ITO, New Delhi V. M/s Mahavir Concast Ltd., New Delhi

ITA 3283/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77620 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 06-01-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 17-06-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Rejection of books of accounts; Commercial expediency
• Section: 143(3)

Judgement Text

8 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : E NEW DELHI BEFORE SHRI J.SUDHAKAR REDDY, AM AND SHRI A.T.VARKEY, JM ITA NO. 3283/DEL/2011 ASSESSMENT YEAR : 200 7-08 ITO, WARD 6(1) VS. MAHAVIR CONCAST LTD. ROOM NO.418 A 143, JAGRATI ENCLAVE C.R.BUILDING NEW DELHI 110 092 NEW DELHI PAN: AADCM 7409 B A N D CROSS OBJECTION 290/DEL/2011 (IN ITA 3283/DEL/11) A.Y. 2007-08 MAHAVIR CONCAST LTD. VS. ITO, WARD 6(1) NEW DELHI NEW DELHI (RESPONDENT) ASSESSEE BY:- SH. P.C.YADAV, ADV. DEPARTMENT BY:- SH. KEYUR PATEL, SR.D.R. O R D E R PER J.SUDHAKAR REDDY, AM THIS IS AN APPEAL FILED BY THE REVENUE DIRECTED AG AINST THE ORDER OF THE LD.CIT(A)-IX, NEW DELHI DATED 15.2.2011 PERTAINING TO THE ASSESSMENT YEAR 2007-08. THE CROSS OBJECTION IS FILED BY THE ASSESSEE. 2. FACTS IN BRIEF :- THE BRIEF FACTS ARE BROUGHT OUT AT PARA 3.0 TO 3.3 OF THE LD.COMMISSIONER OF INCOME TAX (APPEALS)S ORDER, WH ICH IS EXTRACTED FOR READY REFERENCE. ITA NO. 3283/DEL/2011 C.O. 290/DEL/2011 (IN ITA 3283/DEL/2011) MAHAVIR CONCAST LTD. ASSESSMENT YEAR 2007-08 2 THE APPELLANT COMPANY, AS INFORMED WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF MS ALLOYS STEELS CASTING INCLUDING MS INGOTS. THE COMPANY WAS ALSO ENGAGED IN TRADING OF IRON & STEELS AND HA S EARNED COMMISSION INCOME AS WELL DURING THE YEAR. THE RETURN DECLARING NIL INCOME WAS E-FILED BY THE APPELLANT ON 13.10.2007 SHOWING A LOSS OF RS.98,074/-. THE APPELLANT HAD P AID TAX U/S 115 JB ON BOOK PROFIT OF RS.18,31,207/-. THE RETURN WAS PROCESSED U/S 143(1) ON 23.7.2008 AND SUBSEQUENTLY THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) WAS ISSUED AND SERVED UPON THE APPELLANT. DURING THE E YAR THE APPELLANT COMPANY HAD DECLARED GROSS SALES OF RS.35,09,16,339/- AS AG AINST SALE OF RS.13,70,05,966/- IN THE IMMEDIATELY PROCEEDINGS YE AR. FURTHER THE APPELLANT HAD SHOWN COMMISSION INCOME OF RS.36,00,000/- AS AG AINST RS.3,10,81,449/- IN THE IMMEDIATELY PROCEEDINGS YEAR. THE ASSESSMENT U/S 143(3) WAS COMPLETED VIDE ORDER DT. 31.12.2009 MAKING THE FOLLOWING ADDITIONS:- 1. DISALLOWANCE OF INTEREST RS.12,10,000/-; 2. TRADING ADDITION RS.2,66,19,732/- THE TOTAL INCOME WAS DETERMINED AT RS.2,77,31,710/- . 3. THE LD.COMMISSIONER OF INCOME TAX (APPEALS) CONF IRMED THE ADDITION ON ACCOUNT OF DISALLOWANCE OF INTEREST ON THE GROUND T HAT (A) THE ASSESSEE HAS FAILED TO DEMONSTRATE THE NEXUS BETWEEN THE OWN FU NDS AND LOANS AND ADVANCES TO M/S S.V.P.BUILDERS LTD. AND THAT THE RA TIO LAID DOWN IN CIT VS. ABHISHEK INDUSTRIES, 156 TAXMAN 257 APPLIES; (B) IN WRITTEN SUBMISSIONS THE LD.A.R. STATES THAT THE ASSESSEE COULD NOT HAVE ANY DOCUMENTARY EVIDENCE TO ESTABLISH ITS CONTENTIONS THAT THE ADVANCE WAS GIVE N ON ACCOUNT OF COMMERCIAL EXPEDIENCY; (C ) IN CASE THIS GROUND IS REJECTED, T HE APPELLANT SHALL NOT FILE AN ITA NO. 3283/DEL/2011 C.O. 290/DEL/2011 (IN ITA 3283/DEL/2011) MAHAVIR CONCAST LTD. ASSESSMENT YEAR 2007-08 3 APPEAL TO THE ITAT, PROVIDED THE DEPARTMENT DOES NO T FILE A FURTHER APPEAL IN THE CASE OF THE ASSESSEE. 3.1. ON REJECTION OF BOOKS OF ACCOUNTS, THE LD. CIT A UPHELD THE CONTENTION OF THE ASSESSEE BY HOLDING AS UNDER : 5.3.3. THE AR HAS FURNISHED DETAILS IN ACCORDANCE WITH THE PROVISIONS OF S.40A(2) WHICH ARE PLACED ON RECORDS. THE FOLLOWIN G CONCLUSION CAN BE SAFELY DRAWN FROM THE SUBMISSIONS OF THE APPELLANT: THE ASSESSEE HAD FURNISHED COMPLETE DETAILS IN RESP ECT OF PURCHASE OF RAW MATERIAL, MANUFACTURING AND SALE OF FINISHED PRODUC TS. THE METHOD ADOPTED BY ;THE ASSESSEE WAS A REGULARLY EMPLOYED METHOD. THE DEPARTMENT MUST SHOW OTHER DEFECTS IN THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE AND THE DEFECTS MUST BE SUCH THAT I T WAS NOT POSSIBLE TO DETERMINE THE INCOME PROPERLY. THERE IS NOTHING ON RECORD TO SHOW THAT IT WAS PROF ITABLE FOR THE ASSESSEE TO MANIPULATE THE PURCHASE/SALE OF GOODS WITH SISTER C ONCERN. 5.3.4. IN VIEW OF THE ABOVE, I HOLD THAT THE ACTI ON OF THE ASSESSING OFFICER OF REJECTING BOOKS OF ACCOUNTS IS NOT JUSTIFIED ON THE FACTS OF THE CASE AND LEGAL PRONOUNCEMENT MADE FROM TIME TO TIME. THE GROUND N O.2 RELATING TO THE REJECTION OF BOOKS OF ACCOUNTS OF THE APPELLANT IS, THEREFORE, ALLOWED. 3.2. ON GROSS PROFIT RATIO IT WAS HELD THAT, BASED ON THE COMPARATIVE CHART ANNEXED TO THE APPELLATE ORDER, THE EXCESS PAYMENT IS ONLY TO THE TUNE OF RS. 10,02,125/- WHICH DESERVES TO BE ADDED U/S.40A(2) OF THE ACT AND HENCE THE ADDITION ON ACCOUNT OF ESTIMATING THE GROSS PROFIT RATE IS TO BE RESTRICTED TO THIS AMOUNT OF RS 10,02,125/- 4. ON THE ISSUE OF RESTRICTING THE GROSS PROFIT ADD ITIONS, RS 10,02,125/- THE REVENUE IS IN APPEAL BEFORE US. THE ASSESSEE FILED THE CROSS OBJECTION ON DISALLOWANCE MADE ON ACCOUNT OF INTEREST PAID AMOUN TING TO RS 12,10,000/-. ITA NO. 3283/DEL/2011 C.O. 290/DEL/2011 (IN ITA 3283/DEL/2011) MAHAVIR CONCAST LTD. ASSESSMENT YEAR 2007-08 4 5. THE LD.DR MR. KEYUR PATEL SUBMITTED THAT THE LD. CITA (A) HAS WITHOUT PROPERLY APPRECIATING THE DETAILED FACTS BROUGHT OU T BY THE AO IN HIS ASSESSMENT ORDER RESTRICTED THE ADDITION UNDER THE GROSS PROFI T OF RS 10,02,125/-. HE SUBMITTED THAT THE LD.CIT(A) HAS SIMPLY ACCEPTED TH E PARTICULARS OF TRANSACTIONS FURNISHED BY THE ASSESSEE TO ITS SISTER CONCERN I.E ., M/S MAHABIR STEEL ROLLING MILLS (MSRM), WITHOUT GIVING THE AO AN OPPORTUNITY TO VERIFY THE SAME. HE SUBMITTED THAT THE CONCLUSIONS OF THE AO WERE CONFI RMED BY THE LD. CIT(A) TO THE EXTENT THAT THE TRANSACTIONS WITH SISTER CONCER N WERE AT HIGHER RATE. ON THIS FACTUAL MATRIX, HE SUBMITS THAT THE CASE MAY BE SE T ASIDE TO THE FILE OF AO FOR VERIFICATION OF DETAILS FURNISHED BY THE ASSESSEE R EGARDING PARTICULARS OF TRANSACTIONS WITH SISTER CONCERN. 6. THE LD. COUNSEL FOR THE ASSESS MR. P.C.YADAV, O N THE OTHER HAND SUBMITTED THAT 40A(2)(B) WAS NOT APPLIED BY THE AO AND THAT IN FACT THE SECTION DOES NOT APPLY TO THE ASSESSEE. HE SUBMITS THAT TH E DISALLOWANCE WAS MADE BY THE AO BY APPLYING THE PARTICULAR GP RATE OF 6%. T HUS HE SUBMIT THAT LD. CIT (A) WRONG IN QUANTIFYING THE DISALLOWANCE U/S 40A(2 )(B). HE SUBMITS THAT ONCE SEC. 40A(2)(B) DOES NOT COME INTO PLAY , THEN THE ISSUE OF VERIFICATION OF TRANSACTION WITH THE SISTER CONCERN, ON THE BASIS OF PARTICULARS FURNISHED BY THE ASSESSEE DOES NOT ARISE. 7. AFTER HEARING THE RIVAL CONTENTIONS WE HOLD AS F OLLOWS: 8. THE LD. CIT(A) WAS RIGHT IN HOLDING THAT THE RE JECTIONS OF BOOKS OF ACCOUNTS IS NOT JUSTIFIED FOR THE REASONS GIVEN IN PARA 5.3.3 OF HIS ORDER. AS ITA NO. 3283/DEL/2011 C.O. 290/DEL/2011 (IN ITA 3283/DEL/2011) MAHAVIR CONCAST LTD. ASSESSMENT YEAR 2007-08 5 RIGHTLY POINTED OUT BY THE LD.CIT(A) , THE AO HAS N OT POINTED OUT ANY PARTICULAR DEFECT IN THE BOOK ACCOUNT OF THE ASSESSEE. THE SOL E BASIS FOR APPLICATION OF PROVISIONS OF SEC. 145(3), IS THAT THE PURCHASES AND SALES TO SISTER CONCERN IS NOT AT ARMS LENGTH. INSTEAD OF EXAMINING THESE TRA NSACTION U/S 40A(2) OF THE ACT THE AO REJECTED THE BOOKS OF ACCOUNT AND ESTIMATED THE GROSS PROFITS. THIS IN OUR VIEW IS NOT CORRECT. 9. THUS WE UPHOLD THE FINDINGS OF THE LD.CIT(A) ON THIS ISSUE. 10. AFTER REJECTING THE BOOKS OF ACCOUNTS THE AO E STIMATED THE GROSS PROFIT RATE AT 6%. AS WE HAVE UPHELD THE ORDER OF THE LD. CIT(A) THAT REJECTION OF BOOKS OF ACCOUNT IS NOT CORRECT, THE QUESTION OF ES TIMATING PROFITS BY APPLYING A CERTAIN GROSS PROFIT RATE, ON THE BASIS OF CERTAIN COMPARABLES DOES NOT ARISE. THE PROFIT HAS TO BE ARRIVED AT BASED ON THE BOOKS OF A CCOUNTS. HENCE THE DELETION OF THE LD.COMMISSIONER OF INCOME TAX (APPEALS) OF P ROFITS ESTIMATED BASED ON APPLYING G.P. RATE OF 6% BY ASSESSING OFFICER AN D CONSEQUENT ADDITION, IS HERE BY UPHELD. THE LD.COMMISSIONER OF INCOME TAX (APPEA LS) HAS, BASED ON THE EXAMINATION OF THE DETAILS GIVEN BY THE ASSESSEE ON THE TRANSACTION ENTERED IN TO WITH SISTER CONCERN CAME TO A CONCLUSION THAT THERE IS A EXCESS PAYMENT TO THE EXTENT OF RS. 10,02,125/- . HE HELD THAT THIS AMOU NT HAS TO BE ADDED UNDER THE PROVISIONS OF SEC. 40A(2)(B). THE ASSESSEES CASE I S THAT SEC. 40A(2)(B) HAS NOT BEEN INVOKED BY THE AO AND HENCE THE LD. CIT(A) SHO ULD NOT HAVE SUSTAINED PART OF THE ADDITION BASED ON THE PROVISIONS OF SEC . 40A(2)(B). THE LD. D.R. SUGGESTS THAT THE ISSUE MAY BE REMANDED TO THE FILE OF AO FOR FRESH ADJUDICATION. ITA NO. 3283/DEL/2011 C.O. 290/DEL/2011 (IN ITA 3283/DEL/2011) MAHAVIR CONCAST LTD. ASSESSMENT YEAR 2007-08 6 WE NOTE THAT NOW THAT THE ASSESSEE HAS NOT COME UP IN APPEAL AGAINST THE ADDITION OF RS 10,00,02,125/-. AT THE SAME TIME WE ALSO NOTE THAT THE LD. CIT (A) HAS NOT CONFRONTED THE AO WITH THE DETAILS OF T RANSACTIONS FURNISHED BY THE ASSESSEE WITH THE SISTER CONCERN. UNDER THE CIRCUM STANCES WE ARE THE CONSIDERED OPINION THAT IN THE INTEREST OF JUSTICE THE ISSUE SHOULD BE SET ASIDE TO THE FILE OF THE AO FOR FRESH VERIFICATION. HENCE T HE PRAYER OF THE LD.D.R. IS GRANTED. 11. IN THE RESULT THE APPEAL OF THE REVENUE IS ALLO WED FOR STATISTICAL PURPOSES. 12. THE CROSS OBJECTION IS ON THE SUSTENANCE OF DIS ALLOWANCE ON ACCOUNT OF INTEREST PAYMENT , MADE BY THE LD.COMMISSIONER OF I NCOME TAX (APPEALS). THE ASSESSEE DURING THE COURSE OF APPELLATE PROCEEDINGS , AGREED NOT TO AGITATE THE MATTER FURTHER, IF THE REVENUE DOES NOT FILE AN APPEAL BEFORE THE ITAT. AS THE REVENUE HAS FILED ITS APPEAL, THE ASSESSEE HAS TAKE N UP THIS ISSUE. THE SUBMISSIONS OF THE ASSESSEE ARE THAT: A. THE ASSESSEE HAS ITS OWN FUNDS OF RS 340.41 LAKHS AND THAT THE ADVANCE WAS MADE OUT OF OWN FUNDS. B. THAT CASH CREDIT AMOUNT OF RS 140.43LAKSH WAS AVAIL ED AGAINST STOCK OF RS 183.74 LAKS. AND HENCE THE FUNDS WERE NOT DI VERTED. C. THE ADVANCE WAS MADE TO M/S SVP BUILDERS INDIA LT D., OUT OF COMMERCIAL EXPEDIENCY. D. THE LD.DR SUBMITS THAT THE ASSESSEE HAS NOT DEMONST RATED THE COMMERCIAL EXPEDIENCY. ITA NO. 3283/DEL/2011 C.O. 290/DEL/2011 (IN ITA 3283/DEL/2011) MAHAVIR CONCAST LTD. ASSESSMENT YEAR 2007-08 7 13. AFTER HEARING RIVAL CONTENTIONS WE OBSERVE THAT THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS. WHEN THERE ARE BOTH INTEREST FREE FUNDS AND BORROWED FUNDS, THE HONBLE BOMBAY HIGH COURT IN T HE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. REPORTED IN 313 ITR 340 (B OM) HELD THAT, WHEN INTEREST FREE FUNDS ARE AVAILABLE, THEN THE PRESUMPTION WOUL D BE THAT SUCH INTEREST FREE FUNDS WERE INVESTED OR ADVANCED AS INTEREST FREE LO ANS/ADVANCES. IF THIS PRESUMPTION IS APPLIED TO THE FACTS OF THIS CASE TH EN NO DISALLOWANCE CAN BE MADE. 13.1. THE BORROWING IN QUESTING WERE A CASH CREDIT AGAINST STOCK. IN SUCH CASES THE PRESUMPTION WOULD BE THAT THE FUNDS BORROWED FR OM THE BANK WAS UTILIZED FOR THE PURPOSES FOR WHICH IT IS SANCTIONED BY THE BANK. IT CANNOT BE ALLEGED OTHERWISE, WITHOUT ANY EVIDENCE OR MATERIAL. IN VIE W OF THE ABOVE DISCUSSIONS WE DELETE THE DISALLOWANCE AND ALLOW THE CROSS OBJE CTIONS. 14. IN THE RESULT THE APPEAL OF REVENUE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES AND CROSS OBJECTION OF THE ASSESEE IS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH APRIL,2014 . SD/- SD/- (A.T.VARKEY) (J.SUDHA KAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBE R DATED: THE 17 TH APRIL,2014 *MANGA ITA NO. 3283/DEL/2011 C.O. 290/DEL/2011 (IN ITA 3283/DEL/2011) MAHAVIR CONCAST LTD. ASSESSMENT YEAR 2007-08 8 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT (A); 5.DR; 6.GUARD FILE BY ORDER ASST. REGISTRAR