ITO, Ward - 35(4), Kolkata, Kolkata V. Mahendra Traders, Kolkata

ITA 1673/KOL/2009

• Counselvise Citation: 167323514 RSA 2009
• Duration Of Justice: 6 year(s) 1 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-11-2015
• Appeal Filed By: Department
• Bench Allotted: C
• Assessment Year: 2006-2007
• Appeal Filed On: 24-09-2009
• Court: TRIBUNAL
• Department Lawyers: SNEHATPAL DATT A JCIT LD
• Keywords: Corroborative evidences; Non compliance
• Section: 131; 143(3)

Judgement Text

IT A NO. 1673/KOL/2009-C-AM M/S. MAHENDRA TRADERS 1 IN THE INCOME TAX APPELLATE TRIBUNAL, C BENCH, K OLKATA BEFORE : SHRI MAHAVIR SINGH,JUDICIAL MEMBER, AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER I.T.A NO.1673/KOL/2009 A.Y 2006-07 I.T. O WARD 35(4), KOLKATA VS. M/S. MAHENDRA TRADERS PAN: AAFFM1831J ( APPELLANT/DEPARTMENT ) ( RESPONDENT/ASSESSEE ) FOR THE APPELLANT/DEPARTMENT: SHRI SNEHATPAL DATT A, JCIT, LD.SR.DR FOR THE RESPONDENT/ASSESSEE: NONE APPEARED DATE OF HEARING: 04-11-2015 DATE OF PRONOUNCEMENT: 18 -11- 2015 ORDER SHRI M.BALAGANESH, AM THIS APPEAL OF THE REVENUE ARISES OUT OF THE ORDER OF THE LEARNED CIT(A)-XX, KOLKATA IN APPEAL NO. 325/CIT(A)-XX/WARD-35(4)/08-0 9/KOL DATED 22 ND JULY 2009 AGAINST THE ORDER OF ASSESSMENT FOR THE ASST YEAR 2 006-07 FRAMED BY THE LEARNED AO U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). 2. THE FIRST ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER AN ADDITION OF RS. 12,54,947/- COULD BE MADE TOWARDS VALUATION OF STOC K OF SCRAP IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 2.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE AS SESSEE IS A PARTNERSHIP FIRM DERIVING INCOME FROM TRADING BUSINESS OF IRON AND STEEL AND COMMISSION INCOME. THE PARTNERSHIP FIRM WAS DISSOLVED ON 30.6.2005. HENCE THE RETURN OF INCOME IN THE NAME OF THE FIRM WAS FILED BY CONSIDERING THE TRANSACTIO NS IN THE FIRM FOR THE PERIOD 1.4.2005 IT A NO. 1673/KOL/2009-C-AM M/S. MAHENDRA TRADERS 2 TO 30.6.2005. THIS PARTNERSHIP FIRM WAS CONVERTED INTO PROPRIETORSHIP CONCERN WITH EFFECT FROM 1.7.20005 AND ACCOUNTS FOR THE PERIOD 1 .7.2005 TO 31.3.2006 ARE PREPARED SEPARATELY. THE MAIN PRODUCT TRADED BY THE ASSESSEE IS M.S.ROUND AND SCRAP. THE ASSESSEE HAD STATED IN THE TAX AUDIT REPORT THAT VA LUATION OF STOCK HAS BEEN DONE AT COST OR NET REALIZABLE VALUE WHICHEVER IS HIGHER. THE LEARNED AO FOUND THAT THE ASSESSEE IS ADOPTING FIRST IN FIRST OUT (FIFO) METHOD FOR VA LUATION OF STOCK. THE TAX AUDIT REPORT CONTAINED CLOSING STOCK OF M.S.SCRAP OF 559. 97 METRIC TONS. THE LEARNED AO OBSERVED THAT THE PURCHASED MADE BY THE ASSESSEE FR OM 9.6.2005 TO 27.6.2005 ARE LYING IN CLOSING STOCK OF 559.97 MT. THE LEARNED AO FOU ND THAT THE AVERAGE FINAL SALE PRICE MADE ON 30.6.2005 BY THE ASSESSEE WAS RS. 184 70 PER MT AND FINAL PURCHASE PRICE MADE BY ASSESSEE WAS RS. 18611 PER MT. ACCOR DINGLY, THE LEARNED AO CHOSE TO SUBSTITUTE THE VALUE OF CLOSING STOCK IN ACCORDANCE WITH VALUATION METHOD OF COST OF NET REALIZABLE VALUE WHICHEVER IS HIGHER AND PROPOSED A N ADDITION OF RS. 12,54,947/-. IN RESPONSE TO THIS, THE ASSESEE REPLIED THAT IT WAS E RRONEOUSLY STATED IN TAX AUDIT REPORT BY INADVERTENCE THAT THE VALUATION OF STOCKS ARE DONE AT THE HIGHER OF COST OF NET REALIZABLE VALUE INSTEAD OF LOWER OF COST OR NET REALIZABLE VALUE. IT IS A TYPOGRAPHICAL ERROR. THE ASSESSEE HAD BROUGHT TO THE NOTICE OF THE LEANRED A O ABOUT THIS TYPOGRAPHICAL ERROR VIDE LETTER DATED 17.11.2008 WHICH WAS EVEN BEFORE THE SHOW CAUSE NOTICE ISSUED BY THE ASSESSEE ASKING FOR EXPLANATION IN DIFFERENCE I N VALUATION OF STOCK. IN THE SAID LETTER , THE ASSESSEE ALSO EXPLAINED THAT THE MAIN BUYER OF THE PRODUCTS OF THE ASSESSEE IS TATA MOTORS LTD AND THAT THE MAIN BUYER HAD CHAN GED ITS LONG TERM CONTRACT WITH EFFECT FROM 1.7.2005 AND BROUGHT DOWN THE RATE PER MT SUBSTANTIALLY. TAKING INTO ACCOUNT THE SAME, THE CLOSING STOCK AS ON 30.6.2005 WAS VALUED BY THE ASSESSEE AT RS. 85,11,544/- BEING THE LOWER OF COST OR NET REALIZAB LE VALUE. THE LEARNED AO DID NOT APPRECIATE THE CONTENTIONS OF THE ASSESSEE AND MADE AN ADDITION OF RS. 12,54,947/- ( BEING THE ARRIVED VALUE OF RS. 97,66,491/- BY LEARN ED AO AND DECLARED VALUE OF RS. 85,11,544/- BY ASSESSEE) TOWARDS DIFFERENCE IN VALU ATION OF CLOSING STOCK OF M.S.SCRAP. ON FIRST APPEAL, THE SAME WAS DELETED BY THE LEARNE D CITA DULY APPRECIATING THE IT A NO. 1673/KOL/2009-C-AM M/S. MAHENDRA TRADERS 3 CONTENTIONS OF THE ASSESSEE BY GIVING A CLEAR FINDI NG. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND:- 1. FOR THAT THE LEARNED C.I.T (A)-XX, KOL WAS NOT JUSTIFIED IN DELETING THE ADDITION OF RS.12,54,947/- MADE BY THE ASSESSING OFFICER BEING THE UNDER VALUATION OF STOCK OF SCRAPS. 2.2. NONE APPEARED ON BEHALF OF THE ASSESSEE. TH E LEARNED DR VEHEMENTLY SUPPORTED THE ORDER OF THE LEARNED AO. 2.3. WE HAVE HEARD THE LEARNED DR AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE ASSESSEE HAD FILED A DETAILED PA PER BOOK NUMBERING FROM PAGES 1 TO 111 CONTAINING VARIOUS DOCUMENTS AND SUBMISSIONS. WE FIND FROM THE NOTES ON ACCOUNTS TO THE AUDITED ACCOUNTS, THE ASSESSEE HAD CLEARLY STATED THAT THE VALUATION OF INVENTORIES HAVE BEEN MADE AT THE LOWER OF COST OR NET REALIZABLE VALUE. HENCE HIS PLEA THAT A TYPOGRAPHICAL ERROR HAD CREPT IN IN THE FORM 3CD IS UNDERSTANDABLE. MOREOVER, THE ASSESSEE VIDE ITS LETTER DATED 17.11.2008 BROUG HT THIS ERROR TO THE NOTICE OF THE LEARNED AO. HENCE WE HOLD THAT THERE IS NO SCOPE FOR VALUATION OF STOCK AT MARKET PRICE AS WORKED OUT BY THE LEARNED AO. THE VALUATIO N OF STOCK AT COST OR NET REALIZABLE PRICE WHICHEVER IS LOWER IS AN ACCEPTED AND ESTABLI SHED RULE OF COMMERCIAL PRACTICE AS WAS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF CHAINRUP SAMPA TRAM VS CIT REPORTED IN (1953( 24 ITR 481 (SC) WHEREIN IT WAS HELD THAT :- AS THE ENTRY FOR STOCK WHICH APPEARS IN A TRADIN G ACCOUNT IS MERELY INTENDED TO CANCEL THE CHARGES FOR THE GOODS PURCHASED WHICH HAVE NOT BEEN SOLD, IT SHOULD NECESSARILY REPRESEN T THE COST OF THE GOODS. IF IT IS MORE OR LESS THAN THE COST, THEN TH E EFFECT IS TO STATE THE PROFIT ON THE GOODS WHICH ACTUALLY HAVE BEEN SOLD AT THE INCORRECT FIGURE. FROM THIS RIGID DOCTRINE ONE EXCEPTION IS V ERY GENERALLY RECOGNIZED ON PRUDENTIAL GROUNDS AND IS NOW FULLY S ANCTIONED BY CUSTOM, VIZ. THE ADOPTION OF MARKET VALUE AT THE DA TE OF MAKING UP ACCOUNTS, IF THAT VALUE IS LESS THAN COST. IT IS OF COURSE AN ANTICIPATION OF THE LOSS THAT MAY BE MADE ON THOSE GOODS IN THE FOLLOWING YEAR, AND MAY EVEN HAVE THE EFFECT, IF PRICES RISE AGAI N, OF ATTRIBUTING TO IT A NO. 1673/KOL/2009-C-AM M/S. MAHENDRA TRADERS 4 THE FOLLOWING YEARS RESULT A GREATER AMOUNT OF PR OFIT THAN THE DIFFERENCE BETWEEN THE ACTUAL SALE PRICE AND THE AC TUAL COST PRICE OF THE GOODS IN QUESTION. WHILE ANTICIPATED LOSS IS TH US TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPREC IATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASED PROFIT BEFORE ITS ACTU AL REALIZATION. THIS IS THE THEORY UNDERLYING THE RULE THAT CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER, AND IT IS NOW GENERALLY ACCEPTED AS AN ESTABLISHED RULE OR COMMER CIAL PRACTICE AND ACCOUNTANCY. EVEN OTHERWISE, WE FIND THAT THE LEARNED AO HAD TAK EN THE LAST REALIZED SELLING PRICE OF M.S.SCRAP WHEREAS THE CLOSING STOCK NEEDS TO BE VALUED AS REALISABLE VALUE OR COST WHICHEVER IS LOWER. EVEN ON THIS COUNT, THE VALUA TION MADE BY THE LEARNED AO IS NOT APPRECIATED. WE FIND THAT THE MAIN BUYER OF THE ASSESSEE M/S TATA MOTORS LTD HAD REDUCED THE RATE PER MT OF M.S. SCRAP TO RS.15107.4 PER MT WITH EFFECT FROM 1.7.2005 IS VERY CRUCIAL AND IS ALREADY ON RECORDS WHICH FACT IS NOT DISPUTED BY THE REVENUE. BASED ON THE REDUCTION IN THE RATE WITH E FFECT FROM 1.7.2005, THE NET REALIZABLE VALUE HAD AUTOMATICALLY COME DOWN AND TH E ASSESSEE HAD VALUED THE STOCKS APPLYING THAT RATE AFTER DEDUCTING DIRECT EXPENSES INCURRED FOR REALIZING THE SALE AND HENCE WE FIND NO INFIRMITY IN THE VALUATION METHOD ADOPTED BY THE ASSESSEE. WE FIND THAT THE ASSESSEE HAD VALUED THE CLOSING STOCK BY T HE METHOD THAT IT HAS REGULARLY AND CONSISTENTLY FOLLOWED FOR VALUATION OF STOCK. ACCO RDINGLY, THE GROUND NO.1 RAISED BY THE REVENUE IS DISMISSED. 3. THE NEXT ISSUE TO BE DECIDED IN THIS APPEAL I S AS TO WHETHER AN ADDITION OF RS. 23,00,000/- TOWARDS COMMISSION IN THE FACTS AND CIR CUMSTANCES OF THE CASE. 3.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE AS SESSEE MADE PAYMENT OF COMMISSION TO THE FOLLOWING TWO PARTIES AND CLAIMED THE SAME AS D EDUCTION :- IT A NO. 1673/KOL/2009-C-AM M/S. MAHENDRA TRADERS 5 SL. NO. NAME OF THE CONCERN AMOUNT 1 M/S. TIRUPATI INDUSTIRES 14/2 OLD CHINA BAZAR STREET KOLKATA RS.10,00,000/- 2. M/S. ROTO FLUX PRINTING & LAMINATES CO.(P) LTD ANDUL ROAD, CHUNAVATI MORE HOWRAH-711 109 RS.13,00,000/- RS.23,00,000/- THE LEARNED AO IN ORDER TO VERIFY THE GENUINENESS OF THE CLAIM ISSUED SUMMONS U/S. 131 OF THE ACT TO THE AFORESAID TWO PA RTIES. NO RESPONSE WAS RECEIVED FROM ONE PARTY AND IN RESPECT OF ANOTHER PARTY THE NOTICE HAD RETURNED UNSERVED. THE LEARNED AO DOUBTED THE NATURE OF SERVICES, IF ANY, RENDERED BY THE AFORESAID COMMISSION AGENTS. THE ASSESSEE MERELY SUBMITTED T HE COPY OF INCOME TAX RETURNS TOGETHER WITH ITS WORKINGS OF TWO PARTIES WHEREIN T HE COMMISSION RECEIPTS FROM THE ASSESSES WERE REFLECTED BY THE PAYEES BEFORE THE LE ARNED AO AT THE FAG END OF THE ASSESSMENT PROCEEDINGS. HENCE THE LEARNED AO CONCL UDED THAT THE ASSESSEE COULD NOT PRODUCE THE COMMISSION AGENTS FOR VERIFICATION AND HE SOUGHT TO DISALLOW THE COMMISSION EXPENDITURE OF RS. 23,00,000/- ON THE GR OUND THAT SERVICES RENDERED BY THEM COULD NOT BE VERIFIED AND ON ANOTHER GROUND TH AT THE SAME WERE NOT SUBJECTED TO DEDUCTION OF TAX AT SOURCE AND HENCE IS DISALLOWABL E U/S 40(A)(IA) OF THE ACT. ON FIRST APPEAL, THE REMAND REPORT WAS CALLED FOR BY THE LEA RNED CITA FROM THE LEARNED AO. IN REMAND PROCEEDINGS, THE ASSESSEE PRODUCED THE TW O PARTIES AND STATED THAT THE CONCERNS RUN BY TWO PARTIES I.E M/S TIRUPATI INDUST RIES AND M/S ROTO FLUX PRINTINGS & LAMINATES CO PVT LTD WERE RUN BY THE FAMILY MEMBERS OF THE ASSESSEE AND BOTH THE CONCERNS HAD FILED THEIR RETURNS SHOWING INCOME UND ER THE HEAD COMMISSION. THE LEARNED CITA OBSERVED THAT THE ASSESSEE HAD DISCHAR GED ITS COMPLETE ONUS BY PROVING THE GENUINENESS OF THE CLAIM OF PAYMENT OF COMMISSI ON WITH ALL SUPPORTING EVIDENCES BEFORE THE LEARNED AO DURING REMAND PROCEEDINGS AND HE FOUND THAT THE LEARNED AO WITHOUT BRINGING ANY POSITIVE MATERIAL ON RECORD TO CONTROVERT THE CLAIM OF THE ASSESSEE IT A NO. 1673/KOL/2009-C-AM M/S. MAHENDRA TRADERS 6 CANNOT DOUBT THE VERACITY OF THE CLAIM. WITH REGAR D TO THE ALTERNATIVE CLAIM OF NON COMPLIANCE OF TDS PROVISIONS, THE LEARNED CITA HELD AS FOLLOWS:- 5.3 THE AO HAS ALSO TAKEN AN ALTERNATIVE GROUND FO R DISALLOWING COMMISSION OF RS.23,00,000/-. ACCORDING TO THE AO, THE APPELLANT HAS NOT DEDUCTED TAX ON COMMISSION PAYMENT AND THEREFOR E THE SAME WAS NOT ALLOWABLE AS PER THE PROVISIONS OF SECTION 40(A )(IA). THE LD. AR ARGUED BEFORE ME THAT THE FIRM WAS DISSOLVED AND WAS TAKEN OVER AS GOING CONCERN BY ONE OF THE PARTNERS WITH EFFECT F ROM 01-07-2005. THE APPELLANT HAS ACCOUNTED FOR THE AMOUNT OF RS.23 ,00,000/- PAYABLE TO THE SAID PARTIES TO DETERMINE THE ACTUAL INCOME OF THE APPELLANT RELEVANT TO THE PERIOD OF ITS EXISTENCE. THE APPELL ANT HAS NEITHER CREDITED THE ACCOUNTS OF THE SAID PARTIES NOR MADE ANY PAYMENTS TO THEM DURING THE PERIOD ENDING 30-06-2005. THE PAYM ENT WAS MADE BY THE SUCCESSOR OF THE FIRM AND THE TAX WAS DEDUCT ED AND PAID TO THE CREDIT OF THE CENTRAL GOVERNMENT. IT WAS CONTENDED THAT THE DEDUCTION AND PAYMENT TO THE CREDIT OF THE CENTRAL GOVERNMEN T TOOK PLACE WITHIN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2 006-07. AND THEREFORE, THERE WAS FULL COMPLIANCE TO THE REQUIRE MENTS OF SECTION 40(A)(IA). 5.4 ON PERUSAL OF FINANCIAL STATEMENT AND DOCUMENT S, ETC. IT IS OBSERVED THAT M/S. TIRUPATI INDUSTRIES HAS RECEI VED COMMISSION PAYMENT OF RS.25,00,000/- AND M/S. ROTO FLUX PRINTI NGS & LAMINATES CO PVT. LTD RECEIVED COMMISSION PAYMENT OF RS.35,00 ,000/-. THE BUSINESS OF THE APPELLANT FIRM WAS TAKEN OVER BY T HE PROPRIETARY CONCERN AS GOING ON CONCERN WITH EFFECT FROM 01-07- 2005 ALONG WITH ALL THE ASSETS AND LIABILITIES. THE APPELLANT FIRM HAS NOT MADE ANY PAYMENT OF COMMISSION TO THE AFORESAID TWO PARTIES, BUT THE ENTIRE PAYMENT ON ACCOUNT OF COMMISSION WAS MADE BY THE S UCCESSOR PROPRIETARY CONCERN. WHILE CREDITING THE COMMISSION PAYMENT TO THE SAID PARTIES, THE SUCCESSOR CONCERN HAS DEDUCTED T HE TAX ON THE ENTIRE AMOUNT AND PAID THE SAME TO THE CREDIT OF THE CENTR AL GOVERNMENT ON 31-05-2006, I.E. WITHIN THE DUE DATE OF PAYMENT. TH E TDS CERTIFICATES WERE ALSO ISSUED TO THE RESPECTIVE PARTIES. SINCE T HE SUCCESSOR CONCERN HAS TAKEN OVER THE BUSINESS OF THE APPELLANT FIRM A ND ALSO THE ACTUAL PAYMENT OF COMMISSION WAS MADE BY THE SUCCESSOR CON CERN AND IT HAS DULY COMPLIED WITH THE PROVISIONS OF SECTION 40(A)( IA), I AM OF THE OPINION THAT NO DISALLOWANCE U/S. 40(A)(IA) COULD B E MADE IN THE HANDS OF THE APPELLANT. IN VIEW OF THE ABOVE FACTS AND ALSO THE AMENDED PROVISIONS OF SECTION 40(A)(IA) ARE NOT AP PLICABLE IN THE IT A NO. 1673/KOL/2009-C-AM M/S. MAHENDRA TRADERS 7 CASE OF THE APPELLANT. THE AO IS DIRECTED TO DELETE THE DISALLOWANCE OF RS.23,00,000/-. THE LEARNED CIT(A) ALSO FOUND THAT THE TDS WAS INDE ED REMITTED BY THE SUCCESSOR CONCERN I.E PROPRIETARY CONCERN OF THE ASSESSEE ON 31.5.2006 WHICH IS WELL WITHIN THE DUE DATE OF FILING THE RETURN OF INCOME U/S 139(1) OF THE ACT AND HENCE THE DISALLOWANCE U/S 40(A)(IA) OF THE ACT COULD NOT BE MADE ON THAT ACCOUNT. ACCORDINGLY, THE LEARNED CITA DELETED THE ADDITION. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND:- 2. FOR THAT THE LEARNED CIT(A)-XX, KOL WAS UNJUSTI FIED IN DELETING THE PAYMENT OF COMMISSION OF RS.23,00,000/- TO THE PERSON SPECIFIED U/S. 40(A)(B) OF THE ACT, WITHOUT PROPER APPRECIATI ON OF MATERIALS FACTS ON THE RECORD. 3.2. THE LEARNED DR VEHEMENTLY SUPPORTED THE ORDE R OF THE LEARNED AO. 3.3. WE HAVE HEARD THE LEARNED DR AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE LEARNED CIT(A) HAD CATEGORICALLY G IVEN CLEAR FINDINGS IN RESPECT OF THIS ADDITION AND IS SELF EXPLANATORY AND NONE OF T HESE FINDINGS WERE REFUTED BY THE LEARNED DR DURING THE COURSE OF HEARING BEFORE US. HENCE WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LEARNED CIT(A) I N THIS REGARD. ACCORDINGLY, THE GROUND NO. 2 RAISED BY THE REVENUE IS DISMISSED. 4. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. THIS ORDER IS PRONOUNCED IN OPEN COURT ON 18 /11/ 2015 SD/- ( MAHAVIR SINGH, JUDICIAL MEMBER ) SD/- (M. BALAGANESH, ACCOUNTANT MEMBER) DATE 18 /11/2015 IT A NO. 1673/KOL/2009-C-AM M/S. MAHENDRA TRADERS 8 COPY OF THE ORDER FORWARDED TO: 1. . THE APPELLANT/ DEPARTMENT; I T O WARD 35(4), 18 RABINDRA SARANI, P ODDAR COURT, 3 RD FL., KOL - 1 . 2 THE RESPONDENT/ ASSESSEE: M/S. MAHENDRA TRADERS 14/2 OLD CHINA BAZA R ST, 3 RD FL, ROOM NO.226, KOL-1 3 4.. / THE CIT, / THE CIT(A) 5 . DR, KOLKATA BENCH 6 . GUARD FILE . TRUE COPY, BY ORDER, ASSTT REGISTRAR ** PRADIP SPS