Gei Hamon Industries Ltd. Bhopal

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IN THE INCOME TAX APPELLATE TRIBUNAL ,
INDORE BENCH, INDORE
BEFORE SHRI JOGINDER SINGH, J.M. AND SHRI R.C.SHARMA, A.M.

PAN NO. : AABCG1403B

I.T. (SS).A.Nos. 34 to 40 /Ind/2011
A.Y s. : 2001 -02 to 2007 -08

ACIT, M/s.GEI, Hamon
1(1), Industries Limited,
Bhopal. Bhopal.
vs

Appellant Respondent

PAN NO. : AABCG1403B

C.O.Nos.44 to 50/Ind/2011
(Arising out of I.T.(SS).A.Nos. 34 to 40/Ind/2011
A.Y s. : 2001 -02 to 2007 -08

M/s.GEI, Hamon ACIT,
Industries Limited, vs 1(1),
Bhopal. Bhopal.

Appellant Respondent

Department by : Shri Keshave Saxena, CIT DR
Respondent by : S/ Shri H.P.Verma, Adv.,Vipin
Gupta and Shri Ashish Goyal,
CAs

Date of Hearing : 30.04.2012
Date of : 07 .05.201 2
pronouncement
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O R D E R

PER R. C. SHARMA, A.M.

These are the appeals filed by the Revenue and cross

objections filed by the assessee for 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

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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

the books of account. The Assessing Officer also observed that

the assessee was engaged in sale of such scrap outside the

books of account thus suppressed the actual profit. The

Assessing Officer also stated that the assessee does not

maintain the stock register to control over the position of the

stock. Accordingly, the addition was made by the Assessing

Officer in different years on account of difference worked out

between generation of scrap and average rate of scrap sale.

The Assessing Officer also disallowed salary paid to Irene

Valentine by invoking provisions of Section 40A(2)(b) of the

Act.

5. By the impugned order, the ld. CIT(A) held that the

Assessing Officer, was not justified in invoking provisions of

Section 145(3) in the case of the assessee. The ld. CIT(A)

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observed that in the assessment order, the Assessing Officer

has not specified any material defects in the books of account

of the assessee.

6. The ld. CIT(A) also deleted the part of the addition

made by the Assessing Officer on account of scrap sales after

having the detailed observations mentioned hereinbelow.

7. He further observed that findings /conclusions of the

Assessing Officer are based on the valuation report of the

Departmental Valuer without taking into consideration mis-

classification and discrepancies therein as pointed out by the

assessee. The detailed findings of the CIT(A) in this regard was

as under :-

“I have carefully considered the submissions of the

Ld. AO in this regard. I have also perused the

observations and findings of the AO mentioned in

the assessment order. After due consideration of

the matter, I hold that on the facts and as per law,

the AO was not justified in invoking the provisions

of section 145 (3) of the I.T Act in the case of the

appellant. I find from the assessment order that the

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AO has not specified or pointed out any material

defect in the books of account of the appellant

company. It is seen that the findings/ conclusions

of the AO are based on the valuation report of

Department Valuer without taking into

consideration misc1assification and discrepancies

therein as pointed out by the appellant. It is evident

that as per system of accounting, the appellant

maintains the stock of raw materials in the form of

bin cards. There is no stock register maintained for

work in progress and finished goods as the

appellant manufactures equipments 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

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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 purchased and finished goods sold but

also for sale of scrap. The sale of scrap does attract

sales tax and excise duty. It is also pertinent to

note that the accounting policy of not accounting

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scrap at the year end but recognizing income at the

time of scrap sale is being regularly foI1owed by

the appellant since beginning and I do not find any

reason to disturb the same as no infirmity or

irregularity has been noticed by the AO during the

assessment or during the search and seizure

action. There is no material/ evidence with the

Department to suggest that there has been any

scrap sales outside books of account and not

accounted for by the appellant. That the appellant

Company is maintaining excise records, filing

excise returns and these are subject to periodic

checking and audit by the Central Excise

Department. The notes to account forming part of

audited financial statements as well as tax audit

report give quantitative details of stock maintained

by the appellant. The Income Tax law does not

prescribe any maintenance of particular type of

scrap records. I rely on the decision of the Hon’ble I

T A T Chandigarh Bench in the case of Avon cycles

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Pvt. Ltd. Vs. IAC, 47 ITD 23 wherein it was held

that it is practically impossible to maintain stock

records for scrap generated. The Method of

accounting followed by assessee in respect of

earlier years has been consistently accepted by

revenue. It was also observed by the Hon’ble ITAT

that non-maintenance of stock record for scrap

though a defect but it is impossible of execution.

The scrap is generated almost daily and it depends

upon several factors like the workmen’s efficiency,

the fatigue of the machines, the quality of the

material used, the purpose for which it is used, the

filings, cuttings, rejection, breakage, and several

other factors. These factors can never be uniform.

They vary from circumstance to circumstance, day

to day and year to year. The sales of the scrap also

depend upon the utility to the buyer. In a factory of

the magnitude of the assessee, though theoretically

it is possible “to expect a stock record for the scrap

generated, on the practical side, it may not be

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possible to accurately maintain it. This aspect

should not be missed and, therefore, should not

have been insisted upon to verify the accuracy of

the accounts. The previous practice followed

regularly and consistently and in none of 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 I T A T 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

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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 Adopted by
appellant Assessing
Officer
Valuation of 1,65,60,565 4,58,40,223 4,58,40,223
Raw material
Valuation of 10,00,74,074 17,74,08,000 17,79,08,000
WIP
Valuation of 17,83,488 25,58,2000 25,58,2000
Finished
Goods
Valuation of 19,28,505 – Different
scrap values
computed by
Assessing
Officer in
each
assessment
year.
Valuation of – 29,39,000 29,39,000
stores

It is seen that valuation of inventory done by the DVO

is much less than the valuation done by the

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appellant. Even the Assessing Officer, has accepted

the appellant’s valuation. Therefore, it is clear that

the valuation report of DVO suffered from

inconsistency, misclassification, defects and

discrepancies and cannot be completely relied upon

both in respect of quantity and values adopted for

valuation. No inventory of copper or other bought

out items have been included in the DVO’s report.

The Ld. AR in his detailed submissions has

elaborately pointed out discrepancies, defects in

the valuation done by the DVO. The Ld. AR has

also in his submissions highlighted the

discrepancy in adoption of valuation rates of

various materials including scrap arbitrarily

adopted by the DVO. It is also seen that during

the scrutiny assessments in the past done in the

case of the appellant, no defect in the books of

account was found. It is seen that the AO himself

has not adopted the valuation of items of

inventory done by the DVO but invoked

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provisions of section 145(3) in the case of the

appellant which under any circumstances cannot

be justified. It is also seen that the Ld. AR has

categorically rebutted the observations made by

the DVO and accepted by the AO in making

assessment particularly relating to scrap and

maintenance of bin cards. I find that the

appellant which is a public limited company has

disclosed its accounting policies with respect to

inventories in its annual audited accounts and

the said valuation method is consistently

followed. I find that the AO was not correct in

computing ratio between value of consumption of

raw materials and value of sale of scrap. I find

force in the Ld. AR’s contentions that there are

various bought out items forming part of raw

materials where there is no scrap generation as

these purchased parts are straight away fitted

into the equipments manufactured by the

appellant. Moreover, the quantities of materials

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are weighed in kgs. Meters, numbers etc. but the

same are taken compositely by the 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. I t

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

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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 all the assessment not only based on

estimate but also without any corroborative evidence.

Moreover, no addition has been made by the AO in

the case of the appellant in earlier. However, on the

facts and in the circumstances of the appellant’s

case, there is no denial that scrap is generated out of

the manufacturing process which is sold by the

appellant. The appellant has no doubt declared scrap

sale in all the assessment years but looking at the totality of

the picture, the Assessing Officer’s observations, nature of the

appellant’s business, past history of the appellant and

appellant ’s submissions, in my opinion it would be fair and

reasonable if following additions are sustained which would

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also meet the ends of justice in the appellant’s case taking into

account quantity of scrap generated and the rate at which the

same is sold.

S. A.Y. Addition made Addition Relief
No. by the AO Sustained Allowed
1 2001-2002 6,95,402 75,000 6,20,402
2 2002-2003 7,54,602 75,000 6,79,602
3 2003-2004 4,67,970 50,000 4,17,970
4 2004-2005 10,00,041 1,00,000 9,00,041
5 2005-2006 12,37,334 1,00,000 11,37,334
6 2006-2007 20,05,652 1,25,000 18,80,652
7 2007-2008 24,78,660 1,25,000 23,53,660

Thus the above grounds of appeals are partly allowed. ”

8. With regard to disallowance of salary paid to Irene

Valentine, Director of the assessee company by invoking

provisions of Section 40A(2)(b) of the Act, the ld. CIT(A)

observed as under :-

“In the conclusion the AO has held that “It can logically be

held that for the purposes of capital formation”. The appellant

on the other hand has contended that this conclusion deserves

only to be ignored, as none of the reasons given by the AO for

the disallowance are tenable as established above. The AO

has not brought on record any evidence in support of his

“claim” of the alleged capital formation. ”

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9. After considering assessee’s submission as given at

page 34, the ld. CIT(A) deleted the disallowance made u/s

40A(2)(b) after having following observations :-

?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

provided to the appellant company. I find that salary has been

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paid only upto past of A. Y. 2002-03 and not thereafter.

Therefore, disallowance of salary payments to Ms. Irene

Valentine of Rs. 6,00,000/- and Rs. 3,50,000/- in A.Y. 2001-02

and 2002-03 respectively are not justified and therefore, deleted.

This ground of appeal is decided in favour of the appellant. ”

10. Against the above order of CIT(A), the Revenue is in

appeal before us and the assessee has also filed cross

objections for the additions retained by him on account of

scrap sale.

11. Rival contentions have been considered and records

perused. From the record, we found that assessee was

engaged in manufacturing of tailor made heat exchangers and

fined tubes there was search at business premises of the

assessee on 15.11.2006. During the course of search, no

incriminating documents were found. The Department has

taken the stock lying at assessee’s premises with respect to

raw material, work in progress, finished goods and scrap.

Departmental Valuer valued the stock and thereafter on

estimate basis, the Assessing Officer made addition on

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account of difference worked out between generation of scrap

and average rate of scrap sale by rejecting the books of

account u/s 145(3) of the Income-tax Act, 1961. As the

Revenue has not taken any ground with regard to the CIT(A)’s

action for holding that the Assessing Officer was not justified

in invoking the provisions of Section 145(3), the issue of non-

application of Section 145(3) has become settled. The relevant

question asked during the course of search and the respective

reply given by the Director of the assessee are as under :

(a) During search, statements of Shri C.E.Fernandes,

CMD and Shri S. C. Tiwari, Production-in-charge, were

recorded. In response to question numbers 7,8, 11 &

12 Shri Fernandes stated as under :-

Q.7. Can you please state the various raw materials

used, finished goods produced and scrap produced if

any ?

Ans. Various raw materials used are steel plates

and structurals, steel tubes, fin materials of

aluminium and bought out components like motors,

fans, vibration switches, belts and pullies etc. Finished

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goods produced are – Air cooled heat exchangers and

air cooled steam condensers. We are generally buying

raw materials to suit the required sized to ensure

minimum scrap generation. Despite this purchase

precaution, 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.

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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.

Q.10. Production dh process esa fdruk scrap

generate gksrk gS ?

Ans : gekjh ges”kk dksf”k”k gksrh gS fd scrap de ls de

generate gks otherwise our production will

become non competitive, total material

purchases accounting dk dkQh de fgLlk scrap esa

ifjofrZr gksrk gSA Production esa Process (Steel

fabrication) djhc 0.2 ls 0.5 rd dk

scrap generation gksrk gS A

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

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CIT(A) found that no discrepancy was found in the books of

account, therefore, the Assessing Officer was not justified in

rejecting books of account. Thereafter, CIT(A) proceeded to

decide the addition made by the Assessing Officer on account

of scrap generation and its consequent sale. After giving

detailed reasoning with regard to the quantum of scrap

generated 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. From

the record, we found that the assessee is 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. There are twenty types of

material, which was used in manufacturing process, but all

the items do not yield scrap. We found that Cupru Nickle

tubes, Brass plates/tubes, S. S. Tubes/pipes, Impeller,

Motors, Bearing, Belts and pully, Solder wire/sticks, Vibration

switches, C. S. Seamless tubes, M. S. Gratings, Forge

Flanges/plugs, Mother Hollow, M. S. Tubes, Hot rolled non

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alloy and other misc. items were in number and meters and

used after cutting according to the required length/size, there

is no generation of any scrap out of these sixteen types of raw

materials. The scrap was generated only out of the raw

material consisting of Copper wife, strips/rods, Aluminium

strips/tubes, M. S. Plates/sheets/angles, B. Q. Plates, S. S.

Plates and C. S. Plates.

13. We found that the Assessing Officer has wrongly

taken scrap generation from all the 22 items by disregarding

the fact that only six items out of 22 items were generating

scraps. We found that out of total weight of 22 items at

33,64,406 kgs. items weighing 28,00,335 kgs. generated

scrap. However, the Assessing Officer has taken randomly 1 %

as scrap generation out of all the 22 items and determined

scrap at 33,644 kgs. without any basis and after applying

value of scrap sale at Rs. 40/- per kg.,he arrived at the value

of estimated scrap at Rs. 33,45,760/-. We found that scrap

generating items used in manufacturing was weighing

28,00,335 kgs. only and if we apply the estimates as made by

the Assessing Officer, it shall have weight of 28,003 kgs. only.

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However, the assessee himself has shown weight of scrap

generation at 46,478 kgs., which was sold for Rs. 6,50,358/-

giving 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.

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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. 17,83,488/- as against the actual value

arrived at by the assessee at Rs. 25,82,000/-. Thus, it is clear

that 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 145(3) and the CIT(A) has correctly

observed that the Assessing Officer was not justified in

rejecting the books of account u/s 145(3). Even with regard to

the accounting policy, the assessee, which is a Public Limited

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Company has properly disclosed its accounting policy with

respect to the inventories in its annual audited account and

the said valuation method is consistently followed. After

verifying all the documents, the ld. CIT(A) has recorded a

finding to the effect that the Assessing Officer has not correctly

computed ratio between the value of consumption of raw

material and value of sale of scrap. Furthermore, since most of

the part of the raw material were directly used as it is and

having no scrap generation, the Assessing Officer was not

justified in taking percentage of scrap of all types of raw

material. Undisputedly, the assessee was engaged in

manufacturing of order based equipment, where specific raw

materials to be needed therein did not generate any wastage,

the Assessing Officer was not justified in even taking scrap

generation out of these raw materials, which were specifically

pointed out by the assessee during the course of assessment

also. We also found that sale price of the scrap ranges between

Rs. 5/- to Rs. 18/- per kg. and even the DVO has valued the

scrap at Rs. 12/- to Rs. 15/- per kg., whereas the Assessing

Officer has taken the value of scrap at Rs. 40/- per kg, which

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was not at all justified. Even during the course of search, no

documents or papers were found by the Assessing Officer to

indicate that 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

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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 difference in selling price of stainless steel (SS)

scrap, mild steel (MS) scrap, copper scrap, tube scrap etc.

14. From the record, we also found that the assessee has

shown year-wise sales of scrap as under :-

A.Y. Scrap Value Percentage of value
Amount (Rs.) of actual sale of
scrap to the
consumption of raw
material
2001 -02 6,50,358 0.41 %
2002 -03 2,93,518 0.24 %
2003 -04 6,03,150 0.27 %
2004 -05 2,70,279 0.09%
2005 -06 1,58,266 0.05 %
2006 -07 1,36,388 0.04 %
2007 -08 2,67,340 0.04 %
Average 0.163 % each year

15. By taking into consideration all these evidences on

record and after giving detailed finding the CIT(A) has retained

part of the addition on account of scrap sale to meet end of

justice. The detailed finding recorded by the ld.CIT(A) has not

been controverted by the Department by brining any positive

material on record, accordingly, we do not find any reason to

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interfere in the finding and conclusion of the CIT(A), which is

based on material placed on record.

16. In the result, the ground taken both by the Revenue

and assessee with regard to addition made on account of scrap

sale is dismissed.

17. With regard to disallowance of salary u/s 40A(2)(b), we

found that the assessee is a Public Limited Company. The

appointment and remuneration of Mrs. Irena Valentine was

made in annual general meeting of the assessee company. Not

only TDS has been deducted out of the payment of

remuneration but the income has been offered by Mrs. Irena

Valentine in her return of income. The Assessing Officer has

disallowed the remuneration by invoking provisions of Section

40A(2)(b). As per provisions of Section 40A(2)(a), where the

assessee incurs any expenditure in respect of which payment

has been made to a person referred to in clause (b) of Section

40A(2) and the Assessing Officer is of the opinion that such

expenditure is excessive or unreasonable having regard to the

fair market value of the goods, services or facilities for which

payment is made or the legitimate needs of the business of the

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-: 29: –

assessee or the benefits derived by him there from, so much of

the expenditure as is so considered by him to be excessive or

unreasonable shall not be allowed as a deduction. The 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

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-: 30: –

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 commensurate with qualification and the services

provided to the assessee company. It means as per findings of

the learned CIT(A), neither there was excessive payment nor

unreasonable payment was made to Irena Valentine looking to

her qualification, experience and services so provided to the

assessee company. Keeping in to view these findings of CIT(A)

vis-à-vis observation of the Assessing Officer, we direct to

restrict disallowance of salary to the extent of 50% of the

remuneration so paid to Mrs. Irene Valentine.

18. Now we shall take up the cross objection filed by the

assessee in all the years pertaining to the addition retained by

the learned CIT(A) on account of difference worked out

between generation of scrap and average rate of scrap sales.

We have discussed in detail while dealing with the revenue’s

appeal that the additions have been made by the AO on

account of scrap generation. However, the AO has applied the

estimated rate of scrap on all types of raw materials used out

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-: 31: –

of which most were not generating any scrap. We find that out

of the total 22 types of raw material being used by the

assessee in their manufacturing process, only six items were

generating scrap. We also find that the departmental Valuer

has not properly valued the scrap by applying the rates at

which the scrap was being sold and even accepted by the AO.

The learned CIT(A), considering all the factual position with

regard to the quantum of scrap generated and the value for

which it can be sold vis-à-vis the valuation arrived at by the

DVO, upheld the part addition made on account of scrap.

After narrating the findings of the learned CIT(A) at pages 4 to

15 of this order, we find that the learned CIT(A) has very

reasonably retained part of the addition on account of scrap

generated and sold. Accordingly, we do not find any reason to

interfere with the findings recorded by the learned CIT(A) in

retaining the addition on account of scrap generation and its

sales.

19. In the result, the cross appeals filed by the

assessee in all the years under consideration are dismissed.

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20. In the result, the appeals of the Revenue are allowed in

part, whereas all the cross objections filed by the assessee in

all the years are dismissed.

This order has been pronounced in the open court

on _7th
May, 2012.

sd/- sd/ –

(JOGINDER SINGH) ( R.C.SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER

th
Dated :_7 May, 2012.

CPU*
304.5

32

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