When the assessee successfully explains the source of share application money, the additions made u/s 68 are not sustainable

2.1 Before us the Learned AR for the assessee submitted that the assessee vide letter dated 17.9.09 addressed to the AO a copy of which was placed at page 10 of the paper book had given the name and address as well as PAN of the directors. The assessee had also filed balance sheet along with partners’ capital account in the firm SG Enterprises in which the directors were partners and from which the money was withdrawn for investment in share capital. The AO was therefore not correct in stating that the details were not given or the source was not explained. The Learned DR placed reliance on the order of AO.

2.2 We have perused the records and considered the matter carefully. The dispute is regarding addition of Rs. 4.85 crores being the share application money invested by the two directors who were holding 50% share in the company. We find from the records that the assessee vide letter dated 17.9.09 addressed to AO had given full details such as name, address, PAN of the two directors. The source of the money had been explained as the money withdrawn from the capital account in the firm M/s. S.G. Enterprises. The assessee had also filed copy of the balance sheet of M/s. S.G.Enterprises along  with copy of capital account of the partners showing withdrawal for making investment in shares. The two directors were assessed with the same AO. Under these circumstances we see no infirmity in the order of CIT(A) deleting the addition made by the AO and the same is therefore upheld.

3. The second dispute is regarding addition of Rs. 3,64,27,408/- on account of wastage shown by the assessee. The assessee is in the business of manufacture of utensils. The material used is stainless steel, patta /patti (coil). The AO noted that the assessee had made purchases of raw material weighing 2166889 kg and there was sale of scrap of 845115 kg. The AO noted that the scrap generation during the year was shown at 844008 kg which came to 41.67% of raw material consumed. It was observed by him that the assessee was purchasing patta/ patti which were rectangular in share from which circular sheets were cut of different sizes and at the time of taking out circular sheets from the rectangular patta/ patti, only wastage was the loss of corners which was mathematically shown at 21.5%. It was observed by him that in the remaining process of utensil making, scrap was at the most 1%. He also noted that scrap generation in such industry varied from 18 to 22% and even in worst situation the scrap could not exceed 25%. He therefore accepted the scrap only to the extent of 25% and the balance scrap of 337666 kg was treated as good produced and sold unaccounted. It was noted by him that sale price of finished goods was Rs.127.76 per kg and after making allowance for scrap of 19.88 per kg he computed the value of unaccounted sale at Rs.3,64,27,408/- [337666 x (127.76 – 19.88 )] which was added to the total income. In appeal the assessee submitted that the raw material was not rectangular /square type as used by the AO in the computation. Further scrap are generated not only at the stage of cutting but also at the time of utensil making when the sheets some time break and become scrap. The assessee filed copy of letter from Excise authorities in which it was shown that for kitchen ware there was output of one for input 1.86 which gave wastage of more than 40%. It was also submitted that wastage generation was subject matter of verification by the Excise authorities who allow export only after verification of input output ratio. CIT(A) was satisfied by the explanation given. It was observed by him that the Excise authorities who were in charge of verifying the production and export had themselves issued a letter showing wastage of about 42%. Further the assessee was entitled to DEPB income and therefore unless the export income was correctly shown the assessee would not be entitled the DEPB or duty drawback. He also referred to the decision of the tribunal in case of JCIT Vs VXL (India) Ltd. in ITA No. 54/Asr/1999 in which the tribunal in identical situation based on the letter of Excise authorities accepted wastage of 42% and allowed the claim of the assessee. CIT(A) accordingly directed the AO to delete the addition aggrieved by which the revenue is in appeal.

3.1 Before us the Learned AR for the assessee reiterated the submissions made before the CIT(A) that the patta/ patti which was the raw material was not rectangular in shape but of irregular shape. He referred to the photographs placed at apge 76 to 79 of paper book in support of the claim. Therefore in the circular cutting the wastage was not only 21.5% which will be in case of square shape material. Further, in the process of manufacturing the circular patta/ patti have to pass through a very high pressure during which also breakage occurs. He referred to the letter dated 14.12.2004 of Superintendent, Excise placed at page 57 of the paper books in which it was accepted that input output in case of manufacture of goods from SS patta/ patti was 1.73 : 1 which gave scrap of 42.19%. The letter also mentioned that in case of goods manufactured out of SS flat the input output ratio was 1.76 : 1 which gave wastage of 43.18%. The excise authorities were regularly checking the input output ratio and the exports were allowed only after they were satisfied. Therefore the wastage shown by the assessee was quite reasonable and has to be allowed. The Learned DR on the other hand supported the order of AO. He referred to letter dated 18.9.97 of the assessee addressed to the AO placed at page 30 of the paper book to point out that the assessee had not given the finer details such as copy of challan, invoices, production loss, transfer records etc. Therefore the wastage was not fully substantiated. In reply the Learned AR for the assessee stated that such records could not be produced as these were lying with Custom authorities. However, the wastage could be verified from the books of account which had been done by the AO and there was no dispute about the wastage shown by the assessee. The dispute was only regarding its reasonableness which was supported by the letter of the excise authorities who were closely monitoring the production process as well as export.

3.2 We have perused the records and considered the rival contentions carefully. The assessee is in the business of manufacturing of utensils by using raw material such as stainless steel patta/ patti. The assessee had shown wastage of 41.61%. The AO has allowed wastage only at 25%. As per him, the wastage was only in cutting of the square shape patta/ patti in which only the corners were lost which came to 21.5%. He has observed that the wastage could not exceed in any case 25% and therefore allowed 25% and the balance wastage shown was treated as finished products sold unaccounted. In this process addition had been made of Rs. 3,64,27,408/-. The claim of the assessee is that the patta/ patti are not of the square shape. These are irregular in shape which is supported by photographs placed in the paper book. Therefore in the utting itself there is lot of wastage. There is also wastage when the circular patta/ patti is passed through a very high pressure and in the process of breakage occurs many a times. There is some wastage in the manufacturing also. The assessee had also submitted that entire production process as well as export is monitored by the Excise authorities who allow export only after proper verification. The assessee had filed a copy of letter dated 14.12.2004 of the Superintendent, Central Excise in which input output ratio in case of production of goods out of SS patta patti had been accepted as 1.73 : 1 which gives wastage of 42.19%. The assessee has also referred to the decision of the tribunal in case of JCIT Vs VXL India Ltd. (supra) in which in an identical situation on the basis of letter of Excise authorities wastage upto 42% have been accepted. Thus the wastage is supported by certificate from the Excise authorities who are in charge of monitoring the entire production process and the export of goods by the assessee. Therefore the wastage shown by the assessee at 41.67% cannot be held to be excessive. We therefore see no infirmity in the order of CIT(A) in allowing the relief and the same is therefore upheld.

4. The ground No. 3 is regarding dis-allowance of Rs.46,69,615/- being freight payment to various shipping companies or their agents on the ground that no tax had deducted at source. The AO noted that all the parties except one to whom freight had been paid were Indian residents. Since no tax had been deducted at source he disallowed the claim of freight in respect of resident Indians amounting to Rs. 46,69,682/- under section 40(a)(ia). In appeal the assessee submitted before the CIT(A) that payment of freight had been made to the shipping agents of non resident. Therefore in such cases the provisions of section 194C and 195 were not applicable and no tax was required to be deducted. Reliance was placed on the circular No. 723 dated 19.9.95 of CBDT in which it was explained that in case of such agents of non residents no TDS are required. CIT(A) was satisfied by the explanation given and deleted the addition made by the AO aggrieved by which the revenue is in appeal.