Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DIVISION BENCH ‘A’, CHANDIGARH
Before: MS. DIVA SINGH & MS. ANNAPURNA GUPTA
PER DIVA SINGH
The present appeal has been filed by the assessee assailing the correctness of the order dated 28.10.2016 of CIT(A)-5 Ludhiana pertaining to 2012-13 assessment year on the following grounds : 1. That the order of the learned C.I.T..(A) is against the facts of the case and is bad in law. 2. That on the facts & circumstances of the case, the learned C.1.T.(A) has erred in upholding the rejection of books of accounts on the basis of excess stock of Moulds & Rolls found during the course of search. 3. That on the facts & Circumstances of the case, the learned C.I.T(A) has erred in not adjudicating the ground No.3 raised by the assessee resulting in erroneous and perverse finding with regard to ground No.4 taken by the appellant. 4. That on the facts & circumstances of the case, the ld. CIT(A) has erred in : a)that the assessee has not challenged the adoption of 7.63% burning Loss by the A.O. for the Pre-search period ignoring the ground No 3. raised before him challenging the adoption of 7.63% burning loss for the year b) confirming the addition of Rs. 2,40,60,812/- on account of excess burning loss without considering the ground No. 3 raised before him. 5.That on the facts and circumstances of the case the CIT(A) has erred in allowing extra burning loss suffered by the assessee due to inferior and rusty material Applied by foreign suppliers only to the extent of claim of Rs.40,01,684/- received by the assessee ignoring the quantity involved and extra burning loss suffered by the assessee, 6. That the learned A.O. has erred in comparing the burning loss @ 7.63% of A.Y. 2011-12 without considering the burning loss of 8.00% and 8.80% for A.Y. 2008-09 and 2009-10 respectively.
ITA- 74/CHD/2017 A.Y. 2012-13 Page 2 of 22
That on the facts & circumstances of the case, the learned C.I.T.(A) has erred in confirming the disallowance of Rs. 2,91,266/-under the head Office Expenses account. 8. That on the facts & circumstances of the case, the learned C.I.T.(A) has erred in confirming the disallowance of Rs. 55,122/- under the head Selling Expenses. 9. That in spite of complete evidence led by the appellant in support of the fact that the respective assets were put to use by the appellant before 30.09.2011 i.e. for a period of more than 180 days, the learned CIT (A) has erred in sustaining disallowance of Rs.9,08,176/-. Out of deprecation and consequent additional depreciation on the same. 2. The ld. AR inviting attention to the assessment order submitted that the assessee in the facts of the present case is engaged in manufacturing of steel billets, carbon and alloy steels, engineering castings, hot rolled strips/sections and ERW galvanized & black tubes/pipes. It was his submission that search & seizure operation was conducted upon the assessee u/s 132 on 14.07.2011 and the assessee in the course of the search surrendered and also abided by the surrender of Rs. 4.75 Cr. by paying due taxes etc. Despite this, the AO in the course of the assessment proceedings rejected the books of account of the assessee and made additions estimating the burning loss. These actions, it was submitted have been challenged in the present proceedings vide ground No. 2. Vide ground No. 3 to 6, the assessee, it was submitted, has assailed the addition made by the AO and sustained by the CIT(A) estimating the burning loss @ 7.63% as opposed to 8.28% claimed by the assessee. Apart from that, it was submitted that additions have also been arbitrarily made by the AO and sustained by the CIT(A) as Office Expenses and selling expenses disallowances. These additions, it was submitted, have been challenged vide ground Nos. 7 & 8 in the present proceedings. Over and above this, addition has also been made on the grounds of excess depreciation and against the part relief granted by the CIT(A), the assessee is in appeal before the ITAT. The only remaining issue thereafter is disallowance sustained by the CIT(A) which is agitated vide ground No. 9 in the present proceedings. 3. Having summarized the grounds, the ld. AR inviting attention to the written submissions extracted in the orders itself first elaborated and referred to the arguments advanced before the Tax Authorities which highlight the past history of the assessee as the claim of burning loss and the facts which led to the variations. The past history placed on record by the assessee and referred at page 4 of the impugned order, it
ITA- 74/CHD/2017 A.Y. 2012-13 Page 3 of 22
was submitted would show that the burning loss was 8.53% and it was higher when compared to 7.63% in the immediately preceding assessment year. 4. In the said background addressing the first issue in the present appeal, rejection of books of account of the assessee was assailed. The specific reasoning prevailing with the AO, it was submitted, is available at page 4 and 5 para 6 of the assessment order. Carrying us through the specific reasoning of the AO which has been sustained in appeal by the CIT(A) at page 4.2, it was submitted that the rejection of books of account has been wrongly upheld. It was submitted by the ld. AR that the books of account have been rejected by the tax authorities on an incorrect appreciation of facts. Carrying us through the specific reasoning, it was his submission that page 1 of the assessment order would show that the assessee is not into manufacturing of moulds and rolls as has been wrongly understood by the AO. It was submitted that these are consumables items of the assessee. It was also his submission that never in the past, books of account of the assessee have been rejected. On query, it was submitted that in the past years also, the book results of the assessee have never been upset. Accordingly, relying upon CIT Vs Ceramic Industries 396 ITR 50 (Raj) and CIT vs Om Overseas (2010) 315 ITR 185 (P&H) it was his submission that the book results of the assessee on facts could not have been rejected. 5. The ld. CIT-DR Shri Ashish Gupta heavily relying upon the consistent orders of the authorities below conceding the issue submitted that even not withstanding the fact that the rolls and moulds were not manufactured by the assessee and were in-fact consumables for the assessee, the fact remains that the book results of the assessee cannot be relied upon. Para 6 of the Assessment order was heavily relied upon. Accordingly, it was his submission that the rejection in the peculiar facts and circumstances of the present case was justified. The fact that the assessee has made surrender itself it was argued, supports the view. 6. We have heard the rival submissions and perused the material on record. It is seen that the specific reasoning which prevailed with the AO for rejecting the books of account, has been set out in para 6 of his order on which heavy reliance has been placed by the Revenue. For ready reference, same is reproduced hereunder :
ITA- 74/CHD/2017 A.Y. 2012-13 Page 4 of 22
During the course of search it was found that there was discrepancy in the stock of rolls and moulds as very much evident from the inventory prepared during the time of search aanexed with the Panchnama . According to the inventory, the stock of the rolls found in the business premise of M/s Bhawani Industries Ltd, was to the tune of 548 metric ton valued at Rs. 3,84,31,240/- against the stock as per books of Rs. 10,09,835/- resulting into excess stock of rolls to Rs. 3,74,21,405/-, Similarly, it was found that the stock of the moulds found in the business premise of M/s Bhawani Industries Ltd. was to the tune of 1270.300 metric ton valued at Rs. 4,44,60,500/- against the stock as per books of Rs. 1,97,14,625/- resulting into excess stock of moulds to Rs. 2,47,45,875/-. The above mentioned stock difference clearly shows that there is huge variation in the stock as per books of account and the stock actually found during the search and in light of this finding the books of accounts produced by the assessee and the book results are not reliable and are therefore, likely to be rejected. The assessee vide order sheet entry dated 14.01.2014 was confronted regarding the same which is as under - " Sh. Rajiv Datta, C.A attended and filed a written submission. He is required to explain that why the books of accounts of the company should not be rejected in order to the excess stock found against moulds and rolls as discussed, during the search. This stock of moulds and rolls found ( as per the inventory placed on Panchnama) being actual stock as against the stock mentioned in the books, could not be tallied. There is a great difference in the stock as discussed above and it is not possible with out misappropriation of trade results and accounts. So explain the same. The assessee vide his reply dated 17.01.2014 has given the explanation regarding the same which runs as under: Rejection of books of account The assessee has maintained complete books of account alongwith quantitative records. No fault has been found in the production records maintained by the assessee in respect of goods produced and traded. All the purchases and sales are vouched and duly verifiable. There is not a single instance of any under invoicing or over invoicing. The assessee has maintained complete excise records as prescribed and no fault has been found in these records. In view of this the books maintained in regular course of business cannot be rejected. The submission of the assessee has been considered and it is my firm finding that this excess stock of moulds and rolls found during the search cannot be of such a huge and excessive quantity without misappropriation of trade results. The assessee's submission that he has maintained complete excise records does not substantiate or justify this excess stock found during the search proceedings as he has not explained the manner in which this excess stock was manufactured and in light of this finding the books of accounts produced by the assessee and the book results are not reliable and are therefore, rejected.
6.1 It is worth bringing out that the assessee's submissions qua the issue have been set out at page 3 para 4 by the CIT(A). These have been rejected by the CIT(A) vide para 4.2 which finding is under challenge in the present proceedings. For ready reference, the said extract is reproduced hereunder :
“4.2 Ground of Appeal No.2 pertains to rejection of books of accounts on the basis of excess stock of Rolls and Moulds etc., found during the course of search. The AO has observed that such excess stock of Mould & Roll in huge quantity, found during the search indicates misappropriation of trading result. The explanation of the assessee that he is maintaining complete excise record was not found convincing as the assessee could not explain the manner in which the excess stock found during the course of search was manufactured. The AO was of the view that in such circumstances the books of accounts produced are not also the AR During the appellate proceedings AR repeated the same argument as was taken before the AO. However, the AR has not been
ITA- 74/CHD/2017 A.Y. 2012-13 Page 5 of 22
able to rebut the observation of the AO as to how the excess stock was manufactured if the books were maintained meticulously. In this case it is a fact that during the course of search excess stock was found which leads to the conclusion that the book results are not as per the actual position of the stock/production and hence, the same are not reliable. The action of the AO is therefore, upheld. Accordingly, this ground of appeal is dismissed. (emphasis supplied) 6.2. We find on going through the material available on record and the specific reasoning of the Tax Authorities that in the facts of the present there is no merit in the assessee's grounds. The decisions relied upon by the assessee have been taken into consideration and found to be inapplicable as they were in the context where the AO failed to point out defects in the books of account of the assessee. In the facts of the present case the assessee has failed to explain the huge variation in the stock pointed out at the time of the search vis-à-vis its books of account. Thus, in the peculiar facts and circumstances of the present case, the Revenue has successfully demonstrated that the rejection of books of account was justified and warranted. The decisions relied upon by the ld. AR, we find are not of much help. It is seen that whereas in the case of CIT Vs Ceramic Industries (cited supra), the book results of the assessee were rejected by the AO on the grounds that there was a variation in the various months in the input/output ratio and the yield and the GP was much less when compared with its sister concern M/s Bharat Potteries. Their Lordships upheld the order of the ITAT which had held that the rejection of books of account was not maintainable on account of the various reasons which included that no defects in the purchases, sales, opening stock and closing stock had been referred to by the AO and the report of the Khurja for the specific Industry was relied upon for the wastage. In the facts of the present case, the assessee has not been able to address the huge variation in the stock found at the time of the search vis-à-vis its books and the assessee has surrendered a specific amount on account of discrepancies noticed at the time of the search. It is also seen that the reliance placed upon the decision in the case of CIT Vs Home Overseas (cited supra) is also misplaced as therein, no defects were pointed out by the AO which was the consistent finding of fact available before the Hon'ble High Court, in the orders of the CIT(A) as well as the ITAT. In the facts of the present case, as noted, the AO has successfully demonstrated which finding of fact has not been rebutted that there were specific variations in the book
ITA- 74/CHD/2017 A.Y. 2012-13 Page 6 of 22
results of the assessee and the stock found at the time of the search which despite opportunities, the assessee could not explain. Accordingly, we are of the view that ground No. 2 of the assessee has to be rejected.
The next issue agitated by the assessee in the present proceedings is the part relief granted by the CIT(A) in para 4.3 of his order. The record shows that the AO in the course of the assessment proceedings confronted the assessee with the fact that from April to July i.e. upto the date of the search the burning loss claim of the assessee was to the extent of 9.01% whereas from August to March, the burning loss was 8.28%. Taking the average burning loss of 7.63%, which had been disclosed by the assessee in the immediately proceeding assessment year, the assessee was required to explain why burning loss should not be restricted to 7.65%.
7.1 It is seen that the AO considering the submissions of the assessee proceeded to make the addition under challenge vide para 7 holding as under : 7. After considering the submissions made by the assessee in this behalf and related queries raised time to time, the submissions and explanations given by the assessee . The following findings are being drawn: i) Suppressed production on a/c of Excess burning loss claimed : It has been observed that the assessee has shown inflated burning loss during the year in question. It is further observed that the assessee has claimed burning loss of 9.01% from April to July i.e. up to the month of date of search and 8.28% from August of March 2012 as against the average burning loss of 7,63% in the immediate preceding A.Y. 2011-12. The assessee was confronted regarding the same vide order sheet entry dated 14.01.2014 which runs as under :. The submission of the assessee dated I7,01.2014 regarding this issue is as under : "Why burning loss be not restricted to 7.65% The increase in burning loss during the whole year is in the normal course of bus/ness. The burning loss during the last year was 7.63%. The higher burning loss was due to poor quality of scrap The burning loss during the post search period was also affected by the poor quality of imported scrap". This is evident from the fact that the assessee received claims from foreign suppliers during the post search period due to poor quality of .scrap amounting to Rs 40,01,684. This in terms of quantity of scarp was for about 200 M. T. The foreign suppliers did not gave the full claim and in actual the loss due to Rust & Dust etc was much more than 200 M. T which in fact was double the quantity i.e almost 400 M, T It is further bought to your honour's kind notice that the burning loss varies from year to year and depends on the type of raw material. There cannot be consistent burning loss as the raw material is not the same in a/I the years sometime the quantity of HMS is more which results in lower burning loss and sometimes the quantity of light and shredded scrap is more where the burning loss goes up. The lighter scrap is cheaper than HMS. The overall profit is not affected as higher burning loss in terms of value cover the difference between the cost of HMS which is costly and light scrap. We draw your honour's attention to the fact that the scrap's basic rate vanes between Rs 19,659 PMT, Rs 20,219 PMT, Rs 23,254 PMT, Rs 24,895 PMT and even Rs 27,037 PMT. The higher burning loss in light scrap is set off by the value and net realization is not affected by the rate of scrap inspite of higher burning loss. It will
ITA- 74/CHD/2017 A.Y. 2012-13 Page 7 of 22
not be out of place to mention that inspite of the above higher burning loss the G.P was 9.81%, just a fall of 0.10% from last year. " There is no cause to allow such a high burning loss during the year under consideration as claimed by the assessee as the manufacturing conditions were almost the same as in the previous year .I, therefore, find it quite reasonable to apply the same rate of 7,63% on a/c of burning loss as taken by the assessee during the immediate preceding year and calculate the unaccounted production on a/c of this inflated excess burning loss. Further, I find it quite reasonable to split this burning loss in to two segments i.e. pre-search period and post- search period. Accordingly, the working of unaccounted production because of this excess claim of burning loss and its treatment thereof is worked as under: a) Pre-search period It has been observed that a total material of 33755.835 MT. has been consumed by the assessee company for production upto June 2011 resulting a total burning loss of 2892.950 MT @ 8.57 % which is higher by 0.94 % ( 8.57-7.63 ) applying the rate of burning loss of the previous year. The extra production on this account is worked out to be 317.304 MT upto June, 2011. Further quantity of 10622.625 MT has been released during July, 2.011 giving a total production of 8911.985 + 604.310 MT totaling to 9516.095 MT causing a burning loss of 1106.530 MT for the whole month that comes to 10.42 %. The search was commenced on 13.07.2011 as such the period of first twelve days of July, 2011 shall be taken for pre-search calculations of the burning loss on average basis. The calculation of excess burning loss taking the burning loss at 7.63% as discussed above against above mentioned 10.42% for the month of July comes to 2.79%(10.42- 7.63) i.e.296.371 MT for whole of July. As such taking the average, the burning loss upto 12, July comes to 114.724 MT (296.371MTx12/31).The calculations of the above discussion run as under: Excess Burning loss as calculated for April to June, 2011 317.304 MT Burning loss as calculated for July, 2011 296.371 MT Burning loss upto from 01.07.2011 to 12.07.2011 114.724 MT (Pre-search date) Total pre-search burning loss 432.028 MT It has further been observed that the average sale rate of ingots is Rs. 36200.05 for the pre-search period year as mentioned by the assessee itself vide his submission dated 05.01.2014 and as such the cost of excessive the excessive production on account of the discussed burning loss shown comes to the tune of Rs. 1,56,39,413/-. The above was confronted to the assessee and as per the submission of the assessee, the mentioned excess production on account of discussed burning loss of Rs. 1,56,39,413/- was utilized against investment in factory shed and building to the tune of Rs. 135.12 lacs and the remaining amount is also covered in the surrendered income for the year of Rs. 4.75 crores which is being considered. Penalty to be initiated u/s 271AAA of the Income Tax Act, 1961 separately, b) Post search period The search was conducted at the premise of the assessee on 13.07.2011. The issue of burning loss is to be considered from 13.07.2011 to 31.03.2012, the post search period which is calculated as under: From 13.07.2011 to 31.07.2011 Further quantity of 10622.625 MT has been released during July, 2.011 giving a tota production of 8911.985 + 604.310 MT totaling to 9516.095 MT causing a burning loss of 1106.530 MT for the whole month that comes to 10.42 %. The search was commenced on 13.07.2011 as such the period of last Nineteen days of July, 2011 shall be taken for post-search calculations of the burning loss on average basis. The calculation of excess burning loss taking the burning loss at 7.63% as discussed above against above mentioned 10.42% for the month of July comes to 2,79%(10.42 - 7.63) i.e. 296.371 MT for whole of July. As such taking the average, the burning loss from 13th of July to 31SI of July comes to 181.646 MT(296.37MT x 19/31). From 01.08.2011 to 31.03.2012 It has further been observed that a total material of 81868.73 MT. has been consumed by the assessee company for production from August 2011 to
ITA- 74/CHD/2017 A.Y. 2012-13 Page 8 of 22
March 2012 resulting a higher burning loss of 532.14 MT @ 8.28% which is higher by 0.65 % ( 8.28 -7.63 ) applying the rate of burning loss of the previous year of 7.63%. The extra production on this account is worked out to be 532.14 MT from 01.08.2011 to 31.03.2012. The calculations of the above discussion run as under: Excess Burning loss as calculated from 13.07.2011 to 31.07.2011 181.646 MT Excess Burning loss as calculated from August, 2011 To March, 2012 532.140 MT Total post-search burning loss 713.786 MT It has further been observed that the average sale rate of ingots is Rs. 39,315/- for the post search period as mentioned by the assessee itself through his submission dated 05.01.2014 and as such the excessive burning loss shown on a/c of above comes to the tune of Rs. 2,80,62,496/- (713.786 MT x 39,315/-). As such this extra amount claimed on account of excessive burning loss, and this is held that the excess production made on account of this excessive claim of burning loss as discussed above is to be added to the income of the assessee being income on account of excess production and sale thereof (the element of excise duty has not been considered while calculating the rate of sale as this is being considered as sale out of the books on which no excise duty is verifiable). Since, this burning loss belongs to the period after search- the same cannot be considered to be the part of the surrendered income and as such it is quite justified to add this amount of Rs, 2,80,62,496/- to the income of the assessee for the year under consideration. Penalty proceedings u/s 271AAA are initiated separately. ( Addition Rs. 2,80,62,496/-)
The assessee carried the issue in appeal before the CIT(A). Considering the submissions, the CIT(A) granted part relief to the assessee holding as under:
“4.3 Grounds of Appeal Nos.3 & 4 pertain to addition of Rs. 2,80,62,49s/- on account of excessive burning loss. The AO has observed that the assessee dammed burning loss @ 9.01% from April to July, 2011 i.e. up to the date of search and @ 8.28 from August, 2011 to March, 2012 as against the average burning loss of 7.63% for the immediate proceeding F.Y. 2010-11 (A.Y. 2011-12). The AO mentions that the assessee was confronted with the same vide order sheet entry dated 14.01.2014 and the assessee in his reply submitted that the burning loss is effected by poor quality of imported scrap. It was further stated that burning loss varies from year to year and depend upon the type of Raw Material used. Accordingly, it was argued that it cannot be same for all the years and if the quality of scrap is good (i.e. HMS) this results in lower burning loss and in case of light and shredded scrap burning loss goes up but the cost of light scrap is less than good quality HMS scrap. The assessee submitted that the higher burning loss in light scrap is set off by the value and net realization is not effected by low rate of scrap inspite of higher burning. The explanation of the assessee was not found convincing by the AO and he proceeded to estimate the suppressed production for pre-search and post-search period on account of excess claim of burning loss. The total pre-search burning loss was calculated at 432.028 Metric Ton (MT) and by applying ths-swerage sale rate of Ingots at Rs.36200.05 for pre-search period, ,1-M'value^fxthe suppressed production was calculated at Rs. 1,56,39,413/-. This / was allowed to be set off against investment in factory shed and building to the tune of Rs.135.12 lac and balance against surrendered income of Rs.4.75 crore. Similarly the/suppression of production, for post-search period, on account of excessive burning loss claimed by the assessee was calculated at 713.786 Metric Ton (MT). After applying the average sale rate of Ingots at Rs. 39315/- for post-search period the value of suppressed production was calculated at Rs. 2,80,62,496/-. This was not considered for set off against the surrendered income which pertained to the period up to the date
ITA- 74/CHD/2017 A.Y. 2012-13 Page 9 of 22
of search. Therefore, the AO made addition of Rs. 2,80,62,496/- on account of excessive burning loss claimed by the assessee (which resulted in suppression of production). „ During the appellate proceedings, the AR repeated the same argument that burning loss was on account of poor quality of imported scrap which lots of dusts and impurities besides being rusty. It was submitted that assessee filed claim covering 3883.497 MT of scrap against which claim of Rs.40,07,684/- was received. It was also agreed that light scrap has higher burning loss as compare to heavy melting scrap but due to its low cost the ultimate effect on G.P is negligible. The AR submitted that the GP has gone down from 9.91% to 9.81% giving a marginal fall of 0.10% only. It was also argued that in the years burning loss was up to 8% and 8.8% also which were duly brought to the notice of the AO. The AR argued that the AO has not brought any evidence on record to justify the adoption of 7.67% burning loss except that it was last year's result and the explanation filed by the assessee, justifying the increase in loss during the year has not been rebutted. The AR submitted that the assessee has maintained complete stock record, raw material production and sales and no fault has been found. As per AR it was a fall in Net Profit which led to addition on account of burning loss ignoring the explanation and evidence filed by the assessee. The facts of the case, the order passed by the A.O. and the arguments of the AR during the appellate proceedings have been considered. It is seen that the AO has separately calculated the suppression in production on account of extra burning loss claimed by the assessee for both pre and post search periods and made separate calculation of suppressed income for pre-search and post-search period. The conclusions of the AO for pre-search period have not been challenged by the appellant although the basis adopted by the AO for calculating the pre-search and post-search suppressed production are the same. By not challenging the AO action for pre-search period the appellant in a way has accepted/validated the method adopted by the AO. The same method has been extended to the post-search period also, therefore the calculation for post-search period cannot be judged from a different yard sticks. Hence, the calculations of suppressed sales by the AO on account of excess claim of burning loss are found acceptable for post-search period also. However, there is merit in the arguments of the AR that the assessee has received compensation of Rs. 40,01,684/- from different foreign buyers which have already been credited in the purchase account and therefore, the assessee is entitled for relief to the extent of this amount out of the total addition of Rs. 2,80,62,496/-. Accordingly, the addition to the extent of 0,60,812/- is confirmed and the appellant gets a relief of Rs. 2,40,01,684/-. Accordingly, these grounds of appeal are partly allowed.” (emphasis supplied)
Aggrieved by this the assessee is in appeal before the ITAT.
The ld. AR inviting attention to the detailed submissions advanced before the AO and the CIT(A) submitted that ignoring the relevant facts the additions have been made and partly sustained by the CIT(A). It was his submission that in the immediately preceding assessment year the assessee no doubt had shown a less burning loss which was 7.63% as compared to the year under consideration. However, in Assessment Year 2009-10, it was highlighted that the burning loss was as high as 8.80% which had been allowed and accepted. It was his submission that the detailed submissions advanced before the CIT(A) though have been extracted in the order, however, these have not been considered. Referring to the chart extracted at page 4 of the impugned order, it was
ITA- 74/CHD/2017 A.Y. 2012-13 Page 10 of 22
highlighted that the burning loss in Asstt. Year 2007-08 was 7.31% and it increased to 8% in Asstt. Year 2008-09 and in Asstt. Year 2009-10, it increased still more to 8.80% and, thereafter, it declined to 7.88% to further decline to 7.63% in Asstt. Year 2010-11 and Asstt. Year 2011-12 respectively. Thus, it was submitted that the change or variation of 8.53% in the year under consideration has been shown exactly as what it was. It was his submission that the assessee has invited attention of the CIT(A) to the submissions advanced before the AO also that the burning loss variation is on account of the quality of scrap and is entirely dependent upon the ingots and scrap utilized which is necessarily to be melted and subsequently re-rolled. It was submitted that all along, it has been argued that the assessee uses all types of scrap like heavy metallic scrap, shredded scrap, light scrap or sponge. The scrap is mainly stored in the open ground in big heaps and contains rusted material along with dust. It was submitted that at the time of procurement the quality of the scrap is tested thereafter, it is dumped along with the other scrap and is utilized for burning/melting and thereafter, it is not possible to identify which type of scrap was picked up from the open ground where it is dumped. For ready reference these submissions extracted at pages 3 to 8 are extracted hereunder:
“4. Ground No 3& 4 : Both the grounds relate to the addition of Rs.2,80,02,496/- onaccount of excess burning loss up to june,2011 claimed by the assessee. The facts of the case are that during the year under assessment the ] burning loss up June ,2011 was 9.05% and from July to March 2011 was 8.28% During the course of assessment proceedings the assessee was asked to explain the high burning loss during the year was asked to explain and why it should not be restricted to 7.63% as in the immediately preceding year. The learned A.O. considered the pre-search and post search periods separately for making the said addition. During the assessment proceedings, it was explained that the burning loss mainly depends upon the quality of raw material. The burning loss occurs during melting of Scrap while making the Ingots and also in the re-rolling in the process heating the Raw Material and subsequent re-rolling . The burning loss in the past has been accepted as under:-
A.Y. Material Production End Burning % End % Burning Consumed (M.T.) Cutting Loss Cutting Loss ------- -------------- ------------- ------------ ---------- --------- (M.T.) -------- 2007-08 96206.42 86929.31 2243.56 3033.56 2.33 7.31 2008-09 103819.28 91791.22 3726.46 8301.60 3.51 8.00 2009-10 94915.22 81429.29 5131.22 8354.72 5.41 S'3.80 2010-11 109854.34 95437.79 5752.32 8660.64 5.24 T758 2011-12 134480.05 117120.38 7103.75 10256.82 5.28 7.63 2012-13 126247.79 107657.17 7812.81 10777.22 6.17 8.53
ITA- 74/CHD/2017 A.Y. 2012-13 Page 11 of 22
The Id. A.O. compared the Burning loss during the year under appeal with last year i.e. A.Y.2011-12 ignoring the fact that it has also been accepted at 8.00% in the A.Y.2008-08 and 8.80% in the Asstt.Year 2009-10 while framing the assessment u/s 53A.A11 the above facts were brought to the notice of the learned A.O. During the assessment proceedings the assessee was asked to explain the reasons vide letter, copies enclosed. . The part of the same incorporated in Para 7 on Page 5 & 6 of the assessment order are reproduced below- “The increase in burning loss during the whole year the relevant year is in the normal course of business . The burning loss during the last year was 7.63%. The higher burning loss was due to poor quality of scrap. The burning loss during the post search period was also affected by the poor quality of Imported scrap. This is evident from the fact that the assessee received claims from foreign suppliers during the post search period due to poor quality of scrap amounting to Rs. 40,01,684/-. This in terms of quantity of scrap was for about 200 M.T.. The foreign suppliers did not gave the full claim and in actual the loss due to Rust & Dust was much more than 200 M.T. which in fact was double the quantity i.e. almost 400 M.T. It is further brought to your honour’s kind notice that the burning loss varies from year to year and depends on the type of raw material. There cannot be consistent burning loss as the raw material is not the same in all the years sometime the quantity of HMS is more which results in lower burning loss and sometimes the quantity of light and shredded scrap is more where the burning loss goes up. The lighter scrap is cheaper than HMS. The overall Profit is not affected the cost of HMS which is costly than light scrap. We draw your honour’s attention to the fact that the scrap base rate varies between Rs. 19,659/- PMT, Rs.20,219/-PMT. , Rs. 23,254/- PMT ,Rs. 24,895/-PMT and even Rs.27,037/- PMT. The higher burning Loss in light scrap is set off by the value and net realization is not affected by the rate of Scrap inspite of higher burning loss. It will not be out of place to mention that in spite of the above higher burning loss the G.P. was 9.81% just a fall of @10% from last year.”
The learned A.O. observed that there is no cause to allow such a huge burning loss , ignoring the fact the burning loss during A.Y. 2009-10 was accepted @ 8.80%. Thus restricted the burning loss to 7.63% as in A.Y. 2011-12.without rebuting the explanations of the assessee. The learned A.O. divided the production results into Pre-search and Post Search periods. The addition worked out in the Pre-search period has been telescoped against the surrender and no addition has been made. But the addition has been made on the bases of production in the Post search Period as worked out at page 6 of the assessment order after estimating the burning loss separately for the pre-search period and post search period. The burning loss for the post search periods has been restricted to 7.63% against 8.28% after taking into account the burning loss during 19 days in the month of July as search took place on 3.07.2011 and estimated the excess burning loss at 713.786 M.T., as per details on page 8 of the assessment order The learned A.O. alleged that 713.786 M.T. was actually the production which was sold out side the books of accounts and by applying a sale rate of Rs.37315/- has estimated the Sales out side the books and made an addition of Rs.2,80,62,496 (713.786x39315) . Your honour, the burning loss depends mainly on the quality of Scrap. The scrap is available in the market for different specification i.e Turning and Boring, Heavy Melting Scrap, Light Melting Scrap, shredded Imported Scrap, etc and local, Pig Iron Scrap. All these scraps are procured at
ITA- 74/CHD/2017 A.Y. 2012-13 Page 12 of 22
different price which is due the metallization in the scrap during the process of melting in the furnace, keeping in view cost of production per Ton in terms of value and burning loss, The metallization in the scraps ranges as under:-
Heavy Melting Scrap 94 to 95% Shredded 92 to 93% Light 90 to 90% Sponge 85 to 86%
The assessee is using all kinds of Scrap. But it is difficult to ascertain the exact quantity of each type of Scrap except for Sponge as all the Scrap procured is stored in the open ground in big heaps. The mixed Scrap is lifted from the heap for melting and it is not possible to as certain as to which, scrap as detailed above, has been used. The learned AO while framing the assessment for A.Y. 2008-09 and 2009-10 has accepted the production results where the burning loss was 8.00% and 8.80% respectively, in spite of the fact of higher burning loss as compared to earlier year i.e. 7.31% for A.Y. 2007- 08. The assessee also brought to the notice of the learned A.O. that the cost of Scrap varies from quality to quality which is mainly due to Metallization, which affect the burning loss. The cheaper the cost the higher is the burning loss and higher the cost the lower the burning loss. The cost of Scrap to the assessee after adjustment of burning loss will affect the Trading results, in case higher burning loss is claimed .But, it is not the case, The assessee further explained that during the year under assessment the quality of some consignment of Imported Scrap was very bad as it contained rusted material and dust. The assessee took the matter with the foreign supplier as he has no control over the above because neither the loading nor the quality is supervised by the assessee at the port of shipment. The quality is checked only after receipt of scrap. . The payment is made either through the L/C or buyer’s credit after shipping. The freight and customs duty is paid before clearance of the containers from the port. It is not possible to inspect the entire scrap before payment of Freight & Custom duty except for any specific container as the cost and demurrage is very high whereas in the case of local scrap , the quality is always checked before release of payment. The assessee has imported 65853.220 M.T. of Scrap . whjch is higher than last year. The assessee received a claim of Rs.40,01,684/- for inferior quality of Scrap from some of the suppliers as per details enclosed. The import from these parties were for 32.869 M.T.i.e. 49.88% The fact of claim itself speaks of the poor quality of scrap which resulted in lighter burning loss The learned A.O. has ignored the above major factor which resulted in higher burning loss during the year. It is the International law the claims blow 1% of the value are ignored. The assessee had lodged claims for more than 400 M..T. on account of quality. The claims were entertained for about 200 M.T. as is evident from the claims received at Rs. 4001684/- which where as claims in the last year were for only Rs. 3.11 lacs, was also brought to the notice of the learned .A.O. during assessment proceedings. The details of claims received ere also filed, which are enclosed, It is a fact that the claims
ITA- 74/CHD/2017 A.Y. 2012-13 Page 13 of 22
are never entertained for the full account specially where no payment is outstanding .The addition made by the learned A,0, on account of higher burning loss stands explained as above. The difference in the post search period as worked out by the Id. A.O is not based is on any evidence or finding. There was no yard stick with the learned A.O. to upheld the burning loss @7.63% as per last year only against 8.00% and Rs.8.80% in A.Y. 2008-09 & 2009-10 respectively. Had there been any attempt by the assessee to suppress the production that would have affect the G,.P. rate which came down marginally @0.10% over last year, rather this vindicates the explanation of the assessee of higher burning loss in light scrap, which is also cheaper . The assessee has to arrangement his affairs according to his business requirements and availability of scrap. Had the assessee claimed higher burning loss, there would not have been a fall of only 0.10% in G.P.rate. It is further submitted that the learned A.O. has not found any fault in the explanation of the assessee regarding the reason for increase in burning loss. There was no justification to compare only last year’s results without considering the quality of Raw material used .. The production results have been accepted for Asstt. Year 2009-10 and 09 even if we consider the results s for .AY/ 2008-09, ignoring 10 the extra loss due to inferior quality of Scrap at Rs.40.01 lacs itself cover the variation of 0.23%.(8.23(-)8.00). The variation in burning loss will effect the trading results The higher burning loss will result in lower realization But the fall in gross profit has been only 0.10% as it is 9.81% as compared to last year were 9.91%. and that too without considering the full impact of loss .sustained due to poor quality of imported scrap at Rs.40.01 lacs. This itself proves the fact that the higher burning loss was due to the quality of Scrap. It is further submitted that the G.P rates, as per details filed during assessment proceedings were as under:- AY GP Rate Turnover (crores) GP crores
2012-13 9.81% 447.75 43.93 2011-12 9.91% 408.98 40.52 2010-11 9.92% 321.97 31.92 9.05% 2009-10 326.09 39.25 2008-09 8.97% 249.25 22.56 2007-08 6.94% 227.79 15.81 2006-07 6.68% 132.49 8.84
Your honour, without admitting even if the G.P. rate of last year applied i.e.9.91%. The difference in G.P. 0.10% (9.91-9.81) as compared to last year on total turnover of Rs. 447.75 crores can result in fall in G.P. by Rs. 0.45 crore i.e. Rs. 44.79 lacs only (0.10% of 447.75) whereas .the assessee has received claims of Rs 40.01 from the supplier of Scrap , which is not the full compression of the loss., the G.P. rate would not have fallen but for quality of Imported Scrap. Hence, no addition was called for.
It is once again reitreated as under: -
ITA- 74/CHD/2017 A.Y. 2012-13 Page 14 of 22
(i) The learned A.O., has not brought any evidence on record, to justify the adoption of 7.63% burning loss except for last year’s results. (ii) The fact that during the year under the consumption of Imported Scrap and local scrap was 40.61% and 59.39% respectively as compared to last year 34.95% and 65.05% In support of higher compared to last year. Evidence Report (iii) The explanation filed by the assessee justifying the increase in burning loss has not been rebutted. (iv) The learned A.O. has not giving any finding as to why only last years burning loss has been adopted. (v) The learned A.O. has ignored the fact of claim of loss from the foreign suppliers on account of quality.. (vi) That during the course of search no evidence was found of any business outside the books (vii) That the assessee has maintained complete stock records of raw material , Production and sale and no fault has been found. viii) The unit of the assessee is under Central Excise, the production results are filed with particulars of Raw material purchased, Issued for Production, Production and wastage with the concerned Excise Department, where no fault has been found.” (emphasis supplied)
10.1 Inviting attention to para 3.1 of the impugned order, it was submitted that the CIT(A) wanted further justification which was made available and has also been extracted in the order which also it was submitted has not been considered by him. For ready reference, it is reproduced hereunder: “3.1 The AR was asked to justify the burning loss and details of claims made from the foreign suppliers. In response, the AR made following submission: “Sub:-M/s.Bhawani Industries(P) Limited,Vill.Ajnali,Mandi Gobindgarh- Asstt.Year 2012-13. PAN: AABCB5105H. With reference to the above appeal and in continuation to our earlier submissions, the assessee submit as under for your honour’s kind consideration and adjudications:- 2. The learned A.O. has not given any finding as to the reason for adopting Burning Loss of A.Y. 2011-12, where the Burning Loss during A.Y. 2008-09 @8% and even during A.Y. 2009-10 it was 8.80% being even higher than 2008-09. There was no justification to compare only with the A.Y. 2011-12. 3. The learned A.O. failed to appreciate the fact that during the year under appeal, the assessee received Imported Scrap which contained lot of dust and impurities besides being rusty. The assessee has no control over the dispatches at the port of origin as he has to depend on the foreign supplier. The assessee raised the matter with the foreign supplier on telephones and through mails after unloading the contains in the factory premises. The assessee filed claims covering 3883.497 M.T. of Scrap where there was Dust, Rust and other short comings in is excess )f 1% as no claim is
ITA- 74/CHD/2017 A.Y. 2012-13 Page 15 of 22
entertained up to 1%. The assessee received le claim out of the defective 3883.497 M.T. only for Rs. 40,07,684/-. The claims after the receipt of material are generally not entertained. Even if a claim is entertained, it is not up to 100% of loss we are enclosing herewith the details of claims and the claims received along with the copies of the mails exchanged for your honour’s kind consideration. It will be evident that M/s. PAN GLOBAL, where material involved was 950.147 M.T. a claim of Rs. 7,61,858/- was allowed but in the case of SUNDAGRO INTERNATIONAL the claim was covering 2124.58 M.T. but was allowed at Rs, 11,81,208/-. We have already submitted that due to heavy cost of litigations in International market we cannot file the case and have to content from wherever is received. The assessee did not received the entire claims as the claims depends on the will of the Supplier. The payments against the purchases are made by confirmed L/C , which is negotiated by the Seller on dispatch. The assessee cannot arrange inspection of each and every container before delivery at the port as it involves a heavy expenditure and demurrage. There is no alternative with the assessee to the Import of Scrap as local scrap is not enough to meet the requirements.. During the year due to adverse market conditions and fluctuation in the US $ rate, the assessee suffered heavy losses. The Imports of Scrap during the year increased from Rs. 108.35 crores to Rs. 146.28 crores on increase of 39%. The consumption of Imported Raw Material also went up from Rs. 111.23 crores to 145.95 crores as increase of 29.90%. The estimated loss to the assessee towards claim of defective scrap was more than 550 M.. considering, the capital of 1% claim which is not entertained. The details of claims lodged and copies of some mails in proof of claim are enclosed for your kind reference. 4.The learned A.O has kept in mind only the increase in burning loss but has failed to appreciate the fact that the lighter scrap and Sponge though cheaper but the finished goods produced from the scrap are same i.e Ingot which is also produced from heavy and imported Melting Scrap and are also sold at the same rate as that of others finish goods. The cost of Raw Material i.e. Scrap in terms of value will be the same for producing 1 M.T. of Billets or Ingots but in terms of quantity will be higher for light scrap as compared to Heavy Melting Scrap. But the light scrap has higher burning loss as compared to heavy melting scrap. The ultimate effect will be in G.P. Rate. But the G.P. rate inspite of the higher burning loss has gone down only by 0.10 % i.e from 9.91% , 9.81% as submitted in our earlier reply. The fall was marginal and was due to slow down in economy which had just begin. We have already explained that the burning loss varies from Scrap to scrap and ranges between 6% to 16% . The learned A.O. has not appreciated the entire facts and reason for increase in burning loss. The lower the cost of Scrap , the higher is the consumption and higher burning loss , the higher the cost of Scrap , the lower is the burning loss in spite of different. Burning losses the cost of metallization is the same raw material was purchased at rates ranging between Rs. 19,659/- ,2,02,19,23,254, 24,895/- and even Rs.27,037/-. All these facts were brought to the notice of the
ITA- 74/CHD/2017 A.Y. 2012-13 Page 16 of 22
learned A.O. , but these were ignored. Even the higher burning loss in the earlier years @ 8% & 8.80% was not kept in mind. 5.The learned A.O has made the addition of account of alleged higher burning loss at 713.786 M.T. , whereas about 550 M.T. stands explained due to quality of Imported Scrap, where claims were received to the tune of Rs. 47,07,684/- only. The other variation about 180 M.T. was on account of Scrap Mix. The learned A.O has failed to appreciate both the facts. We once again retreat that what ever was the burning loss variation was duly explainable and there was no cause for the learned A.O. to make such huge addition. 6. The details of amount written off Rs.55,191/- are enclosed. They all relate to Trade parties and represents amounts receivable during the course of business.” (emphasis supplied) 10.2 Attention was also invited to further clarification sought by the CIT(A) which also was addressed and has been extracted in order on which heavy reliance is being placed : “Sub:- M/s.Bhawani Industries Limited, Vill.Ajnali, Mandi Gobindgarh- Asstt.Year 2012-13. PAN: AABCB5105H. With reference to the above appeal , the assessee further submit as under for your honour’s kind consideration:-
In continuation to our submissions regarding higher Wastage and Burning loss, the details of claims raised before the foreign suppliers relating to poor quality of Scrap are as given below. The quality of Scrap was a major cause for higher loss. The details of claim filed with the foreign suppliers for material weighing 3883.497 M.T. have already been filed. The assessee has received claim only for 144.989 M.T as under for Rs. 40,01,684/-as detailed below:- Name Claimed Allowed Rate Amount (MT) (MT) Pan 950.147 14.112 17,935 239036 Global 26.780 19,523 522822 40.892 Sungro 2124.580 46.900 23453 1181208 Intl. Bargon & 225.935 5.053 23453 118408 Indica Alzarboni 204.550 42.515 27338 1162206 Indica 215.555 6.309 25828 163012 Group Al 162.730 23.545 26119 614992 Zarooni 3883.497 165.214 4001684
ITA- 74/CHD/2017 A.Y. 2012-13 Page 17 of 22
It is evident from the above that the assessee received claims only for 165.214 M.T against claims of 3883.497 M.T. of inferior and poor quality material including dust and rust and light material. All these factors affected the ultimate wastage taking a very conservative view the extra loss even @20% 971 M.T. (25% of 3883) against the allowing loss of 312 M.T. (8% of 3883) would have itself resulted in the higher wastage by 659 M.T. (971-312) without considering the other as put to use of lighter material having more loss. Your honour had the learned A.O. considered the above facts , there could not have been such addition as made by the learned A.O. Keeping in view the past history of Burning loss even up to 8.80% ,the addition made be kindly deleted.” 11. The learned CIT DR relies upon the impugned order.
We have heard the rival submissions and perused the material on record. We find on carefully going through the submissions advanced on behalf of the assessee which have been extracted in the respective orders and has been repeatedly elaborated before the CIT(A) which submissions we have extracted in the earlier part of this order, we find on going through the consistent claim that the addition made in the facts of the present case have been sustained ignoring relevant facts without caring to rebut the submissions. Nothing has been placed on record by the tax authorities to rebut the consistent argument that the burning loss variation over the years is dependent upon the quality of the raw material. We note that consistently it has been argued by way of referring to actual facts and figures to show that the quality of scraps imported in the year under consideration increased from 108.35 Cr to 146.28 Cr and the consumption of the raw material also increased. The imported scrap, it has been consistently argued was not upto the mark resulting in the assessee raising the dispute through e-mails and phones with the foreign suppliers. The assessee, as per record filed claims covering 3883.497 ton of scrap and received the claim of defect to the extent of Rs. 40 lacs odd. It has been consistently argued that the foreign suppliers do not pay 100% the claim of loss on account of low quality and the cost of litigation in the international market deterred the assessee from contesting the issues further. The fact that Rs. 40 lac odd. has been received by the assessee from the foreign suppliers due to poor quality of scrap is a matter of fact which is not disputed which has been accepted by the CIT(A) on an appreciation of facts. Further, the assessee has successfully demonstrated that whereas in the activity of melting scrap, the metallization/metal recovered from “Heavy Melting Scrap” is to the extent of 94% to 95% in the case of “Sponge” which quality-wise is very low in the spectrum, the recovery is to the extent of 85% to 86%.
ITA- 74/CHD/2017 A.Y. 2012-13 Page 18 of 22
The assessee has also consistently canvassed that the base rate of the scrap varies from Rs. 19,659/- per MT to Rs. 27,037/- per MT. The cheaper the scrap, the higher is the burning loss and the more expensive the scrap, the burning loss is low, consequently the net realization ultimately is not affected by the rate of scrap inspite of higher burning loss. It is because of this reason it has been argued that the GP rate of the assessee in the year under consideration had shown a marginal difference of 0.10%. It is noticed that in the immediately preceding assessment year, the GP rate is 9.91% and in the year under consideration, it is 9.81%. These consistent claims, facts, figures and arguments, we find, have not been rebutted by the tax authorities by any evidence or reasoning to the contrary. We find that it has further been canvassed that the scrap dumped in the open ground is picked up wherein it is not capable to identify as to which heap it has been lifted from and though the quality is tested qua the raw material purchased locally at the time of procurement, however, after being dumped in the open ground, it is not capable of segregating the same. Apart from the fact that in the year under consideration, the percentage of imported scrap was much higher. Thus, the variation in the burning loss over the years is exactly what it is. On going through these detailed submissions extracted in the order which have not been rebutted by the Revenue, we find that the addition cannot survive. Being satisfied by the consistent explanation of the assessee, the addition sustained by the CIT(A) de-hors facts is directed to be deleted. 13. Addressing the next issue agitated by the assessee vide ground No.7, the ld. AR drew attention to page 18 para 4.5 of the impugned order, it was his submission that office expenses on account of Diwali expenses had been disallowed. The expenses incurred, it was submitted, were in the normal course of business and since gold coins were purchased for maintaining good working relations the same may be allowed. 14. The learned CIT DR relies upon the impugned order.
We have heard the submissions and perused the material available on record. It is seen that expense to the tune of Rs.2,91,266/- was claimed on account of purchase of gold coins. The AO required the assessee to justify how the expense was relatable for the business of the assessee. It is seen that no reply has been furnished before the AO. In
ITA- 74/CHD/2017 A.Y. 2012-13 Page 19 of 22
the proceedings before the CIT(A), the record shows that it has been submitted that it is a normal practice to gift gold coins at Diwali and hence the expenses were claimed to be allowable. The explanation was considered to be not satisfactory as in the absence of relevant material as to whom and for what purposes it was given, it was considered that it was not possible to consider the expense to be wholly and exclusively for the purposes of business of the assessee. Considering the submissions advanced, which appear to be general in nature, we find no good reason to vary the conclusions. Being satisfied by the reasoning and the finding, Ground 7 of the assessee is dismissed. 16. Addressing the issue raised in ground No.7 the learned AR submitted that the issue has been considered by the CIT()A) in para 4.6 of his order. Referring to the same it was submitted that the AO required the assessee to justify why the amount written off under the head “selling expenses” to the tune of Rs.55,122/- should not be added back. The AO not satisfied with the explanation held that the assessee has failed to produce any evidence regarding his efforts to realize back the amount written off disallowed the claim. The argument before the CIT(A) that cost of recovery for the amount was much more than the amount accordingly it has been written off, it was submitted, has also not been met with any success. On account of this fact the assessee is in appeal before the ITAT. 17. The ld. CIT relies upon the orders of the authorities below.
We have heard the submission and perused the material available on record. On a consideration thereof we find that the authorities have proceeded to consider the issue contrary to the statutory requirements. Once the assessee has written off the expenses in his books of accounts, the further justification that the cost of recovery was prohibited was thereafter not required. The explanation having been offered in terms of the conduct of the assessee which is not doubted by the tax authorities, the addition by way of disallowance could not have been made. Accordingly Ground No.8 of assessee is allowed.
The next issue agitated by the assessee in the present proceedings, pertains to the disallowance of excess depreciation. The relevant facts are discussed in para 4.7 of the impugned order. The ld. AR referring to the relevant extract of the said para submitted that the CIT(A) while granting
ITA- 74/CHD/2017 A.Y. 2012-13 Page 20 of 22
part relief may have been handicapped on account of the incomplete evidences filed by the assessee before him as would be evident from para 4.7 at page 20 of his order. Accordingly, it was his limited prayer that the assessee would be satisfied if the opportunity to produce relevant evidences in support of its claim is provided which shortcoming he has noticed has occurred on account of the lack of proper representation made on behalf of the assessee before the CIT(A). Thus, it was his submission that though heavy reliance is placed on the submissions advanced and available on record, however, in all fairness he would have no objection if the matter is restored and the issue is decided on the basis of facts and figures
20 The learned CIT DR in view of the request of the assessee had no objection if the issue is remanded. 21. We have heard the submissions and perused the material available on record. It is seen that the issue alongwith connected issues was considered by the CIT(A) in the following manner : 4.7 Ground of Appeal No.8 pertains to addition of Rs.25,39,875/- on account of Excess Depreciation Claimed. The AO observed that the assessee has made additions in the head Plant and Machinery to the tune of Rs. 10,24,53,378/- in the Furnace Division, out of which Rs. 2,25,76,674/- is the amount which has shown to be utilized for more than 180 days. To substantiate the depreciation claimed at 15%, the assessee was asked regarding its installation and the evidence of putting them in use for more than 180 days. And in the absence of which to show cause why a depreciation of 7.5% on this amount and the additional depreciation of 50% on this amount of 7.5% should not be disallowed. In reply, the assessee submitted that it has installed Plant & Machinery, a part of which costing Rs. 2,25,76,674/- was put to use for more than 180 days though it has not kept any record of the exact date of use as the equipment was ancillary equipment used in the existing production line as informed by the works manager. The equipments were put to use in the month of September 2011. As per AO, it is very much clear from the submission of the assessee that no proof regarding the addition of Plant & Machinery of Rs. 2,25,76,674/- having being used for more than 180 days has been filed so as to allow full depreciation claim. The arguments of the AR and reply given by the assessee was not acceptable by the AO who allowed depreciation @ 7.5% instead of 15% claimed by the assessee. The additional depreciation was also disallowed by the AO. Accordingly, the excess claim of the depreciation to the tune of Rs. 25,39,875/- was disallowed by the AO and added to the income of the assessee.
ITA- 74/CHD/2017 A.Y. 2012-13 Page 21 of 22
The facts of the case, the basis of disallowance made by the A.O. and the arguments of the AR during the appellate proceedings have been considered. During the course of appellate proceedings, the AR has filed the copy of Depreciation Chart and explained that the amount of Rs. 2,25,76,674/- on which depreciation @15% has been claimed includes the opening balance of Rs. 53,50,158/- which was taken as work in progress during last year(in support of the same copy of depreciation chart for the year ending 31.03.2011 was enclosed) which has been completed during the year and put to use before 30.09.2011. The balance amount of Rs. 1,72,26,516/- includes Car Addition of Rs. 5074009, addition of Plant & Machinery of Rs.11930151/-, addition of Scooter of Rs. 43,490/- and addition of Office Equipment of Rs. 1,78,866/-. For the addition to Car account, the AR filed copies of purchase bill/registration/insurance etc., arguing that these were put to use from the date of purchase. Same is with regard _ to addition to scooter account which was purchased on 28.04.2011. Regarding the addition to plant & machinery and office equipment, the AR filed purchased account and argued that the items were put to use accordingly as per the date of purchase. It was further argued that the Auditor has not given any adverse remark regarding the depreciation claimed by the assessee. On the strength of these points, the AR argued that the depreciation has been rightly claimed and should be allowed. The arguments of the AR are found acceptable in respect of machine shop which was under installation as per last year Balance Sheet amounting to Rs. 53,50,158/- as well as for the additions in the Car and Scooter Accounts amounting to Rs. 50,74,000/- and Rs. 43,00,490/-”. However, in respect of Plant & Machinery additions of Rs. 1,19,30,151/-, the AR could not submit the complete bills and other details to show that the same were put to use before 30.09.2011. Similar is the position with regard to office equipment. In the circumstances, the disallowance made by the AO in respect of Rs. 53,50,158/-, Rs. / 50,74,009/- and Rs. 43,490/- is not found sustainable and the appellant gets a relief of Rs. 7,85,074/-. However, the disallowance made in respect of amounts of Rs.1,19,30,151/- and Rs. 1,78,866/- is found sustainable and hence the; disallowance to the extent of Rs. 9,08,176/- is sustained. As regard the additional depreciation @50% over and above the normal depreciation, the AR submitted that the company has not claimed additional depreciation on all the items where disallowance has been made by the AO. There is 3 merit in the submissions of the AR because the disallowance can be made only in respect of the items where it has been claimed by the assessee and no disallowance can be made if the assessee itself has not claimed the additional depreciation. The AO is directed to verify from the depreciation chart as per records of
ITA- 74/CHD/2017 A.Y. 2012-13 Page 22 of 22
the assessee for the year under consideration and disallow the additional depreciation only on those items where it has been claimed by the assessee and the claim is not upheld in the appeal. While doing this exercise the AO will provide reasonable opportunity to the assessee to present its case. No disallowance/addition can be made for the items where the assessee has itself not claimed the additional depreciation. Accordingly, this ground of appeal is partly allowed. (emphasis supplied) 21.1 On going through the above, we find that necessary supporting details by way of complete bills and supporting documents that the machinery was put to use before 30.9.2011 was not placed on record before the CIT(A) by the assessee. Accordingly, in the light of the submissions of the parties before the Bench, the said issue is restored back to the file of the AO with a direction to pass a speaking order in accordance with law after giving the assessee reasonable opportunity of being heard. The assessee in its own interest is directed to participate in the proceedings fully and fairly and not abuse the trust reposed. 22. In the result, the appeal of the assessee is partly allowed. Order pronounced in the Open Court on 20th June,2018.
Sd/- Sd/- (ANNAPURNA GUPTA) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER
‘Poonam’/Vijay Sharma(Delhi) Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR
Asstt. Registrar ITAT,Chandigarh