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TMI Blog2015 (10) TMI 2567X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition. Addition on account of cash purchase of raw hide by applying the provision of Section 40A(3) - Held that:- As carefully examining the provision of Rule 6DD(e) of the Rules in which the payments for purchase of produces of animal husbandry ( including livestock, hides and skins) or doing or poultry forming are excluded from the clutches of payment in cash exceeding the specified limit. Therefore, we are of the view that since the payments were made for purchase of raw hides to the producer through the commission agent provision of Rule 40A(3) cannot be invoked as its falls within the exemption clause of Rules 6DD(e) of the Rule. 12. We, therefore, do not find any justification in the addition of 22,10,155/- made on account of purchases in cash by invoking in provision of Rule 40A(3) of the Act so far as the addition deleted by the CIT(A) are concerned, we find that the CIT(A) has mentioned in his order that the payments were made in cash on Sunday therefore, the same stands excluded as per Rule 6DD(j) of the Rule. We therefore, find no infirmity in the order of the CIT(A) deleting the addition Sales effected to sister concern - difference in price - Held that:- In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention of the assessee that every time new Officer should issue a notice u/s 143(2) of the Act. Whenever jurisdiction is transferred from one Officer to other Officer the subsequent officer shall continue with the proceeding from the stage left by the earlier officer. There is no requirement of law to issue a notice u/s 143(2) every time by the new Officer, we therefore, find no merit in the contention of the assessee and we accordingly reject the same. Disallowance made u/s 40(a)(ia) - Held that:- We restore the issue to the file of the AO with a direction to verify the facts and if the recipient has paid the taxes on this receipt no disallowance be made in the hands of the assessee in this regard. Disallowance of pre paid expenses - Held that:- The assessee has credited the pre paid expenses account and debited it to the Freight and Cartage inward account. We, therefore, find no infirmity in the accounting system. Since there is no loss to Revenue, we find no merit in the disallowance Addition of bad debts - Held that:- It is not clear from the orders of lower authorities that requisite conditions of Section 36(2) are fulfilled are not for claiming a bad debts. Therefore, we s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt lay on the assessee and was not discharged. 5. That the Ld. CIT(A) has erred in law a.id facts in failing to appreciate that casn payments made to Shah Traders could not be substantiated by the assessee in remand proceedings directed by the CIT(A) himself and this being the case the entire payments to Shah Traders were required to be disallowed and no part of such payment could be brought within Rule 6DD(j) merely because assessee stated that payments were made on bank holidays. 6. That the Ld. C1T(A) has erred in law and in facts in deleting addition of ₹ 49,09,357/- made on account of sales at other than market rates to sister concerns without appreciating that the AO had adopted the most reasonable method to workout the figure of such sales. 7. That the Ld. CIT(A) has erred in law arid in facts in deleting the addition of Rs, 49,09,357/- without appreciating the fact that the addition was made on account of disallowance of sales to related party below market rates on the basis of the report of the Special Auditors. 8. The order of the CIT(A) is erroneous as reasoning adopted by him for deleting the addition of ₹ 49,09,357/- relies excessively on explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same and for want of corroborating evidence, the AO disallowed the expenditure of ₹ 58,343/-, against which an appeal was filed before the CIT(A) with the submission that the assessee has voluntarily showed a debit balance of ₹ 58,343/-, which were carried forward from earlier years and is not recoverable. The amount being bad debts was required to be written off but inadvertently, the dealing clerk debited the amount to hide account to clear the debit balance instead of written off as bad debts. It was also contended by the CIT(A) that this position was explained to Assessing Officer but did not appreciate the same. The CIT(A) reexamined the claim of the assessee and having verified the fact that the excess payment of ₹ 58,343/- could not be recovered for earlier years or in the year under consideration, therefore, the same would be termed as trading loss. The mistake was made by the Clerk by debiting the same to hide purchase account instead of trading loss. The CIT(A) reexamined the claim of the assessee and having found the truth therein. The CIT(A) accepted the claim and deleted the addition. 6. Now the Revenue is in appeal before the Tribunal and has pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition with respect to payment of ₹ 1.00 lakh made to IBBAN Trading Co. The CIT(A) has held that since this payments were made to IBBAN Trading Co. on Sunday being a Bank holiday, it would not be covered by the provision of Section 40A(3) of the Act as a same is excluded as per Rule 6DD(j). With regard to payment of ₹ 1,57,650/- made to Unique Trader, no evidence was brought forward before the CIT(A) and in the absence of the same the addition of ₹ 1,57,650/- was confirmed by the CIT(A). So far as the transaction of Shah Traders are concerned, the AO has added a sum of ₹ 34,35,285/- being cash payment of purchase of raw hide. In this regard, the CIT(A) has noted that the payment of ₹ 12,25,130/- were made on different dates on Sunday and being a bank holiday a provision of Section 40A(3) cannot be invoked as a same stand excluded as per Rule 6DD(j) of the Income Tax Rules. With respect to remaining payment of ₹ 22,10,155/-, the CIT(A) was of the view that since payments were not made to the producers of animal husbandry livestock hides and skins, the provision of saving clause (e) of Rules 6DD cannot be invoked and accordingly he confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40A(3) of the Act so far as the addition deleted by the CIT(A) are concerned, we find that the CIT(A) has mentioned in his order that the payments were made in cash on Sunday therefore, the same stands excluded as per Rule 6DD(j) of the Rule. We therefore, find no infirmity in the order of the CIT(A) deleting the addition of Rs.Rs.1,57,650/-. Accordingly, this issue is disposed of. 13. Apropos Grounds no. 6,7, and 8, it is noticed that the AO has taken a cognizance of the special auditor report and noted that the assessee sold Chrome Dressed Buff Leather to Treadestone Ltd. and V.T. Dressed Leather to other concern. On verification it was found that similar leather was sold by the assessee to other outsider concern. On further verification, it was found that the rates of sales nearest to sale treadstone Ltd. are that of Kundan Leather Pvt. Ltd. @ ₹ 1200.60 and to popular Trading Corporation. The Assessing Officer further observed that it would be in fitness of things, to take the average sale rate of these two parties, which are nearest to Treadstone Ltd. and treat this average rate as the one at which the assessee should have sold Chrome Leather to its associate concern Tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate charged to the two firms. In this connection, the following points also need to be noted: (a) The associated firms are tax paying companies paying identical rates of taxes. Hence, the tax saving as a group cannot be achieved by charging differential rates. (b) The quantity sold to the associated firms is several times higher, as compared to the sales made to the outside parties and is not comparable. (c) The hide is a natural product derived out of the slaughtered or dead animals. The animals, being living beings, are of different sizes and shapes and are not identical suffer from various sicknesses, injuries, infirmities etc. Hence, the leather derived out of the animals is of varying qualities, described as 1st quality and IInd quality etc. The outside parties buy only 1st quality material, where as the associated firms are given all the available qualities." 15. The CIT(A) reexamined the scheme of the assessee in the light of the detailed explanation and was of the view whatever little difference in prices are there it has to be seen in the light of quantum of sale. The sale to M/s Popular was of very small quantity and that too single quality, whereas the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the quality of leather sold and thus the rates would vary greatly between the qualities. Therefore, one cannot compare the average rate of sale made to Treadstone with that of M/s Popular, where only one quality in small lot was sold. In view of the aforesaid explanation, I am of the considered view that the comparison drawn by the AO was erroneous since:- i) he has compared the rates of number of hides sold as against the rates per dm2 of the hides sold ii) he has not considered the difference in quantity and quality sold. 12.2.1 Accordingly, it cannot be said that goods have been sold at lesser price to Treadstone Ltd. in this view of the matter, the addition of ₹ 49,09,357/- made by the AO stands deleted." 16. Aggrieved, the Revenue has preferred an appeal before the Tribunal. Ld. DR has placed reliance upon the order of the AO and no defect in the order of the CIT(A) has been pointed out. Whereas Ld. counsel for the assessee besides placing reliance on the order of the CIT(A) has contended that rate of hides depends upon its quality and sizes and the sizes are to be measured as per diameter. Since the hides are not manufactured and are obtained from the animals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , although, they also have mentioned the same has 'finishing leather' and not 'finished leather. In view of this situation the working of ratio done by the assessee appears to be more realistic and the same is adopted for calculation. The Special Auditors have taken the industry norms of the above ratio at 50% to 60%. Third Patiy inquiries were made from the Central Leather Research Institute, Jajmau, Kanpur/ Vide their letter dated 20.6.2011 they have given this ratio at 60% to 70% for normal leather and have also added that, thickness, source, health of the animal and type of leather to be produced play a major role in the chemical cost variation meaning thereby that, there is an element of variation possible. The assessee was a/so required to give its explanation regarding the higher chemical consumption. Vide its reply filed on 27.06.2011, the assessee has also narrated the same factors. Looking into the fact that, the major product of the assessee is' saddlery and harness leather, which is thicker and thus requires more chemical input for tanning and finishing, it is considered proper to give another 10% variation over and above the 70%, as informed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was higher than the year under assessment, has already been accepted by the Department. The CIT(A) reexamined the claim of the assessee, in the light of replies and various evidence and the CIT(A) was of the view that the institute has categorically stated that the consumption of chemical in respect of samples given vary from ₹ 30/- to 50/- per Kg. of the raw hides whereas consumption of chemicals per square ft. of finished leather would vary to ₹ 35/- to ₹ 60/-. The CIT(A) accordingly restore the matter to the AO with a direction to determine the average cost of consumption of chemicals/ per sq. ft/kg of finished leather/raw hide and if such chemical consumption is within the outer norms as given by the institute, no addition would be required to be made on account for consumption of chemicals. The relevant observation of CIT(A) is extracted hereunder for the sake of reference:- "I have perused the details. The A.O. h,ad directly enquired from Central Leather Research Institute, Kanpur. The CLRI has replied to the queries of the A.O. through their letters dated 20.06.2011, 15.07.2011 and 14.10.2011. These letter are reproduced as under: To Mr, Rakesh Tripat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any dispute arising out of issue of this letter. With kind regards, Sd. P.K. Bhattacharyya Scientist To, The Deputy Commissioner of Income Tax, Circle-5,15/295-A, Civil Lines, Kanpur Sub: Manufacturing of Finished Leather from Raw Hides-Providing information of Weight wise Ratios of Consumption of Consumable Stores of Raw Hide- Request Regarding. Sir, With reference to your letter no. nildt. 11.07.11 regarding the subject cited above, please note our comments as follows. 1. Due to several reasons, cost of chemicals and raw hide/finished leather ratios vary from case to case. 2. Consumption of chemicals depends on weight of raw material upto the stage of CRUST (unfinished leather) 3. Quantity of finishing chemicals depends on surface area and not weight. 4. There is a wide range of chemicals which can be used in processing of various types of leather. 5. Selection of chemicals depends on the property requirement of the final leather. 6. Even for similar leather use of some variety of chemicals may differ according to choice and requirement of buyer. 7. In Tanning, BCS (Basic Chromium Sulphate) is generally used upto 8% of pelt weight. But t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd draft towards our fees. It is therefore requested to take necessary action to enclose a required bank draft towards our fees for providing technical opinion as you may require in future. You may ask the party to deposit draft as customs do for the samples drawn by them. Last but not the least, may I apologise for the delay in responding because I received your letter only after returning back from my official deputation to Hyderabad. I am really sorry for the inconvenience. If may please be noted that the above opinion is technical and not intended for any advertisement/ publicity/legal purpose. The Institute shall be indemnified against any dispute arising out of issue of this letter. Sd. Scientist fn-charge 13,2.1 The Institute has categorically stated that the consumption of chemical in respect of given samples would vary from ₹ 30/- to ₹ 50/- per Kg. of the raw hide whereas consumption of chemicals per square ft. of finished leather would vary to ₹ 35/- to ₹ 60/-. In view of this letter of the CLR1, I direct the A.O. to determine the average cost of consumption of chemicals/Sq. ft/kg of finished leather/raw hide and if such chemical consum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,41,753/- incurred on freight and cartage (inward) expenses without appreciating the facts and circumstances of the case. 05. Because the CJT(A) has erred on facts and in law in upholding the disallowance of ₹ 30,099/- in the name of Irfan Hyderabad, being amount debited to purchase account without appreciating the facts and circumstances of the case, which amount being relatable to business and being written off, the same is allowable and be deleted. 06. Because the CIT(A) has erred on facts and in law in upholding the addition of ₹ 1,57,650/- made to Unique Traders, upholding the same to be in violation of the provisions of section 40A(3) of the Act. 07. Because the CIT(A) has erred on facts and in law in upholding the addition of ₹ 22,10,155/- made to Shah Traders in respect of purchase of raw hides, holding the same to be in violation of the provisions of section 40A(3). 08. Because the CIT(A) has failed to appreciate that the entire purchase of raw hide is fully verifiable, which purchases have not been doubted, the circumstances under which the purchases have been made has been ignored and has arbitrarily been held that the provisions of section 40A( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferring the file from ACIT-5, Kanpur to DCIT, Circle-5, Kanpour. No order having been passed u/s 127(1) transferring the file from ACIT- 5 to DCIT, Circle-5 Kanpur, the impugned assessment order is without jurisdiction in as much as DCIT, Circle-5 did not have the jurisdiction to frame the assessment. 24. The Ld. DR has contended that notices were issued by the Assessing Officer having jurisdiction over the assessee at the relevant point of time. The first notice u/s 143(2) was issued by the Assessing Officer having jurisdiction over the assessee and during the course of assessment proceeding, jurisdiction is changed and subsequent proceedings are to be conducted by the concerned officer. It is not necessary that every time whenever jurisdiction is shifted or transferred to one Officer to other officer, the subsequent Officer would issue a notice u/s 143(2) of the Act. The legal requirement is to issue notice u/s 143(2) of the Act before initiating the assessment proceeding. Therefore, there is no requirement of law that the Officer, who has completed the assessment, should have issued the notice to the assessee u/s 143(2) of the Act. 25. Having carefully examined the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be made u/s 40(a)(ia) of the Act in the light of various judicial pronouncement. 27. Ld. DR on the other hand, has contended that in such circumstances, the matter may be restored back to the AO for verification of these facts, whether the tax was paid by the recipient and if paid no disallowance can be made u/s 40(a)(ia) of the Act in the hands of the assessee. 28. Having carefully examined the order of the lower authorities, in the light of rival submission, we find force in the contention of the assessee and we accordingly restore the issue to the file of the AO with a direction to verify the facts and if the recipient has paid the taxes on this receipt no disallowance be made in the hands of the assessee in this regard. 29. Apropos Ground No.4, it is noticed that during the course of assessment proceeding, Assessing Officer has noted that the assessee has debited a sum of ₹ 1,41,753/- in the name of all World Movers Logistics Pvt. Ltd. on account of freight charges against bill dated 24.03.2007. Since the assessee has debited prior period expenses, it was disallowed by the AO. The assessee preferred an appeal before the CIT(A) with the submission that it has paid & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's clerk has made incorrect entries instead of claiming it to be a bad debts. During the course of hearing, Ld. counsel for the assessee has contended that let the matter be send back to the AO to verify the facts. If the assessee succeeds in establishing it to be a bad debt, same be allowed. Ld. DR has placed reliance upon the order of the CIT(A). 32. Having carefully examined the orders of the lower authorities, we are of the view that it is not clear from the orders of lower authorities that requisite conditions of Section 36(2) are fulfilled are not for claiming a bad debts. Therefore, we set aside the order of the CIT(A) and restore the matter to the file of the AO with a direction to examine the claim of bad debts in the light of facts whether the assessee has fulfilled the requisite conditions of section 36(2) of the Act. 33. Apropos Grounds No. 6 to 11, the AO made an addition of ₹ 22,10,155/- being cash payment to Shah Traders and ₹ 1,57,630/- to Unique Traders and these grounds have been adjudicated while dealing Grounds no. 4 and 5 of the Revenue's appeal. Therefore, we find no justification to readjudicate it again in the assessee's appeal. Accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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