O/TAXAP/916/2008 JUDGMENT IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 961 of 2008 With TAX APPEAL NO. 962 of 2008 With TAX APPEAL NO. 963 of 2008 With TAX APPEAL NO. 964 of 2008 With TAX APPEAL NO. 965 of 2008 With TAX APPEAL NO. 916 of 2008 With TAX APPEAL NO. 917 of 2008 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE S.H.VORA ====================================== 1 Whether Reporters of Local Papers may be allowed to see judgment ? 2 To be referred to Reporter or not ? 3 Whether their Lordships wish to see fair copy of judgment ? 4 Whether this case involves substantial question of law as to interpretation of Constitution of India or any order made thereunder ? ====================================== COMMISSIONER OF INCOME TAX-II....Appellant(s) Versus GUJARAT FOILS LIMITED....Opponent(s) ====================================== Appearance: MRS MAUNA M BHATT, ADVOCATE for Appellant(s) No. 1 RULE UNSERVED for Opponent(s) No. 1 ====================================== Page 1 of 18 HC-NIC Page 1 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE S.H.VORA Date : 13/04/2015 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) [1.0] As all these Tax Appeals arise out of impugned common judgment and order passed by learned Income Tax Appellate Tribunal (hereinafter referred to as Tribunal ) and between same parties but with respect to different Assessment Years, all these Tax Appeals are heard together, decided and disposed of by this common judgment and order. [2.0] Feeling aggrieved and dissatisfied with impugned common judgment and order dated 18/05/2007 passed by learned Income Tax Appellate Tribunal, Ahmedabad Bench B in ITA No.3760/Ahd/2002 for Assessment Year 1999-2000, revenue has preferred Tax Appeal No.961/2008 requesting to consider following substantial questions of law; (A) Whether Appellate Tribunal is right in law and on facts in deleting addition made on account of suppression of production by showing excess scrap, when in statement recorded under Section 132(4) Director of assessee accepted that scrap generation was being entered into RG1 register on estimate basis, and addition was confirmed by CIT(A)? Page 2 of 18 HC-NIC Page 2 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT (B) Whether Appellate Tribunal is right in law and on facts in holding that as notice under Section 143(2) was not issued within prescribed limitation period, assessment order passed under Section 143(3) was void ab initio? (C) Whether Appellate Tribunal is right in law and on facts in deleting entire disallowance made in respect of telephone expenses on account of personal use of telephone by Director of assessee? [2.1] Tax Appeal No.917/2008 has been preferred by revenue challenging impugned judgment and order passed by learned Tribunal in ITA No.3492/Ahd/2003 for Assessment Year 2000-01 to consider following substantial question of law; (A) Whether Appellate Tribunal is right in law and on facts in deleting addition made on account of suppression of production by showing excess scrap, when in statement recorded under Section 132(4) Director of assessee accepted that scrap generation was being entered into RG1 register on estimate basis, and addition was confirmed by CIT(A)? [2.2] Tax Appeal No.916/2008 has been preferred by revenue challenging impugned judgment and order passed by learned Tribunal in ITA No.3620/Ahd/2004 for Page 3 of 18 HC-NIC Page 3 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT Assessment Year 2001-02 to consider following substantial question of law; Whether Appellate Tribunal is right in law and on facts in deleting addition made on account of suppression of production by showing excess scrap, when in statement recorded under Section 132(4) Director of assessee accepted that scrap generation was being entered into RG1 register on estimate basis, and addition was confirmed by CIT(A)? [2.3] Tax Appeal No.962/2008 has been preferred by revenue challenging impugned judgment and order passed by learned Tribunal in ITA No.1317/Ahd/2006 for Assessment Year 2000-01 by which learned Tribunal has deleted penalty imposed under Section271(1)(c) of Income Tax Act (hereinafter referred to as Act ) to consider following substantial question of law; Whether Appellate Tribunal is right in law and on facts in cancelling penalty of Rs.20,87,776/- levied by Assessing Officer under Section 271(1)(c) of Act, as confirmed by CIT(A)? [2.4] Tax Appeal No.963/2008 has been preferred by revenue challenging impugned judgment and order passed by learned Tribunal in ITA No.1318/Ahd/2006 for Assessment Year 2002-03 to consider following substantial question of law; Page 4 of 18 HC-NIC Page 4 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT Whether Appellate Tribunal is right in law and on facts in deleting disallowance of interest expenses under Section 36(1)(iii) of Act? [2.5] Tax Appeal No.964/2008 has been preferred by revenue challenging impugned judgment and order passed by learned Tribunal in ITA No.1004/Ahd/2007 for Assessment Year 2003-04 to consider following substantial question of law; Whether Appellate Tribunal is right in law and on facts in deleting disallowance of interest expenses under Section 36(1)(iii) of Act? [2.6] Tax Appeal No.965/2008 has been preferred by revenue challenging impugned judgment and order passed by learned Tribunal in ITA No.1111/Ahd/2007 for Assessment Year 2003-04 to consider following substantial question of law; Whether Appellate Tribunal is right in law and on facts in upholding order of CIT(A) wherein he has deleted 2/3rd of addition of Rs.10,78,930/- made by Assessing Officer under Section 40(A)(2)(b), being excessive commission payment to M/s. Maitri Metals Pvt. Ltd.? [3.0] For sake of convenience Tax Appeal No.961/2008 is considered as lead matter and facts of Tax Appeal No.961/2008 are narrated and considered. Page 5 of 18 HC-NIC Page 5 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT [4.0] assessee Company is engaged in business of manufacturing aluminium strips / foils. assessee filed return of income for Assessment Year 1999-2000 declaring total income as NIL . income of assessee was declared at 30% of book profit under Section 115 JA of Act. notice under Section 143(2) of Act was served on assessee on 25/08/2001 and subsequently detailed notice under Section 142(1) of Act was issued and served upon assessee on 02/01/2002. During previous year, assessee-Company was subjected to search under Section 132 of Act on 09/09/1998. During search action, various evidences regarding mis-reporting of scrap generation were found. said issue was dealt with by Assessing Officer in block assessment. In said order, after considering all contentions raised by assessee, scrap was restricted to 15%. [4.1] As part of previous year, relevant to Assessment Year 1999-00, which is already covered in block period, assessee was asked to furnish percentage figure of scrap yield separately for post search part of previous year. assessee was served with show cause notice and was called upon to show cause and to explain method of quantifying scrap generated during production and how quantity wise details of scrap generated are entered into RG1 register. attention of assessee was also drawn upon statement of Shri Navneet Mittal recorded under Section 132(4) on 09/09/1998 where he accepted that scrap generated was being entered into RG1 register on estimate basis and, therefore, assessee was called upon to show cause as to Page 6 of 18 HC-NIC Page 6 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT how scrap be not restricted to 15% and sale value of scrap in excess of this percentage be taken to be that of finished goods. It appears that no submissions were furnished in reply to aforesaid show cause notice and, therefore, one another notice was issued and served upon assessee. In response to same, assessee produced original RG1 register for perusal. Assessing Officer was not satisfied with explanation and made addition of Rs.18,77,727/- in respect of excess generation of scrap. Assessing Officer also disallowed expenses of Rs.3,10,000/- on account of personal use of telephone by Directors. [4.2] Feeling aggrieved and dissatisfied with order passed by Assessing Officer making addition of Rs.18,77,727/- on scarp generation at rate of 15% as well as disallowing expenses of Rs.3,10,000/- on account of personal use of telephone by Directors, assessee preferred appeal before learned CIT(A). learned CIT(A) partly allowed said appeal by restricting disallowance of expenses on account of personal use of telephone to Rs.1.7 lacs, however, confirmed addition of Rs.18,77,727/- made by Assessing Officer on scrap generation at rate of 15%. [4.3] Feeling aggrieved and dissatisfied with order passed by learned CIT(A), assessee preferred appeal before learned Tribunal, being ITA No.3760/Ahd/2002. One additional ground was made before learned Tribunal i.e. issuance of notice under Section 143(2) of Act was beyond period of limitation i.e. beyond period of 12 months from end of month in which return was Page 7 of 18 HC-NIC Page 7 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT filed under Section 139 of Act. [4.4] By impugned judgment and order, learned Tribunal has allowed appeal preferred by assessee and has deleted addition of Rs.18,77,727/- made by Assessing Officer on scrap generation at rate of 15% for all three Assessment Years. learned Tribunal also held that assessment order passed under Section 143(3) of Act was void ab initio as notice under Section 143(2) of Act was barred by limitation as it was not issued within 12 months from end of month in which return was filed under Section 129 of Act. [4.5] Feeling aggrieved and dissatisfied with impugned judgment and order passed by learned Tribunal in holding assessment under Section 143(3) of Act void ab initio as well as deleting addition of Rs.18,77,727/- made by Assessing Officer on scrap generation at rate of 15%, revenue has preferred Tax Appeal No.961/2008 to consider aforesaid substantial questions of law. [4.6] It is required to be noted that for Assessment Years 2000-01 and 2001-02 similar additions were made by Assessing Officer on scrap generation at rate of 15% and same came to be confirmed by learned CIT(A). However, for reasons stated in ITA No.3760/Ahd/2002 for Assessment Year 1999-2000, learned Tribunal has also deleted addition made by Assessing Officer on scrap generation at rate of 15% in ITA No.3620/Ahd/2004 & ITA No.3492/Ahd/2003, which have given rise to Tax Appeal Nos.916/2008 & 917/2008. Page 8 of 18 HC-NIC Page 8 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT [4.7] It appears that for Assessment Year 2000-01, Assessing Officer imposed penalty under Section 271(1)(c) of Act, which came to be confirmed by learned CIT(A). However, on deleting addition made by Assessing Officer on scrap generation at rate of 15%, learned Tribunal by impugned judgment and order has allowed appeal preferred by assessee and has deleted penalty imposed under Section 271(1)(c) of Act. [4.8] It appears that for Assessment Year 2002-03 and 2003-04 assessee claimed deduction of interest expenses under Section 36(1)(iii) of Act. However, Assessing Officer disallowed sum of Rs.5,41,415/- and on appeal before learned CIT(A) confirmed disallowance of interest of Rs.2,22,415/-, which has been set aside by learned Tribunal by impugned judgment and order. Similar disallowance of interest expenses claimed by assessee for Assessment Year 2003-04 was claimed by assessee at Rs.3,86,415/- and learned CIT(A) on appeal sustained addition to extent of Rs.2,22,415/- relating to third party and on further appeal, learned Tribunal by impugned judgment and order has set aside said disallowance out of interest expenses and has allowed appeal. aforesaid has given rise to Tax Appeal No.963/2008 for Assessment Year 2002-03 and Tax Appeal No.964/2008 for Assessment Year 2003-04. [4.9] Now Tax Appeal No.965/2008 remains, which is arising out of impugned judgment and order passed by learned Tribunal in ITA No.1111/Ahd/2007 for Assessment Page 9 of 18 HC-NIC Page 9 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT Year 2003-04 by which learned Tribunal has deleted addition under Section 40A(2)(b) of Act made by Assessing Officer. [5.0] We have heard Ms. Mauna Bhatt, learned advocate appearing on behalf of revenue at length. Now so far as common substantial question of law that arises in Tax Appeal Nos.961/2008, 917/2008 and 916/2008 with respect to deletion of additions made by Assessing Officer on scrap generation at rate of 15% is concerned, while deleting such addition in paras 13.1 to 14, learned Tribunal has observed and held as under; 13.1. additions made in block assessment even if confirmed by Tribunal, cannot be basis for making addition in regular assessment. In block assessment additions are made on basis of material found during course of search and which relates to undisclosed income. regular assessment is entirely different from block assessment. We are therefore of view that finding given or estimate made in block assessment is not at all relevant evidence for making addition in regular assessment. In absence of any material or evidence being brought to our knowledge for estimation of scrap generation @ 15%, we do not agree fro basis of addition made by A.O. We also note that assessee has submitted letter dated 30/09/1992 written by Superintendent of Central Excise (Preventive), Page 10 of 18 HC-NIC Page 10 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT Gandhinagar during course of assessment proceedings for Assessment Year 2000-01, copy of which was filed before us and available at pages 16. In this letter, we noted that Superintendent of Central Excise (Preventive) has clearly stated as under:- With reference to your letter it is brought to your kind attention that as per investigations carried out by Department no clearance of aluminium sheet / foils in guise of aluminium foil / sheet scrap has been noticed and it appears that subject case does not lead to any case of evasion of central excise duty by Gujarat Foils Ltd., Chhatral. 14. A.O., we noted, has rejected this letter merely by observing that no details of inquiries conducted by Central Excise were furnished and inquiries referred to in letter do not relate to Assessment Year but relates to period 1996 to September, 1998. We do not find any basis for rejecting this vital evidence by A.O. This is fact that there had been search in case of assessee and period 1996 to September, 1998 relates to search period. On one side when AO is making addition and estimating generation of scrap AO has relied on statement of Shri Navneet Mittal recorded under Section 132(4) while on other hand, AO is rejecting evidence which has been procured by Page 11 of 18 HC-NIC Page 11 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT assessee from Central Excise Department which also relates to same period. We have already given finding that generation of scrap as mentioned in statement recorded under Section 132(4) are not in accordance with scrap generation shown in books of account. AO cannot be permitted to rely on statement recorded under Section 132(4) while making addition to reject independent evidence produced from Central Excise Department for same period while dealing with addition on generation of scrap. In our opinion, AO is not correct in rejecting letter produced by assessee from Superintendent of Central Excise (Preventive) especially when Excise Department is also one of Departments of Government and is mainly concerned with production of finished products for levying and collecting correct excise duty. Thus, we are of view that addition has been made without any evidence or material in possession of AO and addition so made can not be sustained. We have also noted that assessee is regularly maintaining books of account on mercantile system of accounting. books were duly audited Tax Audit under Section 44AB has been carried out. assessee has duly produced books of account which were verified by AO. Excise Department has also duly verified and checked excise records for raw material and finished goods. AO has not pointed out any defects in Page 12 of 18 HC-NIC Page 12 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT books of account regularly maintained by assessee. Even no finding has been given that AO is not satisfied about correctness or completeness of books of account of assessee. No contravention in respect of provisions of Section 143(2) has been pointed out by AO. gross profit of assessee has also not been disputed by A.O. Rather gross profit ratio has increased during year though sales have increased by 83% as compared to Assessment Year 1998-99. AO has not rejected books of account. In our opinion, without rejecting books of account no trading addition can be made. [5.1] Considering aforesaid facts and circumstances and more particularly when Assessing Officer did not reject books of accounts and / or did not point out any defects in books of accounts regularly maintained by assessee and when considering fact that Excise Department also fully verified and checked records for raw materials and finished goods, learned Tribunal has rightly deleted additions made by Assessing Officer on scrap generation at rate of 15%. [6.0] We are in complete agreement with view taken by learned Tribunal in so far as deleting additions made by Assessing Officer for respective Assessment Years i.e. 1999-00, 2000-01 and 2001-02 on scrap generation at rate of 15%. Under circumstances, question no.(A) in Tax Appeal No.961/2008 and sole question in Tax Appeal Nos.916/2008 & 917/2008 are held against revenue Page 13 of 18 HC-NIC Page 13 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT and in favour of assessee. [6.1] Now so far as question No.(B) in Tax Appeal No.961/2008 by which learned Tribunal has held assessment order under Section 143(3) as void ab initio by observing that notice under Section 143(2) of Act was issued beyond period of limitation i.e. beyond period of 12 months or end of month for which return was filed under section 139 is concerned, it is required to be noted that return was filed by assessee on 31/12/1999 and notice under Section 143(2) of Act was served upon assessee on 25/08/2001. Under circumstances, when notice under Section 143(2) of Act was issued beyond period of one year considering decision of Hon ble Supreme Court in case of Assistant Commissioner of Income Tax and Anr. Vs. Hotel Blue Moon reported in [2010] 321 ITR 362 (SC), question no.(B) in Tax Appeal No.961/2008 is held against revenue and in favour of assessee. [6.2] Now so far as question no.(C) in Tax Appeal No.961/2008 i.e. with respect to disallowance of telephone expenses on account of personal use of telephone by Director is concerned, it is required to be noted that Assessing Officer disallowed expenses of Rs.3,10,000/-, which was restricted by learned CIT(A) to Rs.1.7 lacs. learned Tribunal deleted entire disallowance. However, in facts and circumstances of case and keeping question of law, if any, open solely on ground that amount involved is small amount, question no.(C) in Tax Appeal No.961/2008 also stands dismissed. Page 14 of 18 HC-NIC Page 14 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT [7.0] Now so far as Tax Appeal No.962/2008 arising out of ITA No.1317/Ahd/2006 by which learned Tribunal has deleted penalty under Section 271(1)(c) of Act is concerned, on considering impugned judgment and order passed by learned Tribunal, learned Tribunal has observed that since addition made by Assessing Officer of scrap generation at rate of 15% has been deleted, learned Tribunal has rightly observed and held that there is no question of imposition of penalty arising. Considering above, Tax Appeal No.962/2008 stands dismissed as it cannot be said that learned Tribunal has committed any error in deleting penalty under Section 271(1)(c) of Act. [8.0] Now so far as Tax Appeal No.963/2008 for Assessment Year 2002-03 and Tax Appeal No.964/2008 for Assessment year 2003-04 with respect to disallowance of interest expenses claimed under Section 36(1)(iii) of Act is concerned, learned Tribunal has observed that assessee was having interest free funds available with it. learned Tribunal has observed that advances were given by assessee to various parties to extent of Rs.2,62,48,341/- during Financial Year 1996-97. learned Tribunal has also found that even assessee was having interest free funds to extent of Rs.3,93,65,572/- as on 31/03/2002. It is required to be noted that in earlier preceding year no disallowance was made out of interest claimed by assessee. Considering aforesaid facts and circumstances of case, learned Tribunal has rightly deleted disallowance on interest expenses. We are in complete agreement with view taken by learned Page 15 of 18 HC-NIC Page 15 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT Tribunal. Under circumstances, sole question of law in Tax Appeal Nos.963/2008 & 964/2008 are held against revenue and in favour of assessee. [9.0] Now so far as substantial question of law raised in Tax Appeal No.965/2008 arising out of impugned judgment and order passed by learned Tribunal in ITA No.1111/Ahd/2007 for Assessment Year 2003-04 deleting addition made by Assessing Officer under Section 40A(2)(b) of Act is concerned, it is required to be noted that Assessing Officer found that commission of sales at rate of 1.50 per kg had been made to M/s. Maitri Metals Pvt. Ltd and it is covered under Section 40A(2)(b) of Act. assessee made commission to said party at Rs.1.50 per kg and, therefore, Assessing Officer disallowed entire commission of Rs.10,78,930/- under Section 40A(2)(b) of Act as being unreasonable and for extra commercial considerations. However, on appeal, learned CIT(A) held that commission of Rs.1 per kg was reasonable and balance of Rs.0.50 kg was excessive within meaning of Section 40A(2)(b) of Act and, therefore, learned CIT(A) sustained addition of 2/3rd of Rs.10,78,930/-. Against order passed by learned CIT(A) both assessee and revenue preferred appeal before learned Tribunal. revenue preferred ITA No.1111/Ahd/1007 against order passed by learned CIT(A) deleting 2/3rd of Rs.10,78,930/- and assessee also preferred appeal before learned Tribunal against order passed by learned CIT(A) sustaining addition of 1/3rd of Rs.10,78,930/-. By impugned judgment and order, learned Tribunal has dismissed appeal preferred by assessee on Page 16 of 18 HC-NIC Page 16 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT aforesaid issue and consequently learned Tribunal dismissed appeal preferred by revenue i.e. ITA No.1111/Ahd/1007 confirming order passed by learned CIT(A) deleting disallowance to extent of Rs.10,78,930/-. From reasoning given by learned CIT(A) deleting disallowance of 2/3rd of Rs.10,78,930/- under Section 40A(2)(b) of Act i.e. with respect to commission paid to M/s. Maitree Metals Pvt. Ltd. is concerned, learned CIT(A) in paragraph 3.2 has observed as under; 3.2 I have carefully considered submissions of appellant and also perused relevant portion of assessment order. fact remains that increase in commission was 3 times but there was no commensurate increase in profit. No doubt, as per agreement between consignor (appellant) and consignee, over all business benefits have to be taken into account, though however, increase in commission payment to interested party in light of Section 40A(2)(b) will have to be examined with reference to benefit derived by appellant. I have also considered appellate order for preceding year wherein commission payment was allowed in appeal, rate being at Rs.0.5 per kg. As payment was on basis of mutual consent, it cannot be said that increase in commission payment this year was fully justifiable. Taking into account larger business benefits accruing to appellant and connectivity between appellant and recipient, I hold that Page 17 of 18 HC-NIC Page 17 of 18 Created On Sat Feb 13 12:40:14 IST 2016 O/TAXAP/916/2008 JUDGMENT commission of Rs.1 per kg would be reasonable and balance of Rs.0.5 per kg is considered as excessive within meaning of Section 40A(2)(b). AO is accordingly directed to delete 2/3rd of addition of Rs.10,78,930/-. In other words, addition sustained is 1/3rd of said amount. aforesaid has been confirmed by learned Tribunal. We are in complete agreement with view taken by learned CIT(A) confirmed by learned Tribunal. As such, taking into account larger business benefits accruing to assessee and connectivity between assessee and recipient, learned CIT(A) has held that commission of Rs.1 per kg would be reasonable and balance 0.5 per kg is considered as excessive withing meaning of Section 40A(2)(b) of Act. No substantial question of law arises so far as deleting addition under Section 40A(2)(b) of Act to extent of 2/3rd of Rs.10,78,930/- is concerned. Under circumstances, Tax Appeal No.965/2008 also deserves to be dismissed and is accordingly dismissed. [10.0] In view of above and for reasons stated hereinabove, all these appeal deserve to be dismissed and are accordingly dismissed. No order as to costs. (M.R. SHAH, J.) (S.H. VORA, J.) Siji Page 18 of 18 HC-NIC Page 18 of 18 Created On Sat Feb 13 12:40:14 IST 2016 Commissioner of Income-tax-II v. Gujarat Foils Limited