TaxTMI 
TaxTMI 
2022 (2) TMI 337
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.... in deleted the raw material consumption, treating the same as suppressed income from production @ 2% amounting to Rs. 2,02,64,920/-. 3. The learned CIT (A) erred in law as well as on facts in deletion the addition made towards the claim of Rs. 4,22,800/- on account of stamp duty paid. 4. The learned CIT(A) erred in law as well as on facts in deletion the addition made towards the claim of Rs. 32,60,146/- u/s 40(a)(ia). 5. The learned CIT(A) erred in law as well as on facts in deletion the addition made towards the claim of Rs. 15,08,905/- on account of abnormal increase of store and spares expenses. 6. The learned CIT(A) erred in law as well as on facts in deletion the addition made towards the claim of Rs. 36,715/- on account of payment made u/s 36(l)(va). 7. On the basis of the facts and circumstances of the case, the learned CIT(A) ought to have upheld the order of the Assessing Officer. 8. That the revenue craves leaves to add, amend, alter or withdraw any ground of appeal. 9. It is therefore prayed that the order of the CIT(A), Jamnagar may kindly be set aside I and that of Assessing Officer be restored. 3. The....
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....ny. d) The transaction entered into does not attract section 43(5) of the Act. 3.3 The assessing officer mainly contended on following aspects while making addition is reproduced from the assessment order's page 8 "....In the case under consideration the assessee failed to discharge the onus cast upon him to prove that it has indulged in forward trading only for guarding against the loss. several other case law as well as notification cited by the assessee do not relate to the case of the assessee. The assesses's main commodity is Brass whereas he has never traded in forward in the basic commodity. Considering this fact the assessee's claim required to be rejected and the amount of Rs. 1,52,76,370/- being forward loss is liable for disallowance. The contentions of the assessee have been deliberated at length and are not found to be acceptable. As per provision of section 43(5) of the Income Tax Act, any 'eligible transaction' in respect of trading in derivatives referred to in clause [(ac)] of section 2 of the Securities Contratct (Regulations) Act, 1956 (42 of 1956 ) carried out in a recognised stock exchange. Therefore, the provision of sectio....
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.... other hand, the ld. AR has filed a paper book running from pages 1 to 1 to 586 and evidences and decisions relied upon. The ld. AR has also filed a written submission as well as synopsis citing the contention of the AO, reasoning of the "Ld.CIT(A)" and their contention against the Revenue's appeal. The Ld. Counsel for the assessee has relied on the written submission, synopsis and reasoning given by the "Ld.CIT(A)" Jamnagar. The written submission filed by the assessee are extracted below: a) Section 43(5) of the Income Tax Act, defines the transactions which are periodically or ultimately settled otherwise than by actual delivery as speculative transaction. However, there are some exceptions given in the section as under: Clause Exception Applicability (a) Contract in respect of raw material or merchandise entered in the course of manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contract for actual delivery of goods manufactured or merchandise sold The assessee is a company engaged in business of manufacturing of non-ferrous extrusion of Brass rods, Brass components, brass profiles, Job work....
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....nt being Mark to Market losses incurred by the company should not be disallowed (submission attached at page no. 66-246 of paper book). However, Ld AO has treated the loss as speculative loss contending that hedging transactions have been entered into by assessee in Copper which is not basic raw material of the assessee and the transactions are not carried out in recognized stock exchange. d) Ld. AO has ignored the facts that Brass is the derivative of Copper and Zinc and not a separate metal in itself. Hence, Brass and Copper can be said as connected commodities and falls under clause (a) of section 43(5). Reliance is placed on Circular no. 23D dated 12/09/1960 (page no. 247 of paper book) which excludes hedging transactions in connected commodities from the purview of speculative transactions. e) Further, assessee has never hedged the goods of brass and copper more than its holding, Job work material and pending orders from import. Full quantity records were also produced before AO which showing that there is not a single instance where the import or stock of the material is less than the quantity hedged. In fact it is not at all a cases that assessee has entere....
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....ordance with the audited books and there is not adverse remark on it. The fact that they are using brass as their raw material which is metallurgic combination of copper and zinc and they have hedge that copper and zinc. We do not find any fault in the finding of the "Ld. CIT(A)" in allowing this loss against the income of the assessee, since the Ld. DR has not contracted any of the facts placed before us and before the "Ld. CIT(A)". Therefore, we are inclined to agree with the views of "Ld CIT(A)" and based on the above finding the ground of Revenue that appellant is not eligible to set off the hedging loss of Rs. 1,52,76,370/- having no merits and same is dismissed. 4. Now we take ground no. 2 of the Revenue which is against disallowance of the raw material consumption, treating the same as suppressed income from production @ 2 % amounting to Rs. 2,02,64,920/-. 4.1 The assessing officer in his order observed "Drastic fall in the yield of finished goods" as evident from page 8 of his order. The relevant extract is reproduced below: Further on verification of the quantitative details of the consumption of raw materials and production of finished goods, it is revealed....
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.... penetrate into the international market as it is universally accepted fact that for high precision goods, the copper content in the brass alloy should be higher as compared to other brass components. e) The contention of the assessee that it produced high precision components which resulted into higher gross profit margin earning also should follow as the net profit ratio in the case of the assessee has gone down. f) The contention that it maintained day to day stock register and production records is also not acceptable as mere maintenance of these records does not certify the genuineness of such incredible fall. g) The burning loss is claimed at 5.79 % as against 6.89 % for F.Y. 2010-11. h) Increase / decrease of WIP is 0.28 % theses year as against 2.12 %. i) The assessee has furnished various reasons for extreme and steep down in the yield and has presented various permutation and combination of statistics so as to justify the abnormal result of the manufacturing process. 4.5 Finally the AO made the addition by holding as under: "....[ line 2 on page 16 ] Accordingly it is concluded without any alternative option that th....
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....antitative records maintained by the assessee and produced during the proceeding. f) The profit margin of the assessee company has improved even though there was a fall in the yield, it is because of better margin on other goods and the fact that the gross profit ratio increased is also not disputed by the assessing officer. g) The goods are imported in scrap condition and all the goods so imported have different type of attachment like rubber, iron plastic and are subject to difference type of quality and by melting this goods are manufactured and therefore, since recycled goods are used as raw material yield cannot be kept at same in each year and each year the assessee maintained the required records showing full quantitative details which has not been subjected to defect in the assessment proceedings by the department. h) The Department has carried out survey proceeding at the premises of the assessee and, in the survey, proceeding no incrementing documents found or any difference in quantitative records of inventory maintained viz-a-viz physical stock verification were observed. i) The assessing officer has not rejected the books of account.....
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....of Yield Submission - 4 (Page no. 312-340 of paperbook) 18/03/2014 Details regarding month wise quantitative details of raw material and finished goods, details of purchases of brass and copper scrap, reconciliation of purchases of copper Submission - 5 (Page no. 341-354 of paperbook) 24/03/2014 Month wise quantity details of raw material, work-inprogress and finished goods of opening stock, purchases, consumption, sales and closing stock showing process loss and generation of finished goods for all 12 months and consolidated statement for the year, explanation regarding mark to market hedging loss of Rs. 1,52,76,730/- on account of copper hedging Submission - 7 (Page no. 355-356 of paperbook) 27/03/2014 Monthwise qunaity details of generated scrap out of the manufacturing process, its stock, production, consumption, sales and closing stock Submission - 8 (Page no. 357-370 of paperbook) 28/03/2014 Monthwise inward and outward movement of inventory in the form of consumption of material and production of finished goods, other materials and burning loss Submission - 9 (Page no. 371-416 of paperbook) 29/03/2014 Submission regarding decrease....
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....ted its production result & made accounting jugglery to minimize the taxburden on the true & correct income earned by it by way of suppressing the production of finished goods & claiming impossibly high slag generation. Learned A.O. has also made reference to M/s Shri Bhavani Extrusion, Jamnagar (Manufacturing Brass rods) & compared the same, stating that assessee co. is manipulating the production results to reduce the tax-burden. By comparing the figures of one firm with the assessee co., does not serve as an important base for proving that the assessee has done any sort of manipulation or any accounting jugglery to minimize the tax burden. No opportunity is provided to assessee to know the details of those companies/ firms. They are engaged in mere extrusion business at a very small scale and do not become comparable with the assessee at all as they do not manufacture components. 4. Page no. 16 Ld A.O. has further contended that the standard by-product generation in brass industry is around 4% & relying on the same base, the A.O. has disallowed the claim of 2% out of 6.10% claimed by the assessee, which amounts to Rs. 2,02,64,920/- From the reasons furnished....
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....Excisable) 2 42 427.49 10 68 09 370.14 1 93 215.80 6 98 57 668.61 Less: Sale Return 16 288.08 65 02 613.67 13 605.93 47 95 154.20 Net Sales 2 26 139.41 10 03 06 756.47 1 79 609.87 6 50 62 514.41 2 62 036.96 12 56 15 227.55 1 92 229.17 7 23 76 973.04 ( C) Copper Billets (i) Copper Billets 1 35 653.45 4 91 64 284.47 39 940.40 1 25 84 991.25 Less: Sale Return 0.00 0.00 747.30 1 91 308.80 Net Sales 1 35 653.45 4 91 64 284.47 39 193.10 1 23 93 682.45 (ii) Copper Billets (Against CT-3) 1 32 240.40 4 21 76 094.80 64 398.00 1 80 58 799.75 2 67 893.85 9 13 40 379.27 1 03 591.10 3 04 52 482.20 (D) Copper Extrusion (i) Copper Extrusion 1 57 969.54 8 02 15 525.43 2 02 380.50 7 42 55 432.20 Less: Sale Return 1 295.30 5 46 012.21 4 397.55 ....
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.... up from 8.85 crore to 22.26 crores which has identical results as stated in para above. • The assessee had purchased both inferior and superior quality of raw material in the form of mix brass scrap mix copper scrap etc. This fact has been produced as an evidence in the form of details of purchases and detail of scrap stocks during assessment proceedings, and, therefore, it was not reasonable to expect the same yield in the case of the assessee as in previous years where the quality of material purchased was wholly superior and of better quality. Last year assessee has purchased 17.44 lakhs KG of copper scrap in the lesser turnover where as in the current year on the increased turnover it has purchased lower copper scrap of 11.65 lakh K G only which is almost 30.62 % in this year compared to 53.33 % of last year. Copper is the base metal, which is mixed with low quality lower rate zinc and gives the brass. Therefore, this year lesser purchase of Copper resulted in lower yield. SN Particulars 2010-11 2009-10 Qty Amount Qty Amount (A) Opening Stock - Brass....
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....xpenses - Clearing & Forwarding Expenses Freight Inward Expenses 38,20,677 22,84,998 13,10,783 13,27,565 sub-total - 61,05,675 - 26,38,348 (D) Less: Closing Stock - Brass Scrap 26,173.42 71,62,618 1,05,741.10 220,81,913 Copper Zirconium 45.00 27,000 45.00 27,000 Chromium Metal 145.00 58,290 290.00 1,16,580 Bismuth 36.00 31,860 45.00 39,825 Zinc 11,965.85 14,75,629 32,174.05 35,88,694 Manganese 969.50 1,58,029 153.90 21,084 Copper Phosphorus 90.00 40,950 617.80 2,12,999 Copper Tellurium 38.40 2,22,720 59.00 3,53,091 Tin 191.00 3,22,791 1,579.20 12,11,120 Nickel 486.10 5,78,047 377.00 3,43,070 Cadmium 61.00 12,981 70.00 15,960 Silicon 690.30 89,566 807.65 75,111 Magnesium - - ....
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.... 3 40 882 25 61 698 Other mfg. expenses 58 76 989 49 00 203 7 50 40 850 5 55 74 943 Credit of Wind farm on Units Generated 1 05 91 915 1 15 89 169 Depreciation Related to Mfg. 67 68 087 77 55 982 1 73 60 002 1 93 45 151 (Increase )/Decrease in stock Opening stock By product 1 28 206 2 86 589 Work in process 5 86 46 481 6 63 78 651 Finished goods 1 11 79 254 77 63 967 Total 6 99 53 941 7 44 29 207 Closing stock By product 1 90 383 1 28 207 Work in process 7 39 48 992 5 86 46 481 Finished goods 4 23 41 743 1 11 79 254 Total 11 64 81 118 6 99 53 942 Sub Total 4 65 27 177 - 44 75 265 Cost of Goods Sold 100 70 32 949 73 91 63 478 Gross Profit 7 34 45 318 4 82 66 020 Gross Profit Ratio 6.80% 6.13% 6. R & D Activities carried out for innovation: • The company has because of need of the innovation has started dev....
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....he business of manufacturing of Rod. Assessee is not in the business of manufacturing rods only but in manufacturing of components, profiles, and other materials of brass and copper. • In fact, the value, the quality of the brass rods, which are sold by those firms, also need to be compared. AO has not given any comparable figures of those companies but rejected the comparable given by the assessee of Shree Extrusion that is comparable and is in the same line of business. • AO has also not given any opportunity to co-operate the financials of that company with the assessee. Further assessee's burning loss is almost the same as those comparable companies. Therefore, without giving any opportunity of rebutting material on which AO has relied addition cannot be made of this magnitude. • Further, it is also not clear how AO came in to possession of these companies comparable in absence of any 133(6) proceedings without which AO does not have power to use the comparable. • We submits that Ld AO has not provided the material relating to comparable selected by him such as Bhavani extrusion etc. This is fatal to the assessment. Assessee s....
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....income on basis of increase in raw material consumption ratio, in view of fact that accounts of assessee-company were subject to statutory as well as tax audit and same were not rejected and, moreover, Assessing Officer had nowhere expressed his inability to deduce true income from said accounts, impugned addition made on estimate basis was to be set aside • DCIT vs. Best Paper Mills Pvt Ltd - ITA No. 975/Mum/2017 (Mumbai -Trib.) (Page no. 430-446 of paper book) Assessee's yield compared with other entities without elaborating the technology being used by those concerns and the contents and quality of raw material etc. No conclusions could be derived merely on the basis of bald comparison. After additions in the Plant & Machinery there was improvement in the yield. • Jai Pulse Mills vs. ITO [2010] 39 SOT 312 (Ahmedabad - Trib.) (Page no. 447- 451 of paper book) In view of the facts of the instant case that the Assessing Officer had not rejected the book results of the assessee in all the seven assessment years and there were no defects pointed out by the Assessing Officer, the estimation made by the Assessing Officer and, consequently....
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.... and past history of assessment of assessee as well as his own assessment at the time of survey solely on the basis of conjectures and surmises. • Over and above this, In income tax, assessee is assessed for last several years u/s 143(3) of the act by the highest rank of assessing officers such as Addl CIT or JCIT and they have never stated any adverse remark in all the assessment that have been carried on by income tax department. This shows that our methodology is up to the acceptance of income tax department. There is no year where the books of accounts of the assessee have been found wanting or even a single paisa addition has been made on account of lower profits/ lower yield etc. Even in AY 2007-08 the same rank of officer has accepted the similar level of yield in the past. • Extensive submission have been made before AO during the year in assessment and also in the past assessment years there were not a single expenditure which was found unvouched, not a single sales bill which was found unentered / unaccounted, not a single purchases invoice which was found unaccounted / unvouched / not a single customers account was found out of order, in quantit....
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....'t lead to any sort of manipulative tactic of the assessee to mislead or misguide the A.O. particularly when the assessee has maintained the stock records which are audited by Statutory auditor, VAT auditor, Excise authorities. Moreover, there cannot be comparison of current year data with the earlier years where there is constant change in technology, product mix, upgradation of machineries, demand and supply of products and economic conditions prevalent in particular year. The Ld. A.O. has also made reference to data of M/s Shri Bhavani Extrusion, Jamnagar (Manufacturing Brass rods) & compared the same with the assessee record, and held that assessee co. is manipulating the production results to reduce the tax-burden. Again in our considered opinion comparing the figures of one firm with the assessee co., does not serve as an important base for proving that the assessee has done any sort of manipulation or any accounting jugglery to minimize the tax burden without pointing any defect in record maintained by the assessee. 4.12 We further note that no opportunity was provided to assessee to cross verify the details of those companies/ firms. Moreover the Ld. AR before us sub....
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..... 4,43,560/- under the head 'Legal & Professional fees' in the Profit & Loss A/c which include Stamp Duty of Rs. 4,22,800/-. 2. Details of such stamp duty payments is as under: - Regarding payment of Rs. 4,22,800/-, it was paid for stamps affixed on documents relating to sanction/renewal of CC limits and charge creation. Details of the same are as under: Sr. No. Nature of Documents Amount (Rs.) 1 Arrangement Letter SME-01 100/- 2 Guarantee Agreement SME-03 200/- 3 Supplementary Agreement SME-04 2,11,200/- 4 CIBIL Annexure 150/- 5 CIBIL Annexure 150/- 6 Memorandum of Extension of charge SME 7A 2,11,000/- Total 4,22,800/- 3. Assessee has not at all got any new assets created or got any benefit of enduring nature. Therefore, this amount cannot be held to be in the nature of capital expenditure. The details of addition to fixed assets were also submitted with AO where he could have verified that there is no such addition which warrants the payments of stamp duty except renewal of loan. 4. Thus, above mentioned expense incurred in relation to the renewal existing loan of th....
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....page 17 and the same is reproduced under the contention of the AO: " On verification of payment of clearing and forwarding exp it is noticed that the assessee had made TDS only on the amount of agency service charge and no TDS has been made on reimbursement. As per Circular No.715 dtd.08/08/1995 any sum paid or payable as a reimbursement is also liable for TDS. In this case the assessee has reimbursed several such expenses incurred by its C & F agent. On examination of such expenses it is noticed that this expense are such that if the assessee would have directly paid it he has to deduct the tax before payment of such expenses. Further the relation between the assessee and the C & F agent is of principal and its agent therefore also the assessee and the C & F agent is of principal and its agent therefore also the assessee is liable to make TDS u/s.194(c) of the IT act on any such payments which may or may not be reimbursements. Considering these facts the total disallowance u/s.40(a)(ia) on account of default in making TDS is worked out at Rs. 32,60,146/- as per following chart." 6.2 Aggrieved assessee preferred an appeal before the ld. CIT-A, who deleted the addition m....
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....r sum comprising an element of income. Reimbursement of expenses does not partake the nature of income, in the hands of the payee of such expenses. Hence, the disallowance should not be made as the amount paid as reimbursement to the C&F agent does not carry any element of income / profit for C&F agent. 6. Reliance placed on the following decisions: a) CIT vs. Gujarat Narmada Valley Fertilizers Co Ltd [2013] 35 taxmann.com 638 (Gujarat) (Page no. 496-497 of paper book) "In an appeal by the assessee the Commissioner (Appeals) allowed such deductions observing that so far as the amount of Rs. 6,93,372/- is concerned as such the agent had already deducted the TDS and deposited in the Government and, therefore, there was no further liability of the assessee to deduct the TDS. With respect to Rs. 76,00,509/-, the CIT(A) observed that the said amount was towards the reimbursement of the expenses to the consignment agent, which was in fact incurred on behalf of the assessee and there was no profit element. The CIT(A) held that the assessee was not required to deduct the TDS on such reimbursement and, therefore, the Assessing Officer was not justified in making t....
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....eduction of tax at source as it does not involve any profit element and disallowance u/s. 40(a)(ia) should not be made. 6.6 We have heard the rival contentions of both party and perused the material available on record. It is not under dispute that on the agency commission the tax at source has been deducted by the assessee. The only dispute is non deduction of tax on the reimbursement of expenses paid the C&F agent. On this issue we have persuaded the order of the assessing officer, submission of the assessee before the CIT(A) and the submission of the assessee before us. The issue being covered by the jurisdictional High court in the case of CIT vs. Gujarat Narmada Valley Fertilizers Co Ltd reported in 35 taxmann.com 638, where it was held as under: "It is required to be noted that while confirming the order passed by the CIT(A) and deleting the disallowance, it has been specifically observed by the tribunal that in fact the expenses were incurred by the agent on behalf of the assessee for transportation and other charges, which has been spelt out in the bill itself including the commission to the agent. The learned tribunal also observed that the relation between the....
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....enses claimed by the assessee. 7.3 Aggrieved assessee preferred an appeal before the ld. CIT-A, who deleted the addition made by the AO. 7.4 Being aggrieved by the order of the ld. CIT-A, the Revenue is in appeal before us: 7.5 In the course of hearing, the ld. DR, vehemently supported the order of the AO. 7.6 On the other hand, the learned AR of the assessee has filed a synopsis of the various additions made and. From the argument and submission of the ld. AR in respect of the impugned addition following facts emerges: a) The appellant is engaged in the business manufacturing of non ferrous extrusions roads for selling as well as on job work. b) The consumption of coal increased from 10.78 lacs to 26.81 lacs whereas the production of goods increased from 34.99 kgs to 40.63 kgs as an alternative foundry fuel from coal. Similarly, the power cost decreased by 13.89 % Thus, there is no much difference and it is because of the combination of fuel is used the increase in coal is appearing. c) The other packing material and consumables are used in packing of the finished goods and during the year the sales has increased to 74%. Thus same is justifiable....