M/s Everest Manufacturing Co., RAJKOT-GUJARAT V. The Income Tax Officer, Ward-1(3), JAMNAGAR

ITA 1293/RJT/2010

• Counselvise Citation: 129324914 RSA 2010
• Duration Of Justice: 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-07-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 22-07-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 29-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MK SINGH
• Assessee Lawyers: DR ADHIA
• Keywords: Business income
• Section: 69C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH SMC, RAJKOT BEFORE SHRI N.R.S. GANESAN (JM) I.T.A. NO.1293/RJT/2010 (ASSESSMENT YEAR 2006-07) M/S EVEREST MANUFACTURING CO VS THE ITO, WD.1(3) PLOT NO.53/1/B, STU, GIDC JAMNAGAR JAMNAGAR PAN : AAAFE5581A (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI DR ADHIA RESPONDENT BY: SHRI MK SINGH O R D E R THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF CIT(A), JAMNAGAR DATED 08-09-2010 FOR THE ASSESSMENT YEAR 2 006-07. 2. THE FIRST ISSUE ARISES FOR CONSIDERATION IS ASSE SSMENT OF VALUE OF THE EXCESS STOCK FOUND DURING THE COURSE OF SURVEY OPER ATION. 3. SHRI DR ADHIA, THE LD.REPRESENTATIVE FOR THE ASS ESSEE SUBMITTED THAT THERE WAS A SURVEY AT THE BUSINESS PREMISES ON 10-11-2005 . DURING THE COURSE OF SURVEY OPERATION THE REVENUE AUTHORITIES FOUND EXCE SS STOCK OF FINISHED BRASS GOODS. THE ASSESSEE INCLUDED THE EXCESS STOCK TO T HE EXTENT OF RS. 2,24,642 IN THE BOOKS OF ACCOUNT SUBSEQUENT TO SURVEY AND THE P ROFIT WAS ALSO OFFERED FOR TAX. SUBSEQUENTLY IT WAS FOUND THAT WHILE DETERMIN ING THE VALUE OF EXCESS STOCK FINISHED GOODS, DUE DEDUCTION FOR WEIGHT OF BUCKETS AND PACKING MATERIAL, ETC USED FOR WEIGHING THE GOODS WAS NOT ALLOWED. THE A SSESSEE, THEREFORE, FILED A ITA NO.1293/RJT/2010 2 CHART RECONCILING THE ENTIRE FIGURE OF THE EXCESS F INISHED GOODS FOUND BY ALLOWING DUE CREDIT TO THE WEIGHT OF BUCKETS AND PACKING MAT ERIALS USED WHILE WEIGHING THE GOODS. THE ASSESSEE HAS ALSO INCORPORATED THE EXCESS STOCK IN THE BALANCE- SHEET AND THE SAME WAS SHOWN AS CLOSING STOCK. THE ASSESSEE FURTHER CLAIMED DEDUCTION TOWARDS SALARY AND INTEREST TO THE PARTNE RS ON THE EXCESS STOCK. HOWEVER, THE ASSESSING OFFICER FOUND THAT THE VALUE OF THE EXCESS STOCK HAS TO BE CLASSIFIED AS INCOME FROM OTHER SOURCES AND THERE FORE, HE REJECTED THE CLAIM OF THE ASSESSEE FOR INTEREST AND SALARY TO THE PARTNER S. THE LD.REPRESENTATIVE HAS PLACED HIS RELIANCE ON THE DECISION OF THIS TRIBUNA L IN THE CASE OF M/S RAJWADI PAPAD HOUSE IN ITA NO.927/RJT/2009 ORDER DATED 10-1 2-2010 AND SUBMITTED THAT ON IDENTICAL CIRCUMSTANCE, THIS TRIBUNAL FOUND THAT THE ADDITION MADE ON ACCOUNT OF EXCESS STOCK HAS TO BE ASSESSED AS BUSINESS INCO ME. THEREFORE, THE CLASSIFICATION MADE BY THE LOWER AUTHORITY IS NOT C ORRECT. ONCE IT IS ASSESSED AS BUSINESS INCOME, ACCORDING TO THE LD.REPRESENTATIVE , THE ASSESSEE IS ENTITLED FOR SALARY AND INTEREST TO PARTNERS. THE LD.REPRESENTA TIVE FURTHER SUBMITTED THAT THE VALUE OF THE BUCKETS AND PACKING MATERIALS ARE TO B E REDUCED FROM THE VALUE OF EXCESS STOCK FOUND DURING THE COURSE OF SURVEY OPER ATION AND ONLY THE NET VALUE OF THE EXCESS STOCK FOUND COULD BE ADDED. 4. ON THE CONTRARY, SHRI MK SINGH, THE LD.DR SUBMIT TED THAT ADMITTEDLY, THE EXCESS STOCK WAS FOUND DURING THE COURSE OF SURVEY OPERATION. REFERRING TO THE JUDGMENT OF THE GUJARAT HIGH COURT IN THE CASE OF F AKIR MOHAMMED HAJI HASAN VS CIT (2001) 247 ITR 290 (GUJ), THE LD.DR SUBMITTE D THAT THE GUJARAT HIGH COURT ITA NO.1293/RJT/2010 3 FOUND THAT UNDER THE SCHEME OF SECTION 69A, 69B, & 69C OF THE INCOME-TAX ACT THE STOCK FOUND WAS TO BE ASSESSED AS INCOME FROM OTHER SOURCES. ONCE THE EXCESS STOCK WAS ASSESSED AS INCOME FROM OTHER SOU RCES THERE IS NO QUESTION OF ALLOWING ANY SALARY AND INTEREST TO THE PARTNERS . THE LD.DR FURTHER SUBMITTED THAT THE ASSESSEE HAS NOT CLAIMED ANY REDUCTION TOW ARDS THE WEIGHTAGE OF BUCKETS AND PACKING MATERIALS DURING THE COURSE OF SURVEY OPERATION. REFERRING TO THE ASSESSMENT ORDER, THE LD.REPRESENTATIVE SUBM ITTED THAT THE EXCESS STOCK WAS WEIGHED IN THE ELECTRONIC SCALE AND THEREFORE N ECESSARY FACILITIES MIGHT HAVE BEEN PROVIDED TO IGNORE THE WEIGHT OF THE BUCKET AN D OTHER PACKING MATERIAL. THEREFORE, CLAIMING REDUCTION WITH REGARD TO BUCKET AND PACKING MATERIAL AT THIS STAGE MIGHT NOT BE PROPER. 5. RIVAL CONTENTIONS ON EITHER SIDE WERE CONSIDERE D IN THE LIGHT OF MATERIALS AVAILABLE ON RECORD. THE ASSESSEE IS ENGAGED IN TH E BUSINESS OF MANUFACTURE OF BRASS PARTS. THERE WAS A SURVEY OPERATION IN THE P REMISES OF THE ASSESSEE ON 10-11-2005. DURING THE COURSE OF SURVEY OPERATION THE REVENUE AUTHORITIES FOUND EXCESS FINISHED BRASS GOODS TO THE EXTENT OF RS.2,2 4,642. THE QUESTION ARISES FOR CONSIDERATION IS WHETHER THE VALUE OF EXCESS STOCK IS A BUSINESS INCOME OR IT IS INCOME FROM OTHER SOURCES. WHILE THE ASSESSEE CLAIM S THAT IT IS BUSINESS INCOME, THE REVENUE CONTENDS THAT IT IS INCOME FROM OTHER S OURCES. 6. I HAVE CAREFULLY GONE THROUGH THE JUDGMENT OF TH E GUJARAT HIGH COURT IN FAKIR MOHAMMED HAJI HASAN VS CIT (SUPRA). IN THE C ASE BEFORE THE GUJARAT HIGH ITA NO.1293/RJT/2010 4 COURT, THE ASSESSEE WAS A PARTNER IN A FIRM. THE IT O CALLED UPON THE ASSESSEE TO GIVE INFORMATION ABOUT THE GOLD SEIZED BY CUSTOMS A UTHORITIES WORTH ABOUT RS.48,72,000. THE ITO FOUND THAT THE VALUE OF THE GOLD WAS TO BE ADDED AS INCOME OF THE ASSESSEE U/S 69A OF THE ACT AND MADE ADDITION ACCORDINGLY. THE CIT(A) CONFIRMED THE ADDITION MADE BY THE ITO. ON FURTHER APPEAL BEFORE THIS TRIBUNAL IT WAS FOUND THAT THE ASSESSEE SMUGGLED 23 20 TOLAS OF GOLD OF FOREIGN ORIGIN IN CONTRAVENTION OF THE CUSTOMS ACT. ACCOR DINGLY THE CUSTOMS AUTHORITIS CONFISCATED THE GOLD AND LEVIED PENALTY OF RS.25 LA KHS. THE GOLD WAS CONFISCATED ABSOLUTELY TO THE GOVERNMENT BY THE ORDER OF THE CU STOMS AUTHORITIES. ON THOSE FACTS, THE TRIBUNAL FOUND THAT THE ASSESSEE KEPT TH E GOLD OF FOREIGN ORIGIN IN HIS CAR. SINCE THE ASSESSEE WAS THE OWNER OF THE GOLD, THE VALUE WAS LIABLE TO BE ADDED AS INCOME U/S 69A OF THE AC.T. THIS FINDING OF THE TRIBUNAL WAS CONFIRMED BY THE GUJARAT HIGH COURT. IN THE CASE BEFORE US, THE FACTS ARE ENTIRELY DIFFERENT FROM THAT WAS BEFORE THE GUJARAT HIGH COURT. IN TH E CASE BEFORE US IT IS NOT THE SMUGGLED GOODS. THE ASSESSEE ADMITTEDLY IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF BRASS GOODS. IN THE COURSE OF ITS R EGULAR BUSINESS ACTIVITY, THE ASSESSEE MANUFACTURED BRASS GOODS WHICH WERE FOUND TO BE EXCESS. IN THE CASE BEFORE THE GUJARAT HIGH COURT, THE ASSESSEE SM UGGLED GOLD OF FOREIGN ORIGIN. THEREFORE, THE GUJARAT HIGH COURT HELD THA T THE INVESTMENT IN THE GOLD OF FOREIGN ORIGIN RECOVERED FROM THE CAR OF THE ASSESS EE HAS TO BE TREATED AS INCOME FROM OTHER SOURCES. IN VIEW OF THIS FACTUAL DISTINCTION, THE JUDGMENT OF THE GUJARAT HIGH CURT MAY NOT BE OF ANY ASSISTANCE TO T HE REVENUE. IN THE CASE BEFORE US, AS STATED ABOVE, THE EXCESS STOCK WAS GE NERATED OUT OF THE REGULAR ITA NO.1293/RJT/2010 5 MANUFACTURING ACTIVITY OF THE ASSESSEE. THEREFORE, THE VALUE OF EXCESS STOCK HAS TO BE CONSIDERED AS INCOME FROM REGULAR BUSINESS AC TIVITY IN THE PROCESS OF MANUFACTURE OF BRASS GOODS. A DIVISION BENCH OF TH IS TRIBUNAL HAD AN OCCASION TO CONSIDER THIS ISSUE IN THE CASE OF M/S RAJWADI P APAD HOUSE (SUPRA). THE DIVISION BENCH OF THIS TRIBUNAL, AFTER CONSIDERING THE JUDGMENT OF THE GUJARAT HIGH COURT IN FAKIR MOHAMMED HAJI HASAN VS CIT (SUPRA) F OUND THAT SINCE THE ASSESSEE WAS CONDUCTING BUSINESS AND THE VALUE OF E XCESS STOCK FOUND AFTER PREPARING THE INVENTORY OF THE EXCESS STOCK AT THE BUSINESS PREMISES OF THE ASSESSEE, THE RATIO OF JUDGMENT OF THE GUJARAT HIGH CLURT IN FAKIR MOHAMMED HAJI HASAN VS CIT (SUPRA) MAY NOT BE APPLICABLE. I N VIEW OF THE ABOVE DIVISION BENCH DECISION OF THIS TRIBUNAL IN M/S RAJWADI PAPA D HOUSE (SUPRA), THE JUDGMENT OF GUJARAT HIGH COURT IN FAKIR MOHAMMED HA JI HASAN VS CIT (SUPRA) MAY NOT BE ANY ASSISTANCE TO THE REVENUE. SINCE TH E EXCESS STOCK WAS GENERATED IN THE REGULAR MANUFACTURING ACTIVITY OF THE ASSESSEE IT IS TO BE CLASSIFIED AS BUSINESS INCOME AS HELD BY THE DIVI SION BENCH OF THIS TRIBUNAL IN THE CASE OF M/S RAJWADI PAPAD HOUSE (SUPRA). ONCE THE EXCESS STOCK WAS FOUND TO BE BUSINESS INCOME, THE ASSESSE IS ENTITLE D FOR DEDUCTION WITH REGARD TO SALARY AND INTEREST TO PARTNERS FROM THAT INCOME. 7. THE NEXT ISSUE REMAINS TO BE DECIDED IS WHETHER THE ASSESSEE IS ENTITLED FOR REDUCTION IN RESPECT OF BUCKET / PACKING MATERI AL USED FOR WEIGHING THE GOOD. WHEN THE WEIGHT OF THE FINISHED GOODS WAS TAKEN WIT H THE AID OF BUCKET / PACKING MATERIAL, DUE CREDIT HAS TO BE ALLOWED FOR THE SAME . THE ASSESSING OFFICER WAS ITA NO.1293/RJT/2010 6 NOT SURE WHETHER SUCH A REDUCTION IS GIVEN OR NOT. THE ASSESSING OFFICER WAS UNDER THE PRESUMPTION THAT THE WEIGHT OF THE GOODS WAS TAKEN IN THE ELECTRONIC SCALE, THEREFORE, APPROPRIATE ARRANGEMENT MIGHT HAV E BEEN MADE TO REDUCE THE WEIGHT OF BUCKETS AND PACKING MATERIALS. WHEN THER E IS A DOUBT AS TO WHETHER IT WAS GIVEN OR NOT, IT IS FOR THE ASSESSING OFFICER T O SEE THAT THE WEIGHT OF THE PACKING MATERIALS / BUCKETS ARE REDUCED FROM THE GR OSS WEIGHT OF THE FINISHED PRODUCTS. THEREFORE, THIS TRIBUNAL IS OF THE OPINI ON THAT THE ASSESSEE IS ENTITLED FOR REDUCTION OF THE WEIGHT OF THE BUCKETS AND PACK ING MATERIALS USED WHILE WEIGHING THE FINISHED GOODS. ACCORDINGLY, THE ORDER S OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO REDUCE THE WEIGHT OF THE BUCKET / PACKING MATERIAL FROM WEIGHT OF HE FINISHED PRODU CTS. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF HEARING ON THIS 22 ND DAY OF JULY, 2011. SD/- (N.R.S. GANESAN) JUDICIAL MEMBER RAJKOT, DT : 22 ND JULY, 2011 PK/- COPY TO: 1. ASSESSEE 2. REVENUE 3. THE CIT(A), JAMNAGAR 4. THE CIT, JAMNAGAR 5. THE DR, I.T.A.T., RAJKOT (TRUE COPY) BY ORDER ASSTT.REGISTRAR, ITAT, RAJKOT