M/S RIMJHIM ISPAT LTD. V. COMMISSIONER OF INCOME TAX AND ANOTHER

IAPL/307/2015

AI Insights

The case involves M/S Rimjhim Ispat Ltd., which appealed against the order of the ITAT, Lucknow, concerning an ad-hoc disallowance of 10% on 'Consumable Stores' claimed in their tax return for the Assessment Year 2001-02. The assessee had reported a substantial increase in expenditure on consumables without a corresponding increase in production or turnover, which raised suspicions. The assessing officer (AO) disallowed 10% of the claimed expenditure after finding no supporting evidence for such a high claim. Both the CIT(A) and the ITAT upheld this decision after examining the records and finding inconsistencies in the assessee's claims. The ITAT's decision was based on the comparative analysis of the assessee's expenditure on consumables and their production and turnover over the years, which showed a disproportionate increase in consumables expenditure.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 763041 (HC-LUCKNOW)
• Appeal Type: Others
• Pronouncement Date: 14-08-2018
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: KRISHNA AGRAWAL
• Assessee Lawyers: SUYASH AGARWAL
• Keywords: Adhoc disallowance; Consumable Stores; Income tax appeal; Manufacturing; Modvat
• Section: 144; 143(3); 142(1); 143(2); 145; 260-A

Judgement Text

"1 Reserved Case :- INCOME TAX APPEAL No. - 307 of 2015 Appellant :- M/S Rimjhim Ispat Ltd. Respondent :- Commissioner Of Income Tax And Another Counsel for Appellant :- Suyash Agarwal Counsel for Respondent :- Krishna Agrawal Hon'ble Bharati Sapru,J. Hon'ble Dinesh Kumar Singh,J. (Per Hon'ble Dinesh Kumar Singh,J.) 1. The present Income Tax Appeal has been filed by the assessee under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') against the order dated 30.7.2015 passed by the Income Tax Appellate Tribunal, Lucknow Bench 'B' Lucknow in ITA No. 443/LKW/2013 in respect of the Assessment Year 2001-02. 2. The following questions of law have been formulated for consideration and decision by this Court:- “(I) Whether the ITAT was legally justified in making adhoc disallowance to consumable stores being part of manufacturing while accepting the manufacturing and trading results when there is no such provision in law under the Income Tax Act, 1961 to make partial disallowance on ad-hoc basis without rejecting books of accounts? (II) Whether the ITAT was correct in law in confirming the ad-hoc disallowance solely by taking percentage basis of consumption stores consumed in succeeding year ignoring the facts that the assessee is registered with the excise department maintaining proper records prescribed under the excise law and availing MODVAT on consumption of stores has not been doubted by Excise Department?” 3. The assessee, a company registered under the Companies Act, 1956 carries on the business of manufacturing and trading of iron and steel items such as MS and SS Scrap, Shape and Section etc. The assessee filed its return of income disclosing loss of Rs.7,52,01,250/- on 31.10.2001 for Assessment Year 2001-02. The case was selected for scrutiny and a notice under Section 143(2) of the Act dated 30.10.2002 was issued. Thereafter, notice under Section 142(1) of the Act was issued on 15.11.2002. From examination of the books of account the 2 assessing officer noticed that in the Profit and Loss account the assessee had claimed an expenditure amounting to Rs.13,16,00,830/- under the head ''Consumable Stores'' as against Rs. 5,79,67,751/- claimed in the immediate preceding year. However, the activities of the assessee remained the same as was in the immediate preceding year. No supporting evidence for claiming this amount towards “consumable stores” was produced by the assessee before the AO. The AO also recorded a finding of the fact that the expenses claimed under this head were also incurred in cash. In absence of evidence to establish the claim of “Consumable Stores”, 10% of the expenses claimed under this head was disallowed and thus, Rs.1,31,60,083/- was disallowed by the AO inter alia other disallowances which were not questioned by the assessee. 4. Aggrieved by the aforesaid assessment order dated 31.03.2004 passed by the AO under Section 143(3) of the Act, the assessee filed an appeal before the CIT(Appeals)-I, Kanpur. The CIT(A) vide his order dated 28.03.2013 held that bills and vouchers were neither produced before the AO nor before the Commissioner himself. No stock register for such consumables was maintained. The CIT(A) also held that the assessee had failed to offer any plausible explanation in respect of disproportionate rise in the expenditure incurred on consumables as compared to the increase in sales/production. The CIT(A) was of the view that merely because most of the payments were made by the cheque (as claimed by the assessee) the same would not itself prove the case of the assessee. The CIT(A) held that in the next year i.e. for Assessment Year 2002-03, the total turn over was increased to Rs. 92.93 crores as against current years' turn over (including trading) Rs. 57.00 crores; whereas the consumables had increased to only Rs. 14.86 crores in the Assessment Year 2002-03 from 13.16 crores in the current year. The CIT(A) did not believe the explanation for claim regarding “Consumable Stores”. 5. The CIT(A) also noticed that production of Iron and Steel products 3 had only a minor increase from 23,500 M.T. in the Assessment Year 2000-01 to 26,587 M.T. in the current assessment year, whereas the consumables had increased by more than 100% and same could not be explained by the assessee. The CIT(A) was of the view that the AO had been quite generous in disallowing 10% of assessee's claim of Rs.13.16 crores in respect of “Consumable Stores”. The CIT(A) dismissed the appeal and confirmed disallowanace. 6. Aggrieved by the aforesaid order of the CIT(A), the assessee filed the second appeal before the Income Tax Appellate Tribunal. The Tribunal also after examining and comparing the consumables and productions, came to the conclusion that increase in consumables from the Assessment Years 2000-01 to 2001-02 was around 127% whereas the increase in the turn over was merely 15%. Vide the impugned order the Tribunal had dismissed the appeal and affirmed the orders passed by the authorities below. 7. Heard Sri Suyash Agrawal, learned counsel for the assessee and Sri Krishna Agrawal, learned counsel for the Revenue. 8. The appellant-assessee in support of its claim in respect of consumable stores did not produce any supporting evidence either before the AO or before the CIT(A) or before the Tribunal. All three authorities including ITAT, which is the last fact finding authority under the Act have concurrently held that the appellant-assessee could not substantiate its claim for such a high rise in the expenditure on this account if it was considered with the expenditure on this head incurred in the immediate preceding financial year. The learned CIT(A) as well as the learned Tribunal have made comparative study of the expenditure incurred on “consumable stores” and turn over of the assessee for preceding and subsequent assessment years with the assessment year involved in the present appeal i.e. 2001-02. The authorities have found that more 100% increase of expenditure on this account was not justified whereas the turn over was increased marginally. 4 9. We find that the issues raised in the appeal are only questions of fact and no question of law is involved. All three authorities have concurrently held after examining the facts, evidence and material on record that the assessee was unable to substantiate its claim for exponentially increase in the expenditure on consumables. It was permissible for the AO to reject the books of account under Section 145 of the Act and pass assessment order under Section 144 of the Act. Instead, the AO had disallowed the claim of expenditure on “Consumable Stores” only 10%. The assessee is not prejudiced in any manner in not resorting to the best judgment assessment by the AO. When the assessee had failed to substantiate its claim for more than 100% rise in expenditure on “Consumable Stores” if compared with the immediate preceding year whereas the production was increased marginally, the AO taking a liberal view of the matter had disallowed only 10% of the expenditure on “Consumable Stores”. We therefore, do not find anything illegal or incorrect in the orders passed by the AO and affirmed by the CIT(A) and ITAT. 10. We thus, uphold the order passed by the ITAT and dismiss this appeal. The questions of law as framed are answered against the assessee and in favour of the Revenue. Order Date :- 14.08.2018 sushama "