Commissioner of Incometax-CI, V. M/s. Shaiko Tanners AND Exporters,

ITTA/561/2012

AI Insights

This case involves an appeal by the Revenue against the order of the Income Tax Appellate Tribunal, Hyderabad, which partly allowed the appeal of the respondent, a firm engaged in tanning and manufacturing leather garments. The primary issues revolved around the disallowance of expenditure on imported chemicals and the addition for cash purchases of raw skins under Section 40A(3) of the Income Tax Act. The Tribunal found that the respondent had not claimed excessive expenditure on raw material purchases and that the cash purchases were made in compliance with the statutory requirements, as per the exceptional category covered by Rule 6DD.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 737267 (HC-HYDERABAD)
• Appeal Type: Others
• Pronouncement Date: 19-12-2012
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Keywords: Assessment Year; Cash purchase; Cost of Goods; Imported Chemicals; Income Tax; Manufacturing process; Violation of Section 40A(3); Export Quality Leather
• Section: 148; 40A(3); 80HHC; 234 A; 234 B; 260-A

Judgement Text

"HONOURABLE SRI JUSTICE GODA RAGHURAM AND HONOURABLE SRI JUSTICE M.S.RAMACHANDRA RAO I.T.T.A.No.561 of 2012 JUDGMENT (per Hon’ble Sri Justice M.S.Ramachandra Rao): This appeal is filed under Section 260-A of the Income Tax Act, 1961 (for short ‘the Act’) by the Revenue challenging the order dated 30-11-2007 in I.T.A.No.470/Hyd/1998 of the Income Tax Appellate Tribunal, Hyderabad Bench “B”, Hyderabad for the assessment year 1992-93. 2. The respondent is a registered firm doing business in tanning of semi-finished skins and manufacture of leather garments. It purchases raw skins and gives them for processing into finished leather by a sister concern M/s.Shaiko Mohammad and Co. Thereafter the semi-finished skins are processed into fully finished leather by the respondent and used for manufacture of garments. 3. The respondent did not file returns after assessment year 1990-91. The assessing officer issued notice dated 05-08-1993 under Section 148 of the Act and survey was also conducted. The respondent filed return on 09-01-1996 showing total income of Rs.12,560/- for assessment year 1992-93. 4. By order dated 29-03-1996, the Assessing Officer assessed the total income of the respondent for the assessment year 1992-93 as Rs.60,29,200/- and held that the respondent is liable to pay tax with surcharge and interest under Section 234-A and 234-B of the Act. 5. Aggrieved thereby, the respondent filed an appeal to the CIT (Appeals). In the appeal, the respondent contended that the assessing officer erroneously made certain additions to its income and disallowed claims for deduction under Section 80HHC. By order dated 30-03-1998, the CIT (Appeals) held: i) that the assessing officer erred in rejecting the entire claim of the respondent of Rs.39,46,202/- towards cost of imported chemicals for manufacturing/processing of its goods; that he erred in holding that such imported chemicals were not necessary for manufacturing export quality leather; although it is just to allow the cost of imported chemicals in proportion to the production of export quality finished leather for own use and also on job work basis, the addition of such amount can be sustained considering the cost of imported chemicals per piece; that for 1992-93 it would be reasonable to allow Rs.7.00 lakhs as the cost of imported chemicals and the order of the assessing officer for the balance of Rs.32,46,202/- is confirmed; ii) that the Assessing Officer had estimated profit on sale of imported chemicals @ 10% of the sale price arrived at by adding certain percentage of profit; that this does not warrant any modification and Rs.3,24,620/- should be added as profit on sale of imported chemicals for the assessment year 1992-93. iii) that the finding of the Assessing Officer that all purchases of raw skins are bogus is not correct; that purchases in cash for Rs.3,60,000/- were made in violation of Section 40A (3) of the Act; therefore instead of Rs.4,21,697/- held by the assessing officer as disallowance, only Rs.3,60,000/- is to be the disallowance and this amount has to be added to the income of the assessee; iv) that the Assessing Officer erred in disallowing relief to the tune of Rs.58,21,223/- for 1992-93 claimed by the respondent under Section 80 HHC; that although before the assessing officer, the respondent did not produce evidence regarding receipt of sale price of the export items in convertible foreign exchange, before the CIT (Appeals), for 1991-92, a certificate from State Bank of Hyderabad was filed showing collection of export proceeds by the Bank and although such certificate was not produced for 1992-93, the assessing officer should call for those details and allow the claim keeping in view the observations made by the CIT (Appeals) for the assessment year 1991-92. 6. Aggrieved thereby, the respondent filed appeal before the Tribunal in ITA.No.470/Hyd/1998. By order dated 30-11-2007, the Tribunal partly allowed the appeal. It held that: i) In respect of purchase of imported chemicals, the CIT(Appeals) erroneously held that addition can be sustained considering the cost of imported chemicals per piece which is contrary to his own finding at para 14.3 of his order that the cost of imported chemicals in proportion to the production of export quality finished leather for own use and also on job work basis should be taken; that it was not the case of the Assessing Officer that the respondent had purchased imported chemicals/raw material and did not account for it in the books of accounts; that the case of the Revenue is that the respondent has accounted for the purchases, but the same was not used for the manufacture/processing of goods and were sold outside the books; that by applying GP formula, it can be known whether the imported chemicals/raw material were used in the manufacturing/processing or not; that the GP declared by the respondent for 1992-93 is normal and routine as compared to the earlier years; and therefore the addition on account of excess raw material/chemicals use of Rs.32,46,202/- is not warranted; ii) that for assessment year 1986-87 to 1990-91, the Assessing Officer had made assessments by disallowing only 8% of the imported chemicals as not utilized for the purpose of processing; that disallowance to the extent of 8% of cost of imported raw material of Rs.39,46,202/- = Rs.3,15,696/- is only warranted and not 10% as held by the assessing authority and the CIT (Appeals); iii) that the addition of Rs.3,60,000/- for the assessment year 1992-93 to the income of the respondent under Section 40A (3) of the Act on account of cash payment for purchase of raw skins made by the CIT (Appeals) is not warranted; that in respect of the cash purchases, the respondent had established the identity of the persons and the suppliers were registered with the concerned sales tax authorities; that CBDT circular No.220 dated 31-05-1977 covers the case of the respondent and in view of the said circular and as the respondent had filed full particulars of the seller, his address, sales tax registration number etc., his case falls in the exceptional category covered by Rule 6DD; and that as both the parties were also commission agents, no addition on this count is warranted. 7. Challenging the same, the Revenue has filed the present appeal. 8. Heard Sri S.R.Ashok, learned Senior Standing Counsel for the Income Tax Department at the stage of admission. 9. The learned counsel for the Revenue contended that the order of the Tribunal is contrary to law; that the respondent was not able to produce any evidence whatsoever for transport of imported chemicals from Madras to its unit at Warangal, much less user of the said chemicals in the manufacturing process; therefore the disallowance by the CIT (Appeals) of expenditure to the extent of value of the imported chemicals of Rs.32,46,202/- ought to have been upheld by the Tribunal and it could not have deleted the said amount from the computation of income of the respondent; that the Tribunal erred in restricting disallowance to 8% of the purchase cost of the imported chemicals ; that the Tribunal should have sustained the addition of Rs.3,24,620/- being 10% of the purchase costs of the imported chemicals of Rs.32,46,202/-; that the Tribunal erred in deleting the addition under Section 40A(3) of the Act in respect of purchases of skins allegedly made from one M/s.Parveen and Co., Pune; that the Tribunal erred in deleting the addition of Rs.3,16,000/- for the above reason in spite of admitted omission of non-compliance with the statutory requirement under Section 40-A (3) of the Act ; and it should not have granted relief relying upon the Board’s Circular No.220 dated 31-05-1977. 10. We are unable to agree with the counsel for the Revenue. We are of the view that the Tribunal has given cogent reasons in support of its order. On the deletion of Rs.32,46,202/- made by the Assessing Officer towards disallowance of expenditure on purchase of imported chemicals which was set aside by it, the Tribunal had relied upon the finding of the CIT (Appeals) that cost of imported chemicals should be allowed in proportion to the production of the export quality finished leather for own use and also on job work basis (which had not been challenged by the Revenue before the Tribunal) and also the percentages of GPs worked out for the previous years and concluded that the respondent had not claimed excessive expenditure on account of raw material purchases and therefore addition on this count is not warranted. It had allowed an addition @ 8% only on Rs.39,46,202/- for the assessment year 1992-93 instead of 10% as proposed by the CIT (Appeals) on the ground that it is only a question of estimation of amount of profit on sale of imported chemicals. Admittedly, the Revenue had not questioned the basis of assessment by the CIT (Appeals) in the Tribunal. So, in our view, it cannot challenge the change of rate from 10% to 8% adopted by the Tribunal without any material in support thereof. Even with regard to the amount of Rs.3,60,000/- added by the CIT (Appeals) on account of violation of Section 40A (3) for cash purchase of raw skins which was deleted by the Tribunal, the said deletion is based upon a finding of fact by the Tribunal that the respondent had established the identity of the sellers with address and sales tax registration numbers in which event the CBDT Circular No.220 dated 31-05-1977 would cover his case by bringing it under the exceptional category covered by Rule 6DD. We do not consider that the order of the Tribunal suffers from any error or perversity nor do we find that it is based on non- consideration of material evidence. In our opinion, it had rightly considered and appreciated the evidence on record for recording its conclusions. There is no substantial question of law arising for consideration in this appeal. 11. Accordingly the appeal fails and is dismissed but in the circumstances, without costs. ____________________________ JUSTICE GODA RAGHURAM __________________________________ JUSTICE M.S.RAMACHANDRA RAO Date:19-12-2012 Kvr "