleting the addition made by the AO under the head bogus purchase of Rs. 19,00,493/- despite of material facts and circumstantial evidence brought by the AO on the assessment records.

11 M/s. Bharat hi-Tech (Cement) Pvt. Ltd 7.2. The Learned DR argued that since the notice u/s 133(6) of the Act could not be served on the address of Shakti Trading Company as provided by the assessee, the Learned AO had clearly discharged his duty for verification of the subject mentioned creditor and accordingly supported the order of the Learned AO. In response to this, the Learned AR argued that admittedly the purchases of slag (raw material for manufacture of cement) were made from the said supplier M/s Shakti Trading Company by the assessee and payments thereon are made by account payee cheques to the supplier. He argued that the entire ledger account of the supplier was furnished together with the name and address of the supplier before the Learned AO. He argued that the Learned AO had not recorded any adverse finding with regard to the account payee cheque payment made to the concerned supplier that it is not meant for this supplier payment. In other words, he argued that the payment to supplier has been accepted as genuine by the Learned AO. He further argued that the proprietor of the said concern had expired and pursuant to his death, the concern is closed and that is the reason why the notice u/s 133(6) of the Act could not be served by the Learned AO. In these circumstances, he prayed for confirmation of the order of the Learned CIT(A).

7.3. We have heard the rival submissions and perused the materials available on record. We find from the paper book that the entire ledger account of the supplier was provided before the Learned AO. We find that M/s Shakti Trading Company (supplier) is registered under sales tax laws vide registration number JST No. JR - 3495(C ) LEF – 23.9.2K ; CST No. 19751387254 and TIN No. 19751428091. We are in agreement with the Learned AR that the purchases made from this party are forming part of sales tax records and stock register. It is not the case of the Learned AO that the concerned supplier had not supplied any goods to the assessee. This is evident from one of the sample invoices submitted by the assessee before the Learned AO which proved that the goods had indeed moved from supplier to the assessee. Moreover, what is purchased by the assessee is the raw material without which , it

12 M/s. Bharat hi-Tech (Cement) Pvt. Ltd could not have manufactured the finished product i.e cement. Admittedly the cement manufactured has been sold and the proceeds thereon is credited to profit and loss account. We find that the payment for purchases have been made by account payee cheques which fact has been accepted as genuine by the Learned AO. We also find that the assessee had given reasonable explanation before the lower authorities that the proprietor of Shakti Trading Company had expired and their business is closed in the last known address with the assessee and no subsequent transactions were made with the said supplier. We find that the Learned AO had treated this purchase as bogus only on the limited ground that his notice u/s 133(6) of the Act could not be served on the supplier in the address given by the assessee. In our opinion, this alone cannot be the deciding factor for treating the purchases as bogus. Nothing prevented the Learned AO from making the verification from the bankers of the assessee as to whether the payments made by the assessee through account payee cheques had indeed been credited only to the account of the supplier or not. We find that the payments made to the supplier has been accepted as genuine by the Learned AO. Then the scope for disputing the purchases made from supplier is lost. Hence we don’t find any infirmity in the order of the Learned CITA in this regard . Accordingly, the ground no. 6 raised by the revenue is dismissed.

THIS ORDER IS PRONOUNCED IN OPEN COURT ON 6 / 1 /2016