Rajasthan High Court - Jaipur
Milap Textile Mills vs Dy. Cit on 2 April, 2004
Equivalent citations: (2004)86TTJ(NULL)1125
ORDER
N.K. Saint A.M. These two cross appeals by department and assessee are directed against the order of Commissioner (Appeals) dated 13-12-1993. Since the main issue involved is common and the appeals were heard together, so these are being disposed of by this consolidated order for the sake of convenience.
2. The only issue raised by the assessee and ground No. 2 in departmental appeal relate to the sustenance/deletion of commission expenses.
The assessee was engaged in the business of processing of cloth, i.e., the assessee purchased gray cloth from the market and then carried out the activities of bleaching, dyeing, printing, finishing, and packing etc., and then sold it. During the year the assessee paid brokerage/commission of Rs. 7,29,602 to M/s Hindustan Textile Agency, Balotra which was paid at 3.5 per cent of the sales effected through that party. According to the assessing officer provisions of section 40(a)(2) were applicable since sole selling agent M/s Hindustan Textile Agency was a sister concern of the assessee. Before the assessing officer the assessee stated that the aforesaid concern was appointed sole selling agent long back and commission at 3.5 per cent had been paid for the period relevant to assessment years 1976-77 to 1982-83. It was stated that on account of excellent handling of the sales by the agent the sales had risen from Rs. 83,72,460 in the year 1975-76 to Rs. 2,22,09,939 for the year 1982-83 and in the succeeding year, i.e., accounting year 1982-83 relevant to assessment year 1983-84 the sale came down to Rs. 1,44,48,285 when the commission was reduced to 2.75 per cent from 3.50 per cent. It was contended that the transactions even with relatives or associate concerns could not be disregarded and price paid, as commission, could not be disregarded unless it was shown by the department that the transaction was sham or commission paid was not really paid. The reliance was placed on the judgment of Hon'ble Gujrat High Court in the case of Voltamp Transformers (P) Ltd. v. CIT (1981) 129 ITR 105 (Guj). It was stated that the commission payment to M/s Hindustan Textile Agency was accepted as reasonable since assessment year 1976-77 and it was incorrect to disallow a part of the same payment. The reliance was placed on the following judgments :
(i) Income Tax Officer v. Sh. Laxmi Textile & Allied Corpn. 40 Tax World 42
(ii) Mehta Transport Co. v. Income Tax Officer (1988) 31 TTJ (Ahd) 48
(iii) CIT v. Kumar Engineers (1989) 178 ITR 630 (P&H).
As regards to the comparable cases quoted by the assessing officer the assessee stated that case was not comparable because in the case of M/s Digvijay Textiles, the dealing was in printing and dyeing of sarees whereas the assessee was engaged in dyeing and printing of coarse cloth used for dress material. The assessee relied the case of M/s. Madhav Textiles and stated that this concern was carrying on dyeing and printing of cloth which was similar to that of assessee and that concern was paying commission at 3.25 per cent to its sole selling agent. The assessing officer observed that in the case of M/s. Digvijay Textiles, commission payment to sole selling agent was only 2.5 per cent. However, considering the fact that the turnover of M/s. Digvijay Textiles was fast and their goods had better market than that of the assessee's product, slightly higher rate of commission payment by the assessee may be treated as reasonable. He, therefore, treated the payment of commission at 2.75 per cent as fair and reasonable. The assessing officer also pointed out that in the subsequent year the assessee itself had reduced the payment of commission to 2.75 per cent, therefore, the assessing officer allowed commission at Rs. 6,06,835 as against claim of the assessee at Rs. 7,72,350. Accordingly, the difference between two figures, i.e., Rs. 1,65,515 was treated as excess payment of commission and disallowance was made under section 40(a)(2) of the Income Tax Act.
3. Before the learned Commissioner (Appeals) it was stated that the commission paid to the sister concern was not abnormal and was quite in consonance with the rate of commission payment made to third party. It was stated that such commission was paid in the past also but no disallowance had been made. The assessee agreed that in the subsequent year commission payment to this party had been reduced to 2.75 per cent, however stated that the assessing officer had not seen the background for reduction in rate of commission. Therefore, he was not justified in disallowing the commission at 0.75 per cent.
The learned Commissioner (Appeals) after considering the submissions of the assessee observed that no doubt the assessee reduced the rate of commission payment to same party in the subsequent year and the reason for reduction was stated that in the earlier year this party was only sole selling agent but in the subsequent year this party also took selling agency of another party namely M/s. Rajkamal Textile, therefore, the assessee reduced the rate of commission to its sister concern since the party was not taking much interest in the selling of the goods of the assessee. The learned Commissioner (Appeals) pointed out that the sales of the assessee got reduced due to the reduction of commission to the sole selling agent and that the assessing officer had not commented upon the reply of the assessee to justify his action even when called upon to do so. However, the learned Commissioner (Appeals) sustained the addition of Rs. 65,515 and allowed a relief of Rs. 1,00,000.
4. Now the department is in appeal against the relief of Rs. 1,00,000 while the assessee is in appeal against the sustenance of the disallowance of Rs. 65,515.
The learned Departmental Representative supported the order of the assessing officer and stated that in the subsequent year the assessee itself reduced the commission to 2.75 per cent, therefore, the assessing officer was justified in considering the commission at 2.75 per cent as fair and reasonable. It was further stated that the learned Commissioner (Appeals) has not given any cogent reason for allowing the relief. In his rival submissions learned counsel for the assessee reiterated the submissions made before the authorities below and further stated that the assessing officer while accepting the commission at 2.75 per cent had not appreciated this vital fact that in subsequent year M/s Hindustan Textile Agency also got the agency of M/s Rajkamal Textiles and therefore, the assessee reduced the commission and due to that reduction the business was adversely effected since the sale was reduced from Rs. 2,22,09,939 to Rs. 1,44,48,285. It was stated that the commission at 3.5 per cent was paid by the assessee to the sole selling agent from very beginning of the business till the year relevant to assessment year under consideration and earlier no disallowance had been made by the assessing officer. It was further stated that the learned Commissioner (Appeals) while sustaining the disallowance of Rs. 65,515 had not given any cogent reason and only sustained the same on the basis of, surmises and conjectures. It was argued that to invoke jurisdiction under section 40(a)(2) the assessing officer was required to record a clear finding by making a comparison with the payment of expenditure made by the assessee vis-a-vis fair market value of the goods/services etc. towards which such payment had been made. However, no such action had been taken by the assessing officer. The reliance was placed on the judgment of Hon'ble Supreme Court in the case of Upper India Publishing House (P) Ltd. v. CIT (1979) 117 ITR 569 (SC). It was further stated that the commission was not solely paid for promoting sales but for various other administrative and related functions also, like:
(i)The agent procures orders from the buyers and places the indent with the principal.
(ii) The agent ensures delivery of goods to the buyer.
(iii) The agent appoints sub agent to carry out its work.
(iv) The agent advertises the product of the assessee.
(v) The agent will submit timely report about general market conditions.
(vi) The agent ensures the payment from the parties.
(vii) The agent will also be responsible for the bad debts, if any.
On the basis of aforesaid submissions it was stated that the commission at 3.5 per cent was not at all excessive or unreasonable. It was also stated that the transaction of paying commission was duly supported by an agreement executed on 30-10-1973 between the assessee and M/s Hindustan Textile Agency. The reference was made to page Nos. 65 to 69 of the paper book. Accordingly, it was submitted that the payment of commission was a contractual obligation. On the basis of aforesaid submissions, the learned counsel for the assessee prayed to delete the disallowance sustained by Commissioner (Appeals).
5. We have considered the rival submissions and carefully gone through the material available on the record. In the instant case, it is noticed that M/s. Hindustan Textile Agency a sister concern of the assessee, was acting as sole selling agent and for that purpose there was an agreement which was executed on 30-10-1073. It is also noticed that the commission at 3.5 per cent was paid by the assessee to M/s Hindustan Textile Agency from very beginning of its business till the year relevant to the assessment year under consideration and no such disallowance had been made in past. It seems that the assessing officer allowed the at 2.75 per cent only on the basis that in the subsequent year the assessee itself reduced the commission to M/s. Hindustan Textile Agency at 2.75 per cent of the sales. However, the assessing officer had not considered this fact that M/s. Hindustan Textile Agency. was earlier acting as sole selling agent for the assessee only but, in the succeeding year agency of another competitive concern, i.e., M/s. Rajkamal Textiles had been taken by the sole selling agent. Only for that reason the assessee reduced the commission to the sole selling agent. The assessing officer in the instant case had not disputed that M/s Hindustan Textile Agency was acting as sole selling agent and the commission at 3.5 per cent was paid on the basis of agreement, which was executed on 30-10-1973. It is also not the case the department that in any of the earlier years the commission at 3.5 per cent of the sales had not been paid by the assessee to M/s. Hindustan Textile Agency. Therefore, it cannot be said that the commission paid was excessive. The learned Commissioner (Appeals) for sustaining the disallowance of Rs. 65,515 has not given any basis, therefore, we do not see any justification in the action of the Commissioner (Appeals). Considering the totality of the facts as discussed hereinabove, we delete the addition sustained by the Commissioner (Appeals). Accordingly, ground No. 2 of the departmental appeal is rejected while the appeal of the assessee accepted.
6. Now the remaining other ground agitated by the department relates to the deletion of trading addition of Rs. 5,51,000.
The assessing officer made the trading addition of Rs. 5,51,000 on the ground that the assessee had not been able to reconcile the consumption of colour and chemicals for the cloth processed in its factory. The assessee had shown production of finished products at 19,03,351 mtrs. According to the assessing officer the assessee had shown shortage for the year under consideration at 5.82 per cent while in the assessment year 1980-81 and 1981-82 the shortage shown was at 4.69 per cent and 3.279 per cent respectively and if the shortage shown in the immediately preceding year was to be considered, the production should have been at 19,54,815 mtrs. instead of 19,03,351 mtrs. The assessing officer also pointed out that if the consumption of caustic soda, soda ash, bleaching powder and use of tables were to be compared in the year under consideration with the earlier years then the production of cloth should have been at 19,56,507 mtrs. Similarly on the basis of colours and chemicals consumed the assessing officer opined that the production should have been at 19,95,649 mtrs. The assessing officer after considering the aforesaid estimated production, worked out the estimated production at 19,68,986 mtrs. as against the production shown by the assessee at 19,03,351 mtrs. The estimated production was worked out by the assessing officer by observing as under:
"(a) Estimated production on the basis of average shortage 19,54,815 mtrs. as worked out in para 9 above (i.e. 19,03,351 + 51,464)
(b) Estimated production on the basis of colours and 19,56,507 mtrs. chemicals consumed as worked out in para 15 above
(c) Estimated production on the basis of value of colours 19,95,649 mtrs. and chemicals consumed as worked out in para. 16 above.
Total 59,06,961 mtrs.
The average production of the assessee after taking into account all the above factors thus works out to 19,68,986 mtrs. (i.e. 5,90,961 divided by 3)."
On the aforesaid basis the assessing officer worked out under-production of finished cloth by 65,636 mtrs. and valued the same at Rs, 5,12,000. The assessing officer further stated that the assessee had shown Gross Profit rate of 11.6 per cent for the year under consideration as against the average Gross Profit rate of 13.95 per cent worked out on the basis of results of the assessee for the assessment year 1980-81, 1981-82, 1983-84 and 1984-85. The assessing officer therefore applied the Gross Profit rate of 13.95 per cent and worked out the difference of Gross Profit at Rs. 5,90,000. The assessing officer therefore calculated the average of understated profit and understated production at Rs. 5,51,000 (Rs. 5,90,000 + Rs. 5,12,000 divided by 2) and made the addition to the income of the assessee,
7. Before the learned Commissioner (Appeals), the assessee submitted that the assessing officer himself was not sure about the correct amount of addition. It was stated that there was no specific formulae applied by the assessing officer to clarify that such and such quantity of cloth could only be processed with a particular quantity of raw material in the shape of colour and chemicals etc. consumed. It was stated that the consumption of raw material could not be linked with the production because the production depended upon quality of the cloth processed and also the quantity of colours and chemicals used. It was stated that there was no fixed method to find out that a particular quantity of cloth would be processed with the given quantity of colours and chemicals. It was therefore argued that the addition made by the assessing officer was not fair by any scientific method. It was stated that in the earlier and subsequent years high ratio of colouirs and chemicals were used vis-a-vis the cloth processed and the assessing officer had not made any addition in the earlier and subsequent years on similar grounds.
The learned Commissioner (Appeals) after considering the submissions of the assessee observed that there was no scientific method to hold that such and such quantity of cloth would be processed with such and such quantity of raw material in the shape of colour and chemical. He also pointed out that there was no technical data quoted by the assessing officer in the assessment year to backup his conclusion. The learned Commissioner (Appeals) categorically stated that the assessing officer himself was not sure of the soundness of his own action and grounds. He therefore deleted the addition made by the assessing officer,
8. Before us the learned Departmental Representative relied upon the order of the assessing officer and stated that the trading results shown by the assessee were not comparable with the earlier as well as subsequent years. Therefore, the assessing officer was justified in making the addition and same should be restored. In his rival submissions the learned counsel for the assessee reiterated the submissions made before the authorities below and vehemently argued that the assessing officer had not invoked the provisions of section 145 of the Income Tax Act and the results declared by the assessee as well as method of accounting regularly employed had not been rejected. Therefore, there was no justification in making the trading addition without pointing out any specific defect in the books of account maintained by the assessee, which were supported by the vouchers etc. The reliance was placed on the following case laws:
(i) R. B. Bansilal Abichand Spg. & Wvg, Mills v. CIT (1970) 75 ITR 260 (Bom)
(ii) CIT v. Maharaja Shree Umaid Mills Ltd. (1991) 192 ITR 565 (Raj)
(iii) Dy. CIT v. Mewar Textile Mills Ltd. 21 Tax World 821 (JP)
(iv) Mohd. Umer v. CIT (1975) 101 ITR 525 (Pat)
(v) Ajanta Constructions (P) Ltd. v. Assistant Commissioner 22 Tax World 606 (JP)
(vi) Manohar Lal v. Income Tax Officer (2000) 68 TTJ (Jd) 27
(vii) Shri Gautam Textile v. Income Tax Officer (2001) 72 TTJ (Jd) 169
(viii) Vinod Kumar Pramod Kumar v. Income Tax Officer (2000) 66 TTJ (Jd) 722
(ix) Brij Lal v. Income Tax Officer (2001) 75 TTJ (Jd) 374
(x) Income Tax Officer v. Subhash Synthetics (2003) 78 TTJ (Jd) 567
(xi) Ganesh Foundry v. Assistant Commissioner (2003) 78 TTJ (Jd) 736 The learned counsel for the assessee further submitted that the consumption of colour and chemicals and spares etc. could not have been the basis for estimating the addition. He pointed out that the assessing officer himself worked out different estimated production on the basis of different items of chemicals etc. Reference was made to p. 9 of the assessment order wherein following estimated productions were worked out by the assessing officer Sr. No. Basis taken for estimating production Estimated production (in mtrs.)
1.
Caustic Soda 23,85,311
2. Soda Ash 15,65,006
3. Bleaching Powder 20,68,357
4. Use of tables 18,07,341
5. Production declared by the assessee 19,03,351 On the basis of above it was stated that the production could not have been estimated on the basis of chemicals, stores etc. It was further submitted that the assessing officer applied the average Gross Profit rate of two preceding years and two succeeding years in arbitrarily manner. It was stated if the Gross Profit rate of four consecutive years, i.e., from 1980-81 to 1983-84 was to be worked out it came to 10.66 per cent as against 11.21 per cent declared by the assessee. Thus the Gross Profit rate declared by the assessee was much better than the average Gross Profit rate of earlier years. It was further stated that the assessing officer while making the addition had not quoted any comparable cases neither brought on record any evidence of sale outside the books, therefore, the addition made by the assessing officer was based on presumption only. It was also contended that the sales declared by the assessee was accepted by the sales-tax authorities.
9. We have considered the submissions of both the parties and have carefully perused the material available on the record. In the instant case the assessing officer made the addition by taking into consideration consumption of caustic soda, soda ash, bleaching power and use of tables etc. The assessing officer worked out the average production on the basis of aforesaid chemicals. From the working of the assessing officer it would be clear that the estimated production on the basis of consumption of soda ash and use of tables was very much less than the production declared by the assessee. It seems that the assessing officer worked out the average production without any scientific method. In such type of cases it cannot be said that there is set formulae or scientific method to estimate the production on the basis of consumption of chemicals and stores etc. The production can be compared with other years only if all the conditions are identical, i.e., the quality of cloth to be processed and quality of the chemicals is similar but such type of happening are rare to be happened. In other words it cannot be said that the quality of the chemical will remain the same year after year and the climatic condition will also remain the same year after year. Therefore, the order of the assessing officer can be said as a hypothetical calculation only and not more than that. In that view of the matter, we are of the considered view that the Assessing officer was not justified in estimating the production of the assessee on the basis of consumption of chemicals and stores etc. -As regards to the application of Gross Profit rate is concerned it is noticed that the assessing officer worked out the average Gross Profit rate of the asst, yrs. 1980-81, 1981-82, 1983-84 and 1984-85. In other words the assessing officer took two assessment years which were preceding the assessment year under consideration -and two assessment years which were succeeding the assessment year. However, the assessing officer had not compared the Gross Profit rate declared by the assessee for the year under consideration with any single assessment year. The assessing officer had not compared the Gross Profit rate declared by the assessee neither with preceding year nor with succeeding year. Moreover it is well settled that the Gross Profit rate can not remain same for all the years. If the assessing officer was of the for all the years. If the assessing officer was of the view that the Gross Profit rate declared by the assessee was on lower side, it was his duty to point out the shortcomings, however, no such findings have been given by the assessing officer. In the instant case it is noticed that the assessing officer had not rejected the book results declared by the assessee and it is also not his case that there was a change in the method of accounting followed by the assessee year after year. In fact the assessing officer had not pointed out any suppressed sales or inflated purchase and also not stated that the expenses incurred by the assessee were inflated or were not supported by the vouchers, therefore the action of the assessing officer was based only on surmises and conjectures which is not tenable in the eyes of law. We, therefore, considering the totality of the facts, are of the confirmed view that the assessing officer was not justified in making the estimated trading addition on hypothetical basis, hence, the learned Commissioner (Appeals) rightly deleted the same. In that view of matter, we confirm the impugned order on this issue.
10. In the result, appeal of assessee is allowed and that of the department is dismissed.