D.b. Income Tax Appeal v. M/S Seaward Exports Pvt. Ltd

1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHANBENCH AT JAIPUR. D.B. Income Tax Appeal No. 137/2012.Commissioner of Income Tax, Kota Vs. M/s Seaward Exports Pvt. Ltd. DATE OF ORDER : 12.09.2016 HON'BLE MR. JUSTICE K.S. JHAVERIHON'BLE MR. JUSTICE BANWARI LAL SHARMA Ms. Parinitoo Jain, for appellant.Mr. Naresh Gupta, for the respondent. ***** 1.By way of this appeal, the Department has challengedthe judgment and order of the Tribunal which has affirmedthe order of the CIT (A). 2.The facts of the case are that the assessee respondentcompany is engaged in the business of export of stones. Thereturn of the income was filed on 15.11.2007 for A.Y. 2007-08 at an income of Rs. 46,55,550/-. The case was selectedfor scrutiny and notice under Section 143(2), 142(1) andnotice was duly served on the assessee. During the courseof assessment proceedings it was found by the AssessingOfficer on perusal of stock and sale details that the value ofbreakage and closing stock was calculated by using averageFIFO method after taking purchase cost into consideration.The AO required the director of the company to explain thesaid statement and after submission of the explanation it was found by the AO that the assessee had not followed theaccepted FIFO method. The AO calculated the cost of stockby adopting the average cost of purchases and even afteradopting the average cost the cost per sq. mtr. came to Rs.238.61/- whereas the assessee had adopted the averagecost at Rs. 176.63. Further, the AO added average directexpenses cost to the average purchase cost i.e. Rs. 238.61+ Rs. 31.31 which came to Rs. 269.92 per sq. mtr. Thevalue of stock shown in the books was Rs. 9588146/-against Rs. 14652183/- by taking the value @ Rs. 269.92per sq. mtr. Hence the stock was under valued by Rs.5064037/- which was added in the income following thejudgment of the Hon’ble Supreme Court in the case of CITVs. British Paints India Ltd., 188 ITR 44.The AOobserved that on the total goods including purchases andclosing stock of 2,82,254.16 sq. mtr., breakage of Rs.35,925/- was claimed @ 12.70%. The assessee hadclaimed more than the accepted breakage rate which in theassessee own case for AY 2006-07 was 7.94%. The AOfurther held that since the closing stock was not kept as perFIFO method so the real production in breakage could notbe ascertained and hence the breakage was allowed at thepreceding years rate i.e. 7.9% and the rest of excess claimfor Rs. 3677709/- was disallowed and added to the income of the assessee. Regarding disallowance to be made u/s 40(a) (ia) on account of non deduction of TDS on the freightinward. Therefore, an addition of Rs. 631036/- was madeby the AO. It was also found by the AO that assesseecompany had made payment of Rs. 23,01,840/- under thehead clearing and forwarding expenses out of which TDSwas deducted upon a small amount of Rs. 485853/- @2.02%. It was observed that TDS was not deducted onreimbursement charges so the AO made an addition of Rs.2292664/- by disallowing the same u/s 40(a)(ia). The AOalso found that payment to shipping agents for Rs.1304132/- were subject to TDS but no TDS was deductedand hence the expenses was disallowed u/s 40(a)(ia). 2.1. Against the order of AO, the assessee filed an appealbefore the CIT. However, in respect of addition of Rs.5064037/- account of under valuation of stock, it was heldby the CIT (A) that there was no justification to disturb themethod of valuation of stock followed by the assessee so theaddition made was deleted. In respect of addition of Rs.3647709/- on account of breakage, the CIT (A) aftercomparison with the previous year found the rate ofbreakage inappropriate and deleted the addition. Withregard to addition on account of disallowance u/s 40(i)(ia)for Rs.631036/- on freight inward, it was held by CIT (A) 2.1. Against the order of AO, the assessee filed an appealbefore the CIT. However, in respect of addition of Rs.5064037/- account of under valuation of stock, it was heldby the CIT (A) that there was no justification to disturb themethod of valuation of stock followed by the assessee so theaddition made was deleted. In respect of addition of Rs.3647709/- on account of breakage, the CIT (A) aftercomparison with the previous year found the rate ofbreakage inappropriate and deleted the addition. Withregard to addition on account of disallowance u/s 40(i)(ia)for Rs.631036/- on freight inward, it was held by CIT (A) that there was no evidence of the contract entered into with5 truck owners so there was no requirement to deduct theTDS u/s 194C and accordingly the addition was deleted bythe CIT(A). 2.2Further, the disallowance u/s 40(a)(ia) made onaccount of payment to non resident shipping companies, forRs. 1304132/- it was held that there was no evidence thatSai Shipping Service and three others were agents of theassessee so no TDS was required to be deducted and hencethe addition wad deleted by the CIT(A). 2.3That being aggrieved by the order of the CIT (A) thedepartment filed an appeal before the Tribunal. In respect ofaddition of Rs. 50,64037/- on account of under valuation ofstock, it was held by the Tribunal at para 7 of its order thatthe statement of the Director was not read completely andthe Accounting Standard 2 was also not applied correctlyand further, there was no change in the method ofaccounting applied in the earlier years. Therefore, the CIT(A) was justified in deleting the addition. With regard to theaddition of Rs. 36,47,709/- made by the AO on account ofbreakage claimed by the assessee at 12.70% against theclaim of 7.94% made for previous year, it was held by theTribunal at para 13 of its order that the findings of the CIT(A) remained uncontroverted so the findings being finding of fact, the Tribunal confirmed the order of the CIT(A). Further,in respect of Rs. 6,31,036/- made by the AO u/s 40(a)(ia) itwas held by the Tribunal at para 18 of its order that the CIT(A) was justified in deleting the addition as the totalpayment did not exceed Rs. 50,000/- so the order of the CIT(A) was confirmed. On the issue of addition of Rs.22,92,664/- made u/s 40(a)(ia) in respect of expensesmade under various heads it was held by the Tribunal atpara 22 of its order that the payments made by theassessee were on account of reimbursement of expenses orpayment made on crane charges which were not hit byprovisions of section 40(a)(ia) as there was no regularcontract. So o interference was required in the findings ofthe CIT (A) and hence the made addition made by the AOwas deleted. Further, disallowance of Rs.13,04,132/- madeu/s 40(a)(ia) for payments made to non resident shippingcompany, it was held by the Tribunal para 27 of its orderthat there was no reason to interfere with the finding of theCIT (A) and hence the addition was deleted. The Tribunaldismissed the appeal of the department and confirmed theorder of the CIT (A) vide order dated 21.10.2011. Beingaggrieved against the aforesaid order of the Tribunal, theappellant revenue submits the further appeal under Section260A. “(1) Whether the Tribunal was legally justified inupholding the order of the CIT (A) and deleting theaddition of Rs. 50,64,037/- made on account ofunder valuation of closing stock when theAssessing Officer adopted the average cost methodfollowed by the assessee and did not change theformula of calculating the cost of inventories? (2)Whether the findings of the Tribunal areperverse in deleting the addition made for under-valuation of closing stock when the AssessingOfficer applied average cost method including theaverage cost of direct expenses on the basis ofbooks of accounts, in accordance with theprocedure prescribed in Accounting Standard? “(1) Whether the Tribunal was legally justified inupholding the order of the CIT (A) and deleting theaddition of Rs. 50,64,037/- made on account ofunder valuation of closing stock when theAssessing Officer adopted the average cost methodfollowed by the assessee and did not change theformula of calculating the cost of inventories? (2)Whether the findings of the Tribunal areperverse in deleting the addition made for under-valuation of closing stock when the AssessingOfficer applied average cost method including theaverage cost of direct expenses on the basis ofbooks of accounts, in accordance with theprocedure prescribed in Accounting Standard? (3) Whether the findings of the Tribunal areperverse in deleting the addition of Rs.36,47,709/- and increasing the claim of breakageto 12.70% against 7.94% applied by the AssessingOfficer taking into account the rate of thepreceding previous year i.e. 7.94% when the saleprice for the relevant year was less than the earlieryear? (4)Whether the findings of the Tribunal areperverse in deleting the addition of Rs. 6,31,036/-made u/s 40(a)(ia) on account of freight expensesbeing against the provisions of Section 194C whichapplies to every financial year irrespective of theterm of contract and the number of contractors? (5)Whether the findings of the Tribunal areperverse in deleting the addition of Rs. 6,31,036/-on account of freight payment when admittedlythe payment during the year exceeded Rs.50,000/- and there was a short term contractbetween the assessee and the contractors? (6)Whether the findings of the Tribunal areperverse in deleting the addition of Rs.22,92,664/- made u/s 40(a)(ia) on account ofclearing and forwarding charges on which the TDSwas not deducted when the same were hit byprovisions of Section 194C since the definition of“work” is inclusive u/s 194C? (7)Whether the findings of the Tribunal areperverse in deleting the addition of Rs.13,04,132/- made u/s 40(a)(ia) made on account of Ocean Freight paid to the agents of nonresidents on which TDS u/s 194C was notdeducted?” 4.Counsel for the appellant has taken us through to eachof the questions and the contention which has been takenby the appellant is that the Tribunal and the CIT (A) havecommitted serious error in reversing the order of theAssessing Officer inasmuch as the physical verification of theclosed stocks which was done was not proper, and therefore,the Assessing Officer while considering the closing stock hasvalued on the basis of FIFO method and has come to theconclusion. Even on the breakage percentage which wasfixed by the Assessing Officer was just and proper and CIT(A) and the Tribunal have committed serious error inrefusing the above percentage given by the AssessingOfficer. In Para 7, the Assessing Officer held as under: “After considering the submissions andperusing the material on record, we find noinfirmity in the finding of ld. CIT (A). The AO hasdisturbed the valuation of closing stock withoutassigning any cogent reason. The assessee hasmaintained complete books of account. All thepurchases have been entered in the purchaseregister and sales have also been entered in thesale register. At the end of the year on physicalverification, the valuation of closing stock has beenmade on the basis of method adopted in pastwhich has been accepted by the department itself.Therefore, in our considered view, there was noreasoning to disturb the valuation of closing stockby the AO. Neither AO has given effect of methodof valuation on the opening stock at beginning of “After considering the submissions andperusing the material on record, we find noinfirmity in the finding of ld. CIT (A). The AO hasdisturbed the valuation of closing stock withoutassigning any cogent reason. The assessee hasmaintained complete books of account. All thepurchases have been entered in the purchaseregister and sales have also been entered in thesale register. At the end of the year on physicalverification, the valuation of closing stock has beenmade on the basis of method adopted in pastwhich has been accepted by the department itself.Therefore, in our considered view, there was noreasoning to disturb the valuation of closing stockby the AO. Neither AO has given effect of methodof valuation on the opening stock at beginning of the year nor any effect has been given insubsequent year. Therefore, for this reason alsothe AO was not justified in disturbing the methodof valuation of closing stock adopted by theassessee. Accordingly, we hold that ld. CIT (A)was justified in deleting the addition, moreespecially as the finding of ld. CIT (A) remaineduncontroverted. This ground of the departmentfails.” 5. She has taken us to the fact of 194C where thepayment which was made to the 5 contractors was beyond50,000/-, however Tribunal in Paragraph 9 and 16.2.observed as under: “9.The observation of the AO and thesubmissions of assessee has been discussed by ld.CIT (A) at pages 6 to 8 of his order, are as under:-“The assessing officer opined that breakageclaim at 12.70% was “much more than normallyaccepted breakage even in export trade” for he hadnoticed that in the case of appellant itself breakageclaimed in previous year was only 7.94% and“because Company’s management and businesshave been same in both year”, in his view “it wasappropriate comparison. From the fact that the average rate at whichthe goods were sold this year was Rs. 601.80 per sqmtr as compared with the rate of Rs. 627.20 per sq.mts in the previous year, the assessee has exportedinferior quality goods in comparison to last year …this year breakage claim for the year should havebeen made less than that last year. At least itcannot be more than that in any case”. In theopinion of the assessing officer, because “record ofclosing stock has not been kept as per FIFO method… the position of real production andbreakage/wastage cannot be ascertained.” In this view of things, he restricted thebreakage claim at 7.94% and applied “true averagecost” of Rs. 269.92 determined by him inconnection with valuation of closing stock, to arrive at concealment of stock on account of excessivebreakage claim at Rs. 36,47,709/-. To support hisdecision, the assessing officer referred to the casesof Raja Textiles Ltd. (86 ITR 673), Mc Dowell andCo. and British Paints India Ltd. Through letter dated 04.02.2010, theappellant claimed that higher breakage in this yearwas due to several reasons consisting of need tomaintain high quality in export, being first year ofin-house manufacturing/processing, a large portionof work was got done manually because allmachines were not put to use and breakage washigh due to lack of experience at processing and useof rough stone purchased from URDs. The appellant also objected to conclusion ofthe assessing officer that goods exported this yearwere of inferior quality and breakage claim shouldhave been lower. It was explained that average saleprice was lower because the appellant had operatedat lower margin due to severe competition in theexport market.” Through letter dated 04.02.2010, theappellant claimed that higher breakage in this yearwas due to several reasons consisting of need tomaintain high quality in export, being first year ofin-house manufacturing/processing, a large portionof work was got done manually because allmachines were not put to use and breakage washigh due to lack of experience at processing and useof rough stone purchased from URDs. The appellant also objected to conclusion ofthe assessing officer that goods exported this yearwere of inferior quality and breakage claim shouldhave been lower. It was explained that average saleprice was lower because the appellant had operatedat lower margin due to severe competition in theexport market.” “16.2. To begin with, there is no evidence that theassessee had entered into a contract with any of thefive truck owners to carry its goods through out theyear. Further, there is merit in contention of theassessee that use of available truck was dictated bycommercial expediency. The advisory of theassessing officer that “a professionally managedcompany should make such big payments only tosuch persons for whom they are able to deductTDS” is misplaced, for the business decisions are aprerogative of the business person, and it can in noway be the basis for disallowance.” 6.Learned counsel for the appellant has also taken usthrough the other grounds regarding the reimbursementunder 40 (a)(ia) for the payment was made beyond50,000/-, therefore, there was shipping payment also andCIT and Tribunal have committed error. 10 7.On the other hand, counsel for the respondent Mr.Naresh Gupta has supported the order of the CIT (A) andcontended that there is no substantial question of law, thusappreciation of evidence of law and view taken by the CIT isaccording to law and no interference is called for. 8.We have heard the learned counsel for the parties atlength. 9.Taking into consideration the detail order passed bythe CIT (A) and Tribunal, we are of the opinion that firstchanging the method for closing stock, the view taken bythe Tribunal is correct. The Assessing Officer beforechanging the method and adopting any other method, hehas to change the same as a whole and in that view of thematter, the view taken by the Tribunal and the CIT (A) isjust and proper. 10.Regarding breakage of the production, in our view, theTribunal has correctly appreciated the facts and previousyear method is the correct method and therefore, 7.94which has been stated by the assessee and which wasaccepted for the previous year, there was no reason toincrease the same. 11.We are not reproducing the observations made by theTribunal and CIT (A) for the sake of brevity regarding 194Cand in Para 16.2 referred hereinabove but the same is clear there was no contract. In that view of the matter, otherpayment which was made was less than 50,000/- to everytrip. Summarizing the same at the end of the year on thetrip basis was not a contract but it was an arrangementbetween the owner or the truck driver with the assessee.12.In that view of the matter, the Tribunal has rightlyrelied upon 40(a)(ia). The view taken by the Tribunalregarding the payment of reimbursement is also correct soalso finding of shipping. In that view of the matter, no substantial question oflaw is involved, hence the appeal is dismissed. (Banwari Lal Sharma), J. (K.S. Jhaveri), J. /bm gandhi 8