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Sourashtra Ferrous P Ltd. Versus ITO, Wd 9 (2) (2) , Mumbai And Vice-Versa

2017 (12) TMI 535 - ITAT MUMBAI

Addition made on account of share application money u/s 68 - Held that:- Assessee has all necessary evidence right from Foreign Inward Remittance certificate to application filed with Forex department of RBI to justify allotment of equity shares and receipt of share application money from M/s Great Value Company Ltd of Mauritius. Once the initial burden cast upon the assessee to prove the identity, genuineness of transactions and creditworthiness of the parties is established, then it is for the .....

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to AY 2007-08, in the impugned assessment year, that too, when the assessee has proved all the three ingredients of section 68. The Ld.AO, except for finding fault with the evidence filed by the assessee and disbelieving the same has not been able to add any evidence or information to come to the conclusion that the assessee has not received share application money from the subscriber. The CIT(A), after considering all the evidences filed by the assessee, has rightly deleted addition made by th .....

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he basis of input credits for excise duty claimed in the month of March has come to the conclusion that all assets are purchased and put to use for less than 180 days.. The assessee has filed depreciation chart as per which it has capitalised plant & machinery and other asses of ₹ 13,12,87,037 before 30th September, 2007. There is no evidence to the contrary in the AOs possession that plant & machinery was put to use after 30th September, 2007 except input credit availed in March, 2008 whi .....

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lding that it is in the nature of capital expenditure. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. - Disallowance of interest paid on cash credit u/s 43B(e) - Held that:- The provisions of section 43B(e) provides for disallowance of interest on loans or advances if such interest is not paid on or before the due date of furnishing return of income. Further Explantion 3D explains the position of law provided in section 43B(e) so as to clarify the .....

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made towards excise duty (PLA) shown as loans and advances - as per AO assessee has not made suitable adjustments towards unutilised Modvat credit for valuation of closing stock - Held that:- No merit in the findings of the AO for the reason that there is nothing on record to indicate that the assessee has not considered unutilised input tax credit for valuation of closing stock. The assessee has furnished a certificate from the auditors to the effect that closing stock has been valued includin .....

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see has rightly deleted addition made by the AO. - Addition towards excise duty credits in the P&L Account within the meaning of section 145(3) - AO, on the basis of notes to accounts came to the conclusion that excise duty collected is in the nature of receipt accrued to the assessee, but the assessee has failed to recognise it as income - Held that:- We do not find any merit in the findings of the AO for the reason that the assessee has collected excise duty on sales and paid the same to .....

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excise duty. - TDS u/s 194C - Non deduction of tds on transportation charges paid - addition u/section 40(a)(ia) - Held that:- We find that the CIT(A) has recorded a categorical finding to the effect that the impugned payment is covered by the certificate furnished by the assessee u/s 197 of the Act, for non deduction of tax at source u/s 194C. The AO, without appreciating the facts, simply disallowed transportation charges u/s 40(a)(ia) even though the assessee has furnished valid certifi .....

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authorities have contemplated any action on so-called suppressed production and there is not an iota of evidence to suggest that the assessee has sold produce of finished goods, outside books of account. In the absence of any incorrectness as to books of account and stock registers, merely on the basis of comparison of production percentage of finished goods addition cannot be made for production loss, despite, the assessee explains the reasons for such production and also filed reconciliation e .....

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ory lines of blast furnace. The assessee only regained its lost production capacity by repairing refractory lines. Therefore, the lower authorities were completely erred in treating the repairs and maintenance to plant and machinery being capital in nature. Hence, we direct the AO to delete addition made towards repairs and maintenance to plant & machinery. - I.T.A No.8806/Mum/2011 And I.T.A No.549/Mum/2012 - Dated:- 8-12-2017 - Shri Joginder Singh(JUDICIAL MEMBER And Shri G Manjunatha (ACCOUNTA .....

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ts return of income for the assessment year 2008-09 on 26-09-2008 declaring total loss of ₹ 3,15,83,056. The case was selected for scrutiny and notices u/s 143(2) and 142(1) were served on the assessee alongwith a questionnaire. In response to the notices, the authorized representative of the assessee appeared from time to time and furnished details, as called for. The assessment was completed u/s 143(3) on 27-12-2010 determining total income at ₹ 49,36,78,420, interalia making addit .....

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en submissions on various additions / disallowances made by the AO. The CIT(A), for the detailed reasons recorded in his order dated 30-11-2011 deleted additions made by the AO towards share application money u/s 68, disallowance of depreciation on fixed assets, disallowance of interest u/s 36(1)(iii) and u/s 43B, addition made by the AO towards excise duty u/s 145A, addition on account of excise duty credits in balance-sheet u/s 145(3), addition towards expenses u/s 40(a)(ia) for failure to ded .....

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assessee as well as the revenue are in appeal before us. 4. The revenue has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition made on account of share application money amounting of ₹ 8,51,26,250/- within the meaning of section 68 of the Act.. 2 On the facts and in the circumstances of the case and law, the CIT(A)erred in deleting the addition made on account depreciation amounting of ₹ .....

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ning of Explanation 3D to the section 4313(e) of the Act: 5. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition made on account of disallowance of repairs & Maintenance being Capital expenditure of ₹ 15,86,633/- without providing an opportunity in accordance to the Income tax rule 46A. 6. On the facts and in the circumstances of the case and law, the CIT(A) erred in deleting the addition made on account of excise duty towards cost o .....

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of within the meaning of Section 40(a)(ia) of the Act. 9. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition made on account of reduction of production amounting of ₹ 21,65,77,838/- by rejecting the books of account ' u/s.145 of the Act. 10. On the facts and in the circumstances of the case and law, the Ld CIT(A) erred in admitting additional evidences despite submitting remand report and against Rule 46A IT rules 1962 11. The appe .....

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lue Company Ltd of Mauritius. The assessee has received a sum of ₹ 8,51,26,250 from M/s Great Value Company Ltd of Mauritius in the financial year relevant to assessment year 2007-08. The assessee has allotted equity share of ₹ 10 each at a premium of ₹ 190 per share. During the course of assessment proceedings, the AO called upon the assessee to furnish complete details of source of funds, nature of receipts, statutory approval and justification for basis of charging share pre .....

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pies of statutory forms filed with Registrar of companies. The AO, after considering relevant submissions and also considering various facts observed that the assessee company has totally failed to justify issue of shares and also charging share premium from time to time. The AO further observed that the assessee has not been able to prove beyond reasonable doubt the creditworthiness of the party and genuineness of transaction. Although the assessee has submitted address of shareholder, copy of .....

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ement and also the basis of valuation as stated to be on the basis of management projection of finance for the period from FY 2007-08 to 2011-12. These finances are only projections and estimates and without reference to any past records and audited financial statements of the assessee company. The value has not conducted any due diligence or no independent verification of the facts and the figures provided in the data given by the management. Though the assessee has followed discounted cash flo .....

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has failed to establish genuineness of transactions and creditworthiness of the parties and hence, made addition towards share application money received from M/s Great Value Company Ltd of Mauritius u/s 68 of the Income-tax Act, 1961. 6. The Ld. DR submitted that the Ld.CIT(A) erred in deleting addition made by the AO towards share application money without appreciating the facts that the assessee has failed to discharge onus cast upon it u/s 68 of the Act, by discharging genuineness of transa .....

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arging identity by filing confirmation from subscriber and furnishing bank details for having transferred fund through banking channel will not be a sufficient compliance of section 68 of the Act. To escape from the clutches of provisions of section 68 of the Act, the assessee has to prove identity, genuineness of transaction and creditworthiness of the parties. In this case, no doubt, the assessee has discharged identity of the party, but failed to prove the genuineness of transactions and cred .....

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received share application money of ₹ 8,51,26,250 on three occasions, i.e. on 18-04- 2006; 27-12-2006; and 31-03-2007 which is evident from the fact that the said money has been credited into HDFC Bank Ltd, Lower Parel Branch in US$. The assessee has filed various details including application filed before RBI for approval of allotment of equity shares to non-resident alongwith foreign inward remittance certificate. Therefore, there is no reason for the AO to doubt the genuineness of trans .....

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hould be upheld. The Ld.AR referring to the decision of Delhi High Court in the case of CIT vs Usha Stud Agricultural Farm 301 ITR 385 (Del) and the decision of the Apex Court in the case of CIT vs P Mohanakala 291 ITR 228 submitted that addition cannot be made towards credits received in the earlier year u/s 68 of the Income-tax Act, 1961. 8. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The facts with regard to the re .....

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M/s Great Value Company Ltd of Mauritius on 08-04-2006, 27-12-2006 and 31-03-2007. The assessee also filed various details including share application form, confirmation from subscriber, CA s certificate for valuation of shares, application filed with RBI for approval of allotment of equity shares to NRI, Board resolution for charging premium and statutory form filed with registrar of companies for increase in share capital and allotment of equity shares. The AO has not disputed all these eviden .....

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ditions where any sum is found credited in the books of account of an assessee maintained for any previous year and the assessee, offers no explanation about the nature and source thereof, or the explanation offered by him is not in the opinion of the AO satisfactory, the sum so credited may be charged to income-tax as income of the assessee of that previous year. A plain reading of section 68 makes it clear that any sum found credited in the books of account of the assessee shall be treated as .....

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al Farm Ltd (supra), wherein it was held that the AO was incorrect in making addition towards credit balances in the accounts of the assessee brought forward from earlier years u/s 68 of the Act. In this case, the assessee has received share application money in the financial year relevant to AY 2007-08 and converted such share application money into share capital by allotting equity shares during the relevant financial year 2007-08. Therefore, we are of the view that the AO was incorrect in mak .....

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The assessee has received share application money from M/s Great Value Company Ltd of Mauritius through proper banking channel and the evidence of which has been furnished before the AO. The assessee also filed details of application filed before the RBI for approval of allotment of equity shares to non resident. The assessee also filed Foreign Inward Remittance certificate issued by HDFC Bank Ltd, Lower Parel Branch, which contains the name and address of the subscriber. The assessee also filed .....

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tity, capacity and genuineness of the transaction and creditworthiness of the parties which is material, when one has to invoke section 68 of the Act. By merely holding that the assessee has not been able to prove the same beyond reasonable doubt will not suffice, when there is no adverse material with the AOs possession to justify it. The assessee has discharged its initial onus and it was for the AO to come up with something incriminating / adverse material to shift the onus back to the assess .....

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reat Value Company Ltd of Mauritius and allotment of equity shares. Thereafter the assessment was completed u/s 143(3) by the AO wherein the addition in respect of share application money was accepted. During current assessment proceedings also, the assessee has filed various details to prove identity of the subscriber, genuineness of the transaction and the creditworthiness of the subscriber. The assessee also filed all necessary evidence right from Foreign Inward Remittance certificate to appl .....

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on only on the basis of higher share premium charged by the assessee to conclude that transaction is not genuine. Therefore, we are of the considered view that there is no reason of whatsoever to make addition towards share application money received from M/s Great Value Company Ltd of Mauritius in the financial year 2006-07 relevant to AY 2007-08, in the impugned assessment year, that too, when the assessee has proved all the three ingredients of section 68 of the Act. The Ld.AO, except for fin .....

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lusion that the addition u/s 68 cannot be invoked in the year under consideration. Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue. 11. The next issue that came up for our consideration is addition made by the AO towards disallowance of depreciation amounting to ₹ 381,07,407 within the meaning of section 32 of the Act. The AO disallowed depreciation claimed by the assessee @50% of actual depreciation on the ground that assets were put to .....

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than 180 days and less than 180 days were furnished to the AO with copies of bills. The assessee further contended that the AO, only on the basis of entries in the books of account in respect of treatment of input credit for excise duty in the month of March has come to the conclusion that all assets are put to use for less than 180 days and hence, assessee is eligible for 50% of actual depreciation without appreciating the bills and other evidences filed. 12. Having heard both the sides and co .....

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ating facts, only on the basis of input credits for excise duty claimed in the month of March has come to the conclusion that all assets are purchased and put to use for less than 180 days.. The assessee has filed depreciation chart as per which it has capitalised plant & machinery and other asses of ₹ 13,12,87,037 before 30th September, 2007. There is no evidence to the contrary in the AOs possession that plant & machinery was put to use after 30th September, 2007 except input cre .....

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e has borrowed term loan for acquisition of capital asset which is in the nature of capital expenditure. The AO further observed that except interest on term loan all interest expenditure are incurred for business as working capital requirements. The self admission of the assessee proves that term loan on which interest is paid has not been utilised towards working capital requirements. As such interest paid on term loan is not a revenue expense, but in the nature of capital expenditure. Accordi .....

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hich has commenced production in the financial year 2006-07. It is obvious that the AO has confused himself on this issue and not understood the law in proper perspective. 14. The Ld.DR submitted that the Ld.CIT(A) erred in deleting addition made by the AO towards interest paid on term loan without appreciating the fact that the assessee has borrowed term loan for the purpose of acquisition of capital assets, therefore, the AO was right in disallowing interest u/s 36(1)(iii) and 37(1) of the Act .....

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apital expenditure but not a revenue expenditure used for the purpose of business. We do not find any merit in the findings of the AO for the reason that as per the provisions of section 36(1)(iii) interest paid on loans borrowed for the purpose of business of the assessee is deductible irrespective of the fact that whether it is borrowed for the purpose of working capital or for acquisition of capital assets. Whether the assessee has taken term loan for acquisition of capital asset or working c .....

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ion made by the AO. We do not find any error in the order of the CIT(A), hence, reject ground raised by the revenue. 16. The next issue that came up for our consideration is disallowance of interest paid on cash credit accounting to ₹ 83,41,171 u/s 43B(e) of the Act. The AO disallowed interest on the ground that from the copy of bank statement filed in support of proof of payment of interest it was seen that the bank has debited interest to the CC account on regular intervals and thereby i .....

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3D thereto. Such interest is also not actually paid before filing return of income u/s 139(1). As such interest claimed in the P&L Account representing interest expenses towards cash credit account is inadmissible. 17. The Ld.DR submitted that the CIT(A) deleted addition made by the AO towards interest paid on CC account without appreciating the fact that the assessee has converted interest expenses into further loan without there being any actual payment of interest to bank which squarely c .....

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tions towards interest on CC account without appreciating the facts in right perspective whether such interest falls within the ambit of setion 43B(e) Explanation 3D of the Act. The provisions of section 43B(e) provides for disallowance of interest on loans or advances if such interest is not paid on or before the due date of furnishing return of income. Further Explantion 3D explains the position of law provided in section 43B(e) so as to clarify the position of interest actually paid or intere .....

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tly deleted addition made by the AO. We do not see any error in the order of the CIT(A); hence, we are inclined to uphold the order of the CIT(A) and reject ground raised by the revenue. 20. The next issue that came up for our consideration is addition made by the AO towards excise duty (PLA) of ₹ 42,30,010 shown as loans and advances. The AO made addition towards excise duty being personal ledger account balance shown in the loans and advances on the ground that the assessee has failed to .....

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dition made by the AO by holding that the AO s conclusions are without any basis that excise duty has not been included in the value of closing stock. The assessee has made advance payment of excise duty which has been kept in PLA account after all adjustments towards input credit and excise duty payable. The AO, without appreciating the fact only on suspicion and surmises made addition by invoking provisions of section 145. The assessee has furnished a certificate from auditors wherein they hav .....

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8377; 42,30,010 in the asset side of the balance-sheet under the head Personal Ledger Account . The AO made addition towards PLA balance on the ground that the assessee has not made suitable adjustments towards unutilised Modvat credit for valuation of closing stock. We do not find any merit in the findings of the AO for the reason that there is nothing on record to indicate that the assessee has not considered unutilised input tax credit for valuation of closing stock. The assessee has furnishe .....

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ered for valuation of closing stock. The CIT(A), after considering submissions of the assessee has rightly deleted addition made by the AO. We do not find any error in the order of the CIT(A); hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue. 22. The next issue that came up for our consideration is addition made by the AO towards excise duty credits in the P&L Account for ₹ 12,91,55,890 within the meaning of section 145(3) of the Act. .....

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ognised excise duty collected as its income and only for the purpose of tax payment it sought to differ. It is clearly not acceptable in mercantile system of accounting. Therefore, the AO made addition by invoking provisions of section 145(3) of the Act. 23. The Ld.CIT(A) deleted addition made by the AO by holding that this amount relates to goods sold, further strengthens the case that it does not relate to closing stock. An item sold can by no stretch of imagination be part of the closing stoc .....

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biting the excise duty paid to P&L Account and crediting excise duty collected to P&L Account has routed through balancesheet Account; however, for the purpose of disclosure in the financial statements shown excise duty collected as a separate item by reducing from the gross sales. This presentation is in accordance with the provisions of section 145(1) of the I.T. Act, 1961 and the AO was incorrect in adding excise duty collected as income of the assessee. 24. The Ld.DR submitted that t .....

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lected as income and hence, the AO was right in making addition and his order should be upheld. 25. The Ld.AR for the assessee, on the other hand, strongly supported the order of the CIT(A) and submitted that the Ld.AO failed to appreciate the presentation of accounts to make addition to excise duty collected on the ground that excise duty is not routed through P&L Account and such treatment is in violation of the provision of section 145(1) of the Act. Even going by the method of the AO, if .....

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rough the orders of authorities below. Admittedly, the assessee has shown excise duty collected on sales net of excise duty in its financial statements. The assessee has followed a method wherein the excise duty collected and paid has been routed through balance-sheet; however, shown excise duty collected as a separate item in P&L Account. The AO misconstrued the facts to make addition only on the basis of notes to accounts given in the financial statements wherein the assessee has stated th .....

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y merit in the findings of the AO for the reason that the assessee has collected excise duty on sales and paid the same to the excise department which is evident from the fact that the assessee has routed its excise duty collected on sales and payment of excise duty through balance-sheet. The assessee, for the purpose of disclosure of accounts in accordance with provisions of section 145(1) shown sales net of excise duty in the P&L Account. The AO misconstrued the facts to make addition towa .....

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addition towards transportation charges paid to M/s Delhi Assam Roadways Corporation Ltd on the ground that the assessee has failed to deduct tax at source u/s 194C of the Act. The AO further observed that in response to specific query, the assessee has submitted a certificate u/s 197 of the Act, submitted by the party for non deduction of tax at source. On going through the copy of the said certificate issued on 24-03-2008, it was observed that the said certificate was valid for the period 29-0 .....

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t. It is the contention of the assessee that it has paid gross amount of ₹ 6,23,99,417 to M/s Delhi Assam Roadways Corporation Ltd and deducted TDS of ₹ 12,24,764 for the period from 01-04-2007 to 20-02-2008. The payee has furnished certificate issued u/s 197 of the Act, for non deduction of tax at source for the period from 29-02- 2008 to 31-03-2008, therefore, it has not deducted TDS on payment made for the above period of ₹ 33,00,944. Therefore, the AO was incorrect in disal .....

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llowed transportation charges u/s 40(a)(ia) even though the assessee has furnished valid certificate issued u/s 197 of the Act. We do not find any error in the findings of the CIT(A); hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue. 29. The next issue that came up for our consideration is addition made by the AO on account of reduction in production of pig iron amounting to ₹ 21,65,77,838 by rejecting books of account u/s 145 of the Act. .....

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s not been able to explain reduction in production with necessary evidences. The AO further observed that though the assessee sought to explain the difference in production of finished products attributable to quality of raw materials utilised for production of pig iron and generation of by-product, there is no basis in the generation of by-products and production of pig iron. As such generation of by-product has appeared for the first time in the books of account of the assessee. The AO further .....

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eld of finished product percentage of it, shortage / excess, if any, and the relevant columns are kept blank. This itself shows that there is no such data or record maintained as on the date of tax audit. It is only when specific queries were raised, the assessee, with a view to avoid the crucial question has filed the cooked up details which are not backed by any genuine evidences. Though the assessee claims fines sold constitute 14.60% of total raw-material purchased and moisture and ash reduc .....

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t of quantity of 5742.27 m.t. for an amount of ₹ 6.48 crores, the said debit note is not supported by any documentary evidence. Therefore, the AO opined that the assessee was not able to explain difference in production of pig iron when compared to previous financial year and hence rejected books of account u/s 145(3) and estimated production loss at 11,738 M.T. and worked out total value at ₹ 21,65,77,838 and treated it as unaccounted sales for the year. 30. It is the contention of .....

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duction in production of pig iron. The assessee further submitted that during the year under consideration it is generated 22,675 m.t. of fines and sold for a value of ₹ 8.73 crores which is included in sales in the P&L Account. The assessee further submitted that due to moisture and ash content in LAM coke, there is a reduction of 5,742 m.t. which is included in consumption of raw materials. If you take into account sale of fines and moisture and ash content, then net consumption of r .....

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ses on the basis of comparison of production figures of previous financial years. 31. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The Ld.CIT(A) has dealt with this issue at paras 10 to 10.3.1.11 on pages 16 to 27 of his order, wherein he has extracted written submissions of the assessee as well as the point-wise explanation of the assessee to the observation of the AO in the assessment order. The Ld.CIT(A) also extrac .....

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plaining iron ore fines generated at the time of handling iron ores in segments. It is a kind of by-product of iron ore and not a separate raw material which has been sold. The CIT(A) further observed that if by-product of iron ore fines sold by assessee and the reduction in quantity of coke due to moisture and ash content is considered for the purpose of calculation of consumption of raw materials, the percentage of production of finished goods achieved by the assessee is in comparison with pre .....

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Ltd a company an exporters of such fines. The transportation of fines was arranged by M/s.Canara Overseas Ltd on which the appellant had no control. About 84% exports were made to China and the consideration has been credited to the Profit & Loss Account. The documentary evidence including sale bills, export docum.ants, auditor's certificate are placed on record and no discrepancy or adverse comments has been noticed. As such, the appellant's stand that said difference of 7.57% is on .....

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93327.160 As per assessee Finished Goods 2007-08 2006-07 Quantity (MT) Quantity (MT) Cast Iron 34,037 Pig Iron Articles 39715.975 27410.323 Skull 3293.885 3636.952 Slag 10678.278 8330.413 53688.138 39411.725 Yield (%) 42.39 42.23 10.3.9 Thus, even if the second issue of moisture in coal is not taken into account then also the yield is comparable. 10.3.10 However, the issue of moisture has also addressed. It is fact that moisture content is a factor whi le purchasing the coal f rom sister concer .....

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ching of coke employed by the appellant to cool it down and treated it in the range of around 5000 degree Celsius. In the above background, the moisture content taken at 3.70% by the appellant and mentioned by the Assessing Officer as a credit in calculation of yield by the appellant is very reasonable. 32. The AO has made addition towards estimated production loss on the basis of comparison of production of finished goods percentage of financial years 2006-07 to 2007-08 and found 7.75% reductio .....

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for a value of ₹ 8.73 crores. The assessee also explained that due to less moisture and ash contents, there is a reduction in quantity of 5742 m.t. in consumption of raw materials, and if both sale of fines quantity of 22675 m.t. and moisture and ash content of 5742 m.t. are considered, then the production percentage of pig iron works out to 42.39% which at par with 42.23% achieved in the previous financial year. The assessee has furnished relevant supporting documents for generation of b .....

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disputed by the lower authorities. The assessee has also filed auditor s certificate to support its case. 33. Coming to the issue of moisture content in coal used for production of pig iron moisture and ash content is an integral part of coal which depends upon quality of LAM coke. The moisture and ash content will never be uniform. The assessee had filed a copy of extract taken from website in respect of details of public company, M/s Vedanta which indicates that moisture and ash and volatile c .....

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produced by the assessee which were subjected to audit. The AO has also overlooked the basic fact that the finished products of the assessee are excisable and no finished goods are removed without payment of excise duty. There is nothing on record to suggest that excise authorities have contemplated any action on so-called suppressed production and there is not an iota of evidence to suggest that the assessee has sold produce of finished goods, outside books of account. In the absence of any inc .....

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o not find any error or infirmity in the order of the CIT(A) and hence, we are inclined to uphold the order of the CIT(A) and dismiss the ground raised by the revenue. 35. The next issue that came up for our consideration from assessee s appeal as well as revenue s appeal is disallowance of repairs and maintenance to plant and machinery being capital in nature. The AO has disallowed repairs and maintenance to plant and machinery for ₹ 2,24,08,100 on the ground that expenditure is in the na .....

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achines is about 40% and that itself shows that the asset has been totally revamped for better production, increase yield, etc. The blast furnace is the core component of the machinery used in the unit and the volume of repair which enhanced the life of the machinery and its utility is clearly a capital expenditure. The assessee derived enduring benefit for the rest of the life of the machinery by undertaking this repair which is evident from the fact that the asset installed was new one and the .....

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0 degree centigrade. The blast furnace consists of steel shell which is lined with refractory bricks internally. The shell is continuously cooled by water spray evaporation cooling system from outside. A refractory was installed in the year 2005. Since the size of the furnace of Chinese design is put up for the first time in the country and the same was not functioning properly resulting in yield going down, the assessee has carried out necessary repairs to keep the blast furnace intact to achie .....

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ace, but not bringing into existence of a new asset which gives enduring benefit to the assessee. The Ld.AR also furnished copies of pictures of the machine to argue that it is an integrated production process in which blast furnace is one of the parts of the production system which required repairs as it was not giving intended results, therefore, the assessee has carried out necessary repairs. The AO never disputed the fact that the assessee has not created any new asset. The AO made disallowa .....

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the AO was incorrect in disallowing expenditure as capital in nature. In support of his arguments relied upon plethora of judgements including the decision of Hon ble Bombay High Court in the case of New Sharrock Spinning & Mfg Co Ltd vs CIT 30 ITR 338 (Bom). The assessee also relied upon the decision of Hon ble Supreme Court in the case of Ballimal Naval Kishore & Anr vs CIT 224 ITR 414. 37. On the other hand, the Ld.DR submitted that the Ld.CIT(A) was right in upholding addition made b .....

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h better quality which resulted into enhanced production capacity which gave enduring benefit till life of the asset. Therefore, the AO was right in disallowing repairs to plant & machinery being capital in nature and his order should be upheld. The Ld.DR further submitted that in respect of partial relief allowed by the CIT(A) for ₹ 15,86,633, the CIT(A) without appreciating the fact that expenditure is in the nature of capital expenditure, deleted addition made by the AO without assi .....

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in the nature of capital expenditure which gives enduring benefit till the life of the asset. The AO has given various reasons for disallowing repairs and maintenance expenditure. According to him total expenditure incurred for repairs and maintenance works out to more than 40% of the existing cost of the asset and the assessee derived enduring benefit for the rest of the life of the machinery by undertaking the repair. The AO further observed that functioning of the blast furnace is directly re .....

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h was installed for the first time in 2005 and hence, it has repaired inferior quality blast furnace to achieve better yield and energy efficient which cannot be construed as creation of new asset which gave enduring benefit to the assessee. The assessee further contended that the AO was completely went wrong with his reasoning to disallow expenditure by holding that total expenditure incurred for repairs and maintenance works out to more than 40% of the existing cost of the asset without apprec .....

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total cost of the asset. Other than this, the AO has not given any reason to come to the conclusion that expenditure incurred is in the nature of capital expenditure. On the other hand, the assessee has filed various details to prove that it is merely a repair of blast furnace to retain its existing production capacity and energy efficiency. The assessee has filed pictures of the plant and machinery. According to the assessee, the blast furnace is an integrated production process, in which lini .....

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so furnished various materials used for repairing. On perusal of the details filed by the assessee, the materials used for repairs and maintenance of blast furnace are in the nature of minute components which cannot be considered as creation of new blast furnace which gives enduring benefit to the assessee. We further notice that the AO completely went wrong to conclude that expenditure is in the nature of capital expenditure only on the basis of cost incurred for repairs and maintenance which i .....

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blast furnace. By repairing the blast furnace, the assessee company has regained its production capacity which has reduced substantially due to defects in the refractory lining. Thus, the assessee company has not derived any enduring benefit from the repair of the refractory lining, more so, when the life of the refractory lining cannot be determined as it has to withstand the heat above 2300 degree centigrade. Therefore, we are of the view that repair and maintenance to plant & machinery is .....

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y existing asset, which does not bring a new asset into existence or does not give to the assessee a new or different advantage, and they must be repairs which are attended to as and when the need for them arises. We should also like to make it clear that the question as to when a building, machinery, plant or furniture requires repairs and when the need arises must be decided by not any academic or theoretical test but must be decided by the test of commercial expediency. It is after all for a .....

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Naval Kishore & Anr. v. CIT (224 ITR 414) wherein their Lordships observed as under: In our opinion the test involved by Chagla C. J. , in New Shorrock Spinning and Manufacturing Co. Ltd.'s case [1956] 30 ITR 338 (Born) is the most appropriate one having regard to the context in which the said expression occurs. It has also been followed by a majority of the High Courts in India. We respectfully accept and adopt the test. Dismissing the appeal of the Revenue, the Bombay High Court held a .....

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not mean petty repairs or repairs necessitated by wear and tear during the particular year. Payments on account of current repairs must be understood in contradistinction to payments for additions or improvement . As observed by Chagla C. J. in New Shorrock Spg. and Mfg. Co. Ltd. v. CIT [1956] 30 hR 338 (Born), the simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and m .....

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decided in the context of the business carried on by an assessee. Merely, because the benefit accruing by the expenditure is of enduring nature, is by itself not a conclusive test to hold it as a capital expenditure (see Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC)). Normally initial investment on machines and their parts will be in the nature of capital expenditure but replacement of parts of an existing machinery in the course of their working will he a revenue expenditure. 42. In the cas .....

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