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TMI Blog2013 (9) TMI 360X X X X Extracts X X X X X X X X Extracts X X X X ..... ork in progress, finished goods and scrap. Valuation was carried out by the Departmental Valuer and addition was made on account of difference so worked out. The Assessing Officer rejected the books of account by invoking provisions of Section 145(3) on the plea that method of valuation of closing stock as adopted by the assessee was not within the accepted principle of account. The Assessing Officer also stated that the assessee was generating huge value of scrap out of manufacturing process, which were not properly reflected in the books of account. The Assessing Officer also observed that the assessee was engaged in sale of such scrap outside the books of account thus suppressed the actual profit. The Assessing Officer also stated that the assessee does not maintain the stock register to control over the position of the stock. Accordingly, the addition was made by the Assessing Officer in different years on account of difference worked out between generation of scrap and average rate of scrap sale. The Assessing Officer also disallowed salary paid to Irene Valentine by invoking provisions of Section 40A(2)(b) of the Act. 5. By the impugned order, the ld. CIT(A) held that the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular work cannot be termed as scrap as explained by the appellant that it may be usable in other operations. Any material can not be classified as scrap till it loses its utility in shape or size to be unfit for use in any work. I find force in ld. Authorized Representative's contentions that it is not possible to keep records of surplus/off cut material at one production workshop which is used in another workshop. I also find from the facts of the appellant's case that excise records are required to be maintained not only for raw materials purchased and finished goods sold but also for sale of scrap. The sale of scrap does attract sales tax and excise duty. It is also pertinent to note that the accounting policy of not accounting scrap at the year end but recognizing income at the time of scrap sale is being regularly foI1owed by the appellant since beginning and I do not find any reason to disturb the same as no infirmity or irregularity has been noticed by the AO during the assessment or during the search and seizure action. There is no material/ evidence with the Department to suggest that there has been any scrap sales outside books of account and not accounted for by the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the revenue in the earlier years. Therefore, there is no reason why it should be disturbed, when the assessee has given reasons which are cogent and acceptable. On comparison of valuation of inventories as valued by the DVO and the appellant the following facts emerge :- Particulars As per DVO As per appellant Adopted by Assessing Officer Valuation of Raw material 1,65,60,565 4,58,40,223 4,58,40,223 Valuation of WIP 10,00,74,074 17,74,08,000 17,79,08,000 Valuation of Finished Goods 17,83,488 25,58,2000 25,58,2000 Valuation of scrap 19,28,505 - Different values computed by Assessing Officer in each assessment year. Valuation of stores - 29,39,000 29,39,000 It is seen that valuation of inventory done by the DVO is much less than the valuation done by the appellant. Even the Assessing Officer, has accepted the appellant's valuation. Therefore, it is clear that the valuation report of DVO suffered from inconsistency, misclassification, defects and discrepancies and cannot be completely relied upon both in respect of quantity and values adopted for valuation. No inventory of copper or other bought out items have been in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f raw materials and that the same has been taken and valued by the appellant in the valuation of raw materials. It is evident that during the search proceedings, no document or paper has been found by the AO to indicate any scrap sale outside the books by the appellant. It is also evident that addition made by the AO on account of unaccounted sale of scrap in the assessment order in all the assessment not only based on estimate but also without any corroborative evidence. Moreover, no addition has been made by the AO in the case of the appellant in earlier. However, on the facts and in the circumstances of the appellant's case, there is no denial that scrap is generated out of the manufacturing process which is sold by the appellant. The appellant has no doubt declared scrap sale in all the assessment years but looking at the totality of the picture, the Assessing Officer's observations, nature of the appellant's business, past history of the appellant and appellant 's submissions, in my opinion it would be fair and reasonable if following additions are sustained which would also meet the ends of justice in the appellant's case taking into account quantity of scrap generated and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent of Rs.9.50 lacs in two years commensurate with her qualification, experience and service provided to the appellant company. I find that salary has been paid only upto past of A. Y. 2002-03 and not thereafter. Therefore, disallowance of salary payments to Ms. Irene Valentine of Rs. 6,00,000/- and Rs. 3,50,000/- in A.Y. 2001-02 and 2002-03 respectively are not justified and therefore, deleted. This ground of appeal is decided in favour of the appellant." 10. Against the above order of CIT(A), the Revenue is in appeal before us and the assessee has also filed cross objections for the additions retained by him on account of scrap sale. 11. Rival contentions have been considered and records perused. From the record, we found that assessee was engaged in manufacturing of tailor made heat exchangers and fined tubes there was search at business premises of the assessee on 15.11.2006. During the course of search, no incriminating documents were found. The Department has taken the stock lying at assessee's premises with respect to raw material, work in progress, finished goods and scrap. Departmental Valuer valued the stock and thereafter on estimate basis, the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Assessing Officer on account of raw materials, semi-finished or finished goods. Only addition was made on account of scrap generated during course of manufacturing. In an appeal before the CIT(A), the CIT(A) found that no discrepancy was found in the books of account, therefore, the Assessing Officer was not justified in rejecting books of account. Thereafter, CIT(A) proceeded to decide the addition made by the Assessing Officer on account of scrap generation and its consequent sale. After giving detailed reasoning with regard to the quantum of scrap generated and the value for which it can be sold vis-à-vis valuation arrived at by the DVO, after recording detailed finding, as reproduced hereinabove, the ld. CIT(A) deleted the substantial part of the addition on account of scrap sale. From the record, we found that the assessee is engaged in business of manufacturing and fabrication of engineering items on the basis of specific orders from its customers. Variety of raw materials were used by the assessee. There are twenty types of material, which was used in manufacturing process, but all the items do not yield scrap. We found that Cupru Nickle tubes, Brass plates/tubes, S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's record at Rs. 4,58,40,223/-. Similar is the position with regard to work in progress, which was value by the DVO at Rs.10,00,74,074/- in place of actual value as per assessee at Rs. 17,74,08,000/-. We also found that finished goods was value by the DVO at Rs. 17,83,488/- as against the actual value arrived at by the assessee at Rs. 25,82,000/-. Thus, it is clear that the valuation of the inventory done by the DVO was much less than the valuation done by the assessee . Even the Assessing Officer has accepted the assessee's valuation, which clearly show that DVO's report suffers from inconsistency, mis-classification and defects and discrepancies. Even during course of valuation and assessment proceedings, the assessee has highlighted discrepancies in adoption of valuation rates of various materials including scrap by the DVO, but the same was not taken care of. When no defect was pointed out in the books of account even during the course of scrutiny assessment and when the valuer's report was not accepted by the Assessing Officer, there was no reason for rejection of books of account u/s 145(3) and the CIT(A) has correctly observed that the Assessing Officer was not justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and segregated. If there is no possibility of using it that material is segregated and entered in the excise register after such segregation and then only it is sold to the scrap dealer. The price varies from item to item as well as material to material. There is a difference in selling price of stainless steel (SS) scrap, mild steel (MS) scrap, copper scrap, tube scrap etc. 14. From the record, we also found that the assessee has shown year-wise sales of scrap as under :- A.Y. Scrap Value Amount (Rs.) Percentage of value of actual sale of scrap to the consumption of raw material 2001-02 6,50,358 0.41 % 2002-03 2,93,518 0.24 % 2003-04 6,03,150 0.27 % 2004-05 2,70,279 0.09% 2005-06 1,58,266 0.05 % 2006-07 1,36,388 0.04 % 2007-08 2,67,340 0.04 % Average 0.163 % each year 15. By taking into consideration all these evidences on record and after giving detailed finding the CIT(A) has retained part of the addition on account of scrap sale to meet end of justice. The detailed finding recorded by the ld.CIT(A) has not been controverted by the Department by brining any positive material on record, accordingly, we do not find any reason to interfere in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ene Valentine is a qualified engineer and experience in business and salary paid to her was commensurate with qualification and the services provided to the assessee company. It means as per findings of the learned CIT(A), neither there was excessive payment nor unreasonable payment was made to Irena Valentine looking to her qualification, experience and services so provided to the assessee company. Keeping in to view these findings of CIT(A) vis-à-vis observation of the Assessing Officer, we direct to restrict disallowance of salary to the extent of 50% of the remuneration so paid to Mrs. Irene Valentine. 18. Now we shall take up the cross objection filed by the assessee in all the years pertaining to the addition retained by the learned CIT(A) on account of difference worked out between generation of scrap and average rate of scrap sales. We have discussed in detail while dealing with the revenue's appeal that the additions have been made by the AO on account of scrap generation. However, the AO has applied the estimated rate of scrap on all types of raw materials used out of which most were not generating any scrap. We find that out of the total 22 types of raw material ..... X X X X Extracts X X X X X X X X Extracts X X X X
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