D.C.I.T. RG.9(1), MUMBAI v. M/S. BDH INDUSTRIES LTD., MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI J.SUDHAKAR R EDDY(A.M) ITA NO.6553/MUM/2008(A.Y. 2005-06) THE DCIT RG. 9(1) ROOM NO.223 AAYKAR BHAVAN MK ROAD MUMBAI 20. (APPELLANT) VS. M/S. BDH INDUSTRIES LTD. NAIR BAUG AKURLI ROAD KHANDIVALI (E) MUMBAI 400 101 PAN:AAACB 1720H (RESPONDENT) APPELLANT BY : SHRI HARI GOVIND SINGH RESPONDENT BY : SHRI SATISH R. MODY ORDER PER N.V.VASUDEVAN J.M THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDE R DATED 4/9/2008 OF CIT(A) IX MUMBAI RELATING TO ASSESSMENT YEAR 2005- 06. GROUND NO.1 RAISED BY THE REVENUE READS AS FOLLOWS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) ERRED IN ALLOWING THE DEDUCTION OF PROVI SION FOR RS.34 90 817/- TOWARDS EXPORT COMMISSION AT THE END OF THE RELEVANT PREVIOUS YEAR WITHOUT APPRECIATING THAT THE ASSESSE E COULD NOT FURNISH ANY MATERIAL BEFORE THE ASSESSING OFFICER TO SHOW T HAT THE SAID PROVISION WAS BASED ON ASCERTAINED LIABILITY. 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING AND DEALING IN PHARMACEUTICAL FORMULATIONS. THE A SSESSEE HAD DEBITED IN THE P&L ACCOUNT A SUM OF RS. 70 53 137/- ON ACCOUN T OF COMMISSION. THIS INCLUDED A SUM OF RS.34 90 817/- WHICH WAS A PROVI SION MADE IN THE MONTH OF MARCH IN RESPECT OF COMMISSION PAYABLE TO THE FO LLOWING PARTIES: ITA NO.6553/MUM/2008(A.Y. 2005-06) 2 1. MR. M. MARIMUTTU SRILANKA RS .488972( 195 + 293392) 2. JAGDISH ARAQUECHAND MOZAMBIQUE RS.53041 1 ( 431214 + 99197 3. DR. AAA RIZIG SUDAN RS. 1127578 4. MR. M. MARIMUTTU SRILANKA RS . 1343856 ACCORDING TO THE ASSESSING OFFICER THIS WAS NOT AN ASCERTAINED LIABILITY AND THEREFORE THE ASSESSING OFFICER DISALLOWED A SUM O F RS. 34 90 817/-. 3. BEFORE CIT(A) THE ASSESSEE SUBMITTED THE ASSESSE E COMPANY IS ENGAGED IN THE EXPORT BUSINESS FOR MORE THAN 25 YEARS. THE MAJOR PART OF THE TURNOVER IS FROM OVERSEAS BUSINESS BY WAY OF EXPORT . THE ASSESSEE COMPANY WAS ALSO RECOGNIZED AS AN EXPORT HOUSE BY MINISTRY OF COMMERCE GOVT. OF INDIA. THE EXPORT COMMISSION WAS BEING PAID CONSIS TENTLY FOR LAST SEVERAL YEARS AND THERE WAS NO DISALLOWANCE IN ANY OF THE P REVIOUS ASSESSMENT AS EXPORT COMMISSION IS DIRECTLY LINKED TO EXPORT BUSI NESS. THE EXPORT COMMISSION WAS BEING PAID TO OVERSEAS AGENT AS PER AGREED TERMS AND CONDITIONS WITH OVERSEAS AGENT AND IT HAS DIRECT LI NK WITH THE BUSINESS GENERATED BY THEM. HENCE IT IS ASCERTAINED LIABIL ITY AND NOT A PROVISION AS ALLEGED BY THE AO. IT WAS POINTED OUT THAT THE DE TAILS RELATING TO EXPORT COMMISSION WITH THE DOCUMENTARY EVIDENCE ALONGWITH THE NAME OF THE COUNTRY RECIPIENT OF THE COMMISSION BUSINESS GENE RATED IN US$ BUSINESS EQUIVALENT IN INDIAN RUPEES AND COMMISSION IN RUPEE S RESERVE BANK AUTHORIZED DEALERS VOUCHERS/ADVICE ETC. WERE SUBMI TTED BEFORE THE AO. THE EXPORT COMMISSION WAS PROVIDED FOR THE ASCERTAINED LIABILITY AND THIS IS NOT A CONTINGENT LIABILITY BY ANY STRETCH OF IMAGINATIO N AS MENTIONED BY THE AO. THE DETAILS IN THIS REGARD WERE AS UNDER: COUNTRY RECIPIENT BUSINESS(IN US$) BUSINESS (IN RS. LAKHS) COMMISSION (IN RS. LAKHS) SRILANKA MR.M.MARIMUTHU 14 88 201 654 18.32 MOZAMBIQUE MR. JAGDISH ARAQUCHAND 1 04 583 47 5.30 SUDAN DR. AAA RIZIG 2 70 741 119 11.27 ITA NO.6553/MUM/2008(A.Y. 2005-06) 3 4. IT WAS FURTHER SUBMITTED THAT THE LIABILITY OF COMMISSION PROVIDED WAS ASCERTAINED LIABILITY WHICH HAS BEEN PAID IN SUBSE QUENT PERIOD. THE COMMISSION HAS BEEN REMITTED BY FOREIGN EXCHANGE DE ALER AND ASSESSEES BANKER- CENTRAL BANK OF INDIA. THE RELATED REMITTA NCE ADVICE WITH STATEMENT OF COMMISSION ON EXPORT WERE ALSO FURNISHED. 5. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE F OR DEDUCTION OBSERVING AS UNDER:- 2.3 I HAVE CAREFULLY CONSIDERED THE APPELLANTS S UBMISSION AND RELATED DOCUMENTS AS WELL AS AOS CONTENTION. IT I S OBSERVED THAT THE APPELLANT HAS FILED SUFFICIENT DOCUMENTARY EVIDENCE IN THE FORM OF NAME AND ADDRESS OF THE PARTIES THEIR BANK ACCOUN T NUMBER AND INTERMEDIARY BANK STATEMENT OF COMMISSION GIVING R ELEVANT BANK COLLECTION N NEGOTIATION NUMBER G.R. COPY . A-2 FORM DULY FILLED AND SIGNED LETTER WRITTEN TO THE CENTRAL BANK OF INDIA ALONGWITH THE DOCUMENTARY EVIDENCE CONCERNING REMITTANCE OF COMMI SSION TO THE AGENTS WHO ARE RESIDENCE OF SHRI LANK MOZAMBIQUE A ND SUDAN. CONSIDERING THE NATURE OF THE BUSINESS DOCUMENTAR Y PROOF IT CANNOT BE HELD THAT COMMISSION PAID BY THE APPELLANT IS EI THER BOGUS OR UNREASONABLE OR FOR NON-BUSINESS PURPOSE. SINCE NO EVIDENCE HAS BEEN BROUGHT ON RECORD BY THE AO TO ESTABLISH THAT COMMISSION PAID FOR GETTING EXPORT ORDERS IS NON-BUSINESS PURPOSE THEREFORE THE ADDITION MADE BY THE AO IS DELETED. THIS GROUND OF APPEAL IS ALLOWED. 5. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENUE HAS PREFERRED GROUND NO.1 BEFORE THE TRIBUNAL. 6. THE LD. D.R RELIED ON THE ORDER OF THE ASSESSING OFFICER. 7. WE ARE OF THE VIEW THAT THE ASSESSEE HAD CLEARLY ESTABLISHED BEFORE THE CIT(A) THAT THE LIABILITY IN QUESTION WAS AN ASCERT AINED LIABILITY. AS RIGHTLY HELD BY THE CIT(A) THERE WAS NO EVIDENCE BROUGHT ON RECORD TO SHOW THAT THE COMMISSION PAID WAS NOT FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. IN THESE CIRCUMSTANCES WE CONFIRM THE ORDER OF THE CIT (A) AND DISMISS GROUND NO.1 RAISED BY THE REVENUE. ITA NO.6553/MUM/2008(A.Y. 2005-06) 4 8. GROUND NO.2 READS AS FOLLOWS: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS . 4 22 600/- BEING 20% OF FOREIGN TRAVELING EXPENSES OF RS. 21 13 000/ - WITHOUT APPRECIATING THAT THE ASSESSEE COULD NOT FURNISH AN Y SATISFACTORY EVIDENCE BEFORE THE AO IN SUPPORT OF ITS CONTENTION THAT FREQUENT VSITS OF DIRECTORS TO DIFFERENT COUNTRIES WERE FOR THE PU RPOSE OF THE ASSESSEES BUSINESS. 9. THE ASSESSING OFFICER DISALLOWED 20% OF THE FORE IGN TRAVELLING EXPENSES OF RS.21 13 000/- THEREBY RESULTING IN AN ADDITION OF RS.4 22 600/-. THE REASONS FOR MAKING DISALLOWANCE WAS THAT THERE WERE FREQUENT TRIPS UNDERTAKEN BY THE DIRECTORS OF THE ASSESSEE AND THI S WAS NOT JUSTIFIED BECAUSE THE ASSESSEE ALREADY INCURRED EXPENDITURE O N EXPORT SALES COMMISSION TO THE EXTENT OF RS. 70 53 137/-. 10. BEFORE CIT(A) THE ASSESSEE SUBMITTED THAT ALL FOREIGN TRAVEL EXPENSES WERE INCURRED IN CONNECTION WITH THE EXPORT BUSINE SS OF THE ASSESSEE AND SUCH TRAVEL WAS REQUIRED TO MAINTAIN AND INCREASE S ALE IN VARIOUS COUNTRIES. THE CIT(A) DELETED THE ADDITION HOLDING THAT THE AS SESSING OFFICER HAD NOT BROUGHT ON RECORD ANY MATERIAL TO MAKE THE IMPUGNED DISALLOWANCE AND THE SAME WAS DONE PURELY ON AN ESTIMATE BASIS. 11. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENU E HAS PREFERRED GROUND NO.2 BEFORE THE TRIBUNAL. 12. WE HAVE HEARD THE SUBMISSIONS OF THE LD. D.R W HO RELIED ON THE ORDER OF THE ASSESSING OFFICER. 13. WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) IS JUST AND PROPER AND CALLS FOR NO INTERFERENCE. AS RIGHTLY HELD BY THE CIT(A) THE DISALLOWANCE HAS ITA NO.6553/MUM/2008(A.Y. 2005-06) 5 BEEN MADE PURELY ON SURMISES AND CONJECTURES. THE RE IS NO MATERIAL ON RECORD TO SHOW THAT THE FOREIGN TRAVEL BY THE DIREC TS WAS NOT IN CONNECTION WITH THE BUSINESS OF THE ASSESSEE. IN THESE CIRCUM STANCES WE DISMISS GROUND NO.2 RAISED BY THE REVENUE. 14. GROUND NO.3 & 4 RAISED BY THE REVENUE READ AS F OLLOWS: 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 41 83 098/- BEING ADJUSTMENT TO THE VALUE OF CLOSING STOCK OF RAW MAT ERIAL UNDER SECTION 145A OF THE INCOME TAX ACT 1961 HOLDING THAT CORRE SPONDING ADJUSTMENT SHOULD BE MADE BY THE ASSESSING OFFICER IN OPENING STOCK (WHICH IS CLAIMED BY THE ASSESSEE AT RS. 33.65 LACS ) WITHOUT APPRECIATING THE RATIO OF DECISION OF THE HONBLE J URISDICTIONAL HIGH COURT IN THE CASE OF MELMOULD CORPORATION VS. CIT 2 02 ITR 789 AND FOLLOWED BY THE CO-ORDINATE BENCHES BY THE HONBLE TRIBUNAL IN THE CASE OF WEST COAST PAPER MILLS LTD. VS. ACIT CIR. 1(3) ITAT I BENCH MUMBAI IN ITA NO.3187& 3750/MUM/2003 AND J.B.CHEMIC ALS & PHARMACEUTICALS LTD. OF ADDL. CIT RANGE 6(3) REPOR TED IN (2006) 10 SOT 363 WHEREIN IT WAS HELD THAT INTENT OF SECTIO N 154A CAN ONLY BE ACHIEVED BY MAKING AN ADDITION TO THE VALUE OF CLOS ING STOCK AND NOT BY ALTERING OPENING STOCK. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD. CIT(A) ERRED IN DELETING THE SAID ADDITION OF RS.41 83 098/- HOLDING THAT ADJUSTMENT U/S. 145A WILL NOT RESULT IN ANY AD DITION (PARA 8.2 OF HER ORDER) BY WRONGLY ACCEPTING THE ASSESSEES CLAI M OF ADJUSTMENT OF DEBITING RS. 56.11 LAKHS TOWARDS EXCISE DUTY ON PUR CHASE WHEREAS EXCISE DUTY ON PURCHASES IN ALREADY SHOWN BY THE AS SESSEE ALONGWITH PURCHASES WHICH IS EVIDENT FROM NOTES TO THE ACCOUN TS ITEM NO.A8 REPRODUCED BY THE ASSESSING OFFICER IN PARA 3 OF HI S ORDER AND THUS NO FURTHER ADJUSTMENT WAS REQUIRED IN RESPECT OF EXCI SE DUTY ON PURCHASES. THUS THE ENTIRE WORKING OF EXCISE DUTY ADJUSTMENT U/S.145A ACCEPTED BY THE LD. CIT(A) IS BASED ON ERR ONEOUS FINDING AND INCORRECT APPRECIATION OF FACTS. 15. THIS GROUND RELATES TO ADDITION OF RS.41 83 098 /- AS UNUTILIZED MODVAT CREDIT TO THE VALUE OF CLOSING STOCK. THE AO WAS O F THE VIEW THAT SINCE THE ASSESSEE WAS FOLLOWING EXCLUSIVE METHOD IN RESPECT OF EXCISE DUTY THE CREDIT BALANCE UNUTILIZED AT THE END OF THE YEAR SHOULD HA VE BEEN ADDED TO THE ITA NO.6553/MUM/2008(A.Y. 2005-06) 6 CLOSING STOCK OF THE FINISHED GOODS OR RAW MATERIAL . HENCE THE AMOUNT OF RS. 41 83 098/- WAS ADDED TO THE TOTAL INCOME OF T HE ASSESSEE. 16. BEFORE CIT(A) THE ASSESSEE SUBMITTED THAT THE CREDIT BALANCE OF UNUTILIZED MODVAT OF RS. 41 83 098/- AT THE END OF THE YEAR IS CONSIDERED SEPARATELY WHILE ARRIVING AT THE PROFIT AFTER ADDIN G MODVAT ON CLOSING STOCK. THEREFORE THERE IS NO HIDDEN ELEMENT OF PROFIT ON ACCOUNT OF CREDIT BALANCE OF UNUTILIZED MODVAT AND HENCE NO FURTHER ADJUSTMENT IS REQUIRED ON THIS ACCOUNT. THE ASSESSEE SUBMITTED THAT THE ADDITION MADE TO THE TOTAL INCOME AMOUNTS TO DOUBLE ADDITION RESULTING INTO HIGHER IN COME TO THAT EXTENT. THE WORKING OF MODVAT WAS GIVEN UNDER: (RS. IN LACS) EXCISE DUTY ON OPENING STOCK OF RAW MATERIALS 33.65 ADD: EXCISE DUTY ON PURCHASE (+) 56.11 LESS : EXCISE DUTY ON CLOSING STOCK OF RAW MATERIAL (-) 41.83 LESS: EXCISE DUTY ON RAW MATERIAL CONSUMED (-) 47.63 ------------ EXCISE DUTY ADDITIONS AS PER SECTION 145A NIL ======== EXCISE DUTY ON SALES 73.28 LESS: EXCISE DUTY ON RAW MATERIAL CONSUMED (-) 47.83 LESS: EXCISE DUTY PAID (-) 31.65 ------------- EXCISE DUTY BALANCE ON FINISHED GOODS 145A NIL ========= 17. THE LD. CIT(A) HELD AS UNDER:- I HAVE GONE THROUGH THE APPELLANTS SUBMISSION AND THE AOS CONTENTION AS WELL. ON VERIFICATION OF THE RECONCI LIATION STATEMENT SUBMITTED BY THE APPELLANT IT IS FOUND THAT THE AD DITION OF RS. 41 83 098/- WAS MADE U/S. 145A OF THE IT ACT BY WAY OF ADJUSTMENT IN THE VALUATION OF CLOSING STOCK BECAUSE THE CORRES PONDING ADJUSTMENT WAS NOT MADE IN THE VALUATION OF THE OPENING STOCK. TAKING A NOTE OF ITA NO.6553/MUM/2008(A.Y. 2005-06) 7 THE WORKING OF THE MODVAT ACCOUNT UNDER THE PROVIS IONS OF SECTION 145A AND THE SUBMISSIONS MADE BY THE APPELLANT I F IND THE ADDITION MADE BY THE AO IS UNJUSTIFIED AND HENCE HE IS DIREC TED TO DELETE THE ADDITION MADE ON ACCOUNT OF MODVAT. THIS GROUND OF APPEAL IS ALLOWED. 18. BEFORE US THE LD. D.R RELIED ON THE ORDER OF T HE ASSESSING OFFICER. 19. AFTER CONSIDERING THE ORDER OF THE ASSESSING OF FICER AND THE CIT(A) WE ARE OF THE VIEW THAT THE ADDITION MADE BY THE ASSES SING OFFICER WAS RIGHTLY DELETED BY THE CIT(A). THE ASSESSEE HAS CLEARLY DE MONSTRATED THAT THERE WILL BE NO EFFECT TO THE ADJUSTMENT TO PROFIT AS PER P& L ACCOUNT BECAUSE OF THE INCLUSION OR ADJUSTMENT OF EXCISE DUTY PAID OR PAY ABLE ON FINISHED GOODS. WE THEREFORE CONFIRM THE ORDER OF THE CIT(A) ON TH IS ISSUE AND DISMISS GROUND NO.3 AND 4 RAISED BY THE REVENUE. 20. IN THE RESULT APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 23 RD DAY OF FEBRUARY 2011. SD/- SD/- (J.SUDHAKAR REDDY) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 23 RD FEB.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.6553/MUM/2008(A.Y. 2005-06) 8 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 15/2/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 17/2/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER