9911796707
TMI Blog2013 (9) TMI 360X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - Decided in favor of assessee. The assessee was 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 - 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 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment years 2001- 02 to 2007-08. 2. Common grievance of the assessee and Revenue in all the years relate to part deletion of addition by the learned CIT(A) which was made by the Assessing Officer on account of difference worked out between generation of scrap and average rate of scrap sale. 3. The Revenue is also aggrieved for deletion of disallowance made by the Assessing Officer on account of salary paid to Irene Valentine u/s 40A(2)(b) of the Income-tax Act, 1961. 4. Facts in brief are that there was search at assessee s business premises on 15.11.2006. During course of search, the physical inventory was taken in respect of raw material, work 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on specific order from customers. The raw materials are issued from stores only on the basis bills of materials initially drawn up as per the bid made. There is no specific finished goods in stock in the case of the appellant as once the equipments are ready, they are despatched. I find force in Ld. AR's submission that the records of materials purchased, consumed and stock in hand are maintained by the appellant by way of bin cards. As regards, the scrap material that is not usable in any particular work as mentioned in sheets of finished material, copper etc. I find that in the appellant s business, every material not usable left in that particular 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous years, any addition was made on account of sales of the scrap even though it was varying from year to year. The mere variation in the sales, therefore, cannot be a reason to suppose that a lower amount of sales is a result of manipulation of accounts. The Hon'ble ITAT also observed that there is nothing that prohibits an assessee following mercantile system of account to have an exception about a particular item to have it bonafide and follow it regularly In this case, the fact that this system of accounting for the sale of scrap followed by the assessee was bonafide is borne out by the factum of its acceptance by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO is erroneous. I find that the AO did not properly appreciate the business process of the appellant and drew incorrect conclusions. The AO made the addition on unaccounted scrap sale by adopting an arbitrary flat 1 % rate of scrap generation of the value of materials consumed as against scrap generation shown by the appellant at 0.41 % (Approx) in all these assessment years. I also hold that the sale price of scrap taken at Rs.40/- per kg. by the AO is not at all justified. It is seen from the sale of scrap declared by the appellant in all these years that the price ranged between Rs.5 to Rs.l8/- per kg. Even the DVO has valued the scrap at Rs.12 to Rs. 15/- per kg. I find force in the appellant's submissions that inventory of scrap taken and valued by the DVO at Rs.l9,28,505/- does contain part of 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I have gone through the observations and findings of the AO mentioned in the assessment order. I have also considered the submissions of the appellant. I find that on the facts and. in the circumstances of the case, the AO was not at all justified in making disallowance of salary payment to Ms. Irene Valentine during A.Ys. 2001-02 and 2002-03. I find that the appointment and remuneration fixation of Ms. Irene Valentine was made in annual general meeting of the appellant company which is a public limited company. The contention of the AO that salary has been paid to Ms. Irene Valentine for capital formation and inflating the expenditure in the company is devoid merit as she has been paid salary after deduction of TDS and the said income has been offered by her in the income tax returns filed alongwith other income at the same tax rate. I find force in the arguments made by the Ld. AR that the reasons given by the AO for making the disallowance are not tenable and correct. Ms. Irene Valentine is a qualified engineer with experience in business and total salary paid to her to the extent of Rs.9.50 lacs in two years commensurate with her qualification, experience and service pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, if scrap does get generated, there are possibility of usage in smaller companies. After all avenues of scrap utilization have been exhausted we sell the remaining scrap to the scrap-dealers. Q.8. Could you please quantify the scrap generated in a year ? Ans. : It is not very significant but I will produce the statement tomorrow. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Q.11. Can you please state at what rates scrap is sold out ? Ans. Scrap varies from type to type. Heavy scrap rate is Rs. 11000/- to Rs. 12000/- per ton.Light scrap like turning and boring rate is Rs. 6000/- to Rs. 7000/- per ton. Q.12. Please furnish the list of parties to whom you sell scrap ? Ans. I will furnish the written list tomorrow. Shri Tiwari stated in response to question no.10. 12. However, no addition was made by 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 accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng an average rate of Rs.14/- per kg. We found that sales of the assessee was fully verifiable and no sales was found outside the books of account. Generation and sale of scrap was subject to Central Excise Control and there was no concealment of sale of scrap. Without any basis, the Assessing Officer has stated that there was huge generation of scrap. We found that whatever scrap was generated has duly been sold and the sale value has been incorporated as income in the manufacturing and trading account. The scrap mentioned in registers BH2 and BH3 included the unusable and waste scrap. On verification of valuer s report, we found so many discrepancies. Even the raw materials was valued by the DVO at Rs. 1,65,60,565/- as against the actual value of Rs. 4,58,40,223/-. Even during course of assessment, the Assessing Officer by disregarding the valuation arrived at by the DVO taken the value of raw materials as per assessee 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was any scrap sale outside the books of account, whereas addition has been made by the Assessing Officer in all the assessment years under consideration on account of unaccounted sale of scrap, which is not only based on the estimate but also without any corroborative evidence. We also found that even in earlier years, during scrutiny assessment, no addition was made on account of such generation of scrap and sale outside books of account. It is not a case where assessee has denied generation of scrap out of its manufacturing process, but at the same time whatever scrap has been generated have been declared and sale value of which was also taken into account while computing its income. In all the assessment years under consideration, the assessee has declared scrap sale. From the record, we also found that periodically when the waste material accumulates, it is sorted out by the shop floor technical persons 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 differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onus is on the Revenue to show that payment so made are not as per legitimate needs of the business or the benefits derived from such payment, is not according to the services so rendered. In the instant case, the Assessing Officer has disallowed the payment by observing that services rendered by Mrs. Irene Valentine was not substantially proved alongwith the documentary evidence. Nowhere the Assessing Officer has stated that Mrs. Irene Valentine has not rendered any services, nor that the qualification and experience of Irene was not commensurate with the services provided to the assessee company. Had it been the case of Assessing Officer that no services were rendered, then the action of the Assessing Officer to disallow the entire payment to Mrs. Irene Valentine was justified. However, the Assessing Officer has just stated that assessee has not substantially proved alongwith the documentary evidence for the services so rendered. However, we also found that while deleting disallowance of remuneration, the ld. CIT(A) has categorically recorded a finding to the effect that Mrs. Irene Valentine is a qualified engineer and experience in business and salary paid to her was commensurat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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