The DCIT, Circle-4, Ahmedabad V. M/s. Harsh Geochem Ltd., Ahmedabad

ITA 1948/AHD/2009

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 6409 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 11 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 23-05-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 12-06-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V VERMA
• Assessee Lawyers: ANIL N SHAH
• Keywords: Rejection of books of accounts; Recovery proceedings
• Section: 143(3); 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH AHMEDABAD (BEFORE S/SHRI BHAVNESH SAINI, JM AND A. N. PAHUJA, AM) ITA NO.1948/AHD/2009 A. Y.: 2005-06 THE D. C. I. T., CIRCLE -4, AHMEDABAD, 1 ST FLOOR, NAVJEEVAN TRUST BUILDING, OFF ASHRAM ROAD, AHMEDABAD VS HARSH GEOCHEM LTD., 208, SARTHAK COMPLEX, SWASTIK CHAR RASTA, C. G. ROAD, NAVRANGPURA, AHMEDABAD PA NO. AAACH 8555 Q (APPELLANT) (RESPONDENT) APPELLANT BY MR. V. VERMA, SR. DR RESPONDENT BY SHRI ANIL N. SHAH, AR O R D E R PER BHAVNESH SAINI: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A)-VI II, AHMEDABAD DATED 25-02-2009 FOR ASSESSMENT YEAR 2005-06. 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOT H THE PARTIES, GONE THROUGH THE MATERIAL ON RECORD AND PERUSED THE FINDINGS OF THE AUTHORITIES BELOW. THE LEARNED COUNSEL FOR THE ASSE SSEE STATED THAT THE ASSESSEE HAS NOT PREFERRED ANY CROSS APPEAL. 3. THE REVENUE ON GROUNDS NO.1 AND 2, CHALLENGED TH E DELETION OF ADDITION OF RS.5,69,561/- MADE ON ACCOUNT OF SUPPRE SSION OR PRODUCTION AND SALES BY REJECTING THE BOOK RESULTS. THE AO OBSERVED THAT MANUFACTURING PROCESS PRESCRIBED IS VERY SIMPL E WHERE THE ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 2 CHANCES OF LOSS OR SHORTAGE ARE QUITE REMOTE AND TH E ASSESSEE ITSELF HAS CONFESSED THAT THE MAXIMUM SHORTAGE WILL BE 1.2 5% OF TOTAL RAW MATERIAL USED FOR PRODUCTION. HE NOTED THAT BY ASSE SSEE'S OWN CLAIM AND CONFESSION THE TOTAL RAW MATERIAL USED FOR PROD UCTION AS PER INFORMATION SUPPLIED BY THE ASSESSEE AND REPRODUCED IN TABLE IS 559169 KG. AS CLAIMED BY THE ASSESSEE CONCESSION OF 1.25% SHORTAGE COMES TO 6990 KG. HENCE THE NET PRODUCTION SHOULD BE 5,52,179 KGS. (559169 - 6990). AS AGAINST THIS THE ASSESSEE COMPANY HAS SHOWN PRODUCTION OF 5,12,318 KG. HE ACC ORDINGLY CONCLUDED THAT THE ASSESSEE SUPPRESSED THE PRODUCTI ON OF 39,861 KG. ADOPTING THE AVERAGE RATE OF SALE I.E. 72,17,98 8 (62,62,867 + 9,55,121) FOR 5,05,154 KG. (4,49,954 + 55,200) COME S TO RS. 14,28 PER KG. HE WORKED OUT VALUE OF SUPPRESSED PRODUCTIO N OF 39,861 KGS. AT RS.5,69,561/- BY THE APPLYING THE RATE OF RS. 14 .28 PER KG. HE REJECTED THE BOOKS OF ACCOUNT AND ADDED THE SUM OF RS.5,69,561/-IN THE INCOME OF THE ASSESSEE. DURING THE COURSE OF AP PELLATE PROCEEDINGS BEFORE THE LEARNED CIT(A), THE LEARNED COUNSEL FOR THE ASSESSEE OBJECTED TO THE A.O'S ACTION AND SUBMITTED THAT, THE A.O. HAS NOT APPRECIATED THE FACTS OF THE ASSESSEE' CASE IN PROPER PERSPECTIVE AND MADE HUGE ADDITION BY DISALLOWING R S.5,69,561/- ON ACCOUNT OF SUPPRESSED PRODUCTION AND SALES. HE FURT HER SUBMITTED THAT, THE A.O. HAS NOT CONSIDERED THE SUBMISSIONS M ADE DURING THE COURSE OF ASSESSMENT IN PROPER PERSPECTIVE AND FACT S STATED HAVE BEEN MISINTERPRETED BY A.O. WHILE MAKING DISALLOWAN CE AS SUPPRESSED SALES. HE ALSO POINTED OUT THAT, THE AO HAS MADE A GRAVE MISTAKE IN ARRIVING AND CONCLUDING THAT MAXIMUM SHO RTAGE WILL BE 1.25% OF TOTAL RAW MATERIAL USED FOR PRODUCTION. TH E LEARNED COUNSEL ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 3 FOR THE ASSESSEE FURTHER SUBMITTED THAT IT IS IMPOR TANT TO NOTE THAT 1.25% SHORTAGE AS ARRIVED AND NOTED BY THE AO IN AS SESSMENT ORDER IS NOT IN FACT PRODUCTION LOSS BUT IN FACT LOSS OF MATERIAL ARISING ON TRANSIT OF RAW MATERIAL (ALSO REFERRED AS GHAT) ON PURCHASES. ONLY AFTER CONSIDERING THE TRANSIT SHORTAGE THE NET WEIG HT OF RAW MATERIAL, AND NOT THE GROSS WEIGHT, REMAINS WITH THE ASSESSEE WHICH ONLY IS AVAILABLE TO THE COMPANY FOR MANUFACTURING AND THE YIELD HAS TO BE CONSIDERED ON NET WEIGHT OF RAW MATERIAL ONLY. THE ASSESSEE WAS PROCURING MOST OF ITS RAW MATERIAL REFERRED TO AS P ERLITE ORE MAINLY BY WAY OF IMPORT. EVEN DURING THE YEAR UNDER APPEAL, A SSESSEE COMPANY IMPORTED 675000 KGS. OF PERLITE ORE FROM TU RKEY. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO CONTENDED THA T, THE RAW MATERIAL PERLITE ORE IS LIKE SAND PARTICLE AND DURI NG THE COURSE OF IMPORT, ON LOADING AND UNLOADING AT PORTS, VESSELS AS WELL AS AT FACTORY, THERE IS WEIGHT LOSS/SHORTAGE (REFERRED TO AS GHAT) ON MATERIAL ACTUALLY SUPPLIED AND MATERIAL RECEIVED FO R PRODUCTION. THE FACT WHEREOF IS ALSO MENTIONED IN ANNEXURE 'F' TO F ORM NO. 3CD, WHEREIN GHAT (SHORTAGE) ON RAW MATERIAL IMPORT/PURC HASE IS SHOWN AT 6670 KG., WHICH WORKS OUT 0.98% OF THE RAW MATERIAL PURCHASED BY THE ASSESSEE. EVEN IN EARLIER YEARS ALSO SUCH GHAT ON RAW MATERIAL IS ACCEPTED AND IS EVEN SHOWN IN FORM 3CD REPORT FO R EARLIER YEAR ALSO WHEREIN GHAT IN TERMS OF QUANTITY ON TOTAL QUA NTITY PURCHASE OF 496120 KG IS 2856 KG WHICH WORKS OUT AT 0.58% OF VA LUE OF RAW MATERIAL PURCHASED. EVEN IN IMMEDIATELY SUCCEEDING YEAR RELEVANT TO AY. 2006-07, THE SAME AO WHILE PASSING ORDER U/S. 1 43(3) HAVE ACCEPTED THIS SHORTAGE AND NO ADDITION WAS MADE ON THIS COUNT. SO GHAT SHOWN IN RAW MATERIAL IS PRE-PRODUCTION LOSS W HICH OCCURS ONLY ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 4 ON TRANSIT FROM ITS SHIPMENT AT OVERSEAS TO THE FAC TORY DESTINATION DURING THE COURSE OF ITS IMPORT AND IS DIFFERENT FR OM THE PRODUCTION LOSS AND CAN NEVER BE CONSIDERED AND CONCLUDED AS P RODUCTION LOSS ITSELF AS BEFORE MAKING OF FINAL PRODUCT, RAW MATER IAL PASSES THROUGH VARIOUS PROCESSES OF HEATING, COOLING, MILLING & CY CLING AND SIEVING VARIOUS GRADES OF FINISHED GOODS AND LOSS ARISING T HEREON IS REFERRED AS PROCESS LOSS. THE AO HAS INCORRECTLY INTERPRETED TRANSIT LOSS AS THE PROCESS LOSS AND HAS THEREBY COMMITTED A SERIOUS ER ROR IN MAKING A ADDITION OF RS.5,69,561/-. IT WAS CONTENDED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE AO IN PARA 2 & 3 OF ASSES SMENT ORDER REPRODUCED DETAILED NOTE ON NATURE OF BUSINESS AND MANUFACTURING PROCESS AS EXPLAINED BY ASSESSEE DURING THE COURSE OF HEARING. THE AO HAS TAKEN NOTE OF THE ENTIRE PROCESS IN ASSESSME NT ORDER HIMSELF BUT FAILED TO APPRECIATE THE LOSS ARISING IN THE CO URSE OF PROCESS AND ARRIVED AT CONCLUSION THAT 'THE MANUFACTURING PROCE SS PRESCRIBED IS VERY SIMPLE WHERE THE CHANCES OF LOSS OR SHORTAGE A RE QUITE REMOTE.' BEFORE THE LEARNED CIT(A), A DETAILED NOTE EXPLAINI NG THE MANUFACTURING PROCESS WAS ALSO SUBMITTED. ACCORDIN GLY, FIRSTLY RAW MATERIAL PERLITE ORE IS TAKEN TO VARIOUS BUCKETS AN D LIFTED IN THE BUCKETS ABOVE THE VERTICAL FURNACE. THEN AFTER REAC HING REQUIRED TEMPERATURE OF ABOUT 800 C TEMPERATURES, THE RAW MA TERIAL IS DROPPED ON THE FURNACE FROM THE BUCKETS. BECAUSE OF HIGH TEMPERATURE INSIDE THE FURNACE, THE RAW MATERIAL PA RTICLES GET EXPANDED AND POPPED. AFTER ALLOWING THE RAW MATERIA L TO STAY IN FURNACE FOR REQUIRED PERIOD, THE SAME ARE TAKEN TO DUCT WITH THE USE OF BLOWER FOR COOLING FROM WHERE IT IS TAKEN TO MIL L. AFTER THAT THE SAME ARE CRUSHED AND TAKEN TO CYCLONE, TAKEN TO PLANT ON SLEEVES ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 5 (CHARNAS) FOR GRADING AS PER REQUIREMENT OF THE CUS TOMER. AT THAT TIME WASTE PARTICLES WILL BE SEPARATED IN BAG HOUSE CALLED TRAP. DURING THE PRODUCTION PROCESS, CERTAIN RAW MATERIAL DOES NOT EVEN GO INTO PRODUCTION PROCESS BUT THE SAME IS ELIMINATED AT THE FIRST STAGE ITSELF AND THE SAME IS REFERRED AS TRAP. IT HAS B EEN POINTED OUT THAT WHEN THE RAW MATERIAL PASSES THROUGH VARIOUS PROCES SES, HEATED IN FURNACE AND TAKEN TO DUCT FOR COOLING BEFORE PLANT ON CHARNAS, THERE IS BOUND TO BE LOSS ARISING ON PRODUCTION EVEN WHEN RAW MATERIAL PERLITE ORE ITSELF IS LIKE SAND PARTICLE OVER AND A BOVE LOSS REFERRED AS TRAP ARISE IN PRODUCTION. DURING THE COURSE OF THE APPELLATE PROCEEDINGS, ATTENTION OF THE LEARNED CIT(A) WAS AL SO DRAWN TO ANNEXURE 'F' TO FORM 3CD WHERE IN IT WAS SHOWN THAT STOCK OF TRAP OF 14663 KG. GENERATED DURING THE YEAR UNDER APPEAL WAS SEPARATELY MENTIONED THEREIN. FURTHER, ATTENTION OF THE LEARNE D CIT(A) WAS DRAWN TO THE FACT THAT CERTAIN WASTAGE ARISING DURING THE PRODUCTION PROCESS CAN BE FURTHER PROCESSED BY MIXING WITH THE PERLITE ORE AND SOLD AS SUBSTANDARD QUALITY OF FINISHED GOODS. SUCH MATERIA L OF SUB STANDARD QUALITY IS REFERRED AS BAG HOUSE WHICH DOE S NOT COMMAND SAME MARKET/REALIZATION RATE AS OF SUPERIOR QUALITY CLEAR FLOW PRODUCT. THE LEARNED COUNSEL FOR THE ASSESSEE PLEAD ED THAT CONSIDERING THE VARIOUS GRADE LEVEL, EVEN THE CONTI NUOUS PRODUCTION PROCESS, SHORTAGE CAN NOT BE PRECISELY OR ACCURATEL Y DETERMINED OR EVEN CAN BE CONTROLLED BECAUSE YIELD RESULT DEPEND ON LOT MANY FACTORS VIZ; EXACT QUALITY/GRADE REQUIREMENT FROM CUSTOMERS, WHI CH VARY FROM CUSTOMER TO CUSTOMER ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 6 QUALITY OF RAW MATERIAL - PERLITE ORE. SKILL SET OF WORKERS/LABOUR HANDLING THE JOB/PROCES S WEATHER CONDITION AND TEMPERATURE CONDITIONS ON FUR NACE AND COOLING ROOM HANDLING OF PROCESS THROUGH VARIOUS STAGES FAILURE OF PROCESS/SYSTEM EVEN, AFTER EXPERIENCE OF LONG PRODUCTION CYCLE/BAT CHES, MANAGEMENT CAN NOT EFFECTIVELY CONTROL AND MANAGE S HORTAGE LOSS BUT AO SIMPLY NARRATING AND CONCLUDING THAT PRODUCT ION PROCESS IS SO SIMPLE AND SHORTAGE CAN NEVER BE MORE THAN 1.25% OF THE QUANTITY OF TOTAL RAW MATERIAL USED FOR PRODUCTION AND THEREBY REJECTING BOOKS OF ACCOUNT WITHOUT GIVING PROPER OPPORTUNITY FOR JUSTI FICATION TO ASSESSEE COMPANY TO JUSTIFY/ESTABLISH ITS CASE IS NOT TENABL E IN LAW. HE FURTHER ARGUED THAT, THE AO COULD NOT APPRECIATE THE DIFFER ENCE BETWEEN SHORTAGE AND THE YIELD. YIELD OF RAW MATERIAL IS AR RIVED AND WORKED OUT OF FINISHED PRODUCT AFTER THE RAW MATERIAL REAC HES THE FINAL PRODUCT LEVEL. IT APPEARS THAT, THE AO HAS IMPROPERLY EQUAT ED THE DIFFERENCE IN WEIGHT OF RAW MATERIAL AND FINAL PRODUCT AS SHORTAG E. IN FACT, THE DIFFERENCE IS CALLED AS YIELD OF RAW MATERIAL TO FI NISHED PRODUCT AND NOT SHORTAGE. THE DIFFERENCE GENERATED DURING THE P ROCESS OF MANUFACTURING IS REFERRED TO AS YIELD WHICH CAN NOT BE EQUATED WITH THE SHORTAGE. THIS IS CLEAR FROM THE CLAUSE 28 (A) OF FORM 3CD, ITSELF WHEREIN THE REQUIREMENT IS TO REPORT YIELD AND SHOR TAGE SEPARATELY FOR ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 7 THE ASSESSEES WHO ARE THE MANUFACTURING CONCERNS WH EREAS IN THE CASE OF TRADING CONCERNS THE REQUIREMENT IS OF REPO RTING ONLY SHORTAGE. THIS IS BECAUSE THERE IS BOTH, THE SHORTA GE AND YIELD IN THE MANUFACTURING CONCERNS AS GENERALLY THE WEIGHT OF T HE RAW MATERIALS CONSUMED IS HIGHER THAN THAT OF THE WEIGHT OF FINIS HED PRODUCTS. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO FURNISHED THE DETAILS CALLED FOR AND SUBMITTED DURING THE COURSE OF HEARING FOR A.Y. 06-07 ALONG WITH THE ASSESSEES LETTER DID.05/12/08. THE LEARNED COU NSEL FOR THE ASSESSEE ALSO SUBMITTED THE ASSESSMENT ORDER FOR AY . 2006-07 AND DRAWN ATTENTION OF THE LEARNED CIT(A) TO THE FACT T HAT, THOUGH THE SAME AO RAISED SIMILAR ISSUE WHICH IS BEFORE THE LE ARNED CIT(A) DURING THE COURSE OF ASSESSMENT FOR AY. 2006-07, BU T AFTER CONSIDERING THE SUBMISSIONS WITH THE LETTER DATED 0 5-12-2008 AND THE TECHNICAL DATA SHEET REFERRED TO HEREIN ABOVE, ACCEPTED THE FACTS, YIELD AND SHORTAGE WHICH IS EVEN HIGHER AS COMPARED TO THE YEAR UNDER APPEAL AND DID NOT MAKE ANY ADDITION AS HAVE BEEN DONE BY HIM FOR A.Y.05-06 UNDER APPEAL. ATTENTION OF THE LE ARNED CIT(A) WAS ALSO DRAWN TO THE QUANTITATIVE DETAILS GIVEN IN ANN EXURE F TO FORM 3CD SHOWING THE CONSUMPTION OF IMPORTED RAW MATERIA L WHICH WAS 5,20,115 KG. AND TO THAT IF THE INDIGENOUS RAW MATE RIAL OF 27,600 KG. IS ADDED, TOTAL RAW MATERIAL CONSUMED WORKED OUT ON LY AT 5,47,715 KG.(5,20,115 + 27,600) AS AGAINST THE RAW MATERIAL CONSUMED ADOPTED BY THE AO AT 5,59,169 KG. FOR HIS WORKING. BY REFERRING TO THE INFORMATION WITH REGARD TO SALE OF BAG HOUSE OF 505 4 KG. GIVEN IN ANNEXURE 'F' TO FORM 3CD, IT WAS ALSO POINTED OUT T HAT, THE AO HAS WRONGLY INCLUDED THE BAG HOUSE PRODUCTION AS RAW MA TERIAL. IN FACT, THIS BAG HOUSE IS A BYE PRODUCT GENERATED DURING TH E COURSE OF ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 8 PRODUCTION AND IS SOLD SEPARATELY AND IT WAS ARGUED THAT, IN FACT THIS REQUIRED TO BE ADDED TO THE FIGURE OF PRODUCTION IN STEAD OF ADDING TO THE RAW MATERIAL CONSUMED. BY DOING SO THE A.O. HAS MADE A MISTAKE IN MAKING AN ADDITION OF RS.5,69,561/-. THE LEARNED COUNSEL FOR THE ASSESSEE DRAWN ATTENTION OF THE LEARNED CIT (A) TO THE DETAILS SUBMITTED BY THE ASSESSEE AT THE TIME OF HEARING AN D EXPLAINED HOW IT WAS NOT APPRECIATED AND USED IN A DIFFERENT WAY BY THE AO. WHILE ADOPTING THE RAW MATERIAL CONSUMED THE AO HAS ADOPT ED THE FOLLOWING AND INCLUDED IN THE WEIGHT OF RAW MATERIA L CONSUMED WHICH IS PATENTLY WRONG AS CAN BE SEEN FROM THE FOLLOWING SUBMISSIONS:- KG. 5,20,115 IMPORTED RAW MATERIALS 27,600 INDIGENOUS RAW MATERIAL 6,670 SHORTAGE IN TRANSIT OF IMPORTED RAW MATERI AL 4,728 BAG HOUSE (BYPRODUCT WHICH HAVE BEEN SOLD S EPARATELY. 55 THREAD (THIS IS NOT A RAW MATERIAL BUT A PACKING M ATERIAL ITEM) 5,59,168 TOTAL KG. THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT TH AT FROM THE ABOVE IT IS CLEAR THAT THE RAW MATERIAL CONSUMED WA S ONLY 5,47,775 KG. (5,20,115 + 27,600 KG.) AND NOT 5,59,168 KG. AS ADOPTED BY THE LD. AO. FROM THE ABOVE, THE LEARNED COUNSEL FOR THE ASSESS EE STATED THAT THE DETAILS GIVEN IN THE TABULAR FORM B Y THE AO ITSELF IS MISLEADING IN AS MUCH AS HE HAS INCLUDED THE QUANTI TY OF BAG HOUSE 4728 KG., TRAP 55 KG AND SHORTAGE 6670 KG IN THE RA W MATERIAL ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 9 CONSUMED. ACCORDINGLY, TOTAL RAW MATERIAL CONSUMED WAS TAKEN BY THE AO AS 559169 KG. INSTEAD OF 547715 KG. (5,59,16 9 KG LESS:11,453 KG.(4,728KG. + 55KG. + 6670KG). AGAINST THIS, THE ACTUAL PRODUCTION WORKS OUT AT 517046 KG. (5,12,318 KG. + BAG HOUSE 4728KG). IF THIS IS CONSIDERED THE YIELD WORKS OUT AT 94.40% (517046/547751). THIS YIELD IS COMPARABLE WITH THAT OF THE TECHNICAL DATA SHEET FURNISHED HEREWITH AND REFERRED TO HEREI N ABOVE WHICH SAYS THAT, THE YIELD CAN BE UP TO 93.05% (100% RAW MATERIAL LESS: 6.95% (0.7% MOISTURE LOSS + 5% IGNITION LOSS + 1.25 % TRANSPORTATION AND MOVEMENT OF RAW MATERIAL LOSS IN TERMS OF QUANT ITY). LN VIEW OF THIS, THE LEARNED COUNSEL FOR THE ASSESSEE STATED T HAT, THE YIELD REPORTED BY THE ASSESSEE IS BETTER THAN EVEN THE EX PERTS OPINED. THIS IS BECAUSE OF BATTER HANDLING OF MATERIAL AND EFFIC IENCY ACHIEVED IN THE MANUFACTURING PROCESS OVER THE YEARS. DURING TH E COURSE OF APPELLATE PROCEEDINGS, THE LEARNED COUNSEL FOR THE ASSESSEE ALSO FURNISHED THE COMPARATIVE FIGURES OF LAST THREE YEA RS TO SHOW THE GP. FOR THE YEAR UNDER REFERENCE HAS GONE UP TO 20.62% AS AGAINST 19.16% IN THE IMMEDIATELY PRECEDING YEAR WHEREAS TH E CONSUMPTION OF RAW MATERIAL REMAINED AS MOST AT THE SAME LEVEL. ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 10 PARTICULARS ACCOUNTING YEAR 2002-2003 2003-2004 2004-2005 SALES 4189973 6206724 7217988 RAW MATERIAL CONSUMPTION 3060337 4495047 5280449 YIELD: RAW MATERIAL CONSUMPTION TO PRODUCTION (%) 73.03% 72.42% 73.15% GROSS PROFIT 821285 1189693 1488376 GROSS PROFIT (%) 19.60% 19.16% 20.62% IT HAS BEEN CONTENDED THAT THE AO HAS NOT POINTED O UT A SINGLE DEFECT IN THE ACCOUNTS. THE SUPPRESSED PRODUCTION/SALE ALL EGED BY THE AO IS MERELY A GUESS WORK HAVING NO SOUND BASE FOR HIS ES TIMATION. EVEN, THERE IS NO MATERIAL OR EVIDENCE POINTED OUT BY HIM WHICH CAN LEAD TO THE CONCLUSION THAT THERE WAS ANY SUPPRESSED SALE. THE AO HAS IGNORED THE VITAL FACT THAT, APART FROM TRANSIT LOS S, THERE IS ALWAYS SOME LOSS IN THE PRODUCTION PROCESS ITSELF AND THE ARGUMENT THEREUPON ADVANCED IS THAT, IN THE ABSENCE OF ANY D EFECTS FOUND IN THE ACCOUNTS, THE AO WAS NOT JUSTIFIED IN REJECTING THE BOOKS OF ACCOUNTS AND MAKING THE ADDITION MERELY ON SUSPICIO N AND ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 11 CONJECTURE. IN THIS REGARD THE LEARNED COUNSEL FOR THE ASSESSEE PLEADED RELIANCE ON THE FOLLOWING DECISIONS: (A) BOOKS OF ACCOUNTS REGULARLY MAINTAINED IN THE COURSE OF BUSINESS HAVE TO BE TAKEN AS CORRECT UNLE SS THERE ARE STRONG AND SUFFICIENT REASONS TO INDICATE THAT THEY ARE UNRELIABLE. THE DEPARTMENT HAS TO PROVE SATISFACTORILY THAT ACCOUNT BOOKS ARE UNRELIABLE, I NCORRECT OR INCOMPLETE BEFORE IT CAN BE REJECTED. THIS CAN B E DONE BY SHOWING IMPORTANT PURCHASES/SALES ARE OMITTED TH ERE FROM OR PROPER PARTICULARS OR VOUCHERS ARE NOT FORT HCOMING OR ACCOUNTS DO NOT INCLUDE ENTRIES RELATING TO PART ICULAR CLASS OF BUSINESS. REJECTION OF ACCOUNT SHOULD NOT BE DONE LIGHT HEARTEDLY AS HAS BEEN DONE BY THE LD. AO . (B) HON'BLE HIGH GUJARAT HIGH COURT IN CASE O F GIT V. AMITBHAI GUNWANTBHAI (1981) 129 ITR 573,580 (GUJ) CATEGORICALLY LAID DOWN THE PRINCIPLE THAT, IF THER E IS NO CHALLENGE TO THE TRANSACTIONS REPRESENTED BY ENTRIE S OR TO THE GENUINENESS OF THE ENTRIES, THEN IT IS NOT OPEN FOR REVENUE OR OTHER SIDE TO CONTEND THAT WHAT IS SHOWN BY ENTRIES IS NOT THE REAL STATE OF AFFAIRS. (C) EVEN IN CASE OF VADAYATTU JEWELLERY V. ST ATE OF KERALA (1997) 104 STC 121,126 (KER), COURT CATEGORI CALLY STATED THAT REJECTION OF BOOKS OF ACCOUNT ARE NOT J USTIFIED WHERE THE DEFECTS POINTED OUT IN THE BOOKS OF ACCOU NT WERE OF GENERAL OR TECHNICAL NATURE, OBJECTION OF T HE ASSESSEE WERE NOT CONSIDERED, BOOKS PRODUCED WERE N OT VERIFIED OR NO SUPPRESSION OF SALES AND PURCHASE WA S ESTABLISHED. (D) MERELY BECAUSE BOOKS OF ACCOUNTS ARE REJE CTED AS UNRELIABLE, IT COULD NOT BE SAID THAT THE TURNOVER RETURNED BY THE ASSESSEE MUST NECESSARILY BE REJECTED AND TH AT TURNOVER SHOULD BE ESTIMATED AT A HIGHER FIGURE THA N RETURNED BY THE ASSESSEE. EVEN ON REJECTION, WHETHE R THE TURNOVER RETURNED BY ASSESSEE SHOULD BE ACCEPTED OR WHETHER A HIGHER TURNOVER SHOULD BE ESTIMATED MUST ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 12 DEPEND ON FACTS AND CIRCUMSTANCE OF THE CASE. HERE, THE ASSESSEE COMPANY IS ALSO ASSESSED TO TAX SINCE LAST MANY YEARS AND NO ADDITION ON SUPPRESSED SALES HAS BEEN MADE IN ANY OF EARLIER YEARS OR EVEN IN SUBSEQ UENT YEAR THOUGH THE SAME LD. AO PASSED THE ORDER U/S. 143(3) OF THE ACT ON THE SIMILAR FACTS.. EVEN SALES TAX AUTHORITIES HAVE ACCEPTED THE FIGURES AS SUBMITTED FOR THE YEAR UNDER APPEAL AND EARLIER YEARS AND NO SHORT COMINGS/SUPPRESSED SALES HAVE BEEN ALLEGED. THE MAJ OR SALES AND PURCHASES MADE BY ASSESSEE COMPANY ARE IN ORGANIZED SECTORS AND CROSS VERIFIABLE. CONSIDERING ALL THIS AS HELD BY CST V. PILOT SHOE F ACTORY (1977) 39 SC 95,98 (ALL), REJECTION NEED NOT NECESS ARILY LEAD TO ENHANCEMENT OF TURNOVER. (E) HON'BLE SUPREME COURT OBSERVED THAT WHERE THE ASSESSEE CLAIMS EXPENSES ON THE BASIS OF AN YIELD W HICH, ACCORDING TO THE ASSESSING OFFICER IS LOWER THAN A CTUAL YIELD AND ASSESSING OFFICER ESTIMATES THE PRODUCE A T A HIGHER FIGURE, THERE IS NO REASON WHY HE CANNOT EST IMATE THAT THE EXPENSES INCURRED IN RESPECT OF THAT HIGHE R PRODUCE MUST HAVE BEEN LARGER THAN THE AMOUNT ACTUA LLY SHOWN. (STATE OF UTTAR PRADESH V. YASHPAL SINGH (19 67) 63 ITR 216 (SC). EVEN ON WORST SITUATION FOR WORKIN G SUPPRESSED SALES, MAXIMUM ADDITIONS BE RESTRICTED T O % OF GROSS PROFIT TO SALES ONLY. (F) AS HELD BY HON'BLE ITAT , JODHPUR BENCH I N ITA NO.374/JP/1995 IN DHANESH COTTON GINNING DAL & OIL MILLS VS. INCOME TAX OFFICER [(2004) 86 TTJ 425], 'ADDITION OF INCOME DUE TO LOW YIELD OF RICE BRAN W AS NOT JUSTIFIED AND ADDITION WAS DELETED BY OBSERVING THA T AO SHOULD HAVE POINTED OUT IN DEFECTS IN THE MAINTENAN CE OF ACCOUNTS. IN ABSENCE THEREOF NO ADDITION COULD BE M ADE FOR LOW YIELD. BESIDES, AO SHOULD HAVE COMPARED THE RESULTS OF CURRENT YEAR WITH THAT OF IMMEDIATE PAST YEAR. HOWEVER, ASSESSEE CANNOT BE EXPECTED TO DECLARE THE RESULTS WITH ARITHMETICAL ACCURACY IN COMPARISON TO THE PAST YEARS'. ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 13 IN THE SAME CASE IT HAS ALSO BEEN HELD THAT, 'ASSES SEE WAS USING RICE HUSK IN ITS OWN FACTORY AND NOT SELL ING THE SAME, NO ADDITION ON ACCOUNT OF HUSK COULD BE MADE' . (G) AS HELD BY HON'BLE ITAT, AHMEDABAD 'D' BEN CH IN ITA NO.96/AHD/2001 IN SURAT DISTRICT CO-OPERATIVE M ILK PRODUCERS UNION LTD. VS. COMMISSIONER OF INCOME TAX [(2006) 99 TTJ 390] WHEREIN IT HAS BEEN HELD THAT, 'AO HAVING NOT POINTED OUT ANY SPECIFIC DEFECT IN THE B OOKS OF ACCOUNT REGULARLY MAINTAINED BY THE ASSESSEE WHICH ARE SUBJECT TO AUDIT UNDER S.44AB OR DETECTED ANY MATER IAL OR EVIDENCE INDICATING THAT THE ASSESSEE HAD MADE SALE OUT OF THE BOOKS OF ACCOUNT, HE WAS NOT JUSTIFIED IN MA KING ADDITIONS ON ACCOUNT OF UNACCOUNTED SALES MERELY ON CERTAIN PRESUMPTION/ASSUMPTION. (H) AS HELD BY HON'BLE ITAT , DELHI 'B' BENCH I N ITA NO. 5245/DEL/1987 IN ITO V. VIGYAN CHEMICAL INDUSTRIES [(1991)40 TTJ 82], 'THE YIELD DISCLOSED BY THE ASSE SSEE CONFORMS TO THE EXPECTED YIELD AS INDICTED BY AN EX PERT WHOSE STATEMENT HAD BEEN RECORDED BY THE AO. MOREOVER, IT IS WELL SETTLED PRINCIPLE OF LAW THAT YIELD OF PRODUCT MAY VARY FROM CONCERN TO CONCERN AND YEAR T O YEAR DEPENDING ON VARIOUS FACTORS. MERE LOW YIELD D OES NOT WARRANT AN ADDITION IN THE TRADING ACCOUNT. THE AO HAD MADE AN ADDITION ON THE BASIS OF ASSUMED YIELD ON THE BASIS OF SUPPRESSION OF SALES. IN THE CASE OF SUPPRESSION OF SALES STRONG BURDEN LIES ON THE REVE NUE. THERE IS NO MATERIAL ON RECORD TO JUSTIFY THE CONCL USION REACHED UPON BY THE AO THAT THE YIELD SHOWN BY THE ASSESSEE WAS LOW. THE ASSESSEE HAD MAINTAINED COMPLETE BOOKS OF ACCOUNTS THOUGH ADMITTEDLY MANUFACTURING ACCOUNT HAD NOT BEEN MAINTAINED. YIEL D HAS BEEN FOUND TO BE IN CONFORMITY WITH YIELD EXPEC TED FROM SUCH UNITS. CONSIDERING THE TOTALITY OF THE CIRCUMSTANCES, THERE IS NO JUSTIFICATION FOR THE AD DITION. APPELLANT ALSO STATED, THAT THE FACTS IN THE CASE O F THE APPELLANT IS MUCH BETTER THAN THE ABOVE CITED CASES AND ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 14 THE RATIO OF THE ORDERS/JUDGMENTS IN THE SAID CASES ARE SQUARELY APPLICABLE TO THE FACTS OF THE CASE UNDER APPEAL. 4. THE LEARNED CIT(A) CONSIDERING THE SUBMISSIONS O F THE ASSESSEE AND MATERIAL ON RECORD DELETED THE ADDITIO N. HIS FINDINGS IN PARA 6.14 TO 6.19 IN THE IMPUGNED ORDER ARE REPRODU CED AS UNDER: 6.14 I HAVE CONSIDERED THE FACTS OF THE CASE AND TH E SUBMISSIONS OF THE LD. A.R. CAREFULLY. THERE IS NO DISPUTE ABOUT THE FACT THAT THE APPELLANT DISCLOSED HIGHER G.P. DURING THE RELEVANT PERIOD IN COMPARISON TO LAST YE AR. 6.15. IT IS SEEN THAT THE APPELLANT IS ENGAGED IN T HE BUSINESS OF MANUFACTURING AND TRADING OF CHEMICALS FOR WHICH PERLITE ORE IS USED AS RAW MATERIAL, WHICH IS A SAND LIKE PARTICLE. THE MANUFACTURING PROCESS OF THE APP ELLANT CONSISTS OF HEATING, COOLING, MILLING, CYCLONING AN D SIEVING VARIOUS GRADES OF FINISHED GOODS. THE PERLITE ORE I S IMPORTED FROM TURKEY. DURING THE COURSE OF MANUFACT URING THE ORE IS TAKEN TO VARIOUS BUCKETS AND LIFTED IN B UCKETS ABOVE THE VERTICAL FURNACE. THEN AFTER REACHING REQ UIRED TEMPERATURE ABOUT 800 DEGREE CELSIUS, THE RAW MATER IAL IS DROPPED ON THE FURNACE FROM THE BUCKETS. DUE TO HIGH TEMPERATURE INSIDE THE FURNACE THE RAW MATERIAL PAR TICLES ARE EXPANDED AND POPPED. AFTER ALLOWING THE RAW MAT ERIAL STAYING ON FURNACE FOR A SPECIFIED PERIOD, THE SAME IS TAKEN TO DUCT WITH THE USE OF BLOWER FOR COOLING AN D FROM THERE IT IS TAKEN TO MILL. AFTER THE SAID PROCESS T HE PARTICLES ARE CRUSHED AND TAKEN TO CYCLONE, TAKEN TO PLANT ON SLEEVES (CHARNAS) FOR GRADING AS PER THE REQUIREMEN T OF THE CUSTOMER. AT THIS STAGE WASTE PARTICLES ARE SEP ARATED IN BAG HOUSE CALLED TRAP. SOME OF THE RAW MATERIAL WHICH DOES NOT INTO THE PRODUCTION PROCESS ALSO ELIMINATE D AND REMAIN IN TRAP. THERE IS LOSS OF RAW MATERIAL TO SO ME EXTENT IN THE PROCESS OF HEATING AND COOLING. DURIN G THE RELEVANT PERIOD THE TRAP GENERATED BY THE APPELLANT WAS AT 14663 KG. ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 15 6.15 SIMILARLY, THE WASTAGE GENERATED SUBSEQUENT T O TRAP STAGE IS CALLED BAG HOUSE WHICH IS SOLD BY THE APPELLANT UNDER THE NAME AS STANDARD QUALITY. 6.16 THE AFORESAID WOULD SHOW THAT THERE ARE VARIOU S PROCESS INVOLVED IN THE MANUFACTURING OF THE APPELL ANT AND WASTAGE ON DIFFERENT STAGES IS BOUND TO HAPPEN. SINCE, RAW MATERIAL IS, A SAND LIKE PARTICLE, IT IS BUT NATURAL THAT THERE WILL BE SOME WASTAGE IN THE TRANSIT ITSE LF. 6.17 THE APPELLANT'S WASTAGE DISCLOSED A @ 1.25% BASICALLY PERTAINS TO TRANSIT LOSS WHICH OCCURS DUE TO THE TRANSPORTATION FROM VARIOUS DESTINATIONS TO FACTORY PREMISES. IT IS CLEAR FROM THE ASSESSMENT ORDER THA T THE A.O. WITHOUT APPRECIATING THE FACTS CORRECTLY STICK ED TO THE FIGURE OF 1.25% AND REJECTED THE APPELLANT'S CLAIM FOR WASTAGE WHICH OCCURRED DURING THE MANUFACTURING PROCESS SUBSEQUENT TO TRANSIT LOSS. THERE ARE VARIO US PROCESSES INVOLVED UNDER WHICH THE RAW MATERIAL PAS SES THROUGH. DURING THESE PROCEDURE, SOME WASTAGE IS REQUIRED TO OCCUR DUE TO HEATING ETC. 6.18 THE LD. AR. HAS BEEN ABLE TO SHOW THAT THE TOT AL CONSUMPTION OF THE RAW MATERIAL BY THE APPELLANT DU RING THE RELEVANT PERIOD WAS AT 547715 KG. AS AGAINST 55 9169 KG ADOPTED BY THE A.O. THE A.O. WHILE ARRIVING AT T HE QUANTUM OF RAW MATERIAL INCLUDED THE BAG HOUSE PRODUCTION AT 4728 KG, THREAD 55 KG AND SHORTAGE IN RAW MATERIAL 6670 KG. IT IS CLEAR THAT THE A.O. WITHOUT APPRECIATING THE PRODUCTION PROCESS CORRECTLY INCLU DED THE QUANTITY OF BAG HOUSE PRODUCTION AT 4728 KG SHORTAG E IN RAW MATERIAL AGAIN IN THE RAW MATERIAL TO ARRIVE AT THE QUANTITY OF 559169 KG. IN THIS EXERCISE HE HAS ALSO INCLUDED THE WEIGHT OF THREAD AT 55KG WHICH THE APP ELLANT USES FOR STITCHING THE BAGS. THEREFORE, IT CAN BE S EEN THAT THE CONCLUSIONS DRAWN BY THE A.O. ARE NOT BASED ON CORRECT FACT. THE FACTS WHICH WERE BEFORE HIM WERE ALSO NOT ANALYZED CORRECTLY. THE A.O. HAS ALSO IGNORED T HE PRODUCTION OF TAP AT 1558 KG AND THE BAG HOUSE 1466 3 KG ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 16 WHICH GIVES THE TOTAL PRODUCTION DURING THE RELEVAN T PERIOD AT 528539 KG (512318 KG + 1558 KG + 14663KG) AGAINS T THE TOTAL CONSUMPTION OF 547715 KG WHICH GIVES YIEL D AT 96.50%. 6.19 FURTHER THE A.O. WHILE REJECTING THE BOOKS O F ACCOUNTS HAS NOT BROUGHT ON RECORD ANY DEFICIENCY THEREIN. HE HAS NOT DOUBTED THE SALES AND PURCHASES MADE BY THE APPELLANT DURING THE RELEVANT PERIOD. THEREFORE, CONSIDERING THE TOTALITY OF THE FACTS AS NARRATED ABOVE I DO NOT FIND ANY JUSTIFICATION FOR REJECTION OF BOOKS OF ACCOUNTS THEREBY INTERFERING IN THE YIELD DISCLO SED BY THE APPELLANT DURING THE PERIOD. IT WILL NOT OUT OF PLACE TO MENTION HERE THAT THE A.O. HAS ACCEPTED THE APPELLANTS BOOK RESULT IN THE SIMILAR CIRCUMSTANCES FOR THE A. Y.2006- 07 AND HAS NOT MADE ANY ADDITION ON THE ISSUE UNDER REFERENCE. IN VIEW OF THE ABOVE, THE ADDITION MADE BY THE A.O. CANNOT BE SUSTAINED, THEREFORE, SAME IS HEREBY DELETED. 5. THE LEARNED DR RELIED UPON THE ORDER OF THE AO A ND THE FINDINGS GIVEN BY HIM AND SUBMITTED THAT THE LEARNE D CIT(A) SHOULD NOT HAVE DELETED THE ADDITION. ON THE OTHER HAND, T HE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND REFERRED TO PB-33 WHICH IS TH E ASSESSMENT ORDER U/S 143 (3) OF THE IT ACT IN THE CASE OF THE SAME ASSESSEE FOR ASSESSMENT YEAR 2006-07 IN WHICH THE AO ON THE SAME FACTS DID NOT MAKE ANY ADDITION AND ACCEPTED THE SIMILAR BOOK RES ULTS OF THE ASSESSEE. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND MAT ERIAL ON RECORD AND DO NOT FIND ANY JUSTIFICATION TO INTERFE RE WITH THE ORDER OF THE LEARNED CIT(A). THE LEARNED CIT(A) HAS CONSIDER ED THE ENTIRE MANUFACTURING AND PRODUCTION ACTIVITY OF THE ASSESS EE IN DETAIL AND ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 17 CAME TO THE JUST FINDING THAT THE SUBSTANTIAL WASTA GE ACTUALLY PERTAINS TO TRANSIT LOSS WHICH OCCURS DUE TO TRANSPORTATION FROM VARIOUS DESTINATIONS TO THE FACTORY PREMISES. IN EARLIER YE AR ALSO THE ASSESSEE MAINTAINED ALL BOOKS OF ACCOUNTS ON THE SAME PATTER N IN WHICH NO DEFECT HAS BEEN POINTED OUT. IN THE SUBSEQUENT ASSE SSMENT YEAR 2006-07, THE ASSESSEE MAINTAINED BOOKS OF ACCOUNTS ON THE SAME BASIS IN WHICH NO SPECIFIC DEFECT WAS FOUND BY THE AO AND THE CLAIM OF THE ASSESSEE HAS BEEN ACCEPTED IN THE ASSESSMENT ORDER U/S 143(3) OF THE IT ACT (PB-33). THE GP RATE OF THE AS SESSEE IS BETTER AS COMPARED TO EARLIER YEAR. THE SALES AND PURCHASES S HOWN BY THE ASSESSEE HAVE NOT BEEN DISPUTED. THUS, THE AO HAS N OT POINTED OUT ANY SPECIFIC DEFECT IN MAINTENANCE OF THE BOOKS OF ACCOUNTS BY THE ASSESSEE, THEREFORE, THE FINDINGS OF THE AO THAT TH ERE IS A SUPPRESSED PRODUCTION/SALE IS PURELY ON ASSUMPTION AND PRESUMP TION WITHOUT ANY BASIS. THE AO HAS NOT POINTED OUT ANY MATERIAL OR E VIDENCE TO SHOW THAT THERE WAS ANY SUPPRESSED SALES. THE AO HAS IGN ORED THAT THE MAIN REASON, APART FROM TRANSPORT LOSS, WAS SOME LO SS IN THE PRODUCTION PROCESS. THE FACTUAL FINDINGS GIVEN BY T HE LEARNED CIT(A) HAVE NOT BEEN REBUTTED THROUGH ANY EVIDENCE ON RECO RD. THE LEARNED CIT(A) ON PROPER APPRECIATION OF THE FACTS AND MATE RIAL ON RECORD RIGHTLY DELETED THE ADDITION. SINCE THE CLAIM OF TH E ASSESSEE ON THE SAME BASIS HAS ALREADY BEEN ACCEPTED BY THE AO IN T HE SUBSEQUENT ASSESSMENT YEAR IN THE SCRUTINY PROCEEDINGS AND NOT HING IS BROUGHT AGAINST THE ASSESSEE, WE DO NOT FIND IT TO BE A FIT CASE FOR INTERFERENCE. DEPARTMENTAL APPEAL HAS NO MERIT ON T HESE GROUNDS AND THE SAME ARE ACCORDINGLY DISMISSED. ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 18 7. ON GROUND NO.3, THE REVENUE CHALLENGED THE DELET ION OF ADDITION OF RS.6,36,235/- MADE OUT OF TOTAL DISALLO WANCE OF RS.7,82,665/-. THE ASSESSEE CLAIMED TRANSPORTATION EXPENSES OF RS.8,63,335/-. THE AO ON VERIFICATION OF THE DETAIL S OF SUCH EXPENSES NOTED THAT RS.7,82,665/- WAS PAID WITHOUT DEDUCTION OF TAX AT SOURCE UNDER THE PROVISIONS OF SEC. 195 OF THE IT ACT. HE ACCORDINGLY DISALLOWED THE EXPENSES UNDER THE PROVISIONS OF SEC . 40(A) (IA) OF THE ACT. DURING THE APPELLATE PROCEEDINGS BEFORE THE LE ARNED CIT(A), THE LEARNED COUNSEL FOR THE ASSESSEE OBJECTED TO THE SA ID DISALLOWANCE BY REFERRING PARA 5(B) OF THE ASSESSMENT ORDER, DRA WN ATTENTION OF THE LEARNED CIT(A) TO THE FACT THAT THE COPIES OF THE B ILLS IN RESPECT OF THE CLAIM WAS SUBMITTED TO THE AO. THE SAME WERE ALSO F ILED DURING THE APPELLATE PROCEEDINGS. THE DETAILS GIVEN BY THE A.O . IN THE ASSESSMENT ORDER IS REPRODUCED BELOW:- SR. NO. DATE OF PAYMENT NAME OF PARTY AMOUNT (RS.) 1. 17.06.2004 GREENWAYS SHIPPING AGENCIES PVT. LTD. 2,28,055 2. 28.09.2004 SHREE AMBICA CARGO MOVERS 22,500 3. 2.10.2004 KAUSHALI INTERNATIONAL 45,000 4. 14.10.2004 UNITED ARAB SHIPPING SERVICES (I) PVT. LTD. 2,67,720 5. 14.10.2004. TRANSWORLD SHIPPING SERVICES (L) PVT. LTD. 1,40,460 6. 31.01.2005 APL (INDIA) PVT. LTD. 32,780 7. 17.03.2005 KAUSALI INTERNATIONAL 46,150 TOTAL 7,82,665 ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 19 THE EARNED COUNSEL FOR THE ASSESSEE FURTHER STATED THAT, OUT OF THE ABOVE PAYMENTS OF RS.7,82,665/-DISALLOWED BY THE AO , THE ASSESSEE COMPANY MADE TOTAL PAYMENTS OF RS.6,36,235/- AS UNDER TO THE NRI SHIPPING COMPANIES OR THEIR AGENTS TO WHICH THE PRO VISIONS OF SEC. 195 OR ANY OTHER TDS PROVISIONS DO NOT APPLY. SR. NO. DATE OF PAYMENT NAME OF PARTY AMOUNT (RS.) 1. 17.06.2004 GREENWAYS SHIPPING AGENCIES PVT. LTD. 2,28,055 2. 14.10.2004 UNITED ARAB SHIPPING SERVICES (I) PVT. LTD. 2,67,720 3. 14.10.2004. TRANS WORLD SHIPPING SERVICES (L)PVT. LTD. 1,40,460 TOTAL 6,36,235 IN SUPPORT OF THE CLAIM THAT THE ABOVE PAYMENTS HAV E BEEN MADE TO THE NRI SHIPPING COMPANIES, THE LEARNED COUNSEL FOR THE ASSESSEE DRAWN ATTENTION OF THE LEARNED CIT(A) TO THE COPIES OF THE BILLS REFERRED TO BY THE AO IN HIS ORDER, COPIES OF BILL OF LADING AND COPY OF ACCOUNT OF THE SAID NRL SHIPPING COMPANY FROM THE B OOKS OF THE ASSESSEE COMPANY. THE LEARNED COUNSEL FOR THE ASSES SEE FURTHER REFERRED TO A COPY OF A CERTIFICATE ADDRESSED TO EV ERGREEN MARINE CORPORATION (TAIWAN) LTD. ISSUED BY THE ASST. DIREC TOR OF INCOME TAX, (INTERNATIONAL TAXATION-1 (2)), MUMBAI CLEARLY MENT IONING THE CBDT CIRCULAR NO. 723 DATED 19-10-1995, THE PROVISIONS O F SEC. 195 OF THE INCOME TAX ACT, 1961 FOR TDS ARE NOT APPLICABLE TO PAYMENTS MADE ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 20 TO FOREIGN SHIPPING COMPANIES. IT WAS CONTENDED THA T A CERTIFICATE ISSUED BY THE GREENWAYS SHIPPING AGENCIES PVT. LTD. THAT THEY ARE THE AGENT OF SAID EVERGREEN MARINE CORPORATION (TAI WAN) LTD. WHICH IS AN NRI SHIPPING COMPANY WAS ALSO FILED BEFORE TH E AO. FURTHER, THE COPY OF DEBIT NOTE ISSUED BY THE SAID PAYEE ON BEHALF OF THEIR PRINCIPAL ALONG WITH BILL OF LADING AMOUNTING TO RS .2,28,055/- WAS ALSO PRODUCED BEFORE THE AO. THEREFORE, IT WAS CONT ENDED THAT THE PAYMENTS MADE TO GREEN WAY SHIPPING AGENCIES PVT. L TD., AS AN AGENT OF NRI SHIPPING COMPANY NAMELY, EVERGREEN MAR INE CORP. (TAIWAN) LTD. WERE REQUIRED TO BE ALLOWED ACCORDING LY AS THEY WERE NOT HIT BY PROVISIONS OF TDS. WITH REGARD TO THE P AYMENTS OF RS.2,67,720/- TO UNITED ARAB SHIPPING CO.(S.A.G.), AN NRI SHIPPING CO. ITSELF, THE LEARNED COUNSEL FOR THE ASSESSEE DR AWN ATTENTION OF THE LEARNED CIT(A) TO THE COPY OF BILL OF LADING AN D COPY OF ACCOUNT OF THE SAID NRI SHIPPING COMPANY FROM THE BOOKS OF THE ASSESSEE COMPANY AND CONTENDED THAT SINCE THE PAYMENT IS MAD E DIRECTLY TO THE NRI COMPANY TO WHICH THE CIRCULAR NO. 723 DATE 19-10-1995 APPLIES AND NO TDS IS REQUIRED TO BE MADE ON THE SA ID PAYMENT. WITH REGARD TO THE PAYMENTS OF RS.1,40,460/- MADE TO TRA NS WORLD SHIPPING SERVICES (INDIA) PVT. LTD. AN AGENT OF NRI SHIPPING COMPANY NAMELY, UNITED ARAB SHIPPING CO.(S.A.G.), T HE LEARNED COUNSEL FOR THE ASSESSEE DRAWN ATTENTION OF THE LEA RNED CIT(A) TO THE COPY OF ACCOUNT OF THE SAID AGENT OF NRI SHIPPING C OMPANY FROM THE BOOKS OF THE ASSESSEE COMPANY, COPY OF BILL OF LADI NG AND DEBIT NOTE AND STATED THAT, THE SAID DOCUMENTS/SUPPORTING CLEA RLY SHOWS THAT THE PAYMENT HAVE BEEN MADE TO THE SAID AGENT OF NRI SHI PPING COMPANY FOR THE CHARGES TO WHICH THE CIRCULAR NO.72 3 DATED ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 21 19-10-1995 APPLIES AND NO TDS IS REQUIRED TO BE MAD E ON THE SAID PAYMENT. 8. THE LEARNED CIT(A) CONSIDERING THE SUBMISSIONS O F THE ASSESSEE DELETED THE PART OF THE ADDITION OF RS.6,3 6,235/-. HIS FINDINGS IN PARA 8.6 IN THE IMPUGNED ORDER ARE REPR ODUCED AS UNDER: 8.6 I HAVE CONSIDERED THE FACTS OF THE CASE AND TH E SUBMISSION OF THE LD. A.R. CAREFULLY. I HAVE GONE T HROUGH THE CBDT CIRCULAR NO.723 DATED 19.10.1995. I HAVE PERUSED THE BILLS AND DOCUMENTS PRODUCED AND REFERR ED TO THE A.O. AS WELL AS THE LD. AR FOR THE APPELLANT. I T IS SEEN THAT THE APPELLANT HAS MADE THE PAYMENTS OF RS.2,28,055/- TO GREEN WAY SHIPPING AGENCIES PVT. L TD., AS AN AGENT OF NRI SHIPPING COMPANY NAMELY, EVERGREEN MARINE CORP. TAIWAN) LTD., RS.2, 67,720 T O UNITED ARAB SHIPPING CO.(S.A.G-), AN NRI SHIPPING C O. ITSELF AND RS.1,40,460 TO TRANS WORLD SHIPPING SERV ICES INDIA) PVT. LTD. AN AGENT OF NRI SHIPPING COMPANY NAMELY, UNITED ARAB SHIPPING CO.(S.A.G). SINCE, THE PAYMENTS AMOUNTING TO RS.6,36,225/- HAVE BEEN MADE TO THE NRI SHIPPING COMPANIES OR THEIR AGENTS,, THEY A RE NOT HIT BY THE PROVISIONS OF SEC. 195 OF THE ACT BY VIR TUE OF THE CBDT CIRCULAR AS REFERRED TO ABOVE. THEREFORE, UNDE R THESE CIRCUMSTANCES, THE APPELLANT WAS NOT REQUIRED TO DEDUCT TAX AT SOURCE ON SUCH PAYMENTS DURING THE RELEVANT PERIOD. CONSEQUENTLY, THESE PAYMENTS ARE N OT HIT BY THE PROVISIONS OF SEC. 40(A)(IA) OF THE CT. IN V IEW OF THIS, THE DISALLOWANCE MADE BY THE A.O. TO THE EXTENT OF RS.6,36,235/- IS HEREBY DELETED. AS REGARDS, EXPENS ES TO THE TUNE OF RS.1,46,430/- INCLUDING PAYMENTS OF RS.22,500/- TO SHRI AMBICA CARGO MOVERS, RS.91,950/ - + RS.46,150/-) PAID TO KAUSHALI INTERNATIONAL AND RS.32,780/- TO AAI SHREE KHODIYAR ROADLINES AMOUNTI NG TO RS.32,780/-. THE LD. A.R. HAS FAILED TO ESTABLIS H THAT THESE PAYMENTS WERE COVERED BY THE CBDT CIRCULAR ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 22 NO.723 AS REFERRED TO ABOVE. THEREFORE, THE DISALL OWANCE TO THE TUNE OF RS.1,46,430/- IS HEREBY CONFIRMED. 9. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE DO NOT FIND ANY MERIT IN THE DEPARTMENTAL APPEAL. IT IS ADMITTED FA CT THAT THE ASSESSEE MADE PAYMENTS TO 3 NRI SHIPPING COMPANIES OR THEIR AGENTS. COPIES OF BILLS OF LADING, COPY OF THE ACCOUNTS OF THE SAI D NRI SHIPPING COMPANIES FROM THE BOOKS OF ACCOUNTS OF THE ASSESSE E COMPANY WERE FILED BEFORE THE AUTHORITIES BELOW. CERTIFICAT E ISSUED BY INCOME TAX DEPARTMENT IN FAVOUR OF M/S. EVER GREEN MARINE CORPORATION IS FILED ON RECORD IN WHICH IT WAS CLEARLY MENTIONED T HAT CBDT CIRCULAR NO.723 DATED 19-10-1995 PROVIDES THAT PROVISIONS OF SECTION 195 OF THE IT ACT FOR TDS ARE NOT APPLICABLE TO PAYMENTS MADE TO FOREIGN SHIPPING COMPANIES. IT WAS ALSO FOUND THAT CERTIFIC ATE ISSUED BY GREEN WAYS SHIPPING CO. LTD. STATED THAT THEY ARE T HE AGENT OF THE SAID EVER GREEN SHIPPING CORPORATION WHICH IS A NRI SHIPPING CORPORATION WAS ALSO FILED ON RECORD. COPY OF THE B OARD CIRCULAR NO.723 IS ALSO PLACED ON RECORD (PB-91) IN WHICH IT IS CLEARLY EXPLAINED THAT SECTION 172 DEALS WITH SHIPPING BUSI NESS OF NON RESIDENTS WHICH PROVIDES FOR MODE OF LEVY AND RECOV ERY OF TAXES IN CASE OF ANY SHIP BELONGING TO OR CHARTERED BY A NON -RESIDENT, WHICH CARRIES PASSENGERS, LIVE-STOCK, MAIL OR GOODS SHIPP ED AT A PORT IN INDIA. IT IS ALSO CLARIFIED THAT PROVISIONS OF SECT ION 172 OF THE IT ACT ARE TO APPLY, NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISIONS OF THE ACT. THEREFORE, IN SUCH CASES, THE PROVISION S OF SECTION 194C AND 195 OF THE IT ACT RELATING TO TAX DEDUCTION AT SOURCE ARE NOT APPLICABLE. THE RECOVERY OF TAX IS TO BE REGULATED UNDER THE PROVISIONS OF SECTION 172 OF THE IT ACT. IT WAS ALSO CLARIFIED THAT THERE ARE SOME ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 23 CASES WHERE PAYMENTS ARE MADE TO SHIPPING AGENTS OF NON-RESIDENT SHIPPING COMPANIES OR CHARTERS ETC. SHIPPED AT A PO RT IN INDIA. SINCE THE AGENT ACTS ON BEHALF OF THE NON-RESIDENT SHIPPI NG COMPANIES OR CHARTERS, HE STEPS INTO THE SHOES OF THE PRINCIPAL. ACCORDINGLY PROVISIONS OF SECTION 172 OF THE IT ACT SHALL APPLY AND THUS PROVISIONS OF SECTION 194C AND 195 OF THE IT ACT WILL NOT APPL Y. CONSIDERING THE FACTS OF THE CASE IN THE LIGHT OF THE FINDINGS OF T HE LEARNED CIT(A), WE ARE OF THE VIEW THAT PAYMENTS ARE MADE TO NRI SHIPP ING COMPANIES OR THEIR AGENTS, THEREFORE, BOARD CIRCULAR NO.723 ( SUPRA) WILL APPLY. THE DEPARTMENT HAS ALSO CLARIFIED THAT IN SUCH A SI TUATION THE TDS PROVISIONS WILL NOT APPLY. THUS, THERE IS NO MERIT IN THIS GROUND OF APPEAL OF THE REVENUE. THE SAME IS ACCORDINGLY DISM ISSED. 10. ON GROUND NO.4, THE REVENUE CHALLENGED THE DELE TION OF DISALLOWANCE OF RS.3,16,099/- MADE ON ACCOUNT OF F REIGHT AND ON GROUND NO.5, THE REVENUE CHALLENGED DELETION OF ADD ITION OF RS.1,16,020/- MADE ON ACCOUNT OF INLAND HAULAGE C HARGES. BOTH THE DISALLOWANCES WERE MADE BEING THE AMOUNTS PAID TO M /S. TRANS WORLD SHIPPING SERVICES BECAUSE NO TAXES HAVE BEEN DEDUCTED. THE LEARNED CIT(A) FOUND THAT THIS IS THE SAME GROUND I N WHICH PAYMENT IS MADE TO NRI SHIPPING COMPANY AND BY FOLLOWING BO ARD CIRCULAR NO.723 ADDITION WAS DELETED. ON CONSIDERATION OF THE ABOVE FACTS, WE NOTE THESE GROUNDS ARE SAME AS GROUND NO.3. BY FOLLOWING THE REASONS FOR DISMISSING GROUND NO.3, WE DISMISS THESE GROUNDS OF APPEAL OF THE REVENUE. IN THE RESULT, GROUNDS NO.4 AND 5 OF THE A PPEAL OF THE REVENUE ARE DISMISSED. ITA NO.1948AHD/20009 THE DCIT, CIR-4, AHMEDABAD VS HARSH GEOCHEM LTD. 24 11. IN THE RESULT, THE DEPARTMENTAL APPEAL IS DISMI SSED. ORDER PRONOUNCED IN THE OPEN COURT ON 24-05-2011 SD/- SD/- (A. N. PAHUJA) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 24-05-2011 LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR, ITAT, AHMEDABAD