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TMI Blog2018 (1) TMI 803X X X X Extracts X X X X X X X X Extracts X X X X ..... y paid to them. As regards to the findings of the Assessing Officer that most of the parties were relatives to the assessee, CIT(A) was of the view that AO has not properly enquired into the matter to prove that commission payment made to the parties, ultimately flown to the assessee. Looking into the facts and circumstances of the case, we set aside the order of the CIT(A) and restore the matter back to the file of the Assessing Officer to re-adjudicate the payment of commission after conducting a thorough enquiry into the matter. Disallowance u/s. 40A(3) - Held that:- We find that the freight payment is an advance which is subsequently reimbursed to the assessee company. Hence, the provisions of section 40A(3) are not applicable in this case. Hence, we confirm the order of the CIT(A) and dismiss this ground of appeal of the revenue. Addition on account of under valuation of closing stock - Held that:- In the instant case, the appellant has valued the inventory at cost being lower than the net realizable value. It is equally settled that the A.O does not have the power to recompute the cost using any other method in disregard to the method adopted by the appellant which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;2008 against finished products of 3521.367 / MT, the power consumption was 69 units per NT. The furnace oil consumption during the re levant period was 53 Ltrs. Per MT and that considering the past consistent reco rd of burning loss oscillating around 2.25%, the burning loss for this year is reasonably accepted at 2.25% and balance 1% of claim of excess burni ng loss is disallowed. Therefore, adopting the rate of closing st ock of finished goods i.e. @ ₹ 26637/- per MT, the Assessing Officer worked o ut the quantum of inflated burning loss at ₹ 83,78,135/-. 5. Before the CIT(A), the assessee submitted that the yield depends on various factors and it cannot be constant. If the quality of ingots purchased is not to the mark i.e. having more carbon content then the yield of steel rolled product would be los and that the appearance of all ingots would be same and one cannot judge the quality by appearance; that it is an accepted position in trade that average burning loss varies between 2,5% to 4% and such burning loss is considered reasonable. The Excise Department which is more concerned with the production and removal of goods for the purpose of levy of excise duty h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assessment yea r 2008-09 the same has varied between 45 to 50 litres per ton product ion as compared to earlier years the variation is not that much fluctuatin g. 6. The Id CIT(A) after considering the submission of the assessee deleted the addition by observing as under: I have carefully gone through the assessment order, and submissions of the appellant. It is a matter on record that the appellant has maintained quantitative records of raw material consumed and finished product produced. The books of accounts were subject to tax audit which was produced before the A.O. together with bills and vouchers and the same was examined by lest check. The A.O. has not come across any material defect in account so as to hold that any profit has been suppressed. The appellant has satisfactorily explained the reasons for decrease in gross profit and the yield and also variation in consumption. The A.O. has not brought any material on record to disbelieve the book result shown by the appellant. If there is no suppression of material facts, the authority cannot embark upon a speculative assessment of notional profits. The assessment should be based on cogent facts and there should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . I find that the decision of the Hon'ble Kerala High Court in the case of St. Teresa's Oil Mill Vs. State of Kerala (1970) 76 1TR 365 (Ker) is providing strength to the case of the appellant in which 'it has been held that strong and sufficient reasons must be given to indicate that they are unrelia ble-mere disparity in consumption of electricity in certain month s cannot be the reason for rejection of accounts-such variation can be due to various factors beyond the control of assessee-rejection, therefore, not justified. The A.O examined the audited books of account but had not pointed out any specific discrepancy nor has he detected any suppression in sales or inflation in purchases/expenses. No evidence whatsoever was brought on record to prove that, the appellant, in fact, earned more than that returned as per the books of account kept in the regular course of business. The assessment order is evidence to the fact that there was no specific finding given by the A.O to the effect that the method employed by the appellant was such that correct profits could not be deduced there from. It is also not the case of the appellant that it has not followed the mercantile sy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of the scrutiny assessments according to his whims and fancies which is not the spirit of the circulars issued by the Board on scrutiny assessment. An assessment cannot be made arbitrarily and in order that an assessment can be sustained, it must have nexus to the material on record. (CIT v. Mahesh Chand [1983] 199 ITR247, 249 (All.). 13. It is the settled position that, though the AO has very wide powers and is not fettered by technical rules of evidence and pleadings, there is one over-riding restriction on his judgement and that is, that, he must act honestly and diligently on the material, howsoever, inadequate it was, and not vindictively, capriciously or arbitrarily. Probability cannot be construed as material evidence to form .an opinion by-the AO to conclude an assessment and for drawing adverse inference against the appellant unless there is evidence to substantiate such probable inference. . 14. Assessment has to be made based on the real income theory, i.e., income to be determined taxation must invariably be proved to have been the correct quantum of income earned by the appellant during the relevant previous year and the one presumed to have been earne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought to be rejected, was absolutely perverse and could not be sustained in the absence of any opinion expressed or any finding arrived at to the effect that the accounts maintained were incorrect or that the method of accounting plied was such that the income could not be deduced. In the absence any such finding, the account books could not be rejected merely on the ground that item wise stock was not maintained in the stock register. Thus, the rejection of account books was not justified. In ITO v. Bothra International (2008) 117 TTJ (Jd.) 672, it was held that where the A.O laid no material on record to suggest that there had been any suppression of income nor that the appellant carried any activity outside the hooks, merely because of decline in GP rate, books of account could not be rejected. In Delhi Securities Printers v. Dy. CIT [2007] 15 SOT 353 (Delhi) it was held that rejection of books of account merely because appellant has not maintained stock .register,, without pointing out any specific defects in books of account of any nature whatsoever, could not be said to be justified. Such adhoc addition is also unsustainable in view of the decision of the Hon'ble High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrect and complete or income could not be deduced from the accounts maintained by the assessee was not controverted by the I d DR. In view of above, we do not find any reason to interfere with t he order of the CIT(A), which is hereby confirmed and ground of appeal of reve nue is dismissed. 9. Ground No.2 of appeal relates to deletion of addition of ₹ 50,62,705/-made by the Assessing Office on account of commission paid on purchase. 10. The Assessing Officer found that the assessee has claim ed an amount of ₹ 50,62,705/- as commission paid to different person s. Therefore, the Assessing Officer required the assessee to explain the genu ineness of the claim alongwith basis on which the commission was worked o ut, details of relation of the recipients, relatives, friends, employe es and associates concerns, complete address, copy of ledger account to whom the commission was paid. The assessee only submitted that the expenditure was incurred for the business purposes but did not submit the details to substantiate the commission payment. From the details filed before the Assessing Officer by the assessee, it was observed that most of the persons are relatives of membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts and circumstances of the case, we set aside the order of the CIT(A) and restore the matter back to the file of the Assessing Officer to re-adjudicate the payment of commission after conducting a thorough enquiry into the matter. The assessee is directed to produce all bills and documents to substantiate its claim before the Assessing Officer, who will decide the matter after affording proper opportunity of being heard to the assessee. This ground of appeal of the revenue is allowed for statistical purposes. 14. Ground No.3 of appeal relates to deletion of di sallowance of ₹ 3,32,885/- made by the Assessing Officer u/s. 40A(3) of the Act. 15. The Assessing Officer observed that the assessee has made freight payments to different parties exceeding ₹ 20,0007- in a day. Therefore, by invoking the provisions of section 40A(3) of the Act, the Assessing Officer disallowed Rs,3,32,887- and added the same to the income of the assessee. 16. Before the CIT(A), the assessee submitted that the Freight Payable Account is for the preceding year. Freight Liability provided in the accounts and paid during the year under consideration by debiting Freight Liability Accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant. I am of the considered opinion that liability to pay excise duty arises immediately after production of goods and not on sale of goods. Only for administrative purposes, the payment of excise duty is made subject to removal of goods. Thus, there is no merit in the argument of the appellant as regards incurrence of liability towards excise duty. Therefore, it was obligatory on the part of the appellant to include excise duty while valuing closing stock of finished goods. However, at the same time, the appellant was entitled to claim deduction in respect of provision for excise duty. Thus, I am of the considered opinion that the default on the part of the appellant is revenue neutral. Hence, no addition is warranted on account of non inclusion of excise duty in the value of inventory. Accordingly, the addition made by the AO is deleted. It is seen that, the A.O has computed the value of inventory of raw materials and furnace oil based on average purchase cost. It is not the case of the A.O that the appellant has changed the method of valuation of inventory. As per Accounting Standard -2 Valuation of Inventory which has also been notified by the Central Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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