M/s Prabhat Corporation, RAJKOT-GUJARAT V. The Asstt. Commr. of Income Tax, Cir.-2, RAJKOT-GUJARAT

ITA 721/RJT/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 0057 (ITAT-RAJKOT)
• Duration Of Justice: 1 year(s) 11 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 17-11-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 11-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C S ANJARIA
• Assessee Lawyers: M N MANVAR
• Keywords: Rejection of books of accounts; Fair market value; Difference of opinion
• Section: 143(3); 2

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT [CONDUCTED THROUGH E COURT AT AHMEDABAD] BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ./ ITA.NO.721/RJT/2014 ASSTT.YEAR 2008-2009 PRABHAT CORPORATION C/O. M.N. MANVAR &CO., CHARTERED ACCOUNTANTS 504-STAR PLAZA PHULCHHAB CHOWK RAJKOT. VS ACIT, CIR.2 RAJKOT. &' / (APPELLANT) () &' / (RESPONDENT) ASSESSEE BY : SHRI M.N. MANVAR, CA REVENUE BY : SHRI C.S. ANJARIA, DR / DATE OF HEARING : 17/11/2016 / DATE OF PRONOUNCEMENT: 22/11/2016 *+,/ O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: ASSESSEE IS IN APPEAL AGAINST ORDER OF THE LD.CIT(A )-III, RAJKOT DATED 16.10.2014 PASSED FOR THE ASSTT.YEAR 2008-09. 2. SOLITARY GRIEVANCE OF THE ASSESSEE IS THAT THE L D.CIT(A) HAS ERRED IN CONFIRMING PENALTY OF RS.22,71,085/- UNDER SECTION 271(1)(C) OF THE INCOME TAX ACT, 1961. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE WA S ENGAGED IN THE BUSINESS OF TRADING IN PULSES. IT HAS FILED ITS RETURN OF INCOME ON 3.10.2008 DECLARING A LOSS OF RS.69,80,685/-. THE LD.AO HAS PASSED AN AS SESSMENT ORDER UNDER ITA NO.721/RJT/2014 2 SECTION 143(3) ON 22.12.2010 AND DETERMINED TAXABLE INCOME OF THE ASSESSEE AT RS.77,03,070/-. DISSATISFIED WITH THE DETERMINA TION OF THE INCOME, THE ASSESSEE CARRIED THE MATTER IN APPEAL. THE LD.CIT( A) DID NOT UPHOLD THE REJECTION OF THE BOOKS OF ACCOUNTS AS MADE BY THE A O. THE LD.CIT(A) HAS RECORDED A FINDING THAT THE AO FAILED TO BRING THE DEFECTS IN THE BOOKS OF ACCOUNTS IN ORDER TO REJECT THE BOOK RESULT. HENCE , THE LD.CIT(A) HAS UPHELD THE BOOK RESULT OF THE ASSESSEE. HOWEVER, THE LD.CI T(A) HAS OBSERVED THAT ASSESSEE HAD MADE EXCESS PAYMENT TO THE CONCERN COV ERED UNDER SECTION 40A(2)(B) ON THE PURCHASES. ACCORDINGLY, DISALLOWE D EXCESS PAYMENT OF RS.73,49,790/-. AFTER SETTING OFF OF THE LOSS CLAI MED BY THE ASSESSEE, THE TAXABLE INCOME OF THE ASSESSEE HAS BEEN UPHELD AT R S.3,69,105/- AS AGAINST RS.77,03,070/- DETERMINED BY THE AO. THE FINDING R ECORDED BY THE LD.CIT(A) IN THE QUANTUM APPEAL READS AS UNDER: 4. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND SU BMISSIONS OF APPELLANT. I FIND THAT ASSESSING OFFICER HAS NOT FO UND ANY ERROR IN THE ACCOUNTS OF APPELLANT OR ANY DEFECT IN ACCOUNTING M ETHOD OF APPELLANT TO REJECT THE BOOKS OF ACCOUNT. HOWEVER, THE PERSON M/S PRABHAT HYGIENE PRODUCTS P. LTD FROM WHOM APPELLANT HAS MAD E ALL THE PURCHASES IS A RELATED PERSON OF APPELLANT AND THER EFORE THE RATE OF PURCHASE FROM M/S. PRABHAT HYGIENE PRODUCTS P. LTD MAY BE COMPARED WITH FAIR MARKET RATE BY THE APPELLANT U/S 40A(2) OF THE I.T.ACT. THE NAME OF M/S. PRABHAT HYGIENE PRODUCTS P. LTD WAS CHANGED TO D M SONS REALITIES PRIVATE LTD. REPRESEN TATIVE OF APPELLANT SUBMITTED THE COPY OF TAX AUDIT REPORT IN CASE OF A PPELLANT WHERE D M SONS REALITIES PRIVATE LTD HAS BEEN SHOWN AS A RELA TED PERSON U/S 40A(2)(B) OF THE LT.ACT. APPELLANT HAS SUBMITTED TH E COMPUTATION OF INCOME OF D M SONS REALITIES PRIVATE LTD WHERE THE INCOME OF THE ASSESSMENT YEAR 2008-09 HAS BEEN COMPUTED AT RS 3,5 0,751/- AND THE SAME HAS BEEN SET OFF AGAINST THE BROUGHT FORWARD L OSS OF ASSESSMENT YEAR 2000-01 OF RS 1390938. AS THE LOSS CANNOT BE C ARRIED FORWARD BEYOND 8 YEARS, THE BALANCE LOSS OF RS 1390938 - RS . 350751 = 1040187 OF ASSESSMENT YEAR 2000-01 LAPSED. IN FACT, THE ENTIRE LOSS OF RS 1390938 OF D M SONS REALITIES PRIVATE LTD FOR AS SESSMENT YEAR ITA NO.721/RJT/2014 3 2000-01 WOULD HAVE LAPSED IF APPELLANT HAD NOT PURC HASED THE GOODS AT HIGHERTHAN MARKET RATE FROM D M SONS REALITIES PRIV ATE LTD AND PASSED ON THE PROFITS TO THEM. THEREFORE, APPELLANT AND D M SONS REALITIES PRIVATE LTD HAVE AT LEAST SAVED RS 3,50,7 51/- OF BUSINESS LOSS OF D M SONS REALITIES PRIVATE LTD FROM GETTING LAPS ED BECAUSE OF HIGHER RATE OF PURCHASE BY APPELLANT FROM D M SONS REALITIES PRIVATE LTD. THE MARKET RATE OF PURCHASE WOULD OBVIOUSLY BE LESS THAN THE RATE OF SALE BY APPELLANT IN OPEN MARKET. APPELLANT HAS MADE SALES AT RS. 4.01 CRORE AND IN CASE OF TRADING; A GROSS PROFIT O F 4%-5% IS REASONABLE SAY 4.75%. THEREFORE, THE FAIR MARKET RA TE OF PURCHASE SHOULD BE ABOUT RS 40162637 LESS (4.75%), WHICH IS RS 38254912. IN OTHER WORDS APPELLANT HAS MADE EXCESS PAYMENT OF RS . 45604702 - RS. 38254912 = RS. 7349790 U/S 40A(2) OF THE IT. ACT. T HE LOSS OF RS. 69,80,685 ON ACCOUNT OF PAYMENT OF SUCH EXCESS PURC HASE PRICE WOULD TURN INTO A POSITIVE INCOME OF APPELLANT OF RS. 369 105 AFTER DISALLOWANCE OF EXCESS PURCHASE PRICE OF RS. 734979 0 U/S 40A(2) OF THE I.T.ACT. AS MENTIONED ABOVE, THE TAX PLANNING OF AP PELLANT AND D M SONS REALITIES PRIVATE LTD WAS ALSO LIMITED TO SAVI NG THE BROUGHT FORWARD LOSS OF ASSESSMENT YEAR 2000-01 IN CASE OF D M SONS REALITIES PRIVATE LTD TO THE EXTENT OF ALMOST THE SAME AMOUNT . I THEREFORE, DIRECT THE ASSESSING OFFICER TO REDUCE THE TOTAL INCOME OF APPELLANT TO RS.3,69,105/-FROM RS. 77,03,070/-. 2. GROUND NO.2 OF THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. 4. THIS FINDING WAS NOT CHALLENGED BY ANY OF THE PA RTIES. THE LD.AO HAS INITIATED PENALTY PROCEEDINGS AND OBSERVED THAT SIN CE SUBSTANTIAL LOSS HAS BEEN REDUCED, THEREFORE, IT DESERVES TO BE VISITED WITH PENALTY UNDER SECTION 271(1)(C) OF THE ACT ON THE CONCEALED INCOME WHICH HAS BEEN SET OFF AGAINST THE LOSS. 5. WITH THE ASSISTANCE OF THE LD.REPRESENTATIVES, W E HAVE GONE THROUGH THE RECORD. SECTION 271(1)(C) OF THE ACT HAS A DIRECT BEARING ON THE CONTROVERSY, THEREFORE, WE TAKE NOTE RELEVANT PROVISION, WHICH R EADS AS UNDER: '271. FAILURE TO FURNISH RETURNS, COMPLY WITH NOTIC ES, CONCEALMENT OF INCOME, ETC. (1) THE ASSESSING OFFICER OR THE C OMMISSIONER ITA NO.721/RJT/2014 4 (APPEALS) OR THE CIT IN THE OF COURSE OF ANY PROCEE DINGS UNDER THIS ACT, IS SATISFIED THAT ANY PERSON (A) AND (B) ** ** ** (C) HAS CONCEALED THE PARTICULARS OF HIS INCOME OR FURNISHED INACCURATE PARTICULARS OF SUCH INCOME. HE MAY DIREC T THAT SUCH PERSON SHALL PAY BY WAY OF PENALTY. (I)AND (INCOME-TAX OFFICER,)** ** ** (III) IN THE CASES REFERRED TO IN CLAUSE (C) OR CLA USE (D), IN ADDITION TO TAX, IF ANY, PAYABLE BY HIM, A SUM WHICH SHALL N OT BE LESS THAN, BUT WHICH SHALL NOT EXCEED THREE TIMES, THE AMOUNT OF TAX SOUGHT TO BE EVADED BY REASON OF THE CONCEALMENT OF PARTICULA RS OF HIS INCOME OR FRINGE BENEFIT THE FURNISHING OF INAC CURATE PARTICULARS OF SUCH INCOME OR FRINGE BENEFITS: EXPLANATION 1- WHERE IN RESPECT OF ANY FACTS MATERI AL TO THE COMPUTATION OF THE TOTAL INCOME OF ANY PERSON UNDER THIS ACT, (A) SUCH PERSON FAILS TO OFFER AN EXPLANATION OR OF FERS AN EXPLANATION WHICH IS FOUND BY THE ASSESSING OFFICER OR THE COMM ISSIONER (APPEALS) OR THE CIT TO BE FALSE, OR (B) SUCH PERSON OFFERS AN EXPLANATION WHICH HE IS N OT ABLE TO SUBSTANTIATE AND FAILS TO PROVE THAT SUCH EXPLANATI ON IS BONA FIDE AND THAT ALL THE FACTS RELATING TO THE SAME AND MAT ERIAL TO THE COMPUTATION OF HIS TOTAL INCOME HAVE BEEN DISCLOSED BY HIM, THEN, THE AMOUNT ADDED OR DISALLOWED IN COMPUTING THE TOT AL INCOME OR SUCH PERSON AS A RESULT THEREOF SHALL, FOR THE PURP OSES OF CLAUSE (C) OF THIS SUB-SECTION, BE DEEMED TO REPRESENT THE INC OME IN RESPECT OF WHICH PARTICULARS HAVE BEEN CONCEALED.' 6. A BARE PERUSAL OF THIS SECTION WOULD REVEAL THA T FOR VISITING ANY ASSESSEE WITH THE PENALTY, THE ASSESSING OFFICER OR THE LEARNED CIT(APPEALS) DURING THE COURSE OF ANY PROCEEDINGS BEFORE THEM SH OULD BE SATISFIED, THAT THE ASSESSEE HAS; (I) CONCEALED HIS INCOME OR FURNISHED INACCURATE PARTICULARS OF INCOME. AS FAR AS THE QUANTIFICATION OF THE PENALTY IS CONCERNED, THE PENALTY IMPOSED UNDER THIS SECTION CAN RANGE IN BETWEEN 100 % TO 300% OF THE TAX SOUGHT TO BE EVADED BY THE ASSESSEE, AS A RESULT OF SUCH CONCEALMENT OF INCOME OR FURNISHING INACCURATE PARTICULARS. THE OT HER MOST IMPORTANT FEATURES OF THIS SECTION IS DEEMING PROVISIONS REGARDING CON CEALMENT OF INCOME. THE ITA NO.721/RJT/2014 5 SECTION NOT ONLY COVERED THE SITUATION IN WHICH THE ASSESSEE HAS CONCEALED THE INCOME OR FURNISHED INACCURATE PARTICULARS, IN CERT AIN SITUATION, EVEN WITHOUT THERE BEING ANYTHING TO INDICATE SO, STATUTORY DEEM ING FICTION FOR CONCEALMENT OF INCOME COMES INTO PLAY. THIS DEEMING FICTION, BY WAY OF EXPLANATION-1 TO SECTION 271(1)(C) POSTULATES TWO SITUATIONS; (A) FI RST WHETHER IN RESPECT OF ANY FACTS MATERIAL TO THE COMPUTATION OF THE TOTAL INCO ME UNDER THE PROVISIONS OF THE ACT, THE ASSESSEE FAILS TO OFFER AN EXPLANATION OR THE EXPLANATION OFFERED BY THE ASSESSEE IS FOUND TO BE FALSE BY THE ASSESSING OFFICER OR LEARNED CIT(APPEAL); AND, (B) WHERE IN RESPECT OF ANY FACT, MATERIAL TO THE COMPUTATION OF TOTAL INCOME UNDER THE PROVISIONS OF THE ACT, THE ASSESSEE IS NOT ABLE TO SUBSTANTIATE THE EXPLANATION AND THE AS SESSEE FAILS, TO PROVE THAT SUCH EXPLANATION IS BONA FIDE AND THAT THE ASSESSEE HAD DISCLOSED ALL THE FACTS RELATING TO THE SAME AND MATERIAL TO THE COMPUTATIO N OF THE TOTAL INCOME. UNDER FIRST SITUATION, THE DEEMING FICTION WOULD CO ME TO PLAY IF THE ASSESSEE FAILED TO GIVE ANY EXPLANATION WITH RESPECT TO ANY FACT MATERIAL TO THE COMPUTATION OF TOTAL INCOME OR BY ACTION OF THE ASS ESSING OFFICER OR THE LEARNED CIT(APPEALS) BY GIVING A CATEGORICAL FINDIN G TO THE EFFECT THAT EXPLANATION GIVEN BY THE ASSESSEE IS FALSE. IN THE SECOND SITUATION, THE DEEMING FICTION WOULD COME TO PLAY BY THE FAILURE O F THE ASSESSEE TO SUBSTANTIATE HIS EXPLANATION IN RESPECT OF ANY FACT MATERIAL TO THE COMPUTATION OF TOTAL INCOME AND IN ADDITION TO THIS THE ASSESSE E IS NOT ABLE TO PROVE THAT SUCH EXPLANATION WAS GIVEN BONA FIDE AND ALL THE FA CTS RELATING TO THE SAME AND MATERIAL TO THE COMPUTATION OF THE TOTAL INCOME HAV E BEEN DISCLOSED BY THE ASSESSEE. THESE TWO SITUATIONS PROVIDED IN EXPLANAT ION 1 APPENDED TO SECTION 271(1)(C) MAKES IT CLEAR THAT THAT WHEN THIS DEEMIN G FICTION COMES INTO PLAY IN THE ABOVE TWO SITUATIONS THEN THE RELATED ADDITION OR DISALLOWANCE IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE FOR THE PURPOSE OF SECTION ITA NO.721/RJT/2014 6 271(1)(C) WOULD BE DEEMED TO BE REPRESENTING THE I NCOME IN RESPECT OF WHICH INACCURATE PARTICULARS HAVE BEEN FURNISHED. 7. IN THE LIGHT OF THE ABOVE, LET US EXAMINE FACTS OF THE PRESENT CASE. A PERUSAL OF THE FINDING OF THE LD.CIT(A) IN QUANTUM PROCEEDINGS EXTRACTED (SUPRA) WOULD REVEAL THAT DISALLOWANCE HAS BEEN MAD E WITH THE HELP OF SECTION 40A(2)(B) OF THE ACT. SECTION 40A(2)(A) CONTEMPLAT ES THAT WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSONS REFERRED TO IN CLAUSE (B) OF THIS SU B-SECTION AND THE AO IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREA SONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FAC ILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM , SO MUCH OF THE EXPENDITURE AS IS CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. SUB-CLAUSE (B) PROVIDE S A LIST OF PERSONS. AT SERIAL NO.(I) IT PROVIDES THAT IF ANY COMPANY PAID A SUM AMOUNT TO ANY OF THE DIRECTORS OF THE COMPANY, THEN, REASONABLENESS OF S UCH AMOUNTS HAS TO BE DETERMINED BY THE AO WITHIN THE MEANING OF SUB-CLAU SE (A) OF SECTION 40A. IN OTHER WORDS, A CONJOINT READING OF TWO CLAUSES ( A) AND (B) WOULD INDICATE THAT IF THE ASSESSEE HAS AVAILED GOODS OR SERVICES FROM ANY PERSONS, WHO ARE MENTIONED IN THE LIST MADE IN SUB-CLAUSE (B) AND FA IR MARKET VALUE OF SUCH SERVICES OR GOODS IN THE OPINION OF AO IS LOWER THA N THE PRICE PAID BY THE ASSESSEE, THEN, THE LD.AO WOULD DISALLOW SUCH EXCES S PAYMENT. IN THE PRESENT CASE, ACCORDING TO THE LD.CIT(A), THE ASSESSEE SHOU LD HAVE PAID A PURCHASE OF RS.3,82,54,912/- INSTEAD OF PAYMENT OF RS.4,01,62,6 37/- DEBITED IN THE ACCOUNT. THIS DISALLOWANCE HAS BEEN MADE ON THE BA SIS OF DIFFERENCE OF OPINION. IT HAS BEEN WORKED OUT ON AN ESTIMATE BAS IS. THE ASSESSEE CANNOT BE ALLEGED THAT IT HAS FURNISHED INACCURATE PARTICULAR S OR CONCEALED HIS INCOME. ITA NO.721/RJT/2014 7 THE BOOKS OF ACCOUNTS REJECTED BY THE AO WAS NOT UP HELD BY THE CIT(A). THEREFORE, ON OUR OPINION, THE ASSESSEE DOES NOT DE SERVE TO BE VISITED WITH PENALTY. WE ALLOW THE APPEAL OF THE ASSESSEE AND D ELETE THE IMPUGNED PENALTY. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE COURT ON 22 ND NOVEMBER, 2016 AT AHMEDABAD. SD/- SD/- (AMARJIT SINGH) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER