Commissioner of Income Tax, Kota V. Seaward Exports Pvt. Ltd.

ITA/137/2012

AI Insights

The case involves the Commissioner of Income Tax, Kota as the appellant and M/s Seaward Exports Pvt. Ltd. as the respondent. The dispute centered on the assessment year 2007-08, where the Assessing Officer made several additions to the income of the assessee company based on the valuation of stock and claims of breakage, as well as non-deduction of TDS on certain payments. The CIT (A) and the Tribunal found in favor of the assessee, leading to the Department's appeal to the High Court. The High Court's decision affirmed the lower authorities' rulings, dismissing the appeal and upholding the method of stock valuation and the breakage claims as well as the non-deduction of TDS on the grounds that the payments were not made under a regular contract but were based on arrangements that did not necessitate TDS deduction.

• Counselvise Citation: [2016] 140 COUNSELVISE.COM (IT) 799899 (HC-RAJASTHAN)
• Appeal Type: Others
• Pronouncement Date: 12-09-2016
• Assessment Year: misc
• Other Referred Cases: CIT Vs. British Paints India Ltd., 188 ITR 44
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: NARESH GU PTA
• Assessee Lawyers: PARINITOO JAIN
• Keywords: FIFO method; Income tax appeal; TDS non-deduction; Under valuation of stock; Breakage claim
• Section: 142(1); 143(2); 40(a)(ia)

Judgement Text

"1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR. D.B. Income Tax Appeal No. 137/2012. Commissioner of Income Tax, Kota Vs. M/s Seaward Exports Pvt. Ltd. DATE OF ORDER : 12.09.2016 HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE BANWARI LAL SHARMA Ms. Parinitoo Jain, for appellant. Mr. Naresh Gupta, for the respondent. ***** 1. By way of this appeal, the Department has challenged the judgment and order of the Tribunal which has affirmed the order of the CIT (A). 2. The facts of the case are that the assessee respondent company is engaged in the business of export of stones. The return of the income was filed on 15.11.2007 for A.Y. 2007- 08 at an income of Rs. 46,55,550/-. The case was selected for scrutiny and notice under Section 143(2), 142(1) and notice was duly served on the assessee. During the course of assessment proceedings it was found by the Assessing Officer on perusal of stock and sale details that the value of breakage and closing stock was calculated by using average FIFO method after taking purchase cost into consideration. The AO required the director of the company to explain the said statement and after submission of the explanation it 2 was found by the AO that the assessee had not followed the accepted FIFO method. The AO calculated the cost of stock by adopting the average cost of purchases and even after adopting the average cost the cost per sq. mtr. came to Rs. 238.61/- whereas the assessee had adopted the average cost at Rs. 176.63. Further, the AO added average direct expenses cost to the average purchase cost i.e. Rs. 238.61 + Rs. 31.31 which came to Rs. 269.92 per sq. mtr. The value of stock shown in the books was Rs. 9588146/- against Rs. 14652183/- by taking the value @ Rs. 269.92 per sq. mtr. Hence the stock was under valued by Rs. 5064037/- which was added in the income following the judgment of the Hon’ble Supreme Court in the case of CIT Vs. British Paints India Ltd., 188 ITR 44. The AO observed that on the total goods including purchases and closing stock of 2,82,254.16 sq. mtr., breakage of Rs. 35,925/- was claimed @ 12.70%. The assessee had claimed more than the accepted breakage rate which in the assessee own case for AY 2006-07 was 7.94%. The AO further held that since the closing stock was not kept as per FIFO method so the real production in breakage could not be ascertained and hence the breakage was allowed at the preceding years rate i.e. 7.9% and the rest of excess claim for Rs. 3677709/- was disallowed and added to the income 3 of the assessee. Regarding disallowance to be made u/s 40 (a) (ia) on account of non deduction of TDS on the freight inward. Therefore, an addition of Rs. 631036/- was made by the AO. It was also found by the AO that assessee company had made payment of Rs. 23,01,840/- under the head clearing and forwarding expenses out of which TDS was deducted upon a small amount of Rs. 485853/- @ 2.02%. It was observed that TDS was not deducted on reimbursement charges so the AO made an addition of Rs. 2292664/- by disallowing the same u/s 40(a)(ia). The AO also found that payment to shipping agents for Rs. 1304132/- were subject to TDS but no TDS was deducted and hence the expenses was disallowed u/s 40(a)(ia). 2.1. Against the order of AO, the assessee filed an appeal before the CIT. However, in respect of addition of Rs. 5064037/- account of under valuation of stock, it was held by the CIT (A) that there was no justification to disturb the method of valuation of stock followed by the assessee so the addition made was deleted. In respect of addition of Rs. 3647709/- on account of breakage, the CIT (A) after comparison with the previous year found the rate of breakage inappropriate and deleted the addition. With regard to addition on account of disallowance u/s 40(i)(ia) for Rs.631036/- on freight inward, it was held by CIT (A) 4 that there was no evidence of the contract entered into with 5 truck owners so there was no requirement to deduct the TDS u/s 194C and accordingly the addition was deleted by the CIT(A). 2.2 Further, the disallowance u/s 40(a)(ia) made on account of payment to non resident shipping companies, for Rs. 1304132/- it was held that there was no evidence that Sai Shipping Service and three others were agents of the assessee so no TDS was required to be deducted and hence the addition wad deleted by the CIT(A). 2.3 That being aggrieved by the order of the CIT (A) the department filed an appeal before the Tribunal. In respect of addition of Rs. 50,64037/- on account of under valuation of stock, it was held by the Tribunal at para 7 of its order that the statement of the Director was not read completely and the Accounting Standard 2 was also not applied correctly and further, there was no change in the method of accounting applied in the earlier years. Therefore, the CIT (A) was justified in deleting the addition. With regard to the addition of Rs. 36,47,709/- made by the AO on account of breakage claimed by the assessee at 12.70% against the claim of 7.94% made for previous year, it was held by the Tribunal at para 13 of its order that the findings of the CIT (A) remained uncontroverted so the findings being finding of 5 fact, the Tribunal confirmed the order of the CIT(A). Further, in respect of Rs. 6,31,036/- made by the AO u/s 40(a)(ia) it was held by the Tribunal at para 18 of its order that the CIT (A) was justified in deleting the addition as the total payment did not exceed Rs. 50,000/- so the order of the CIT (A) was confirmed. On the issue of addition of Rs. 22,92,664/- made u/s 40(a)(ia) in respect of expenses made under various heads it was held by the Tribunal at para 22 of its order that the payments made by the assessee were on account of reimbursement of expenses or payment made on crane charges which were not hit by provisions of section 40(a)(ia) as there was no regular contract. So o interference was required in the findings of the CIT (A) and hence the made addition made by the AO was deleted. Further, disallowance of Rs.13,04,132/- made u/s 40(a)(ia) for payments made to non resident shipping company, it was held by the Tribunal para 27 of its order that there was no reason to interfere with the finding of the CIT (A) and hence the addition was deleted. The Tribunal dismissed the appeal of the department and confirmed the order of the CIT (A) vide order dated 21.10.2011. Being aggrieved against the aforesaid order of the Tribunal, the appellant revenue submits the further appeal under Section 260A. 6 3. Counsel for the appellant has submitted revised substantial questions of law which reads as under: “(1) Whether the Tribunal was legally justified in upholding the order of the CIT (A) and deleting the addition of Rs. 50,64,037/- made on account of under valuation of closing stock when the Assessing Officer adopted the average cost method followed by the assessee and did not change the formula of calculating the cost of inventories? (2) Whether the findings of the Tribunal are perverse in deleting the addition made for under- valuation of closing stock when the Assessing Officer applied average cost method including the average cost of direct expenses on the basis of books of accounts, in accordance with the procedure prescribed in Accounting Standard? (3) Whether the findings of the Tribunal are perverse in deleting the addition of Rs. 36,47,709/- and increasing the claim of breakage to 12.70% against 7.94% applied by the Assessing Officer taking into account the rate of the preceding previous year i.e. 7.94% when the sale price for the relevant year was less than the earlier year? (4) Whether the findings of the Tribunal are perverse in deleting the addition of Rs. 6,31,036/- made u/s 40(a)(ia) on account of freight expenses being against the provisions of Section 194C which applies to every financial year irrespective of the term of contract and the number of contractors? (5) Whether the findings of the Tribunal are perverse in deleting the addition of Rs. 6,31,036/- on account of freight payment when admittedly the payment during the year exceeded Rs. 50,000/- and there was a short term contract between the assessee and the contractors? (6) Whether the findings of the Tribunal are perverse in deleting the addition of Rs. 22,92,664/- made u/s 40(a)(ia) on account of clearing and forwarding charges on which the TDS was not deducted when the same were hit by provisions of Section 194C since the definition of “work” is inclusive u/s 194C? (7) Whether the findings of the Tribunal are perverse in deleting the addition of Rs. 13,04,132/- made u/s 40(a)(ia) made on account 7 of Ocean Freight paid to the agents of non residents on which TDS u/s 194C was not deducted?” 4. Counsel for the appellant has taken us through to each of the questions and the contention which has been taken by the appellant is that the Tribunal and the CIT (A) have committed serious error in reversing the order of the Assessing Officer inasmuch as the physical verification of the closed stocks which was done was not proper, and therefore, the Assessing Officer while considering the closing stock has valued on the basis of FIFO method and has come to the conclusion. Even on the breakage percentage which was fixed by the Assessing Officer was just and proper and CIT (A) and the Tribunal have committed serious error in refusing the above percentage given by the Assessing Officer. In Para 7, the Assessing Officer held as under: “After considering the submissions and perusing the material on record, we find no infirmity in the finding of ld. CIT (A). The AO has disturbed the valuation of closing stock without assigning any cogent reason. The assessee has maintained complete books of account. All the purchases have been entered in the purchase register and sales have also been entered in the sale register. At the end of the year on physical verification, the valuation of closing stock has been made on the basis of method adopted in past which has been accepted by the department itself. Therefore, in our considered view, there was no reasoning to disturb the valuation of closing stock by the AO. Neither AO has given effect of method of valuation on the opening stock at beginning of 8 the year nor any effect has been given in subsequent year. Therefore, for this reason also the AO was not justified in disturbing the method of valuation of closing stock adopted by the assessee. Accordingly, we hold that ld. CIT (A) was justified in deleting the addition, more especially as the finding of ld. CIT (A) remained uncontroverted. This ground of the department fails.” 5. She has taken us to the fact of 194C where the payment which was made to the 5 contractors was beyond 50,000/-, however Tribunal in Paragraph 9 and 16.2. observed as under: “9. The observation of the AO and the submissions of assessee has been discussed by ld. CIT (A) at pages 6 to 8 of his order, are as under:- “The assessing officer opined that breakage claim at 12.70% was “much more than normally accepted breakage even in export trade” for he had noticed that in the case of appellant itself breakage claimed in previous year was only 7.94% and “because Company’s management and business have been same in both year”, in his view “it was appropriate comparison. From the fact that the average rate at which the goods were sold this year was Rs. 601.80 per sq mtr as compared with the rate of Rs. 627.20 per sq. mts in the previous year, the assessee has exported inferior quality goods in comparison to last year … this year breakage claim for the year should have been made less than that last year. At least it cannot be more than that in any case”. In the opinion of the assessing officer, because “record of closing stock has not been kept as per FIFO method … the position of real production and breakage/wastage cannot be ascertained.” In this view of things, he restricted the breakage claim at 7.94% and applied “true average cost” of Rs. 269.92 determined by him in connection with valuation of closing stock, to arrive 9 at concealment of stock on account of excessive breakage claim at Rs. 36,47,709/-. To support his decision, the assessing officer referred to the cases of Raja Textiles Ltd. (86 ITR 673), Mc Dowell and Co. and British Paints India Ltd. Through letter dated 04.02.2010, the appellant claimed that higher breakage in this year was due to several reasons consisting of need to maintain high quality in export, being first year of in-house manufacturing/processing, a large portion of work was got done manually because all machines were not put to use and breakage was high due to lack of experience at processing and use of rough stone purchased from URDs. The appellant also objected to conclusion of the assessing officer that goods exported this year were of inferior quality and breakage claim should have been lower. It was explained that average sale price was lower because the appellant had operated at lower margin due to severe competition in the export market.” “16.2. To begin with, there is no evidence that the assessee had entered into a contract with any of the five truck owners to carry its goods through out the year. Further, there is merit in contention of the assessee that use of available truck was dictated by commercial expediency. The advisory of the assessing officer that “a professionally managed company should make such big payments only to such persons for whom they are able to deduct TDS” is misplaced, for the business decisions are a prerogative of the business person, and it can in no way be the basis for disallowance.” 6. Learned counsel for the appellant has also taken us through the other grounds regarding the reimbursement under 40 (a)(ia) for the payment was made beyond 50,000/-, therefore, there was shipping payment also and CIT and Tribunal have committed error. 10 7. On the other hand, counsel for the respondent Mr. Naresh Gupta has supported the order of the CIT (A) and contended that there is no substantial question of law, thus appreciation of evidence of law and view taken by the CIT is according to law and no interference is called for. 8. We have heard the learned counsel for the parties at length. 9. Taking into consideration the detail order passed by the CIT (A) and Tribunal, we are of the opinion that first changing the method for closing stock, the view taken by the Tribunal is correct. The Assessing Officer before changing the method and adopting any other method, he has to change the same as a whole and in that view of the matter, the view taken by the Tribunal and the CIT (A) is just and proper. 10. Regarding breakage of the production, in our view, the Tribunal has correctly appreciated the facts and previous year method is the correct method and therefore, 7.94 which has been stated by the assessee and which was accepted for the previous year, there was no reason to increase the same. 11. We are not reproducing the observations made by the Tribunal and CIT (A) for the sake of brevity regarding 194C and in Para 16.2 referred hereinabove but the same is clear 11 there was no contract. In that view of the matter, other payment which was made was less than 50,000/- to every trip. Summarizing the same at the end of the year on the trip basis was not a contract but it was an arrangement between the owner or the truck driver with the assessee. 12. In that view of the matter, the Tribunal has rightly relied upon 40(a)(ia). The view taken by the Tribunal regarding the payment of reimbursement is also correct so also finding of shipping. In that view of the matter, no substantial question of law is involved, hence the appeal is dismissed. (Banwari Lal Sharma), J. (K.S. Jhaveri), J. /bm gandhi 8 "