Cosmos Forgings Limited, Hyderabad, Hyderabad V. DCIT, Circle-2(3), Hyderabad, Hyderabad

ITA 2/HYD/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0595 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 8 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 08-08-2018
• Assessment Year: 2011-2012
• Appeal Filed On: 02-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: J SIRI KUMAR
• Assessee Lawyers: P MURALI MOHANA RAO
• Section: 44AD; 143(3); 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 2/HYD/2017 ASSESSMENT YEAR: 2011-12 COSMOS FORGINGS LTD., HYDERABAD. PAN AABCG 4822A VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 2(3), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI P. MURALI MOHANA RAO REVENUE BY : SHRI J. SIRI KUMAR DATE OF HEARING 08/08/2018 DATE OF PRONOUNCEMENT 19/09/2018 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DATED 30/06/2016 OF CIT(A) 9, HYDERABAD FOR AY 20 11-12. 2. BRIEF FACTS OF THE CASE ARE, THE ASSESSEE COMPAN Y ENGAGED, IN THE BUSINESS OF TRADING IN STEEL, FILED ITS RETURN OF INCOME FOR THE A.Y. 2011-12 ON 30.09.2011 ADMITTING TOTAL INCOME OF RS. 42,62,570/- UNDER NORMAL PROVISIONS OF INCOME TAX ACT, 1961 ( I N SHORT THE ACT) AND BOOK PROFIT UNDER SECTION 115JB OF RS. 28,.69,6 95/-., WHICH WAS PROCESSED U/S 143 (1) OF THE ACT. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) WAS ISS UED, AGAINST WHICH, THE ASSESSEE FILED THE INFORMATION AS CALLED FOR. 2.1 FROM THE P&L A/C DURING THE YEAR UNDER CONSIDER ATION, AO NOTICED THAT THE ASSESSEE RECORDED SALES OF RS. 125 9,84,89,400/- AS AGAINST THE PURCHASES OF RS. 1251,43,77,442/- AND T HERE IS NO 2 ITA NO. 2/HYD/17 COSMOS FORGINGS LTD. OPENING STOCK NOR CLOSING STOCK OF MATERIAL IN WHIC H THE ASSESSEE SUPPOSED TO HAVE TRADED IN. HE NOTED THAT THE GROSS PROFIT OF THE ASSESSEE WORKED OUT TO RS. 8.41 CRORES I.E. 0.67% O F THE SALES. HE ALSO NOTICED THAT IN P&L A/C THE ASSESSEE DEBITE D SELLING AND ADMINISTRATIVE EXPENSES OF RS. 23,94,121/- AND FINA NCIAL EXPENSES OF RS. 7,66,83,929/-. THE PROFIT BEFORE TAX WAS SHOWN AT RS. 15,53,695/- WHICH WORKS TO A MEAGRE 0.01% OF THE SALES. 2.2 THE AO ASKED THE AR OF THE ASSESSEE TO SUBMIT T HE COMPLETE DETAILS OF PARTIES FROM WHOM THE ASSESSEE PURCHASED ITS MATERIAL AND ALSO TO WHOM IT HAD SOLD. THE DETAILS SUBMITTED BY THE ASSESSEE WERE EXTRACTED BY THE AO IN HIS ORDER AT PAGES 2 & 3 OF HIS ORDER. AFTER EXAMINING THE SAID DETAILS, THE AO OBSERVED THAT TH E ASSESSEE DID ITS BUSINESS WITH ONLY FEW PARTIES AND MAJORITY OF THEM ARE ITS GROUP COMPANIES. ADMITTEDLY, THE ASSESSEE IS IN THE TRADI NG OF STEEL AND SURPRISINGLY, THE ASSESSEE WITH SUCH HUGE TURNOVER, DID NOT DEBIT ANY EXPENDITURE ON ACCOUNT OF MATERIAL HANDLING CHARGES OR TRANSPORT CHARGES OR LABOUR CHARGES OR ANY OTHER EXPENDITURE THAT IS RELATED TO THE ACTUAL DELIVERY OF THE TRADED GOODS. WHEN ASKED TO EXPLAIN, THE AR OF THE ASSESSEE FILED A NOTE WHICH WAS EXTRACTED BY THE AO AT PAGE 3 OF HIS ORDER AND THE SAME IS REPRODUCED BELO W: 'THE COMPANY MAKES BULK SALES AND PURCHASES BASED O N PRE- ORDERS FROM ITS CUSTOMER BASIS. THE PURCHASES ARE M ADE ONLY AFTER THE COMPANY RECEIVES CONFIRMED ORDERS FROM IT S CUSTOMERS. ONCE THE ORDERS ARE RECEIVED, THE COMPAN Y MAKES ENQUIRES AND PROCURES THE MATERIAL FROM THE LOWEST QUOTING PARTY. ONCE THE PURCHASE PARTY IS FIRMED UP, WE RAI SE OUR PURCHASE ORDER ON OUR SUPPLIER AND REQUEST THE SUPP LIER TO DIRECTLY DELIVER THE GOODS TO OUR CUSTOMER. WE RAIS E THE INVOICES AND THE MATERIAL IS DIRECTLY RECEIVED BY O UR CUSTOMER WITHOUT REACHING OUR PREMISES BASED ON OUR INSTRUCT IONS. AS THE MATERIAL DOES NOT TOUCH OUR PREMISES AT THE POINTS OF PURCHASE OR SALE, WE DO NOT HAVE ANY LOADING, UNLOADING, TRA NSPORTATION CHARGES WHICH ARE BORNE BY THE SUPPLIER AND THE CUS TOMER AT THEIR RESPECTIVE PLACES AND WE DO NOT BOOK ANY SUCH CHARGES. 3 ITA NO. 2/HYD/17 COSMOS FORGINGS LTD. AFTER CONSIDERING THE SUBMISSIONS OF THE AR OF THE ASSESSEE, THE AO HELD THAT THE FACTS OF THE ASSESSEE COMPANY CLEARLY ESTABLISH THAT IT IS A MERE PAPER COMPANY WHICH IS NOT DEALING IN REAL T RADING ACTIVITY AS CLAIMED, THEREFORE, THE FINANCIAL CHARGES CLAIMED B Y THE ASSESSEE OF RS. 7,66,83,929/- WERE DISALLOWED. 3. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE CIT(A). 4. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, WHICH WERE EXTRACTED IN HIS ORDER AT PAGES 8 TO 13, THE CIT(A) OBSERVED THAT THE AO HAS DISCUSSED THE ISSUE ELABORATELY AS TO HOW TH E ASSESSEE IS NOT CONDUCTING ANY TRADING ACTIVITY AND HENCE, THE FINA NCIAL CHARGES OF RS. 7,66,83,299/- DEBITED TO THE P&L ACCOUNT ARE DI SALLOWED. THE CIT(A) HELD THAT THE ASSESSEE FAILED TO REBUT THE C ONCLUSIONS OF THE AO WITH ANY COGENT EVIDENCE AND HENCE, THE ACTION O F THE AO IS JUSTIFIED IN DISALLOWING THE SAID AMOUNT OF RS. 7,6 6,83,299/-. 5. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE I S IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE LD. CIT (A)-9 HAS ERRED IN BOTH IN LAW AND ON FACTS IN PASSING THE APPELLATE ORDER UPHOLDING THE ASSESSMEN T ORDER PASSED BY THE AO U/S 143(3) FOR THE AY 2011-12. 2. THE LD. CIT (A)-9 OUGHT TO HAVE APPRECIATED THE FACT THAT THE ASSESSEE IS MAINTAINING THE BOOKS OF ACCOUNTS AND T HE SAME ARE AUDITED BY A QUALIFIED CHARTERED ACCOUNTANT UND ER THE PROVISION OF 44AD OF THE INCOME TAX ACT, 1961. 3. THE LD. CIT (A)-9 ERRED IN NOT APPRECIATING THE FACT THAT THE ASSESSEE COMPANY INCURRED THE EXPENDITURE EXCLUSIVE LY FOR TRADING ACTIVITY RELATED TO BUSINESS ACTIVITY ONLY BUT NOT FOR ANY UNRELATED ACTIVITY. 4.THE LD. CIT (A)-9 HYDERABAD ERRED IN DISALLOWING A SUM OF RS. 7,66,83,299/- TOWARDS BANK CHARGES (BILL DISCOU NTING). 5. THE LD. CIT (A)-9 ERRED THAT THE COMPANY HAS NOT DEBITED ANY EXPENDITURE RELATED TO THE ACTUAL DELIVERY OF G OODS. 4 ITA NO. 2/HYD/17 COSMOS FORGINGS LTD. 6. THE LD. CIT (A)-9 ERRED IN TREATING THE COMPANY AS PAPER COMPANY ON THE GROUND THAT HERE IS NO TRADING ACTIV ITY DONE BY THE COMPANY. 7. THE LD. CIT (A)-9 ERRED IN CONCLUDING THAT NO BU SINESS ACTIVITY IS CONDUCTED MERELY ON THE GROUND THAT NO EXPENDITURE IS INCURRED RELATING TO THE ACTIVITY OF DELIVERY OF TRADED GOODS. 8. THE LD. CIT (A)-9 OUGHT TO HAVE APPRECIATED THE FACT THAT THE ASSESSEE IS HAVING PROPER LEDGER ACCOUNTS IN RESPEC T TO EACH OF THE TRADE CREDITOR. 9. THE CIT (A)-9 OUGHT TO HAVE APPRECIATED THE FACT THAT THE LETTER OF CREDIT PROCEEDS WERE UTILIZED FOR PAYMENT OF VARIOUS TRADE CREDITORS. 10. THE LD. CIT (A)-9 OUGHT TO HAVE APPRECIATED THE FACT THAT THE ISSUE OF DISALLOWANCE OF FINANCIAL CHARGES IN T HE ASSESSEE' 5 OWN CASE OF M/S GLOBAL FORGINGS LTD. BY THE AO FO R THE AY 2011-12, WAS DELETED BY THE HONORABLE ITAT, HYDERAB AD VIDE ORDER IN ITA NO. 1269/HYD/2014. 11. THE ASSESSEE MAY ADD, ALTER OR MODIFY OR SUBSTI TUTE ANY OTHER POINT TO THE GROUNDS OF APPEAL AT ANY TIME BE FORE OR AT THE UME OF HEARING OF THE APPEAL. 6. THE ASSESSEE HAS RAISED 11 GROUNDS OF APPEAL, TH E SUM AND SUBSTANCE OF WHICH IS AGAINST THE DISALLOWANCE OF A SUM OF RS. 7,66,83,299 TOWARDS BANK CHARGES (BILL DISCOUNTING) . 7. BEFORE US, LD. AR OF THE ASSESSEE SUBMITTED THAT THE FINANCIAL CHARGES WERE INCURRED ON A LETTER OF CREDIT GRANTED BY VARIOUS FINANCIAL INSTITUTIONS AND THE LETTER OF CREDIT PRO CEEDS WERE UTILIZED FOR PAYMENTS TO VARIOUS TRADE CREDITORS AND FOR THESE S ERVICES, THE AMOUNTS CHARGED BY THE BANKS WERE SHOWN UNDER THE H EAD FINANCIAL CHARGES. HE SUBMITTED THAT THE ASSESSEE FURNISHED T HE BANK ACCOUNT COPIES AND OTHER EVIDENCES BEFORE THE AO TO ACCEPT THE FINANCIAL CHARGES OF RS. 7,66,83,299/-. BUT, THE AO REJECTED THE SUBMISSION AND DISALLOWED THE SAID FINANCIAL CHARGES ON THE GR OUND THAT THE ASSESSEE WAS A MERE PAPER COMPANY WHICH WAS NOT DEA LING ANY REAL 5 ITA NO. 2/HYD/17 COSMOS FORGINGS LTD. TRADING ACTIVITY. HE SUBMITTED THAT BOOKS OF ACCOUN T, PROPER LEDGER ACCOUNTS HAVE BEEN MAINTAINED WITH RESPECT TO EACH OF THE TRADE CREDITOR. LETTERS OF CREDIT WHICH ARE FROM REPUTED BANKS/ FINANCIAL INSTITUTIONS REGARDING THE AMOUNT OF DISCOUNTING CH ARGES HAVE BEEN FILED. HE SUBMITTED THAT THESE EXPENSES ON DISCOUNT ING CHARGES, CHARGED BY THE FINANCIAL INSTITUTIONS WAS INCURRED IN THE NORMAL COURSE OF BUSINESS AND THEY ARE VERIFIABLE. 7.1 HE SUBMITTED THE ABOVE ISSUE OF DISALLOWANCE OF FINANCIAL CHARGES IS ALREADY COVERED IN ASSESSEES OWN CASE ( FORMERLY KNOWN AS M/S GLOBAL FORGINGS LTD.) FOR THE AY 2010-11 WH EREIN ITAT VIDE ITA NO. 1269/HYD/2014, ORDER DATED 26/11/2014, HAS DISMISSED THE APPEAL OF THE REVENUE AND UPHELD THE ORDER OF CIT(A ), WHO DELETED THE DISALLOWANCE OF FINANCIAL CHARGES. A COPY OF TH E SAID ORDER IS AVAILABLE ON RECORD. HE SUBMITTED THE FOLLOWING DOC UMENTS IN THE PAPER BOOK, WHICH WERE ALREADY FILED BEFORE THE REV ENUE AUTHORITIES: 1. COPY OF AUDITORS REPORT - PAGES 1 TO 14. 2. COPY OF TAX AUDIT REPORT - PAGES 15 TO 27 3. STATEMENT SHOWING DETAILS OF FINANCIAL CHARGES, RECEIPTS AND UTILIZATION OF LC PROCEEDS PAGES 28-29 4. COPY OF BANK STATEMENTS EVIDENCING THE PAYMENTS OF LC PROCEEDS PAGES 30-48 5. COPY OF BREAK UP OF PURCHASES AT PAGE 49 6. COPY OF BREAK UP OF SALES PAGE 50 7. DETAILS OF FINANCIAL CHARGES PAGES 60 TO 62 8. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORD ERS OF REVENUE AUTHORITIES. 9. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. ON PERUSAL OF THE DOCUMENTS FILED BY THE AS SESSEE, WE ARE OF THE VIEW THAT THE ASSESSEE ESTABLISHED THE FACT THA T IT INCURRED THE FINANCIAL CHARGES DURING THE COURSE OF ITS BUSINESS , WHICH ARE GENUINE. MOREOVER, IN ITS OWN CASE (FORMERLY KNOWN AS M/S GLOBAL FORGINGS LTD. (SUPRA), SIMILAR ISSUE CAME UP FOR CO NSIDERATION BEFORE 6 ITA NO. 2/HYD/17 COSMOS FORGINGS LTD. THE TRIBUNAL AND THE TRIBUNAL DISMISSED THE APPEAL OF THE REVENUE BY HOLDING AS UNDER: 15. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS CAN BE SEEN FROM THE IMPUGNED ORDER OF ASSESSMENT, THE ASSESSING OFF ICER HAS NOT DISPUTED THE FACT THAT THE ASSESSEE HAS INCURRE D THE EXPENDITURE IN QUESTION. THE ONLY REASON FOR THE DI SALLOWANCE MADE BY THE ASSESSING OFFICER WAS THAT THE ASSESSEE HAS INCURRED THE EXPENDITURE, WHILE DISCOUNTING THE BIL LS FROM OUTSIDE PARTIES AND PROVIDING GOODS TO ITS SISTER C ONCERNS ON CREDIT BASIS. IN OUR VIEW, THE CONCLUSION. DRAWN BY THE ASSESSING OFFICER IS BASED ON MERE PRESUMPTIONS AND SURMISES, RATHER THAN EVIDENCE. IT IS EVIDENT FROM THE DISCUS SION MADE BY THE ID CIT(A) IN THE IMPUGNED ORDER, EXTRACTED ABOV E, THE EXPENDITURE INCURRED BY THE ASSESSEE IS FULLY SUPPO RTED BY EVIDENCE AND ALSO CERTIFIED BY BANKS AND FINANCIAL INSTITUTIONS. THAT BEING THE CASE, THERE CANNOT BE ANY REASON TO DOUBT THE GENUINENESS OF THE EXPENDITURE. IN THIS VIEW OF THE MATTER, THERE BEING NO INFIRMITY IN THE ORDER OF THE LEARNED CIT( A), WE DO NOT FIND ANY REASON TO INTERFERE WITH THE SAME. WE ACCO RDINGLY REJECT THE GROUNDS OF THE REVENUE IN THIS APPEAL. AS THE ISSUE UNDER CONSIDERATION IS MATERIALLY IDEN TICAL TO THAT OF THE SAID CASE, FOLLOWING THE DECISION THEREIN, WE S ET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE AO TO DELETE THE DISALLOWANCE OF RS. 7,66,83,299/- MADE TOWARDS BANK CHARGES. ACCORD INGLY, THE GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. PRONOUNCED IN THE OPEN COURT ON 19 TH SEPTEMBER, 2018. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHM AN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 19 TH SEPTEMBER, 2018 KV 7 ITA NO. 2/HYD/17 COSMOS FORGINGS LTD. COPY TO:- 1) M/S COSMOS FORGINGS LTD., C/O P. MURALI & CO., CAS, 6-3-655/2/3, 1 ST FLOOR, SOMAJIGUDA, HYDERABAD 82 2) DCIT, CIRCLE 2(3), HYDERABAD. 3) CIT(A) 9, HYDERABAD. 4) PR. CIT 2, HYD. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE S.NO DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./ P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER