DCIT 7(2), MUMBAI V. RONCH POLYMERS P. LTD, MUMBAI

ITA 6729/MUM/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62424 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-05-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2007-2008
• Appeal Filed On: 22-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RUPINDER BRAR
• Keywords: Rejection of books of accounts; Depreciation; Question of law
• Section: 80IB; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D , MUMBAI BEFORE : SHRI P. M. JA GTAP, ACCOUNTANT MEMBER & SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO.6629 /MUM/2010 ASSESSMENT YEAR: 2007-2008 RONCH POLYMERS, P. LTD., 3, NANJI RAVJI BLDG., ACHARYA DONDE MARG, SEWRI NAKA, MUMBAI-400 015. PAN NO.AAACR4924P ACIT 7 (2), MUMBAI. APPELLANT VS. RESPONDENT AND ITA NO.6729 /MUM/2011 ASSESSMENT YEAR: 2007-2008 ACIT 7 (2), MUMBAI RONCH PO LYMERS, P. LTD., 3, NANJI RAVJI BLDG., ACHARYA DONDE MARG, SEWRI NAKA, MUMBAI-400 015. PAN NO.AAACR4924P APPELLANT VS. RESPONDENT APPELLANT BY : MS. RUPINDER BRAR RESPONDENT BY : MR. HARIDAS BHAT DATE OF HEARING : 26 TH APRIL 2012 DATE OF PRONOUNCEMENT : 16 TH MAY 2012 O R D E R PER AMIT SHUKLA (J.M.) : THESE CROSS APPEALS ARE ARISI NG OUT OF THE ORDER DATED 25-5- 2010, PASSED BY THE CIT(A)-13, MUMBAI FOR THE QUANTUM OF ITA NOS : 6629&6729/MUM/2010 2 ASSESSMENT PASSED UNDER SECTION 143( 3) FOR THE ASSESSMENT YEAR 2007-2008. 2. IN THE ASSESSEES APPEAL THE A SSESSEE HAS INITIALLY TAKEN TEN GROUNDS OF APPEAL WITH VARIOUS S UB-GROUNDS, WHICH HAVE BEEN LATER ON CONCISED, WHEREIN THE GROUNDS NO .1,7,8 & 9 HAVE NOT BEEN PRESSED AND GROUND NO.10 IS ONLY A PRAYER. HENCE, THESE GROUNDS ARE TREATED AS DISMISSED . 3 . EFFECTIVELY THERE ARE FIVE GROUNDS OF APPEAL, WHICH HAVE BEEN CHALLENGED BEFORE US. IN GROUND NO.2, THE ASSESSEE HAS CHALLENGED THE ALLOCATION OF PORTION OF ADMINISTRATIVE EXPENSES AND FINANCIAL CHARGES TO UNIT ELIGIBLE FOR DEDU CTION UNDER SECTION 80IB ON THE BASIS OF THE SUM TOTAL OF TURNOVER AND J OB WORK CHARGES FOR ALL THE UNITS. THE ASSESSEE HAS SIX UNITS HAVING DIFFE RENT BUSINESS LINE AND DIFFERENT PROFITABILITY. DURING THE RELEVANT ASSE SSMENT YEAR ONLY FOUR UNITS WERE IN OPERATIONAL, WHICH WERE MANUFACTURING THE FOLLOWING ITEMS :- UNIT NO. LOCATION ACTIVITY I TALOJA MANUFACTURING INJECTION MOULDING ITEMS II DAMAN MANUFACTURING OF INJECTION MOULDED ITEMS AND ASSEMBLY OF WATER PURIFIER-SOLD AS FINISHED PRODUCT III PUNE MANUFACTURING INJECTION MOULDING ITEMS IV DAMAN MANUFACTURING CARBON BLOCKS, WHICH IS A COMPONENT OF PURIFIERS. OUT OF ABOVE UNITS ONLY UNIT II WAS ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB. ITA NOS : 6629&6729/MUM/2010 3 3.1 THE ASSESSING OFFICER NOTED THAT THE ASSESS EE IS SHOWING HIGH NET PROFIT RATE IN UNIT II ON WHICH T HE ASSESSEE IS ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB IN COMPARISON TO LOSS ON LOWER PROFITS IN OTHER UNITS, EVEN THOUGH NATURE OF ACTIVITIES BY AND LARGE IS SIMILAR IN ALL THE FOUR UNITS. THE DEDUCTION UNDER SECTION 80IB FOR PROFIT OF UNIT NO2 WAS SHOWN AT ` .1.27 CRORES BEING 30% OF ` .4.24 CRORES. HE FURTHER OBSERVED THAT THE GROSS TOTAL INCOME OF THE ASSESSEE (IN ALL FOUR UNITS) IS ONLY `. 3 CRORES AND, THEREFORE, THE PROFIT OF ONE UNDERTAKING INCLUDED IN THE GROSS TOTAL INCOME CANNOT EXCEED ` .3 CRORES. BEFORE THE ASSESSING OFFICER, THE ASSESSEE SUBMITTED DETAILS OF INCOME, EXPENDITURE, GROSS PROFIT AND BOOK PROF IT OF VARIOUS UNITS AS UNDER :- PARTICULARS UNIT I UNIT II UNIT III UNIT IV MERGED RESULTS NET SALES 6,03,70,261 26,47,41,795 15,19,06,575 1,76, 47,111 49,46,65,742 GROSS PROFIT 25.6% 28. 07% 21.73% 9.28% 22.34% BOOK PROFIT BEFORE TAX -9.89% 18.88% 6. 63% -8.87 10.45% THE MERGED PROFIT HAS THUS WORKED OUT TO 10.45%. THE WORKING GIVEN BY THE ASSESSING OFFICER HAS BEEN REPRODUCED AT PAGES 2 & 3 OF THE ASSESSMENT ORDER. 3.2 THE ASSESSING OFFICER OBSERVED T HAT LOOKING TO THE FACT THAT OVERALL NET PROFIT IS 10.45%, THE PROFIT OF 80IB UNIT IS QUITE HIGH. THIS ACCORDING TO THE ASSESSING OFFICER, WAS DUE TO IMPROPER ALLOCATION OF EXPENSES. AFTER ANALYSING THE OVERA LL BUSINESS ACTIVI TIES OF THE ASSESSEE IN ALL THE UNITS, NATURE OF EXPENSES, LIABILITIES, ETC. THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO GIVE JUSTIFICATION AND BASIS ITA NOS : 6629&6729/MUM/2010 4 FOR ALLOCATION OF INDIRECT EXPENSES , EXCLUDING DEPRECIATION AND FINANCE CHARGES. THE ASSESSEE SUBMITTED THAT THE ALLOCATION HAS BEEN DONE ON THE BASIS OF SALES OF EACH UNITS AN D WHILE ARRIVING AT THE SALES THE JOB WORK CHARGES HAVE BEEN CONVERTED IN TO SALES BY MULTIPLYING THE JOB WORK CHARGES FOUR TIMES SO THAT IT BALANCES WITH THE ABSENCE OF RAW MATERIALS IN THE JOB WORK DONE. THE ASSESSING OFFICER REJECTED THE SAID CONTENTION ON THE GROUND THAT NO BAS IS HAVE BEEN GIVEN FOR ARRIVING A MULTIPLIER FIGURE OF 4 FOR JOB WORK CHARGES AND RESULTS ARE NOT AUDITED RESULTS. THE WORKING OF WHOLE PROFIT AND LOSS ACCOUNT AFTER CONVERTING JOB WORK CHARGES BY APPLYING MULTIP LIER OF 4 WAS SUBMITTED BY THE ASSESSEE WHICH HAS BEEN INCOR PORATED AT PAGES 6 & 7 OF THE ASSESSMENT ORDER. EVEN FROM SUCH REWORKING THE ASSESSING OFFICER OBSERVED THAT GROSS PROFIT AND NET PROFIT UNDER SECTION 80IB UNIT IS STILL MUCH HIGHER THAN OTHER UNITS. HE, THEREFORE, REJECTED THE BOOKS OF ACCOUNTS TO THE EXTENT OF THE EXPENSES AND NET PROFIT OF DIFFERENT UNITS AFTER INVOKING THE PROVISIONS OF SECTION 145(3). HE WORKED OUT THE RATIO OF 9.9% (BY TAKING THE RATIO OF PROFIT BEFORE TAX OF OTHER INCOME AND NET SALES) AND APPLIED THE SAME RA TE FOR ESTIMATION OF COMPUTATION OF NET PROFIT FOR ALL THE UNITS AND WORKED OUT THE DEDUCTION IN PROFIT OF 80IB UNIT AT ` .2,21,51,241/- AND WORKED THE ALLOWABLE DEDUCTION UNDER SECTION 80IB AS UNDER :- ESTIMATED PBT WITHOUT CONSIDERING OTHER INCOME 26209438 ADD ITA NOS : 6629&6729/MUM/2010 5 BOOK DEPRECIATION 3356262 DONATION 430167 PROVISION FOR GRATUITY 31077 40(A)(I) 103357 3920863 LESS IT DEPRECIATION 10280511 40A(IA) DISALLOWED EARLIER 1058500 11339011 (-)7418148 BUSINESS PROFIT AS PER ` .1,87,91,290 INCOME TAX ACT THE ASSESSEE HAS ALSO SHOWN OTHER INCOME OF 16,16,695/- FOR UNIT-II, WHICH INCLUDED PROFIT ON SALE OF MACHINERY OF 1,51,840/-. THE UNIT WISE BREAK UP OF REMAINING 14,64,855/- HAS NOT BEEN GIVEN. HOWEVER, IT INCLUDES IN COME U/S 41(1) OF 7,52,023/-, EXCHANGE RATE GAIN OF 11,38,532/- AND RECEIPTS FOR PROFESSIONAL SERVICES OF 5,51,271/- NONE OF WHICH IS THE INCOME DERIVED FROM INDUSTRIAL UNDERTAKING. THEREFORE, ALLOWABLE DEDUCTION U/S 80IB IS WORKED OUT AT 30% OF 1,87,91,290 /- I.E. ` .56,37,387/- AGAINST CLAIM OF 1,27,22,216/-. THIS LEADS TO AN ADDITION OF ` .70,84,829/- ON THIS ACCOUNT . THEREAFTER HE COMPUTED THE UNITWISE INCOME AND WORKED OUT THE TOTAL INCOME OF ALL THE SIX UNITS AT ` .3,04,16,361/-. 4. BEFORE THE CIT(A), IT WAS SUBMITTED BY THE ASSESSEE THAT DIFFERENT UNITS ARE CARRYING OUT DIFFERENT TYPE OF ACTIVITIES, THEREFORE, THE PROFITABILITY IN ALL THE UNITS WERE DIFFERENT. THE PROFITABILITY OF ELIGIBLE UNIT UNDER SECTION 80IB (UNIT-II) IS HIGH AS IN THAT UNIT ONLY MANUFACTURING ACTIVITIES WERE CARRIED OUT BY THE ASSESSEE WHEREIN FINISHED PRODUCTS ARE SOLD FOR ONWARD MARKETING AND DIST RIBUTION, WHEREAS IN OTHER UNITS IT IS BASICALLY SUPPLYING OF RAW MATE RIALS TO ITS CUSTOMERS. THE UNIT WISE EXPLANATION OF ACTIVITIES AND REASONS OF PROFITABILITY THEREOF FURNISHED ITA NOS : 6629&6729/MUM/2010 6 BY ASSESSEE HAS BEEN INCORPORATED IN THE APPELLATE ORDER FROM PAGES 8 TO 11. IT WAS ALSO SUBMITTED T HAT THE UNIT III IS PRIMARILY DOING JOB WORK, WHEREAS OTHER UNITS WERE INVOLVED IN BOTH SALES AND JOB WORK AND FOR TAKING THE JOB WORK AT PAR WITH SALES TURNOVER, THE JOB WORK CHARGES HAVE TO BE CONVERTED INTO SALES FIGURE BY CONSIDERING THE RATIO OF 1:4. THIS RATIO WAS BASED ON INDU STRIAL NORM I.E. IF THE PROCESSING CHARGE FOR INJECTION MOULDED COMPONEN TS IS RE.1/- THEN MATERIAL COST WOULD BE ` .4. IT WAS FURTHER SUBMI TTED THAT THE ASSESSEE HAS MAINTAINED SEPARATE BALANCE SHEET FOR ALL THE UNITS AND ALLOCATION OF EXPENSES AS GIVEN DURING THE COUR SE OF THE ASSESSMENT PROCEEDINGS WAS PURELY BASED ON BOOKS OF ACCOUNTS. 5 . LEARNED CIT(A) PARTLY APPRECIA TED THE SUBMISSIONS OF THE ASSESSEE AND HELD THAT :- 3.0 THE FACTS OF THE CASE HAS BEEN CONSIDERED : THE APPELLANT IS MAINTAINING SEPARATE BOOKS OF ACCOUNTS FOR EACH UNIT. EVEN THE SEPARATE BALANCE SHEET HAS ALSO FILED BEFORE THE A.O.ALSO. ALL THE UNITS ARE SUBJECT TO EXCISE RECORDS. SEPARATE BOOKS OF ACCOUNTS ARE MAINTAINED, DIRECT EXPENSES ARE DIRECTLY ALLOCATED UNIT WISE. NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE AO THAT DIRECT EXPENSES CHARGED TO THE UNIT ARE NOT CORRECT/NOT GENUINE. THE ONLY DISPUTE COULD THEREF ORE BE REGARDING APPROPRIATION OF INDIRECT EXPENSES TO WORK OUT THE PROFIT OF EACH UNIT. MERELY ON THE GROUND THAT CERTAIN INDIRECT EXPENSES HAVE BEEN ALLOCATED ON A DIFFERENT BASIS, TO WHICH THE AO DOES NOT AGREE CANNOT BE THE BASIS OF REJECTION OF BOOKS. THIS VIEW HAS BEEN UPHELD IN THE CASE OF DCIT VS. DELHI PRESS SAMACHAR PATRA ITA NOS : 6629&6729/MUM/2010 7 (P) LTD. 101 ITD 253 (DEL) T.M. -HELD, EXPENSES CLAIMED BY ASSESSEE HAVING BEEN ALLOWED NONE OF THE EXPENSES HAVING BEEN TREATED AS IN GENUINE, AND T HERE BEING NO MATERIAL ON RECORD-ASSESSMENT BASED ON INFERENCE THAT EXPENSES OF DIFFERENT UNITS SHOULD BE PROPORTIONATE- IS ARBITRARY. 5.1 THEREAFTER UNITWISE BASIS OF ALLOCATION/APPROPRIATION WAS WORKED OUT BY THE LEARNED CIT(A) WHICH HAS BEEN GIVEN AT PAGES 12 TO 14 OF THE APPELLATE ORDER. HE HOWEVER REJECTED THE CONTENTION OF THE ASSESSEE THAT WEIGHTED GROSS SALE RATI O IN THE CASE OF THE UNIT CARRYING ON JOB CHARGES SHOULD BE TAKEN AT 1:4 AS IT IS NOT A SCIENTIFIC BASIS AND HELD THAT SINCE THE ASSESSEE IS ENGAGED IN SALES AND JOB WORK AND THE DIRECT EXPENSES HAVE TO BE DIRECTLY ALLOCATED UNITWISE, WHEREAS INDIRECT EXPENSES IS TO BE INCURRED WHETHER THE JOB WORK OR NO JOB WORK. THEREFORE, THE FACTOR OF FOUR TIMES TO JOB WORK CHARGES IS NOT MAINTAINABLE. THUS, THE INDIRECT EXPENSES WILL BE APPROPRIATED IN RATIO OF GROSS SALES AND JOB WORK CHARGES. ACCORDINGLY, HE WORKED OUT REVISED COMPUTATION OF INCOME OF UNIT WISE AND WORKED OUT THE PROFIT BEFORE TAX IN RESPECT OF 80IB UNIT AT ` .4,69,16,128/- INSTEAD OF ` .4,99,77,374/- TAKEN BY T HE ASSESSEE AS UNDER :- RECONCILIATION OF 80IB CLAIM PARTICULARS UNIT II (80IB) PROFIT BEFORE TAX AS PER CI T(A) ORDER ADD: 4,69,16,127 TOTAL AMOUNT OF ALLOCA TIONS DISPUTED 1,36,37,507 LESS: TOTAL AMOUNT OF ALLOCATIONS REQUESTED IN APPEAL 1,13,22,957 PROFIT BEFORE TAX 4,92,30,6771 - PROFIT AS WORKED OUT BY CIT(A) 4,69,16,127 ITA NOS : 6629&6729/MUM/2010 8 REDUCTION IN ELIGIBLE PROFIT MADE BY CIT(A) 23,14,549 RESULTANT REDUCTION IN 80IB 6,94,365 6. LEARNED AR ON BEHALF OF THE ASSE SSEE SUBMITTED THAT ALLOCATION OF EXPENSES AS DONE BY THE ASSE SSEE IS BASED ON THE ACTIVITY AND SHOULD BE APPORTIONED ON A LIKE SITUATION AND MAKING THEM COMPARABLE. IN CASE OF JOB WORK, THE MATERIAL COST IS NOT RELATED TO THE TURNOVER, WHEREAS IN THE REGULAR MANUFACTURING AND SALES TURNOVER, MATERIAL IS THE MAIN INGREDIENT OF THE TURNOVER. THE GROSS PROFIT OF MANUFACTURING ACTIVITY IS NOT COMPARABLE TO THE DETAIL JOB WORK CHARGES RECEIVED AND TO MAKE THEM COMPARABLE REASONABLE MULTIPLYING FACTOR IS REQUIRED, AND THEREFORE, MULTIPLIE R FACTOR OF 4 GIVEN BY THE ASSESSEE IS WHOLLY JUSTIFIED. 7. ON THE OTHER HAND, LEARNED CIT DR RELIED UPON THE DETAIL REASONING AND THE FINDING GI VEN BY THE CIT(A). 8. AFTER CAREFULLY CONSIDERING THE RIVAL SUBMISSIONS AND THE FINDINGS GIVEN BY THE CIT(A) AND THE ASSESSIN G OFFICER, WE FIND THAT LEARNED CIT(A) HAS ACCEPTED THE BASIS OF ALLOCATION UNDER THE HEAD INCOME FROM OPERATIONS, OTHER INCOME, EXPENDITURE RELATING TO RAW MATERIAL, CONSUMPTION AND MANUFACTURING EXPENSES AS GIVEN BY THE ASSESSEE. IT IS ONLY WITH REGARD TO EXPENSE S, UNDER THE HEAD OF ADMINISTRATIVE EXPENSES AND FINANCIAL CHARGES, THE CIT(A) HAS GIVEN THE BASIS OF ALLOCATION ON WEIGHTED GROSS SALES RATI O. THUS, AS PER THE WORKING OF ITA NOS : 6629&6729/MUM/2010 9 UNIT-WISE FOLLOWING ALLOCATIONS OF EXPENSES AND PROFIT BEFORE TAX HAVE BEEN DONE BY THE CIT(A) :- UNIT PROFIT EXPENSES I (61,86,914) 33,92,404 II (4,69,16,128) 1,36,37,507 III 1,29,95,282 84,79,227 IV 20,28,011 81,39,809 TOTAL 5,16,95,984 2,63,22,225 9. EVEN THOUGH THE ALLOCATION OF DIRECT EXPENSES HAVE BEEN ACCEPTED BY THE CIT(A) AS PER THE WORKING OF THE ASSESSEE, HOWEVER, WE FAIL TO APPRECIATE THAT INDIRE CT EXPENSES HAS NO DIRECT BEARING ON JOB WORK AS TURNOVER OF JOB WORK CANNOT BE AT PAR WITH SALES OF MATERIALS. WE PARTLY AGREE WITH THE CONTENTION OF THE LEARNED AR THAT VARIOUS ACTIVITIES OF DIFFERENT UNITS SHOULD BE APPORTIONED IN A LIKE SITUATION BY MAKING THEM COMPARABLE FOR THE PURPOSES OF ALLOCATION OF EXPENSES. IN JOB WORKING THE MATERIAL COST IS NOT THE PART OF THE TURNOVER WHEREAS IN MANUFACTURING AND SALES MATERIAL IS THE MAIN INGREDIENT. THEREFORE, SOME MULTIPLIER IS REQUIRED FOR BALANCING THE EXPENSES OF THE UNIT. SINCE THE CIT( A) HAS ALREADY ACCEPTED THE DIRECT EXPENSES, THE SOME MULTIPLIER IS REQUIRED FOR INDIRECT EXPENSES ALSO. HERE IN THIS CASE ONLY IN ONE UNIT THERE IS JOB WORK, THEREFORE, THE MULTIPLIER OF 2.5 WOULD SUFFICE FO R ALLOCATION OF INDIRECT EXPENSES. ACCORDINGLY THE ASSESSING OFFICER IS DIRECTED TO APPLY THE MULTIPLIER OF 2.5% IN JOB WORK FOR ALLOCATION OF EXPENSES. ACCORDINGLY, THIS GROUND IS PARTLY ALLOWED . ITA NOS : 6629&6729/MUM/2010 10 10. IN GROUND NO.3, THE ASSESSEE HAS CHALLENGED THE EXCLUSION OF EXCHANGE FLUCTUATION GAINS OF ` .9,60,301/- AND CREDITORS BALANCES WRITTEN OFF ` .5,04,554/- FROM PROFIT ELIG IBLE FOR DEDUCTI ON UNDER SECTION 80IB. AT THE OUTSET, LEARNED AR SUBMITTED THAT THE EXCLUSION OF EXCHANGE FLUCTUATION GAINS IS COVERED BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. RACHNA UDHYOG, REPORTED IN (2010) 230 CTR (BOM) 72 , WHEREIN IT WAS HELD AS UNDER :- 5. HAVING HEARD THE LEARNED C OUNSEL APPEARING ON BEHALF OF THE APPELLANT AND LEARNED COUNSEL APPEARING FOR THE ASSESSEE, WE ARE OF THE VIEW THAT THE DIFFERENCE ON ACCOUNT OF EXCHANGE RATE FLUCTUATION IS LIABLE TO BE ALLOWED UNDER S. 80-IB . THE EXCHANGE RATE FLUCTUATION ARISES OUT OF AND IS DIRECTLY RELATED TO THE SALE TRANSACTION INVOLVING THE EXPORT OF GOODS OF THE INDUSTRIAL UNDERTAKING. THE EXCHANGE RATE FLUCTUATION BETWEEN THE RUPEE EQUIVALENT OF THE VALUE OF THE GOODS EXPORTED AND THE ACTUAL RECEIPTS WHICH ARE REALIZED ARISES ON ACCOUNT OF THE SALE TRANSACTION. THE DIFFERENCE ARIS ES PURELY AS A RESULT OF A FLUCTUATION IN THE RATE OF EXCHANGE BETWEEN THE DATE OF EXPORT AND THE DATE OF RECEIPT OF PROCEEDS , SINCE THERE IS NO VARIATION IN THE SALE PRICE UNDER THE CONTRAC T. THE VIEW WHICH WE HAVE TAKEN IS ALSO CONSISTENT WITH THE VIEW TAKEN BY A DIVISION BENCH OF THIS COURT ON 15 TH DEC., 2009 IN THE CASE OF SYNTEL LTD. (IT APPEAL NOS.1974, 1976 AND 1978 OF 2009). IN THE CIRCUMSTANCES, WE WOULD AFFIRM THE JUDGMENT OF THE TRIBUNAL INSOFAR AS THE QUESTION OF EXCHANGE RATE FLUCTUATION IS CONCERNED. ITA NOS : 6629&6729/MUM/2010 11 THUS, RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT, WE HOL D THAT ON ACCOUNT OF EXCHANGE FLUCTUATION, THE ASSESSEE IS EN TITLED FOR DEDUCTION UNDER SECTION 80IB. 10.1 AS REGARDS THE CREDITORS BALANC ES WRITTEN OFF, LEARNED AR SUBMITTED THAT THIS ISSUE IS ALSO CO VERED BY THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. METALMAN AUTO (P) LTD., REPORTED IN (2011) 52 DTR (P&H) 385 , WHEREIN IT WAS HELD THAT :- TRIBUNAL WAS JUSTIFIED IN LAW IN ALLOWING DEDUCTION UNDER S.80IB ON JOB RECEIPTS AND OTHER MISCELLANEOUS INCOME BEING MISCELLANEOUS RECEIPTS, REBATE AND DISCOUNT AND BALANCES WRITTEN OF ETC. AS THE SAME WERE DERIVED FROM THE ELIGIBLE BUSINESS OF INDUSTRIAL UNDERTAKING OF THE ASSESSEE COMPANY, AND NO SUBSTANTIAL QUESTION OF LAW ARISES. SIMILARLY, HONBLE HIGH COURT OF MADRAS EARLIER IN THE CASE OF CIT VS. ABDUL RAHMAN INDUSTRIES, REPORTED IN (2007) 293 ITR 475(MAD) , HAS HELD THAT :- THERE WERE CREDITS APPEARING IN THE BOOKS ON THE BASIS OF PURCHASE OF ITEMS FROM VARIOUS SUPPLIERS AND THESE SUPPLIERS WERE NOT PAID. THESE UNCLAIMED CREDIT BALANCES WERE BROUGHT TO THE P&L A/C AND THE SAME HAD EMANATED FROM TRADING TRANSACTION ONLY. THERE IS A FINDING GIVEN BY THE TRIBUNAL THAT THE SAID TRANSACTION IS VERY MUCH CONNECTED OR CLOSELY LINKED WITH THE ASSESSEES BUSINESS ACTIVITIES. THE RECEIPT HAD ARISEN ONLY OUT OF ORDINARY TRADING TRANS ACTION AND HENCE IT WAS RIGHTLY ASSESSED UNDER THE HEAD BUSINESS. THEREFORE, THE REASONS GIVEN BY THE TRIBUNAL ARE BASED ON VALID MATERIALS AND EVIDENCE AND HENCE, THERE IS NO ERROR OR LEGAL INFIRMITY IN THE ORDER OF THE ITA NOS : 6629&6729/MUM/2010 12 TRIBUNAL SO AS TO WARRANT INTERF ERENCE. UNDER THE CIRCUMSTANCES, THE TRIBUNAL IS RIGHT IN HOLDI NG THAT THE INCOME SHOULD BE ASSESSED UNDER THE HEAD BUSINESS AND ALSO ON THIS BASIS, THE ASSESSEE IS ENTITLED TO THE BENEFIT UNDER S.80HHC. THUS, RESPECTFULLY FOLLOWING THE AFOR ESAID TWO JUDGMENTS, WE HOLD THAT CREDITORS BALANCE WRITTEN-OFF FOR SUM OF ` .5,04,554/- IS IN CIDENTAL TO THE PROFITS AND GAINS DERIVED FROM ELIG IBLE BUSINESS U/S. 80IB AND THE ASSESSEE IS ENTITLED FOR DEDUCTION FROM THE COMPUTATION OF PROFITS WHILE WORKING OUT THE DEDUCTION UNDER SECTION 80IB. 11. GROUNDS NO.4 & 5 ARE ON ACCOUNT OF ADDITION OF UNUTILIZED MODVAT CREDIT AND VAT UNDER SECTION 145A. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS NOT INCLUDED THE EXCISE DUTY IN THE VALUATION OF THE OPENING STOCK. AFTER REFERRING TO THE SECTION 145A, HE OBSERVED THAT THE SECTION MAKES IT VERY CLEAR THAT AFTER COMPUTING PROFITS AND GAINS OF BUSINESS OR PROFESSIONS AS PER THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY T HE ASSESSEE, THE PROFIT SHALL BE FURTHER ADJUSTED TO INCLUDE THE E XCISE DUTY COMPONENT OF COST PAID NOTWITHSTANDING ANY CENVAT ARISING AS A CONSEQUENCE TO SUCH PAYMENT. THERE IS NO DISCRETION IN THIS MATTER AND EXCISE COMPONENT OF THE COST OF INPUTS I.E. RAW MATE RIALS/PACKAGING MATERIAL ETC. HAS TO BE INCLUDED IN CLOSING STOCK VALUATION I RRESPECTIVE OF CENVAT CLAIM. HE FURTHER OPINED THAT THE STOCK OF FINISHED GOODS HAS THREE COST COMPONENTS, VIZ., THE RAW MATERIAL COST, THE PRODUCTION COST AND THE EXCISE DUTY PAID ON PURCHASE OF RAW MATERIAL. THESE COMPONENTS OF ITA NOS : 6629&6729/MUM/2010 13 EXCISE DUTY IS DIFFERENT FROM E XCISE DUTY PAID/PAYABLE OF FINISHED GOODS. IN FACT, THE EXCISE DUTY COMPONENT RAW MATERIAL IS AN INDIRECT COST CHARGED BY THE MANUFACTURER OF RAW MATERIAL FROM THE ASSESSEE. IT IS A PART OF THE COST OF RAW MATERIAL AND ALSO A PART OF CLOSING STOCK OF FINISHED GOODS. THEREAFTER THE ASSESS ING OFFICER WORKED OUT THE DETAIL METHOD AS TO HOW CENVANT CREDIT IS NECESSARY FOR ADJUSTMENT IN THE CLOSING STOCK. THE ILLUSTRATION OF SUCH ADJUSTMENT HAS BEEN GIVEN IN DETAIL IN THE IMPUGNED ASSESSMENT ORDER. ACCORDINGLY, HE REQUIRED THE ASSESSEE TO FURNISH INFORMATI ON OF EXCISE DUTY COMPONENT AND RAW MATERIAL, WORK-IN-PROGRESS(WIP) AND CLOSING STOCK. HOWEVER, THE ASSESSEE GAVE THE WORKING AS PER GUIDELINES OF ICAI. THE ASSESSING OFFICER REJECTED THE SAME AND HIMSELF WORKED OUT THE FIGURE ON THE BASIS OF DATA AVAILABLE AND M ADE AN ADJUSTMENT OF ADDITION OF ` .1,56,35,714/- AND CONSEQUENTLY THE ADDITIONAL AMOUNT OF VALUATION STOCK FOR 80IB UNIT WAS INCLUDED AT ` .1,30,66,976/-. 12 . THE LEARNED CIT(A) TOO UPHELD T HE FINDING AND OBSERVATION OF THE ASSESSING OFFICER IN THE FOLLOWING MANNER :- IT IS THEREFORE HELD AS UNDER : I)* RESULTANT CHANGE, IF ANY, WILL HAVE TO BE ADDED TO THE ASSESSEES INCOME. II) ANOMALY MAY ARISE BECAUSE OF THE FACT THAT THE ASSESSEE HAS UTILIZED PLA A/C INSTEAD OF CENVAT/VAT CREDIT AVAILABLE FOR PAYMENT OF THE DUTY TO THE GOVT. A/C. THE AMOUNT OF PAYMENT MADE OUT OF THE PLA A/C TO THE EXTENT OF THE CENVAT/VAT CREDIT WAS STILL AVAILABLE IN THE ITA NOS : 6629&6729/MUM/2010 14 CENVAT/VAT REGISTER SHALL BE ADDED TO THE CENVAT/VAT SET OFF/UTILIZED DURING THE YEAR AS ABOVE. III) VAT IS PAYABLE AT THE TIME OF SALES AND NOT ON CLOSING STOCK OF FINISHED GOODS. IV) THE ADDITION ON ACCOUNT OF DUTY FOLLOWING THE PROVISIONS OF SEC.145A IS PRINCIPALLY CALLED FOR. NO ADJUSTMENT IN THE OPENING STOCK IS POSSIBLE AS HELD IN THE CASE OF MELMOULD CORPORATION VS. CIT 202 ITR 789 (BOM). BESIDES, TAX PROVISIONS U/S. 145A CAME IN TO EFFECT FROM 1.4.98 A.Y. 2003-04 CANT BE SAID TO BE TRANSITIONAL YEAR. HENCE THE JUDGMENT OF MAHAVIR ALUMIN IUM LTD 297 ITR 77 (DEL) SHALL NOT APPLY. V) THE A.O. IS DIRECTED TO VERIFY THESE FACTS AND FIGURES AND MAKE ADDITION AS PER AFORESAID DIRECTIONS. VI) THE APPELLANT HAS RAISED AN AD DL. GROUND THAT IF ADDITIONS TO CLOSING STOCK AS ON 31.3.07 IS SUSTAINED THE LD. AO BE DIRECTED TO CONSIDER THE CO RRESPONDING INCREASE IN THE VALUE OF OPENING STOCK AS ON 1.4.07. IT GOES WITHOUT SAYING THAT THE AO SHOULD FOLLOW A CONSISTENT PRACTICE AS DETAILED AFORESAID EVEN IN NEXT ASSESS MENT YEAR AND WORK OUT THE INCOME ACCORDINGLY. 5.1 THIS GROUND OF APPEAL IS ACCORDINGLY DISPOSED OFF. 13. LEARNED AR SUBMITTED THAT THE ASSESSEE HAS BEEN FOLLOWING THE PROCEDURE AS LAID DOWN BY THE ICAI AND AS PER THE AUDITORS REPORT IN FORM 3CD WHERE IT HAS BEEN SHOWN THAT THE ASSESSEE IS SHOWING THE PURCHASES AND SALES NET OF CENVAT BENEFIT AND HENCE CLOSING STOCK OF FINISHED GOODS IS VALUED AT EXCLUS IVE OF EXCISE DUTY AND FURTHER REPORTED THAT EFFECT OF DEVIATION ON PROFIT AND LOSS IS NIL. HE FURTHER SUBMITTED THAT THIS METHOD HAS BEEN REGULARLY FOLLOWED BY THE ITA NOS : 6629&6729/MUM/2010 15 ASSESSEE. IN SUPPORT OF HIS CONTENTIONS, HE RELIED UPON THE FOLLOWING DECISIONS :- I) HAWKINS COOKERS LTD. VS. ITO, 14 DTR (MUM) (TRIB) 206; II) R.R.KABLE LTD. VS. ADDL. CIT 66 DTR (MUM) (TRIB) 250; III) CIT VS. LOKNETE BALASAHEB DESAI S.S.K. LTD. 339 ITR 288 (BOM)(2011). ALTERNATIVELY, HE SUBMITTED THAT IN GROUND NO.5, HE HAS MADE AN ALTERNATIVE CLAIM THAT ADJUSTMENT OF THE SAME SHOULD BE MADE IN OPENING STOCK ALSO. IN SUPPORT OF THIS, HE RELIED UPON THE DECISION IN THE CASE OF CIT VS. MAHALAXMI GLASS WORKS (P) LTD., REPORTED IN 318 ITR 116 (BOM) . ON THE OTHER HAND, LEARNED CIT DR HAS RELIED UPON THE FINDING AND THE REASONING GIVEN BY THE CIT(A). 14. WE HAVE HEARD RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE FINDINGS GIVEN BY THE CIT(A) AS WE LL AS THE ASSESSING OFFICER. SECTION 145A IS A NON-OBSTANTE CLAUSE TO SECTI ON 145, WHICH PROVIDES THAT :- [ METHOD OF ACCOUNTING IN CERTAIN CASES. 145A. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 145 , ( A ) THE VALUATION OF PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION SHALL BE ( I ) IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE; AND ITA NOS : 6629&6729/MUM/2010 16 ( II ) FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF ANY TAX, DUTY, CESS OR FEE (BY WHATEVER NAM E CALLED) ACTUALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CONDITION AS ON THE DATE OF VALUATION. EXPLANATION . FOR THE PURPOSES OF THIS SECTION, ANY TAX, DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) UNDER ANY LAW FOR THE TIME BEING IN FORCE, SHALL INCLUDE ALL SUCH PAYMENT NOTWITHSTANDING ANY RIGHT ARISING AS A CONSEQUENCE TO SUCH PAYMENT; ( B ) INTEREST RECEIVED BY AN ASSESSEE ON COMPENSATION OR ON ENHANCED COMPENSATION, AS THE CASE MAY BE, SHALL BE DEEMED TO BE THE INCOME OF THE YEAR IN WHICH IT IS RECEIVED . ] 14.1 FROM THE PERUSAL OF THE ABOVE, IT IS CLEAR THAT FOR THE PURPOSE OF VALUATION OF CENVAT, ADJUSTMENT ON AC COUNT OF TAX, DUTIES, CESS OR FEE ACTUAL PAID OR INCURRED BY THE ASSESSEE HAS TO BE MADE. THE EXCISE COMPONENT IN VARIOUS ITEMS OF RA W MATERIALS, PACKAGING MATERIALS, STORES ETC. HAS TO BE INCLUDED IN THE CLOSING STOCK AND ALSO THE EXCISE COMPONENT IN WORK-IN-PROGRESS, AS IT HAS DIRECT BEARING IN THE COST OF MANUFACTURING AND CONSEQUENTLY THE VAL UATION OF STOCK. HOWEVER, THERE IS A DISTINCTION IN THE CASE OF E XCISE DUTY PAYABLE ON FINISHED GOODS AS THE LIABILITY CRYSTALLIZES ON THE DATE WHEN THE GOODS ARE CLEARED AND NOT ON THE DATE OF MANUFACTURING. TILL THE DATE OF CLEARANCE THE ASSESSEE CANNOT BE SAID TO HAVE INCURRED THE EXCISE DUTY LIABILITY IN RESPECT OF THOSE GOODS LYING IN THE STOCK TILL DATE OF CLEARANCE OF SUCH GOODS. SIMILARLY, VAT IS APPLICABLE AT THE TI ME OF SALES AND IT CANNOT BE TAKEN ITA NOS : 6629&6729/MUM/2010 17 INTO CONSIDERATION FOR THE VALUATI ON OF THE CLOSING STOCKS OF FINISHED GOODS AS ITS LIABILITIES CRYSTALLIZES ONCE THE SALE HAS BEEN MADE. TO THIS EXTENT, JUDGMENT OF HONBLE JURISDI CTIONAL HIGH COURT IN THE CASE OF CIT VS. LOKNETE BALASAHEB DESAI S.S. K. LTD., REPORTED IN (2011) 339 ITR 288 (BOM) AS RELIED UPON BY THE AR IS SQUARELY APPLICABLE. HOWEVER, THE SAID JUDGMENT WOULD NOT BE APPLICABLE IN THE CASE WHERE THERE IS A LEVY OF MODVAT OR C ENVAT ON RAW MATERIALS, PACKAGING MATERIALS AND COST OF OTHER MATERIALS AS IT IS THE PART OF PRODUCTION COST WHICH HAS TO BE VALUED IN THE WORK -IN-PROGRESS AND CLOSING STOCK. THE REASONING GIVEN BY THE ASSESSING OFFICE R AS WELL AS THE CIT(A) TO THIS EXTENT IS ABSOLUTELY CORRECT. HOWEVER, THE ASSESSING OFFICER IS DIRECTED TO SEGREGATE THE EXCISE DUTY ON FI NISHED GOODS LYING IN THE STOCK AND ALSO VAT IN VIEW OF THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT. GROUND NO.4 IS DISPOSED OFF ACCORDINGLY . 15 . THE ALTERNATIVE CLAIM MADE BY THE ASSESSEE IN GROUND NO.5 IS THAT CORRESPONDING ADJUSTMENT HAS TO BE MADE IN THE OPENING STOCK, IF SUCH EXCISE DUTIES ARE TAKEN INTO CLOS ING STOCK, IS FULLY JUSTIFIED IN VIEW OF THE DECISION OF THE HONBLE JURISD ICTIONAL HIGH COURT IN THE CASE OF CIT VS. MAHALAXMI GLASS WORKS (P) LTD., REPORTED IN 318 ITR 116 (BOM) , WHEREIN THE HONBLE HIGH COUR T RELYING UPON THE DECISION OF DELHI HIGH COURT IN THE CASE OF CIT VS. MAHAVIR ALUMINIUM LTD., REPORTED IN 297 ITR 77 , HELD THAT IF ANY ADJUSTMENT SHALL REQUIRE TO BE MADE BY THE STATUTE, THE EFFECT S HOULD BE GIVEN TO IT COMPLETELY AND ITA NOS : 6629&6729/MUM/2010 18 THERE MUST NECESSARILY BE CORRESPONDING ADJUSTMENT MADE IN THE OPENING STOCK ALSO. WE, THEREFORE, DIRE CT THE ASSESSING O FFICER TO MAKE SIMILAR CORRESPONDING ADJUSTMENT OF THE OPENING STOCK AS ON 1-4-2006. IN THE RESULT, GROUND NO.5 IS ALLOWED . 16 . IN GROUND NO.6, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF EMPLOYEES CONTRIBUTION TO PROV IDENT FUND AND ESI AMOUNTING TO ` .24,768/- AND ` .3751/- RESPECTIVELY. LEARNED AR SUBMITTED THAT THERE WAS ONLY A MARGINAL DELAY AND THE SAME WERE PAID BEFORE THE DUE DATE OF RETURN. IN VIEW OF THE SETTLED PRIN CIPLE OF LAW LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. ALOM EXTRUSION LTD, REPORTED IN 319 ITR 306 , THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE SAME AFTER VERIFICATION. IN THE RESULT, GROUND NO.6 IS ALLOWED. 17. ACCORDINGLY, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. 18. THE DEPARTMENT IN ITS APPEAL I.E. ITA NO.6729/M/2010, HAS RAISED THE FOLLOWING GROUNDS :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE OF THE CIT(A) ERRED IN LAW IN HOLDING THAT THE NET PROFIT PERCENTAGE AT 9.9% IS NOT APPLICABLE TO THE TURNOVER OF EACH UNIT WHEN COMPUTING THE PROF ITS ELIGIBLE FOR DEDUCTION U/S.80IB. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE OF THE CIT(A) ERRED IN LAW IN HOLDING THAT INDIRECT EXPENSES HAVE TO BE APPORTIONED IN RATIO OF GROSS SALES AND JOB WORK CHARGES. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE OF THE CIT(A) WAS JUSTIFIED IN NOT APPRECIATING THAT THERE IS AN ITA NOS : 6629&6729/MUM/2010 19 IMMENSE DIFFERENCE IN THE PROFITS RATIO OF THE UNIT ELIGIBLE FOR DEDUCTION U/S 80IB AND OTHER UNITS MANUFACTURING SIMILAR ITEMS. 4. THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE GROUNDS TO BE SET ASIDE AND THAT OF THE AO RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND THAT MAY BE NECESSARY. 19 . THE AFORESAID ISSUE HAS ALREADY BEEN DISCUSSED IN DETAIL WHILE DECIDING THE GROUND NO.2 IN THE APPEAL OF THE ASSESSEE. IN VIEW OF THE REASONING GIVEN IN THE ASSESSEES APPEAL AND THAT TO THE EXTENT OF GROUNDS RAISED BY THE DEPARTMENT, THERE IS NO INFIRMITY IN THE REASONING AND FINDING GIVEN BY THE CIT(A). THUS, THE GROUNDS RAISED BY THE DEPARTMENT ARE TREATED AS DISMISSED. 20. IN THE RESULT, APPEAL FILED BY THE DEPARTMENT IS DISMISSED . ORDER PRONOUNCED ON THIS 16 TH DAY OF MAY, 2012. ( P.M.JAGTAP ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DT: 16 TH MAY, 2012 PKM COPY FORWARDED TO : 1. THE APPELLANT, 2. THE RESPONDENT, 3. THE C.I.T. 4. CIT (A) 5. THE DR, B - BENCH, ITAT, MUMBAI //TRUE COPY// ITA NOS : 6629&6729/MUM/2010 20 BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI