Income Tax Appellate Tribunal - Jodhpur
The D.C.I.T, Special Range And Addl. ... vs Prem Cables (P) Ltd. on 7 October, 2004
ORDER
R.S. Syal, Accountant Member
1. A reference Under Section 255(4) of the Income-tax Act, 1961 was made by the Hon'ble President for my opinion as Third Member on the following points of difference arising out of the appeal for A.Y. 1996-97.
2. The ld. Judicial Member has framed the following question for reference to the Third Member:
Whether the genuinity or ingenuinity of the impugned "AGREEMENT" can be determined on the basis of available facts on record; or further investigation of facts is necessary, in the backdrop of divergent views taken by the ld. Assessing Officer and the ld. CIT(A).
On the other hand the ld. Accountant Member has proposed the following two questions in his statement of points of difference Under Section 255(4):
1. Whether on the facts and in the circumstances of the case and having regard to material and evidence on record, addition of Rs. 56,70j828/- being reduction in job charges allowed on the basis of an agreement dated 313.1995 is to be confirmed or matter remanded for making enquiries?
2. Whether, on the facts and in the circumstances of the case and having regard to evidence and material on record, addition of Rs. 4,08,1091- being reduction in conversion charges allowed by the assessee is to be confirmed or matter remanded for making further enquiries.
3. Briefly stated the facts of the case which are material to decide the controversy are that the assessee derived income from manufacture and sale of conductors of different specifications. Besides that, it had also executed job work for which job work receipts and conversion charges were shown. Return of income was filed at Rs. 64 lakhs and odd. It had disclosed total turnover at Rs. 23,47,76,832/- comprising of the following three components:
1. Trading/sales of raw material : 1,69,31,160/-
2. Turnover on account of purchase of ready made conductor : 12,74,94,900/-
3. Sales of conductor/wires manufactured by the assessee : 9,03,50,772/-
The assessee had also shown the following items on the credit side of its trading account:
1. Job charges : 25,70,910/-
2. Conversion charges : 47,64,492/-
Both these items represent net receipts on account of job and conversion charges after deducting the debit notes.
4. In so far as job charges are concerned, it emerges that the job work was done for three parties for converting raw material supplied by such parties into aluminium conductor of different specifications. Such activities were being done by the assessee in earlier years also and continued in the succeeding years as well. Break up of job charges for the year under consideration is as under:
Name of Party Gross Invoice Debit Note Net Amount
Amount Issued Credited
M/s P.G. Foils Ltd., Ahmedabad 72,72,897 56,70,828 17,02,068
M/s Torrent Cables Ltd., Nadiad 8,31,555 25,044 8,06,511
M/s General Engineering Works Faridabad 62,330 --- 62,330
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82,66,782 56,95,872 25,70,910
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The dispute in question refers to job charges received from M/s P.G. Foils Ltd., a company in which the directors of the assessee-company and their family members are interested, who hold substantial interest in both the companies. Numerous transactions were carried out by the assessee with M/s P.G. Foils Ltd., which included executing job work on the raw material supplied by them, purchasing finished goods/conductors which were manufactured by the assessee on job work basis from the said M/s P.G. Foils Ltd. and also lending and borrowing of raw material depending upon the availability of aluminium. The assessee charged job rates during the year varying from Rs. 4,000/- per M.T. to Rs. 8000/- per M.T. from M/s P.G. Foils Ltd., a table in respect of which has been extracted by the ld. J.M. in para 4 of his proposed order. Subsequently, such job charges were reduced to Rs. 1,000/- per M.T. by way of debit note issued by M/s P.G. Foils Ltd. on 30.3.1996. The total amount of debit note came at Rs. 56,70,828/- as against the original invoice amount of Rs. 73,72,897/-. Thus the net amount of Rs. 17,02,068/- was eventually credited in the P & L account of the assessee. On being called upon to explain the reasons for issuance of debit note for such a huge sum which resulted into under reporting of taxable income by Rs. 56,70,828/-, the assessee stated that job charges were charged by the company as per regular rates and deduction of tax at source was also made by M/s P.G. Foils Ltd. on the accounted for job and conversions bills. It was further explained that on the last date of the accounting period, it was noticed that such amount was charged at a rate higher than agreed between the two parties at Rs. 1,000/- per M.T. and hence the differential amount was adjusted by way of debit note issued by M/s P.G. Foils Ltd. It was also submitted before the AO that M/s P.G. Foils Ltd., is regularly assessed to tax and had paid tax at identical rate as that paid by the assessee. Copy of computation of income of M/s P.G. Foils Ltd. Ahmedabad for A.Y. 1996-97 and the annual report for same year were placed on record to demonstrate that the total income of M/s P.G. Foils Ltd., was at Rs. 2,30,61,636/-. The AO observed that the issuance of debit note was nothing but a colourable device by which attempt was made to reduce the assessee's genuine income. He observed that in A.Y. 1995-96 job work charges were at Rs. 5365/- per MT and in the succeeding A.Y. 1997-98 also the rate was between Rs. 4000/- to Rs. 5000/-. As such the rate charged during the year as per invoices was held to be valid. Accordingly, agreement dated 31.3.1995 alleged to be executed between the assessee company and M/s P.G. Foils Ltd. for charging @ Rs. 1000/- per MT was held to be colourable device on account of reasons mentioned by the AO, which have been extracted by the ld. A.M. in para 4 of his proposed order. In this process the AO also considered the submission made on behalf of the assessee qua the taxability on the same rates in the hands of the two companies and found that M/s P.G. Foils Ltd. had claimed deduction Under Section 80HHC for Rs. 44,82,097/- on its inflated business income of Rs. 2,75,43,733/-. It was opined that by issuing debit note at the end of the year, the said M/s P.G. Foils Ltd. managed to reduce the job charges as expenditure in its hands which resulted into the enhanced income and the resultant high benefit of deduction Under Section 80HHC. Accordingly, addition of Rs. 56,70,828/-, being the amount for which debit note was issued by M/s P.G. Foils Ltd., was made.
5. That apart, the assessee had also executed work of conversion of aluminium ingots into aluminium rods for a number of parties including the above referred M/s P.G. Foils Ltd. Such activity of conversion was also being done in the past and also in the succeeding years as well. As against the invoiced amount of Rs. 25,60,276/-, being the conversion charges from M/s P.G. Foils Ltd., charged throughout the year, a debit note of Rs. 4,08,109/- was acknowledged thereby bringing down the income from conversion charges from M/s P.G. Foils Ltd. to Rs. 21,52,167/-. It was observed by the AO that the assessee also did conversion job for other 27 outside parties from whom invoiced amount was received at Rs. 26,12,325/- and there were no such debit notes. Debit note issued by M/s P.G. Foils Ltd. on this account was dated 30.3.1996. On being called upon to explain the reasons for reduction in the conversion charges by way of debit note, the assessee stated that it had issued bills for conversion of scrap into aluminium rods @ Rs. 4,000/- per M.T. vide invoice dated 27.10.1995, 31,10.1995, 14.2.1996, 10.3.1996 and 31.3.1996. The assessee revised the rate of Rs. 2,000/- per M.T. and debit note dated 30.3.1996 was acknowledged from M/s P.G. Foils Ltd. The AO opined that the amount of Rs. 4,08,109/-, being the figure as per debit note was nothing but the income of the assessee.
6. While reaching his conclusion about the taxability of further job charges to the extent of Rs. 56,70,828/- and conversion charges to the tune of Rs. 4,08,109/-, the AO compared the rate charged by the assessee per M.T. in the preceding and succeeding years which was almost in the same range in which the invoices were originally issued by the assessee in the instant year. In the first appeal, the ld. CIT(A) deleted the total addition of Rs. 60,78,937/- by observing that reduction in the job charges and conversion charges was only on account of business expediency. He also took into account that "though the rates were reduced on account of job charges and conversion charges but at the same time as per agreement, appellant had been given the credit of Modvat and the appellant's liability stood reduced on account of Excise duty". The Revenue being aggrieved carried the matter to the Tribunal.
7. The ld. J.M. observed that the AO disbelieved the impugned agreement because in the opening words of the said agreement, a reference was made to the letters exchanged between the assessee and M/s P.G. Foils Ltd. and such letters were not produced before him. It was further noted by the ld. J.M that it was clear from the observations of the AG's order at page 4 that the never insisted or required the assessee to produce these letters. Since these letters were found to be significant for coming to the conclusion for genuineness of the agreement, the ld. J.M. opined that such letters ought to have been considered by the AO. He further held in para 23 of his order that there were certain inherent defects in the investigation because when a company enters into any agreement, a resolution of the Board of directors of the company is passed and the same is to be sent to the Registrar of Companies, which fact has also not been verified by the department. The other relevant fact being purchase of stamp papers was also not found to be verified by the AO. Another important factor being, the question of grant of deduction Under Section 80HHC to M/s P.G. Foils Ltd. was also found (sic) to have been verified by the AO vide para 20 of the proposed order. (sic) Excise Duty by 400% is concerned, the ld. J.M. in paras 21 and 22 found that the gains on account of benefit of Excise Duty to the assessee was material one and this aspect has also not been properly considered by the AO. Considering these facts, the ld. J.M. after setting aside the order of the ld. CIT(A) on this issue, sent the matter back to the file of the AO to verify the genuineness of this issue from all angles and to take a decision on the same afresh.
8. The ld. A.M. in his dissenting note came to the conclusion that the alleged agreement was a colourable device for reducing the income in the hands of the assessee. He did not concur with the opinion expressed by the ld. J.M. for remitting the matter back to the file of the AO on the ground that there was no benefit to the assessee by way of Excise Duty as the assessee was allowed to avail the benefit of Modvat credit paid by M/s P.G. Foils Ltd. in respect of raw materials and the necessary credit was to be given to the sister concern at the year end. Hence there was no resultant accrual of Income to the assessee on this count. In so far as the fresh investigation or deduction Under Section 80HHC in the hands of M/s P.G. Foils Ltd. is concerned, the ld. A.M. came to the conclusion that by way of the alleged agreement, the business income of M/s P.G. Foils Ltd., stood enhanced by way of reduction in job charges and conversion charges amounting to Rs. 60 lakhs [approx] and which qualified for the deduction in the hands of that company. It was felt that no fresh enquiry was needed as facts were already brought on record and the copy of computation of income of M/s P.G. Foils Ltd. was made available to the AO. In this way, the ld. A.M. in his proposed order accepted the departmental appeal on first two grounds and came to the conclusion that the additions of Rs. 56,70,828/- made by the AO on account of job charges and of Rs. 4,08,109/- on account of conversion charges were wrongly deleted by the ld. CIT(A). Resultantly, the appeal of the Revenue was allowed.
9. The Third Member case was fixed for hearing in which the ld. Representatives reiterated their respective submissions accepted by the members in their dissenting proposed orders. The ld. Counsel for the assessee fairly conceded the factual position that the assessee as well as M/s P.G. Foils Ltd. were sister concerns and directors were also common in both the companies. It is also borne out from record and was candidly admitted by the ld. A.R. that the factory premises of both the companies were situated at same village, Piplia Kalan, Distt. Pali. The ld. Counsel for the assessee contended that the agreement dated 31.3.1995 was entered into between two companies as a result of which the amount of job charges was receivable @ Rs. 1000/- per metric ton for the previous year 1.4.1995 to 31.3.1996 relevant to the A.Y. under consideration. It was contended that payments made during the year at higher rates ranging between Rs. 4,000/- to Rs. 8,000/- were erroneously made and discrepancy was noticed at the year end as a result of which debit note was issued by M/s P.G. Foils Ltd. in consonance with the terms of agreement. About the genuineness of the agreement, the ld. A.R. drew my attention to its copy placed in the PB which depicts the treasury stamp dated 12.1.1995 and on the back side of page 1 of the said agreement the vendor has put the date of sale of stamp paper as 31.3.1995. in the light of these dates it was contended by the ld. A.R. that the agreement was genuinely made as at the closing day of the preceding year to be effective during this year as per which the job charges were to be paid @ Rs. 1000/- per M.T. It was further contended by the ld. A.R. that by no stretch of imagination this agreement could be doubted or said to be a colourable device for the reason that it was executed prior to the opening of the F.Y and as such there could not have been any consideration about the prospective income to be earned from job charges in the year to come. The ld. A.R. further explained that the assessee company was manufacturing its own products and also doing the job work on the raw material supplied by M/s P.G. Foils Ltd. the finished product so made which was eventually purchased by the assessee company and sold to the electricity boards. The ld. A.R. explained that by reason of the reduction in the job charges to Rs. 1000/- per M.T., there was ultimately reduction in the purchase price of the goods to the assessee. The ld. A.R. further explained that the assessee had earned benefit on account of Excise duty from M/s P.G. Foils Ltd., which fact cannot be ignored. As regards the diversion of income from the assessee to M/s P.G. Foils Ltd., the ld. Counsel for the assessee made out a case that both the companies were assessed at the same rate and there was no benefit accruing to either of them by way of artificially reducing the job charges as the tax liability would remain the same. It was, therefore, contended that the agreement so entered into by the assessee with M/s P.G. Foils Ltd. was genuine one and deserved to be acted upon. The ld. A.R. relied on the judgment of Laxmi Engineering Industries v. Income-tax Officer in support of his proposition that merely on the basis of suspicion there cannot be any disallowance of expenditure and in applying commercial expediency for determining the reasonableness of the expenditure, the judgment should be from the point of view of business man and not the department. He also cited the judgment of the Hon'ble Supreme Court in the case of J.K. Woollen Manufacturers v. CIT and CIT v. Balchand and Co Pvt. Ltd. for the proposition that the reasonableness of amount of expenditure has to be considered by the assessee only and the I.T. authorities cannot determine that what amount of expenditure should be incurred. He also relied on certain other decisions for the same reasoning that the business man is free to take appropriate decision about the amount of expenditure to be incurred while carrying on his business. It was, therefore, concluded that the assessee had rightly reduced the rate of job charges and the view taken by the ld. CIT(A) was correct and no addition was called for at all.
10. In the opposition, the ld. Departmental representative, while referring to the copy of agreement, stated that it was signed by Shri Pankaj P. Shah as Managing Director in M/s P.G. Foils Ltd. who was also Director and Managing Director of the assessee company. He further submitted that Shri Ashok P. Shah, who signed as Director of the assessee company, that is, M/s Prem Cables (P) Ltd. was also the director and Joint Managing Director of M/s P.G. toils Ltd. It was, therefore, contended that the management of both the companies was same. The job charges throughout the year were charged by the assessee company ranging between Rs. 4000/- to Rs. 8000/- per MT. Not only the monthly payments were made by M/s P.G. Foils Ltd. to the assessee company but deduction of tax at source on such amount was also promptly made. While referring to copy of Form No. 16A, being part of assessment folder, the ld. D.R. contended that these forms were signed by Shri Pankaj P. Shah who was shown as Managing Director in the alleged agreement dated 31.3.1995. It was further submitted that in the preceding year, namely A.Y. 1995-96 the rate charged by the assessee was at Rs. 5365/- per M.T. and the rates so charged in the succeeding year, namely A.Y. 1997-98 also remained between Rs. 4000/- to Rs. 5000/- per MT. The rate was argued to have been allegedly reduced only in this year for same job work done and almost for same quantity of work done. It was further stated that the entire exercise was done for artificially boosting the income in the hands of M/s P.G. Foils Ltd. so that it could avail the benefit of deduction Under Section 80HHC on such enhanced income since the benefit of deduction under this section was not available to the assessee company. The ld. D.R. further stated that there was no benefit to the assessee in terms of Excise duty, as the case was made by the ld. CIT(A) because no such refund was claimed and the Excise Duty already paid stood merged in the cost of the goods. The ld. D.R. further referred to the observation of the ld. AM about the time period of three months allowed by the Bench to the assessee to show the ultimate alleged benefit accruing to the assessee by way of reduction in the job charges, which was not done. He referred to the judgment of the Hon'ble Jurisdictional High Court in the case of CIT v. Jairamdas Lokesh Kumar to contend that the income belonging to the assessee was required to be put to tax in his hands only. He further referred to the judgment of the Hon'ble Supreme Court in the case of Sumati Dyal v. CIT to contend that for considering whether the transaction is real, the matter has to be considered by applying the test of human probabilities. He submitted that when the facts of the case were examined on the test of human probability, it clearly proved that there was a sham agreement intended only to reduce the incidence of tax.
11. I have heard the rival submissions, gone through the proposed dissenting orders and also the relevant material on record. The difference of opinion is on the point of addition of Rs. 56,70,828/-, towards reduction in job charges and Rs. 4,08,109/- towards reduction in conversion charges, in so far as transactions of the assessee with M/s P.G. Foils Ltd. are concerned. Whereas the ld. JM has restored the matter to the file of the AO with the direction to verify the genuineness of the agreement from all angles and take a decision afresh on the same, the ld. AM has concluded that agreement was only a device for reducing the profits of the assessee and the final tax liability. Thus the scope of controversy raised before me is only to decide as to whether the matter required fresh examination for determining the genuineness of the agreement dated 31.3.1995 entered into between the assessee and M/s P.G. Foils Ltd. or it is to be held as a colourable device. The ld. A.R. has strenuously argued before me that the said agreement be declared as valid since all the requisite conditions of a valid agreement were satisfied. I am afraid that this proposition is too broad to be accepted in view of the limited scope of Third member Under Section 255(4) as per which he has to agree with either of the two opinions expressed by the ld. Members of the Bench on the point of difference. He cannot formulate a third view de hors the opinion of the two members who earlier heard the appeal. The choice before him is to either agree with the view taken by the ld. JM or with the ld. AM and hence he cannot set up a third view as proposed by the parties. Hence I am unable to accept the view point of the ld. Counsel for the assessee that the agreement be held to be valid and sustaining the deletion of addition by ld. CIT(A).
12. Reverting to the examination of question before me as to whether the matter should be restored to the file of the AO for fresh decision or the addition be upheld, I observe that the power of framing assessment rests with the AO who has to make assessment on the basis of material produced before him and after hearing the assessee and perusing the evidence placed before him during the course of assessment proceedings. In this respect it is the duty of the assessee to extend cooperation to the AO and furnish details as required enabling him to make assessment. When such material/evidence as required by the AO is made available to him, then the duty shifts on the AO to make proper assessment, as per law in the light of material/evidence provided to him. Thus the primary onus is on the assessee to make available the requisite information called for by the AO. If the assessee fails to comply with the terms of notice issued Under Section 142(1) or with all the terms of notice issued Under Section 143(2), the AO gets power to make assessment of total income or loss to the best of his judgment after taking into account all the relevant material which he has gathered. The assessee is liable to be visited with the adverse consequences if he fails in discharging the duty cast upon him by not furnishing necessary particulars called for by the AO. However, the assessee is entitled to produce additional evidence before the first appellate authority where the AO had refused to admit evidence which ought to have been admitted or where the AO had made the assessment order without giving sufficient opportunity to the assessee to adduce evidence. Rule 46A(2) of Income-tax Rules, 1962, prescribes that no additional evidence shall be admitted by the first appellate (sic) unless he records in writing the reasons for admission, Sub-rule (3) further stipulates that the first appellate authority shall not take into account any additional evidence produced before him unless the AO has been allowed a reasonable opportunity to examine the additional evidence or to cross examine the witnesses produced or to produce any evidence or document or witness, in rebuttal of additional evidence produced by the assessee. Though the first appellate authority is also empowered to direct the production of any additional evidence but that is possible only when he finds that such additional evidence is required to dispose of the appeal before him. In so far as the right of the assessee for the production of additional evidence is concerned, the same is eclipsed and available only subject to the conditions aforementioned and under the circumstances as noted hereinabove. Similarly Rule 29 of the Income-tax Appellate Tribunal Rules, 1963 provides that the parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any document to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or if the income tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on the points specified by them or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced. The sum and substance of this discussion is that it is the primary duty of the assessee to produce necessary documents/evidence as called for the by the AO for framing assessment. If he fails on his part in this regard, then the matter goes out of his hands and the furnishing of additional evidence at the appellate stages becomes the discretion of the appellate authorities which can be exercised only in the circumstances specified. Hence there is no rule that if the assessee had not adduced necessary evidence/material at the assessment stage, then the appellate authorities must remit the matter back to the file of the AO for considering the additional evidence later on sought to be produced before them. Only if the assessee was prevented by sufficient cause in making available necessary evidence to the AO or the assessment was improperly framed by the AO by either not allowing adequate opportunity to the assessee or by not considering the relevant material, then the matter can be restored for a fresh decision. Thus it has to be decided by the appellate authorities in each and every case distinctly as to whether the addition made for non compliance on the part of the assessee at the assessment stage be sustained or the assessee be allowed a fresh opportunity to make up the deficiency in the second round. With these observations, now I will proceed to test the facts of the case that whether the addition deserves to be sustained or the matter be examined afresh by the AO.
13. There is no dispute about the fact that the assessee and M/s P.G. Foils Ltd. are sister concerns and the directors of both the companies are common. The assessee company is doing different activities which comprise of sale of conductors/wires manufactured by itself and doing job work for converting raw material into aluminium conductors of different specifications. In so far as the dispute in question is concerned, the precise sequence of transactions is that M/s P.G. Foils Ltd. made purchases of raw material at their own, which were supplied to the assessee for doing job work. After doing such job work, the goods were purchased by the assessee company itself from M/s P.G. Foils Ltd. and were subsequently sold. The ld. A.R. has admitted that the entire raw material on which the assessee company did job work was purchased by the assessee company from M/s P.G. Foils Ltd. and was ultimately sold by it. The ownership of raw material or goods finally produced remained with M/s P.G. Foils Ltd. till the completion of job work and it was only when the sale was made by M/s P.G. Foils Ltd. to the assessee that the said ownership was transferred. The assessee earned job charges from M/s P.O. Foils Ltd. till the raw material was under the ownership of M/s P.G. Foils Ltd. The dispute about the reduction in job charges is relatable to the period during which ownership of goods had not passed to the assessee. From the facts narrated above, it transpires that the assessee was regularly dealing with M/s P.G. Foils Ltd. in earlier years and in succeeding years also in same manner by way of doing job work on material supplied by M/s P.G. Foils Ltd. and thereafter purchasing such finished goods, which were eventually sold. In the year in question the assessee did similar activity of job work for M/s P.G. Foils Ltd. and rate was charged in original invoices ranging between Rs. 4000/- to Rs. 8000/- per MT. The invoices so raised by the assessee company on M/s P.G. Foils Ltd. were appropriately sent and the payment was made on monthly basis as per invoice value after deduction of tax at source, by M/s P.G. Foils Ltd. Such transactions continued during the entire previous year. At the end of year, a debit note was raised by which the rates charged in original invoices was reduced to Rs. 1000/- per MT. The case of the assessee is that an agreement was entered into between the two companies on 31.3.1995 i.e. before the commencement of the previous year relevant to the A.Y. under consideration as per which the rate of job charges was settled at Rs. 1000/- per MT. The rate of job charges invoiced by the assessee was stated to be continued on the basis of rates of the preceding year, by mistake and such mistake was realized only at the end of the year when debit note was issued for Rs. 56.70 lakhs reducing the total invoice value of Rs. 73.72 lakhs to Rs. 17.02 lakhs. It has been contended with great vehemence that this mistake occurred due to the ignorance and came to light only at the end of the year. On the contrary, the departmental view is that the assessee continued to receive job charges ranging between Rs. 4,000/- to Rs. 8,000/- per MT which rate is in consonance with that charged in the preceding as well as succeeding years and it was only with a view to boost up the income in the hands of M/s P.G. Foils Ltd. that reduction in job charges was effected at the end of the year so that M/s P.G. Foils Ltd. could claim higher deduction Under Section 80HHC on the enhanced income, which benefit was not otherwise available to the assessee. From these arguments, the question arose that whether the transactions entered into at the rates throughout the year were correct or the reduction in the rate by issuance of debit note at the end of the year stated to be as per agreement dated 31.3.1995 was to be considered as genuine. In this connection, various factors need to be weighed properly. First is to determine the nature of job work done by the assessee for M/s P.G. Foils Ltd. in this year vis a vis in the preceding or succeeding year. It has been fairly conceded by the ld. A.R. that the magnitude and the quality of services rendered by the assessee company in this year continued to remain almost same as was there in the preceding as well as succeeding years. Once it is found that the nature of job remained same, then it is necessary to find out the manner and mode in which the job charges were received by the assessee. From the Table made by the AO at page 3 of the assessment order, it is noted that the assessee originally charged @ Rs. 4,000/- per MT on three occasions, Rs. 5,000/- per MT on four occasions and Rs. 8008/- per MT on one occasion. In the immediately preceding A.Y. i.e. 1995-96, the rate was charged at Rs. 5365/- per MT and in the immediately succeeding A.Y. 1997-98 the rate was charged at Rs. 4000/- to Rs. 5000/- per MT. Thus it can be clearly seen that the assessee was uniformly charging from M/s P.G. Foils Ltd. at Rs. 4000/- and above per MT for job work done by it in the preceding, current and succeeding years. The AO has recorded a categorical finding in the body of the assessment order that almost identical rates were charged by the assessee for job work done for outside parties in the A.Y. in question. Such finding has not been controverted by the assessee either before the ld. CIT(A) or the Tribunal. When the same work was done by the assessee for M/s P.G. Foils Ltd. as was being done in the past or future and the rate originally charged as per invoice during the year correspond with that charged from M/s P.G. Foils Ltd. in the past as well as in the future and also from other parties in the current year, then what can be the possible reason for scaling down the rate of job charges drastically from Rs. 4,000/- to Rs. 1,000/- per MT, is a question which required to be examined in depth.
14. The Hon'ble Supreme Court in the case of Sumati Dayal [supra] examined the facts in which an amount was credited in the assessee's capital account declared as winning from races. The revenue authorities did not accept the explanation offered by the assessee. The case of the assessee was that the amount was received from various race clubs on the basis of winning tickets. When the matter finally travelled to the Hon'ble Supreme Court, it found that the apparent must be considered real unless it can be shown that there are reasons to believe that the apparent is not real. It was further held that the taxing authorities were entitled to look into the entire circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities. It was finally held that an inference can be reasonably drawn in these facts that the apparent was not real and winning tickets were purchased by the assessee after the event.
15. In the case of CIT v. Durga Prasad More the Hon'ble Supreme Court came to hold that the apparent must be considered as real until it is shown that there are reasons to believe that the apparent is not real. In that case, the party relying on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self serving statements in documents either executed by him or taken by the party and rely on those recitals. The taxing authorities were required to probe into the matter while looking at the documents produced before them. It was further held that they were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents. It was therefore, Observed as under:
Now coming to the question of onus, the law does not prescribe any quantitative test to find out whether the onus in a particular case has been discharged or not. It all depends on the facts and circumstances of each case. In some cases, the onus may be heavy whereas, in others, it may be nominal. There is nothing rigid about. Herein the assessee was receiving some income. He says that it is not his income but his wife's income. His wife is supposed to have hoc two lakhs of rupees neither deposited in banks nor advanced to others but safely kept in her father's safe. Assessee is unable to say from what source she built up that amount. Two lakhs before the year 1940 was undoubtedly a big sum. It was said that the said amount was just left in the hands of the father in law of the assessee. The Tribunal disbelieved the story, which is, prima facie, a fantastic story. It is a story that does not accord human probabilities. It is strange that the High Court found fault with the Tribunal for not swallowing that story. If that story is found to unbelievable as the Tribunal has found, and in our opinion rightly, then the position remains that the consideration for the sale proceeded from the assessee and, therefore, it must be assumed to be his money.
16. From the ratio decidendi of these two summit court judgments, it is manifest that before relying on the documents placed for consideration, it is important to consider the truthfulness of such recitals, which become paramount when these are between two interested parties. Adverting to the facts of the case, I am not inclined to accept the genuineness of the alleged agreement dated 31.3.1995 for the reason that when the assessee continued to render the same services to its sister concern as was done in the past and future, there was nothing to show the reason for reducing such rate in this particular year only to around 20% of that charged earlier. It is further seen that the same rate of Rs. 4000 to Rs. 5000 per MT was charged by the assessee for same services from other outside parties as well. The theory propounded by the assessee does not inspire confidence further in view of the fact that throughout the relevant year the invoices were raised at the rate of Rs. 4000/- to Rs. 8000/- per MT etc. Not only the payments were continuously made by M/s P.G. Foils Ltd. at the invoiced rate but the deduction of tax at source was also made accordingly. The contention put forth on behalf of the assessee that the agreement existed prior to the opening of the current year and there was a mistake in recording and in receiving job charges at earlier rates, does not merit acceptance for the reason that the persons making payments and receiving and also issuing bills have been shown to be parties to the alleged agreement dated 31.3.1995. It is not possible to accept that the parties to the agreement continued to raise bills not in accordance with the alleged agreement and payments were also accordingly made throughout the year after deduction of tax at source. The facts which are clear to the naked eye cannot be brushed aside. The Tribunal, being a final fact finding authority cannot act as a mute spectator to the glaringly unbelievables going on, which is nothing but an arrangement between two interconnected concerns aimed at defrauding the Revenue and reducing the incidence of tax on the whole. It is under such circumstances that the cloak of corporate veil needs to be pierced for unearthing the real intention of the parties. It is observed that the alleged agreement between these sister concerns is nothing but a colourable device for shrinking the total tax liability of the group. If it had been genuinely entered into on the stated dated, the same must have been acted upon during the year and the invoices properly raised and the payments accordingly made. It is highly unbelievable that rate of job charges is settled at Rs. 1000/- per MT at the beginning of the year but the rate is continuously charged at Rs. 4000/- to 5000/- per MT throughout the year without any knowledge, whisper or objection from the either side. If the situation had been in fact as per the alleged agreement, it would have come to the fore immediately and correction would have been made accordingly during the year itself. In the facts of the present case, I find that the job charges were received by the assessee company as per invoice rates ranging between Rs. 4000/- to Rs. 8000/- pet MT and it was only at the end of the year that both the sister concerns, having common directors, realized that if the rate of job charges is reduced, that would increase the income in the hands of M/s P.G. Foils Ltd. on which deduction Under Section 80HHC would be admissible, that an ante dated agreement was executed for giving colour of genuineness to their intention.
17. The ld. JM has taken into consideration the fact that the question of deduction Under Section 80HHC in the hands of M/s P.G. Foils Ltd. was not properly appreciated by the AO, which needed fresh consideration. In my considered opinion, the requisite information about deduction Under Section 80HHC in the hand: of M/s P.G. Foils Ltd., was made available to the AO alongwith computation of income. It was only on the perusal of this information that the AO on page 6 para (j) came to note that M/s P.G. Foils Ltd. had claimed deduction Under Section 80HHC for Rs. 44,82,097/- on business income of Rs. 2.75 crores. it was further observed by the AO that on showing higher business income, M/s P.G. Foils Ltd. was able to get higher deduction Under Section 80HHC as compared to what would have been allowable to it had it not accounted for the debit note. It is, therefore, clearly borne out that the assessee, in collusion with M/s P.G. Foils Ltd., diverted its income to M/s P.G. Foils Ltd., so that higher benefit of deduction Under Section 80HHC could be availed which was otherwise not available to the assessee. This modus operandi of reducing the job work charges at the end of the year was aimed at reducing the tax incidence in the hands of the sister concerns in unison.
18. The ld. JM in his proposed order has also discussed about the non consideration of impact of Excise Duty by the AO, which weighed with him for restoring the matter. The ld. CIT(A) also proceeded to delete the addition by noting that the assessee was benefited by credit of Modvat and thus its liability stood reduced on account of Excise Duty. I am not in agreement with the view taken by the ld. CIT(A) for the reason that Clause (iv) of the alleged agreement, as extracted by the ld. AM in his proposed order at para 10, clearly stipulates that the Excise Duty will be paid by the assessee at the time of removal of goods and simultaneously Modvat credit will be taken by the assessee on the input material supplied by M/s P.G. Foils Ltd. as per Excise Rules. It is also stipulated that necessary credit will be given by the assessee company to M/s P.G, Foils Ltd. at the year end. It is, therefore, vivid that the benefit of Modvat credit would be available to the assessee at the time of paying Excise duty and the same amount would be credited to the account of M/s P.G. Foils Ltd. at the year end. In this way, there is neither any loss nor profit to the assessee on account of payment of Excise Duty or Modvat credit. The benefit which it received towards the payment made by M/s P.G. Foils Ltd. in the shape of Modvat credit got adjusted against the Excise duty finally payable and such amount again become payable to M/s P.G. Foils Ltd.. In my considered opinion, the ld. CIT(A) did not properly appreciate the impact of Excise duty in the transaction when he came to the conclusion that the assessee's liability of Excise Duty was reduced by 400%. As there is no profit or loss to the assessee on account of Excise duty, in my considered opinion the ld. AM was fully justified in holding so that no useful purpose would be served by remitting the matter back to the AO for fresh consideration on this aspect. Further, there is no reduction in the sale price by virtue of the reduction in the job charges as has been argued so far. Primarily, no such detail of the benefit to the assessee, worth the name, has been made available to any of the authorities below or the Tribunal. Further, since the assessee was issuing invoices during the currency of year at actual rate of job charges, it was also purchasing the goods from M/s P.G. Foils Ltd. at the stipulated price. The exercise of reducing job charges was done at the end of the year and by that time the assessee had already made purchases from its sister concern and recorded accordingly. No corresponding debit note issued by the assessee at the end of the year to reduce its purchase price from M/s P.G. Foils for setting off the impact of reduction in job charges has ever been argued or brought on record.
19. The ld. Counsel for the assessee also submitted that M/s P.G. Foils Ltd. had accounted for job charges at the reduced rate and if that rate is varied in the hands of the assessee that would be very inequitable. In this regard I find force in the submission advanced by the ld. D.R., for which he has relied on the case of Shri Jairamdass Lokesh Kumar [supra]. In this case the Hon'ble Jurisdictional High Court has held that if income actually belongs to the assessee, there was no impediment in levying tax on the income irrespective of the fact whether some persons have already paid or have been assessed on the basis of declaration submitted by them. I further find that the Hon'ble Supreme Court in the case of Income-tax Officer v. Ch. Atchaiah has also held to the same extent by holding that "the AO must tax the right person and right person alone. By 'right person' is meant the person who is liable to be taxed according to law with respect to particular income. Merely because wrong person is taxed with respect to particular income, the AO is not precluded from taxing the right person with respect to that income". From here it follows that the liability to tax is on the right person only and fact that such income was taxed in the hands of another wrong person would not be material in deciding taxability in the hands of the right person.
20. In so far as addition of Rs. 4,08,109/- on account of conversion charges is concerned, it is found that M/s P.G. Foils Ltd. issued debit note again at the end of the year reducing the rate to Rs. 2000/- per MT from the earlier charged at Rs. 4000/- per MT and Rs. 3000/- per MT. This reduction is not even the part of the alleged agreement by means of which the job charges were sought to be reduced. Here again, I find that the assessee was charging Rs. 3000/- per MT from M/s P.G, Foils Ltd. for conversion of aluminium into rods in A.Y. 1995-96 i.e. immediately preceding year. What prompted the assessee to reduce conversion charges for rendering the same services is again not coming up from any relevant material. It is further important to note that there are 27 outside parties for whom the assessee did same conversion job and there was no such reduction in amount of invoice which was received without any debit note as is the case with M/s P.G. Foils Ltd. The reasons cited above qua the job charges, mutatis mutandis hold good for conversion charges. Accordingly, I do not approve the reduction in the conversion charges. The ld. Counsel for the assessee has relied on certain decisions including that of Laxmi Engineering Industry [supra], J.K. Woollen Manufacturers [supra]. In all these cases it was held by the Hon'ble Courts that an expenditure cannot be disallowed merely on the basis of suspicion and in applying commercial expediency for determining whether the expenditure was wholly and exclusively made out for the purpose of assessee's business, the reasonableness of the expenditure has to be judged from the point of view of the business man and not the department. This is the ratio laid down by the Hon'ble Courts in the light of decision cited by the ld. A.R. I find that these decisions are not applicable to the facts of the instant case for the reason primarily, that these have been (sic) expenditure incurred by the assessee whereas the issue in question is that of non-recording of proper income by way of collusive agreement between the two sister concerns, aiming at the reduction in the income of the assessee and corresponding increase in the income of M/s P.G. Foils Ltd. to facilitate the reduction in the total tax liability of the group concerns. Further, it is not a case in which the AO has stepped into the shoes of the assessee for determining that what amount should have been charged but a case in which income already earned and received was sought to be negatived by collusive agreement. So, these decisions do not bring the case of the assessee further in any manner. Therefore, taking into consideration the entirety of the factual matrix and the legal position emerging from the judicial precedents discussed above, I am not inclined to hold that the matter requires fresh investigation at the hands of the AO again. Accordingly, I concur with the order proposed by the ld. AM.
21. The matter may now be placed before the regular Bench for decision in accordance with law.
1. In my view, the following points of difference need to be referred to the Hon'ble President under Section 255(4) of the Income-tax Act, 1961:
i) Whether, on the facts and in the circumstances of the case and having regard to material and evidence on record, addition of Rs. 56,70,828/- being reduction in job charges allowed on the basis of an agreement dated 31.3.1995 is to be confirmed or matter remanded for making enquiries?
ii) Whether, on the facts and in the circumstances of the case and having regard to evidence and material on record, addition of Rs. 4,08,109/- being reduction in conversion charges allowed by the assessee is to be confirmed or matter remanded for making further inquiries.?
1. As there has been a difference of opinion between the two members being Judicial Member and Accountant Member constituting this Bench of ITAT, Jodhpur the point of difference is stated below with a request that the Hon'ble President, ITAT may be pleased to kindly nominate a Third Member for deciding the same as required Under Section 254(4) of the Income-tax Act, 1961:
Whether the genuinity or ingenuinity of the impugned "AGREEMENT" can be determined on the basis (sic) facts on record; or further investigation of facts is necessary, in the backdrop of divergent views taken by the id. Assessing Officer and ld. CIT(A)?
Hari Om Maratha, Judicial Member
1. This appeal by the department is directed against the order of CIT(A) dated 27.3.2000 for A.Y. 1996-97.
2. Briefly stated, the facts of the case are that the assessee derived income from manufacture and sale of conductors of different specifications. Besides this, the assessee company also executed job work. The assessee showed job work receipts and conversion charges receipts. The assessee also sold raw material, purchased by it from M/s P.G. Foils and earned profit therefrom. Income from interest, lease rent, dividend etc was also disclosed in P & L account.
3. The assessee purchased readymade conductors from M/s. P.G. Foils Ltd. Ahmedabad for a consideration of Rs. 12,25,05,970/- and sold it to State Electricity Boards for a consideration of Rs. 12,74,94,900/-, thus earning a gross profit of Rs. 49,88,930/- on this transaction.
4. The assessee has been doing job work of a number or parties and in this process it converts the raw materials supplied by such parties into Aluminum Conductors of different specifications He has been doing this work for the past several years. During this year the break up of job charges is as under:
Name of the Party Gross Invoice Debit Note Net Amount
Amount Issued Credited
M/s. P.G. Foils Ltd.,
Ahmedabad 73,72,897/- 56,70,828/- 17,02,068/-
M/s. Torrent Cables Ltd.,
Nadiad 8,31,555/- 25,044/- 8,06,511/-
M/s. General Engineering
Works, Faridabad. 62,330/- -- 62,330/-
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82,66,782/- 56,95,872/- 25,70,910/ -
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As the discussion in subsequent paragraph would he in relation to M/s. P.G. Foils Ltd., Ahmedabad only, it would be relevant to mention briefly about this concern. M/s. P.G. Foils Ltd. is a Public Limited Company in which majority share holding is with the Directors of M/s Prem Cables Pvt. Ltd. and their family members. Thus, the management of M/s. P.G. Foils Ltd. is in the hands of the Directors of the assessee company and their family members. Both these concerns have numerous financial and trading manufacturing transactions because M/s. P.G. Foils Ltd. is also engaged in manufacturing and trading activities of the items dealt by the assessee. The interlacing of transactions can also be appreciated from the fact that the assessee is selling raw materials to M/s P.G. Foils Ltd., executing job work for M/s. P.G. Foils Ltd. on the raw materials supplied by it, purchasing furnished goods (Conductors) which were manufactured by the assessee on Job Work basis from P.G. Foils Ltd. and lending and borrowing raw materials depending upon the availability of Aluminium (Ingots/Rods) with either of them.
The specifications and rates of job work undertaken by the assessee from M/s. P.G. Foils Ltd. are shown as under:
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SI. Invoice Nos. Quality Rate Charged Rate considered
No. in original while issuing
Invoice Per M.T. Debit Note Per M.T.
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01 Job 01 to Job 05 ASCRZEBRA 4,000 1,000 02 Job 38 -do- 5,000 1,000 03 Job 8A, Job 9, ASCR WEASEL 4,000 1,000 JOB 15, 16, 23 & 37 04 Job 6 ASCR PANTHER 4,000 1,000 05 Job 21, 22 -do- 5,000 1,000 06 Job 14 ACSR MOOSE 8,008 1,000 07 Job 25 -do- 5,000 1,000 08 Job 10, 24 ACSR DOG 5,000 1,000
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Thus, it is evident that while the assessee initially charged job rates varying from Rs. 4,000 per M.T. Rs. 8008 Per M.T., it subsequently reduced the job rates to a petty amount of Rs. 1,000/- per M.T. by issuing Debit Notes on 30.3.96. In this process aggregate sum of Debit Note so issued is for Rs. 56,70,828/- and so credited net amount of Rs. 17,02,068/- is credited in the Profit & Loss Account for taxation purposes. The assessee was, therefore, asked to explain the transactions undertaken with M/s. P.G. Foils Ltd. on this count and reasons for issuing Debit Notes for an aggregate amount of Rs. 56,70,828/- which resulted (sic) ting of taxable income by Rs. 56,70,828/-.
To explain the position, the assessee has submitted that job charges were charged by the office as per regular charges and TDS was also made by M/s. P.G. Foils Ltd. on the accounted for Job and Conversion bills. However, in the last date of accounting period when it was noticed that for the job charges there lies an agreement according to which job charges should not be more than agreed, hence the company M/s. P.G. Foils Ltd. raised Debit Notes and accordingly rate difference was allowed by the assessee company to the said concern. Copy of agreement was also enclosed. During the course of assessment proceedings, AR of the assessee also stated that the issue of Debit Notes has not affected revenue because M/s. P.G. Foils Ltd., which has been benefited on this count, has been regularly assessed to tax and has paid tax at the identical rate as that of the assessee. In this process AR also referred to the copy of computation of total income of M/s. P.G. Foils Ltd., Ahmedabad for A.Y. 1996-97 and Annual Report for A.Y. 1996-97. It was further stated that total income returned of M/s. P.G. Foils Ltd. is Rs. 2,30,61,636/- and, thus, there were no revenue loss.
5. But the Assessing Officer did not agree with the explanation of the assessee and concluded that the job work agreement relied by the assessee is nothing but colourable device to reduce taxable income. But the CIT(A), accepted this agreement to be genuine and thus deleted the major addition in question.
6. The department is aggrieved. We have heard the rival submissions, perused the evidence on record, and circumspectiously considered all the relevant facts, evidence and surrounding circumstances of this case.
7. The bone of contention in this case is the 'Agreement' in question. The ld. AO held, this agreement, between the assessee company and the M/s. P.G. Foils Ltd. to be colourable device to defeat payment of taxes. The reasons given by him are contained in pages 4 to 7 of his order, mainly given in point 'a' to 'j'. These reasons, we will discuss in later part of our order, at relevant places.
8. The CIT(A) has accepted this 'Agreement' dtd. 31.3.98 as genuine and has also accepted the explanations of the assessee company that it has received job charges and conversion charges under this agreement only. The reason for charging less conversion and job charges is given to be business compulsions of the assessee company.
9. To further narrate more relevant facts, the assessee company and M/s. P.G. Foils Ltd. are sister concerns, which are managed and controlled by same persons. Assessee Company used to receive, in earlier years, conversion charges varying from Rs. 4000/- to Rs. 8000/- per metric ton from M/s. P.G. Foils Ltd. But in this year it received only Rs. 1000/- per metric ton on account of job charges and conversion charges; that too, by issuing debit notes for these charges amounting to Rs. 56,70,828/- and Rs. 4,08,109/- respectively. It may be mentioned here that in the accounts, however, the assessee had charged at the previous rates and had raised bills against M/s. P.G. Foils Ltd. at the old rates and entries were made to that effect in the books; but at the fag end of the accounting year relevant to A.Y. 1996-97, these debit notes were issued. The reasons given by the assessee for this anomaly was the terms and conditions mentioned in 'this agreement', referred to above. The assessee-company purchased conductors at the same rate as it has purchased in earlier years, but had substantially reduced the rates for job work and conversion work. The reasons given by assessee-company were that it had to supply conductors to RSEB (Rajasthan State Electricity Board) and there were huge orders for that supply and to meet that the assessee company had to execute the impugned agreement with M/s. P.G. Foils.
10. We agree to that extent with ld. AR that it is the prudence of the assessee company, and not that of the department which is relevant to carry on its business. Yes, it is the assessee who is to take care of its business and to carry on its business in a way which benefits most to its interest. Nobody can deny this fact. The only worry of the department, which can be accounted for and to be relevant is that it has to watch if the assessee company had not employed any such methodology which could lead to evasion of tax. The department was to see, whether this agreement has been designed and devised to reduce the taxable income, or it is a genuine need or exigency of the assessee's business, whether this is a collusive document?
11. After careful consideration, the Assessing Officer came to the conclusion that it was a colourable device utilized by the assessee. The doubts raised by the Assessing Officer are not irrelevant or illegal. In past the assessee was getting more rate for these works from M/s. P.G. Foils Ltd. and also issued bills and entries on that basis in this F.Y. also. But at the fag end of the F.Y. debit notes were issued, in consonance of the terms and conditions of this impugned agreement. The doubts raised by ld. Assessing Officer are genuine, particularly when both concerns are sister concerns and managed by same persons. The Assessing Officer has given various reasons for the same. The CIT(A) has accepted this agreement to be genuine by holding that reduction in the rates per metric ton of job charges and conversion charges was only on account of business consideration. By doing so the assessee could manufacture conductors out of the raw materials supplied by P.G. Foils Ltd. at a reasonable rate so that it could earn huge profits by making supply of such conductors to RSEB.
12. We do not deny the factual situation narrated by ld. AR Shri G.S. Mehta that as per agreement this assessee had been given the credit of 'Modvat' and its liability stood reduced on account of Excise Duty by 400%, which ultimately resulted into better rate of profit, as compared to last year. This year rate of g.p. was 3.96% as compared to 1.17% last year. We are also in agreement with him that there was no change of activities of the company during this year, it supplied the conductors, mainly to RSEB. We also agree with ld. AR that this agreement was executed on 31.3.95, i.e., prior to accounting year in question which started on 1.4.1995. We also agree with ld. AR that this agreement is to be weighed in the light of the overall business interest of the assessee company. It is also true that last year the assessee had suffered heavy losses, and in this year positive income has been shown.
13. But the doubts raised by the department are that this agreement was executed after the assessee company had noticed huge profits and wanted to reduce taxable income.
14. To further elaborate, the Assessing Officer disbelieved the impugned agreement, because in the opening words of the Agreement, a reference has been made to the letter exchanged between assessee and M/s P.G. Foils Ltd. The assessee did not produce either the letters or the contents of these letters before the Assessing Officer. But, it is clear from the observation of the Assessing Officer on pg 4, that he never insisted or required the assessee to produce these letters. Otherwise also, these letters can be ignored by him on the basis of the same reasoning that when the 'Agreement' is a collusive one, then the letters can also be collusive. So, it seems that the Assessing Officer did not want to enquire about these letters. These letters are very significant to come to one conclusion about the impugned 'Agreement'.
15. In the next reason given in Sub-clause (b), it is stated that both the concerns are closely-knit companies, which are managed by nears and dears. But in our view, the Id Assessing Officer has ignored the fact that a company is a legal entity, separate from its promoters or Directors, and is governed by certain law as laid down by the Companies Act.
16. The next material reason given by the Id Assessing Office is that the assessee's as well as the conduct of M/s P.G. Foils Ltd., in recording the transactions regularly in their books of accounts also support the conclusion that the Agreement is nothing but a colourable device to reduce taxable profit. Tax at source had been deducted at regular intervals by M/s P.G. Foils Ltd., in normal manner on the job/conversion bills on invoice rates and tax so deducted had been deposited at regular intervals to the credit of the Central Government. The doubt of the Assessing Officer is that had there been an Agreement in force genuinely, M/s P.G. Foils Ltd. would have definitely indicated the error made by the assessee in the Bills and corrective action would have been taken then and there. But both the parties regularly followed the old rates. So, accordingly to the Assessing Officer, this conduct of the parties to the agreement is against the agreement itself.
17. As we have stated above, the assessee admits that this mistake was committed inadvertently, and that this is the only reason which ensued thinking against the Agreement in the mind of the Assessing Officer. But, at the same time, it is also not justified to ignore every other material, including the Agreement due to this mistake, may be, a very grave mistake for that matter. Can the mistakes be not corrected as and when detected?
18. On the other hand, the ld. CIT(A) accepted the submissions of the assessee that due to this 'Agreement' appellant could execute the huge orders received from RSEB for supply of conductors. The assessee was able to get raw material for manufacture of these conductors and that too at low cost. The assessee also saved Excise Duty and Sales Tax and took the credit of Modvat. The assessee had to suffer loss due to delay in execution of contract for supplying conductors to RSEB. The assessee had to pay Rs. 9,00,597/- last year but only Rs. 96,627/- during this year and due to which Gross Profit rate of the assessee was better during this year. So, these are important areas which remained unraveled by the Assessing Officer,
19. The important factor is that M/s P.G. Foils Ltd. did not benefit Under Section 80HHC, as has been observed by the Assessing Officer. The I.T. records of M/s P.G. Foils, which is assessed at Ahmedabad and in this year assessed at an income of Rs. 2,31,53,850/- vide order dated 29.1.99 wherein job charges as received by this assessee have been accepted by the department.
20. In our opinion this is also a most important fact which the Assessing Officer did not take notice of, to come to a conclusion. This fact also required investigation by the Assessing Officer.
21. The finding of the ld. CIT(A) that by this agreement this assessee has reduced Excise duty by 400% and thus gains for it were much more higher, which ultimately resulted into better rate of profit this year as compared to last year; and in fact Net Profit of this year are better than the last year. The reason was this arrangement between the assessee and M/s P.G. Foils.
22. This aspect has not been properly considered by the Assessing Officer. The ld. D.R. has also not been able either to substantiate or refute the same. It would not be justified to come a conclusion by picking some facts from here and some from there, to complete a conclusion.
23. After careful consideration of this agreement, in the light of the relevant facts as mentioned above, we are of the opinion that, there are certain inherent defects in the investigation of this agreement. When a company enters into any agreement, a resolution of the Board of directors of the company is passed and the same is to be sent to the Registrar of the Companies. This aspect has not been verified by the department. The other important fact about the date of purchase of the stamp papers, has also been not verified by the Assessing Officer.
24. We may, however, mention other reasons which weighed in our mind to restore the issues to the file of Assessing Officer, which are:
The opening sentence in the impugned agreement referred to letters exchanged between the parties, to the agreement. The ld. Assessing Officer has mentioned in his order that no such correspondence was produced before him by the assessee. But ld. AR has produced copies of letters which are contained in the Paper Book, which are the correspondence dated 02.02.95, 17.02,95, 18.02.95 and 20.02.95. According to these letters, a rate for such work was settled and finally an agreement was drawn, for making 'the terms and conditions' legally binding on the parties. This aspect is a very material aspect in this regard, which remained uninvestigated by the Assessing Officer.
25. The impugned agreement was executed before the commencing of the relevant accounting period, so this cannot be said to be an afterthought, unless it is proved that it is an ante dated document, by getting evidence from, stamp vendor, deed writer, from Registrar of Companies etc, as we have mentioned above.
26. The Assessing Officer has also pointed that M/s. P.G, Foils Ltd. has claimed deduction Under Section 80 HHC for Rs. 44,82,097/- on business income of Rs. 27,54,3733/-. This fact is most relevant. But this factum has not been verified and properly investigated into.
27. The other main point which the Assessing Officer has noticed is that the assessee company had raised the bills on old rates as it was raised in the past. This is true, and this is the only 'fact' which led the Assessing Officer to doubt the genuinity of the impugned agreement. But the explanation of the assessee that this was clerical error and did not render the agreement invalid or non est, has not been properly considered by the ld. Assessing Officer.
28. M/s. P.G. Foils Ltd. is assessed at Ahmedabad and its income was assessed at Rs. 2,31,53,850/- vide order dated 29.1.99, wherein job charges and conversion charges as received by this assessee after considering these debit notes only have been accepted. This aspect has not been reasonably disposed of by A.O., because these debit notes have a direct bearing on the impugned agreement.
29. The Tribunal being the final fact-finding body, it is desirable that full and final facts are ascertained from available records and if some facts are missing, the matter should be restored so that full and final facts are established to decide an important issue on the basis of available facts only is not justified, because it does good to no party to the litigation. The Assessing Officer has taken one view and the ld. CIT(A) has taken another view, so far as impugned agreement is concerned. But neither the Assessing Officer (sic) the ld. CIT(A) has considered the above noted factors, white arriving at a decision. The reasons given by them are not complete ones. The chains are missing and not complete. Any judgment cannot be based on half furnished facts. The finding is to be objective and not subjective one.
30. So, in the light of the above observations, we are of the considered opinion that this issue be sent back to the file of the Assessing Officer, with the direction to verify the genuinity of this agreement from all angles and to take a decision afresh on the same.
31. In the result, this appeal is accepted for statistical purpose.
Joginder Pall, Accountant Member
1. I have gone through the proposed order of my ld. Brother (Judicial Member). I have not been able to persuade myself to agree to the view taken by my ld. Brother. I, therefore, proceed to write my own order. In this appeal, the revenue has raised the following three grounds:
On the facts and in the circumstances of the case the ld. CIT(A) has erred in:
i) deleting without appreciating fully the facts brought on record by the AO, the addition of Rs. 56,70,828/- on account of debit note issued for job charges.
ii) deleting without appreciating fully the facts brought on record by the AO, the addition of Rs. 4,08,109/- made on account of debit note issued for conversion charges.
iii) holding the agreement entered into by the assessee with M/s P.G. Foils Ltd. as genuine ignoring the facts and circumstances as well as the reasons mentioned in assessment order.
2. The outcome of this appeal solely rests on the facts of the case. Therefore, I feel, the facts of the case require little detailed discussion. The same are that the assessee is a Private Ltd. Co. in which the Directors of M/s P.G. Foils Ltd. are the Directors. M/s P.G. Foils Ltd. is a limited company IN which the Directors of the assessee company and their family members hold the majority snare holdings. Thus, the management and control over both the companies are in the hands of the same Directors and their family-members. The assessee filed the return of income declaring therein income of Rs. 64,94,934/- after claiming set off of brought forward depreciation for the assessment year 1995-96. The assessee derived income from trading of raw-materials i.e. Aluminum ingots and rods without doing any processing for which the sales were made to M/s P.G. Foils Ltd. for a consideration of Rs. 1,69,31,160/-. Such raw materials were purchased for Rs. 1,67,88,610, thus, resulting in a gross profit of Rs. 1,42,550/-. The assessee also purchased ready-made conductors from M/s P.G. Foils Ltd., Ahmedabad for a consideration of Rs. 12,25,05,970/- and sold the same to the State Electricity Boards for a consideration of Rs. 12,74,94,900/-. resulting in g.p. of Rs. 49,88,930/-.
3. Apart from these activities, the assessee also earned income by way of job charges for converting the raw-material supplied by the parties into Aluminium conductors of different specifications. The assessee had been undertaking such activities for the past several years as well as the succeeding years. The AO observed that out of the gross job charges of Rs. 82,66,782/-, the assessee had shown job Charges at Rs. 73,72,897/- from M/s. P.O. Foils Ltd. However, subsequently, debit notes were issued by M/s P.G. Foils Ltd. amounting to Rs. 56,70,828/-, thus, reducing the amount of job charges receivable from M/s P.G. Foils Ltd., Ahmedabad from Rs. 73,72,897/- to Rs. 17,02.068/- The details of gross amounts raised against the various parties, debit notes issued and the net amount as recorded on page 2 of the assessment order as under:
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Name of the Gross Invoice Debit Note Net Amount Party Amount Credited
--------------------------------------------------------------------------
M/S. P.G. Foils 73,72,897/- 56,70 828/- 17,02,0687/- Ltd., Ahmedabad
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M/s. Torrent 8,31,555/- 25,044/- 8,06,511/- Cables Ltd., Nadiad
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M/s. General 62,330/- - 627330/- Engineering Works, Faridabad.
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82,66,782/- 56,95,872/- 25 70,910/-
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The AO also observed that the rate charged as per original invoices, depending upon the specifications and the rates considered while issuing debit notes per M.T. were as under:
--------------------------------------------------------------------------
Sl. Invoice Nos. Quality Rate Rate considered
No. Charged while issuing
in original Debit Note Per
Invoice M.P.
per M.T.
-------------------------------------------------------------------------- 1 Job 01 to Job 05. ASCR 4,000 1,000 ZEBRA
-------------------------------------------------------------------------- 2 Job 38 -do- 5,000 1,000
--------------------------------------------------------------------------
3 Job 8A, Job 9, ASCR 4,000 1,000
Job 15, 16, 23 & 37 WEASEL
-------------------------------------------------------------------------- 4 Job 6 ASCR 4,000 1,000 PANTHER
-------------------------------------------------------------------------- 5 Job 21, 22 -do- 4,000 1,000
-------------------------------------------------------------------------- 6 Job 14 ACSR 8,008 1,000
--------------------------------------------------------------------------
MOOSE 7 Job 25 -do- 5,000 1,000
-------------------------------------------------------------------------- 8 Job 10, 24 ACSR 5,000 1,000 DOG
--------------------------------------------------------------------------
Thus, the AO observed that while the assessee initially charged job charges varying from Rs. 400 per MT to Rs. 800 per MT but subsequently reduced the job charges to a petty amount of Rs. 1,000/- per MT by issuing debit notes on 30.3.1996 jr. the process, the assessee passed on the benefit of Rs. 56,70,828/- to M/s P.G. Foils Ltd. and thereby reduced its taxable income by the same amount.
4. Likewise, the AO further observed that the assessee had charged conversion charges as per original invoices at the rates of Rs. 4000/- and Rs. 3000/- per MT. Subsequently the assessee revised the rate to Rs. 2,000/- per MT in respect of (sic) In this manner, a benefit of Rs. 4,08,109/- was passed to M/s but Foils Ltd. The AO confronted these facts to the assessee the assessee explained that job charges were charged as per regular rates by both the parties i.e. M/s Prem Cables and M/s P.G. Foils Ltd. However, on the last date of accounting period relevant to assessment year under reference, it was noticed that there was an agreement between the two parties executed on 31.3.1995 as per which it was agreed to charge the job charges from M/s P.G. Foils Ltd. @ Rs. 1,000/- per MT. Therefore, M/s P.G. Foils Ltd. raised the debit notes on 30.3.95 and the assessee allowed the rate difference to the said concern. Same explanation was given for reducing the conversion charges. However, the AO observed that the agreement dated 31.3.1995 was nothing but a colourable device for reducing the genuine taxable income of the assesses. He based his finding on the following facts:
i) In the agreement, a reference has been made about the exchange of letters between M/s P.G. Foils Ltd. and the assessee. However, these letters were not produced. The agreement does not spell out the reasons under which the assessee agreed to accept the reduced rates of a nominal amount, though the scope of activities undertaker, by the assessee remained the same as in the past and subsequent years. The AO also mentioned that in the assessment year 1995-96, the assessee had received job charges @ Rs. 5,365/- per MT and for the subsequent assessment year i.e. 1997-98, the assessee received job charges @ Rs. 4,0007- to Rs. 5,000/- per MT. Thus, there was absolutely no justification for accepting the job charges at a nominal amount of Rs. 1,000/- per MT. The AO also observed that the assessee failed to discharge the onus in establishing that the reduced rates were accepted due to commercial consideration
ii) The agreement has been signed by Shri Ashok P. Shah on behalf of M/s Prem Cables Ltd. P. Ltd. i.e. the assessee and Shri Pankaj P. shah on behalf of PGFL Both these persons were related to each other and Shri Pankaj P. Shah also happened to be the Director of the assessee company and he was paid remuneration of Rs. 75,000/-
iii) By referring to the first three clauses of the agreement, the assessee had bound itself to undertake job work @ Rs. 1,000/- per MT irrespective of the size and quantity so required by M/s P.G. Foils Ltd. There was absolutely no justification for agreeing to such reduced rate i.e. 20% of the normal rates being charged in the past and subsequent assessment years. He also observed that the assessee charged the same job charges from other parties i.e. @ old rates and not at the reduced rates.
iv) The AO also observed that the assessee failed in (sic) separate trading accounts in respect of various activities undertaken by it on the ground that it was not possible to do so because the same labour and other manufacturing inputs have been utilized both for manufacturing and the job work and conversion activities. The AO observed that if the manufacturing expenses of Rs. 1,33,83,807/- were allocated between the manufacturing of conductors and balance for job charges/conversion charges, the same would yield substantial g.p. on manufacturing activities. However, there would be a loss on account of job work and conversion activities by taking the reduced rates received from M/s P.G. Foils Ltd.
v) The agreement was sweeping in nature as it did not provide differential rates for the various types of conductors having different sizes and specifications. The fact that in the past and future, the differential rates had been charged show that labour cost involved was higher in respect of certain type of conductors vis-a-vis others.
vi) The AO also observed that inspite of agreement, different rates had been charged for conversion charges by way of debit note dated 30.03.96. The rate mentioned in the agreement for conversion work was also Rs. 1,000/- per MT but as per debit note the same was charged at Rs. 2,000/- per MT.
vii) M/s P.G. Foils Ltd. also recorded the job charges as per the original invoices issued by the assessee. In fact, even on last date of the accounting year, job charges were credited to assessee's account at the old rates. The tax was also deducted at source on the relevant dates and promptly paid the same to the Government account by taking the amount of job charges as per original invoices. These details are indicated on page 6 of the assessment order.
Date of Amount of Date of Date of Issue
payment/ credit for job payment TDS certificate
credit work & of tax deducted Certificate
Conversion
---------- ---------- ---------------- -----------------
30.4.95 1,174 12.5.95 30.5.95
30.6.95 20,73,808 7.7.95 9.7.95
31.10.95 8,33,925 11.1.96 12.1.96
31.11.95 6,84,900 7.12.95 10.12.95
31.1.96 5,37,669 8.2.96 9.2.96
29.2.96 34,84,517 3.7.96 9.3.96
31.3.96 23,09,442 30.5.96 31.5.96
----------
99,25,465
Had there been genuine agreement entered into on the last date of the previous accounting year relevant to assessment year 1995-96 M/s P.G. Foils Ltd. would have noticed the same and could have not deducted the tax at source by taking the amounts as per original invoices, bills and issued form No. 16A accordingly. He further observed that if the debit note had been issued on 30.3.96, there was no need for M/s P.G. Foils Ltd. to credit an amount of Rs. 23,09,442/- by way of job charges at the old rates when, in fact, the debit note already stood issued at the reduced rates on 30.3.96
viii) The excise duty was also paid regularly on the basis of original bills issued by the assessee.
Thus, the AO concluded that the so-called agreement was only a device to reduce the taxable income of the assessee. While coming to such conclusion he also took into account the fact that by claiming higher income, M/s P.G. Foils Ltd. had claimed deduction under Section 8HHC of Rs. 44,82,097/- on the business income of Rs. 2,75,43,733/-. Accordingly, the AO made additions of Rs. 56,70,828/- and Rs. 4,08,109/-.
5. Being aggrieved, the assessee impugned the additions in appeal before the CIT(A). It was submitted before the CIT(A) that the agreement dated 31.3.75 was made by taking into account the business considerations. The agreement was also made at the beginning of the year. It was submitted that there a bona fide mistake on the part of both the companies in not taking cognizance of the agreement at the time of preparing the invoices, bills and job charges were debited to the account of M/s P.G. Foils Ltd. at the old rates Likewise M/s P.G. Foils Ltd. also credited the account of the assessee at the old rates. However, this mistake was noticed on 30.3.96 i.e. just a day before the last day of the accounting year and accordingly M/s P.G. Foil Ltd. issued debit notes and as a result reduced the job charges and conversion charges for the aforesaid amounts it was also submitted that due to such arrangements, the assessee was able to execute huge orders received for supply of conductors to the Electricity Boards. The assessee also did not suffer any loss due to delay in execution of contracts for supply of conductors to State Electricity Board as the assessee had to pay only a sum of Rs. 96,627/- by way of penalty whereas in the immediately preceding assessment year the assessee suffered a penalty of Rs. 9,00,597/. It was also submitted that as a result of such arrangements the assessee earned a profit as against loss suffered in the earlier assessment year. It was also submitted that as a result of such agreement the assessee was allowed modvat credit. It was also contended that it was not a case of diversion of profit to M/s P.G. Foils Ltd. as income shown in that was case Rs. 2,31,43,850/- i.e. much higher than the income shown by the assessee. Therefore, it could not be considered as an attempt to reduce me taxable income of the assessee. Accepting the contentions of the assesses, the ld. CIT(A) has deleted both the additions aggregating to Rs. 60,78,937/- by recording the following finding in para 5 or the impugned order:
I have considered the submissions or the ld. counsel very carefully in this regard. I have also seen the reasoning given by the AO for making additions on account of debit notes for job charges and conversion charges. After due consideration of the matter, I hold that the AO was not justified in making these additions by holding that the agreement between the appellant and M/s P.G. Foils Ltd. was a colourable device to reduce the genuine income of the appellant because the AO had laid too much stress on the reduction in rates for job charges and conversion charges but he had not seen overall fact of such reduction in rates. In my view, reducing rate per metric ton of job charges and conversion charges was only on account of business consideration because by doing so appellant could get the manufactured conductors out of the raw-material supplied by M/s P.G. Foils Ltd. at a reasonable rate so that it could earn huge profits by making supply of such conductors to RSEB. It is to be noted here that though rates were reduced on account of job charge and conversion charges but at the same time as per agreement appellant had been given the credit of Modavet and appellant's liability stood reduced on account of excise duty. In fact, appellants liability of excise duty is reduced by 400% and thus gain for the appellant were much more which ultimately resulted into better rate of profit this year as compared to last year and, in fact, the net profit of the appellant this year was better on account of this fact alone. Therefore, in my view, agreement entered into with M/s P.G. Foils Ltd. was not a colourable device to reduce the income of the appellant but in fact it seems to be in favour of the appellant. It is to be mentioned here that in case of P.G. Foils Ltd. the modified account of job charges and conversion charges were accepted. I therefore, hold that the AO was not justified in making these additions and the additions made by the AO are hereby deleted. The appellant will, therefore, get a relief of Rs. 60,78,937/-
Aggrieved, the revenue has now brought this matter in appeal before the Tribunal. The submissions made by both the parties have been recorded by my ld. Brother in his proposed draft order Therefore these are not repeated here. However, in nutshell, while the revenue has heavily relied on the order of the AO, the assessee has relied on the order of CIT(A) and reiterated the submissions which are made before the authorities below.
6. After hearing both the parties now the only issue that requires to be decided by the Bench is whether on the basis of facts and material placed on record, the AO was justified in coming to conclusion that agreement dated 31.3.1995 was a colourable device for reducing the taxable income or the CIT(A) was justified in holding otherwise and thereby deleting the impugned additions. From the facts discussed above, it is obvious that for the purpose of reducing job charges and conversion charges the assessee has heavily relied on the agreement dated 31st March, 1995 which could not be taken into account by both the parties during the accounting year under reference as they continued to show the job charges as per original invoices, bills etc.. Even the tax was deducted at source by M/s P.G. Foils Ltd. as per the original amounts shown in the invoices/bills and paid the same at the relevant time. TDS in Form No. 16A was also issued accordingly. Strong reliance has been placed on the agreement which is titled as job work agreement. It would be in the fitness of things to reproduce herein the relevant clauses of the agreement which are as under:
i) The supplier will supply to the Manufacturer Aluminium Ingots/Roads/Scrap on job work basis for conversion into AAC & ACSR Conducers
ii) The Mfr. will fully cooperate and carryout all responsible direction of the supplier for manufacturing AAc/ACSR Conductors.
iii) For the above work the Mfr. will raise their bill @ Rs. 1000/- per MT during the period 01.04.95 to 31.3.96 irrespective of size & quantity of conductor so required by the supplier.
iv) Excise duty will be paid by the Prem Cables Pvt. Ltd., at the time of removal of the goods. Modvat credit will be taken by Prem Cables (P) Ltd., on input material supplied by PG Foils Ltd. as per excise rules and necessary credit the given to PG Foils Limited at year end
v) The specification for the conductors to be manufactured on Job shall be given by supplier to manufacturer verbal from limit to time with the consent of manufacturer
vi) The finished goods manufactured by Prem Cables (P) Ltd. will be taken in possession by PG Foils Ltd. in the godown of Prem Cables (P) Ltd., before clearing/Removing the goods/conductors and the goods/conductors will remain in the godown of Prem Cables P. Ltd., as ownership of PG Foils Ltd., till the ownership is transferred to them.
vii) In case of any dispute pertaining to this agreement, the matter shall be referred to a mutually appointed arbitrator and decision of such arbitrator shall be final and binding on both the parties. This agreement has been signed and entered into between both the parties on 31st day of March 1995.
7. A plain reading of the above mentioned (sic) this is heavily loaded in favour of M/s P.G. Foils Ltd. (sic) any clause in the agreement which is in favour of the assessee. There is no clause in the agreement as per which M/s P.G. Foils Ltd. was required to supply the raw-material for the job work on time. There is also no clause in the agreement which binds the supplier i.e. M/s P.G. Foils Ltd. to supply the finished goods to assessee at concessional rate. The agreement does not mention any compensatory or penal clause in case raw-material are not supplied to the assessee on time. It is also a fact that the agreement is supposed to have been made on 31.3.1995 i.e. before the start of the accounting period relevant to assessment year under reference. It is not disputed by the assessee that it was making loss prior to 31.3.1995. On this date, the company would have not imagined that by passing a benefit of Rs. 60,00,000/- to M/s P.G. Foils Ltd., the company would earn profit by reducing the rates of job charges and conversion charges to 20% of the amounts being charged in the past and also for subsequent years. It meant that, by entering into such agreement, the assessee ensured for itself substantial increase in the quantum of loss already suffered by it. Thus, the argument of the assessee that by entering into such agreement, the assessee has safe guarded its business interests or the same was executed for commercial considerations/expediency does not appear to be well founded and at least does not appear so from the clauses of agreement.
8. Much has been said about the assessee's claim that by entering into such agreement, the assessee was able to supply the conductors to State Electricity Board on time which resulted in a lesser penalty of Rs. 96,626/- as compared to at Rs. 9,00,597/- in the last year. As noted earlier there is hardly any clause in the agreement as per which M/s P.G. Foils Ltd. was under an obligation to supply the raw-materials on the due dates. There is no clause in the agreement as per which M/s P.G. Foils Ltd. was made liable to pay compensations or damages for any delay in supply of raw materials. It is also undisputed fact that even for the assessment year under reference the assessee was visited with a penalty of Rs. 96,627/-. If the same was due to delay in supply of raw materials for which M/s P.G. Foils Ltd. was responsible the assessee could have at least asked that concern to compensate the loss in any case, there is no clause in the agreement as per which M/s P.G. Foils Ltd. was under an obligation to ensure timely supply and failure on their part would entitle the assessee for some compensation or damages. Therefore, this submission of the assessee has no merit.
9. As regards the contention of the assessee that as a result of agreement with M/s P.G. Foils Ltd. entered on the last day of the previous accounting year, the assessee earned better profit. The assessee contended that M/s P.G. Foils Ltd. supplied conductors to the assessee on time and as a result the assessee was able to execute huge orders with Rajasthan State Electricity Board resulting in better profit. It is observed that no such, benefit flows from the agreement- As mentioned earlier, the agreement is titled as job work agreement. It spells out the scope of activities relating to job work alone i.e. M/s P.G. Foils Ltd. would supply the raw-materials for job work for which job charges would be paid to the assessee at a particular rate. Nowhere it mentions that M/s P.G. Foils Ltd. shall supply to the assessee conductors at a concessional rate and within time. Therefore, no such benefit flows from the agreement. In fact, on a specific query from the Bench, the ld. counsel conceded before us that M/s P.G. Foils Ltd. charged the same price for conductors as was charged and no concession was allowed Thus, if the assessee has earned such profit, it is co-inciental only and cannot be attributed to the agreement for reducing the job charges to such a nominal amount.
10. It is the contention of the assessee that as a result of such agreement, the assessee was able to avail of modvat credit. The relevant clauses of the agreement have already been reproduced in the preceding paragraph. However, clause 4 of the agreement which refers to modvat credit is again reproduced for the sake of convenience:
Excise duty will be paid by the Prem Cables P. Ltd. at the time of removal of the goods. Modvat credit will be taken by Prem Cables (P) Ltd. on input material supplied by P.G. Foils Ltd. as per excise rules and necessary credit given to PG Foils Limited at year end.
As mentioned earlier, this agreement is termed as job work agreement. As per the scope of the agreement, the supplier i.e. M/s P.G. Foils Ltd. were required to supply raw-materials to the assessee for job work and conversion work for which the assessee was entitled to receive job charges and conversion charges Since the raw-materials were supplied by M/s P.G. Foils Ltd. it was their responsibility to pay excise duty. However, the agreement spells out that such excise duty shall be paid by M/s Prem Caples P. Ltd. at the time of removal of goods. Since the excise duty was paid by me assessee, it was also spelt out that modvat credit will be taken by M/s Prem Cables P. Ltd. on input materials supplied by M/s P.G. Foils Ltd. which was, in fact, due to M/s P.G. Foils Ltd. This clause is provided in the agreement for the reason that the excise duty was also paid by the assessee which otherwise was payable by M/s P.G. Foils Ltd.. Besides, the clause further provides that credit on account of modvat be given to M/s P.G. Foils Ltd. at year end. A plain reading of this clause shows that the assessee was to pay excise duty in respect of raw-materials, which otherwise was the responsibility of M/s P.G. Foils Ltd. because the raw-materials were to be supplied by the suppliers i.e. M/s P.G. Foils Ltd. Since the assessee agreed to pay excise duty, it was provided that credit for modvat be taken by the assessee on input materials supplied by M/s P.G. Foils Ltd.. It further states that necessary credit be given to M/s P.G. Foils Ltd. at year end. Thus, there is no such clause in the agreement as per which the assessee was entitled to some additional benefit over and above the job charges and conversion charges by the assessee from M/s P.G. Foils Ltd. In fact, the assessee was allowed a period of 3 months to quantity the benefit accruing to the assessee in monetary terms as a result of such agreement. No such specific details have been conversion work was not the subject matter of present agreement dated 31.3.95. This contention of the assessee appears to be correct as it does not refer to conversion work and conversion charges. The title of the agreement is 'Job Work Agreement and it does not include conversion work. Still, however, M/s P.G. Foils Ltd. issued similar debit note on 30.3.96 reducing the conversion charges to Rs. 2.000/- P.M.T. as against rates at Rs. 4,000/- and Rs. 3,000/- P.M.T. charged as per invoices. The assessee's explanation that this was done through mutual discussion is not supported by any evidence Not a single letter or note exchanged between the two for reducing such charges has been placed on record. The reasons why the assessee accepted reduced conversion charges of Rs. 4,08,109/- on 30.3.96 are not known. It, thus, appears that even the job charges were not reduced on the basis of agreement.
13. Besides, it was conceded before us that the scope of activities undertaken by the assessee for the assessment year under reference and in the earlier and subsequent years remained the same Similarly, the assessee was not allowed any concession in the price at which purchased conductors from M/s P.G. Foils Ltd. Therefore, the logic of accepting the reduced rates at 20% of the normal rate is inexplicable. As regards reference to an agreement requiring approval of the Board of Directors of the company mentioned in para 23 of the order of my ld. Brother, I am of the view that the addition has not been made for the lack of such resolution and the CIT(A) has not deleted the same on account of existence of the same. No such pleadings have been made before us by either parties. Therefore, in my view such inquiry is not necessary. Similarly, the finding of the AC that M/s P.G. Foils Ltd. claimed deduction under Section 80HHC on higher business income which also included reduction in job charges and conversion charges amounting to Rs. 60,00,000/- (approximately) finding of fact which is not disputed by the assessee. Therefore, no further inquiry is needed as the fact already brought on record is sufficient to decide this issue. Further, the fact that M/s P.G. Foils Ltd. is had higher income is not relevant what is relevant is to whom such income belongs. If the income belongs to the assessee, the same is taxable in its hands and not in the hands of M/s P.G. Foils Ltd. The facts on record show that such income indeed belongs to the assessee.
14. Further, it is also observed from a copy of the agreement placed on our file that stamp paper was purchased on 12.1.95. Thereafter, letters dated 2.2.95, 7.2.95, 18.2.95 and 20.2.95 were exchanged between M/s P.G. Foils Ltd. and the assessee and the agreement was made on 31.3.95. This shows that preparation of making the agreement preceded before the need for making the agreement was felt and the letters were exchanged in February, 1995. These facts do not inspire much confidence about the genuineness of the agreement, though my findings are not based purely on this fact.
15. Thus, in the light of detailed discussion in the preceding paragraphs, I am of the considered opinion that the AO was justified in coming to conclusion that the agreement was only a device for reducing the profits of the assessee and making the impugned additions of Rs. 56,70,828/- and Rs. 4,08,109/-. The ld. CIT(A) has misled himself in taking cognizance of irrelevant factors while deleting the additions He has not property appreciated (sic) points raised in the assessment order. Therefore the order of the CIT(A) is set aside and that of the AO restored. the amounts of appeal of the revenue are accordingly allowed.
In the result, the appeal is allowed.