Failed To Substantiate Continuous Fall Of Gross Profit Over The Years As Analyzed Along The Parameters Given By The Assessing Officer Either Before The Assessin v. Cit_ Reported In 228 Itr 253 (Sc)?”

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITA No.354 of 2015Date of decision: 25.4.2016 Principal Commissioner of Income Tax, Faridabad .....- Appe M/s Talbros Engineering Limited ....mesponden CORAM: HON BLE MR. JUSTICK AJAY KUMAR MITTALHON BLE MR. JUSTICEK DARSHAN SINGH 1. Whether Reporters of local papers may be allowed to see the judgment?2. To be referred to the Reporters or not?YES3. Whether the judgment should be reported in the Digest?2. To be referred to the Reporters or not?YES3. Whether the judgment should be reported in the Digest? Present: Mr. Tajender K.Joshi, Advocate for the appellant. Mr. Kanisth Ganeriwala, Advocate for the respondent.Ajay Kumar Mittal, J. inThis appeal has been preferred by the revenue under Section260A of the Income Tax Act, 1961 (in short, “the Act’) against the orderdated 19.1.2015, Annexure A.III, passed by the Income Tax AppellateTribunal, New Delhi (In short, “the Tribunal”) in ITA No.534/Del/2009 forthe assessment year 2005-06, claiming following substantial questions of law:- “1. Whether on the facts and in the circumstances, the Hon'bleITAT was right in law in upholding the order of learned CIT(A)in deleting the addition of “a1,19,93,081/- made by theAssessing Officer on account of unexplained fall in GPITAT was right in law in upholding the order of learned CIT(A)in deleting the addition of “a1,19,93,081/- made by theAssessing Officer on account of unexplained fall in GP especially when the assessee failed to explain the reason for fallin GP rate from 18.52% in the Ist year to 15.71% during theyear under consideration?in GP rate from 18.52% in the Ist year to 15.71% during theyear under consideration? 2. Whether on facts and circumstances of the case, the learned!ITAT was justified in law in upholding the deleting of theaddition on account of lower GP although the assessee hasfailed to substantiate continuous fall of gross profit over theyears as analyzed along the parameters given by the AssessingOfficer either before the Assessing Officer, the CIT(A) andbefore the learned [ITA ITAT was justified in law in upholding the deleting of theaddition on account of lower GP although the assessee hasfailed to substantiate continuous fall of gross profit over theyears as analyzed along the parameters given by the AssessingOfficer either before the Assessing Officer, the CIT(A) andbefore the learned [ITA 3. Whether on facts and circumstances of the case, the learned!ITAT was justified in law in upholding the deletion of additionon account of low gross profit by holding that the books ofaccount of the assessee could not be rejected by the AssessingOfficer despite the Assessing Officer's findings based on harddata that correct profits could not be deduced from theassessee's books?ITAT was justified in law in upholding the deletion of additionon account of low gross profit by holding that the books ofaccount of the assessee could not be rejected by the AssessingOfficer despite the Assessing Officer's findings based on harddata that correct profits could not be deduced from theassessee's books? 4. Whether on the facts and in the circumstances, the Hon'bleITAT was right in law in upholding the order of learned CIT(A)in deleting the addition of|a45,94,710/- made by the AssessingOfficer on account of cash credit under section 68 especiallywhen the assessee had failed to prove the creditworthiness ofthe deposits despite specific requirement?ITAT was right in law in upholding the order of learned CIT(A)in deleting the addition of|a45,94,710/- made by the AssessingOfficer on account of cash credit under section 68 especiallywhen the assessee had failed to prove the creditworthiness ofthe deposits despite specific requirement? 4. Whether on the facts and in the circumstances, the Hon'bleITAT was right in law in upholding the order of learned CIT(A)in deleting the addition of|a45,94,710/- made by the AssessingOfficer on account of cash credit under section 68 especiallywhen the assessee had failed to prove the creditworthiness ofthe deposits despite specific requirement?ITAT was right in law in upholding the order of learned CIT(A)in deleting the addition of|a45,94,710/- made by the AssessingOfficer on account of cash credit under section 68 especiallywhen the assessee had failed to prove the creditworthiness ofthe deposits despite specific requirement? 5. Whether on the facts and in the circumstances, the Hon'be ITATwas right in law in upholding the order of learned CIT(A) indeleting the addition of|21,68,938/- made by the AssessingOfficer on account of capital subsidy on sales tax even thoughthe assessee's business was already 1n existence and the subsidywas given after the commencement of production and was notfor setting up of the industry and that the same is incontravention of the decision of Hon'ble Supreme court in thecase of.Sahney Steel & Press Works Limited etc. vs. CITreported in 228 ITR 253 (SC)?”was right in law in upholding the order of learned CIT(A) indeleting the addition of|21,68,938/- made by the AssessingOfficer on account of capital subsidy on sales tax even thoughthe assessee's business was already 1n existence and the subsidywas given after the commencement of production and was notfor setting up of the industry and that the same is incontravention of the decision of Hon'ble Supreme court in thecase of.Sahney Steel & Press Works Limited etc. vs. CITreported in 228 ITR 253 (SC)?” ITA No.354 of 2015 |A few facts relevant for the decision of the controversyinvolved as narrated in the appeal may be noticed. Return of incomedeclaring total income ofTL1,46,73,940/- was filed by the assessee companyon 31.10.2005. Assessment was completed under section 144 of the Act bymaking certain additions at an assessed income Ofv4,18,94,110/- videorder dated 18.12.2007, Annexure A.1. Firstly, the Assessing Officer madean addition of|L1,19,93,081/- on account of unexplained fall in GP rate ascompared to the immediately preceding year. The CIT(A) deleted theaddition holding that no difference or defect had been detected by theAssessing Officer in the purchases and in the turnover of the companywhich had been accepted by the Assessing Officer. Aggrieved by the order,the revenue filed appeal before the Tribunal. The Tribunal upheld thedeletion made by the CIT(A). Secondly, the Assessing Officer made anaddition of L45,94,710/- on account of cash credit under section 68 of theAct since the assessee had failed to prove the creditworthiness of thedeposits despite specific requirement. The CIT(A) on appeal by theassessee deleted the addition holding that the Assessing Officer had notgiven any adverse remarks and the assessee had furnished elaborate detailsregarding the deposits of such depositors giving their PAN Nos. and thebank accounts showing all particulars. On appeal by the revenue, theTribunal upheld the order passed by the CIT(A) observing that the assesseehad proved the genuineness of the depositors and once the receipt ofdeposits amounting toLT44 lacs from the depositors was held to be genuine,the consequent disallowance of interest amounting to =a1,94,710/- by theAssessing Officer would automatically stand deleted. Thirdly, the Assessing ITA No.354 of 2015 ITA No.354 of 2015 Officer made an addition oft<a21,68,938/- on account of capital subsidy onsales tax. The CIT(A) deleted the said addition holding that the subsidy wasgiven not to enable the assessee to run the business more profitably but insetting up of the industry in a remote rural area. On appeal by the revenue,the Tribunal upheld the decision taken by the CIT(A) observing that theexercise of option by the assessee 1n paying half of the amount of deferred!tax upfront thereby retaining the remaining half as subsidy cannot convertthe otherwise capital subsidy into an item of revenue. Hence the instantappeal by the revenue. 3)We have heard learned counsel for the parties. 4Detailed findings have been recorded by the Tribunalupholding the deletions made by the CIT(A) on all the issues. The firstissue was with regard to addition of|a1,19,93,981/- made by the AssessingOfficer on account of fall in GP rate from 18.52% in the preceding year to15.71% during the year in question. During the assessment proceedings, itwas noticed by the Assessing Officer that the GP rate of the assessee hadreduced from 18.52% from the preceding year to 15.71%. On being asked,the assessee explained that there was an increase in the prices of steel roundbar during the year which led to the decline in the gross profit rate. TheAssessing Officer observed that certain expenses forming part of thecomputation of the gross profit had reduced as a percentage of sales incomparison with the preceding year. Rejecting the books of account, theAssessing Officer adopted the gross profit rate of the preceding year at18.52% which resulted into making of GP addition of=a1.19 crore. TheCIT(A) on appeal by the assessee deleted the addition holding that the Assessing Officer had assigned no reason for rejecting the books of account,The Assessing Officer had not controverted the quantity or value of theclosing and opening inventory. The books of account were properlymaintained by the assessee. It had maintained all the stock registers requiredfor the purposes of the payment of excise duty. The Tribunal upheld the saidfindings. The relevant findings recorded by the Tribunal on this issue readthus:- “4, After considering the rival submissions and perusing the relevantmaterial on record, it is observed that the assessee filed certainadditional evidence before the learned CIT(A), who chose toseek remand report from the Assessing Officer, a copy of whichis available on pages 88 to 92 of the department paper book.Coming back to the merits of this ground, 1t can be seen that theAssessing Officer has assigned no reason for rejecting the booksof account other than a decline in the gross profit rate. It 1smatter of record that the assessee 1s engaged in a manufacturingactivity and has maintained all the stock registers required forthe purposes of the payment of excise duty. The AssessingOfficer has not controverted the quantity or value of the closingand opening inventory. There 1s no dearth ofjudicial precedentsunanimously holding that books of account cannot be rejectedon the solitary reason of decline in the gross profit rate. Sincethe Assessing Officer was swayed only by the decline in the GPrate to reject the books of account without anything else, we areof the considered opinion that such an action of the AssessingOfficer has no sanction of law. The assessee has placed onrecord a copy of chart, which was also filed before theAssessing Officer to demonstrate that there has been analarming increase in the price of steel round bar. For example,the rate per mt. of raw material purchased from RINL increasedfrom-20,350/- in the preceding year to-26,900/- in the current year, thereby registering an increase of 32%. In the likemanner, there 1s increase in the rate of raw material from otherparties ranging between 19% to 36%. This chart indicates thatthe input costs became costly 1n the instant year in comparisonwith the rates prevailing in the preceding year which led to thereduction in the overall profitability. The AO has notcontradicted the contents of such chart. When we consider thisfactor pushing down the gross profit rate coupled with fact thatthe Assessing officer has not pointed out any mistake in thequantitative records maintained by the assessee or the value ofthe closing stock, the only conclusion which in our consideredopinion can be drawn 1s that the books of account were properlymaintained. We, therefore, hold that the learned CIT(A) wasJustified in cancelling the action of the AO in rejecting thebooks and resultantly deleting the addition of |1.19 crore onthis score.’ Learned counsel for the appellant-revenue has not been able to show anyillegality or perversity in the said findings, 4]The second issue was with regard to addition of LO45,94,710/-made by the Assessing Officer under Section 68 of the Act. The assesseereceived fixed deposits from nine persons for a total sum of|=a54.75 lacs.The Assessing Officer called upon the assessee to prove the genuineness ofthe transaction of receipt of FDRs from these persons with necessaryevidence. The assessee filed some details and also produced one of suchdepositors. In the absence of the assessee producing the other creditors, theAssessing Officer held that the deposits amounting to—=a44 lacs receivedfrom six persons were bogus. The assessee had also claimed deduction inrespect of interest paid on such FDRs to its depositors. The AssessingOfficer made further addition for41,94,7100/- being the amount of interest paid in respect of about six credits, making a total addition ofL45.94 lacs,The CIT(A) deleted the said addition holding that the Assessing Officer hadnot given any adverse remarks and the assessee had furnished elaboratedetails regarding the deposits of such depositors giving their PAN and thebank accounts showing all particulars. The Tribunal upheld the order passedby the CIT(A) observing that once the receipt of deposits amounting toTy55lacs from the six depositors was held to be genuine, the consequentdisallowance of interest amounting toL1,94,71/- would automatically standdeleted. The relevant findings recorded by the Tribunal on this issue readthus:- paid in respect of about six credits, making a total addition ofL45.94 lacs,The CIT(A) deleted the said addition holding that the Assessing Officer hadnot given any adverse remarks and the assessee had furnished elaboratedetails regarding the deposits of such depositors giving their PAN and thebank accounts showing all particulars. The Tribunal upheld the order passedby the CIT(A) observing that once the receipt of deposits amounting toTy55lacs from the six depositors was held to be genuine, the consequentdisallowance of interest amounting toL1,94,71/- would automatically standdeleted. The relevant findings recorded by the Tribunal on this issue readthus:- 7. After considering the rival submissions and perusing therelevant material on record, it is observed that the AssessingOfficer made addition under section 68 of the Act in respect ofthe above six depositors by treating them as bogus mainly dueto the failure of the assessee in producing these depositors. Atthe outset, we emphasize on the duty of the assessee to complywith the requirements of the Assessing Officer 1n the course ofassessment proceedings. If the Assessing Officer directs theassessee to produce the creditors, it becomes the duty of theassessee to produce the’ creditors so as to establish thegenuineness of the credits to the satisfaction of the AO. Thisrule is not infallible. If the assessee, pursuant to the directionof the Assessing Officer for producing certain creditors,expresses its inability to produce the persons but places onrecord sufficient evidence to prove the genuineness of thedeposits, the addition cannot be made under section 68 of theAct without the AO discharging his duty to summon thecreditors. Presently, we are dealing with a situation in whichthe assessee intimated the AQ to call these creditors at his ownwhich he did not and chose to make addition without rebuttingrelevant material on record, it is observed that the AssessingOfficer made addition under section 68 of the Act in respect ofthe above six depositors by treating them as bogus mainly dueto the failure of the assessee in producing these depositors. Atthe outset, we emphasize on the duty of the assessee to complywith the requirements of the Assessing Officer 1n the course ofassessment proceedings. If the Assessing Officer directs theassessee to produce the creditors, it becomes the duty of theassessee to produce the’ creditors so as to establish thegenuineness of the credits to the satisfaction of the AO. Thisrule is not infallible. If the assessee, pursuant to the directionof the Assessing Officer for producing certain creditors,expresses its inability to produce the persons but places onrecord sufficient evidence to prove the genuineness of thedeposits, the addition cannot be made under section 68 of theAct without the AO discharging his duty to summon thecreditors. Presently, we are dealing with a situation in whichthe assessee intimated the AQ to call these creditors at his ownwhich he did not and chose to make addition without rebutting the evidence filed by the assessee. We will deal with all the sixcreditors one by one, §$ to 13. xxxxxxxXxxXxx xXx Xx 14. Once the receipt of deposits amounting to|=a44 lac from theabove six depositors 1s held to be genuine, the consequentdisallownace of interest amounting to=a1,94,710/- made bythe Assessing Officer would automatically stand deleted. We,therefore, uphold the impugned order in deleting the additionof|<45.94 lacs.’above six depositors 1s held to be genuine, the consequentdisallownace of interest amounting to=a1,94,710/- made bythe Assessing Officer would automatically stand deleted. We,therefore, uphold the impugned order in deleting the additionof|<45.94 lacs.’ the evidence filed by the assessee. We will deal with all the sixcreditors one by one, §$ to 13. xxxxxxxXxxXxx xXx Xx 14. Once the receipt of deposits amounting to|=a44 lac from theabove six depositors 1s held to be genuine, the consequentdisallownace of interest amounting to=a1,94,710/- made bythe Assessing Officer would automatically stand deleted. We,therefore, uphold the impugned order in deleting the additionof|<45.94 lacs.’above six depositors 1s held to be genuine, the consequentdisallownace of interest amounting to=a1,94,710/- made bythe Assessing Officer would automatically stand deleted. We,therefore, uphold the impugned order in deleting the additionof|<45.94 lacs.’ No material was placed on record by the learned counsel for the appellant tocontrovert the findings recorded by the Tribunal.6]The next issue was with regard to addition of|=a21,68,938 onaccount of capital subsidy on sales tax. The assessee received a subsidy ofsales tax amounting toa21,68,938/- which was claimed as a capital receiptnot chargeable to tax. On being asked as to why the subsidy be not treatedas revenue receipt, the assessee stated that 1t was given as per the scheme ofthe State Government for encouraging the industries to set up their units inrural areas and for compensating for the hardship in setting up suchindustries in remote rural areas. The Assessing Officer treated this amountas revenue by relying upon judgment of the Apex Court in Sahney Steeland Pass Works Limited vs. CIT,228 ITR 253. The CIT(A) treated thisamount as capital receipt holding that if the purpose of the subsidy was tohelp the assessee to set up its business or complete a project, the amountsmust be treated to have been received for capital purpose. The Tribunalafter considering the matter upheld the deletion made by the CIT(A)observing that if some subsidy 1s given for encouraging the industries forsetting up units in the remote or rural areas etc. then such subsidy assumes the character of a capital receipt. If subsidy 1s given for enabling an assesseeto run its business more profitably, then it would amount to an operationalsubsidy chargeable to tax. The relevant findings recorded by the Tribunalread thus: the character of a capital receipt. If subsidy 1s given for enabling an assesseeto run its business more profitably, then it would amount to an operationalsubsidy chargeable to tax. The relevant findings recorded by the Tribunalread thus: “16. We have heard the rival submissions and perused the relevantmaterial on record. The relevant factor for decision as towhether subsidy is a capital or a revenue receipt, 1s its natureand object. If some subsidy is given for encouraging theindustries for setting up units in the remote or rural areas etcthen such subsidy assumes the character of a capital receipt. Onthen other hand, if subsidy is given for enabling an assessee torun its business more profitably, then it would amount to anoperational subsidy chargeable to tax. It 1s clear from theassessee'’s submissions reproduced in the assessment order thathe subsidy was given to the assessee as a compensation forsetting up its unit in remote rural areas. The nature of suchsubsidy has not been disputed by the AO. As the nature ofsubsidy in the present facts and circumstances 1s undisputed,being towards the setting up of unit in remote and rural areas,the natural conclusion which therefore follows jis that thisubsidy is a capital receipt and not chargeable to tax. Thelearned DR contended that the nature of subsidy has undergonechange because of the assessee itself stating that 1t opted for thehalf of the amount of the deferred sales tax by making paymentfor the remaining half of the amount of the deferred tax upfront,In our considered option, the exercise of option by the assesseein paying half of the amount of deferred tax upfront therebyretaining the remaining half as subsidy, cannot convert theotherwise capital subsidy into an item of revenue. The SpecialBench of the Tribunal in Sulzer India Limited vs. DCIT, (2010)134 TTJ(Mum.) (SD) 385 has held that the payment of netpresent value against a deferred sales tax liability cannot bematerial on record. The relevant factor for decision as towhether subsidy is a capital or a revenue receipt, 1s its natureand object. If some subsidy is given for encouraging theindustries for setting up units in the remote or rural areas etcthen such subsidy assumes the character of a capital receipt. Onthen other hand, if subsidy is given for enabling an assessee torun its business more profitably, then it would amount to anoperational subsidy chargeable to tax. It 1s clear from theassessee'’s submissions reproduced in the assessment order thathe subsidy was given to the assessee as a compensation forsetting up its unit in remote rural areas. The nature of suchsubsidy has not been disputed by the AO. As the nature ofsubsidy in the present facts and circumstances 1s undisputed,being towards the setting up of unit in remote and rural areas,the natural conclusion which therefore follows jis that thisubsidy is a capital receipt and not chargeable to tax. Thelearned DR contended that the nature of subsidy has undergonechange because of the assessee itself stating that 1t opted for thehalf of the amount of the deferred sales tax by making paymentfor the remaining half of the amount of the deferred tax upfront,In our considered option, the exercise of option by the assesseein paying half of the amount of deferred tax upfront therebyretaining the remaining half as subsidy, cannot convert theotherwise capital subsidy into an item of revenue. The SpecialBench of the Tribunal in Sulzer India Limited vs. DCIT, (2010)134 TTJ(Mum.) (SD) 385 has held that the payment of netpresent value against a deferred sales tax liability cannot be considered as income under section 41(1) of the Act. This viewof the Special bench has been recently upheld by the Hon'bleBombay High Court vide its judgment dated 5.12.2014, a copyof which has been made available by the learned AR. In view ofthe above forgoing discussions, we are of the consideredopinion that the learned CIT(A) was justified in treating salestax subsidy as a capital receipt.” considered as income under section 41(1) of the Act. This viewof the Special bench has been recently upheld by the Hon'bleBombay High Court vide its judgment dated 5.12.2014, a copyof which has been made available by the learned AR. In view ofthe above forgoing discussions, we are of the consideredopinion that the learned CIT(A) was justified in treating salestax subsidy as a capital receipt.” In the absence of any material to assail the findings recorded by theTribunal on this issue, the same are also upheld.Ty.The view adopted by the Tribunal is a plausible view based onappreciation of material on record and the relevant case law on the point.Learned counsel for the appellant-assessee has not been able to show anyillegality or perversity in the findings recorded. Thus, no substantialquestion of law arises. The appeal stands dismissed.| (Ajay Kumar Mittal)Judge April 25, 20160"; (Darshan Singh)Judge