M/S. ACIT CIR 6(3), MUMBAI v. THE H.K. IMPEX PVT. LTD, MUMBAI

1 IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH MUMBAI BEFORE SHRI RAJENDRA SINGH(AM) AND SHRI V.D.RAO (JM) ITA NO.4465/M/2008 ASSESSMENT YEAR 2005-06 THE ACIT CIR.6(3) R.NO.522 5 TH FLOOR M/S.H.K.IMPEX PVT. LTD. AAYAKAR BHAVAN 459 A-2 SHAH & NAGAR IND.ESTAT E M.K.ROAD MUMBAI 400 020. DHANRAJ MILL COMPOUND S.J.MARG LOWER PAREL (W) MUMBAI 400 013. PAN : AABCH 3542G APPELLANT RESPONDENT REVENUE BY : SHRI K.R.DAS ASSESSEE BY : SHRI JAYANT BHATT O R D E R PER RAJENDRA SINGH (AM) THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 28.3.2008 OF CIT(A) FOR THE ASSESSMENT YEAR 2005-06. THE REVE NUE IN THIS APPEAL HAS RAISED DISPUTES ON THREE DIFFERENT GROUNDS. 2. THE FIRST DISPUTE IS REGARDING ADDITION OF RS.4. 85 CRORES BEING THE SHARE APPLICATION MONEY INVESTED BY THE DIRECTORS IN THE ASSESSEE COMPANY. THE AO NOTED THAT THE ABOVE INVESTMENT HAD BEEN MADE BY TH E TWO DIRECTORS WHO HAD SHARE HOLDING OF 50% EACH. THE AO OBSERVED THAT THE ASSESSEE DID NOT GIVE DETAILS VIZ. NAME ADDRESS BALANCE SHEET BANK STA TEMENT OF THE SHARE HOLDERS AND ONLY FILED LEDGER COPY OF SHARE APPLICATION MON EY. NO CONFIRMATION WAS 2 FILED NOR PAN OF THE DIRECTORS WAS GIVEN. HE THEREF ORE ADDED THE AMOUNT UNDER SECTION 68 OF THE INCOME-TAX ACT. IN APPEAL THE ASS ESSEE SUBMITTED THAT DURING THE ASSESSMENT PROCEEDINGS THE ASSESSEE VIDE LETTER DATED 13.12.2007 AND 17.12.2007 HAD SUBMITTED CONFIRMATION LEDGER COPY OF ACCOUNT AND PAN ETC BEFORE THE AO WHICH WAS IGNORED. CIT(A) WAS SATISFI ED BY THE EXPLANATION GIVEN AND OBSERVED THAT THE ASSESSEE HAD EXPLAINED THE SO URCE OF INVESTMENT AS WITHDRAWAL FROM THE FIRM IN WHICH THE DIRECTORS WER E PARTNERS. THE DIRECTORS WERE ASSESSED WITH THE SAME AO. HE THEREFORE DELETE D THE ADDITION AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL. 2.1 BEFORE US THE LEARNED AR FOR THE ASSESSEE SUBMI TTED THAT THE ASSESSEE VIDE LETTER DATED 17.9.09 ADDRESSED TO THE AO A COP Y OF WHICH WAS PLACED AT PAGE 10 OF THE PAPER BOOK HAD GIVEN THE NAME AND AD DRESS AS WELL AS PAN OF THE DIRECTORS. THE ASSESSEE HAD ALSO FILED BALANCE SHEET ALONG WITH PARTNERS CAPITAL ACCOUNT IN THE FIRM SG ENTERPRISES IN WHICH THE DIRECTORS WERE PARTNERS AND FROM WHICH THE MONEY WAS WITHDRAWN FOR INVESTME NT IN SHARE CAPITAL. THE AO WAS THEREFORE NOT CORRECT IN STATING THAT THE DE TAILS WERE NOT GIVEN OR THE SOURCE WAS NOT EXPLAINED. THE LEARNED DR PLACED REL IANCE ON THE ORDER OF AO. 2.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING ADDITION OF RS.4.85 CRORES BEI NG THE SHARE APPLICATION MONEY INVESTED BY THE TWO DIRECTORS WHO WERE HOLDIN G 50% SHARE IN THE COMPANY. WE FIND FROM THE RECORDS THAT THE ASSESSEE VIDE LETTER DATED 17.9.09 ADDRESSED TO AO HAD GIVEN FULL DETAILS SUCH AS NAME ADDRESS PAN OF THE TWO DIRECTORS. THE SOURCE OF THE MONEY HAD BEEN EXPLAIN ED AS THE MONEY WITHDRAWN FROM THE CAPITAL ACCOUNT IN THE FIRM M/S. S.G. ENTERPRISES. THE ASSESSEE HAD ALSO FILED COPY OF THE BALANCE SHEET O F M/S. S.G.ENTERPRISES ALONG 3 WITH COPY OF CAPITAL ACCOUNT OF THE PARTNERS SHOWIN G WITHDRAWAL FOR MAKING INVESTMENT IN SHARES. THE TWO DIRECTORS WERE ASSESS ED WITH THE SAME AO. UNDER THESE CIRCUMSTANCES WE SEE NO INFIRMITY IN TH E ORDER OF CIT(A) DELETING THE ADDITION MADE BY THE AO AND THE SAME IS THEREFO RE UPHELD. 3. THE SECOND DISPUTE IS REGARDING ADDITION OF RS.3 64 27 408/- ON ACCOUNT OF WASTAGE SHOWN BY THE ASSESSEE. THE ASSESSEE IS I N THE BUSINESS OF MANUFACTURE OF UTENSILS. THE MATERIAL USED IS STAIN LESS STEEL PATTA /PATTI (COIL). THE AO NOTED THAT THE ASSESSEE HAD MADE PURCHASES O F RAW MATERIAL WEIGHING 2166889 KG AND THERE WAS SALE OF SCRAP OF 845115 KG . THE AO NOTED THAT THE SCRAP GENERATION DURING THE YEAR WAS SHOWN AT 84400 8 KG WHICH CAME TO 41.67% OF RAW MATERIAL CONSUMED. IT WAS OBSERVED BY HIM THAT THE ASSESSEE WAS PURCHASING PATTA/ PATTI WHICH WERE RECTANGULAR IN SHARE FROM WHICH CIRCULAR SHEETS WERE CUT OF DIFFERENT SIZES AND AT THE TIME OF TAKING OUT CIRCULAR SHEETS FROM THE RECTANGULAR PATTA/ PATTI ONLY WASTAGE WAS THE LOSS OF CORNERS WHICH WAS MATHEMATICALLY SHOWN AT 21.5%. IT WAS OBSERVED BY HIM THAT IN THE REMAINING PROCESS OF UTENSIL MAKING SCRAP WAS AT T HE MOST 1%. HE ALSO NOTED THAT SCRAP GENERATION IN SUCH INDUSTRY VARIED FROM 18 TO 22% AND EVEN IN WORST SITUATION THE SCRAP COULD NOT EXCEED 25%. HE THEREF ORE ACCEPTED THE SCRAP ONLY TO THE EXTENT OF 25% AND THE BALANCE SCRAP OF 33766 6 KG WAS TREATED AS GOOD PRODUCED AND SOLD UNACCOUNTED. IT WAS NOTED BY HIM THAT SALE PRICE OF FINISHED GOODS WAS RS.127.76 PER KG AND AFTER MAKING ALLOWAN CE FOR SCRAP OF 19.88 PER KG HE COMPUTED THE VALUE OF UNACCOUNTED SALE AT RS. 3 64 27 408/- [337666 X (127.76 19.88 )] WHICH WAS ADDED TO THE TOTAL INC OME. IN APPEAL THE ASSESSEE SUBMITTED THAT THE RAW MATERIAL WAS NOT RE CTANGULAR /SQUARE TYPE AS USED BY THE AO IN THE COMPUTATION. FURTHER SCRAP AR E GENERATED NOT ONLY AT THE STAGE OF CUTTING BUT ALSO AT THE TIME OF UTENSIL MA KING WHEN THE SHEETS SOME 4 TIME BREAK AND BECOME SCRAP. THE ASSESSEE FILED COP Y OF LETTER FROM EXCISE AUTHORITIES IN WHICH IT WAS SHOWN THAT FOR KITCHEN WARE THERE WAS OUTPUT OF ONE FOR INPUT 1.86 WHICH GAVE WASTAGE OF MORE THAN 40%. IT WAS ALSO SUBMITTED THAT WASTAGE GENERATION WAS SUBJECT MATTER OF VERIF ICATION BY THE EXCISE AUTHORITIES WHO ALLOW EXPORT ONLY AFTER VERIFICATIO N OF INPUT OUTPUT RATIO. CIT(A) WAS SATISFIED BY THE EXPLANATION GIVEN. IT WAS OBSE RVED BY HIM THAT THE EXCISE AUTHORITIES WHO WERE IN CHARGE OF VERIFYING THE PRO DUCTION AND EXPORT HAD THEMSELVES ISSUED A LETTER SHOWING WASTAGE OF ABOUT 42%. FURTHER THE ASSESSEE WAS ENTITLED TO DEPB INCOME AND THEREFORE UNLESS THE EXPORT INCOME WAS CORRECTLY SHOWN THE ASSESSEE WOULD NOT BE ENTIT LED THE DEPB OR DUTY DRAWBACK. HE ALSO REFERRED TO THE DECISION OF THE T RIBUNAL IN CASE OF JCIT VS VXL (INDIA) LTD. IN ITA NO.54/ASR/1999 IN WHICH THE TRI BUNAL IN IDENTICAL SITUATION BASED ON THE LETTER OF EXCISE AUTHORITIES ACCEPTED WASTAGE OF 42% AND ALLOWED THE CLAIM OF THE ASSESSEE. CIT(A) ACCORDINGLY DIREC TED THE AO TO DELETE THE ADDITION AGGRIEVED BY WHICH THE REVENUE IS IN APPEA L. 3.1 BEFORE US THE LEARNED AR FOR THE ASSESSEE REITE RATED THE SUBMISSIONS MADE BEFORE THE CIT(A) THAT THE PATTA/ PATTI WHICH WAS THE RAW MATERIAL WAS NOT RECTANGULAR IN SHAPE BUT OF IRREGULAR SHAPE. HE REFERRED TO THE PHOTOGRAPHS PLACED AT APGE 76 TO 79 OF PAPER BOOK IN SUPPORT OF THE CLAIM. THEREFORE IN THE CIRCULAR CUTTING THE WASTAGE WAS NOT ONLY 21.5% WHI CH WILL BE IN CASE OF SQUARE SHAPE MATERIAL. FURTHER IN THE PROCESS OF MANUFACT URING THE CIRCULAR PATTA/ PATTI HAVE TO PASS THROUGH A VERY HIGH PRESSURE DUR ING WHICH ALSO BREAKAGE OCCURS. HE REFERRED TO THE LETTER DATED 14.12.2004 OF SUPERINTENDENT EXCISE PLACED AT PAGE 57 OF THE PAPER BOOKS IN WHICH IT WA S ACCEPTED THAT INPUT OUTPUT IN CASE OF MANUFACTURE OF GOODS FROM SS PATTA/ PATT I WAS 1.73 : 1 WHICH GAVE SCRAP OF 42.19%. THE LETTER ALSO MENTIONED THAT IN CASE OF GOODS MANUFACTURED 5 OUT OF SS FLAT THE INPUT OUTPUT RATIO WAS 1.76 : 1 WHICH GAVE WASTAGE OF 43.18%. THE EXCISE AUTHORITIES WERE REGULARLY CHECK ING THE INPUT OUTPUT RATIO AND THE EXPORTS WERE ALLOWED ONLY AFTER THEY WERE S ATISFIED. THEREFORE THE WASTAGE SHOWN BY THE ASSESSEE WAS QUITE REASONABLE AND HAS TO BE ALLOWED. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDE R OF AO. HE REFERRED TO LETTER DATED 18.9.97 OF THE ASSESSEE ADDRESSED TO T HE AO PLACED AT PAGE 30 OF THE PAPER BOOK TO POINT OUT THAT THE ASSESSEE HAD N OT GIVEN THE FINER DETAILS SUCH AS COPY OF CHALLAN INVOICES PRODUCTION LOSS TRANSFER RECORDS ETC. THEREFORE THE WASTAGE WAS NOT FULLY SUBSTANTIATED. IN REPLY THE LEARNED AR FOR THE ASSESSEE STATED THAT SUCH RECORDS COULD NOT BE PRODUCED AS THESE WERE LYING WITH CUSTOM AUTHORITIES. HOWEVER THE WASTAGE COULD BE VERIFIED FROM THE BOOKS OF ACCOUNT WHICH HAD BEEN DONE BY THE AO AND THERE WAS NO DISPUTE ABOUT THE WASTAGE SHOWN BY THE ASSESSEE. THE DISPUT E WAS ONLY REGARDING ITS REASONABLENESS WHICH WAS SUPPORTED BY THE LETTER OF THE EXCISE AUTHORITIES WHO WERE CLOSELY MONITORING THE PRODUCTION PROCESS AS WELL AS EXPORT. 3.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE ASSESSEE IS IN THE BUSINESS OF MANUF ACTURING OF UTENSILS BY USING RAW MATERIAL SUCH AS STAINLESS STEEL PATTA/ PATTI. THE ASSESSEE HAD SHOWN WASTAGE OF 41.61%. THE AO HAS ALLOWED WASTAGE ONLY AT 25%. AS PER HIM THE WASTAGE WAS ONLY IN CUTTING OF THE SQUARE SHAPE PAT TA/ PATTI IN WHICH ONLY THE CORNERS WERE LOST WHICH CAME TO 21.5%. HE HAS OBSER VED THAT THE WASTAGE COULD NOT EXCEED IN ANY CASE 25% AND THEREFORE ALLO WED 25% AND THE BALANCE WASTAGE SHOWN WAS TREATED AS FINISHED PRODUCTS SOLD UNACCOUNTED. IN THIS PROCESS ADDITION HAD BEEN MADE OF RS.3 64 27 408/-. THE CLAIM OF THE ASSESSEE IS THAT THE PATTA/ PATTI ARE NOT OF THE SQUARE SHAP E. THESE ARE IRREGULAR IN SHAPE WHICH IS SUPPORTED BY PHOTOGRAPHS PLACED IN THE PAP ER BOOK. THEREFORE IN THE 6 CUTTING ITSELF THERE IS LOT OF WASTAGE. THERE IS AL SO WASTAGE WHEN THE CIRCULAR PATTA/ PATTI IS PASSED THROUGH A VERY HIGH PRESSURE AND IN THE PROCESS OF BREAKAGE OCCURS MANY A TIMES. THERE IS SOME WASTAG E IN THE MANUFACTURING ALSO. THE ASSESSEE HAD ALSO SUBMITTED THAT ENTIRE P RODUCTION PROCESS AS WELL AS EXPORT IS MONITORED BY THE EXCISE AUTHORITIES WHO A LLOW EXPORT ONLY AFTER PROPER VERIFICATION. THE ASSESSEE HAD FILED A COPY OF LETT ER DATED 14.12.2004 OF THE SUPERINTENDENT CENTRAL EXCISE IN WHICH INPUT OUTPU T RATIO IN CASE OF PRODUCTION OF GOODS OUT OF SS PATTA PATTI HAD BEEN ACCEPTED AS 1.73 : 1 WHICH GIVES WASTAGE OF 42.19%. THE ASSESSEE HAS ALSO REFERRED T O THE DECISION OF THE TRIBUNAL IN CASE OF JCIT VS VXL INDIA LTD. (SUPRA) IN WHICH IN AN IDENTICAL SITUATION ON THE BASIS OF LETTER OF EXCISE AUTHORIT IES WASTAGE UPTO 42% HAVE BEEN ACCEPTED. THUS THE WASTAGE IS SUPPORTED BY CER TIFICATE FROM THE EXCISE AUTHORITIES WHO ARE IN CHARGE OF MONITORING THE ENT IRE PRODUCTION PROCESS AND THE EXPORT OF GOODS BY THE ASSESSEE. THEREFORE THE WASTAGE SHOWN BY THE ASSESSEE AT 41.67% CANNOT BE HELD TO BE EXCESSIVE. WE THEREFORE SEE NO INFIRMITY IN THE ORDER OF CIT(A) IN ALLOWING THE RE LIEF AND THE SAME IS THEREFORE UPHELD. 4. THE GROUND NO.3 IS REGARDING DISALLOWANCE OF RS. 46 69 615/- BEING FREIGHT PAYMENT TO VARIOUS SHIPPING COMPANIES OR TH EIR AGENTS ON THE GROUND THAT NO TAX HAD DEDUCTED AT SOURCE. THE AO NOTED TH AT ALL THE PARTIES EXCEPT ONE TO WHOM FREIGHT HAD BEEN PAID WERE INDIAN RESID ENTS. SINCE NO TAX HAD BEEN DEDUCTED AT SOURCE HE DISALLOWED THE CLAIM OF FREIGHT IN RESPECT OF RESIDENT INDIANS AMOUNTING TO RS.46 69 682/- UNDER SECTION 40(A)(IA). IN APPEAL THE ASSESSEE SUBMITTED BEFORE THE CIT(A) THA T PAYMENT OF FREIGHT HAD BEEN MADE TO THE SHIPPING AGENTS OF NON RESIDENT. T HEREFORE IN SUCH CASES THE PROVISIONS OF SECTION 194C AND 195 WERE NOT APPLICA BLE AND NO TAX WAS 7 REQUIRED TO BE DEDUCTED. RELIANCE WAS PLACED ON THE CIRCULAR NO.723 DATED 19.9.95 OF CBDT IN WHICH IT WAS EXPLAINED THAT IN C ASE OF SUCH AGENTS OF NON RESIDENTS NO TDS ARE REQUIRED. CIT(A) WAS SATISFIE D BY THE EXPLANATION GIVEN AND DELETED THE ADDITION MADE BY THE AO AGGRIEVED B Y WHICH THE REVENUE IS IN APPEAL. 4.1 WE HAVE HEARD BOTH THE PARTIES PERUSED THE RECO RDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOW ANCE OF FREIGHT CHARGES PAID TO SHIPPING AGENTS OF NON RESIDENTS. THE AO HAS DIS ALLOWED THE CLAIM ON THE GROUND THAT NO TAX HAD BEEN DEDUCTED AT SOURCE. THE CASE OF THE ASSESSEE IS THAT IN SUCH CASES PROVISIONS OF SECTION 194C AND 1 95 ARE NOT APPLICABLE. RELIANCE HAS BEEN PLACED ON THE CIRCULAR NO.723 DAT ED 19.9.95 OF CBDT IN WHICH IT HAS BEEN CLARIFIED THAT THE AGENTS ACT ON BEHALF OF THE NON RESIDENT SHIP OWNERS AND CHARTERS AND THEREFORE THEY ENTER INTO T HE SHOES OF THE PRINCIPAL AND THEREFORE THE PROVISIONS OF SECTION 172 WERE AP PLICABLE AND NOT SECTION 194C AND 195. BASED ON SUCH CIRCULAR NO TAX IS REQU IRED TO BE DEDUCTED AND THEREFORE ON THIS GROUND NO ADDITION CAN BE MADE UN DER SECTION 40(A)(IA). WE THEREFORE SEE NO INFIRMITY IN THE ORDER OF CIT(A) D ELETING THE ADDITION AND THE SAME IS CONFIRMED. 5. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED . 6. THE DECISION WAS PRONOUNCED IN THE OPEN COURT ON 28.02.2011. SD/- SD/- ( V.D. RAO ) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 28.02.2011 AT :MUMBAI 8 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) MUMBAI CONCERNED 4. THE CIT MUMBAI CITY CONCERNED 5. THE DR H BENCH ITAT MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI ALK