M/s GEI, Hamon Industries Ltd., Bhopal V. The ACIT, 1(1), Bhopal

CO 48/IND/2011

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7206 (ITAT-INDORE)
• Duration Of Justice: 8 month(s) 25 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 07-05-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2005-2006
• Appeal Filed On: 12-08-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: H P VERMA ADV VIPIN GUPTA; ASHISH GOYAL C
• Assessee Lawyers: KESHAVE SAXENA
• Keywords: Search and seizure; Fair market value; Valuation report
• Section: 145; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL , INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH, J.M. AND SHRI R.C.SHARM A, A.M. PAN NO. : AABCG1403B I.T. (SS).A.NOS. 34 TO 40 /IND/2011 A.Y S . : 2001 - 02 TO 2007 - 08 ACIT, 1(1), BHOPAL. M/S.GEI, HAMON INDUSTRIES LIMITED, BHOPAL. VS APPELLANT RESPONDENT PAN NO. : AABCG1403B C.O.NOS.44 TO 50/IND/2011 (ARISING OUT OF I.T.(SS).A.NOS. 34 TO 40/IND/2011 A.Y S . : 2001 - 02 TO 2007 - 08 M/S.GEI, HAMON INDUSTRIES LIMITED, BHOPAL. VS ACIT, 1(1), BHOPAL. APPELLANT RESPONDENT DEPARTMENT BY : SHRI KESHAVE SAXENA, CIT DR RESPONDENT BY : S/ SHRI H.P.VERMA, ADV.,VIPIN GUPTA AND SHRI ASHISH GOYAL, CAS DATE OF HEARING : 30.04.2012 DATE OF PRONOUNCEMENT : 07 . 0 5 .201 2 -: 2: - 2 O R D E R PER R. C. SHARMA, A.M. THESE ARE THE APPEALS FILED BY THE REVENUE AND CROS S OBJECTIONS FILED BY THE ASSESSEE FOR THE ASSESSMENT YEARS 2001- 02 TO 2007-08. 2. COMMON GRIEVANCE OF THE ASSESSEE AND REVENUE IN ALL THE YEARS RELATE TO PART DELETION OF ADDITION BY TH E LEARNED CIT(A) WHICH WAS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DIFFERENCE WORKED OUT BETWEEN GENERATION OF SCRAP A ND AVERAGE RATE OF SCRAP SALE. 3. THE REVENUE IS ALSO AGGRIEVED FOR DELETION OF DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOU NT OF SALARY PAID TO IRENE VALENTINE U/S 40A(2)(B) OF THE INCOME-TAX ACT, 1961. 4. FACTS IN BRIEF ARE THAT THERE WAS SEARCH AT ASSESSE ES BUSINESS PREMISES ON 15.11.2006. DURING COURSE OF S EARCH, THE PHYSICAL INVENTORY WAS TAKEN IN RESPECT OF RAW MATERIAL, WORK IN PROGRESS, FINISHED GOODS AND SCRAP. VALUATI ON WAS CARRIED OUT BY THE DEPARTMENTAL VALUER AND ADDITION WAS MADE ON ACCOUNT OF DIFFERENCE SO WORKED OUT. THE AS SESSING -: 3: - 3 OFFICER REJECTED THE BOOKS OF ACCOUNT BY INVOKING P ROVISIONS OF SECTION 145(3) ON THE PLEA THAT METHOD OF VALUATION OF CLOSING STOCK AS ADOPTED BY THE ASSESSEE WAS NOT WITHIN THE ACCEPTED PRINCIPLE OF ACCOUNT. THE ASSESSING OFFICER ALSO ST ATED THAT THE ASSESSEE WAS GENERATING HUGE VALUE OF SCRAP OUT OF MANUFACTURING PROCESS, WHICH WERE NOT PROPERLY REFL ECTED IN THE BOOKS OF ACCOUNT. THE ASSESSING OFFICER ALSO OB SERVED THAT THE ASSESSEE WAS ENGAGED IN SALE OF SUCH SCRAP OUTS IDE THE BOOKS OF ACCOUNT THUS SUPPRESSED THE ACTUAL PROFIT. THE ASSESSING OFFICER ALSO STATED THAT THE ASSESSEE DOE S NOT MAINTAIN THE STOCK REGISTER TO CONTROL OVER THE POS ITION OF THE STOCK. ACCORDINGLY, THE ADDITION WAS MADE BY THE AS SESSING OFFICER IN DIFFERENT YEARS ON ACCOUNT OF DIFFERENCE WORKED OUT BETWEEN GENERATION OF SCRAP AND AVERAGE RATE OF SCR AP SALE. THE ASSESSING OFFICER ALSO DISALLOWED SALARY PAID T O IRENE VALENTINE BY INVOKING PROVISIONS OF SECTION 40A(2)( B) OF THE ACT. 5. BY THE IMPUGNED ORDER, THE LD. CIT(A) HELD THAT THE ASSESSING OFFICER, WAS NOT JUSTIFIED IN INVOKING PR OVISIONS OF SECTION 145(3) IN THE CASE OF THE ASSESSEE. THE LD. CIT(A) -: 4: - 4 OBSERVED THAT IN THE ASSESSMENT ORDER, THE ASSESSIN G OFFICER HAS NOT SPECIFIED ANY MATERIAL DEFECTS IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. 6. THE LD. CIT(A) ALSO DELETED THE PART OF THE ADDITIO N MADE BY THE ASSESSING OFFICER ON ACCOUNT OF SCRAP S ALES AFTER HAVING THE DETAILED OBSERVATIONS MENTIONED HEREINBE LOW. 7. HE FURTHER OBSERVED THAT FINDINGS /CONCLUSIONS OF T HE ASSESSING OFFICER ARE BASED ON THE VALUATION REPORT OF THE DEPARTMENTAL VALUER WITHOUT TAKING INTO CONSIDERATI ON MIS- CLASSIFICATION AND DISCREPANCIES THEREIN AS POINTED OUT BY THE ASSESSEE. THE DETAILED FINDINGS OF THE CIT(A) IN TH IS REGARD WAS AS UNDER :- I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE LD. AO IN THIS REGARD. I HAVE ALSO PERUSED THE OBSERVATIONS AND FINDINGS OF THE AO MENTIONED IN THE ASSESSMENT ORDER. AFTER DUE CONSIDERATION OF THE MATTER, I HOLD THAT ON THE FACTS AND AS PER LAW , THE AO WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 145 (3) OF THE I.T ACT IN THE CASE OF TH E APPELLANT. I FIND FROM THE ASSESSMENT ORDER THAT TH E -: 5: - 5 AO HAS NOT SPECIFIED OR POINTED OUT ANY MATERIAL DEFECT IN THE BOOKS OF ACCOUNT OF THE APPELLANT COMPANY. IT IS SEEN THAT THE FINDINGS/ CONCLUSIONS OF THE AO ARE BASED ON THE VALUATION REPORT OF DEPARTMENT VALUER WITHOUT TAKING INTO CONSIDERATION MISC1ASSIFICATION AND DISCREPANCIES THEREIN AS POINTED OUT BY THE APPELLANT. IT IS EVID ENT THAT AS PER SYSTEM OF ACCOUNTING, THE APPELLANT MAINTAINS THE STOCK OF RAW MATERIALS IN THE FORM OF BIN CARDS. THERE IS NO STOCK REGISTER MAINTAINED FO R WORK IN PROGRESS AND FINISHED GOODS AS THE APPELLANT MANUFACTURES EQUIPMENTS ON SPECIFIC ORDER FROM CUSTOMERS. THE RAW MATERIALS ARE ISSUED FROM STORES ONLY ON THE BASIS BILLS OF MATERIALS INITIALLY DRAWN UP AS PER THE BID MADE. THERE IS NO SPECIFIC FINISHED GOODS IN STOCK IN THE CASE OF THE APPELLANT AS ONCE THE EQUIPMENTS ARE READY, THEY ARE DESPATCHED. I FIND FORCE IN LD. AR' S SUBMISSION THAT THE RECORDS OF MATERIALS PURCHASED, CONSUMED AND STOCK IN HAND ARE -: 6: - 6 MAINTAINED BY THE APPELLANT BY WAY OF BIN CARDS. AS REGARDS, THE SCRAP MATERIAL THAT IS NOT USABLE I N ANY PARTICULAR WORK AS MENTIONED IN SHEETS OF FINISHED MATERIAL, COPPER ETC. I FIND THAT IN THE APPELLANTS BUSINESS, EVERY MATERIAL NOT USABLE LEF T IN THAT PARTICULAR WORK CANNOT BE TERMED AS SCRAP AS EXPLAINED BY THE APPELLANT THAT IT MAY BE USABLE IN OTHER OPERATIONS. ANY MATERIAL CAN NOT BE CLASSIFIED AS SCRAP TILL IT LOSES ITS UTILITY IN SH APE OR SIZE TO BE UNFIT FOR USE IN ANY WORK. I FIND FORCE IN LD. AUTHORIZED REPRESENTATIVES CONTENTIONS THAT IT IS NOT POSSIBLE TO KEEP RECORDS OF SURPLUS/OFF CUT MATERIAL AT ONE PRODUCTION WORKSHOP WHICH IS USED IN ANOTHER WORKSHOP. I ALSO FIND FROM THE FACTS OF THE APPELLANT'S CASE THAT EXCISE RECORDS ARE REQUIRED TO BE MAINTAINED NOT ONLY FOR RAW MATERIALS PURCHASED AND FINISHED GOODS SOLD BUT ALSO FOR SALE OF SCRAP. THE SALE OF SCRAP DOES ATTR ACT SALES TAX AND EXCISE DUTY. IT IS ALSO PERTINENT TO NOTE THAT THE ACCOUNTING POLICY OF NOT ACCOUNTING -: 7: - 7 SCRAP AT THE YEAR END BUT RECOGNIZING INCOME AT THE TIME OF SCRAP SALE IS BEING REGULARLY FOI1OWED BY THE APPELLANT SINCE BEGINNING AND I DO NOT FIND ANY REASON TO DISTURB THE SAME AS NO INFIRMITY OR IRREGULARITY HAS BEEN NOTICED BY THE AO DURING THE ASSESSMENT OR DURING THE SEARCH AND SEIZURE ACTION. THERE IS NO MATERIAL/ EVIDENCE WITH THE DEPARTMENT TO SUGGEST THAT THERE HAS BEEN ANY SCRAP SALES OUTSIDE BOOKS OF ACCOUNT AND NOT ACCOUNTED FOR BY THE APPELLANT. THAT THE APPELLANT COMPANY IS MAINTAINING EXCISE RECORDS, FILING EXCISE RETURNS AND THESE ARE SUBJECT TO PERIODIC CHECKING AND AUDIT BY THE CENTRAL EXCISE DEPARTMENT. THE NOTES TO ACCOUNT FORMING PART OF AUDITED FINANCIAL STATEMENTS AS WELL AS TAX AUDIT REPORT GIVE QUANTITATIVE DETAILS OF STOCK MAINTAINE D BY THE APPELLANT. THE INCOME TAX LAW DOES NOT PRESCRIBE ANY MAINTENANCE OF PARTICULAR TYPE OF SCRAP RECORDS. I RELY ON THE DECISION OF THE HON'BL E I T A T CHANDIGARH BENCH IN THE CASE OF AVON CYCLES -: 8: - 8 PVT. LTD. VS. IAC, 47 I TD 23 WHEREIN IT WAS HELD THAT IT IS PRACTICALLY IMPOSSIBLE TO MAINTAIN STOCK RECORDS FOR SCRAP GENERATED. THE METHOD OF ACCOUNTING FOLLOWED BY ASSESSEE IN RESPECT OF EARLIER YEARS HAS BEEN CONSISTENTLY ACCEPTED BY REVENUE. IT WAS ALSO OBSERVED BY THE HON'BLE ITAT THAT NON-MAINTENANCE OF STOCK RECORD FOR SCRAP THOUGH A DEFECT BUT IT IS IMPOSSIBLE OF EXECUTION. THE SCRAP IS GENERATED ALMOST DAILY AND IT DEPENDS UPON SEVERAL FACTORS LIKE THE WORKMEN'S EFFICIENCY, THE FATIGUE OF THE MACHINES, THE QUALITY OF THE MATERIAL USED, THE PURPOSE FOR WHICH IT IS USED, TH E FILINGS, CUTTINGS, REJECTION, BREAKAGE, AND SEVERAL OTHER FACTORS. THESE FACTORS CAN NEVER BE UNIFORM. THEY VARY FROM CIRCUMSTANCE TO CIRCUMSTANCE, DAY TO DAY AND YEAR TO YEAR. THE SALES OF THE SCRAP ALS O DEPEND UPON THE UTILITY TO THE BUYER. IN A FACTORY OF THE MAGNITUDE OF THE ASSESSEE, THOUGH THEORETICALLY IT IS POSSIBLE 'TO EXPECT A STOCK RECORD FOR THE SC RAP GENERATED, ON THE PRACTICAL SIDE, IT MAY NOT BE -: 9: - 9 POSSIBLE TO ACCURATELY MAINTAIN IT. THIS ASPECT SHOULD NOT BE MISSED AND, THEREFORE, SHOULD NOT HAVE BEEN INSISTED UPON TO VERIFY THE ACCURACY OF THE ACCOUNTS. THE PREVIOUS PRACTICE FOLLOWED REGULARLY AND CONSISTENTLY AND IN NONE OF THE PREVIOUS YEARS, ANY ADDITION WAS MADE ON ACCOUNT OF SALES OF THE SCRAP EVEN THOUGH IT WAS VARYING FROM YEAR TO YEAR. THE MERE VARIATION IN THE SALES, THEREFORE, CANNOT BE A REASON TO SUPPOSE THAT A LOWER AMOUNT OF SALES IS A RESULT OF MANIPULATION O F ACCOUNTS. THE HON'BLE I T A T ALSO OBSERVED THAT THERE IS NOTHING THAT PROHIBITS AN ASSESSEE FOLLOWING MERCANTILE SYSTEM OF ACCOUNT TO HAVE AN EXCEPTION ABOUT A PARTICULAR ITEM TO HAVE IT BONAFIDE AND FOLLOW IT REGULARLY IN THIS CASE, THE FACT THAT THIS SYSTEM OF ACCOUNTING FOR THE SALE OF SCRAP FOLLOWED BY THE ASSESSEE WAS BONAFIDE IS BORNE OUT BY THE FACTUM OF ITS ACCEPTANCE BY THE -: 10: - 10 REVENUE IN THE EARLIER YEARS. THEREFORE, THERE IS N O REASON WHY IT SHOULD BE DISTURBED, WHEN THE ASSESSEE HAS GIVEN REASONS WHICH ARE COGENT AND ACCEPTABLE. ON COMPARISON OF VALUATION OF INVENTORIES AS VALUE D BY THE DVO AND THE APPELLANT THE FOLLOWING FACTS EMERGE :- PARTICULARS AS PER DVO AS PER APPELLANT ADOPTED BY ASSESSING OFFICER VALUATION OF RAW MATERIAL 1,65,60,565 4,58,40,223 4,58,40,223 VALUATION OF WIP 10,00,74,074 17,74,08,000 17,79,08,000 VALUATION OF FINISHED GOODS 17,83,488 25,58,2000 25,58,2000 VALUATION OF SCRAP 19,28,505 - DIFFERENT VALUES COMPUTED BY ASSESSING OFFICER IN EACH ASSESSMENT YEAR. VALUATION OF STORES - 29,39,000 29,39,000 IT IS SEEN THAT VALUATION OF INVENTORY DONE BY TH E DVO IS MUCH LESS THAN THE VALUATION DONE BY THE -: 11: - 11 APPELLANT. EVEN THE ASSESSING OFFICER, HAS ACCEPTED THE APPELLANTS VALUATION. THEREFORE, IT IS CLEAR T HAT THE VALUATION REPORT OF DVO SUFFERED FROM INCONSISTENCY, MISCLASSIFICATION, DEFECTS AND DISCREPANCIES AND CANNOT BE COMPLETELY RELIED UPON BOTH IN RESPECT OF QUANTITY AND VALUES ADOPTED FOR VALUATION. NO INVENTORY OF COPPER OR OTHER BOUGHT OUT ITEMS HAVE BEEN INCLUDED IN THE DVO'S REPORT. THE LD. AR IN HIS DETAILED SUBMISSIONS HAS ELABORATELY POINTED OUT DISCREPANCIES, DEFECTS IN THE VALUATION DONE BY THE DVO. THE LD. AR HAS ALSO IN HIS SUBMISSIONS HIGHLIGHTED THE DISCREPANCY IN ADOPTION OF VALUATION RATES OF VARIOUS MATERIALS INCLUDING SCRAP ARBITRARILY ADOPTED BY THE DVO. IT IS ALSO SEEN THAT DURING THE SCRUTINY ASSESSMENTS IN THE PAST DONE IN THE CASE OF THE APPELLANT, NO DEFECT IN THE BOOKS OF ACCOUNT WAS FOUND. IT IS SEEN THAT THE AO HIMSELF HAS NOT ADOPTED THE VALUATION OF ITEMS OF INVENTORY DONE BY THE DVO BUT INVOKED -: 12: - 12 PROVISIONS OF SECTION 145(3) IN THE CASE OF THE APPELLANT WHICH UNDER ANY CIRCUMSTANCES CANNOT BE JUSTIFIED. IT IS ALSO SEEN THAT THE LD. AR HAS CATEGORICALLY REBUTTED THE OBSERVATIONS MADE BY THE DVO AND ACCEPTED BY THE AO IN MAKING ASSESSMENT PARTICULARLY RELATING TO SCRAP AND MAINTENANCE OF BIN CARDS. I FIND THAT THE APPELLANT WHICH IS A PUBLIC LIMITED COMPANY HAS DISCLOSED ITS ACCOUNTING POLICIES WITH RESPECT TO INVENTORIES IN ITS ANNUAL AUDITED ACCOUNTS AND THE SAID VALUATION METHOD IS CONSISTENTLY FOLLOWED. I FIND THAT THE AO WAS NOT CORRECT IN COMPUTING RATIO BETWEEN VALUE OF CONSUMPTION OF RAW MATERIALS AND VALUE OF SALE OF SCRAP. I FIND FORCE IN THE LD. AR'S CONTENTIONS THAT THERE ARE VARIOUS BOUGHT OUT ITEMS FORMING PART OF RAW MATERIALS WHERE THERE IS NO SCRAP GENERATION AS THESE PURCHASED PARTS ARE STRAIGHT AWAY FITTED INTO THE EQUIPMENTS MANUFACTURED BY THE APPELLANT. MOREOVER, THE QUANTITIES OF MATERIALS -: 13: - 13 ARE WEIGHED IN KGS. METERS, NUMBERS ETC. BUT THE SAME ARE TAKEN COMPOSITELY BY THE AO IS ERRONEOUS. I FIND THAT THE AO DID NOT PROPERLY APPRECIATE THE BUSINESS PROCESS OF THE APPELLANT AND DREW INCORRECT CONCLUSIONS. THE AO MADE THE ADDITION ON UNACCOUNTED SCRAP SALE BY ADOPTING AN ARBITRARY FLAT 1 % RATE OF SCRAP GENERATION OF THE VALUE OF MATERIALS CONSUMED AS AGAINST SCRAP GENERATION SHOWN BY THE APPELLANT AT 0.41 % (APPROX) IN ALL THESE ASSESSMENT YEARS. I ALSO HOLD THAT THE SALE PRICE OF SCRAP TAKEN AT RS.40/- PER KG. BY THE AO IS NOT AT ALL JUSTIFIED. I T IS SEEN FROM THE SALE OF SCRAP DECLARED BY THE APPELLANT IN ALL THESE YEARS THAT THE PRICE RANGED BETWEEN RS.5 TO RS.L8/- PER KG. EVEN THE DVO HAS VALUED THE SCRAP AT RS.12 TO RS. 15/- PER KG. I FIND FORCE IN THE APPELLANT'S SUBMISSIONS THAT INVENTORY OF SCRAP TAKEN AND VALUED BY THE DVO AT RS.L9,28,505/- DOES CONTAIN PART OF RAW MATERIALS AND THAT THE SAME HAS BEEN TAKEN AND -: 14: - 14 VALUED BY THE APPELLANT IN THE VALUATION OF RAW MATERIALS. IT IS EVIDENT THAT DURING THE SEARCH PROCEEDINGS, NO DOCUMENT OR PAPER HAS BEEN FOUND BY THE AO TO INDICATE ANY SCRAP SALE OUTSIDE THE BOOKS BY THE APPELLANT. IT IS ALSO EVIDENT THAT ADDITION MADE BY THE AO ON ACCOUNT OF UNACCOUNTED SALE OF SCRAP IN THE ASSESSMENT ORDER IN ALL THE ASSESSMENT NOT ONLY BASED ON ESTIMATE BUT ALSO WITHOUT ANY CORROBORATIVE EVIDENC E. MOREOVER, NO ADDITION HAS BEEN MADE BY THE AO IN THE CASE OF THE APPELLANT IN EARLIER. HOWEVER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE, THERE IS NO DENIAL THAT SCRAP IS GENERATED OU T OF THE MANUFACTURING PROCESS WHICH IS SOLD BY THE APPELLANT. THE APPELLANT HAS NO DOUBT DECLARED SCRA P SALE IN ALL THE ASSESSMENT YEARS BUT LOOKING AT THE TOTALIT Y OF THE PICTURE, THE ASSESSING OFFICERS OBSERVATIONS, NATURE OF THE APPELLANT'S BUSINESS, PAST HISTORY OF THE APPELLANT AND APPELLANT S SUBMISSIONS, IN MY OPINION IT WOULD BE FAIR AND REASONABLE IF FOLLOWING ADDITIONS ARE SUSTAINED WHI CH WOULD -: 15: - 15 ALSO MEET THE ENDS OF JUSTICE IN THE APPELLANT'S CA SE TAKING INTO ACCOUNT QUANTITY OF SCRAP GENERATED AND THE RATE AT WHICH THE SAME IS SOLD. S. A.Y. ADDITION MADE ADDITION RELIEF NO. BY THE AO SUSTAINED ALLOWED 1 2001-2002 6,95,402 75,000 6,20,402 2 2002-2003 7,54,602 75,000 6,79,602 3 2003-2004 4,67,970 50,000 4,17,970 4 2004-2005 10,00,041 1,00,000 9,00,041 5 2005-2006 12,37,334 1,00,000 11,37,334 6 2006-2007 20,05,652 1,25,000 18,80,652 7 2007-2008 24,78,660 1,25,000 23,53, 660 THUS THE ABOVE GROUNDS OF APPEALS ARE PARTLY ALLOWE D. 8. WITH REGARD TO DISALLOWANCE OF SALARY PAID TO IRENE VALENTINE, DIRECTOR OF THE ASSESSEE COMPANY BY INVO KING PROVISIONS OF SECTION 40A(2)(B) OF THE ACT, THE LD. CIT(A) OBSERVED AS UNDER :- IN THE CONCLUSION THE AO HAS HELD THAT 'IT CAN LOG ICALLY BE HELD THAT FOR THE PURPOSES OF CAPITAL FORMATION'. T HE APPELLANT ON THE OTHER HAND HAS CONTENDED THAT THIS CONCLUSIO N DESERVES ONLY TO BE IGNORED, AS NONE OF THE REASONS GIVEN BY THE AO FOR THE DISALLOWANCE ARE TENABLE AS ESTABLISHED ABOVE. THE AO HAS NOT BROUGHT ON RECORD ANY EVIDENCE IN SUPPORT O F HIS 'CLAIM' OF THE ALLEGED CAPITAL FORMATION. -: 16: - 16 9. AFTER CONSIDERING ASSESSEES SUBMISSION AS GIVEN AT PAGE 34, THE LD. CIT(A) DELETED THE DISALLOWANCE MA DE U/S 40A(2)(B) AFTER HAVING FOLLOWING OBSERVATIONS :- I HAVE GONE THROUGH THE OBSERVATIONS AND FINDINGS O F THE AO MENTIONED IN THE ASSESSMENT ORDER. I HAVE ALSO CONS IDERED THE SUBMISSIONS OF THE APPELLANT. I FIND THAT ON THE FA CTS AND. IN THE CIRCUMSTANCES OF THE CASE, THE AO WAS NOT AT ALL JU STIFIED IN MAKING DISALLOWANCE OF SALARY PAYMENT TO MS. IRENE VALENTINE DURING A.YS. 2001-02 AND 2002-03. I FIND THAT THE A PPOINTMENT AND REMUNERATION FIXATION OF MS. IRENE VALENTINE WA S MADE IN ANNUAL GENERAL MEETING OF THE APPELLANT COMPANY WHI CH IS A PUBLIC LIMITED COMPANY. THE CONTENTION OF THE AO TH AT SALARY HAS BEEN PAID TO MS. IRENE VALENTINE FOR CAPITAL FORMAT ION AND INFLATING THE EXPENDITURE IN THE COMPANY IS DEVOID MERIT AS SHE HAS BEEN PAID SALARY AFTER DEDUCTION OF TDS AND THE SAID INCOME HAS BEEN OFFERED BY HER IN THE INCOME TAX RETURNS F ILED ALONGWITH OTHER INCOME AT THE SAME TAX RATE. I FIND FORCE IN THE ARGUMENTS MADE BY THE LD. AR THAT THE REASONS GIVEN BY THE AO FOR MAKING THE DISALLOWANCE ARE NOT TENABLE AND CORRECT. MS. I RENE VALENTINE IS A QUALIFIED ENGINEER WITH EXPERIENCE IN BUSINESS AND TOTAL SALARY PAID TO HER TO THE EXTENT OF RS.9.50 LACS IN TWO YEARS COMMENSURATE WITH HER QUALIFICATION, EXPERIENCE AND SERVICE PROVIDED TO THE APPELLANT COMPANY. I FIND THAT SALA RY HAS BEEN -: 17: - 17 PAID ONLY UPTO PAST OF A. Y. 2002-03 AND NOT THEREA FTER. THEREFORE, DISALLOWANCE OF SALARY PAYMENTS TO MS. I RENE VALENTINE OF RS. 6,00,000/- AND RS. 3,50,000/- IN A .Y. 2001-02 AND 2002-03 RESPECTIVELY ARE NOT JUSTIFIED AND THER EFORE, DELETED. THIS GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE A PPELLANT. 10. AGAINST THE ABOVE ORDER OF CIT(A), THE REVENUE IS I N APPEAL BEFORE US AND THE ASSESSEE HAS ALSO FILED CR OSS OBJECTIONS FOR THE ADDITIONS RETAINED BY HIM ON ACC OUNT OF SCRAP SALE. 11. RIVAL CONTENTIONS HAVE BEEN CONSIDERED AND RECORDS PERUSED. FROM THE RECORD, WE FOUND THAT ASSESSEE WA S ENGAGED IN MANUFACTURING OF TAILOR MADE HEAT EXCHAN GERS AND FINED TUBES THERE WAS SEARCH AT BUSINESS PREMISES O F THE ASSESSEE ON 15.11.2006. DURING THE COURSE OF SEARCH , NO INCRIMINATING DOCUMENTS WERE FOUND. THE DEPARTMENT HAS TAKEN THE STOCK LYING AT ASSESSEES PREMISES WITH R ESPECT TO RAW MATERIAL, WORK IN PROGRESS, FINISHED GOODS AND SCRAP. DEPARTMENTAL VALUER VALUED THE STOCK AND THEREAFTER ON ESTIMATE BASIS, THE ASSESSING OFFICER MADE ADDITION ON -: 18: - 18 ACCOUNT OF DIFFERENCE WORKED OUT BETWEEN GENERATION OF SCRAP AND AVERAGE RATE OF SCRAP SALE BY REJECTING THE BOO KS OF ACCOUNT U/S 145(3) OF THE INCOME-TAX ACT, 1961. AS THE REVENUE HAS NOT TAKEN ANY GROUND WITH REGARD TO THE CIT(A)S ACTION FOR HOLDING THAT THE ASSESSING OFFICER WAS N OT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 145(3), THE I SSUE OF NON- APPLICATION OF SECTION 145(3) HAS BECOME SETTLED. T HE RELEVANT QUESTION ASKED DURING THE COURSE OF SEARCH AND THE RESPECTIVE REPLY GIVEN BY THE DIRECTOR OF THE ASSESSEE ARE AS UNDER : (A) DURING SEARCH, STATEMENTS OF SHRI C.E.FERNANDES, CMD AND SHRI S. C. TIWARI, PRODUCTION-IN-CHARGE, WE RE RECORDED. IN RESPONSE TO QUESTION NUMBERS 7,8, 11 & 12 SHRI FERNANDES STATED AS UNDER :- Q.7. CAN YOU PLEASE STATE THE VARIOUS RAW MATERIALS USED, FINISHED GOODS PRODUCED AND SCRAP PRODUCED IF ANY ? ANS. VARIOUS RAW MATERIALS USED ARE STEEL PLATES AND STRUCTURALS, STEEL TUBES, FIN MATERIALS OF ALUMINIUM AND BOUGHT OUT COMPONENTS LIKE MOTORS, FANS, VIBRATION SWITCHES, BELTS AND PULLIES ETC. FI NISHED -: 19: - 19 GOODS PRODUCED ARE AIR COOLED HEAT EXCHANGERS AND AIR COOLED STEAM CONDENSERS. WE ARE GENERALLY BUYIN G RAW MATERIALS TO SUIT THE REQUIRED SIZED TO ENSURE MINIMUM SCRAP GENERATION. DESPITE THIS PURCHASE PRECAUTION, IF SCRAP DOES GET GENERATED, THERE ARE POSSIBILITY OF USAGE IN SMALLER COMPANIES. AFTER AL L AVENUES OF SCRAP UTILIZATION HAVE BEEN EXHAUSTED WE SELL THE REMAINING SCRAP TO THE SCRAP-DEALERS. Q.8. COULD YOU PLEASE QUANTIFY THE SCRAP GENERATE D IN A YEAR ? ANS. : IT IS NOT VERY SIGNIFICANT BUT I WILL PRODU CE THE STATEMENT TOMORROW. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Q.11. CAN YOU PLEASE STATE AT WHAT RATES SCRAP IS SOLD OUT ? ANS. SCRAP VARIES FROM TYPE TO TYPE. HEAV Y SCRAP RATE IS RS. 11000/- TO RS. 12000/- PER TON. -: 20: - 20 LIGHT SCRAP LIKE TURNING AND BORING RATE IS RS. 6000/- TO RS. 7000/- PER TON. Q.12. PLEASE FURNISH THE LIST OF PARTIES TO WHOM YOU SELL SCRAP ? ANS. I WILL FURNISH THE WRITTEN LIST TOM ORROW. SHRI TIWARI STATED IN RESPONSE TO QUESTION NO.10. Q.10. PRODUCTION DH PROCESS ESA FDRUK SCRAP GENERATE GKSRK GS ? ANS : GEKJH GESKK DKSFKK GKSRH GS FD SCRAP DE LS DE GENERATE GKS OTHERWISE OUR PRODUCTION WILL BECOME NON COMPETITIVE, TOTAL MATERIAL PURCHASES ACCOUNTING DK DKQH DE FGLLK SCRAP ESA IFJOFRZR GKSRK GSA PRODUCTION ESA PROCESS (STEEL FABRICATION) DJHC 0.2 LS 0.5 RD DK SCRAP GENERATION GKSRK GS A 12. HOWEVER, NO ADDITION WAS MADE BY ASSESSING OFFICER ON ACCOUNT OF RAW MATERIALS, SEMI FINISHED OR FINIS HED GOODS. ONLY ADDITION WAS MADE ON ACCOUNT OF SCRAP GENERATE D DURING COURSE OF MANUFACTURING. IN AN APPEAL BEFORE THE CI T(A), THE -: 21: - 21 CIT(A) FOUND THAT NO DISCREPANCY WAS FOUND IN THE B OOKS OF ACCOUNT, THEREFORE, THE ASSESSING OFFICER WAS NOT J USTIFIED IN REJECTING BOOKS OF ACCOUNT. THEREAFTER, CIT(A) PROC EEDED TO DECIDE THE ADDITION MADE BY THE ASSESSING OFFICER O N ACCOUNT OF SCRAP GENERATION AND ITS CONSEQUENT SALE. AFTER GIVING DETAILED REASONING WITH REGARD TO THE QUANTUM OF SC RAP GENERATED AND THE VALUE FOR WHICH IT CAN BE SOLD VI S--VIS VALUATION ARRIVED AT BY THE DVO, AFTER RECORDING DE TAILED FINDING, AS REPRODUCED HEREINABOVE, THE LD. CIT(A) DELETED THE SUBSTANTIAL PART OF THE ADDITION ON ACCOUNT OF SCRA P SALE. FROM THE RECORD, WE FOUND THAT THE ASSESSEE IS ENGAGED I N BUSINESS OF MANUFACTURING AND FABRICATION OF ENGINEERING ITE MS ON THE BASIS OF SPECIFIC ORDERS FROM ITS CUSTOMERS. VARIET Y OF RAW MATERIALS WERE USED BY THE ASSESSEE. THERE ARE TWEN TY TYPES OF MATERIAL, WHICH WAS USED IN MANUFACTURING PROCESS, BUT ALL THE ITEMS DO NOT YIELD SCRAP. WE FOUND THAT CUPRU N ICKLE TUBES, BRASS PLATES/TUBES, S. S. TUBES/PIPES, IMPEL LER, MOTORS, BEARING, BELTS AND PULLY, SOLDER WIRE/STICK S, VIBRATION SWITCHES, C. S. SEAMLESS TUBES, M. S. GRATINGS, FOR GE FLANGES/PLUGS, MOTHER HOLLOW, M. S. TUBES, HOT ROLL ED NON -: 22: - 22 ALLOY AND OTHER MISC. ITEMS WERE IN NUMBER AND METE RS AND USED AFTER CUTTING ACCORDING TO THE REQUIRED LENGTH /SIZE, THERE IS NO GENERATION OF ANY SCRAP OUT OF THESE SIXTEEN TYPES OF RAW MATERIALS. THE SCRAP WAS GENERATED ONLY OUT OF THE RAW MATERIAL CONSISTING OF COPPER WIFE, STRIPS/RODS, AL UMINIUM STRIPS/TUBES, M. S. PLATES/SHEETS/ANGLES, B. Q. PLA TES, S. S. PLATES AND C. S. PLATES. 13. WE FOUND THAT THE ASSESSING OFFICER HAS WRONGLY TAKEN SCRAP GENERATION FROM ALL THE 22 ITEMS BY DIS REGARDING THE FACT THAT ONLY SIX ITEMS OUT OF 22 ITEMS WERE G ENERATING SCRAPS. WE FOUND THAT OUT OF TOTAL WEIGHT OF 22 ITE MS AT 33,64,406 KGS. ITEMS WEIGHING 28,00,335 KGS. GENERA TED SCRAP. HOWEVER, THE ASSESSING OFFICER HAS TAKEN RAN DOMLY 1 % AS SCRAP GENERATION OUT OF ALL THE 22 ITEMS AND DET ERMINED SCRAP AT 33,644 KGS. WITHOUT ANY BASIS AND AFTER AP PLYING VALUE OF SCRAP SALE AT RS. 40/- PER KG.,HE ARRIVED AT THE VALUE OF ESTIMATED SCRAP AT RS. 33,45,760/-. WE FOUND THA T SCRAP GENERATING ITEMS USED IN MANUFACTURING WAS WEIGHING 28,00,335 KGS. ONLY AND IF WE APPLY THE ESTIMATES A S MADE BY THE ASSESSING OFFICER, IT SHALL HAVE WEIGHT OF 28,0 03 KGS. ONLY. -: 23: - 23 HOWEVER, THE ASSESSEE HIMSELF HAS SHOWN WEIGHT OF S CRAP GENERATION AT 46,478 KGS., WHICH WAS SOLD FOR RS. 6 ,50,358/- GIVING AN AVERAGE RATE OF RS. 14/- PER KG. WE FOUND THAT SALES OF THE ASSESSEE WAS FULLY VERIFIABLE AND NO SALES W AS FOUND OUTSIDE THE BOOKS OF ACCOUNT. GENERATION AND SALE O F SCRAP WAS SUBJECT TO CENTRAL EXCISE CONTROL AND THERE WAS NO CONCEALMENT OF SALE OF SCRAP. WITHOUT ANY BASIS, TH E ASSESSING OFFICER HAS STATED THAT THERE WAS HUGE GENERATION O F SCRAP. WE FOUND THAT WHATEVER SCRAP WAS GENERATED HAS DULY BE EN SOLD AND THE SALE VALUE HAS BEEN INCORPORATED AS INCOME IN THE MANUFACTURING AND TRADING ACCOUNT. THE SCRAP MENTIO NED IN REGISTERS BH2 AND BH3 INCLUDED THE UNUSABLE AND WAS TE SCRAP. ON VERIFICATION OF VALUERS REPORT, WE FOUND SO MANY DISCREPANCIES. EVEN THE RAW MATERIALS WAS VALUED BY THE DVO AT RS. 1,65,60,565/- AS AGAINST THE ACTUAL VALUE OF RS. 4,58,40,223/-. EVEN DURING COURSE OF ASSESSMENT, TH E ASSESSING OFFICER BY DISREGARDING THE VALUATION ARR IVED AT BY THE DVO TAKEN THE VALUE OF RAW MATERIALS AS PER ASS ESSEES RECORD AT RS. 4,58,40,223/-. SIMILAR IS THE POSITIO N WITH REGARD TO WORK IN PROGRESS, WHICH WAS VALUE BY THE DVO AT RS. -: 24: - 24 10,00,74,074/- IN PLACE OF ACTUAL VALUE AS PER ASSE SSEE AT RS. 17,74,08,000/-. WE ALSO FOUND THAT FINISHED GOODS W AS VALUE BY THE DVO AT RS. 17,83,488/- AS AGAINST THE ACTUAL VALUE ARRIVED AT BY THE ASSESSEE AT RS. 25,82,000/-. THUS , IT IS CLEAR THAT THE VALUATION OF THE INVENTORY DONE BY THE DVO WAS MUCH LESS THAN THE VALUATION DONE BY THE ASSESSEE . EVEN THE ASSESSING OFFICER HAS ACCEPTED THE ASSESSEES VALUA TION, WHICH CLEARLY SHOW THAT DVOS REPORT SUFFERS FROM INCONSI STENCY, MIS-CLASSIFICATION AND DEFECTS AND DISCREPANCIES. E VEN DURING COURSE OF VALUATION AND ASSESSMENT PROCEEDINGS, THE ASSESSEE HAS HIGHLIGHTED DISCREPANCIES IN ADOPTION OF VALUAT ION RATES OF VARIOUS MATERIALS INCLUDING SCRAP BY THE DVO, BUT T HE SAME WAS NOT TAKEN CARE OF. WHEN NO DEFECT WAS POINTED O UT IN THE BOOKS OF ACCOUNT EVEN DURING THE COURSE OF SCRUTINY ASSESSMENT AND WHEN THE VALUERS REPORT WAS NOT AC CEPTED BY THE ASSESSING OFFICER, THERE WAS NO REASON FOR REJE CTION OF BOOKS OF ACCOUNT U/S 145(3) AND THE CIT(A) HAS CORR ECTLY OBSERVED THAT THE ASSESSING OFFICER WAS NOT JUSTIFI ED IN REJECTING THE BOOKS OF ACCOUNT U/S 145(3). EVEN WIT H REGARD TO THE ACCOUNTING POLICY, THE ASSESSEE, WHICH IS A PUB LIC LIMITED -: 25: - 25 COMPANY HAS PROPERLY DISCLOSED ITS ACCOUNTING POLIC Y WITH RESPECT TO THE INVENTORIES IN ITS ANNUAL AUDITED AC COUNT AND THE SAID VALUATION METHOD IS CONSISTENTLY FOLLOWED. AFTER VERIFYING ALL THE DOCUMENTS, THE LD. CIT(A) HAS REC ORDED A FINDING TO THE EFFECT THAT THE ASSESSING OFFICER HA S NOT CORRECTLY COMPUTED RATIO BETWEEN THE VALUE OF CONSUMPTION OF RAW MATERIAL AND VALUE OF SALE OF SCRAP. FURTHERMORE, S INCE MOST OF THE PART OF THE RAW MATERIAL WERE DIRECTLY USED AS IT IS AND HAVING NO SCRAP GENERATION, THE ASSESSING OFFICER W AS NOT JUSTIFIED IN TAKING PERCENTAGE OF SCRAP OF ALL TYPE S OF RAW MATERIAL. UNDISPUTEDLY, THE ASSESSEE WAS ENGAGED IN MANUFACTURING OF ORDER BASED EQUIPMENT, WHERE SPECI FIC RAW MATERIALS TO BE NEEDED THEREIN DID NOT GENERATE ANY WASTAGE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN EVEN TAK ING SCRAP GENERATION OUT OF THESE RAW MATERIALS, WHICH WERE S PECIFICALLY POINTED OUT BY THE ASSESSEE DURING THE COURSE OF AS SESSMENT ALSO. WE ALSO FOUND THAT SALE PRICE OF THE SCRAP RA NGES BETWEEN RS. 5/- TO RS. 18/- PER KG. AND EVEN THE DVO HAS VA LUED THE SCRAP AT RS. 12/- TO RS. 15/- PER KG., WHEREAS THE ASSESSING OFFICER HAS TAKEN THE VALUE OF SCRAP AT RS. 40/- PE R KG, WHICH -: 26: - 26 WAS NOT AT ALL JUSTIFIED. EVEN DURING THE COURSE OF SEARCH, NO DOCUMENTS OR PAPERS WERE FOUND BY THE ASSESSING OFF ICER TO INDICATE THAT THERE WAS ANY SCRAP SALE OUTSIDE THE BOOKS OF ACCOUNT, WHEREAS ADDITION HAS BEEN MADE BY THE ASSE SSING OFFICER IN ALL THE ASSESSMENT YEARS UNDER CONSIDERA TION ON ACCOUNT OF UNACCOUNTED SALE OF SCRAP, WHICH IS NOT ONLY BASED ON THE ESTIMATE BUT ALSO WITHOUT ANY CORROBORATIVE EVIDENCE. WE ALSO FOUND THAT EVEN IN EARLIER YEARS, DURING SC RUTINY ASSESSMENT, NO ADDITION WAS MADE ON ACCOUNT OF SUCH GENERATION OF SCRAP AND SALE OUTSIDE BOOKS OF ACCOU NT. IT IS NOT A CASE WHERE ASSESSEE HAS DENIED GENERATION OF SCRA P OUT OF ITS MANUFACTURING PROCESS, BUT AT THE SAME TIME WHATEVE R SCRAP HAS BEEN GENERATED HAVE BEEN DECLARED AND SALE VALU E OF WHICH WAS ALSO TAKEN INTO ACCOUNT WHILE COMPUTING I TS INCOME. IN ALL THE ASSESSMENT YEARS UNDER CONSIDERA TION, THE ASSESSEE HAS DECLARED SCRAP SALE. FROM THE RECORD, WE ALSO FOUND THAT PERIODICALLY WHEN THE WASTE MATERIAL ACC UMULATES, IT IS SORTED OUT BY THE SHOP FLOOR TECHNICAL PERSON S AND SEGREGATED. IF THERE IS NO POSSIBILITY OF USING IT THAT MATERIAL IS SEGREGATED AND ENTERED IN THE EXCISE REGISTER AFTER SUCH -: 27: - 27 SEGREGATION AND THEN ONLY IT IS SOLD TO THE SCRAP D EALER. THE PRICE VARIES FROM ITEM TO ITEM AS WELL AS MATERIAL TO MATERIAL. THERE IS A DIFFERENCE IN SELLING PRICE OF STAINLESS STEEL (SS) SCRAP, MILD STEEL (MS) SCRAP, COPPER SCRAP, TUBE SC RAP ETC. 14. FROM THE RECORD, WE ALSO FOUND THAT THE ASSESSEE H AS SHOWN YEAR-WISE SALES OF SCRAP AS UNDER :- A.Y. SCRAP VALUE AMOUNT (RS.) PERCENTAGE OF VALUE OF ACTUAL SALE OF SCRAP TO THE CONSUMPTION OF RAW MATERIAL 2001 - 02 6,50,358 0.41 % 2002 - 03 2,93,518 0.24 % 2003 - 04 6,03,150 0.27 % 2004 - 05 2,70,279 0.09% 2005 - 06 1,58,266 0.05 % 2006 - 07 1,36,388 0.04 % 2007 - 08 2,67,340 0.04 % AVERAGE 0.163 % EACH YEAR 15. BY TAKING INTO CONSIDERATION ALL THESE EVIDENCES ON RECORD AND AFTER GIVING DETAILED FINDING THE CIT(A) HAS RETAINED PART OF THE ADDITION ON ACCOUNT OF SCRAP SALE TO ME ET END OF JUSTICE. THE DETAILED FINDING RECORDED BY THE LD.CI T(A) HAS NOT BEEN CONTROVERTED BY THE DEPARTMENT BY BRINING ANY POSITIVE MATERIAL ON RECORD, ACCORDINGLY, WE DO NOT FIND ANY REASON TO -: 28: - 28 INTERFERE IN THE FINDING AND CONCLUSION OF THE CIT( A), WHICH IS BASED ON MATERIAL PLACED ON RECORD. 16. IN THE RESULT, THE GROUND TAKEN BOTH BY THE REVENUE AND ASSESSEE WITH REGARD TO ADDITION MADE ON ACCOUN T OF SCRAP SALE IS DISMISSED. 17. WITH REGARD TO DISALLOWANCE OF SALARY U/S 40A(2)(B) , WE FOUND THAT THE ASSESSEE IS A PUBLIC LIMITED COMPANY . THE APPOINTMENT AND REMUNERATION OF MRS. IRENA VALENTIN E WAS MADE IN ANNUAL GENERAL MEETING OF THE ASSESSEE COMP ANY. NOT ONLY TDS HAS BEEN DEDUCTED OUT OF THE PAYMENT OF REMUNERATION BUT THE INCOME HAS BEEN OFFERED BY MRS . IRENA VALENTINE IN HER RETURN OF INCOME. THE ASSESSING OF FICER HAS DISALLOWED THE REMUNERATION BY INVOKING PROVISIONS OF SECTION 40A(2)(B). AS PER PROVISIONS OF SECTION 40A(2)(A), WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN MADE TO A PERSON REFERRED TO IN CLAUSE (B) OF SECTION 40A(2) AND THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REG ARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILIT IES FOR WHICH PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSI NESS OF THE -: 29: - 29 ASSESSEE OR THE BENEFITS DERIVED BY HIM THERE FROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EX CESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. T HE ONUS IS ON THE REVENUE TO SHOW THAT PAYMENT SO MADE ARE NOT AS PER LEGITIMATE NEEDS OF THE BUSINESS OR THE BENEFITS DE RIVED FROM SUCH PAYMENT, IS NOT ACCORDING TO THE SERVICES SO R ENDERED. IN THE INSTANT CASE, THE ASSESSING OFFICER HAS DISALLO WED THE PAYMENT BY OBSERVING THAT SERVICES RENDERED BY MRS. IRENE VALENTINE WAS NOT SUBSTANTIALLY PROVED ALONGWITH THE DOCUMENTARY EVIDENCE. NOWHERE THE ASSESSING OFFICER HAS STATED THAT MRS. IRENE VALENTINE HAS NOT RENDERED A NY SERVICES, NOR THAT THE QUALIFICATION AND EXPERIENCE OF IRENE WAS NOT COMMENSURATE WITH THE SERVICES PROVIDED TO THE ASSE SSEE COMPANY. HAD IT BEEN THE CASE OF ASSESSING OFFICER THAT NO SERVICES WERE RENDERED, THEN THE ACTION OF THE ASSE SSING OFFICER TO DISALLOW THE ENTIRE PAYMENT TO MRS. IRENE VALENT INE WAS JUSTIFIED. HOWEVER, THE ASSESSING OFFICER HAS JUST STATED THAT ASSESSEE HAS NOT SUBSTANTIALLY PROVED ALONGWITH THE DOCUMENTARY EVIDENCE FOR THE SERVICES SO RENDERED. HOWEVER, WE ALSO FOUND THAT WHILE DELETING DISALLOWANCE OF -: 30: - 30 REMUNERATION, THE LD. CIT(A) HAS CATEGORICALLY RECO RDED A FINDING TO THE EFFECT THAT MRS. IRENE VALENTINE IS A QUALIFIED ENGINEER AND EXPERIENCE IN BUSINESS AND SALARY PAID TO HER WAS COMMENSURATE WITH QUALIFICATION AND THE SERVICE S PROVIDED TO THE ASSESSEE COMPANY. IT MEANS AS PER F INDINGS OF THE LEARNED CIT(A), NEITHER THERE WAS EXCESSIVE PAY MENT NOR UNREASONABLE PAYMENT WAS MADE TO IRENA VALENTINE LO OKING TO HER QUALIFICATION, EXPERIENCE AND SERVICES SO PROVI DED TO THE ASSESSEE COMPANY. KEEPING IN TO VIEW THESE FINDING S OF CIT(A) VIS--VIS OBSERVATION OF THE ASSESSING OFFICER, WE DIRECT TO RESTRICT DISALLOWANCE OF SALARY TO THE EXTENT OF 50 % OF THE REMUNERATION SO PAID TO MRS. IRENE VALENTINE. 18. NOW WE SHALL TAKE UP THE CROSS OBJECTION FILED BY T HE ASSESSEE IN ALL THE YEARS PERTAINING TO THE ADDITIO N RETAINED BY THE LEARNED CIT(A) ON ACCOUNT OF DIFFERENCE WORKED OUT BETWEEN GENERATION OF SCRAP AND AVERAGE RATE OF SCR AP SALES. WE HAVE DISCUSSED IN DETAIL WHILE DEALING WITH THE REVENUES APPEAL THAT THE ADDITIONS HAVE BEEN MADE BY THE AO ON ACCOUNT OF SCRAP GENERATION. HOWEVER, THE AO HAS AP PLIED THE ESTIMATED RATE OF SCRAP ON ALL TYPES OF RAW MATERIA LS USED OUT -: 31: - 31 OF WHICH MOST WERE NOT GENERATING ANY SCRAP. WE FI ND THAT OUT OF THE TOTAL 22 TYPES OF RAW MATERIAL BEING USED BY THE ASSESSEE IN THEIR MANUFACTURING PROCESS, ONLY SIX I TEMS WERE GENERATING SCRAP. WE ALSO FIND THAT THE DEPARTMENT AL VALUER HAS NOT PROPERLY VALUED THE SCRAP BY APPLYING THE R ATES AT WHICH THE SCRAP WAS BEING SOLD AND EVEN ACCEPTED BY THE AO. THE LEARNED CIT(A), CONSIDERING ALL THE FACTUAL POS ITION WITH REGARD TO THE QUANTUM OF SCRAP GENERATED AND THE VA LUE FOR WHICH IT CAN BE SOLD VIS--VIS THE VALUATION ARRIVE D AT BY THE DVO, UPHELD THE PART ADDITION MADE ON ACCOUNT OF SC RAP. AFTER NARRATING THE FINDINGS OF THE LEARNED CIT(A) AT PAGES 4 TO 15 OF THIS ORDER, WE FIND THAT THE LEARNED CIT(A) H AS VERY REASONABLY RETAINED PART OF THE ADDITION ON ACCOUNT OF SCRAP GENERATED AND SOLD. ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS RECORDED BY THE LEARNED CIT(A) IN RETAINING THE ADDITION ON ACCOUNT OF SCRAP GENERATI ON AND ITS SALES. 19. IN THE RESULT, THE CROSS APPEALS FILED BY THE ASSESSEE IN ALL THE YEARS UNDER CONSIDERATION ARE D ISMISSED. -: 32: - 32 20. IN THE RESULT, THE APPEALS OF THE REVENUE ARE ALLO WED IN PART, WHEREAS ALL THE CROSS OBJECTIONS FILED BY THE ASSESSEE IN ALL THE YEARS ARE DISMISSED. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON _7 TH MAY, 2012. S D / - SD/ - (JOGINDER SINGH) ( R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED :_7 TH MAY, 2012. CPU* 304.5