Meghachem Industries, Ahmedabad V. The ACIT, Circle-3(2), Ahmedabad

ITA 251/AHD/2019

• Counselvise Citation: [2023] 102 COUNSELVISE.COM (IT) 0496 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-10-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 01-08-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 19-02-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: USING CERTAIN FAVORABLE ORDERS FROM HONBLE HIGH
• Keywords: Business income; Rule of consistency; Wrong claim
• Section: 145; 40(b); 251; 13

Judgement Text

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठ ‘सी’ अहमदाबाद। अहमदाबाद।अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD BEFORE MRS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER ITA No. 251/Ahd/2019 िनधा榁रणवष榁/Assessment Year: 2013-14 Meghachem Industries, C/o. M.C. Mashruwala & Co., Chartered Accountants, 301- 303, Akik, Opp. Lions Hall, Mithakhali Six Roads, Ahmedabad-380006 PAN : AAIFM 1621 R Vs. The ACIT, Circle – 3 (2), Ahmedabad ITA No. 344/Ahd/2019 िनधा रणवष /Assessment Year: 2013-14 The ACIT, Circle – 3 (2), Ahmedabad Vs. Meghachem Industries, 68/1, Phase-1, GIDC, Vatva, Ahmedabad PAN : AAIFM 1621 R अपीलाथ牸 अपीलाथ牸अपीलाथ牸 अपीलाथ牸/ (Appellant) 灹瀄 灹瀄 灹瀄 灹瀄 यथ牸 यथ牸यथ牸 यथ牸/ (Respondent) Assessee by : Shri S.N. Soparkar, Sr. Advocate & Shri Parin Shah, AR Revenue by : Shri Ashok Kumar Suthar, Sr. DR सुनवाई सुनवाईसुनवाई सुनवाई क琉 क琉क琉 क琉 तारीख तारीखतारीख तारीख/Date of Hearing : 02.08.2023 घोषणा घोषणाघोषणा घोषणा क琉 क琉क琉 क琉 तारीख तारीखतारीख तारीख /Date of Pronouncement: .10.2023 आदेश आदेशआदेश आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER: These are cross appeals filed by the assessee and the Revenue against the order of the learned Commissioner of Income-tax (Appeals)-3, Ahmedabad (hereinafter referred to as "CIT(A)") dated 27.12.2018 passed u/s 250(6) of the Income-tax Act, 1961, (hereinafter referred to as "the Act") for the Assessment Year (AY) 2013-14. 2 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 2. We shall first take up the appeal of the assessee in ITA No. 251/Ahd/2019. 3. The ld. Counsel for the assessee, at the outset itself, pointed out that the solitary issue raised by the assessee in the present appeal relates to the disallowance of remuneration paid to partners amounting to Rs.13,71,189/-. The grounds raised in this regard are as under:- “1. The Ld. CIT-(A) has erred in disallowing the claim of remuneration paid aggregating to Rs. 13,71,189 to working partners viz. two female partners and an HUF represented by its Karta. 2. In the order of assessment, remuneration paid to the 2 female partners is disallowed. In the constitution of the appellant's firm, one of the partners is SUKHDEV C DAMANI HUF represented by its Karta Sukhdev C Damani. The remuneration attributable to HUF is disallowed. The disallowance is as follows:- Name of partner Amount of remuneration disallowed (Rs.) Smt. HA Patel 4,57,063 Smt. M S Damani 4,57,063 Sukhdev C. Damani HUF represented by its Karta Sukhdev C Damani 4,57,063 Total 13,71,189 3. Remuneration to HUF and female partners:- It is urged that the remuneration paid to female partners is wrongly disallowed. The division of the work of the appellant is that the females take care of the accounts, vouchers, cheque passing etc and the male partners take care of the production. Furthermore, the appellant has paid remuneration to HUF but the same is taxed in the individual who is karta of HUF which is a partner of the appellant. Hence, claim of expense of remuneration to partners worth Rs. 13,71,189/- must be allowed. It is wrongly alleged that the appellant did not produce the female partners. The Ld. CIT(A) has ignored the actual facts of the case of the appellant and merely relied on the order of CIT-A in appellant's own case for another year to disallow the claim of remuneration wherein the disallowance was restricted only to the remuneration attributed to HUF and taxed in the hands of the Karta of HUF. Hence, the addition made must be 3 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 deleted and the appellant must be allowed deduction of remuneration paid worth Rs.13,71,189/- as remuneration to partner. 4. Without prejudice, it must be noted that the partners are all in the maximum tax bracket and hence, appropriate income tax is discharged. In the event the remuneration is disallowed in the hands of firm there would be twice taxation of the same amount.” 4. Drawing our attention to the facts of the case from the orders of the authorities below, it was pointed out that the assessee partnership firm had paid remuneration to three partners – two being female partners and one being HUF represented by its Karta as detailed in Ground No.2 raised by the assessee above – each partner being paid Rs.4,57,063/- respectively. The basis for disallowance of the above by the Assessing Officer was that as per the provisions of Section 40(b) of the Act, only remuneration paid to working partners was allowable. That since the assessee had been unable to demonstrate that the female partners were working partners; therefore, the remuneration paid to them was disallowed under Section 40(b) of the Act; and as for the payment made to Karta of HUF, since the HUF could not possibly be a working partner, therefore, the remuneration paid to the Karta of HUF was also disallowed. The learned Counsel for the assessee pointed out that the ld. CIT(A) upheld the disallowance following his order in the case of the assessee for AY 2014-15. His findings in this regard at paragraph No.4.4 of the order are as under:- “4.4. In this case, on similar ground for A. Y.2014-15 addition has been confirmed by my predecessor vide order No. CIT(A)-3/471/Cir.3(2)/16-17 dated 02.02.2018. The relevant part of the order is reproduced as under:- "I have considered the facts mentioned in the assessment order and the submissions of the appellant carefully. The firm has paid remuneration to the karta of HUF Shri Sukhdev C. Damani and claims that it should be allowed as Shri Sukhdev C. Damani has shown the impugned income in the return of income filed by it as an individual. The appellant as 4 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 individual and as karta of HUF are two different entities. He discharges functions and signs certain papers as karta of HUF Therefore, karta and the appellant as individual are two different entities to which provisions of Income Tax have to be applied as interpreted by the Hon'ble Courts The appellant has submitted that payment of remuneration to HUF is justified as it is a settled principle of law in view of the decision of the Hon'ble Allahabad High Court in CIT v Jugal Kishore and Sons (347 ITR 0325). Further the appellant has also relied on the decision of the Hon'ble Allahabad High Court in the case of CIT v Jugal Kishore and Sons (347 ITR 0325) wherein it was held that although an HUF can't be a partner but that when remuneration is paid by a firm to a HUF partner and taxed in the hands of its Karta, the same is allowed as a valid deduction of expense as remuneration to the firm. I have perused both the judgments of Hon'ble Allahabad High Court w.rt the issue involved. The perusal of assessment order gives entirely different perspective in view of ratio laid down by Hon'ble Supreme Court in the case of Rashikial & Co. Vs. CIT in 229 ITR 458 (SC). It is quite possible that the firm may pay excess remuneration to the eligible partners including HUF In other words, one individual partner may get the remuneration twice that is as individual partner and as karta of HUF The tax liability can be reduced through such arrangement and that is the reason that such arrangement has not found favor with the ratio laid down in the case of Rashiklal & Co. Vs. CIT in 229 ITR 458 (SC). Once there is a ratio by the Supreme Court, the same cannot be contested by the appellant by using certain favorable orders from Hon'ble High Courts. No jurisdictional ITAT or Hon'ble High Court case was referred or discussed by the AR The AO has discussed the issue in detailed manner at page No.3 of assessment order by quoting the judgment of ITAT, Pune in the case of ITO VS. Bharat Enterprises 103 TTJ 280 dated 27.09.2005. In view of these facts, I don't intend to interfere with the order of the Assessing Officer. The grounds of appeal are dismissed" Following the decision of my predecessor as above, as the issue is identical in the year under appeal, the addition made by the AO is confirmed.” 5. The ld. Counsel for the assessee argued that the disallowance made of remuneration paid to the Karta of HUF was not sustainable since the decision of the ld. CIT(A) for AY 2014-15 which was followed in the impugned year stood reversed by the ITAT in its order passed in ITA No.803/Ahd/2018 5 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 dated 30.01.2020. Copy of the order was placed before us at page Nos. 83 to 85 of the paper-book. Our attention was drawn to the relevant portion of the order at paragraph no.3 of the order deleting the disallowance as under:- “3. Heard the parties, perused the relevant materials available on record including the order passed by the Co-ordinate Bench. While allowing the appeal preferred by the assessee the Co-ordinate Bench in IITA No. 1912/Ahd/2010 in the matter of M/s. P Gautam & Co. Versus JCIT, Ahmedabad has been pleased to observe as follows:- “...9. From the above Explanation-4 to Section 40(b), it is seen that a working partner can be an individual who is actively engaged in conducting the affairs of business of the firm of which he is a partner, it is not the objection of the Assessing Officer or of Ld. DR of the Revenue that salary was not paid by the firm to an individual. It is also not an objection that the concerned individual is not actively engaged in conducting the affairs of the business of the assessee-firm. The objection is this that such individual is not a partner of the assessee-firm in his individual capacity but he is a partner in the capacity of representative of HUF of which he is a karta and for this reason, the Revenue has rejected the claim of the assessee. As per this judgment of Hon'ble apex court rendered in the case of Raslk Lal And Co. (supra), it was held that it is the individuals constitute the firm who are its partners, St was also held that a partner does not act in the representative capacity in the partnership and he functions in his personal capacity like any other partner. This goes to show that a partner of a firm is individual only even if he is partner as a representative of HUF. If that be so, the requirements of Explanation-4 to Section 40(b) are complied with in respect of payment of remuneration to such a partner also who is a partner in his representative capacity being karta of the HUF partner. In our considered opinion, in the light of this judgment of Hon'ble apex court, the requirement of Explanation-4 to Section 40(b) stand complied with in the present case and hence, there is no valid reason for making this disallowance because it is not the case of the Assessing Officer that the concerned partner, Shri Vikram N Gandhi was not actively engaged in conducting the affairs of the business of the assessee-firm. We, therefore, hold that the disallowance made by Assessing Officer and confirmed by Ld. CIT(Appeals) is not justified and hence the same is deleted. 10. In the result, assessee’s appeal is allowed...” Respectfully relying upon the observation made hereinabove by the Coordinate Bench, we find no justification in making disallowance by the 6 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 Revenue towards the salary given to the partner of the firm to the tune of Rs.10,25,000/-. We, therefore, delete the same.” 6. The ld. DR fairly agreed with the above. 7. As for the disallowance of remuneration paid to female partners, it was pointed out that the assessee had been consistently paying the remuneration to these partners and it had been explained to the authorities below that they were doing the work of passing of cash vouchers, signing of cheques and such other administrative work. He contended that this remuneration was never disallowed in the past in scrutiny assessment. He drew our attention to the order passed in the case of the assessee-firm in AY 2011-12 placed before us at page Nos. 86 to 88 of the paper-book and to AY 2014-15 placed before us at paper-book page Nos. 92 to 96. He pointed out that in the AY 2014-15 the Assessing Officer has specifically examined the remuneration paid to partners disallowable under Section 40(b) of the Act and had disallowed only the remuneration paid to Karta of HUF, which was partner in the assessee-firm. He further contended that following the principle of consistency, the remuneration paid to the female partners needed to be allowed. 8. The ld. DR, however, relied on the order of the Assessing Officer that the assessee had been unable to sufficiently demonstrate that the female persons were working partners of the partnership-firm. 9. We have heard the contentions of both the parties and have gone through the orders of the authorities below as also the documents and case laws referred to before us. The issue before us relates to the disallowance of remuneration paid to partners which included HUF whose Karta was paid remuneration and two female partners. 7 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 10. As far as the issue of remuneration paid to Karta of HUF is concerned, undoubtedly, an identical disallowance was made in AY 2014-15 also in the case of the assessee which stood deleted by the ITAT, following the decision of the co-ordinate bench in the case of M/s. P. Gautam & Co. Vs. JCIT in ITA No.1912/Ahd/2010. We are also aware that the Hon’ble Madras High Court in the case of CIT Vs. Golden Touch, reported in [2004] 263 ITR 261, held an identical disallowance made of remuneration paid to Karta of HUF ,in terms of Section 40(b) of the Act, untenable in law. The disallowance in the said case was made for the identical reason that the HUF does not qualify as a working partner, which is a prerequisite for claiming allowance of remuneration paid to partners as per law. The specific question addressed by the Hon’ble High Court in the said case was as under: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the remuneration paid by the assessee to its partner representing a Hindu Undivided Family can be disallowed under section 40(b) of the Income-tax Act, 1961, in the light of the Explanation 4 to the section by the Amendment Act?" The said question was addressed by the Hon’ble High Court placing reliance on the decision of the Hon’ble Supreme Court in the case of Rasik Lal & Co. Vs. CIT, reported in (1998) 229 ITR 458 (SC) wherein it was held that a HUF cannot be a partner in a partnership firm and remuneration paid to the partner cannot be claimed to be a remuneration or commission paid to the HUF. The Hon’ble Court held that “the partner i.e. Karta may be accountable to the family for the monies received from him from the partnership firm, but, in. the assessment of the firm, the partner cannot be heard to say that he has not received the commission as a partner of the firm, but in a different capacity”. The Hon’ble High Court held that the remuneration paid to individual partners who are working partners cannot be disallowed on the 8 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 sole ground that such partners are nominees of their HUF. The relevant findings of the Hon’ble High Court are as under:- “The assessment year is 1994-95. Explanation 4 in section 40(b) of the Act reads thus : "For the purposes of this clause, ‘working partner’ means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner." 2. The assessee is a firm which had paid remuneration to its working partners. The payments so made were disallowed by the Assessing Officer on the ground that those partners represented their respective Hindu Undivided Families, and therefore could not be treated as "individuals" for the purposes of Explanation 4 to section 40(b). That view of the Assessing Officer though, affirmed by the Commissioner, has been reversed by the Tribunal. 3. The Supreme Court in the case of Rashik Lal & Co. v. CIT [1998] 229 ITR 458 has held that : ". . . There is no way that a Hindu Undivided Family can intrude into the relationship created by a contract between certain individuals. The only right of the Hindu Undivided Family is possibly to call upon its nominee partner to render accounts for the profits that he has made from the partnership business. But that is something between the nominee and the Hindu Undivided Family with which the partnership is not concerned." (p. 465) 4. After referring to section 13 of the Partnership Act which permits a special contract for payment of remuneration to the partners, the court observed: "Section 40(b) of the Income-tax Act, 1961, will apply even when there is such a special contract. Any commission paid by a firm to its partner will not be permitted as deduction from the business income of the firm. If a claim is made by a partner that he is representing a Hindu Undivided Family or any other body of persons then the position in law will not be any different. The Hindu Undivided Family is not and cannot be a partner in a partnership firm. The remuneration or the commission that is paid to the partner cannot be claimed to be a remuneration or commission paid to the Hindu Undivided Family. The partner may be accountable to the family for the monies received by him from the partnership. But, in the assessment of the firm, the partner cannot be heard to say that he has not received the commission as a partner of the firm, but in a different capacity." (p. 466) 9 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 5. Having regard to that position in law, the remuneration paid to the individual partners who are working partners is not to be disallowed on the sole ground that such partners were nominees of their Hindu Undivided Families. Even as the Hindu Undivided Family cannot claim that remuneration paid to the partners representing it, is remuneration paid to the Hindu Undivided Family, so also the Assessing Officer cannot regard to the remuneration paid to such partner, who is also a working partner, as remuneration paid to the Hindu Undivided Family. 6. The question raised before us by the revenue is required to be and is answered in favour of the assessee. The appeal is dismissed.” 11. In view of the above, there is no doubt regarding the allowability of remuneration paid to Karta of HUF in terms of Section 40(b) of the Act. Therefore, we hold that the assessee’s claim of remuneration paid to the HUF is allowable in law and the Assessing Officer is accordingly directed to delete the disallowance made with respect to the same. 12. With regard to the remuneration paid to the female partners, we have noted that the Department in the past has consistently accepted the claim of the assessee in scrutiny assessment, even when the issue of remuneration paid to partners was specifically examined in AY 2014-15. Therefore, following the principle of consistency, we see no reason to disallow the claim of the assessee in the impugned year. The claim of remuneration paid to the female partners is, therefore, also allowed. 13. In effect, the entire claim of remuneration paid to partners is allowed and the disallowance so made is directed to be deleted. Grounds of appeal raised by the assessee in this regard are allowed in above terms. The appeal of the assessee is accordingly allowed. 14. We shall now take up the appeal of the Revenue in ITA No. 344/Ahd/2019. 10 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 15. Ground No.1 raised by the Revenue reads as under:- “1. The ld. CIT(a) has erred in law and on facts in deleting the addition of Rs.28,99,273/- made by the Assessing Officer on account of disallowance of CENVAT difference.” 16. The orders of the authorities below reveal that the addition relates to CENVAT expenses. The Assessing Officer noted that while the assessee has claimed expenditure of Rs.3,49,76,978/-, the credit of CENVAT taken by the assessee was only Rs.3,22,70,807/-. The difference of Rs.28,99,273/- claimed as expenditure by the assessee was treated as wrongly claimed by the Assessing Officer taking note of the assessee’s explanation that the entries relating to CENVAT were passed through P&L account and the difference was taken to the balance-sheet. Accordingly, as per the Assessing Officer, the assessee ought not to have claimed the difference in the P&L Account but should have shown it in its balance-sheet. As per the Assessing Officer, therefore, since the assessee had made wrong claim of CENVAT in its P&L A/c. to the tune of Rs.28,99,273/-, the same was disallowed and added to the income of the assessee. The ld. CIT(A) deleted the disallowance following the decision of the ld. CIT(A) in assessee’s own case for AY 2014-15. The findings of the ld. CIT(A) at paragraph Nos. 2.3 to 2.4 of the order are as under:- “2.3. I have carefully considered the facts of the case. During assessment proceedings the appellant's plea that it uses to pass the duties and taxes through PLA account and difference in year end is taken to balance sheet. Appellant further submitted that he was following exclusive method of VAT. However, explanation in this regard though that in assessee was following exclusive method, but still difference of VAT family amounting to Rs. 26,99,273/- was passed through P&L Account as expenditure in the head of indirect expenses. The appellant claim was not allowed and hence the same is added to the income of the appellant by the AO. The appellant has submitted that the Assessing Officer has accepted that the appellant follows an exclusive method of accounting and that the sales and 11 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 purchases are required to be shown excluding of excise and VAT. The figure of Rs.28,99,723/- represents the difference between CENVAT on sales and CENVAT on purchases. In order to claim credit of excise, the appellant reverses the amount of excise duty, education cess and S&H Education Cess on purchase and shows them as credit in Trading Account. This amount of credit receivable is transferred to Balance sheet under the head of "Duties and Taxes." Similarly, the excise duty, Education Cess and S&H Education Cess payable on sales is debited to Profit and Loss Account and transferred as amount payable in Balance Sheet under the head of "Duties and Taxes." The appellant has shown sales and purchase including excise duty, education cess and S&H Education cess. In order to transfer these accounts of excise to Balance Sheet under the head of Duties and taxes, the appellant debited Profit and Loss A/c by Rs. 3,51,70,080/- being the amount of excise on sales and credited Trading A/c by Rs. 3,22,70,807/- The tax of excise duty payable which is the difference of CENVAT on sales and CENVAT on purchases has also shown by the appellant. The appellant has discharged this liability by paying Rs 28,58,219/- by way of chalans and utilizing unadjusted excess amount worth Rs. 41,504/- attributable to the previous years. The Assessing Officer has considered these aspects as falling under VAT family. Assessing Officer has considered a sum of Rs.28,99,273/- as income. The appellant submitted that the action of Assessing Officer is not proper. The appellant has passed the entries for CENVAT (sale) and CENVAT (purchase) in order to exclude the same from its Profit and Loss account as it follows an exclusive method of accounting. The sum of Rs. 28,88,273/- is being wrongly added to the income as in-fact it never represents any income. The foundation of the addition is that the Assessing Officer assumed a difference. Actually, there is no variance at all. The appellant has further submitted that it had fully explained all the details as to how the amount has been ascertained and so, the addition of Rs.28,99,273/- required to be deleted. 2.4. After going through the facts of the case, it is seen that in this case, for A.Y.2011- 12 the CIT(A)-7 has decided the similar issue in favor of the No.CIT(A)-7/184/2016-17 dated 08.09.2017 The relevant part of the order is reproduced as under. “5.2 I have considered the assessment order and the submissions made by the appellant. The Hon'ble Supreme Court in the case of CIT vs. Indo Nippon Chemicals Co. Ltd. (2003) 130 Taxman 179 has held as under. “.....there are two possible methods of valuation of stock. The first would be the "gross method", in which the stock is valued at cost price inclusive of the excise duty element. If this method is adopted then the unconsumed stock also must necessarily be valued in the same manner. 12 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 The other method is the "net method", in which the raw material purchased is valued at the actual cost, that is the actual purchase price and, on this, Modvat credit would be available. If this method is to be adopted, the uniformly the same method must be adopted while valuing the unconsumed stock at the end of the year. Whichever method one adopts, the result would be the same. 5.2.1 It is seen that the AO has only partially followed the provisions of section 145A of the IT Act. I am inclined to agree with the contention of the appellant that it is not appropriate to include the amount of tax etc. Includible in the value of closing stock only without modifying the figures of purchases, sales and opening stock. Moreover, the appellant has been following this method of accounting for the past many years. The method of accounting regularly followed by the taxpayer which was accepted by the AO in the past cannot be rejected in future years without expressing dissatisfaction about the correctness or completeness of the accounts of the taxpayer, which has not be3en done in this case. In view of the facts of the case and the decision of the Hon'ble Supreme Court, the said addition of Rs.24,43,193/- u/s. 145A made by the Assessing officer is deleted. Ground of appeal No.5 is allowed" Following the decision of CIT(A)-7 as above, as the issue is identical in the year under appeal, the addition of Rs.28,99,273/- is allowed. The ground No.1 of appeal is allowed.” 17. The ld. Counsel for the assessee, at the outset itself, pointed out that the Revenue had not preferred appeal against the order of the ld. CIT(A) in AY 2014-15; the ld. DR. however, relied on the order of the Assessing Officer. 18. We have heard the rival contentions. The issue before us relates to addition made of the difference in CENVAT credit as income and expenditure in the P&L Account. Admittedly, identical addition was made in AY 2011-12 also which was deleted by the ld. CIT(A). We have gone through the order of the ld. CIT(A) and we find that the assessee had explained to the authorities below that the amount claimed in the P&L account of Rs.28,99,273/- represented the amount of duty paid by the assessee through its PLA account, i.e Personal Ledger Account. The assessee had explained that it was following 13 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 exclusive method of accounting for CENVAT, wherein the duties paid on purchases and which was utilized for payment of duties on sales were accounted for exclusive of the purchase and sales account. That all duties paid on purchases were accounted for in a separate account and all duties required to be paid on sales were accounted for in a separate account. That the duties paid on purchases were utilized for payment of duties further on sales and the balance amount of shortfall was paid by the assessee on its own through its PLA account. That at the year end, the total of the duties realized on purchases and that paid on sales were reflected in the P&L account and the difference was attributable to the amount paid to the PLA account. The ld. CIT(A) appreciated this explanation of the assessee and found it to be in consonance with the decision rendered by the Hon’ble Apex Court in the case of Indo Nippon Chemicals Co. Ltd. (supra), wherein the Hon’ble Supreme Court had recognized both the inclusive and exclusive method of accounting for taxes. It is evident, therefore, that the assessee had sufficiently demonstrated to the authorities below that the difference in the CENVAT account, noted by the Assessing Officer, represented the amount paid by the assessee to the CENVAT authority through its PLA account and was, therefore, in the nature of expenditure of the assessee. The Assessing Officer, we have noted that, had no basis at all for disallowing the claim of the assessee and in fact, has not appreciated the accounting followed by the assessee in the correct light as pointed out by the Hon’ble Apex Court also in the case of Indo Nippon Chemicals Co. Ltd. (supra). In view of the above, we uphold the order of the ld. CIT(A) deleting the disallowance of CENVAT credit amounting to Rs.28,99,273/- . This ground of appeal of the Revenue is, therefore, dismissed. Ground No. 1 raised by the Revenue is accordingly dismissed. 14 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 19. Ground No.2 raised by the Revenue reads as under:- “2. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.1,93,81,632/- made by the Assessing Officer on account of stock difference.” 20. The issue relates to addition made to the income of the assessee on account of sales and purchases made outside the books. As transpires from the orders of the authorities below, the Assessing Officer noted that the assessee, being in the business of manufacturing of fertilizers, chemicals and paints, had basically used two raw-materials only i.e. Liquid Chlorine and Copper. From the data furnished in the audited balance-sheet of the assessee and Tax Audit Report, he gathered the consumption ratio of the two items for preparing the final product; and on comparing that with actual consumption of the said two raw-materials reflected in the Tax Audit Report, he found that the consumption of Copper was in excess while that of Chlorine was found to be short. From the same, he inferred that the assessee had manufactured more of the final product which was sold outside the books and from the short consumption of Chlorine, he inferred that the said item had been purchased outside the books, and accordingly he made addition of the same to the income of the assessee amounting to Rs.26,08,683/- of unaccounted sales and Rs.1,67,72,949/- of unaccounted purchases – totaling in all to Rs.1,93,81,632/- . The facts relating to the issue find mentions at paragraph Nos.3.3 to 3.5 of the ld. CIT(A)’s order as under:- “3.3. I have carefully considered the facts of the case. The brief facts of the case as discussed in Assessment Order are that Appellant is manufacturing fertilizers, chemicals and paint. The Appellant has declared production of Cuprous Chloride and for its production only two raw material are consumed by Appellant. While issuing the Show Cause Notice the AO has referred to raw material consumption as mentioned in Tax Audit Report as under- Particulars Liquid Chlorium (Kgs) Copper (Kgs) Opening stock 6300 4302 15 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 Purchases 54900 728542 Consumption 45900 721411 Closing Stock 13500 11433 On this basis AO has stated that Appellant has claimed consumption of liquid chlorine at 45900 Kgs and copper at 721411 Kgs. Thereafter AO has stated that in Tax Audit Report production of Cuprous Chloride is mentioned at 1114657 Kgs. The Appellant in Assessment proceedings has given yield ratio. On this basis AO has worked out consumption of copper at 715609 Kgs. (111465 being production X 0.642 yield) whereas Appellant has declared figure of 721411 Kgs. hence AO has stated that there is unaccounted sale of 5801.21 Kgs for which he worked out sale value of Rs.26.08 683. Similarly in the case of liquid chlorine AO has worked out consumption at 399047.20 Kgs. (111465 being production X 0.358 yield) whereas Appellant has declared figure of 45900 Kgs., which means that there is unaccounted purchases of 351347.20 Kgs. The AO has issued Show Cause Notice for making above addition. The explanation provided by Appellant is reproduced at page No. 10 to 12 of Assessment Order wherein it was stated that while giving quantity details of raw material of liquid chlorine in Tax Audit Report, due to inadvertent mistake, only figures of March 2013 were given instead of giving figure for entire 12 months. On this basis Appellant has submitted revised chart showing figure of purchases of liquid chlorine for 12 months at 3,87,000 Kgs, and consumption of 3,78,000 Kgs. 3.4. The Appellant has also stated that all the purchases made during the year are supported by bills on which excise duty is paid and copies of sample bills were also submitted to AO. On this basis Appellant has claimed that there is no difference in figure of purchase of liquid chlorine as alleged by AO. The Appellant has also stated that AO has considered copper yield at 64.20 % whereas actual yield is 64.72% which is mentioned in letter dated 27th January, 2016. On this basis Appellant has claimed that figure of actual consumption of copper as shown in tax audit report and working is matching and there is no unaccounted sales, as alleged by AO. Similarly, for chlorine, Appellant has claimed that it is in the form of gas hence exact measure is not possible and correct figure is 33.91 % as against 35.80 % adopted by AO in Show Cause Notice. The Appellant has claimed that if ratio of yield is considered at 33.91 %, then actual consumption works out to 3,78,000 Kgs. and same figure is matching with the revised figure of consumption given for all the 12 months. Thus, Appellant has claimed that there is no unaccounted purchases as worked out by AO. However, this contention of Appellant was rejected by AO on the ground that chlorine was purchased in liquid form and formula cannot be disturbed and changed. It was also stated that figure as 16 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 mentioned in tax audit report is correct and considering the Show Cause Notice he made addition of Rs.1,98,81,632/- comprising of unaccounted purchase of copper at Rs.26,08,683/- and unaccounted purchase of liquid chlorine at Rs. 1,67,72,949/-. 3.5. The appellant submitted that the Assessing Officer has grievously erred in making hypothetical additions to the sales and purchases. The appellant is an excisable unit and daily stock records are maintained, as well as excise records are maintained which were duly made available for verification at the time of assessment. The records maintained by the appellant are Cash Book, Bank Book, Journal, Ledger, Sales and Purchase Register, Excise records such as RG 23 Part I, RG 23 Part II, Daily Stock account (DSA); Stock record. In the Tax Audit report, the quantitative details of one particular raw material ie. liquid chlorine was by mistake stated wrong ie. instead of the figure of entire financial year, only the figure of month of March 2013 was stated. In order to substantiate the error, the appellant had submitted all the purchase invoices for the month of March 2013 as well as justified that there was a clerical error on the part of the it's book keeping accountant while supplying the figure to the tax auditor and so, the mistake took place. The excise records of the appellant have been duly examined and no defects have been pointed out in the same. The raw material liquid chlorine is an excisable item and the appellant being excisable unit has shown all the purchases in its books of account as well reflected the quantity of purchase in its stock details which have been ignored by the Ld. Assessing Officer. For the purpose of ease of transportation, liquid chlorine is compressed in gas form. The appellant has nowhere altered any chemical property of its raw material chlorine. In order to manufacture the finished product of the appellant i.e. cuprous chloride, the appellant uses two raw materials i e, copper scrap and chlorine. The mix of the raw materials in manufacture of final product is: Copper Scrap: 65%, Liquid chlorine 35%. The production quantity as shown by the appellant is duly accepted which is nothing more but the outcome of the usage of raw materials in the proportion stated in point viii above. It's undisputed that the appellant is liable to pay excise and that it has maintained proper records relating to excise which inter- alia includes daily stock account, Daily stock account is nothing else but day to day stock inward outward register Also, the records of RG 23 register are found perfectly in order and there are no defects at all in such records. The appellant submitted that a plain look at the most crucial facts which can be traced from the records leads us to the conclusion that the Assessing Officer has grossly over-looked the facts of the case and so, the entire order contains hypothetically derived figures.” 17 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 21. The assessee pleaded before the ld. CIT(A) that the difference in consumption of Copper noted by the Assessing Officer was too minor and insignificant to be taken cognizance of. He produced entire books of accounts of the assessee including the stock register and the excise records pointing out that all items had been duly accounted for and he contended that there was actually no excess consumption of Copper. With respect to the consumption of Chlorium found short, he pointed out that the tax auditor had inadvertently mentioned the consumption figure of Chlorium pertaining to the March alone. From the books of accounts, he pointed out the correct figure of consumption of Chlorium. 22. The ld. CIT(A), on going through the records, documents and facts, as pointed out by the ld. Counsel for the assessee, was convinced that there was no unaccounted sales and purchases of the assessee ;that all data of purchase, sales and consumption of the raw-material was in order and tallied with the final output produced by the assessee. Accordingly, he deleted the entire addition made by the Assessing Officer on account of unaccounted purchases and unaccounted sales to the tune of Rs.1,93,81,632/-. His findings in this regard are at paragraph Nos. 3.6 – 3.8 of his order as under:- “3.6. On careful consideration of entire facts it is observed that AO has worked out the figure of actual consumption of both the raw materials on the basis of yield ratio of such material in final product. It is observed that AO has compared the figure of consumption as derived by him based on above formula with figures shown in tax audit report. During the course of Assessment Proceedings Appellant has given month-wise details of opening stock, purchases, consumption and closing stock of both the raw materials The Appellant has also given copies of sample bills of such purchases. The figures of purchases and consumption as mentioned in stock register in Books of Account are matching with Audited Annual Accounts. The AO has not found any defect in purchase value or sales value. So far as addition made for unaccounted sale of copper is concerned, it is observed that Appellant has stated 18 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 before AO that consumption ratio of copper in Cuprous Chloride is 63.54/98.909-64 80 and in the working he has stated that current year yield is 0.6472 = 0.65 The AO has adopted yield ratio at 0.6418 as against 0.6472 which shows only minor difference. It is a matter of fact that Appellant has stated before AO that general ratio of mix of raw material in manufacture of final product is 65:35. It is observed that entire purchases are supported by evidences and duly entered in excise register which are not found to be incorrect by AO hence there was no basis for making addition based upon yield stated by Appellant. In entire process of manufacturing of chemical product, this ratio can vary on production and cannot remain constant. If there is a huge variation in yield ratio then what is accepted in industry. AO can still make an addition whereas in present case difference is very minor and AO having no material that there is any specific defect in Books of Account maintained by Appellant or any evidences that there is suppression of purchases or unaccounted sale of material, addition made by him for Rs.26,08,683/- cannot be sustained. 3.7. So far as addition for unaccounted purchases of liquid chlorine is concerned, it is observed that in Tax Audit Report there was an error on the part of Tax Auditor and he has only stated the figures of purchases and consumption for the month of March 2013 In the Assessment Proceedings Appellant has given month-wise purchase details and consumption details, which are not found to be incorrect. The figure of purchases shown by Appellant in Audited Annual Accounts at Rs. 36,49,02,249/- includes figures of purchases of entire 12 months and corresponding raw material purchase quantity is 3,87,000 Kgs., and not 45,900 Kgs. as mentioned in Tax Audit Report. In entire Assessment Order AO has not pointed out any defect in book results nor proved that Appellant has in fact claimed purchase value of 45,900 Kgs.., only. When Appellant has given complete details of month-wise purchase of such raw material along with value of goods, AO has not brought anything on record that these details are incorrect or not matching with Excise authorities. A human error can happen and if such error is rectified by Assessee with evidences, correct figure of purchases need to be considered. When Appellant has declared book results he has considered correct value but error was only with regard to quantitative details mentioned in Tax Audit Report and there cannot be any addition based upon comparison of wrong figure. The Appellant has submitted correct figure of raw material purchases and consumption and figures of such consumption are matching with yield of such raw material. The AO has no evidence that Appellant has in fact made any unaccounted purchases as claimed by him hence entire addition made on such incorrect working cannot be sustained. It is a matter of fact that AO himself has worked out figure of unaccounted purchases at Rs.16,77,449/- in Show 19 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 Cause Notice but has proceeded to make addition of Rs 1,67,72,949/- and even on this ground, entire addition is without any basis. 3.8. Reliance is also placed on decision of Hon'ble Gujarat High court in the case of CIT Vs Symphony Comfort System Ltd [2013] 35 taxmann.com 533 held that In absence of any defect in maintenance of books of account, books could not be rejected and gross profit rate need not be enhanced. Hon'ble Ahmedabad ITAT in the case of DCIT Vs Ashok Weaving Works 63 Taxman.com 370 has held that unless defect is pointed out in books of assessee, no addition could be made by Assessing Officer. ” Reliance is also placed on decision of Commissioner of Income Tax vis Vikram Plastics (239 ITR 0161) wherein Hon'ble Gujarat High court has held as under:- "In this case, the Hon'ble Gujarat High Court has held that when there were no discrepancies or defects pointed out in the books of account and further that they were regularly maintained and also on the finding that there was no material brought on record to establish that the books are defective, Sec 145 could not be invoked. This decision of the Hon'ble Guj High Court in Vikram Plastics squarely applies to the case of the appellant. The appellant has indeed maintained regular books of account. no specific defect is pointed out in the books of account and so, the addition made worth Rs 1,67.72.949 as undisclosed purchases and worth Rs 26,08, 683-must be deleted in full.” In view of the above, the addition made by the AO for Rs. 1,67,72.949/- is deleted.” 23. The ld. Counsel for the assessee relied on the order of the ld. CIT(A) while the ld. DR relied on the order of the Assessing Officer. 24. We have gone through the findings of the ld. CIT(A) and we find that he has accepted assessee’s contention of there being no unaccounted sales and purchases after appreciating of the facts on record before him emanating from the books of accounts of third party and other records like excise records maintained by the assessee. 20 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 25. With regard to the addition made of unaccounted sales which was made by the Assessing Officer on the basis of the information in his possession that there was excess consumption of Copper, the ld. CIT(A) noted that the variation in yield ratio noted by the Assessing Officer was very minor and, therefore, was of no significance. He further noted that the assessee had furnished all details of raw materials, purchase, consumption and closing stock of the raw materials had given sample bills of purchases; and the purchase and consumption mentioned in the stock registers matched with the audited annual accounts. He noted that no defects whatsoever had been noted by the Assessing Officer in the purchase and sales value. Therefore, taking note of all the facts, the ld. CIT(A) held that there was no case of suppression of sale and accordingly deleted the addition made on the same. With respect to the addition made on account of unaccounted purchases of liquid chlorine, he found the contention of the ld. Counsel for the assessee, that the figure of consumption mentioned in the Tax Audit Report reflected only that of the month of March and not the entire year’s figure of consumption, as factually correct. That, therefore, the Assessing Officer had incorrectly assumed that the consumption of Chlorine by the assessee was very small in comparison to the final output prepared by the assessee and thus the assessee had made purchases of the same outside the books. On examination of the entire books and details submitted by the assessee, the ld. CIT(A) found that the assessee had rightly mentioned that there was a mistake in the Tax Audit Report as far as the figure of consumption of Chlorine is concerned, and accordingly, he deleted the addition made on account of unaccounted purchase of Chlorine to the tune of Rs.1.67 crores. 26. The ld. DR has been unable to point out any infirmity in the factual findings of the ld. CIT(A) as above. In view of the same, we see no reason to 21 ITA No. 251 & 344/Ahd/2019 Assessee - Meghachem Industreis (CrossAppeals) AY : 2013-14 interfere in the order of the ld. CIT(A) deleting the addition made on account of unaccounted sales and purchases to the tune of Rs.1,93,81,632/-. The ground of appeal No.2 raised by the Revenue is accordingly dismissed. The appeal of the Revenue is thus dismissed. 27. In effect, the appeal preferred by the assessee is allowed, whereas the appeal of the Revenue is dismissed. Order pronounced in the open Court on 27/10/2023 at Ahmedabad. Sd/- Sd/- (SIDDHARTHA NAUTIYAL) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad; Dated 27/10/2023 **bt आदेश आदेशआदेश आदेश क琉 क琉क琉 क琉 灹ितिलिप 灹ितिलिप灹ितिलिप 灹ितिलिप अ灡ेिषत अ灡ेिषतअ灡ेिषत अ灡ेिषत/Copy of the Order forwarded to : 1. अपीलाथ牸 अपीलाथ牸अपीलाथ牸 अपीलाथ牸 / The Appellant 2. 灹瀄यथ牸 灹瀄यथ牸灹瀄यथ牸 灹瀄यथ牸 / The Respondent. 3. संबंिधत संबंिधतसंबंिधत संबंिधत आयकर आयकरआयकर आयकर आयु猴 आयु猴आयु猴 आयु猴 / Concerned CIT 4. आयकर आयकरआयकर आयकर आयु猴 आयु猴आयु猴 आयु猴)अपील अपीलअपील अपील (/ The CIT(A)- 5. िवभागीय िवभागीयिवभागीय िवभागीय 灹ितिनिध 灹ितिनिध灹ितिनिध 灹ितिनिध ,आयकर आयकरआयकर आयकर अपीलीय अपीलीयअपीलीय अपीलीय अिधकरण अिधकरणअिधकरण अिधकरण/DR,ITAT, Ahmedabad, 6. गाड榁 गाड榁गाड榁 गाड榁 फाईल फाईलफाईल फाईल /Guard file. आदेशानुसार आदेशानुसारआदेशानुसार आदेशानुसार/ BY ORDER, TRUE COPY सहायक सहायकसहायक सहायक पंजीकार पंजीकारपंजीकार पंजीकार (Asstt. Registrar) आयकर आयकरआयकर आयकर अपीलीय अपीलीयअपीलीय अपीलीय अिधकरण अिधकरणअिधकरण अिधकरण ITAT, Ahmedabad 1. Date of dictation ......19/20.10.2023........ Date on which the typed draft is placed before the Dictating Member :..22.10.2023... .......... 1. Other Member......25.10.2023.................. 2. Date on which the approved draft comes to the Sr.P.S./P.S......25.10.2023.................... 3. Date on which the fair order is placed before the Dictating Member for pronouncement...27.10.2023... 4. Date on which the fair order comes back to the Sr.P.S./P.S......27.10.2023............. 5. Date on which the file goes to the Bench Clerk...27.10.2023............. 6. Date on which the file goes to the Head Clerk... 7. The date on which the file goes to the Assistant Registrar for signature on the order............ 8. Date of Despatch of the Order..................