M/S. BHILOSA TEX-N- TWIST PVT. LTD, MUMBAI V. THE DCIT 4(1), MUMBAI

ITA 3771/MUM/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7214 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 18-02-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 15-05-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAY KUMAR SRIVASTAVA
• Keywords: Source of fund; Set aside
• Section: 80IB; 133(6); 80IA; 131; 145; 68

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'I' BENCH, MUMBAI BEFORE SHRI D.K. AGARWAL, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 4148/MUM/2007 (ASSESSMENT YEAR: 2004-05) DCIT - 4(1) M/S. BHILOSA TEX-N-TWIST PVT. LTD. ROOM NO. 604, 6TH FLOOR 122, ZAVERI BAZAR, 2ND FLOO R AAYAKAR BHAVAN, M.K. ROAD VS. MUMBAI 400002 MUMBAI 400020 PAN - AAACB 1538 K APPELLANT RESPONDENT ITA NO. 3771/MUM/2007 (ASSESSMENT YEAR: 2004-05) M/S. BHILOSA TEX-N-TWIST PVT. LTD. DCIT - 4(1) 122, ZAVERI BAZAR, 2ND FLOOR ROOM NO. 604, 6TH FLOO R MUMBAI 400002 VS. AAYAKAR BHAVAN, M.K. ROAD PAN - AAACB 1538 K MUMBAI 400020 APPELLANT RESPONDENT REVENUE BY: SHRI AJAY KUMAR SRIVASTAVA ASSESSEE BY: SHRI VIPUL JOSHI O R D E R PER B. RAMAKOTAIAH, A.M. THESE CROSS APPEALS ARE BY THE REVENUE AND ASSESSEE AGAINST THE ORDER OF THE CIT(A) IV, MUMBAI DATED 29.03.2007. VARIOUS GROUNDS CONTESTED IN THE APPEALS ARE CONSIDERED AS UNDER, AFTER HEARING THE LEARNED COUNSEL AND THE LEARNED D.R. ITA NO. 3771/MUM/2007 2. THE ASSESSEE HAS RAISED TWO GROUNDS WHICH ARE AS UN DER: - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOME TAX (APPEALS) IV; 1.1 ERRED IN CONFIRMING THE ADDITION OF RS.1,81,500 0/- U/S 68 OF THE I.T. ACT, 1961. 1.2 FAILED TO CONSIDER THAT THERE IS NET DEBIT BALA NCE OF RS.78 LACS (RECEIVABLE RS.259 LACS AND PAYABLE RS.181 LACS BY THE APPELLANT COMPANY) IN THE ACCOUNT OF LOAN CREDITOR. ITA NO. 4148 & 3771/MUM/2007 M/S. BHILOSA TEX-N-TWIST PVT. LTD. 2 WITHOUT PREJUDICE TO ABOVE 1.3. FAILED TO CONSIDER THE ALTERNATIVE GROUND REGA RDING DEDUCTION OF RS.1,81,50,000/- AS ELIGIBLE DEDUCTION U/S 80IB OF THE I.T. ACT, 1961. 2.1 ERRED IN CONFIRMING THE ADDITION OF RS.1,58,12, 468/- TO THE VALUE OF CLOSING STOCK ON ACCOUNT OF MODVAT ELEMENT U/S 145A (B) OF THE I.T. ACT, 1961. 3. GROUND NO. 1 IS WITH REFERENCE TO ADDITION OF RS.1, 81,50,000/- UNDER SECTION 68 OF THE I.T. ACT AND IN THE ALTERNATE SHO ULD BE CONSIDERED FOR DEDUCTION UNDER SECTION 80IB. BRIEFLY STATED, DURIN G THE ASSESSMENT PROCEEDINGS THE A.O. NOTICED THAT THE ASSESSEE COMP ANY HAS RECEIVED A LOAN OF RS.1,81,50,000/- FROM MR. CHHAGANLAL P. RAWAL. T HE A.O. STATES THAT HE HAS ISSUED SUMMONS AND IN RESPONSE SIMPLY A COPY OF LEDGER ACCOUNT WAS FURNISHED. ON FURTHER ENQUIRY BY ITI, THE A.O. CAME TO THE OPINION THAT THE SAID PERSON STAYS IN A FAR FLUNG AREA OF BHAYANDER (E) AND DID NOT HAVE THE CAPACITY TO ADVANCE A LOAN OF RS.1,81,50,000/-. IT WAS THE SUBMISSION OF THE ASSESSEE THAT THE MONIES WERE RECEIVED BY DIFFERENT CHEQUES AND ON DIFFERENT DATES WHICH CAN BE VERIFIED FROM THE BANK STATEMENT OF M/S. CHHAGAN TEXTILES INDUSTRIES, PROPRIETARY CONCERN OF MR. CHH AGANLAL P. RAWAL AND THESE AMOUNTS WERE RECEIVED BY ACCOUNT PAYEE CHEQUE S. THE ASSESSEE HAS NOT PAID ANY INTEREST TO THE SAID CHHAGANLAL P. RAW AL AS THE ASSESSEE COMPANY OFFERED EXTENSIVE CREDITS FOR THE GOODS SOL D AND THE COMPANY HAS TO RECEIVE RS.2,50 CRORES FROM CHHAGAN TEXTILE INDUSTR IES. IT WAS FURTHER SUBMITTED THAT HIS PA NUMBER WAS CORRECTLY MENTIONE D IN THE TAX AUDIT REPORT. THE A.O. DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE AND HELD THAT THE CAPACITY OF MR. CHHAGANLAL P. RAWAL CANNOT BE A CCEPTED. THE CIT(A) ALSO CONSIDERED THE SAME INFORMATION BUT SINCE THE CREDI TOR DID NOT RESPOND TO ASSESSING OFFICERS NOTICE UNDER SECTION 131 AND FU RTHER ENQUIRIES MADE BY THE INSPECTOR, HE HAS CONSIDERED THAT THE CREDITOR WAS NOT A MAN OF MEANS SO AS TO ADVANCE LOAN TO THE EXTENT OF CRORES OF RU PEES. ACCORDINGLY HE CONFIRMED THE SAME. BEFORE THE CIT(A) AN ALTERNATE PLEA WAS ALSO MADE THAT THE NET DEBIT BALANCE RECEIVABLE WAS RS.78 LAKHS, H ENCE CANNOT BE CONSIDERED AS A LOAN CREDITOR AND FURTHER IF THE AM OUNT IS CONSIDERED AS INCOME ASSESSEE WAS ELIGIBLE FOR DEDUCTION UNDER SE CTION 80IB. ITA NO. 4148 & 3771/MUM/2007 M/S. BHILOSA TEX-N-TWIST PVT. LTD. 3 4. REFERRING TO THE PAPER BOOK FILED IN THIS REGARD, THE LEARNED COUNSEL SUBMITTED THAT THE ASSESSEE HAS FURNISHED LOAN CONF IRMATION FROM MR. CHHAGANLAL P. RAWAL AND RELEVANT COPIES OF BALANCE SHEET AND GROUPING OF ASSESSEE COMPANY AS WELL AS M/S. CHHAGAN TEXTILE IN DUSTRIES INCLUDING THE RETURN OF INCOME, COMPUTATION OF TOTAL INCOME, PRES ENT CAPITAL, ETC. IT WAS HIS SUBMISSION THAT THERE WERE NO SUMMONS ISSUED BY THE A.O. BUT ONLY A LETTER UNDER SECTION 133(6) WAS ISSUED. REFERRING T O THE REPLY FILED IN PAGE 46 OF THE PAPER BOOK IN WHICH THE SAID MR. CHHAGANLAL P. RAWAL REFERRED TO THE NOTICE UNDER SECTION 133(6), AND THE REPLY TO THE Q UERIES MADE BY THE DCIT, RANGE 4(1) IT WAS THE SUBMISSION OF THE LEARNED COU NSEL THAT SUMMONS WERE ISSUED IN THE CASE OF THE DIRECTOR OF THE COMPANY T O WHOM ALSO THE SAID MR. CHHAGANLAL P. RAWAL ADVANCED MONIES BUT IN ASSESSEE S CASE ONLY AN ENQUIRY LETTER WAS ISSUED AND NO OTHER ENQUIRIES WE RE MADE WITH REFERENCE TO THE ASSESSEE COMPANY. HE ALSO FURTHER DREW OUR A TTENTION TO THE LEDGER COPY OF THE SALES ACCOUNT TO SUBMIT THAT THE ASSESS EE HAS SOLD GOODS TO CHHAGAN TEXTILE INDUSTRIES REGULARLY AND THE ASSESS EE HAS ADVANCED MONIES AND REFERRED TO THE BALANCE OF CHHAGAN TEXTILE INDU STRIES WHERE THE ASSESSEE COMPANY HAS SHOWN AS SUNDRY CREDITOR TO TH E EXTENT OF RS.2,09,09,198/- AND DEBITS OF PROPRIETORS CAPITAL ACCOUNT TO THE EXTENT OF RS.1,81,69,463/-. ON ENQUIRY ABOUT PAGE 33 AND 34 I N THE PAPER BOOK, IT WAS SUBMITTED THAT THE SAID MR. CHHAGANLAL P. RAWAL WAS A SALARIED EMPLOYEE OF THE ASSESSEE COMPANY DURING THE RELEVAN T PERIOD AND HAS OFFERED INCOME OF RS.1,13,878/- PAID TO HIM AS SALA RY. 5. THE LEARNED D.R., HOWEVER, RELIED ON THE ORDERS OF THE A.O. AND CIT(A) IN THIS REGARD. 6. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE PAPER BOOK. PRIMA FACIE THERE SEEMS TO BE SALE OF GOODS TO M/S. CHHAG AN TEXTILE INDUSTRIES, PROPRIETARY CONCERN OF MR. CHHAGANLAL P. RAWAL AND ADVANCES FROM THE SAID PERSON TO THE ASSESSEE COMPANY. INSTEAD OF CREDITIN G THE SAME TO THE RECEIPT OF MONEY THEY HAVE BEEN SHOWN AS SEPARATE CREDITS A ND BOTH THE PARITIES HAVE CONFIRMED THE TRANSACTIONS. HOWEVER, AS SEEN F ROM THE BALANCE SHEET OF CHHAGAN TEXTILE INDUSTRIES THE ASSESSEE COMPANY WAS SHOWN TO THE EXTENT RS.2.59 CRORES AS CREDITOR AND AN AMOUNT OF RS.1.81 CRORES SHOWN IN ITA NO. 4148 & 3771/MUM/2007 M/S. BHILOSA TEX-N-TWIST PVT. LTD. 4 PROPRIETORS CAPITAL ACCOUNT. IT IS ALSO NOTICED TH AT THE SAID PERSON WAS A SALARIED EMPLOYEE DURING THE YEAR OF THE ASSESSEE C OMPANY. THERE IS NO P & L ACCOUNT OF THE SAID CONCERN IN THE PAPER BOOK TO VERIFY WHETHER THE GOODS SOLD BY THE ASSESSEE COMPANY TO THE SAID CONCERN WE RE IN TURN SOLD OR NOT. THE SOURCE OF CREDIT INTO THE BANK ACCOUNT BY WAY O F CHEQUES CAN ONLY BE SALE PROCEEDS OF THE GOODS SOLD ON CREDIT BY THE AS SESSEE COMPANY, OTHERWISE THERE SEEMS TO BE NO OTHER SOURCE FOR ADV ANCING FUNDS. SINCE THE TRADING ACCOUNT OF THE SAID BUSINESS CONCERN OF MR. CHHAGANLAL P. RAWAL WAS NOT ON RECORD IT IS NOT POSSIBLE FOR US TO VERI FY ANY OTHER SOURCE OF FUNDS, EVEN THOUGH THE BALANCE SHEETS WERE FILED SU PPORTING THE TRANSACTIONS. ANOTHER ASPECT WAS THAT SUMMONS HAVE NOT BEEN ISSUED AS ONLY A NOTICE UNDER SECTION 133(6) SEEMS TO HAVE B EEN ISSUED AND THE SAID MR. CHHAGANLAL P. RAWAL HAS REPLIED VIDE LETTER DAT ED 2212.2006. THE INSPECTORS ENQUIRY REPORT WAS NOT CONFRONTED TO TH E ASSESSEE. IN VIEW OF THIS WE ARE OF THE OPINION THAT THE ISSUE REQUIRES RE-EX AMINATION BY THE A.O. IN ORDER TO VERIFY THE GENUINENESS OF THE CLAIM OF THE ASSESSEE. ACCORDINGLY, WE SET ASIDE THE ISSUE AND RESTORE THE MATTER BACK TO THE FILE OF THE A.O. TO EXAMINE THE CREDIT SHOWN BY THE ASSESSEE COMPANY IN ITS CORRECT PERSPECTIVE AND DECIDE THE ISSUE AFRESH. NEEDLESS TO SAY THAT T HE ASSESSEE SHOULD BE GIVEN OPPORTUNITY. GROUND IS CONSIDERED ALLOWED. 7. GROUND NO. 2 PERTAINS TO THE ADDITION OF RS.1,58,12 ,468/- TO THE VALUE OF CLOSING STOCK ON ACCOUNT OF MODVAT ELEMENT UNDER SECTION 145A(B) OF THE I.T. ACT. IT WAS FAIRLY SUBMITTED THAT THIS ISSUE H AS TO BE RESTORED BACK TO THE FILE OF THE A.O. TO CONSIDER THE VALUATION UNDER SE CTION 145 KEEPING THE OPENING STOCK ALSO INTO CONSIDERATION ON THE BASIS OF THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. MA HALAKSHMI GLASS WORKS LTD. 318 ITR 116 AND CIT VS. MAHAVIR ALLUMINI UM LTD. 292 ITR 77 (DEL.). THE A.O. IS DIRECTED TO REWORK OUT THE ADDI TION UNDER SECTION 145 KEEPING IN VIEW THE PRINCIPLES ESTABLISHED IN THE A BOVE DECISIONS AND THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. THE ISSUE IS RESTORED BACK TO THE FILE OF THE A.O. AND GROUND IS CONSIDERED ALLOW ED. 8. IN THE RESULT, ASSESSEES APPEAL IS CONSIDERED ALL OWED FOR STATISTICAL PURPOSES. ITA NO. 4148 & 3771/MUM/2007 M/S. BHILOSA TEX-N-TWIST PVT. LTD. 5 ITA NO. 4148/MUM/2007 9. REVENUE HAS RAISED THE FOLLOWING TWO GROUNDS: - 1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN HOLDING THAT TEXTURISING AND TWISTING YARN DOES NOT CONSTITUTE MANUFACTURING AND HENCE ELIGIBLE FOR TAX DEDUCTION U/S. 80IB OF THE I.T. ACT, 1961. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO RECAST THE VALUE OF THE OPENING STOCK AS PER THE PROVISIONS OF SECTION 145A AND GIVE EFFECTS TO THE SAME, WHILE AT THE SAME TIME CONFIRM ING THE ACTION OF THE A.O. IN IMPLEMENTING THE EXISTING PROVISIONS OF SEC. 145A AND MAKING ADDITION OF RS.1,58,12,468/-. 10. WITH REFERENCE TO THE ISSUE OF HOLDING THAT TEXTURI SING AND TWISTING DOES NOT CONSTITUTE MANUFACTURE AND ASSESSEE WAS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB, THE CIT(A) HAS CONSID ERED THE ISSUE IN THE LIGHT OF VARIOUS JUDICIAL PRONOUNCEMENTS AND HELD T HAT TEXTURISING AND TWISTING YARN DO CONSTITUTE MANUFACTURING, HENCE, T HE REVENUE IS AGGRIEVED. 11. THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. EM PTEE POLY-YARN P. LTD. 320 ITR 665(SC) HAS CONSIDERED TEXTURISING AND TWISTING PARTIALLY ORIENTED YARN AS MANUFACTURE AND SINCE THE ASSESS EE IS ALSO PROCESSING PARTIALLY ORIENTED YARN, ON THE BASIS OF THE DECISI ON OF THE HON'BLE SUPREME COURT IT IS TO BE HELD THAT TEXTURISING AND TWISTIN G YARN DO CONSTITUTE MANUFACTURING. HOWEVER, BEFORE ARRIVING AT THE ABOV E DECISION THE HON'BLE SUPREME COURT HAS CONSIDERED THE PROCESS INVOLVED I N TWISTING AND TEXTURISING AND HELD AS UNDER: IN EACH CASE THE QUESTION WHETHER THERE IS ANY PR OCESS WHICH AMOUNTS TO MANUFACTURE HAS TO BE DECIDED BY EXAMINING THE PROCESS UNDERTAKEN BY THE ASSESSEE. PARTIALLY ORIENTED YARN (POY) IS A SEMI-FINISHED YA RN NOT CAPABLE OF BEING PUT IN WARP OR WEFT: IT CAN ONLY BE USED FOR MAKING A TEXTURISED YARN, WHICH, IN TURN, CAN BE USED IN THE MANUFACTURE OF F ABRIC. IN OTHER WORDS, POY CANNOT BE USED DIRECTLY TO MANUFACTURE FABRIC. CRIMPS, BULKINESS, ETC., ARE INTRODUCED BY A PROCESS CALLED THERMO MEC HANICAL PROCESS, WHICH CONVERTS POY INTO TEXTURISED YARN. IF ONE EXA MINES THIS THERMO MECHANICAL PROCESS IN DETAIL, IT WOULD BE CLEAR THA T TEXTURISING AND TWISTING OF YARN CONSTITUTES MANUFACTURE IN THE C ONTEXT OF CONVERSION OF POY INTO TEXTURISED YARN. THE THERMO MECHANICAL PRO CESS ALSO BRINGS ABOUT A STRUCTURAL CHANGE IN THE YARN ITSELF, WHICH IS ONE OF THE IMPORTANT TESTS TO BE SEEN WHILE JUDGING WHETHER A PROCESS IS MANUFACTURE OR NOT. ITA NO. 4148 & 3771/MUM/2007 M/S. BHILOSA TEX-N-TWIST PVT. LTD. 6 THEREFORE, TWISTING AND TEXTURISING OF PARTIALLY OR IENTED YARN AMOUNTS TO MANUFACTURE IN TERMS OF SECTION 80IA OF THE INCOM E-TAX ACT, 1961. 12. SINCE THE FACT WHETHER THERMO MECHANICAL PROCESS WA S EMPLOYED BY THE ASSESSEE OR NOT IS NOT ON RECORD, FOR THE LIMIT ED PURPOSE OF EXAMINING THE PROCESS AND TO GIVE A FINDING, THE MATTER IS RESORT ED TO THE A.O. TO DECIDE THE ISSUE KEEPING IN VIEW THE PRINCIPLES ESTABLISHED BY THE HON'BLE SUPREME COURT. IF THE ASSESSEE IS USING THERMO MECHANICAL P ROCESS WHILE TWISTING AND TEXTURISING PARTIALLY ORIENTED YARN THEN ASSESS EE IS ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB. ASSESSEE IS DIRECTED TO FURNISH THE NECESSARY PROCESS DETAILS TO THE A.O. IN THIS REGARD. GROUND CONSIDER ED ALLOWED. 13. GROUND NO. 2 IS WITH REFERENCE TO THE ADDITION UNDE R SECTION 145A AND SINCE THE ISSUE WAS RESTORED BACK TO THE A.O. IN AS SESSEES GROUND NO. 2 ABOVE, THIS GROUND IS CONSIDERED ALLOWED AND THE IS SUE IS RESTORED BACK TO THE FILE OF THE A.O. TO CONSIDER IT AFRESH. 14. IN THE RESULT, BOTH THE APPEALS ARE CONSIDERED ALLO WED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD MARCH 2010. SD/- SD/- (D.K. AGARWAL) (B. RAM AKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 23 RD MARCH 2010 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) IV, MUMBAI 4. THE CIT IV, MUMBAI CITY 5. THE DR, I BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.