M/s Ocean Metals Pvt. Ltd., V. ITO,

ITA 2172/DEL/2009

• Counselvise Citation: 217220114 RSA 2009
• Duration Of Justice: 4 year(s) 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 17-12-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 22-05-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SELESH GUPTA
• Keywords: Rejection of books of accounts; Business income; Salary income; Corroborative evidences; Sham transactions
• Section: 143(3); 145; 12; 68

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B: NEW DELHI) BEFORE SHRI I. C. SUDHIR, JUDICIAL MEMBER AND SHRI T. S. KAPOOR, ACCOUNTANT MEMBER ITA NO. 2172/DEL/2009 (ASSESSMENT YEAR: 2005-06) OCEAN METALS PVT. LTD. VS. ITO G-55, MASJID MOTH WA RD 13(4) G.K. PART-II NEW DELHI. NEW DELHI (AAAC00922A) (APPELLANT) (RESPONDENT) ITA NO. 2861/DEL/2009 (ASSESSMENT YEAR: 2005-06) ITO VS. OCEAN METALS PVT. LTD. WARD 13(4) G-55, MASJID MOTH NEW DELHI. G.K. PART-II NEW DELHI (AAAC00922A) (APPELLANT) (RESPONDENT) ASSESSEE BY :SHRI SALIL AGARWAL & SHRI SELESH GUPTA, ADVOCATE REVENUE BY :MS. MEENAKSHI VOHRA, D R ORDER PER I. C. SUDHIR, JUDICIAL MEMBER: ITA NO.2861/DEL/2009(REVENUES) IN THE APPEAL PREFERRED BY THE REVENUE THE FIRST APPELLATE ORDER HAS BEEN QUESTIONED ON FOLLOWING GROUNDS:- ITA NOS.2172/DEL/2009, 2861/DEL/2009 2 1. THE LD. CIT(A) ERRED IN LAW IN DELETING THE A DDITION OF RS. 3,50,000/- MADE U/S 68 WITH RESPECT TO THE MONEY CL AIMED TO HAVE BEEN RECEIVED AS TOWARDS SHARE APPLICATION WITHOUT APPRECIATING THE FACTS AND THE CIRCUMSTANCES OF THE CASE IN THE RIGH T PERSPECTIVE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 1,01,9 0,000/- MADE U/S 68 ON ACCOUNT OF TRANSACTIONS IN FABRIC BUSINESS ES TABLISHED AS SHAM TRANSACTIONS BY THE ASSESSING OFFICER. 3. THE LD. CIT(A) FURTHER ERRED IN DELETING THE ADDITION OF RS. 53,77,921/- MADE BY ADOPTING THE AVERAGE OF THE PRE CEDING TWO YEARS G P RATE OF 3.48% AFTER REJECTING THE BOOKS O F ACCOUNTS OF THE ASSESSEE ON ACCOUNT OF LAW G.P. RATE WITHOUT APPREC IATING THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE RIGHT PERSPECT IVE. 2. THE ASSESSEE ON THE OTHER HAND IN ITA NO.2172/ DEL/2009 HAS IMPUGNED FIRST APPELLATE ORDER ON THE FOLLOWING GRO UNDS : 1 THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED BOTH IN LAW AND ON FACTS IN UPHOLDING THE TRADING A DDITION OF RS. 35,02,280/- OUT OF TOTAL ADDITION OF RS. 53,77,921/ - MADE BY THE LEARNED ASSESSING OFFICER IN THE ORDER OF ASSESSMEN T FRAMED UNDER SECTION 143(3) OF THE ACT. 1.1 THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) WHILE UPHOLDING THE AFORESAID ADDITION, HAS FURTHER ERRED BOTH IN LAW AND ON FACTS IN CONFIRMING THE REJECTION OF BOOKS OF A CCOUNTS UNDER SECTION 145(3) OF THE ACT. 1.2 THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) HAS FAILED TO APPRECIATE THAT MERE ALLEGATION THAT, THERE WAS MIS MATCH IN APPELLANTS MONTHLY PRODUCTION FIGURES AND CORRESPO NDING PRODUCTION EXPENSES OR SALES WERE MADE TO RELATED CONCERNS ALL EGEDLY AT A LOWER PURCHASE PRICE OR CLOSING STOCK HAD NOT BEEN VALUED BY NOT INCLUDING THE EXCISE DUTY COMPONENT, COULD NEITHER IN LAW AND , NOR ON FACT BE HELD TO BE ANY BASIS MUCH LESS ANY VALID BASIS FOR INVOKING PROVISIONS CONTAINED IN SECTION 145(3) OF THE ACT. 1.3 THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS FAILED TO ITA NOS.2172/DEL/2009, 2861/DEL/2009 3 APPRECIATE THAT THE DETAILED EXPLANATION SUBMITTED BY THE APPELLANT TO ESTABLISH THAT TRADING RESULTS DECLARED BY THE A SSESSEE WHICH WERE AUDITED RESULTS COULD NOT HAVE BEEN REJECTED AS THE Y WERE DULY SUPPORTED BY NECESSARY BILLS AND VOUCHERS AND THERE WAS NO ALLEGATION THAT ANY SALES OR PURCHASES HAVE BEEN MA DE OUTSIDE THE BOOKS OF ACCOUNTS. 1.4 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS FURTHER ER RED BOTH IN LAW AND ON FACTS IN APPLYING GP RATIO OF 1.5% ON THE TO TAL SALES AS DECLARED BY THE APPELLANT TO SUSTAIN THE TRADING AD DITION WHICH IN LIGHT OF THE EVIDENCES FURNISHED AND EXPLANATION TE NDERED DESERVE TO BE DELETED AS SUCH. ITA NO. 2861/D/2009 (REVENUES) GROUND NO. 1 3. IN SUPPORT OF THE GROUND THE LD. DR HA S BASICALLY RELIED UPON THE ASSESSMENT ORDER. LD. AR ON THE OTHER TRIED TO JUST IFY THE FIRST APPELLATE ORDER ON THE ISSUE. 4. THE LD. DR SUBMITTED THAT THERE WAS NO APPLICATION FOR ALLOTMENT OF SHARES NOR THE SHARES WERE ALLOTTED BY THE ASSES SEE TO THE APPLICANT. DESPITE OPPORTUNITY THE RETURN OF INCOME FOR THE AS SESSMENT YEAR 2005-06 OF THE APPLICANT WAS NOT FILED. THE ASSESSEE ALSO F AILED TO EXPLAIN THE SOURCE OF INVESTMENT. THE AO WAS THUS JUSTIFIED IN MAKING THE ADDITION OF RS. 3,50,000/- U/S 68 OF THE ACT IN RESPECT OF THE MONE Y CLAIMED TO HAVE BEEN RECEIVED TOWARDS SHARE APPLICATION. THE LD. CIT(A) WITHOUT APPRECIATING THE FACTS OF THE CASE IN RIGHT PROSPECTIVE HAS DELETED THE ADDITION. ITA NOS.2172/DEL/2009, 2861/DEL/2009 4 5. SUBMISSION OF THE LD. AR ON THE OTHER HA ND REMAINED THAT NOWHERE IT IS THE ALLEGATION OF THE AO THAT THE AMOUNT IN Q UESTION WAS ACCOMMODATION ENTRY. THE ASSESSEE HAD FILED SUFFICI ENT EVIDENCE IN SUPPORT OF THE CLAIMED INVESTMENT LIKE CONFIRMATION OF THE SHARE APPLICATION OF SHRI ROHIT KUMAR GOGIA PROPRIETOR M/S R.K. ENGINEERS, HIS PAN, HIS RETURNS OF INCOME FOR THE ASSESSMENT YEARS 2004-05, 2006-07, S TATEMENT OF BANKING ACCOUNT OF M/S. R.K. ENGINEERS AND THEREBY THE ASSE SSEE HAD DISCHARGED ITS PRIMARY ONUS TO ESTABLISH THE CLAIM. HE SUBMITTED T HAT IT IS NOT RELEVANT AS TO WHETHER SHARES WERE ALLOTTED TO THE APPLICANT OR NOT. HE SUBMITTED THAT THE COPIES OF THE ABOVE DOCUMENTS HAVE ALSO BEEN MA DE AVAILABLE BEFORE THE TRIBUNAL IN THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE AT PAGE NO. 36 OF THE PAPER BOOK WITH THE LETTERS ON DIFFERENT DATES WITH ANNEXURES. HE REITERATED THE SUBMISSIONS MADE BEFORE THE LD. CIT( A) AND HIS FINDING. THE LD. AR ALSO REFERRED THE DECISIONS CITED BEFORE LD. CIT(A) ALONGWITH THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF LO VELY EXPORTS PVT. LTD. 216 ITR 195 (SC) HOLDING THAT IF THE SHARE APPLICAT ION MONEY IS RECEIVED BY THE ASSESSEE COMPANY FROM BOGUS SHARE HOLDERS, WHOS E NAMES ARE GIVEN TO THE AO, THEN THE DEPARTMENT IS FREE TO PROCEED T O REOPEN THEIR INDIVIDUAL ASSESSMENT IN ACCORDANCE WITH LAW. 6. CONSIDERING THE ABOVE SUBMISSION WE FIN D THAT THE AO HAD DENIED THE CLAIMED SHARE APPLICATION MONEY OF RS. 3,50,000 /- INVESTED BY THE ITA NOS.2172/DEL/2009, 2861/DEL/2009 5 SHARE APPLICANT MR. ROHIT KUMAR GOGIA, PROPRIETOR M /S R K ENGINEERS DOUBTING THE TRANSACTION AND THE CREDITWORTHINESS O F THE APPLICANT. THE AO HELD THAT THE ASSESSEE FAILED TO ESTABLISH THE CLAI MED INVESTMENT BY FURNISHING PROPER EVIDENCE DESPITE OPPORTUNITIES GI VEN BY HIM IN THIS REGARD TO THE ASSESSEE. THERE IS NO DISPUTE THAT BEFORE TH E AO THE ASSESSEE HAD FILED CONFIRMATION OF THE SAID APPLICANT, COPIES OF HIS RETURN OF INCOME FOR THE ASSESSMENT YEARS 2004-05 AND 2006-07, STATEMENT OF BANK ACCOUNT OF M/S R K ENGINEERS, PROPRIETOR SHRI ROHIT KUMAR GOGIA . THE AO HELD THAT MERE FURNISHING OF PARTICULARS AND CONFIRMATION LET TER FROM THE ALLEGED SHARE APPLICANT OR THE SIMILAR FACT THAT PAYMENTS WERE MA DE BY WAY OF ACCOUNT PAYEE CHEQUES ARE NOT SUFFICIENT EVIDENCE TO PROVE THE GENUINENESS OF THE CLAIMED SHARE APPLICATION MONEY. HE ALSO NOTED THAT INSTEAD OF RETURN OF INCOME FOR THE ASSESSMENT YEAR 2005-06 WHICH WAS CA LLED FOR, COPY OF ACKNOWLEDGMENT OF RETURNS PERTAINING TO SHRI R K GO GIA FOR THE ASSESSMENT YEAR 2004-05 AND ASSESSMENT YEAR 2006-07 HAVE BEEN FILED. HE OBSERVED FURTHER THAT IN THE COPY OF BANK STATEMENT PERTAINI NG TO M/S R.K. ENGINEERS, FILED FOR THREE DAYS, THERE WAS NO MENTION OF THE N AME OF SHRI R.K. GOGIA. THE AO ALSO NOTED THAT IN THE ACKNOWLEDGMENT OF RET URN FOR ASSESSMENT YEAR 2004-05 TOTAL INCOME OF RS. 1,04,640/- HAS BEE N SHOWN MAINLY COMPRISING OF SALARY INCOME OF RS. 98,640/-. THUS H E DOUBTED THE CREDITWORTHINESS OF THE APPLICANT TO MAKE THE ALLEG ED SHARE APPLICATION ITA NOS.2172/DEL/2009, 2861/DEL/2009 6 MONEY FOR AN AMOUNT OF RS. 3,50,000/- TO LISTED CON CERN. THE LD. CIT(A) HAS HOWEVER DELETED THE ADDITION IN QUESTION PLACIN G RELIANCE ON SEVERAL DECISIONS INCLUDING DECISION OF HONBLE SUPREME COU RT IN THE CASE OF LOVELY EXPORT PVT. LTD. (SUPRA) WITH THIS FINDING THAT THE ASSESSEE COMPANY HAD FILED CONFIRMATION OF SHRI R.K. GOGIA PROPRIETOR R K ENGINEERS, COPY OF RETURN OF INCOME FILED BY HIM FOR THE ASSESSMENT YE AR 2004-05 AND ASSTT. YEAR 2006-07, COPY OF THE BANK STATEMENT OF ALLAHAB AD BANK FROM WHERE SHARE APPLICATION MONEY WAS GIVEN TO THE ASSESSEE C OMPANY BY WAY OF CHEQUE TO PROVE THE GENUINENESS OF THE TRANSACTION AND IN CASE AO WAS HAVING ANY DOUBT HE COULD HAVE SUMMONED THE APPLICA NT TO VERIFY THE GENUINENESS OF THE CLAIMED SHARE APPLICATION MONEY. HE HAS NOTED FURTHER THAT SIMPLY BECAUSE THE ASSESSEE COULD NOT FILE THE COPY OF THE RETURN OF INCOME FOR THE ASSTT. YEAR 2005-06 OF THE INVESTOR, THE TRANSACTION CANNOT BE TREATED AS UNEXPLAINED IN THE HANDS OF THE ASSES SEE. AS PER HIM IT IS NOT THE DUTY OF THE ASSESSEE TO ASK THE INVESTOR, WHETH ER HE HAD FILED THE RETURN OF INCOME FOR A PARTICULAR YEAR OR NOT. ONCE THE CONFIRMATION AND PAN OF THE SHARE APPLICANT IS FILED BY THE ASSESSEE , THE ONUS CAST UPON HIM HAS BEEN DISCHARGED. WE FIND SUBSTANCE IN THE ABOVE FINDING OF THE LD. CIT(A) SINCE AFTER FILING OF THE PRIMARY EVIDENCE L IKE CONFIRMATION OF THE SHARE APPLICANT, HIS PAN, BANK STATEMENT OF THE FIR M UNDER THE PROPRIETORSHIP OF THE SHARE APPLICANT WHICH REMAIN THE SOURCE OF THE ITA NOS.2172/DEL/2009, 2861/DEL/2009 7 INVESTMENT IN QUESTION, ETC. THE ONUS WAS SHIFTED U PON THE AO TO ESTABLISH THAT AFTER VERIFICATION THE CONFIRMATION AND OTHER DOCUMENTS WERE NOT FOUND RELIABLE. OF COURSE MERELY BECAUSE TRANSACTION WAS THROUGH BANKING CHANNEL BY CHEQUE IS NOT SUFFICIENT EVIDENCE BUT WE HAVE TO SEE THE SAID FACT COUPLED WITH OTHER DOCUMENTS LIKE PAN AND CONF IRMATION OF THE APPLICANT. WITHOUT EXAMINING THE VERACITY OF THESE DOCUMENTS BY SUMMONING THE APPLICANT, WE ARE OF THE VIEW THAT TH E AO WAS NOT JUSTIFIED IN HOLDING THAT THE EVIDENCE FILED IN SUPPORT BY T HE ASSESSEE WAS NOT SUFFICIENT TO ESTABLISH THE GENUINENESS OF THE CLAI M. WE ARE THUS OF THE VIEW THAT THE LD. CIT(A) FOLLOWING THE RATIO LAID DOWN BY SEVERAL DECISIONS INCLUDING DECISION OF HONBLE SUPREME COURT IN THE CASE OF LOVELY EXPORTS PVT. LTD. (SUPRA) AS WELL AS THE FACTS OF THE PRESE NT CASE HAS RIGHTLY DELETED THE ADDITION. THE SAME IS UPHELD . GROUND NO. 1 IS ACCORDINGLY REJECTED. GROUND NO. 2 7. THE FACTS IN BRIEF ARE THAT DURING THE ASS ESSMENT PROCEEDINGS THE AO NOTICED THAT FOR THE VERY FIRST TIME SINCE THE DATE OF INCORPORATION OF THE ASSESSEE COMPANY ON 29.12.94, THE ASSESSEE COMPANY HAS SHOWN ITSELF ENGAGED IN TRADING OF FABRICS FOR A VERY SHORT PER IOD OF 10 DAYS IN THE LAST MONTH OF ACCOUNTING PERIOD. HE NOTED THAT THE ENTIR E PURCHASE OF FABRICS WERE SHOWN FROM M/S. HANUNG QUALITY PRODUCTS PVT. L TD. AND THE ENTIRE STOCK HAS BEEN SHOWN AS SOLD OUT TO M/S OCEAN OVERS EAS. THE AO OBSERVED ITA NOS.2172/DEL/2009, 2861/DEL/2009 8 THAT THE ASSESSEE COMPANY IS IN THE BUSINESS OF MAN UFACTURING AND DEALING IN IRON AND STEEL PIPES, HOWEVER HE HAD INVOLVED IN THE ACTIVITY OF PURCHASE AND SALE OF FABRICS IN A SHORT PERIOD OF 10 DAYS AN D THE QUANTUM OF SALE OF FABRICS WAS AS MUCH AS RS. 2,54,14,200/- AGAINST TH E PURCHASE OF RS. 2,11,89,000/- OUT OF WHICH IT HAD EARNED HIGHER PRO FIT OF RS. 42,25,200/- IN THE SAID 10 DAYS . THE AO NOTED FURTHER THAT IN THE TAX AUDIT REPORT THE AUDITORS HAVE SHOWN THE BUSINESS OF ASSESSEE COMPAN Y AS MANUFACTURING AND DEALING WITH IN IRON AND STEEL PIPES. THERE IS NO MENTION AT ALL OF ANY TRADING BUSINESS OF FABRICS. HE THUS DOUBTED THE GE NUINENESS OF THE CLAIMED TRANSACTION AND MADE ADDITION OF RS. 1,01,90,000/- U/S 68 OF THE ACT ON ACCOUNT OF CASH DEPOSIT MADE IN THE ACCOUNTS OF THE PARTIES FROM WHOM THE ASSESSEE HAD SHOWN PURCHASE AND SALE OF FABRICS. TH E LD. CIT(A) HAS DELETED THIS ADDITION ON THE BASIS THAT THE ASSESSE E COMPANY HAD PROVIDED VARIOUS SUPPORTING EVIDENCE TO PROVE THE IDENTITY O F THE PARTIES AND GENUINENESS OF THE TRANSACTION, IN THE FORM OF COPY OF SALE AND PURCHASE BILLS AS WELL AS CONFIRMATION FROM THE SAID PURCHAS ER AND SELLER AND MAKING OTHER OBSERVATIONS. THIS ACTION OF THE LD. CIT(A) H AS BEEN QUESTIONED BEFORE US. 8. IN SUPPORT OF THE GROUND LD. DR HAS BA SICALLY TRIED TO JUSTIFY THE ASSESSMENT ORDER ON THE ISSUE. HE SUBMITTED THAT WH ILE GIVING RELIEF TO THE ASSESSEE ON THE CLAIMED SHAM TRANSACTION, THE LD. C IT(A) HAS FAILED TO ITA NOS.2172/DEL/2009, 2861/DEL/2009 9 APPRECIATE THAT THE CONCERN PARTIES WERE NOT FOUND ON THE GIVEN ADDRESS. BESIDES, THE LD. CIT(A) HAS ALSO FAILED TO APPRECIA TE THE SURROUNDING CIRCUMSTANCES AS OBSERVED BY THE AO. HE HAS ALSO NO T GIVEN ANY FINDING ESPECIALLY ON THE CIRCULAR TRADING AMONG THE SELLER AND PURCHASER I.E M/S. HANUNG QUALITY PRODUCTS PVT. LTD. AND M/S OCEAN O VERSEAS. 9. THE LD. AR ON THE OTHER HAND TRIED TO J USTIFY THE FIRST APPELLATE ORDER ON THE ISSUE. HE SUBMITTED THAT THE AO FAILED TO APPRECIATE THAT APPLICATION OF THE PROVISIONS OF SECTION 68 BY THE AO UNDER THE FACTS ON THE ISSUE WAS MISCONCEIVED. HE FAILED TO APPRECIATE THA T CREDITS WERE APPEARING IN THE BOOKS OF THE ASSESSEE AND NOT IN THE BOOKS O F TWO TRADERS FROM WHOM PURCHASES WERE MADE AND TO WHOM GOODS WERE SOL D. THE AO HAS ALLEGED THAT THE SAID TWO TRADERS WERE RELATED TO T HE ASSESSEE WITHOUT APPRECIATING THESE MATERIAL FACTS THAT THEY ARE ASS ESSED TO TAX. BESIDES THERE WAS NO EVIDENCE THAT ONE EMANATED FROM THE AC COUNT OF ASSESSEE. HE ALSO REFERRED CONTENTS OF PAGE NOS. 20 TO 24 OF THE FIRST APPELLATE ORDER, WHEREIN BESIDES OTHER THE LD. CIT(A) HAS ALSO DEALT WITH THE ALLEGATION MADE BY THE AO THAT THE TRANSACTIONS IN QUESTION WE RE NOTHING BUT CIRCULATED AMONG THE SAID PARTIES. 10. CONSIDERING THE ABOVE SUBMISSION, WE FIND THAT THE LD. CIT (A) HAS RIGHTLY APPRECIATED THE CONTENTION OF THE ASSESSEE THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN ASSESSING THE INCOME REPRESENT ED BY THE CASH DEPOSITS ITA NOS.2172/DEL/2009, 2861/DEL/2009 10 IN THE ACCOUNT OF THIRD PARTY AS UNDISCLOSED INCOME IN THE HANDS OF THE ASSESSEE U/S 68 OF THE ACT. WHAT IS TAXABLE UNDER T HE INCOME TAX ACT, IS INCOME WHICH HAS ON ITS OWN BEEN DISCLOSED BY THE A SSESSEE. THE CONTENTION OF THE ASSESSEE BEFORE THE AUTHORITIES B ELOW REMAINED THAT IT HAD AN OPPORTUNITY OF EARNING PROFIT WHICH WAS AVAI LED BY THE ASSESSEE. IT WAS CONTENDED BEFORE THE LD. CIT (A) THAT THE ASSES SING OFFICER HAS MADE ADDITION ONLY ON THE DOUBT OF SUCH INCOME IN A SHOR T DURATION WHICH AS PER HIM IS NORMALLY IMPROBABLE. IN SUPPORT OF THE CLAIM THE ASSESSEE HAD FILED COPIES OF THE BILLS RAISED BY THE SELLER AND THE BI LLS ISSUED BY THE ASSESSEE TO THE PURCHASER AND DETAILS OF THE PAYMENTS MADE TO T HE SELLER AND PAYMENTS RECEIVED FROM THE PURCHASER OF THE FABRICS SO SOLD. WE CONCUR WITH THE SUBMISSION OF THE ASSESSEE THAT NOTHING PREVENTS TH E ASSESSEE FROM VENTURING INTO NEW LINE OF BUSINESS IF IT RESULTS I N EARNING OF THE PROFITS. THE PURCHASER AND SELLER BOTH ARE IDENTIFIED IN THE PRE SENT CASE AND BOTH ARE INCOME TAX ASSESSEES IN ITS THEIR OWN CAPACITY. IN SUPPORT OF ITS CLAIM THE ASSESSEE HAD ALSO FILED CONFIRMATION FROM THE PURCH ASER AND SELLER AND BESIDES, THE ASSESSING OFFICER HAD ALSO OBTAINED BA NK STATEMENT FROM SENTURIAN BANK OF PUNJAB OF THE SAID PARTY WHEREBY THE PAYMENT RECEIVED AND PAID BY THE ASSESSEE WERE DULY FOUND RECORDED. CONSIDERING THESE FACTUAL ASPECTS, WE ARE OF THE VIEW THAT THE LD. CI T (A) HAS RIGHTLY HELD THAT THE ASSESSEE HAD DISCHARGED ITS INITIAL ONUS OF EST ABLISHING BONAFIDE OF THE ITA NOS.2172/DEL/2009, 2861/DEL/2009 11 TRANSACTION OF SALE AND PURCHASE OF FABRICS BY FURN ISHING ABOVE STATED EVIDENCE AND DECLARING SUBSTANTIAL PROFITS THEREON AND, THEREAFTER, THE ONUS WAS SHIFTED ON ASSESSING OFFICER TO DISLODGE THOSE EVIDENCE. IN THE ABSENCE OF SUCH ACTION ON THE PART OF THE ASSESSING OFFICER IN OUR VIEW IT WAS NOT JUSTIFIED BY HIM TO HOLD THE AMOUNT DEPOSITED IN TH E BANK ACCOUNT OF THE SELLER AS WELL AS PURCHASER AS ASSESSEES OWN UNDIS CLOSED INCOME. 11. THE LD. CIT (A) WAS THUS RIGHT IN DELETING THE ADDITION IN QUESTION. THE FINDING OF THE LD. CIT (A) IN THIS REGARD IS TH US UPHELD. THE GROUND NO.2 IS ACCORDINGLY RECORDED. GROUND NO.3 (REVENUE) AND GROUND NO. 1,1.1 TO 1.4. (ASSESSEE) 12. IN ITS GROUND NO.3 REVENUE HAS QUESTIONED THE F IRST APPELLATE ORDER IN DELETING THE ADDITION OF RS.53,77,921/- MADE BY ADOPTING THE AVERAGE OF THE PRECEDING TWO YEARS G.P OF 3.48 % AFTER REJECTI NG THE BOOKS OF ACCOUNT OF THE ASSESSEE ON ACCOUNT OF LOW G. P RATE. THE AS SESSEE IN THE ABOVE STATED GROUNDS OF ITS APPEAL HAS QUESTIONED THE ACT ION OF THE LD. CIT (A) IN REJECTING THE BOOKS OF ACCOUNT U/S 145(3) OF THE AC T AND SUSTAINING THE TRADING ADDITION OF RS.35,02,280/- BY APPLYING G. P . RATE OF 1.5% ON THE TOTAL SALES DECLARED BY THE ASSESSEE. THUS THE ISSU ES INVOLVED IN THESE GROUNDS ARE AS TO WHETHER THE ASSESSING OFFICER WAS JUSTIFIED IN REJECTING THE BOOKS OF ACCOUNT U/S 145(3) OF THE ACT, UPHELD BY THE LD. CIT (A) AND ITA NOS.2172/DEL/2009, 2861/DEL/2009 12 SECONDLY THE REASONABLENESS OF THE ESTIMATION OF TR ADING ADDITION IF ANY. THUS, GROUNDS ARE THUS BEING DISPOSED OFF SIMULTANE OUSLY. 13. THE RELEVANT FACTS ARE THAT DURING THE YEAR THE ASSESSEE HAD SHOWN SALE OF IRON AND STEEL, SAW PIPES WORTH RS.9,47,29, 322/-, CLAIMING GROSS LOSS OF RS.20,81,341/-. THE ASSESSING OFFICER NOTED SHOR TCOMINGS IN THE AFFAIRS OF THE ASSESSEE AND BEING NOT SATISFIED WITH THE EX PLANATION FURNISHED BY ASSESSEE TO HIM, THE ASSESSING OFFICER HAS REJECTED THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND COMPUTED ITS TAXABLE INCOME AT THE G. P. RATE OF 3.48% FROM THE BUSINESS OF TRADING AND MANUFACTURING TUBE S AND PIPES RESULTING IN TRADING ADDITION OF RS.53,77,921/-. 14. THE LD. CIT (A) AFTER DISCUSSING THE CASE OF TH E PARTIES HAS UPHELD THE REJECTION OF BOOKS OF ACCOUNT AND FOUND IT REAS ONABLE TO ESTIMATE THE PROFIT BY ADOPTING G.P. RATE OF 1.5% OF THE TOTAL S ALES WHICH HAS RESULTED IN THE RELIEF OF RS.18,75,640/- ( QUESTIONED BY THE RE VENUE) AND SUSTAINING OF THE ADDITION OF RS.35,02,280/- (IMPUGNED BY THE ASS ESSEE). 15. IN SUPPORT OF ITS GROUND NO.3, THE LD. DEPARTME NTAL REPRESENTATIVE HAS BASICALLY PLACED RELIANCE ON THE ASSESSMENT ORD ER. HE SUBMITTED THAT IT IS AN ADMITTED FACT THAT SALES WERE MADE BY THE ASS ESSEE TO ITS SISTER CONCERN. THERE WERE SEVERAL SHORTCOMINGS IN THE BUS INESS AFFAIRS OF THE ASSESSEE. THE 95% OF THE SALES WERE BY THE SISTER C ONCERN M/S SPARK ELECTRODES PVT. LTD. AT LOWER RATE AS COMPARED TO OT HER CONCERN. SALES WERE ITA NOS.2172/DEL/2009, 2861/DEL/2009 13 MADE TO SISTER CONCERN ON OPERATING LOSS. THERE WAS NO AGREEMENT WITH THE SISTER CONCERN THAT SALES WOULD BE MADE AT PARTICUL AR RATE. HE SUBMITTED THAT THE ASSESSING OFFICER HAD ADOPTED G. P. RATE A T 3.48%, AFTER COMPARING THE RESULTS OF THE OTHER COMPANIES IN THE SIMILAR M ANUFACTURING AND TRADE OF SALE OF TUBE AND PIPES. HE ALSO SUBMITTED THAT THE SALE TRANSACTIONS WERE SHAM AND IN SUPPORT OF IT, HE PLACED RELIANCE ON TH E FOLLOWING DECISIONS (I) MCDOWELL & CO. LTD. VS. CTO 154 ITR 148 (SC) (II) UOI VS. AZADI BACHAO ANDOLAN 263 ITR 706(SC ). 16. THE LD. AR ON THE OTHER HAND SUBMITTED THAT WHI LE ESTIMATING THE PROFIT. THE ASSESSING OFFICER HAS EXCLUDED TRANSACT ION OF FABRICS AND THERE WAS NO BASIS FOR LD. CIT (A) TO APPLY G. P. RATE AT 1.5% IN THIS REGARD HE CITED THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. PADAMCHAND RAMGOPAL REPORTED IN 76 ITR 719 (SC). HE FURTHER SUBMITTED THAT IT IS AN ESTABLISHED PROPOSITION OF LAW THAT E VEN IF BOOKS OF ACCOUNT ARE REJECTED IT IS NOT NECESSARY TO MAKE TRADING ADDITI ON AND PLACED RELIANCE ON THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. GOTAN LIME KHANIJ UDHYOG (2002) 256 ITR 243 (RAJ.). HE SUBMITTED THAT THE PRIMARY ALLEGATION OF THE ASSESSING OFFICER THAT TH E ASSESSEE HAD SOLD SISTER CONCERN AT LOWER PRICE IS NOT CORRECT, SINCE HE HAS CONSIDERED THE SALES OF ONLY ONE AND HALF MONTHS OUT OF THE TOTAL SALES MAD E. IN THIS REGARD HE REFERRED PAGE NO.11 OF THE ASSESSMENT ORDER. HE REF ERRED PAGE NOS.67 AND ITA NOS.2172/DEL/2009, 2861/DEL/2009 14 84 OF THE PAPER BOOK. AT PAGE NO.67 OF THE PAPER BO OK, THE ASSESSEE HAS MADE AVAILABLE COMPARATIVE CHART OF SALES TO DIFFER ENT CUSTOMERS AND AT PAGE NO.84 OF THE PAPER BOOK HAS BEEN MADE AVAILABL E THE DETAILS OF PURCHASES (RAW MATERIAL) WITH THE DATE, PARTIES NAM E, BILL NOS., QUANTITY IN M.T., PURCHASE ACCOUNT, EXCISE DUTY, TOTAL ACCOUNT AND THE RATE, HE ALSO REFERRED PAGE NO.40,41,75,79 AND 80 OF THE PAPER BO OK FILED ON BEHALF OF THE ASSESSEE WITH THE SUBMISSION THAT CONTENTS OF T HESE PAGES HAVE BEEN ACCEPTED BY THE LD. CIT (A) WHICH HAS NOT BEEN REBU TTED. THESE ARE DETAILS OF PURCHASES DURING THE ASSESSMENT YEAR UNDER CONSI DERATION, DETAILS OF SALES MADE DURING THE YEAR WITH PARTY NAME, ADDRESS AND ACCOUNT, LETTER DATED 14.05.2007 BY THE ASSESSEE TO THE ASSESSING O FFICER EXPLAINING THE REASON OR DECLINING IN THE G.P RATE DURING THE YEAR . INSTANCES OF PURCHASES WHERE THE SELLER OF THE RAW MATERIAL HAVE NOT REDUC ED RATES EVEN AFTER REDUCTION IN EXCISE RATE, AND THE DETAILS OF PAYMEN TS MADE THROUGH PROFIT AND LOSS ACCOUNT DURING THE YEAR WORTH RS.39,50,939 /- WERE FURNISHED. 17. CONSIDERING THE ABOVE SUBMISSION, WE FIND THAT THE ASSESSING OFFICER HAD MADE TRADING ADDITION OF RS.53,77,921/-, AFTER REJECTING THE BOOKS OF ACCOUNT U/S 145(3) OF THE ACT, POINTING OUT SOME SH ORTCOMINGS IN THE BUSINESS AFFAIRS OF THE ASSESSEE AND FINDING IT REA SONABLE TO ESTIMATE THE PROFIT AT THE G. P. RATE OF 3.48% OF THE TURNOVER. THE ASSESSING OFFICER NOTED THAT 95% OF SALES WERE MADE TO SISTER CONCERN M/S SPARK ELECTRODES ITA NOS.2172/DEL/2009, 2861/DEL/2009 15 PVT. LTD. AT MUCH LOWER RATE AS COMPARED TO OTHER C ONCERN, AT VARIOUS INSTANCES SALES HAVE BEEN MADE TO SISTER CONCERN ON OPERATING LOSS, GOODS SOLD TO THE SISTER CONCERN WERE LESS THAN THE PURCH ASED PRICE, THERE WAS NO AGREEMENT WITH THE SISTER CONCERN FOR MAKING THE SA LE AT PARTICULAR RATE THE OPERATING RESULT SHOWN BY THE OTHER COMPANIES IN SI MILAR TRADE WAS HIGHER IN COMPARISON TO THE ASSESSEE, THE VALUATION OF CLO SING STOCK WAS DONE BY THE ASSESSEE IN CONTRAVENTION OF SECTION 145(A) OF THE ACT, THE ASSESSEE HAD NOT TAKEN INTO CONSIDERATION THE COMPONENT OF E XCISE DUTY WHICH WAS RS.6,03,142/-, THE ASSESSEE HAD SHOWN HIGHER ELECTR ICITY CONSUMPTION CORRESPONDING TO THE LESSER PRODUCTION AND THAT THE ASSESSEE HAD NOT SHOWN ANY CLOSING STOCK OF CONSUMABLE WHEREAS IN TH E OPENING STOCK THE VALUE OF CONSUMABLE STORE WAS DECLARED AT RS.1,25,4 53/-. THE EXPLANATION OF THE ASSESSEE TO THE ABOVE OBSERVATION OF THE AS SESSING OFFICER REMAINED THAT DURING THE YEAR THOUGH THERE WAS REJECTION IN EXCISE DUTY FROM 16% TO 8% ON RAW MATERIAL, BUT THE BENEFIT OF THE SAME WA S NOT PASSED ON BY THE SUPPLIERS AS A RESULT OF WHICH THE ASSESSEE HAD TO PAY EXCISE DUTY TO THE EXTENT OF RS.39 LAC OUT OF P & L ACCOUNT, INSTEAD O F ADJUSTING AGAINST MOD VAT, THEREBY AFFECTING THE TRADING RESULTS AS AGAIN ST THE PAYMENT OF EXCISE DUTY RS.0.08 LAC DURING THE IMMEDIATELY PRECEDING Y EAR. IN SPITE OF ADVERSE CONDITION THE ASSESSEE COULD NOT STOP ITS MANUFACTU RING ACTIVITY, AS THE SAME WOULD HAVE RESULTED IN DETERIORATION IN THE PL ANT AND MACHINERY AND ITA NOS.2172/DEL/2009, 2861/DEL/2009 16 ALSO WITHDRAWAL OF SALES TAX EXEMPTION AND OTHER EX PECTED STATE INCENTIVES, WHICH WERE AVAILABLE TO THE BACKWARD AREAS OF PUNJA B, IF THE ASSESSEE HAS STOPPED ITS MANUFACTURING ACTIVITY, IT WOULD HAVE S UFFERED LOSS OF FIXED EXPENSES/ OVERHEADS AND ALSO HAVE LOSS OF SERVICES OF CONTINUING LOYAL EMPLOYEES. AGAINST THE OBSERVATION OF THE ASSESSING OFFICER THAT TRADING THE RESULTS WERE MANIPULATED TO AVOID EXCISE DUTY AND S ALES TAX PAYMENTS, IT WAS SUBMITTED BY THE ASSESSEE THAT ITS UNIT WAS EXE MPT UNDER SALES TAX LAW, DURING THE YEAR UNDER CONSIDERATION. IT WAS ST ATED THAT THERE IS CONTINUOUS EXCISE MONITORING AND AT NO STAGE, ANY DISCREPANCY HAS BEEN OBSERVED BY THE CENTRAL EXCISE DEPARTMENT. IT WAS EX PLAINED THAT THE STOCK VALUATION HAS BEEN MAINTAINED IN ACCORDANCE WITH AC CRUAL CONCEPT BASIS, AND THERE WAS NO DISCREPANCY IN THE SAME. IT WAS AL SO SUBMITTED THAT EXCISE DUTY DUE ON THE STOCK OF FINISHED GOODS HAS BEEN DULY CONSIDERED. SINCE THE PURCHASE OF MATERIALS WAS ACCOUNTED FOR O N NET BASIS IN ITS BOOKS OF ACCOUNT I.E NET ON MOD VAT, EXCISE DUTY COMPONEN T WAS NOT ADDED TO THE VALUE OF STOCK OF RAW MATERIAL. IT WAS EXPLAINED BY THE ASSESSEE THAT STOCK HAVE BEEN VALUED AT COST OR MARKET PRICE WHICH IS L OWER AS PER ACCEPTED ACCOUNTING PRINCIPLES. IT WAS EXPLAINED BY THE ASSE SSEE THAT SALES WERE MADE TO ITS SISTER CONCERN M/S SPARK ELECTRODES LTD. AT A PRICE WHICH WAS IN ACCORDANCE WITH THE MARKET CONDITIONS. IT IS SUBMIT TED COMPARATIVE CHART, IN SUPPORT SHOWING THE SALES MADE BY M/S SPARK ELECTROD ES LTD. FROM ASSESSEE ITA NOS.2172/DEL/2009, 2861/DEL/2009 17 AS WELL AS TO OTHER OUTSIDE PARTIES. THE ASSESSEE A LSO FURNISHED EVIDENCE TO SUPPORT ITS CONTENTION THAT THE PURCHASES WERE MADE BY M/S SPARK ELECTRODES LTD. FROM THE ASSESSEE AT THE RATE HIGHER THAT THE RATE AT WHICH IT HAD PURCHASED SIMILAR GOODS FROM THE OTHER PARTIES. SIMILARLY IT WAS ALSO SHOWN BY THE APPELLANT THAT THE GOODS PURCHASED FRO M THE APPELLANT BY M/S SPARK ELECTRODES LTD. WERE SOLD ON A VERY MEAGER PRO FIT MARGINS. 18. THE LD. CIT (A) HAS UPHELD THE ACTION OF THE AS SESSING OFFICER IN REJECTING THE BOOKS OF ACCOUNT U/S 145(3) OF THE AC T, ON THE BASIS THAT THERE WAS DRASTIC DECLINE IN THE GROSS PROFIT OF THE ASSE SSEE AS COMPARED TO THE PRECEDING YEARS, THE PAYMENT OF EXCISE DUTY OF RS.3 9 LAC INCLUDED IN THE SALE PRICE, WILL ONLY HAVE MARGINAL IMPACT ON THE O PERATIONAL RESULTS OF THE ASSESSEE AND THAT THE ASSESSEE HAS NOT EXPLAINED TH E MISMATCH IN THE MONTHLY PRODUCTION FIGURE AND CORRESPONDING PRODUCT ION EXPENSES. HE HAS ALSO NOTED THAT THE ASSESSEE HAS NOT ADDED THE EXCI SE DUTY COMPONENT WHILE VALUING ITS CLOSING STOCK, THOUGH IT IS SPECI FICALLY PROVIDED IN SECTION 145A OF THE I. T. ACT. HE HAS ALSO NOTED THAT THE A SSESSEE HAS MADE CERTAIN SALES TO ITS SISTER CONCERN, AT A VALUE LOWER THAN ITS PURCHASE PRICE OF RAW MATERIAL. WE FIND THAT LD. CIT (A) WHILE NOTING ABO VE OBSERVATION HAS NOT CONSIDERED THE EXPLANATION OF THE ASSESSEE ON THOSE OBSERVATIONS MADE BY THE ASSESSING OFFICER. STILL THERE IS NO DISPUTE TH AT PAYMENT OF EXCISE DUTY OF RS. 39LAC INCLUDED IN THE SALES PRICE WILL ONLY FOR MARGINAL IMPACT ON THE ITA NOS.2172/DEL/2009, 2861/DEL/2009 18 OPERATIONAL RESULTS OF THE ASSESSEE, WHICH WILL NOT BRING DOWN THE GROSS PROFIT TO SUCH AN EXTENT AND THAT THERE WERE MISMAT CH IN THE ASSESSEES MONTHLY PRODUCTION FIGURE AND CORRESPONDING PRODUCT ION EXPENSES. 19. WE ARE OF THE VIEW THAT THE LD. CIT (A) RIGHTL Y UPHELD THE ACTION OF THE ASSESSING OFFICER IN REJECTING THE BOOKS OF ACC OUNT U/S 145(3). BUT MERELY BECAUSE BOOKS OF ACCOUNT WERE REJECTED THE A CTION OF THE AUTHORITIES BELOW IN ESTIMATING THE PROFIT BY ADOPTING A PARTIC ULAR GP RATE WITHOUT ASSIGNING ANY REASON IN SUPPORT RESULTING INTO THE TRADING ADDITION CANNOT BE JUSTIFIED. THE ADDITION MADE BY THE ASSESSING OF FICER AT RS.53,77,921/- AND SUSTAINED BY THE LD. CIT (A) AT RS. 35,02,280/- ON ACCOUNT OF TRADING ADDITION APPLYING AN ESTIMATED GROSS PROFIT RATE WI THOUT ASSIGNING THE VERY BASIS, THUS CANNOT BE JUSTIFIED. IN THIS REGARD, W E FIND SUPPORT FROM THE DECISION OF THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. GOTAN LIME KHANIJ UDHYOG (SUPRA, WHEREIN THE HONBLE HIGH COURT HAS BEEN PLEASED TO HOLD THAT SECTION 145 OF THE I.T. ACT, 1 961, ONLY PROVIDES THE BASIS ON WHICH COMPUTATION OF INCOME IS TO BE MADE FOR THE PURPOSE OF DETERMINING THE AMOUNT OF TAX. THE PROVISION BY IT SELF DOES NOT DEAL WITH ADDITION OR DELETION TO THE INCOME. THEREFORE, MER E REJECTION OF, OR SOME DEFICIENCY IN, THE BOOKS OF ACCOUNT WOULD NOT MEAN THAT IT MUST NECESSARILY LEAD TO ADDITIONS TO THE SUSTAINED INCOME. ITA NOS.2172/DEL/2009, 2861/DEL/2009 19 20. WE THUS WHILE SETTING ASIDE THE ADDITION MADE A ND SUSTAINED BY THE AUTHORITIES BELOW DIRECT THE ASSESSING OFFICER TO D ELETE THE ADDITION. GROUND NO.3 OF THE APPEAL OF THE REVENUE IS THUS REJECTED AND GROUND NO.1,1.1TO 1.4 OF THE APPEAL PREFERRED BY THE ASSESSEE ARE PAR TLY ALLOWED. 21. IN THE RESULT, THE APPEAL PREFERRED BY THE REVE NUE IS DISMISSED AND THAT PREFERRED BY THE ASSESSEE IS PARTLY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 14 TH MARCH, 2014. SD/- SD/- (T.S. KAPOOR) ( I.C. SUDHIR ) ACCOUNTANT MEMBER J UDICIAL MEMBER DATE 14 TH MARCH, 2014 VEENA/S. SINHA COPY OF ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER ASSTT. REGISTRAR, ITAT