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Case Law Details

Case Name : Betterman Engineers Pvt. Ltd. Vs I.T.O. (ITAT Kolkata)
Appeal Number : ITA.No.2001/Kol//2014
Date of Judgement/Order : 06/06/2018
Related Assessment Year : 2010-11

Betterman Engineers Pvt. Ltd. Vs I.T.O. (ITAT Kolkata)

In the instant case the assessee has acquired certain fixed assets on lease and has charged depreciation on the same. The assets being the godown building, office building, power house building, Weigh Bridge room and machinery. The ld. AO on the basis of the statement made by the director of the assessee company namely Shri D.K.Jaiswal that these assets cannot be put to use during the relevant year and disallowed the depreciation as claimed for.

The ld. CIT(A) upheld the order passed by the ld.AO on the ground that the assessee has failed to submit any direct evidence to establish that the relevant assets had been utilising during the year, and the evidence so submitted does not establish the use of assets in question.

It was the case of the ld. AR that these assets were not put to use but ready to use. The ld. AR further contended that the assessee was the owner of these assets and these assets were for the purpose of business of the assessee company which are not in dispute. Since these assets were ready to use, though not being utilised during the year under consideration in the said business depreciation is to be allowed on such assets. He has relied upon the judgment passed by the Hon’ble Jurisdictional High Court in the case of CIT, West Bengal-IV, Calcutta vs Norplex Oak India.

Taking into considering the ratio laid down in the judgment under reference we find that the assets acquired by the assessee company on lease were ready to use though not used in the business for whatever reason the assessee is entitled to get relief of deprecation as charged on these assets.

FULL TEXT OF THE ITAT JUDGMENT

The instant appeal has been preferred by the assessee against the order dated 23.07.2014 passed by the Commissioner of Income Tax-(A)-I, Kolkata arising out of an order dated 22.03.2013 passed by the Ld. Income Tax Officer, Ward-1(1), Kolkata u/s 143(3) of the Income Tax Act, 1961 (Act) (hereinafter referred to as the ‘ Act’ ) for the A.Y. 2010-11 on the following grounds :-

“1) On the facts and in the circumstances of the case, the Hon ‘ble C.I. T. (Appeals) was not justified and concurrent with fact as well as erred in law to confirm the addition of Rs. 95,68,468/- as shortage of stock without appreciating the facts and explanations provided. The appellant prays that the addition of Rs. 95,68,468/- made in respect of shortage of stock be deleted.

2) On the facts and in the circumstances of the case, the Hon ‘ble C.LT. (Appeals) was wrong and unjustified in confirming the addition of Rs 5,58,525/- towards under valuation of Closing stock without considering the submission made at the time of proceedings. The appellant prays that the addition of Rs. 558525/- made in respect of undervaluation of stock be deleted.

3) On the facts and in the circumstances of the case, the Hon ‘ble C.I. T. (Appeals) has quite unjustfiedly confirmed the addition of Rs 6,40,000/- paid as Salary to the ladies directors of the Company. The appellant prays to delete the disallowance of Rs. 640000/- made U/s. 40A(2) of the Income Tax Act, 1961.

4) On the facts and in the circumstances of the case, the Hon ‘ble C.I. T. (Appeals) was wrong and unjustified in confirming the addition of Rs 3,07,487/- on depreciation without appreciating the facts of the case. The appellant prays that the addition of Rs. 307487/- on account of depreciation be deleted.

5) That the appellant craves leave to add or alter, amend and modify substantiate, delete and/or revise all or any of the grounds of appeal and or before the final hearing.”

2. Ground No.1 relates to the addition on account of shortage of stock. The fact is this that the assessee company is engaged in fabrication from sheet metals basically is a manufacturing and trading unit. The assessee had shown sales of stock of MS Scrap/Off Cut/Wrong Cut of 13,27,718 kg at a sale value of Rs.79,63,323/-. Upon verification of sale bills it is seen that sales were made @ Rs. 13-14 per kg and ultimately it was found that only 591681 kg of the above stock has been sold. Since the appellant has shown sale of stock of 5,91,681.6 kg. the balance stock of 7,36,036 kg (1327718 – 591681.6) should have been included in the closing stock which was found shortage. It appears from the records that the assessee has not maintained any stock register on such item. The explanation given by the assessee in support of this shortage was not accepted by the AO and therefore the AO made an addition of 95,68,468/- to the total income of the assessee as undisclosed stock of MS Scrap (wrong cut). Such order was confirmed by the ld. CIT(A) and hence the appeal before us.

3. At the time of hearing of the matter the ld. AR submitted before us that the assessee company does not have any factory of its own and having an open shed only. It was further submitted by the assessee that there was no scope for physical verification of the stock being heavy and bulky items and the assessee used to verify the closing stock under ‘eye estimation’. Only upon physical verification as demanded by the auditors 700 metric tonnes was found short in the closing stock which was brought to the notice of the Board of the company of the assessee. The supervisor of the company thereafter resigned from service. It was further submitted by the ld. AR that when the matter was brought to the notice of the Directors of the company it was decided to take legal action upon which general complaint were lodged before the concerned police station copies whereof have been annexed to the paper book available at pages 11 to 15. The correspondences of the Board of Directors were also annexed to the said paper book at pages 16 to 23. The ld. AR argued that it was not possible for them to keep vigil all the time on the factory shed being an open one and though steps were taken repeatedly to control the situation by making complaints one after another before the concerned police station, theft occurred frequently resulting to loss suffered by the assessee, fact of which was made known to the AO with corroborating evidence thereof; the same was not considered by the ld. AO and the CIT(A) as well. The ld AR further submitted that the learned AO took the shortage of scraps as stock in hand and added back an amount of Rs.95,68,468/- as income being the value of scrap shortage of 736036 kgs at an assumed rate of Rs. 13.00 per Kg. The ld. AO came to the conclusion that there was no loss through theft and considered the shortage of stock as undisclosed sales. In Tax Audit a reference was made to the audited accounts which is fully in agreement with the submission made before the Ld. AO but the Ld. AO did not consider the shortage of wrong cuts and scraps aggregating to 736.036 M.T. although supported by authentic evidences.

On the contrary, the ld. DR vehemently argued in support of the orders passed by both the lower authorities by saying that no proper action has been taken by the assessee to stop such theft where more than 20% of the stock is found shortage due to theft as claimed by the assessee. He further ascertained that only general diary has been lodged against such theft but no FIR or proper complaint was made by the assessee which shows lacuna in justifying the genuineness of the explanation of shortage by theft as explained by the assessee.

4. We have heard the counsels of both the parties. We have perused the orders of the authorities below and relevant materials available on records. It appears from the records that there is a shortage of stock of 7,36,036 kg in the books of accounts which was to be explained to the AO by way of loss due to theft. We find from the records that general dairies were made before the concerned police station without even mentioning the quantity of materials theft. It is neither believable that the huge quantity of materials were lost within a short period of three years from the shed of the assessee. It further appears that this fact of theft was not disclosed by the assessee initially before the AO but only when the shortage was detected by the AO during the assessment proceedings, such explanation was submitted by the assessee. It is also evident from the certificate of the Chartered Accountant dated 26.08.20 10 relied upon by the assessee, that no actual weightment of the stock had been made during the course of physical verification which is clear from the statement reproduced as under :-

“There was no weightment facility within your factory or nor by area, so the verification was made by sectional measurement mathematical and procedure as alternative to actual weight.”

We find that the explanation given by the assessee both before the AO and the CIT(A) and before us as well is not strong enough to justify the fact of theft specially taking into consideration the conduct of the assessee in not taking proper steps to control the situation. The assessee ought to have taken proper/adequate measure to save the loss of the company, as claimed. No proper explanation is forthcoming form the assesee in this respect. We, however, considering the submissions made by the parties and the records available before us we think it fit to delete 10% of the addition in the total income as undisclosed stock of MS Scrap (wrong cut) as ordered by the AO and hence the ground taken by the assessee is partly allowed.

5. Ground No.2 relates to addition of Rs.5,58,525/- made by the AO towards undervaluation of closing stock.

6.  The assessee has shown closing stock of various items of raw material at the end of the relevant financial year and the total value of such closing stock was shown at Rs.1,79,40,385/- as on 31.03.2010. In the audit report   Schedule-5 the auditor has mentioned that the stock was valued by FIFO method. Details of such raw materials was verified with respect of relevant purchase bills during the assessment proceedings. The AO found some of the items was undervalued or not valued properly as per the method mentioned by the auditor in the audit report. The assesee was asked to furnish the true vlauation of stock by FIFO method. Fresh valuation was made by the assessee himself and the valuation of closing stock was determined at Rs.1,84,98,910/-. The difference of Rs.5,58,525/- has been added in the total income of the assesse by the AO for under valuation of the closing stock of raw material.

6.1. The assessee preferred an appeal against the said order before the ld. CIT(A) but without any result.

7. At the time of hearing of the instant appeal the ld. AR relied upon the audited balance sheet and profit and loss account along with the notes to the accounts for the year under consideration where it was mentioned “raw materials are valued at cost or market price whichever is lower. Cost of materials is determined on FIFO basis”. He further added that on the basis of such noting the stock of raw material are to be valued at cost or market value whichever is lower. The FIFO is a method to determine the cost and not the value of stock to be taken for consideration. He further submitted that as per Accounting Standard-2 related to inventories issued by ICAI the inventories should be valued at cost or market value whichever is lower. It has been followed by the assessee since years. The ld. AO misinterpreted that the inventories are to be valued at cost considering FIFO method whereas the cost is to be determined following FIFO method and the inventory is to be valued at cost or market value whichever is lower. The AO has not disputed the market value of the inventories neither the auditor found any infirmity in the valuation of the inventories. More so, the ld. AO has accepted the auditors report without any objection but made addition. The ld. AR further urged that the ld. CIT(A) has wrongly accepted the contention made by the ld. AO and confirmed the addition of Rs.5,58,525/- which is unjustified, wrong and should be deleted. The ld. DR relied upon the orders passed by the ld. AO and raised objection to the submissions made by the ld. AR.

8. We have heard the submissions made by the respective parties and we have also perused the relevant materials available on record. We find substance in the submissions made by the ld. AR in this regard. We find that the assessee has followed FIFO method while determining the cost of inventories. The raw materials were correctly valued following the Accounting Standard at cost or market value which ever is lower as shown by the assessee. The ld. CIT(A) without taking into consideration this particular aspect of the matter followed the observations made by the ld. AO which is unjust and we therefore deleted the addition of Rs.5,58,525/- to the total income of the assessee on the ground of under valuation of stock of raw material. Thus ground no.2 preferred by the assessee is allowed.

9 The third ground relates to the salary of Rs. 1,60,000/- each paid to four lady directors by the assessee company disallowed by the AO u/s 40(A)(2) (b)of the Income Tax Act, 1961 (Act).

10. The assessee claimed expenses of Rs. 12,80,000/- on Directors’ remuneration, eight in number, out of which four are lady directors. It is the case of the assessee that the assessee has three production units to run and four male directors remain involved in supervising production, marketing and visiting customers office, collection and procurement of raw materials etc in those units. The company has engaged four female directors for adequate surveillance and supervising of official works including for duly timely compliance with statutory obligations in running the business. The ld. AO rejected the plea of the assessee for allowing such deduction; according to the AO such expenses shown as salary/remuneration to these directors are bogus expenditure. He then disallowed the total remuneration of Rs.6,40,000/- and added in the total income invoking the provision of section 40(A)(2) of the Act.

10.1. The provision of section 40(A)(2) (b) of the I.T.Act lays that where an assessee incurs any expenditures in respect of which payment is required to be made or has been paid to any persons referred to income clause (b) to section 40(A)(2) of the Act and such expenditure is excessive, unreasonable having regard to (a) fair market value of goods, services or facilities for which payment is made or (b) legitimate need of the business of the assessee or (c) the benefits derived by or accruing to the assesee in receipt of such goods, services or facilities, is not allowable. In this particular case the AO in his order specifically observe that no proper documents has been furnished by the assessee in order to justify the qualification/expertise of these lady directors to supervise the work and handle these statutory matters and hence the assessee failed to justify the payment of remuneration as mentioned above. The AO further relied upon the statement made by another Director of the company to this effect that these lady directors are involved in organising functions, doing puja etc and they do not come to the office regularly. Such activities do not come under the purview of business activities according to the AO. The AO observed this as a sort of arrangement to reduce the tax liability and thus the same is a bogus expenditure. The total remuneration of Rs.6,40,000/- claimed to have been paid to the four lady directors was disallowed and added in the total income of the assessee. The ld. CIT(A) affirmed the order passed by the AO.

10.2 At the time of hearing of the matter the ld. AR strongly argued in support of his claim for allowing Rs.6,40,000/- as the remuneration of the lady directors of the assessee. He further pointed out to the order passed by the CIT(A) where a specific query was made as to whether any tax has been paid by these ladies on the remuneration paid to them in the absence of any such evidence in support thereof. The ld. AR has taken us to the return of income of the lady directors furnished by the assesee forming part of the record from pages 64 to 71 of the paper book. However, the ld. DR supported the contentions made by the AO while allowing the claim of the assessee in this respect.

11. We have heard the counsels for the respective parties. We have perused the orders of the authorities below and relevant materials available on records. We find that even if the lady directors are not involved in pure managerial or supervising work of the assessee company their contribution to some extent cannot be brushed aside. Both the AO as well as the CIT(A) indirectly accepted that to certain extent the women directors are rendering services to the benefit of the assessee company. Furthermore, taking into consideration the return of income of these lady directors it can also not be said that the income has escaped taxation. We, therefore, think it fit to allow 30% of the remuneration given to these lady directors. This ground of appeal preferred by the assessee is partly allowed.

12. Ground No.4 relates to disallowance of depreciation of Rs.3,07,487/-. In the instant case the assessee has acquired certain fixed assets on lease and has charged depreciation on the same. The assets being the godown building, office building, power house building, Weigh Bridge room and machinery. The ld. AO on the basis of the statement made by the director of the assessee company namely Shri D.K.Jaiswal that these assets cannot be put to use during the relevant year and disallowed the depreciation as claimed for.

12.1. The ld. CIT(A) upheld the order passed by the ld.AO on the ground that the assessee has failed to submit any direct evidence to establish that the relevant assets had been utilising during the year, and the evidence so submitted does not establish the use of assets in question.

13. It was the case of the ld. AR that these assets were not put to use but ready to use. The ld. AR further contended that the assessee was the owner of these assets and these assets were for the purpose of business of the assessee company which are not in dispute. Since these assets were ready to use, though not being utilised during the year under consideration in the said business depreciation is to be allowed on such assets. He has relied upon the judgment passed by the Hon’ble Jurisdictional High Court in the case of CIT, West Bengal-IV, Calcutta vs Norplex Oak India. The ld. DR raised his objection to the submissions made by the ld. AR and relied upon the orders by the lower authorities.

14. We have heard the submissions of both the parties. We have perused the relevant materials available on record. We have gone through the judgment passed by the Jurisdictional High Court regarding the same issue. The relevant portion of the judgement is narrated herein below :

“13. In the case before us there is no dispute that the assessee is the owner of the plant and machinery. The only dispute before us whether the assessee should be treated to have “used” the plant and machinery for the relevant assessment year notwithstanding its admission that the machines could not be operated as would appear from the report of its Director.

14. In our opinion, the word “used” appearing in section 32(1) of the Act should be given a reasonable meaning. By introducing the said provision, the Legislature wanted to give the benefit of depreciation of the plant and machinery purchased by the assessee and used for the purpose of business. The word “used” should be interpreted to mean a situation where the machineries which are required for implementing the nature of business the assessee runs, have been kept ready for use for the above purpose. In other words, if the assessee purchases a machine which is not required at all having regard to the nature of the business carried on by the assessee, he will not be entitled to the benefit of depreciation because the said machinery is not meant for the use in the business of the assessee.

15. On the other hand, an assessee-doing various manufacturing items may have purchased different machineries having regard to the diversity of the orders he gets or expects to get. In the process, a particular type of machinery may be required for finishing a particular type of a product. If in a given assessment year, the assessee did not get any order of manufacture of that particular item necessitating the use of that particular machinery, for that reason, he should not be deprived of the benefit of depreciation of that machinery although the same was ready for use whenever an order of manufacture of such item would come.

16. In the case before us, the assessee was ready for doing his business. But for the adverse law and order situation, he could not actually run the factory although all the machineries were ready for use and the valuation of such machinery also depreciated notwithstanding its non-user. Notwithstanding such adverse law and order situation, the assessee did not abandon its business but suffered loss for such a state of affairs prevailing in that State over which he had no control with an expectation of resuming the business. This is not a case where the assessee himself is embroiled in a dispute with his labourers and in the process, has decided to declare a lockout expressing its intention not to run the business. Thus, taking into consideration the circumstances of the present case, we are of the view that the Tribunal below rightly granted depreciation in favour of the assessee.”

14.1. Taking into considering the ratio laid down in the judgment under reference we find that the assets acquired by the assessee company on lease were ready to use though not used in the business for whatever reason the assessee is entitled to get relief of deprecation as charged on these assets and we therefore quash the order passed by the ld. CIT(A) and delete the addition made by the ld. AO to the tune of Rs.3,07,487/- which was subsequently confirmed by the ld. CIT(A). This ground of appeal is accordingly allowed.

15. In the result the appeal by the assessee is allowed.

Order pronounced in the Court on 06.06.2018.

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