M/S. Hari Om Steels (P) Ltd.,, Kanpur vs Assessee

ACIT - 6, Vs. M/s Hari Om Steels (P) Ltd., Kanpur 46/146, Halsey Road, Kanpur. PAN:AAACH7413H (Appellant) (Respondent)

Appellant by Shri Anil Anand, Advocate Respondent by Smt. Swati Ratna, Sr. DR Date of hearing 26/06/2015 Date of pronouncement 24/07/2015

ORDER PER A. K. GARODIA, A.M.

Out of this bunch of three appeals, there are two appeals of the revenue for A.Y. 2003 - 04 & 2005 - 06 and the remaining one appeal is filed by the assessee for A.Y. 2003 - 04. All these appeals were heard together and are being disposed of by way of this common order for the sake of convenience.

2. First, we take up the assessee's appeal. The only one effective ground raised is as under:-

2 "(i) The Ld. Commissioner (Appeals)- II Kanpur has erred in law and on facts in sustaining the addition of Rs. 50,92,440/-

made by the assessing Officer on account of confiscation of stocks of scrap Rail and scrap Cast Iron by the District Authorities against the dues of KESCO."

3. Learned AR of the assessee reiterated the same contentions which were raised before CIT (A) and noted by him on page 11 of his order. He also drawn our attention to page 24 of the paper book and pointed out that as per letter dated 07.10.2002 of District Authorities appearing on this page, the stock confiscated was sold for Rs. 2.03 Lacs and it was adjusted against demand of KESCO of Rs. 71,21,300/-. He also drawn our attention to pages 7 and 8 of the assessment order and submitted that the A.O. has also noted these facts. The bench made a query about panchnama for the seizure by KESCO to find out the quantity of stock seized but the same could not be furnished. Learned DR of the revenue supported the orders of the authorities below.

4. We have considered the rival submissions. We find that as per the A.O., there was opening stock of raw materials as per item no. 28A of the Tax Audit Report of Rail (Form 31) 344.374 MT and Cast Iron (Form 31) 488.435 MT total 832.809 MT. He has also reproduced the note given by the auditors which reads as under:-

" As explained to us, this stock has been seized by KESCO there are no record for that purpose available so unable to make comment thereon."

Hence, it is seen that even the auditors were not satisfied about this claim that the entire stock was seized by KESCO. The A.O. asked the assessee to explain as to why the value of stock said to have been seized by KESCO should not be added in closing stock because even after seizure, it remained a property of the assessee. It is noted by the A.O. that in reply, the assessee could not come out with any convincing reply. Under these 3

facts, the A.O. made addition of Rs. 50,92,490/- being value of this stock. When the assessee carried the matter in appeal before CIT (A), only argument was this that district authorities auctioned this entire stock for Rs. 2.03 Lacs which was adjusted towards arrear demands by KESCO. Learned CIT (A) decided the issue against the assessee by holding that there is no dispute regarding the value of confiscated stock of Rs. 50,92,490/- for which only possession has changed but the right remains with the assessee only. Before us also, same argument is made without establishing that entire stock of 832.809 M.T. was auctioned for Rs. 2.03 lacs because on page 24 of the paper book, no quantity is mentioned and hence it is very much possible that this sale proceeds of Rs. 2.03 Lacs is for sale of only a small part of 832.809 M.T. and the remaining part is still unsold or was sold by the assessee prior to seizure. Moreover, this amount of Rs. 2.03 Lacs is said to have been adjusted against outstanding demand of KESCO of Rs. 71,21,300/-. If this demand of KESCO of Rs. 71,21,300/- or any part thereof is already accounted for in books, then the payment to KESCO is to reduce sundry creditor only and in that situation, sale proceeds of stock has to be considered as income only and the balance has to be considered as stock in absence of any evidence that entire stock was sold for Rs. 2.03 Lacs. If this demand of KESCO is other than liability as per books than also the assessee has to establish that deduction is allowable for the same but the assessee has not even explained the nature of the liability said to be payable to KESCO. Hence, we do not find any reason to interfere in the order of learned CIT (A) on this issue.

5. In the result, the appeal of the assessee is dismissed.

6. Now, we take up the revenue's appeal for A.Y. 2003 - 04 in ITA No. 526/LKW/2013.

7. Ground No. 1 to 3 are inter connected as per which, the revenue is aggrieved for deletion of the addition of Rs. 18,47,381/- made by the A.O. 4

on the basis of profit on sale outside books of excess stock shown in the stock statement submitted to the bank by the assessee as on 31.03.2002 and no such excess stock shown in the stock statement submitted to the bank by the assessee as on 30.04.2002.

8. Learned DR of the revenue supported the assessment order and learned AR of the assessee supported the order of CIT (A). He also placed reliance on the judgment of Hon'ble Jurisdictional High Court rendered in the case of CIT vs. Khan & Sirohi Steel Rolling Mills, 152 Taxman 224 (All.).

9. We have considered the rival submissions. We find that the present issue is covered in favour of the assessee by the judgment of Hon'ble Jurisdictional High Court rendered in the case of CIT vs. Khan & Sirohi Steel Rolling Mills (Supra). Learned CIT (A) has decided this issue by following this judgment and learned DR could not point out any difference in facts. Hence, we decline to interfere in the order of learned CIT (A) on this issue. These grounds are rejected.

10. Ground No. 4 to 5 are also inter connected as per which, the revenue is aggrieved for deletion of the addition of Rs. 24,39,059/- made by the A.O. on account of alleged unexplained investment made in the purchase of unrecorded stock.

11. Learned DR of the revenue supported the assessment order and learned AR of the assessee supported the order of CIT (A). He also submitted that this addition made by the A.O. is linked with the other addition made by him on account of excess stock as per stock statement submitted to bank and for which, ground no. 1 to 3 are raised by the revenue.

12. We have considered the rival submissions. We find that the learned CIT (A) has given a categorical finding on page 10 of his order that 5

purchase shown in the stock statement submitted to bank almost tallies with value reflected in books of accounts. He has also given this finding that books of accounts are not rejected and no other adverse circumstantial evidence is brought on record by the A.O. After making these observations, he has decided this issue by following this judgment of Hon'ble Jurisdictional High Court rendered in the case of CIT vs. Khan & Sirohi Steel Rolling Mills (Supra). Learned DR of the revenue could not controvert these categorical findings of CIT (A) and he could not show as to how this judgment of Hon'ble Jurisdictional High Court rendered in the case of CIT vs. Khan & Sirohi Steel Rolling Mills (Supra) is not applicable. Hence, we decline to interfere in the order of learned CIT (A) on this issue also. These grounds are also rejected.

13. As per Ground No. 6, the revenue is aggrieved for deletion of the addition of Rs. 18,96,399/- made by the A.O. on account of disallowance out of depreciation on plant & machinery which as per the assessing officer were not put in to use during the period under reference.

14. Learned DR of the revenue supported the assessment order. He also submitted that as per section 38, depreciation is not allowable in the facts of the present case. Learned AR of the assessee supported the order of CIT (A). He also submitted that the assets were ready for use and hence, depreciation is allowable.

15. We have considered the rival submissions. We find that the learned CIT (A) has decided this issue by following the judgment of Hon'ble Allahabad High Court in the case of CIT vs. Swaroop Vegetable Products India Ltd., 277 ITR 60, tribunal decision rendered in the case of Ashok Pan Products (P) Ltd. vs. ACIT as reported in 14 ITR (Trib) 505 and two judgments of Hon'ble Delhi High Court in the case of CIT vs. Bharat 6

Aluminium Co. Ltd., 187 Taxman 111 and CIT vs. Panacea Bitech Pvt. Ltd., 324 ITR 311.

16. First we examine the applicability of these judgments. The first judgment is the judgment of Hon'ble Allahabad High Court in the case of CIT vs. Swaroop Vegetable Products India Ltd. (Supra). In this case, there was a categorical finding of the tribunal that the unit was kept ready for use and despite all efforts to restore, it remained under suspension. In the present case, the assessee has started trading business and although we are in the year 2015, the learned AR of the assessee could not show that the manufacturing activity has restarted. Nothing is brought on record to establish this also that the plant & machinery were kept ready for use. Mere submission that it were kept ready for use is not sufficient. Because of these differences in facts, this judgment is not applicable.

17. The second judgment is the tribunal decision rendered in the case of Ashok Pan Products (P) Ltd. vs. ACIT (Supra). In this case, there was a categorical finding of the tribunal that the machine was kept ready for use and only this machine was not used although the plant was working. Hence, it is seen that the facts in that case are totally different. In that case, the plant was operational but only two machines for 2 in pouch making were not used because of no demand for such pouches. Because of these differences in facts, this tribunal order is also not applicable.

18. The next judgment is the judgment of Hon'ble Delhi High Court rendered in the case of CIT vs. Bharat Aluminium Co. Ltd.(Supra). In this case also, only some items of machineries were not used but the concerned block was used. Under these facts, it was held that when the block of assets is being used in the relevant year, it is not relevant if some particular machine was not used. Hence, it is seen that the facts in that case are also 7

totally different. In that case, the plant was operational but only a few machines were not used whereas in the present case, total block is idle because although it is claimed that some machines were used in course of trading operations, no evidence is brought on record in support of this contention. Because of these differences in facts, this judgment is also not applicable.

19. The next judgment is also the judgment of Hon'ble Delhi High Court rendered in the case of CIT vs. Panacea Bitech Pvt. Ltd. (Supra). In this case, the facts were that the office was put to use but not full fledged use. Under these facts, it was held that depreciation is allowable because full fledged use of office is not essential. Hence, it is seen that the facts in that case are also totally different. Therefore, this judgment is also not applicable.

20. As per above discussion, it is seen that none of the judgments followed by learned CIT (A) is applicable in the present case. Moreover, this is admitted position of facts that the industrial unit was not working and although it is claimed that some machines were used in course of trading but no evidence is brought on record in support of this contention. No evidence is brought on record in support of this contention also that the machines were kept ready for use. This also is not the case of the assessee that the operation of industrial unit has restarted even till now i.e. in the year 2015. Considering all these facts, we hold that the order of learned CIT (A) on this issue is not sustainable and therefore, we reverse the same and restore that of the A.O. This ground is allowed.

21. As per Ground No. 7, the revenue is aggrieved for deletion of the addition of Rs. 20,22,852/- made by the A.O. u/s 43B on account of penal interest charged by the bank and interest payable to bank.

8 22. Learned DR of the revenue supported the assessment order. Learned AR of the assessee supported the order of CIT (A).

23. We have considered the rival submissions. We find that disallowance of Rs. 19,16,159/- was made by the A.O. on account of interest payable on cash credit account and of Rs. 106,693/- on account of penal interest charged by the bank. Learned CIT (A) has given a categorical finding that in the relevant year, section 43B did not cover interest on cash credit account. He has also given a finding that the penal interest was for contravention of contractual obligation between borrower and lender and not for infraction of any law. Learned DR of the revenue could not controvert any of these findings of CIT (A). Hence, we find no reason to interfere in the order of CIT (A) on this issue. This ground is rejected.

24. In the result, this appeal of the revenue is partly allowed.

25. Now, we take up the revenue's appeal for A.Y. 2005 - 06 in ITA No. 720/LKW/2013.

26. The grounds raised by the revenue are as under:-

"1. The CIT(A) has erred in law and on facts in annulling the assessment order u/s 143(3) dated 26.12.2007 without appreciating the fact that notice u/s 143(2) dated 13.09.2006 was served upon the assessee well within time i.e. on 19.09.2006.

2. The CIT(A) has erred in law and on facts in annulling the assessment order ignoring the fact that during the assessment proceedings, the assessee replied to various notices issued by the A.O. and appeared through authorized representative before the AO.

3. That the CIT(A) has erred in law and facts in ignoring that the impugned notice and assessment proceedings were in substance and effect in conformity with or according to the intent and purposes of the Act and being thus covered by Section 292B could not be invalidated.

9 4. The CIT(A) has erred in law and on facts in annulling the assessment order ignoring the provision of Section 124 of the Income-tax Act, 1961, whereby the assessee could not question the jurisdiction of the AO after expiry of the period prescribed.

5. The Ld. CIT(A) has erred in law and in fact in annulling the assessment order without appreciating the facts as submitted by the AO in his remand report dated 30.07.2013 before him.

6. The order of the CIT(A), Kanpur being erroneous, unjust and bad in law be vacated and the order of the AO be restored."

27. Learned DR of the revenue supported the assessment order and learned AR of the assessee supported the order of CIT (A).

28. We have considered the rival submissions. We find that return of income was filed on 30.10.2005. An additional ground was raised before CIT (A) contending that no notice u/s 143 (2) was served on the assessee. Learned CIT (A) obtained remand report from the A.O. Relevant portion of remand report is reproduced by CIT (A) on page 5 of his order. As per the same, it was reported by the A.O. that notice u/s 143 (2) was received on 19.09.2006 by the persons namely Sri Rohit & Sri Rajendra Misra. In the rejoinder, it was submitted by the assessee that the assessee has never given an authority to any of these two persons to receive any notice etc. from Income Tax Department. Reliance was placed on a tribunal order in the case of Anil Kumar Goel vs. ITO, 115 ITD 245 (Lucknow). Learned CIT (A) has decided this issue in favour of the assessee by following this tribunal order where the tribunal has considered the provisions of section 282 also and it was held that service of notice on a person who was not specifically authorized to receive notice on behalf of the assessee is not valid. Learned CIT (A) held that since the notice u/s 143 (2) was not validly 10

served on the assessee within prescribed time, the assessment is void and he annulled the same. We find no infirmity in the order of CIT (A) in the facts of the present case and therefore, we decline to interfere in his order.

29. In the result, this appeal of the revenue is dismissed.

30. In the combined result, the appeals of the assessee for A.Y. 2003 - 04 is dismissed and revenue's appeal for A.Y. 2003 - 04 is partly allowed and the appeal of the revenue for A.Y. 2005 - 06 is dismissed.

(Order was pronounced in the open court on the date mentioned on the caption page) Sd/. Sd/.

(SUNIL KUMAR YADAV) ( A. K. GARODIA ) Judicial Member Accountant Member

Dated:24/07/2015

Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow Asstt. Registrar