Patel Alloy Steel Pvt.Ltd., Ahmedabad V. The Dy.CIT, Circle-3(1)(1), Ahmedabad

ITA 3158/AHD/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 6313 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 06-11-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 143(3); 14A; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH AHMEDABAD BEFORE, SHRI PRAMOD KUMAR , ACCOUNTANT MEMBER AND SHRI S. S. GODARA, JUDICIAL MEMBER ITA NO. 3158/AHD/2015 (ASSESSMENT YEAR: 2012-13) PATEL ALLOY STEEL PVT. LTD., PLOT NO.297 300, PHASE-II, GIDC ESTATE, VATVA, AHMEDABAD 382 445 AP PELLANT VS. DCIT, CIRCLE - 3(1)(1), AHMEDABAD RESPONDENT & ITA NO. 3340/AHD/2015 (ASSESSMENT YEAR: 2012-13) DCIT, CIRCLE - 3(1)(1), AHMEDABAD APPELLA NT VS. M/S. PATEL ALLOY STEEL PVT. LTD., PLOT NO.297 300, PHASE-II, GIDC ESTATE, VATVA, AHMEDABAD 382 445 RESPONDENT PAN: AABCP2984J /BY ASSESSEE : SHRI BANDISH SOPARKAR, A.R. /BY REVENUE : SHRI MUDIT NAGPAL, SR. D.R /DATE OF HEARING : 11.01.2018 /DATE OF PRONOUNCEMENT : 15.01.2018 ORDER ITA NOS. 3158 & 3340/AHD/15 [PATEL ALLOY STEEL PVT. LTD.] AY: 2012-13 - 2 - PER S. S. GODARA, JUDICIAL MEMBER THE ASSESSEE AND REVENUE HAVE FILED THEIR INSTANT C ROSS APPEALS FOR ASSESSMENT YEAR 2012-13 AGAINST THE CIT(A)-7, AHMED ABADS ORDER DATED 15.09.2015, IN CASE NO. CIT(A)-7/549/15-16, IN PROC EEDINGS U/S. 143(3) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT. HEARD BOTH SIDES. CASE FILES PERUSED. 2. WE COME TO ASSESSEES APPEAL ITA NO.3158/AHD/201 5. IT RAISES TWO SUBSTANTIVE GROUNDS THEREIN. THE FIRST ONE SEEKS TO REVERSE BOTH THE LOWER AUTHORITIES ACTION INVOKING SECTION 14A R.W. RULE 8D DISALLOWANCE OF RS.3,18,172/-. WE NOTICE AT THE OUTSET THAT BOTH T HE LOWER AUTHORITIES FOLLOW THEIR RESPECTIVE FINDINGS RIGHT FROM ASSESSMENT YEAR 2008 -09 TO 2011-12 IN ORDER TO COMPUTE THE IMPUGNED DISALLOWANCE UNDER THE NEWLY I NTRODUCED COMPUTATION PROVISION I.E. RULE 8D OF THE INCOME TAX RULES. CA SE RECORDS REVEAL THAT THE ASSESSEES APPEALS AGAINST THE SAID CORRESPONDING D ISALLOWANCE STAND ACCEPTED ON 08.04.2016 AND 14.09.2017. IT HAS COME ON RECORD T HAT THE SAID CO-ORDINATE BENCHES HAVE DELETED IDENTICAL DISALLOWANCES IN EAR LIER ASSESSMENT YEARS. WE THEREFORE FOLLOW CONSISTENCY TO DELETE THE IMPUGNED DISALLOWANCE FOR WANT OF AN APPROPRIATE SATISFACTION U/S.14A(2) OF THE ACT. THE ASSESSEES FORMER SUBSTANTIVE GROUND SUCCEEDS. 3. THE ASSESSEES SECOND SUBSTANTIVE GROUND AS WELL AS REVENUES FIRST SUBSTANTIVE GRIEVANCE ARISES AGAINST THE CIT(A)S F INDINGS AFFIRMING SECTION 40(A)(2)(B) DISALLOWANCE OF RS.4,18,05,272/- AS UPH ELD TO THE TUNE OF RS.1,56,81,564/- IN LOWER APPELLATE PROCEEDINGS AS FOLLOWS: 5.2 I HAVE CONSIDERED THE ASSESSMENT ORDER AND THE SUBMISSIONS MADE BY THE APPELLANT. THE AO NOTED THAT DURING THE YEAR UNDER CONSIDERATION, THE MD OF THE APPELLANT COMPANY SHRI K.H. JAVERI RECEIVED REMUNER ATION AMOUNTING TO RS.4,52,51,059/- AND THE EXECUTIVE DIRECTOR SHRI AB HISHEK K. JAVERI RECEIVED RS.1,62,94,505/- AS REMUNERATION. IT HAS BEEN NOTED BY THE AO THAT THERE WAS FIVE-FOLD INCREASE IN REMUNERATION TO SHRI K.H. JAV ERI OVER 7 TO 8 YEARS AND AN INCREASE OF 36 TIMES TO SHRI ABHISHEK K. JAVERI IN A PERIOD OF 5 TO 6 YEARS. A PERUSAL OF THE SUBMISSION MADE BY THE APPELLANT SHO WS THAT THE APPELLANT HAS REITERATED THE SUBMISSIONS MADE DURING THE ASSESSME NT PROCEEDINGS THAT THE ITA NOS. 3158 & 3340/AHD/15 [PATEL ALLOY STEEL PVT. LTD.] AY: 2012-13 - 3 - INCREASE IN REMUNERATION WAS DECIDED BY THE BOARD O F DIRECTORS. THE APPELLANT HAS NOT MADE OUT ANY CASE OR SUBMITTED ANY EVIDENCE TO SHOW THAT THERE WAS ANY IMPROVEMENT OR ALTERATION IN THE SERVICES RENDERED BY THE DIRECTORS TOWARDS THE COMPANY. THERE HAS NOT BEEN ANY SUBSTANTIAL INCREAS E IN THE TURNOVER OF THE COMPANY DURING THE YEAR UNDER CONSIDERATION EITHER. IT IS SEEN THAT THE A.O HAS DISALLOWED DIRECTORS' R EMUNERATION AS PER THE PROVISIONS OF SEC.40A(2) OF THE I.T. ACT. THE PROVI SIONS OF SEC.40A START WITH NON OBSTANTE CLAUSE AND HAVE OVERRIDING EFFECT OVER THE PROVISIONS OF ANY OTHER SECTION OF INCOME-TAX ACT, 1961. THE HON'BLE GUJARA T HIGH COURT IN CIT VS BHARAT VIJAY MILLS LTD. (1988) 128 ITR 633 (GUJ.) H AS HELD THAT PROVISIONS OF SEC.40A HAVE BEEN DECLARED TO BE OF AN OVERRIDING N ATURE. THE NON OBSTANTE CLAUSE AT THE BEGINNING OF SEC.40A(L) CLEARLY INDIC ATES THAT IF ANY OTHER PROVISIONS EXIST SOMEWHERE ON THE STATUTE BOOK, THEY HAVE TO G IVE WAY TO CLEAR THE EXPRESS PROVISIONS OF SECTION 40A. 5.2.1 IN VIEW OF THE OVERRIDING PROVISIONS OF SEC.4 0A(2)(A), THE PAYMENT OF REMUNERATION MAY BE AUTHORIZED BY THE DEED OF PARTN ERSHIP, MAY ALSO BE IN ACCORDANCE WITH THE TERMS OF DEED, AND MAY FURTHER BE WITHIN THE CEILING LIMIT AS FIXED BY CL.V OF SECTION 40(B), IN RESPECT OF AGGRE GATE AMOUNT OF REMUNERATION PAYABLE TO THE PARTNERS. IF THE AMOUNT OF REMUNERAT ION PAID TO A PARTICULAR PARTNER(OR PARTNERS) IS EXCESSIVE OR UNREASONABLE O R, LOOKING TO THE LEGITIMATE NEEDS TO THE BUSINESS OF THE ASSESSEE FIRM OR THE B ENEFIT DERIVED BY THE FIRM, THE SAME IS UNFAIR, THE A.O. MAY ALLOW A REMUNERATION O NLY TO THE EXTENT IT IS REASONABLE AND NOT EXCESSIVE IN HIS OPINION. 5.2.2 THE ABOVE DISCUSSION CLEARLY SHOWS THAT THE E XCESSIVE DIRECTORS REMUNERATION CAN ALWAYS BE DISALLOWED AS PER THE PR OVISIONS OF SEC.40A(2) OF THE I.T. ACT. DURING THE ASSESSMENT PROCEEDINGS AS WELL AS THE APPELLATE PROCEEDINGS, THE APPELLANT HAS SUBMITTED THAT THE DIRECTORS REMU NERATION IS APPROVED BY BOARD OF DIRECTORS, THAT THE DIRECTORS ARE QUALIFIED ENGI NEERS AND THE BUSINESS OF THE COMPANY IS INCREASED AS A RESULT OF THE SERVICE REN DERED BY THE DIRECTORS. AS FAR AS RELIANCE PLACED ON THE BOARD OF DIRECTOR'S RESOL UTION IS CONCERNED, I AM NOT INCLINED TO AGREE WITH THE SAME AS THE RESOLUTION O F BOARD OF DIRECTORS IS AN INTERNAL MATTER AND MEETING OF BOARD OF DIRECTORS I S DOMINATED AND CONTROLLED BY SHRI K.H. JHAVERI AND SHRI ABHISHEK K. JHAVERI. AS FAR AS THE UTILITY OF DIRECTORS' SERVICES TO THE APPELLANT COMPANY, I AM INCLINED TO AGREE WITH THE CONTENTIONS OF THE APPELLANT THAT THE REMUNERATION TO THE DIRECTOR S BE ALLOWED KEEPING IN VIEW THE INCREASE IN TURNOVER AND PROFITABILITY OF COMPA NY. HOWEVER, A PERUSAL OF THE SUBMISSIONS MADE BY THE APPELLANT SHOWS THAT THE AP PELLANT HAS NOT MADE OUT ANY CASE OR SUBMITTED ANY EVIDENCE TO SHOW THAT THERE W AS ANY IMPROVEMENT OR ALTERATION IN THE SERVICES RENDERED BY THE DIRECTOR S TOWARDS THE COMPANY. THERE HAS NOT BEEN ANY SUBSTANTIAL INCREASE IN THE TURN OVER OF THE COMPANY DURING THE YEAR UNDER CONSIDERATION EITHER. HOWEVER, THE REM UNERATION PAID TO THE DIRECTORS APPEARS TO BE EXCESSIVE AND IN MY CONSIDE RED VIEW, THE SAME NEEDS TO BE RESTRICTED AS PER THE PROVISIONS OF SEC.40A(2) O F THE IT. ACT. 5.2.3 THIS ISSUE HAS BEEN DECIDED CONSISTENTLY BY M Y PREDECESSORS AS WELL IN ASST. YEARS 2008-09, 2009-10, 2010-11 AND 2011-12. IN THE EARLIER YEAR I.E. ASST. YEAR 2011-12, REMUNERATION OF RS.4,40,64,000/- HAS BEEN ALLOWED TO SHRI K.H. ITA NOS. 3158 & 3340/AHD/15 [PATEL ALLOY STEEL PVT. LTD.] AY: 2012-13 - 4 - JAVERI. CONSIDERING THE FACT THAT THERE HAS BEEN NO SUBSTANTIAL INCREASE IN TURNOVER DURING THE CURRENT YEAR AND THE APPELLANT HAS NOT GIVEN DETAILS OF ANY CHANGE OR IMPROVEMENT IN THE NATURE OF SERVICES REN DERED BY THE DIRECTORS, THE REMUNERATION IS ALLOWED TO THE EXTENT OF RS.4,40,64 ,000/-AND BALANCE DISALLOWANCE TO THE EXTENT OF RS.11,87,059/- IS CON FIRMED. 5.2.4 AS REGARDS DISALLOWANCE OF REMUNERATION PAID TO SHRI ABHISHEK K. JAVERI, FOR SIMILAR REASONS AS DISCUSSED ABOVE, I AM OF THE VIEW THAT THE REMUNERATION PAID TO HIM IS EXCESSIVE. IT IS SEEN THAT SHRI ABHI SHEK JHAVERI WAS PAID A SALARY OF RS.18,00,000/- IN THE YEAR 2005-06, WHICH INCREASED TO RS.1,62,94,505/- IN THE CURRENT YEAR. IN MY CONSIDERED VIEW THERE IS NO JUS TIFICATION FOR INCREASE IN DIRECTORS REMUNERATION IN THE CASE OF SHRI ABHISHEK K. JHAVERI, DUE TO REASONS DISCUSSED IN DETAIL IN THE PARA ABOVE. THUS DIRECTO R'S REMUNERATION TO THE EXTENT OF RS.4,58,64,000/- (RS.4,40,64,000/- + RS. 18,00,0 00/-) IS ALLOWED. DISALLOWANCE MADE TO THE EXTENT OF RS. 1,56,81,564/- (RS.11,87,0 59/- + RS.1,44,94,505/-) IS CONFIRMED. THIS GROUND OF APPEAL IS PARTLY ALLOWED. 4. WE HAVE HEARD RIVAL CONTENTIONS. THERE IS HARDL Y ANY DENIAL OF THE FACT THAT THE CIT(A) HAS FOLLOWED HIS PREDECESSORS ORDERS FO R ASSESSMENT YEARS 2008-09 TO 2011-12. WE NOTICE IN THIS FACTUAL BACKDROP THAT T HE ABOVE CO-ORDINATE BENCHS ORDER (SUPRA) HAS REVERSED THE CIT(A)S FINDINGS UN DER CHALLENGE THEREIN IN PARTLY AFFIRMING ASSESSING OFFICERS IDENTICAL ACTION; ALT HOUGH INVOLVING DIFFERENT AMOUNTS PAID AS REMUNERATION TO ASSESSEES DIRECTOR S AND OTHER SPECIFIED PARTIES. LEARNED DEPARTMENTAL REPRESENTATIVE IS FAIR ENOUGH IN NOT DRAWING ANY DISTINCTION ON FACTS AS WELL AS LAW. WE THUS ACCEP T ASSESSEES LATTER SUBSTANTIVE GROUND AS WELL AS ITS MAIN APPEAL ITA NO. 3158/AHD/ 2015. 5. THE REVENUES SUBSTANTIVE GROUND ON THE OTHER HA ND SEEKING TO REVIVE THE ENTIRE DISALLOWANCE IS REJECTED ACCORDINGLY. 6. THIS LEAVES US WITH REVENUES LATTER SUBSTANTIVE GROUND SEEKING TO REVIVE CLOSING STOCK ADDITION OF RS.1,38,38,690/- AS MADE BY THE ASSESSING OFFICER U/S.145A OF THE ACT AND DELETED IN COURSE OF LOWER APPELLATE PROCEEDINGS AS FOLLOWS: 6.2 I HAVE CONSIDERED THE ASSESSMENT ORDER AND THE SUBMISSIONS MADE BY THE APPELLANT. A PERUSAL OF THE SUBMISSIONS MADE BY THE APPELLANT SHOWS THAT THE APPELLANT IS FOLLOWING EXCLUSIVE METHOD OF ACCOUNTI NG. ACCORDING TO THIS METHOD OF ACCOUNTING PAYMENT AND RECEIPT OF CENVAT IS A BA LANCE SHEET ITEM AND IT IS NOT DEBITED OR CREDITED IN THE P & L A/C. IN THIS R EGARD, I AM INCLINED TO AGREE WITH THE CONTENTION OF THE LD. A.R. THAT THE AMOUNT OF RS.1,38,38,690/- BEING ITA NOS. 3158 & 3340/AHD/15 [PATEL ALLOY STEEL PVT. LTD.] AY: 2012-13 - 5 - CENVAT PAID ON RAW MATERIAL IS REVENUE NEUTRAL. IN THIS REGARD, THE APPELLANT HAS RIGHTLY PLACED RELIANCE ON INDO NIPPON CHEMICAL CO. LTD. (2003] 261 ITR 275 (SC). I HAVE ALSO PERUSED THE OTHER CASE LAWS R ELIED UPON BY THE APPELLANT AND RATIOS OF THESE CASE LAWS ALSO SUPPORT THE CASE OF THE APPELLANT. FURTHER, IT IS SEEN THAT THE A.O. HAS NOT COMMENTED ON THE ACCOUNT ING POLICIES FOLLOWED BY THE APPELLANT. THE POLICY OF VALUATION OF CLOSING STOCK IS CONSISTENTLY BEING FOLLOWED BY THE APPELLANT IN THE PREVIOUS YEARS AS WELL AS I N THE SUCCEEDING YEARS. THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF VOLTAMP T RANSFORMERS LTD. V/S. CIT (2008) ,217 CTR 254 HAS HELD THAT A.O. HAS GOT VERY LIMITED POWERS TO CHANGE VALUATION OF CLOSING STOCK. THE A.O. CANNOT CHANGE METHOD OF ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE WITHOUT VALID RE ASONS. THE HON'BLE SUPREME COURT IN THE CASE OF CHAINRUP SAMPATRAM (1953) 24 I TR 481 HAS ALSO CLEARLY HELD THAT PROFITS DO NOT ARISE OUT OF VALUATION OF CLOSING STOCK AND SITUS OF ITS ARISING OR ACCRUING WHERE THE VALUATION IS MADE AND VALUATION OF UNSOLD STOCK IS NECESSARY PART OF THE PROCESS OF DETERMINING TRADIN G RESULTS BUT IT CAN IN NO SENSE BE REGARDED AS SOURCE OF SUCH PROFIT. THE CASE OF C HAINRUP SAMPATRAM WAS ALSO FOLLOWED BY THE HON'BLE S.C. IN THE CASE OF CIT VS DYNAVISION (2012) 76 DTR 351 (S.C). IN THIS CASE IT IS HELD BY HON'BLE S.C. THAT CLOSING STOCK CANNOT BE VALUED BY INCLUDING THE ELEMENT OF EXCISE DUTY WHEN NO SUCH A DJUSTMENT IS MADE IN OPENING STOCK. IT HAS ALSO BEEN CLEARLY HELD IN THE CASE OF CIT V/ S. AHMEDABAD NEW COTTON MILLS, 4 ITC 245, THAT WHEN THE OPENING AND CLOSING STOCK OF BUSINESS ARE BOTH UNDERVALUED, IF THE METHOD OF ALTERATION OF BO TH VALUATION IS NOT ADOPTED, IT IS PERFECTLY PLAIN THAT PROFITS WHICH IS BROUGHT FO RWARD IS NOT REAL ONE. IN SUCH CASES, THE REAL PROFITS OF A PARTICULAR YEAR CANNOT BE ASCERTAINED BY MERELY RAISING VALUE OF CLOSING STOCK, NOT TAKING INTO CON SIDERATION THE SIMILAR VALUATION O!F OPENING STOCK. AS PER THE RATIO OF THIS CASE, E NHANCING THE VALUE OF CLOSING STOCK WITHOUT GIVING CORRESPONDING EFFECT TO THE VA LUATION OF OPENING STOCK IS NOT PROPER. IT IS ALSO SEEN THAT THE SAME ISSUE ON IDENTICAL FA CTS HAD BEEN DECIDED BY MY PREDECESSOR IN FAVOUR OF THE APPELLANT IN THE IM MEDIATELY PRECEDING YEAR I.E. A.Y.211-12 II APPEAL NO.CIT(A)-XI/367/ADDL.CIT.CIR- 5/13-14 DATED 29.01.2015. 6.2.1 IN VIEW OF THE ABOVE FACTS, I AM NOT CONVIN CED ABOUT THE MAINTAINABILITY OF ADDITION OF RS.1,38,38,690/- IN VALUATION OF CLOSI NG STOCK. THE A.O. IS DIRECTED TO DELETE ADDITION OF RS.1,38,38,690/- MADE BY TH E A.O. U/S.145A OF I.T. ACT, 1961. THIS GROUND OF APPEAL IS ALLOWED. 7. WE HAVE HEARD BOTH THE PARTIES REITERATING THEIR RESPECTIVE STANDS AGAINST AND IN SUPPORT OF THE IMPUGNED ADDITION. THERE IS NO DISPUTE THAT THE CIT(A) HAS FOLLOWED HIS PRECEDING ASSESSMENT YEARS FINDINGS T O DELETE THE IMPUGNED ADDITION. WE FIND THAT THE ABOVE LATTER CO-ORDINAT E BENCH IN ITS ORDER DATED 14.09.2017 HAS UPHELD THE SAME IN PRECEDING ASSESSM ENT YEAR 2011-12. WE THEREFORE ADOPT JUDICIAL CONSISTENCY QUA THE INSTAN T ISSUE TO UPHOLD THE CIT(A)S ITA NOS. 3158 & 3340/AHD/15 [PATEL ALLOY STEEL PVT. LTD.] AY: 2012-13 - 6 - FINDINGS UNDER CHALLENGE DELETING THE IMPUGNED CLOS ING STOCK ADDITION. THE REVENUES INSTANT SUBSTANTIVE GROUND AS WELL AS MAI N APPEAL ITA NO.3340/AHD/2015 IS REJECTED. 8. WE ACCORDINGLY ALLOW ASSESSEES APPEAL ITA NO.31 58/AHD/2015 AND DISMISS REVENUES CROSS APPEAL ITA NO.3340/AHD/2015 . [PRONOUNCED IN THE OPEN COURT ON THIS THE 15 TH DAY OF JANUARY, 2018.] SD/- SD/- ( PRAMOD KUMAR ) (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEM BER AHMEDABAD: DATED 15/01/2018 TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- / REVENUE 2 / ASSESSEE ! / CONCERNED CIT 4 !- / CIT (A) ( )*+ ,--. . /0 / DR, ITAT, AHMEDABAD 1 +23 / GUARD FILE. BY ORDER / . // . /0