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TMI Blog2012 (3) TMI 701X X X X Extracts X X X X X X X X Extracts X X X X ..... Paul Goyal has persistently elongated the proceedings by seeking numerous opportunities is against facts and law. 2. The observation of the ld. CIT(A) that the appellant throughout the appellant proceedings resorted to 'running with the hare and hunting with the hounds' is uncalled for in the facts and circumstances of the case. 3. The ld. CIT(A) has erred both on facts and law in confirming the rejection of accounts books u/s 145(3) on the ground that no stock registers were maintained. 4. The ld. CIT(A) has erred in confirming addition of Rs. 2619720/- on account of unaccounted production and sale when there is not a single instance of unaccounted purchase or sale. The addition is based on surmises and conjectures only. 5. The ld. CIT(A) has erred in confirming addition of Rs. 436620/- on account of alleged capital employed in unaccounted production. 6. The ld. CIT(A) has erred both in law and facts in not confirming disallowance of interest of Rs. 133185/-. 7. The ld. CIT(A) has erred both in law and facts in confirming addition of Rs. 1686721/- on the ground that out of expenses debited in 'repair and maintenance account' expenses worth Rs. 1686721/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Bench, in ITA No. 348/Chd/2011 AY 2007-08 and ITA No. 267/Chd/2011, AY 2007-08 are reproduced hereunder: 3. The ld. 'AR', for the assessee, offered no serious comments in respect of ground Nos. 1 & 2. It appears that the ld. 'AR', for the assessee, was prompted by certain observations of the ld. CIT(A) to raise such grounds of appeal. Therefore, these two grounds of appeal need no separate adjudication, in the interest of propriety and non-pursing the same, by the ld. 'AR', for the assessee. The ld. 'DR' for the revenue relied on the order of ld. CIT(A). Hence, these two grounds of appeal are dismissed as not pressed. 3. In respect of ground No. 3, the ld. 'AR', for the assessee, referred to various pages of the paper book and written synopsis filed by him. The ld. 'DR' for the revenue placed reliance on the orders passed by the lower authorities. 4. We have carefully perused the rival submissions, facts of the case, relevant pages of paper book and case laws relied upon by the parties. Briefly stated, the facts of the case are that the assessee filed return of income, on 31.10.2007, declaring an income of Rs, 20,62,950/-. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r MT in financial year 2005-06 to 803.2 units per MT, in the year under consideration. The ld. CIT(A), also found that consumption of electricity, in the month of July 2006 and October 2006 not in consonance with the material used. The assessee failed to file any documentary evidence, for such high consumption of electricity. The ld. CIT(A), upheld the action of the AO u/s 145(3) of the Act and the relevant findings of the ld. CIT(A) are reproduced hereunder: In view of the facts and circumstances of the case and from the rival contentions of both the AO in his various remand reports and the contentions of the counsel in his written submissions filed on various dates, it is clear that the appellant has not maintained the books of account and other relevant documents as was required to be done. There is no proper co-relation between the electricity consumed and the production of finished goods shown. The appellant was required to show how various inputs used in the manufacturing process tally with its production account. He has admitted that no stock register was maintained for many of the consumables. The presence or absence of stock register is one of the relevant aspects to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day to production, receipt of raw material and consumption of raw material as well as consumables and the Assessing Officer has not found any fault in such voluminous record of day to day manufacturing. Refer to letter, dated 30.12.2009. Page 51, Clause (D). 3. All purchases and sales are fully vouched and no discrepancy noticed by the Assessing Officer or by the CIT (A). 4. During the course of assessment proceedings, the numerous details were filed which were crossed verified by the Assessing Officer and after scrutinizing the details, the AO has framed the assessment on wrong figures and facts which have partly been sustained by the CIT (A), Patiala, which is also against the factual facts and circumstances. 5. In the above said case, we have filed written submissions on various grounds of appeal and, accordingly, each of the ground of appeal is being argued on the basis grounds of appeal taken before the Worthy CIT (A) as under: i. Regarding first two grounds of appeal, which relate to the observation made by the CIT (A) in para-3 of the order, we have given our comments at page 1 and 2 of our submissions and briefly, it is stated there has never any chance, where the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hly variable. The corrected figures supported by bills of electricity department placed at pages 184B and 184C read with certificate from electricity department placed at page 300 of the paper book. iii No documentary evidence produced for increase in the electric consumption The reasons for increase in the electricity units explained to the AO as per letter, dated 28.12.2009 placed at paper book pages 56 to 58 read with reply dated 30.12.2009 placed at paper book pages 50 to 55. Our load had increased from 990 KWs to 2450 KWTs on 19.4.2006 (immediately at the beginning of the year) placed at pages 184A of the paper book. The production capacity had increased from 7300 MT to 18250 MT placed at paper book page 66 and in this year the total production was 13948.5820 MT giving an increase by 78.96%. New plant and machinery worth 2.61 crores installed and put to use during the year. Refer to page 269 of the paper book. The electric Motor and equipment worth 1.55 crores installed and put to use during the year. Page 269 of paper book. Boiler under Fabrication/Installation valuing to the tune of Rs. 2,28,90,151/- at page 284 of the paper book and for which electricity had been u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtment for any sales outside the books and the Central Excise Audit also completed for the year under consideration and no adverse view taken. Since, we had installed the new machinery during the year, some trial runs had to be made and which had led to increase in the consumption of electricity has totally been ignored by the AO/ld. CIT(A). 2 Non-maintenance of stock register for Steam, Chemicals and consumables There are no consumables at all and only chemicals are there. The steam is being purchased from M/s Vishal Cotton Ltd. And no doubt has cast upon by the AO and such purchases have been made from sister concern. It is practically impossible to maintain stock register of steam used, for drying of the paper. The same is fed through the pipes only. The steam do not increase weight of finished products. For chemicals, all the purchases are fully vouched and each type of chemicals numbering more than 50 of small quantities a re being used in the manufacturing process and therefore it is not practically possible to maintain the stock register. It has also been pointed out that consumption of chemicals is less as compared to the earlier year as per chart at paper book page 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances as mentioned in our cases, besides the judgment enclosed in the paper book from pages 69 to 132: a. PyarelalMittal v. CIT 291 ITR 214 (Gau) b. Income Tax Officer V. Girish M. Mehta, 105 ITD (Trib-Rajkor)585 c. International Forest Co. V. CIT, 101 ITR 721 (J&K) d. CIT V. Om Overseas, 315 ITR 185 a. CIT v. R.K. Rice Mills, 319 ITR 173 b. Judgment of the Jurisdictional Bench of the ITAT, Chandigarh Bench, Chandigarh in the case of M/s BabuJewellers Bearing ITA No. 126/Chd/2011 for AY 2007-08. c. Shiva Exports V. ITO, 28 SOT (Chd-Trib) 512 h. Reliance on the written submissions field as para 3 from page 3 to 11 5 Ground No. 4 & 5 read with Ground No. 2 of the Department appeal which deals with the alleged unaccounted production on the basis of alleged higher consumption of Electricity units, based on incurred figures by the AO and non-applicable of mind by the ld. CIT(A). The AO has discussed this issue in para 8 page 22 to 24 of the assessment order and the CIT has discussed this issue and given his finding in para 5.7. Though the ld. CIT(A) has reduced the addition but the basis of reducing the addition is only on the basis of corrected figures of ele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elief/confirmation of addition made by the ld. CIT(A). We had field detailed submissions in our written submissions to the ld. CIT(A) from page 26 to 39 of the paper book read with pages 156 to 160 along with annexures from pages 161 to 179 is the chart of each and every item at pages 172 to 179 of the paper book. Our is an integrated manufacturing process in as much as that the raw material of chemicals are different from one end and from the other end, the finished product is retrieved. In the manufacturing process, there are number of machines, which are working with different attachments and any small defects in any of the machine/attachment would lead to disruption of manufacturing activity. Besides that it is a continuous process and, whatever, amount has been claimed as revenue expenditure is on account of tax or other items capable, being named as full machines itself. All such purchase are vouched and the AO has not pointed out any defects and to prove our contention, the chart is at page 172 to 179 as contained in the paper book, is self explanatory and is being relied upon. Reliance by the AO on the judgment of Hon'ble Supreme Court have been distinguished at pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the another submissions made before the Hon'ble Bench. 7 (i) We have carefully perused and considered the rival submissions, facts of the case and relevant records. The assessee has filed correct chart of figures of consumption of electricity vis-à-vis the chart relied upon by he AO. A chart of consumption by the assessee is supported by bills of electricity department placed, at pages, 184 B and 184C read with certificate from Electricity Department placed at page 300 of the paper book. It was, further, pointed out that the boiler under fabrication of Rs. 2,28,90,151 (paper book page 124) was installed, which led to increase in electricity consumption. The ld. 'AR' for the assessee, further, pointed out that the findings of the ld. CIT(A), in para 5.6 does not dispute the explanation given by the assessee, in the matter. However, the observations of the ld. CIT(A), are purely general in nature and no co-relation had been established between electricity consumption and production of the goods. Therefore, the findings of the ld. CIT(A), are not in consonance with the factual position of the case. The assessee placed reliance on the decision of Hon'ble Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts are unreliable, incorrect or incomplete-The accounts regularly maintained in the course of business, duly audited under the provisions of IT Act and free from any qualification by the auditors, should be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable-For rejecting the books of account, it is the Revenue's onus to prove that either the books of account maintained by the assessee are not correct and complete or the method of accounting adopted is such that true profit cannot be deducted therefrom. c) International Forest Co. V. CIT, 101 ITR 721 (J&K) Accounts - Rejection - Omission of sale in books of account - Estimated addition by ITO - In absence of any omission, irregularity or other defect in method of accounting or positive evidence to show that accounts did not disclose the whole income of assessee, account books cannot be rejected. d) CIT v. Om Overseas, 315 ITR 185 Accounts-Rejection-Absence of specific defect-AO rejected assessee's books of account and made addition by applying GP rate of 27 per cent as against 25.38 per cent shown by the assessee - CIT(A) has given a finding of fact that the add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1.2011 has afresh determined the unaccounted production for 3-047 MT instead of 5008 MT taken earlier on the basis of the July and October, 2006 figures of electricity consumption. These figures are as per latest confirmations made from PSEB authorities. He has also stated that the sale rate of Rs. 22,390/- per MT be taken to calculate the unaccounted production. During discussions with him he accepts that there is an element of excise duty included in the sale rate. In case the benefit of excluding this excise duty element in the sale price is given then the sale price would be Rs. 20,223/- per MT. After applying the correct GP rate of 12.11% (against 12.5% taken by the AO in his assessment order) the value of unaccounted production would be reduced to Rs. 74,62,119/-. Addition to this extent only needs to be sustained and balance relief allowed to the appellant. 10. We have considered the rival submissions, facts of the case and relevant record. The ld. CIT(A) had adjudicated the ground No. 4 of the present appeal, in para 5.7 of his order, as reproduced above. The AO worked out suppression of actual production by the assessee-appellant, on the ground of consumption of abnormal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gurubachhan Singh J. Juneja (supra) held that in the absence of any material on record, to show that there was any unexplained investment made by the assessee which was reflected by the alleged unaccounted sales, the finding of the Tribunal that only gross profit on the said amount can be brought to tax, does not call for any interference. 12. The decision of the Hon'ble Supreme Court, in the case of CST V. H.M. Esufali H.M. Abdulali (1973), 90 ITR 271 (S.C), is relevant in the instant case. In this case, there was detection of sales for 19 days not entered in the books of account. Therefore, the Hon'ble Apex Court held that estimate of unaccounted sales can be made on such basis. However, the Hon'ble Apex Court gave this finding on the specific fact that the assessee had dealing outside the books of account, in respect of the value of Rs. 31,171.28, for 19 days. Therefore, it was open to the AO, to infer that the assessee had large scale dealing outside the books of account. In such a situation, it was not possible, for the AO, to find out precisely the turnover suppressed and he could only make an estimate of the suppressed turnover, on the basis of the material befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the books of account and sales of the manufactured goods outside the books of account allegedly produced by way of higher consumption of electricity. In the real manufacturing world, there is hardly any direct and uniform correlation with consumption of electricity and production of manufactured goods. Having regard to the above legal and factual discussions, we do not find any substance and merit, in the findings of the ld. CIT(A). Therefore, such findings cannot be sustained. Consequently, this ground of appeal of the assessee-appellant is allowed. 15. In ground No. 5, the assessee contended that the ld. CIT(A) erred in confirming the addition of Rs. 12,34,686/-, on account of alleged capital employed in the unaccounted production. 16. The brief facts of the case are that the AO after rejection of books of account, worked out unaccounted production on the basis of higher consumption of electricity. The AO, further, concluded that unexplained investment had been made by the assessee, for funding such unaccounted production. The AO computed the working capital at Rs. 2,94,91,430/-, for earlier years production of 13948.6 MT of paper. For the unaccounted production of 508 MT of pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n such unaccounted production, cannot be upheld. The core issue in the present ground of appeal is that in the absence of unaccounted production, there can not be a case for employment of unaccounted capital. Therefore, we do not find any substance and merit in addition made by the AO. Hence, the findings of the ld. CIT(A) cannot be upheld. Therefore, this ground of appeal of the appellant is allowed. 17. In ground No. 6, the assessee contended that the ld. CIT(A) erred both in law and facts in not allowing deduction u/s 80IBon total assessed income when the entire assessed income is derived from industrial undertaking. 18(i) The ld. CIT(A), has recorded a finding in para 7.1 of his order that the AO has not discussed this claim in the assessment order. He, further, recorded that it is not known whether such claim was made in the return of income and why the AO has not taken this fact for consideration. The ld. CIT(A), further, observed that it seems that the assessee is making new claim at this stage. The assessee stated that the claim was made as per returned income. Various additions made by the AO, pertain only to the business income, is required to be considered, for allowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n nature. The assessee contended that the detailed submissions was filed before the ld. CIT(A) which is annexed at page 26 to 30 of the paper book read with pages 156 to 160 along with annexure from page 161 to 179, with the chart of each and every item at page 172 and 179 of the paper book. 20. We have carefully perused the page Nos. 172 to 179 wherein details of the items, amount and remarks of the assessee are furnished, in respect of expenses incurred under the head 'repair and maintenance'. These items included GP Sheets, Rounds, Flats, TMS Bars, Channels, Angles, Squares, Channels and Angles, TMT Bars, MS Bend, MS Round, Regulator, Pneumatic Cylinder, Gear Box, Vibro Screen, Air Dryer, Vaccum Pump, Filter, Air Pipe, CAM System, Indicator, Transmitter, Panel View, Screen, Grinding Wheel, Gear Pully and Dousing Pump Etc. All these item have independent use. Having regard to the nature of items and their use, we do not find any substance in the confirmation of addition by the ld. CIT(A), treating such items as capital expenses. The issue of capital or revenue expenditure in nature, depends on several tests. No single test is universally applicable and infallible in natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shares can not be held to be for purposes of business. The borrowings have thus been diverted for purposes other than business and interest of Rs. 1,33,185/- has been rightly disallowed by the AO. 4(iv). Having regard to the facts and circumstances of the case and the decision relied upon by the AO as also the findings recorded by the ld. CIT(A), we do not find any infirmity in the findings of ld. CIT(A) and hence the findings of the ld. CIT(A) are upheld. Ground No. 6 of assessee's appeal is dismissed. Thus, the Ground No. 6 raised by the assessee in his appeal is discussed and adjudicated in ITA No. 347/Chd/2011. 22. In the result, appeal of the assessee is partly allowed. ITA No. 267/Chd/2011 -Revenue's Appeal 23. In ground No. 1, the revenue contended that the ld. CIT(A) erred in deleting the addition of Rs. 15,61,828/-, made by the AO, on account of disallowance of interest u/s 36(1)(iii) of the Act, on borrowed capital without appreciating the fact that the same asset was not put to use. 24. We have perused the rival submissions, facts of the case, relevant record and the paper book. The ld. 'DR' for the revenue placed reliance on the order of the AO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant made payments for purchase of assets, even though the same was far in excess of profits earned. The ld. CIT(A), further, observed as "also, interest cannot be disallowed merely because the asset was never used and where the borrowing had been held for business (CIT v. Associated Fibre & Rubber Industries Pvt Ltd (1999) 236 ITR 471 (SC). In view of this discussion made the addition made by the AO needs to be deleted." 28. This is undisputed fact that the interest has been paid by the assessee, as is evident from perusal of the profit and loss account, as mentioned by the AO. It is also undisputed fact that the assessee had purchase assets. Therefore, the provisions of section 36(1)(iii) and proviso thereunder, which is inserted w.e.f. 1.4.2004 vide Finance Act, 2003 are applicable. It is evident that the interest on borrowed capital cannot be allowed unless such asset was first put to use. In the present case, the ld. CIT(A), has placed reliance on the decision of Hon'ble Supreme Court in the case of Associated Fibre and Rubber Industries Pvt Ltd (supra) which relates to period prior to the insertion of proviso to section 36(1)(iii) of the Act. We are dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract and nor the assessee supplied any material, to the persons from whom, material is being purchased. It is simply a case of purchases from other parties and all the invoices are raised as per Punjab VAT Act. There is no job work involved. The assessee placed reliance on the decision of Hon'ble jurisdictional High Court reported in 304 ITR 17. The assessee, further, relied on the written submissions made before the ld. CIT(A) as per pages 42 to 48 of the paper book. The findings of the ld. CIT(A) as contained in para 10.5 are reproduced hereunder: 10.5` I have considered the facts of the case and the rival contentions. The main question in dispute in this case is whether the supply of packing material with pre-printed labels to the appellant is a simple case of 'contract for sale of goods' or 'work contract'. The party named by the AO in his order is an independent manufacturer of different printed and packing material. It is supplying this material to the appellant as per its specifications. All the work of manufacturing, the packing material and the printing work of this packing material was being done in the premises of the of the other party. Before ..... X X X X Extracts X X X X X X X X Extracts X X X X
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