DCIT, Madurai V. Shri Karpagambal Mills Ltd., Rajapalayam

ITA 234/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8748 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2016
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 06-06-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 09-02-2016
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: R SRINIVASAN
• Keywords: Commercial expediency
• Section: 143(3)

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO. 2 3 4 /MDS/201 6 / ASSESSMENT YEAR :20 09 - 1 0 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 2 , MADURAI. VS. M/S. S R EE KARPAGAMBAL MILLS LTD., 740 - 789, MILLS PREMISES, CHOLAPURAM SOUTH, RAJA PALAYAM 626 139. [PAN: A A D C S9038A ] ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI A. V. SREEKANTH , J CIT / RESPONDENT BY : SHRI R. SRINIVASAN, ADVOCATE / DATE OF HEAR ING : 0 6 . 0 6 .201 6 / DATE OF P RONOUNCEMENT : 11 . 0 8 .201 6 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) 1 , MA DURAI DATED 27 . 11 .201 5 RELEVANT TO THE ASSESSMENT YEAR 20 09 - 1 0 . THE ONLY EFFECTIVE GROUND RAISED BY THE REVENUE IS THAT THE LD. CIT(A) HAS ERRED IN ALLOWING THE ADDITION MADE TOWARDS EXCESS PURCHASE PRICE PAID FOR GINNED COTTON ON THE GROUND THAT THE ASSES SING OFFICER HAS NOT SPECIFIED DEFECTS IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. I.T.A. NO . 23 4 /M/ 1 6 2 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF COTTON YARN. T HE ASSESSEE FILED ITS RETURN OF INCOME ON 13.09.2009 ADMI TTING TOTAL LOSS OF .2,46,81 ,587/ - . THE RETURN FILED BY THE ASSESSEE WAS PROCESSED UNDER SECTION 143(1) OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT] . SUBSEQUENTLY, THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE A CT WAS ISSUED TO THE ASSESSEE ON 31.08.2010. THEREAFTER, AFTER CONSIDERING THE DETAILS FURNISHED BY THE ASSESSEE THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT BY DETERMINING THE LOSS AT . 72,11,697/ - . 3. IN THE ASSESSMENT ORDER, T HE ASSES SING OFFICER HAS NOTICED THAT THERE WAS CONSIDERABLE VARIATION IN THE PURCHASE OF PRICE OF VARIOUS TYPES OF GINNED COTTON (RAW MATERIALS) AMONG 14 MILLS. HENCE, THE ASSESSEE WAS ASKED TO FURNISH THE PURCHASE DETAILS. ASSESSING OFFICER MADE A COMPARATIVE AN ALYSIS IN ORDER TO VERIFY WHETHER THE COST OF PURCHASE OF GINNED COTTON WAS IN TUNE WITH THE (AVERAGE) COST OF GINNED COTTON ANNOUNCED / PUBLISHED BY THE C OTTON ASSOCIATION OF INDIA (CAI), MUMBAI. HE MADE A DETAILED ANALYSIS SHOWING VARIOUS TYPES OF GINNED C OTTON PURCHASED WITH DATE, MONTH AND YEAR, TOTAL AMOUNT OF PURCHASE, PER KG PRICE PAID BY THE ASSESSEE COMPANY, PER KG PRICE OF CANDY AS ANNOUNCED BY COTTON ASSOCIATION OF INDIA(CAI) ,MUMBAI (MONTH - WISE, YEAR WISE) AND THE DIFFERENCE BETWEEN THE PRICE PAID BY THE ASSESSEE COMPANY AND PER KG PRICE / PER CANDY PRICE ANNOUNCED BY I.T.A. NO . 23 4 /M/ 1 6 3 CAI AND ARRIVED AT TOTAL EXCESS PRICE PAID BY THE ASSESSEE COMPANY. OUT OF THE TOTAL PURCHASES MADE, THE ASSESSING OFFICER HAS TAKEN A SAMPLE PURCHASE OF 12 NUMBERS ON RANDOM BASIS AN D THE PRICE PAID BY THE ASSESSEE COMPANY WAS COMPARED WITH THE AVERAGE MONTHLY PRICE ANNOUNCED BY THE CAI. FOR THE ENTIRE 12 PURCHASES, THE PRICE PAID BY THE ASSESSEE COMPANY WAS IN EXCESS OF PRICE ANNOUNCED BY CAI. THE TOTAL PRICE PAID FOR 12 PURCHASES IS .2, 18,06,575/ - AND THE TOTAL EXCESS PRICE PAID FOR 12 PURCHASES WAS QUANTIFIED AT . 14,85,488/ - . THE TOTAL PURCHASE VALUE OF 12 SAMPLE PURCHASED . 2,18,06,575 THE TOTAL PURCHASE PRICE (100%) . 24,19,48,252 PERCENTAGE OF SAMPLE 9.013 EXCESS PRICE P AID FOR TOTAL PURCHASE (1485488/9.013) X 100 . 1,64,81,793 ON THE BASIS OF RANDOM SAMPLING AS DISCUSSED ABOVE, OUT OF THE TOTAL PURCHASE PRICE, THE ASSESSING OFFICER HAS WORKED OUT THE EXCESS PURCHASE PRICE PAID BY THE ASSESSEE AT .1,64,81,793/ - IN COM PARISON TO THE MONTHLY AVERAGE PRICE AS ANNOUNCED BY CAI AND SAME WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE . 4. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE LD. CIT(A) HELD T HAT THE ESTIMATED DISALLOWANCE MADE BY THE ASSESSING OFFICER IS NOT SUSTAINABLE AS IT WAS NOT ESTABLISHED BY THE ASSESSING OFFICER WITH REFERENCE TO SPECIFIC DEFECTS IN THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE. I.T.A. NO . 23 4 /M/ 1 6 4 5. ON BEING AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. THE LD. DR HAS SUBMITTED THAT THE ADDITION WAS MADE ON ACCOUNT OF EXCESS PURCHASE PRICE OF GINNED COTTON AFTER VERIFYING THE AVERAGE COST OF GINNED COTTON PUBLISHED BY THE CAI AND COMPARING THE PRICE PAID BY THE ASSESSEE I N RESPECT OF 12 RANDOM SAMPLES PURCHASED, WHEREIN, THE ASSESSING OFFICER HAS IDENTIFIED THAT IN 12 SAMPLES PURCHASES, THE ASSESSEE HAS PAID IN EXCESS OF THE PRICE PUBLISHED BY THE CAI. THEREFORE, THE LD. DR HAS SUBMITTED THAT THE LD. CIT(A) SHOULD HAVE SUS TAINED THE ADDITION MADE BY THE ASSESSING OFFICER AND PLEADED THAT THE ORDER PASSED BY THE LD. CIT(A) SHOULD BE REVERTED. 6. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS BEEN MAINTAIN ING REGULAR BOOKS OF ACCOUN TS AND TAX AUDIT REPORT UNDER 44AB OF THE ACT HAS BEEN DULY FILED BEFORE THE ASSESSING OFFICER . THE ASSESSEE HAS MADE THE PAYMENT IN RESPECT OF COTTON PURCHASES ONLY BY MEANS OF ACCOUNT PAYEE CHEQUES AND, THEREFORE, THE ESTIMATED ADDITION CANNOT BE SUSTAIN ED UNDER LAW. HE STRONGLY SUPPORTED THE ORDER PASSED BY THE LD. CIT(A) 7. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS OBSERVED THAT THERE W AS CONSIDERABLE VARIATION IN THE I.T.A. NO . 23 4 /M/ 1 6 5 PURCHASE PRICE OF VARIOUS TYPES OF GINNED COTTON [RAW MATERIAL] AMONG 14 MILLS. AFTER CALLING THE PURCHASE DETAILS FROM THE ASSESSEE, THE ASSESSING OFFICER MADE DETAILED ANALYSIS TO ARRIVE THE COST PRICE OF THE GINNED COTTO N AND ESTIMATED THE EXCESS PRICE AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. ON APPEAL, THE LD. CIT(A) HAS OBSERVED AS UNDER: 4.3 I HAVE CONSIDERED THE SUBMISSIONS OF THE REPRESENTATIVE. IT IS SEEN THAT THE ASSESSING OFFICER HAD NOT CONDUCTED ANY ENQ UIRY WITH THE ACTUAL SELLERS OF COTTON REGARDING EXCESS PURCHASE PRICE OF COTTON. THE METHODOLOGY ADOPTED BY THE ASSESSING OFFICER BY COMPARING ASSESSEE'S PURCHASE PRICE OF COTTON WITH THE FIGURES OF COTTON ASSOCIATION OF INDIA (CSI) I.E. CONTEMPORANEOUS M ARKET CONDITIONS IS FRAUGHT WITH RISK AND INHERENT CHANCE OF GETTING FALSE (MEANINGLESS) RESULTS FOR THE FOLLOWING REASONS: - I) DIFFERENT TEXTILE MILLS PRODUCE DIFFERENT COUNTS OF YARN - SOME COARSE AND SOME FINE. NEEDLESS TO SAY, COTTON CONSUMPTION WILL BE DEPENDENT ON THE COUNT MIX AND THE STAPLE LENGTH OF COTTON AND STRENGTH (REFERRED TO AS CSP) SOLD BY THE PARTICULAR MILL. NATURALLY THE PRICE PAID FOR COTTON DEPENDS ON THE VARIETY CHOSEN STAPLE LENGTH, COLOUR, MOISTURE CONTENT ETC. II) APART FROM T HE COUNT MIX, THE COTTON VARIETY PURCHASED WILL DETERMINE PRICE. III) A) PURCHASES FROM THE COTTON EXCHANGE (CAI) ARE COMPLETELY DIFFERENT FROM THAT OF PURCHASE FROM COTTON DEALERS. IN THE FORMER MECHANISM, THE BUYER HAS TO PAY ONCE THE CONTRACT IS DECI DED, I.E. IN ADVANCE, AND CANNOT ALTER THE PRICE IF THE DELIVERED QUANTITY DOES NOT MATCH SPECIFICATIONS THAT WERE CONTRACTED WHEN COTTON IS PURCHASED FROM DEALERS, ANY DIFFERENCE IN QUALITY IS COMPENSATED BY WAY OF REBATES OR IN SUBSEQUENT DELIVERIES. B) CAI PRICE QUOTED IS FOR READY MONEY CASH PRICE WHEREAS ASSESSEE'S PURCHASES ARE ON CREDIT BASIS ALSO. C) CAI PRICE IS THE PRICE FOR THE DELIVERY AT THE UP - COUNTRY SPOT MARKET PLACE WHEREAS IN ASSESSEE'S CASE DELIVERY IS AT ASSESSEE'S FACTORY SITE. D) CAI PRICE IS EXCLUSIVE OF SALES TAX OR EXPENSES OF SUCH NATURE AS THE CASE MAY BE WHEREAS ASSESSEE'S PURCHASES ARE THROUGH I.T.A. NO . 23 4 /M/ 1 6 6 BROKERS AND AGENTS AND ACTUAL PRICE WILL BE MORE FOR THE INCLUSION OF INTEREST ELEMENT /LORRY FREIGHT / INSURANCE / BROKERAGE E TC. IV) PRICES HAVE BEEN OBTAINED FROM THE COTTON EXCHANGE AFTER THE EVENT. CIRCUMSTANCES ARE HARDLY THE SAME WHEN A BUYER MAKES A COMMODITY PURCHASE ON THE SPOT MARKET. IN OTHER WORDS, AS IS TRUE OF ANY COMMODITY MARKET, THE PRICES THAT PREVAIL IN AN E XCHANGE ARE THE RESULT OF SPECULATIVE EFFORTS BY THE TRADERS AND OTHER STOCKHOLDERS IN A MARKET. A SPOT MARKET ON THE OTHER HAND, IS A PHYSICAL AND TANGIBLE EXCHANGE THAT ENABLES A BUYER TO MAKE AN INFORMED DECISION ON THE SPOT AND THE PRICE IS THEN DETERM INED CONSIDERING THE VARIOUS PARAMETERS MENTIONED ABOVE. V) A BUYER'S STANDING, HIS CREDIT WORTHINESS, PURCHASE VOLUME, DELIVERY TERMS AND A PLETHORA OF OTHER PARAMETERS PLAY A ROLE IN THE PRICE THAT IS ULTIMATELY PAID. AN EFFICIENT BUYER WILL CONSIDER A MIX OF THESE FACTORS AND ULTIMATELY CHOOSE THE OPTIMAL QUALITY OF COTTON AT THE BEST AVAILABLE PRICE FOR THESE PARAMETERS. VI) COMMERCIAL EXPEDIENCY MUST BE DECIDED FROM BUSINESS MAN'S POINT OF VIEW. IN THE CASE OF CIT VS. SALES MAGNESITE PVT. LTD.[199 5] 214 ITR PAGE 1 (BOMBAY), HON'BLE BOMBAY HIGH COURT HELD AS UNDER : - 'THE QUESTION WHETHER IT WAS NECESSARY COMMERCIALLY EXPEDIENT OR NOT IS A QUESTION THAT HAS TO BE DECIDED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT BY THE SUBJECTIVE STANDARD OF REASONABLENESS OF THE REVENUE.' IN VIEW OF THE ABOVE, I HOLD THAT THE ESTIMATED DISALLOWANCE MADE BY THE ASSESSING OFFICER IS NOT SUSTAINABLE AS IT WAS NOT ESTABLISHED BY THE ASSESSING OFFICER WITH REFERENCE TO SPECIFIC DEFECTS IN THE BOOKS OF ACCOUNTS MAINTAINED BY THE APPELLANT. 8. ADMITTEDLY, IN THIS CASE, THE ASSESSING OFFICER HAS NOT NOTICED ANY MISTAKE IN THE BOOKS OF ACCOUNTS MAINTAINED AND THE TAX AUDIT REPORT FILED BY THE ASS ESSEE. IT IS AN ADMITTED FACT THAT EACH AND EVERY MILL HAS A DISTINCT PURCHASE POLICY DEPENDING UPON THE PRODUCTS MANUFACTURED AS WELL AS THE END USE OF THE YARN AND ALSO THE STRENGTH AND COLOUR. SIMILARLY, THE RATES OF COTTON SHALL VARY WITH THE AREA OF T HE CROP AS WELL AS THE PICKING OF THE CROP. I.T.A. NO . 23 4 /M/ 1 6 7 MOREOVER, THE RATE VARIES WITH THE PAYMENT SCHEDULE OF THE MILLS. ADMITTEDLY, THE ASSESSEE PURCHASED THE RAW MATERIALS ON CREDIT BASIS AND MADE THE PAYMENT ON ACCOUNT PAYEE CHEQUES. FOR WORKING OUT THE PRICE OF G INNED COTTON, THE ASSESSING OFFICER HAS TAKEN THE PRICE DECLARED BY THE COTTON ASSOCIATION OF INDIA, WHICH IS NOT APPLICABLE TO THE ASSESSEE SINCE THE CAI PRICE QUOTED IS FOR READY MONEY CASH PRICE, WHEREAS, THE ASSESSEE HAS PURCHASED THE MATERIALS ON CRED IT BASIS. IN THE APPELLATE ORDER, THE LD. CIT(A) HAS GIVEN A DETAILED FINDINGS OVER THE METHODOLOGY ADOPTED BY THE ASSESSING OFFICER FOR ESTIMATING THE DISALLOWANCE , WHICH CANNOT BE SUSTAINABLE, WHEN THE ASSESSING OFFICER HAS NOT DISPUTED THE BOOKS OF ACCO UNTS AND OTHER PARTICULARS FILED BY THE ASSESSEE . UNDER THE ABOVE FACTS AND CIRCUMSTANCES, WE FIND NO REASON TO INTERFERE WITH THE ORDER PASSED BY THE LD. CIT(A). THUS, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 9 . IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED . ORDER PRONOUNCED ON THE 11 TH AUGUST , 20 16 AT CHENNAI. SD/ - SD/ - ( CHANDRA POOJARI ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 11 . 0 8 .201 6 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.