D.b. Income Tax Appeal v. M/S Century P.p. Industries, F-57, Industrial Area, Sikar

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 658 / 2011COMMISSIONER OF INCOME TAX, JAIPUR-III ,JAIPUR ----Appellant Versus M/s Century P.P. INdustries, F-57, Industrial Area, Sikar. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Daksh Pareek for Mr. Sameer JainFor Respondent(s) : Mr. Gunjan Pathak with Mr. Aditya Bohra _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERIHON'BLE MR. JUSTICE VIJAY KUMAR VYASJudgment 09/01/2018 1.By way of this appeal, the appellant has assailed thejudgment and order of the tribunal whereby tribunal has dismissedthe appeal of the department as well as cross objections filed bythe assessee. 2.This court while admitting the appeal on 26.8.2014 framedfollowing substantial question of law:- “(i) Whether the ITAT being the last factfinding body was justified in holding thatthe provisions of Sec.145(3) are notapplicable without recording finding onits own assigning reasons in supportthereof? (ii) Whether provisions of 40A (2) of theAct are non applicable in spite of the factthat admittedly payments were made torelative concerns which were excessiveand unreasonable on account of interest,freight and purchases?”Act are non applicable in spite of the factthat admittedly payments were made torelative concerns which were excessiveand unreasonable on account of interest,freight and purchases?” and thereafter, it was restored by this court and today it has comefor final hearing. 4.The facts of the case are that as in earlier years, theassessee mainly derived income from business of transformerrepair/supply on contract, awarded by various electricityboards/Nigams. During the year assessee has executed anotherwork of supply and installation of MCCB Boxes for DHBVNL. As perthe manufacturing and trading accounts, assessee’s sales/receiptsincluding labour charges receipts are Rs. 12,11,06,197/-, againstwhich gross profit of Rs. 1,41,21,012/- @ 11.66% is declared. Asper the separate trading account of scrap, total sales are Rs.51,82,004/- against which G.P. of Rs. 89,494/- @ 1.7% has beendeclared. As per another separate trading account of MCCB Box,sales/receipts including labour charges receipts are Rs.4,85,21,849/- against which gross profit of Rs. 35,09,597/- @7.2% is declared. As per combined profit and loss account ofallthe three trading accounts, the assessee has declared net profit ofRs. 62,23,170/- (which is also the total income declared byassessee), after deducting all expenses including depreciation andinterest to partners. The business of assessee firm is essentially ofrepair and supply on contract basis. Receipts of the assesseeinclude labour charges receipts relating to labour work done byassessee on contract. Receipts are essentially from variousElectricity Boards/Nigams; whether on account of repair oftransformers, supply of transformers, MCCB Boxes or labour workfor their installation. These receipts are essentially of contractnature and have all the characteristic features of contract work. Expenses like cash discount Rs. 37,21,596/- debited in P & Laccount relate to timely payment by Electricity Board and in factrelates to trading account rather than P & L account. Similarlytruck and jeep (pick up) are used for transporting thetransformers etc. to and from to various sites. Similarly for thesame purpose assessee has debited its P & L account by Rs.12,66,334/- as freight expense. All these expenses are of tradingnature and chargeable against contract receipts. In thecircumstances of the assessee’s case, its income can be betterestimated by applying N.P. rate as in the case of other contractors. 5.Counsel for the appellant has taken us to the order of the AOwherein it has been observed as under:- Expenses like cash discount Rs. 37,21,596/- debited in P & Laccount relate to timely payment by Electricity Board and in factrelates to trading account rather than P & L account. Similarlytruck and jeep (pick up) are used for transporting thetransformers etc. to and from to various sites. Similarly for thesame purpose assessee has debited its P & L account by Rs.12,66,334/- as freight expense. All these expenses are of tradingnature and chargeable against contract receipts. In thecircumstances of the assessee’s case, its income can be betterestimated by applying N.P. rate as in the case of other contractors. 5.Counsel for the appellant has taken us to the order of the AOwherein it has been observed as under:- 3.3 The assessee has framed separatetrading account for scrap and separatetrading account for MCCB Box. Howeverthe assessee has not mentioned thequantitative details as required in clause28(a) of audited form No.3CD. The factshows that the accounting system adoptedby assessee is not complete. Furnishing ofthese details later on does ot add sancityto assessee’s accounts. If these detailswere practical to be maintained there is noreason for not mentioning these details inaudit report. 3.4In respect of manufacturing/repairingactivity, the assessee has maintainedquantitative details in Annexure-E. Butthese details are not complete as requiredvide clause 28(b) of form No.3CD [againstclause 28(b) annexure mentioned is F butdetails are maintained in annexure Eenclosed with form 3CD.] In this annexuredetails like % yield and shortage are notmentioned. Quantities of various materialmentioned in annexure E do not tally. 3.5 In the notes on accounts and as perclause 12(a)&(b) of form No.3CD, the assessee has deviated from valuation ofclosing stock of finished goods andrepaired transformers. The fact shows thatbooks do not reflect true profit ofassessee. As per note-7 on accounts, theassessee has not maintained vouchers forpetty cash expenses. Assessee’s claim thatall its expenses are vouched is thus notcorrect. 3.8 Assessee has debited Rs.9,50,485/- asinward freight and Rs.12,66,334/- asoutward freight i.e. total expense onfreight is Rs.22,16,819/-. Out of theseexpenses, payment of Rs.13,44,900/- ismade to the HUF of partner Shri SureshKumar Saraf. During the course ofassessment proceedings, copy of “truckincome and expenditure account” ofSuresh Kumar Saraf HUF was filed. As perthis copy of account gross truck freightreceipts of Suresh Kumar Saraf HUF wereRs.14,08,700/-. Thus practically entirereceipts were from the assessee. SureshKumar Saraf HUF has declared gross profitof Rs.3,75,515/- (which is also the netprofit)fromtruckreceiptsofRs.14,08,700/-. Thus net profit in thehands of Suresh Kumar Saraf HUF fromtruck plying is 26.6% which is very highas compared to normal profit from truckplying. The anomaly is due to arbitrarinessin the freight rates paid by assessee torelated persons. Under the circumstancesthe accounting in assessee’s book can notbe considered genuine/correct. 5.1He further contended that Tribunal as well as CIT(A) havecommitted serious error in reversing the finding of the AO andrejecting the books of accounts. 5.2He contended that in view of para no.3.11, the AO hasrightly observed as under:- 3.11 In the trading account of MCCB Boxassessee has shown labour chargesreceipts of Rs.37,51,572/- on the salesside. Labour charges expenses onpurchasesideareshownatRs.15,92,840/- Obviously the difference between the two is the profit of theassessee, which comes to Rs.21,58,732/-i.e. 57.5%. This fact shows the extent ofhigh profit margin inherent in the labourrelated contract work executed byassessee. Similarly in the manufacturingand trading account (Transformerrepairing), assessee has shown labourcharges receipts of Rs.88,91,146/- whichhave heavy profit margin as illustratedabove. 5.2He contended that in view of para no.3.11, the AO hasrightly observed as under:- 3.11 In the trading account of MCCB Boxassessee has shown labour chargesreceipts of Rs.37,51,572/- on the salesside. Labour charges expenses onpurchasesideareshownatRs.15,92,840/- Obviously the difference between the two is the profit of theassessee, which comes to Rs.21,58,732/-i.e. 57.5%. This fact shows the extent ofhigh profit margin inherent in the labourrelated contract work executed byassessee. Similarly in the manufacturingand trading account (Transformerrepairing), assessee has shown labourcharges receipts of Rs.88,91,146/- whichhave heavy profit margin as illustratedabove. 5.3He further contended that the AO was right in invokingprovisions of Sec. 40A(2)(b) of the Income Tax Act. 5.4He contended that in para no.7.1, the tribunal observed as under:- While invoking provisions of section145(3), the AO has pointed out in hisorder the following discrepancies :-a) Position of the books of account and theworking done during the year are similaras for the A.Y. 2005-06 {AO page 3 para3.1}.b) Payment of job work to Hoshiyar Singhis not found genuine (AO page 3 para3.2). c) Payment to labourers at site are notproperly vouched and auditors note fornon maintaining of petty cash vouchers{AO page 4 para 3.5}. d) Shortage in raw material and % yield offinished product is not ascertainable {AOpage 4 para 3.4}. e) Defect in accounting of scrap as regardsto the difference in purchases of scrap andTCS certificate amount {Page 4 para 3.6}.f) Assessee has paid interest at higherrates to the related parties {AO page 4para 3.7}. g) Payment of freight outward and inwardare not found reasonable (AO page 5 para3.8 & 3.9).h) Assessee has made purchases fromrelated parties for diversion of income {AOpage 5-6 para 3.10}. observations made by the CIT(A) wherein it has been observed as under:- 2-3 eSaus nksuksa ikfVZ;ksa ds rdksZa dk voyksdu fd;k ,oa ik;kfd fo-v- ds rdZ mfpr gSaA vihykFkhZ QeZ ds ekeys esa,DlkbZt foHkkx dk dkuwu ykxw gksrk gS rFkk ,DlkbZtdkuwuksa dh ikyuk esa vihykFkhZ QeZ dbZ izdkj ds fjdkMZj[krk gS] ftudh ppkZ Åij dh tk pqdh gS] rFkk fu-v-us ,DlkbZt vf/kdkfj;ksa }kjk tkap esa dHkh dksbZ foijhrfVIi.kh ugha ikbZ gSA blds vfrfjDr ekuuh; vk;djvihyh; U;k;kf/kdj.k us mijksDr lanfHkZr vkns’k esa fu-v- }kjk /kkjk 145 ds mi;ksx dks mfpr ugha ekurs gq, dh xbZo`f) dks gVk fn;k gS rFkk eSaus Lo;a us ekuuh; U;k;kf/kdj.kds vkns’k dk llEeku vuqlj.k djrs gq, dj fiNys fu-o-2005&06 ,oa 2006&07 esa ifj, esjs mijksDr lanfHkZr vkns’kksaesa fu-v- }kjk 145¼3½ ds mi;ksx dks ;qfDrlaxr ugha ekursgq, gVk fn;k gSA blds vfrfjDr ik;k fd fu-v- us eq[;r%vihykFkhZ QeZ ds fiNys bfrgkl dks ns[krs gq, gh /kkjk145¼3½ dk mi;ksx fd;k gSA tgka rd fu-v- }kjk dj fu-o-2003&04 esa ntZ dh xbZ folaxfr;ksa ds vfrfjDr folaxfr;kafopkj.kh; o"kZ esa ik, tkus dk iz’u gS] fu-v- }kjk ntZfolaxfr;ka lk/kkj.k izÑfr dh gSa] ,oa dksbZ fof’k"V folaxfrfu-v- vius vkns’k esa ntZ ugha dj ik;k gSA cfYd fu-v- usvihykFkhZ ds fiNys bfrgkl dks ns[krs gq, rFkk lkekU;folaxfr;ka ntZ djrs gq, /kkjk 145¼3½ ds izko/kkuksa dk mi;ksxfd;k gS rFkk lkFk gh rdZ fn;k fd vihykFkhZ ds ekeys esamPp U;k;ky; esa foHkkx }kjk vihy dh gqbZ gS] blfy,ekuuh; U;k;kf/kdj.k ds fu.kZ; dks foHkkx us Lohdkj ughafd;k gS rFkk blh vk/kkj ij fu-v- us fopkj.kh; o"kZ esa Hkhcgh[kkrs fujLr dj vk; esa o`f) dh gSA ijUrq ekuuh;vk;dj vihyh; U;k;kf/kdj.k rF;ksa dk vUos"k.k dj fu.kZ;nsus ds fy, mPpre izkf/kdkj gS rFkk ekuuh; vk;djvihyh; U;k;kf/kdj.k us vihykFkhZ ds ekeys esa mijksDrlanfHkZr fu.kZ;ksa esa fu-v- }kjk /kkjk 145¼3½ ds mi;ksx dks lghugha ekudj gVk fn;k gSA vr% vihykFkhZ QeZ ds fiNysbfrgkl dks fopkj esa ysrs gq, rFkk vius Lo;a ds dj fu-o-2005&06 ds vkns’k ds leku fopkj.kh; o"kZ esa Hkh fu-v- }kjk/kkjk 145¼3½ ds mi;ksx dks lgh ugha ekuk tkrk ,oa gVk;ktkrk gSA rn~uqlkj fu-v- }kjk vk; esa dh xbZ o`f) dks mfprugha ekudj gVk;k tkrk gS rFkk vihykFkhZ QeZ dh vihybu rhuksa eqn~nksa ij Lohdkj dh tkrh gSA 9-3 eSaus nksuksa ikfVZ;ksa ds rdksZa dk voyksdu fd;k ,oa ik;kfd vihykFkhZ us mDr nksuksa ikfVZ;ksa ls dqy [kjhn :16228884 dh gS] ftlesa ls ,elhlhch cksDl dh [kjhn :-11172356 gS rFkk :- 5056528 dh [kjhn dPps eky dh gSAvihykFkhZ ,elhlhch cksDl fuekZ.k dk dk;Z ugha djrk] cfYddsoy vkiwfrZ dk dk;Z djrk gSA vihykFkhZ us mDr nksuksafj’rsnkj ikfVZ;ksa ,oa vU; ckgj dh ikfVZ;ksa ls ,elhlhchcksDl [kjhns gSa ,oa vkiwfrZ fd, gSaA vihykFkhZ us fj’rsnkjikfVZ;ka ,oa ckgj dh ikfVZ;ksa dks leku njksa ij Hkqxrku fd;kgSA blfy, fu-v- dk fj’rsnkj ikfVZ;ksa dks fd, x, Hkqxrkuij lansg izdV djus dk dksbZ vk/kkj ugha gSA blds vfrfjDrfu-v- us mDr nksuksa ikfVZ;ksa ls [kjhn&fcØh ds vanj dksvihykFkhZ dh vk; esa tksM fn;k gS] tcfd ;g ,dfufoZokfnr rF; gS fd fdlh Hkh izdkj ds fuekZ.k dk;Z esacgqr ls [kpZ tSls] fdjk;k&HkkMk] etnwjh] fctyh&ikuh vkfn Hkh gksrs gSa] ftudks fu-v- us dksbZ [k;ky gh ugha j[kk gSAblds vfrfjDr mDr nksuksa ikfVZ;ksa fu;fer vk;djnkrk gSa]viuh vk;dj fooj.kh foHkkx dks fu;fer rkSj ij is’k djrhjgh gS rFkk mDr ikfVZ;ksa dh [kjhn&fcØh ij dHkh dksbZ lansgfoHkkx ugha dj jgk gSA blds vfrfjDr vk;dj vf/kfu;e dsizko/kkuksa ds vuqlkj fj’rsnkj ikfVZ;ksa ls [kjhn ugha fd, tkusdk dksbZ ca/ku ugha gS] cfYd /kkjk 40,¼2½¼ch½ ds izko/kkudsoy tku&cw>dj] vius ykHk dks de djus dh ea’kk lsviuh fj’rsnkj ikfVZ;ksa dks fd, tkus okys Hkqxrkuksa dh tkapdjus gsrq j[kh xbZ gSA vr% fu-v- ds fu.kZ; dks;qfDrlaxr ,oa rdZlaxr ugha ekuk tkrk ,oa gVk;k tkrk gSrFkk vihykFkhZ dh vihy bl eqn~ns ij Lohdkj dh tkrh gSA 6.1He also relied upon the following observations made by the tribunal:- “9. After examining the orders of AO andld. CIT (A), we find that ld. CIT (A) wascorrect in holding that provisions ofsection 145(3) are not applicable. For A.Y.2003-04, 05-06 and 06-07 the provisionsof section 145(3) were invoked by theAO. Matter reached to the stage ofTribunal and the Tribunal has held thatthe provisions of section 145(3) are notapplicable as assessee has maintainedproper books of account. Defects notedby the AO re not such that it can be heldthat provisions of section 145(3) are notapplicable. Order of the Tribunal for theseyears are placed at pages 86, 97 of thepaper book and for assessment year2006-07 the order of the Tribunal is filedalong with written submissions. Latestorder passed by Tribunal for assessmentyear 2006-07 is in ITA No. 538/JP/2009and ITA No. 652/JP/2009 decided on31.3.2010. In this year also theprovisions of section 145(3) were appliedand g.p. rate was estimated at 3.5% onthe declared turnover against g.p. rate of0.08% shown in earlier year. Facts andcircumstances are similar for the yearunder consideration and this fact has alsobeen mentioned by the AO in his order atpage 3 that for assessment years 2003-04 05-06 and 06-07 the provisions ofsection 145(3) are made applicable.However, the ld. CIT (A) has allowed theissue in favour of the assessee but sincethe department has filed appeal beforethe Tribunal and before Hon’ble HighCourt, therefore, he rejected the books ofaccount for the year under consideration also. Since in earlier year the issue hasbeen decided in favour of the assessee,therefore, for the same reasoning givenby Tribunal, we confirm the order of theld. CIT (A) for the year underconsideration also. Accordingly, groundno. 1 in appeal of the department isrejected. 19. Ground Nos. 4, 5 and 6 are againstrestricting the addition on account of saleof scrap to Rs. 91,876/- against additionof Rs. 4,28,706/- made by AO anddeleting the addition made under section40A(2)(b) at Rs. 2,86,400/- and at Rs.4,06,740/-. 20. These additions were made by AO onthe basis of earlier year. The ld. CIT (A)has deleted these additions by observingthat similar additions were made inearlier year and order of ld. CIT (A) hasbeen confirmed by the Tribunal for earlieryear. Accordingly the addition on accountof sale of scrap was restricted toRs.91,876/- and addition made undersection 40A(2)(b) were deleted. 19. Ground Nos. 4, 5 and 6 are againstrestricting the addition on account of saleof scrap to Rs. 91,876/- against additionof Rs. 4,28,706/- made by AO anddeleting the addition made under section40A(2)(b) at Rs. 2,86,400/- and at Rs.4,06,740/-. 20. These additions were made by AO onthe basis of earlier year. The ld. CIT (A)has deleted these additions by observingthat similar additions were made inearlier year and order of ld. CIT (A) hasbeen confirmed by the Tribunal for earlieryear. Accordingly the addition on accountof sale of scrap was restricted toRs.91,876/- and addition made undersection 40A(2)(b) were deleted. 21. After considering the orders of the AOand ld. CIT (A) we find no infirmity in thefinding of ld. CIT (A) which is based onthe finding of Tribunal given in earlieryear. Neither the findings of the ld. CIT(A) could be controverted nor any othermaterial was brought on record to holdotherwise. In view of the above facts andcircumstances, we confirm the order of ld.CIT (A) on these issues. 29. After considering the submissions andperusing the material on record, the ld.CIT (A) found that payments made torelated persons are similar as made toprivate parties. On similar rates theassessee has purchased the materialcovered under section 40A(2)(b) and onsame rate the same material has beenpurchased from private parties also.Therefore, he held that provisions ofsection 40A(2)(b) are not applicable onthe facts of the present case. Accordinglyhe deleted the addition.” 7.We have heard counsel for the parties. 8.Taking into account the observations made by the CIT(A) andwhile considering the matter, the tribunal has rightly observed inpara no.9 as reproduced above, upholding the view taken by theCIT(A) and adding g.p. rate of 1.73% shown by the assessee andrestricting the addition on account of sale of scrap to Rs.91,876/-and deleting the addition made u/s 40A(2)(b). 9.In that view of the matter, both the issues are answered infavour of the assessee and against the department. 10.The appeal stands dismissed. (VIJAY KUMAR VYAS)J. (K.S.JHAVERI)J. Brijesh 43.