Income Tax Appellate Tribunal - Delhi
Tehri Steel Ltd, vs Department Of Income Tax on 30 November, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'F' ; NEW DELHI
BEFORE SHRI C.L. SETHI, JM AND SHRI A.K. GARODIA, AM
I.T.A. No.486/Del of 2008
Assessment Year: 2002-03
ACIT, Circle Haridwar. Vs M/s Tehri Steel Ltd.,
Village Dhalwala, Muni Ki Reti,
Rishikesh.
Appellant Respondent
Appellant by: Shri N.K. Chand, Sr. DR
Respondent by: Shri Ashwani Taneja
ORDER
PER C.L. SETHI, JM
The revenue is in appeal against the order dated 30.11.2007 passed by the CIT(A) in the matter of an assessment u/s 143(3)/263) of the Income-tax Act, 1961 (the Act) for the Assessment Year 2002-03.
2. In this case, original assessment u/s 143(3) was completed on 29.1.2004. However, the same was cancelled by CIT vide order dated 22.3.2006 u/s 263 of the Act. The assessee filed appeal against CIT's order passed u/s 263 before the Tribunal, and the Tribunal confirmed the CIT's order. The AO, therefore, proceeded to complete the fresh assessment as per directions of the CIT given in his order u/s 263 of the Act as further 2 confirmed by the Tribunal. The AO then completed the assessment u/s 143(3)/263 of the Act vide order dated 29.12.2006 determining the assessee's total income at Rs.1,76,54,306/-. Assessee then preferred appeal before the learned CIT(A), who deleted various additions made by the AO, which have now been challenged in this case by the revenue.
3. Ground No.1 raised by the revenue is as under:
"That the ld. CIT(A) has erred a law and on facts in deleting the addition of Rs.4659998/- on account of sales of shares."
4. One of the additions deleted by the CIT is the addition of Rs.46,59,998/- on account of sale of shares, which has been objected to by the revenue vide Ground No.1 of this appeal.
5. In the return, the assessee claimed a loss from shares under the head 'capital gains' amounting to Rs.2,11,895/-. During the year, 2,92,000 shares of M/s Tehri Pulp and Paper Mills Ltd., a company in which the public was substantially interested, was sold @ Rs.2.5 per share. It was claimed by the assessee that these shares were acquired by the assessee in the Financial Year 1994-95, 1995-96 and 1996-97 at a face value of Rs.10/- each. It was also pointed out by the assessee that during the year assessee sold 35,000 shares of Titan Securities Ltd. @ Rs.112.40 per share , and these shares were purchased in financial Year 2000-01. The assessee submitted the details of share of Tehri Pulp and Paper Mills Ltd. sold to Diwakar Securities. The 3 assessee applied cost inflation index, and computed the capital gain in respect of all the shares sold during the year. The AO examined the assessee's explanation and did not find any force in the assessee's claim by giving the following reasons:
"Regarding the capital loss of Rs.211895/- from long term capital loss, it is seen from the records available in this office that the assessee had no where disclosed holding of these shares of M/s Tehri Pulp and Papers Ltd. and M/s Titan Securities Ltd in his balance sheet neither in the year under consideration nor in the earlier years. Besides, the names and identity of purchasers of these shares of such a unknown and insignificant company and of this volume i.e. 292000 shares of M/s Tehri Pulp and Papers ltd. @ Rs.2.50 per share and 35,000 shares of M/s Titan Securities Ltd. @ Rs.112.40 per share is also not known. It can very well be assumed that general investor would never be interested in purchasing shares of such loss making companies. The transactions of these shares were made outside the stock exchange and were never entered into the DTR (Daily Trading Report) filed by the broker. Thus, it is clear in absence of any documentary evidences of holding these shares, it can very well be considered that the assessee had introduced his own unaccounted money in the garb of trading in such shares which the assessee never possessed. I, therefore, add Rs.46,59,998/- being undisclosed income from the sales of such shares which the assessee never possessed."
The AO, therefore, taken a view that in the absence of any documentary evidences of holding the shares in question, it was clear that assessee had 4 introduced his own unaccounted money in the garb of sale amount of shares, which assessee never possessed or hold. He, therefore, treated the sale consideration of shares amounting to Rs.46,59,998/-, being the undisclosed income of the assessee.
6. Being aggrieved, the assessee preferred an appeal before the learned CIT(A).
7. Before the learned CIT(A), the assessee submitted that all the shares of Tehri Pulp & Paper Mills Ltd. and of Titan Securities Ltd were duly shown in the accounts of earlier years, and therefore, the AO's finding that these shares were never possessed or held by the assessee, is not justified.
8. After examining the AO's order and submissions of the assessee and the material on record, the CIT(A) deleted the addition by observing as under:
" 6.2 I have gone through the order of the AO and the submissions of the AR very carefully. I agree with the AR that disallowance of Rs.46,59,998/- without giving any opportunity to the appellant was against the principles of natural justice. These shares have been duly reflected by the appellant on the asset side of its balance sheet as investment right from the year ending on 31.3.95. The investment as on 31.3.95 was Rs.16 lacs while it because Rs.32,59,250/- as per the balance sheet as on 31.3.2001. The appellant purchased shares of Titan Securities in FY 2000-01 from Umesh Securities P. Ltd. and sold these shares to Diwakar Securities for 5 Rs.39,29,957/-. The full payment for the purchase was made by the end of February 2002. Shares of Tehri Pulp were acquired in FY 1994-95 to 1996- 97 as direct allotment @ Rs.10/- per share and sold to Rakesh Kumar Bindal @ Rs.2.50 per share during the year under consideration. The sale and purchase of shares is tabulated as under:
Name of No. of Year of Purchased Amount Year Sale rate Sold to shares shares purchase from of sale Tehri 292000 94-95 to Direct Rs.10/- 01- Rs.2.5 Rakesh Pulp & 96-97 allotment per 02 per share Kumar Papers by the Co. share Bindal Ltd.
Titan 35000 FY 00- Umesh 264250 01- Rs.112.40 Diwakar Securities 01 Securities 02 per share Securities Ltd. P.Ltd.
As the shares are not quoted on stock exchange, it was not necessary to sell these shares through the stock exchange. The AO was, therefore, not right in making the addition. The same is deleted."
9. Hence, the Department is in appeal before us.
10. The learned DR has merely placed reliance upon the AO's order.
11. The learned counsel for the assessee, on the other hand, supported the CIT(A)'s order and submitted that the shares of Tehri Pulp and Paper Mills Ltd. and Titan Securities Ltd. were duly shown in the earlier years as per the details of purchases of shares made in earlier years and they were duly reflected in the balance sheet. He, therefore, submitted that AO was 6 unjustified in making the whole of the sale consideration of sale of shares as undisclosed income of the assessee in the year under consideration.
12. Rival contentions of both the parties have been considered and materials on record have been carefully perused.
13. On perusal of CIT(A)'s order, it is seen that CIT(A) has given a finding that shares of Tehri Pulp & Paper Mills Ltd. and Titan Securities P. Ltd. purchased in earlier years, i.e., 1994-95 to 1996-97 in the case of Tehri Pulp & Paper Mills ltd., and Financial Year 2000-01 in the case of Titan Securities Ltd., which were duly reflected in the balance sheet as investment. The learned CIT(A) has examined year wise investment and came to a finding that all the shares were duly disclosed in the balance sheet. The learned DR has not disputed these findings. The AO has also not brought out any material on record to disprove the above findings of learned CIT(A) that all the shares were duly disclosed in the balance sheet of earlier years. In the light of the findings recorded by the learned CIT(A) that all these shares were disclosed in the balance sheet of earlier year, the addition of sale amount of share sold during the year is not at all called for. The assessee has calculated the capital gain after applying the cost inflation index and worked out the amount of capital gain or loss accordingly. The AO has nowhere 7 disputed the genuineness of the purchase and sale transactions made by the assessee. We, therefore, uphold the order of CIT(A) in deleting the addition.
14. Ground No.2 raised by the revenue is as under:
"2. The ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs.5,39,816/- claimed as commission on sale of steel."
15. During the year, the assessee had paid Rs.5,39,816/- as commission to M/s R.R.Steel Traders, Ghaziabad for effecting sales to Steel Authority of India Ltd. The payment of commission was disallowed by the AO by observing that it was not clear as to why M/s R.R. Steel Trader was engaged for effecting sales of the assessee's product when assessee itself made sales to various big organizations, and M/s R.R. steel Trader was not a well- known company.
16. On an appeal, the learned CIT(A) deleted the addition by observing that from the AO's order and submission of the assessee, he found that M/s R.R. Steel Traders sold the products of the company and charged commission, in respect of which a bill raised by M/s R.R. Steel Traders was placed on record giving complete details of R.R. Steel Traders, its address, ST, CST number as well as telephone numbers. The CIT(A) further observed that the assessee submitted bill wise details of commission before the AO, and once it was found that the expenditure was expended, it was to be allowed as business deduction unless contrary is established by the 8 revenue. The CIT(A) further observed that whether to pay commission on sale or not is a commercial decision based on commercial expediency and this decision lies with the assessee businessman and not with the AO, and if in case of any doubt, it was open to him to make enquiry from M/s R.R. Steel Traders. The CIT(A) thus deleted the addition.
17. The learned DR has submitted that assessee has failed to prove any services being rendered by M/s R.R. Steel Traders in respect of which a commission was paid. He, therefore, supported the AO's order.
18. The learned AR, on the other hand, reiterated the facts and evidences that were placed before the authorities below and submitted that assessee had produced all the details as to the services rendered by M/s R.R. Steel Traders, and, therefore, the CIT(A) has rightly deleted the addition.
19. After considering the submissions of both the parties and material on record, we find that CIT(A) has rightly deleted the addition. From reading the AO's order, we find that AO has merely disallowed the commission on the presumption, assumption and doubt as to why M/s R.R. Steel Traders was engaged for effecting sales. He has not brought any material on record to prove and establish that M/s R.R. Steel Traders was not instrumental in effecting sales of the assessee's product in the market. The assessee submitted details of sales made by M/s R.R. Steel Traders as would be clear 9 from the different bills produced before the AO. The payment of commission to M/s R.R. Steel Traders is also not in dispute. We, therefore, find that the assessee has been able to establish and prove that the commission was paid for effecting sales of assessee's product by M/s R.R. Steel Traders, and thus, the payment is to be considered as business expenditure. We, therefore, upheld the order of CIT(A) in deleting the addition.
20. Ground No.3 reads as under:
"3. The ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs.2,14,493/- claimed as commission on purchase of raw material."
21. In the assessment, the AO disallowed the assessee's claim of payment of commission of purchases of raw material amounting to Rs.2,14,493/- by observing that as to why this commission was paid on purchase of raw material. On an appeal, CIT(A) deleted the addition by observing that once the assessee submitted the bills of the parties to whom commission was paid for making purchases, and that has not been disputed by the AO and mere because the AO raised a question as to why the commission was paid, the same cannot be said to have not been paid out of business needs and commercial expediency.
10
22. The learned DR merely relied upon AO's order and further submitted that assessee has failed to prove the factum of services rendered by the persons to whom commission were paid.
23. The learned AR for the assessee, on the other hand, reiterated the facts and evidences placed before the authorities below and submitted that the payment was made for procuring purchases necessary for the purpose of assessee's business.
24. After considering the arguments of both the parties and the material available on record, we find that the CIT(A) has rightly deleted the addition inasmuch as AO has failed to disprove the assessee's claim that the commission has not been paid on purchases made by him. The only objection raised by the AO is merely on doubt and not the established fact that no services were actually rendered by person to whom commissions were paid. The order of CIT(A) is, thus, on this issue is upheld.
25. Ground No.4 is against the CIT(A)'s order in deleting the addition of Rs.1,25,00,000/- on account of difference in sales and manufacturing cost of the final product.
26. The learned DR has relied upon the AO's order.
27. The addition of Rs.1,25,00,000/- has been made by the AO by observing as under:
11
" 9. Regarding Yield and Production, it is seen the assessee's cost of production of final product as disclosed in the Balance Sheet filed along with the return comes to 15790 per MT, whereas sales price has been disclosed at Rs.12376 per MT. The assessee's this sales price is more or less consistence w.e.f. 1st April, 01 to 31st March, 02. It is quite surprising that in spite of such heavy losses right from the beginning of the Assessment Year, how the assessee has sustained this business. No prudent businessman will ever continue such business in these conditions of heavy losses for all the year.
Without prejudice to this, it is seen that the assessee's purchases and sales are not fully vouched. Assessee maintains a branch office at Muzaffarnagar and head office at Rishikesh, Tehri Garhwal. The debtors/creditors of branch office of Muzaffarnagar and head office at Rishikesh, Tehri Garhwal and also outstanding liabilities and provisions at branch office and head office is not verifiable. Sales have been made inc ash and through cheque/draft also. Details of sales, its rate and the party to whom sales have been effected are not verifiable. I, therefore, based on above ground, reject the books of account maintained by the assessee u/s 145 of the IT Act, 1961 and add Rs.1,25,00,000/- as undisclosed income on account of difference in sales and manufacturing cost per MT of the final product."
28. On an appeal, CIT(A) called a remand report from the AO and the AO repeated the same observations as were made in the assessment order. The remand report of AO was made available to the assessee to give its comments. The assessee then submitted a reply vide letter dated 27.11.2007, 12 which has been reproduced by the learned CIT(A) in para 9.1 of his order. The assessee was also asked by the CIT(A) to explain sale price of ingots at Rs.12376 per MT, which is lower than the average cost of production of Rs.15790 per MT. The assessee then submitted its reply in this respect, which has been reproduced by the learned CIT(A) in para 9.2 of his order as under:
"(1) Your appellant manufactures M S Bar from ingots.
(2) Your appellant along with the many other producers produces M S Bar. In other words, due to the existence of number of producers of MS Bar the market of this product is very competitive. Hence, the selling price of MS Bar cannot vary much. (3) The average selling price of your appellants product during the year under consideration was Rs.14,668/- per MT working for this price along with the supporting in the form of relevant portions of the audited accounts (which was also filed along with the return of income) is being appended herewith as annexure 1 & 2 respectively.
(4) For your ready reference we are attaching herewith as annexure 3 a list of producers producing the same item to MS Bar. To support this list copies of the bills of these parties is also being attached herewith. (5) From the list given in annexure 3 your goodself will observe that the average selling price of MS Bar in the perfectly competitive market for the year under consideration was around 12,735/- per MT.
In comparison to this the average selling 13 price of your assessee is 14,668 per MT (as supported by annexure 1 & 2).
(6) Keeping in view the market trends and the fact that perfect competition exists in this trade the sale price of Rs.14,668/- per MT as reflected by your assessee is fully justified.
(7) Further we would once again like to point out that the produce of your appellant is bound by the excise records ie all purchases, sales, production are recorded and documented as per the requirement of the excise department and that all these documents were produced time and time again before the AO.
(8) Regarding the investments in the shares we would like to bring to your kind attention that these are old investments. In support of this we are attaching herewith the copies of the balance sheets of the previous years.
(9) We would like to point out that full working of the capital gains along with the supporting were placed before the AO. We are once again appending herewith these calculations.
Keeping in view the above facts the sale price adopted by your assessee is fair and reasonable."
29. After considering the AO's order, his remand report and submissions of the assessee and material on record, the learned CIT(A) deleted the addition by observing as under:
"9.3 I have gone through the order of the AO, his remand report, the order of the ITAT and the submissions of the AR very carefully. As can be seen from the order of the AO, AO has failed 14 miserably to bring any material on record to justify the addition except observing as under:
(i) Assessee's purchases and sales are not fully vouched.
(ii) It is surprising that in spite of such heavy losses how the assessee has sustained his business. No prudent businessman will ever continue such business in these conditions of heavy losses.
The two issues mentioned by the AO, in my opinion, were indeed material in suspecting the book results. These observations, however, in itself are not sufficient to reject the books of accounts and estimate the income. The AO cannot be compelled to accept the accounts. It is not only the right but the duty of the AO to consider whether or not the books disclose the true state of accounts and the correct income can be deducted therefrom. However, AO has to refer to the inherent defects in the system and must record a clear finding that the system of accounting followed by the assessee is such that correct profits cannot be deduced from the books of accounts. However, before doing this, an opportunity has to be given to the assessee to rebut the basis. The appellant is entitled ti know the basis of estimate and the basis for estimation must be disclosed by the AO by way of a speaking order. Even where estimation becomes necessary, it cannot be arbitrary, vague and fanciful but must be legal and regular. The law permits AO to make assessment to the best of his judgment but this means that assessment should be according to the rules of reason and justice, not according to private or personal opinion but according to law and not humour (Mysore Fertilizers Co. vs CIT, 59 ITR 268). Where accounts are audited and proper books of accounts are maintained, book results cannot be rejected (Shankar Rice Co. vs ITO, 72 ITD 139 15 (SB); Steel Home vs ACIT, 69 ITD 240 (Del)}.
The appellant had produced the books of accounts, excise records and vouchers before the AO on 24.11.2006. No specific deficiency was pointed out by the AO with regard to unvouched sales and purchases, if any. The AO, however, made huge addition of Rs.1.25 crores without giving any basis and without giving any opportunity to the appellant. The addition was clearly against the principles of natural justice. Despite AO's failure to bring any material on record items of sale/purchase which were not fully vouched. However, even after a lapse of 6 months, no such material has been brought on record as is clear from the remand report reproduced above. The appellant, however, was asked by the undersigned to explain rather unusual aspect of selling the end product at a price lower than the cost of production. The appellant, according to AR, under the forces of market competition was compelled to sell the product at a cost less than the cost of production. The appellant has submitted details giving the average rate of sale of MS Bars made by few other companies. The same is reproduced as under:
1. Shri Sidhbali Steels Ltd. Rs.13,933 per MT
2. Shiv Steel Industries Rs.14,150 per MT
3. Steel Authority of India Rs.10,121 per MT The AO has mentioned average sale price of MS Bars at Rs.12,376 per MT. The fact, however, is that appellant sold 13352.12 MT of MS Bars for Rs.19,58,48,778/- giving average rate of Rs.14,668/-. This, however, still is lower than the average cost of production of Rs.15,790/-. The average rate of sale by other producers is mentioned above and SAIL, a Govt. undertaking, has sold MS Bars at Rs.10,121/- per MT. The appellant under these circumstances, perhaps 16 had only two choices - either to close down the unit to avoid further losses or sustain losses for some time in the hope to recoup the losses in future. The choice either way has to be made by the appellant only and has to be commercial decision based on commercial expediency. The appellant perhaps chose to suffer losses in the hope of making good the losses in future. Even otherwise, it is easier said than done to close an existing manufacturing unit due to various labour laws and other legal constraints.
Therefore, in the absence of any material available with the AO till the date of assessment, and even during the enquiry period of about 6 months available to him before sending the remand report, the books of accounts maintained by the assessee in the regular course of business will have to be taken as prima facie correct. The accounts of the appellant are duly audited and its manufacture is subject to control and inspection by the Central Excise Deptt. The appellant's books, which have been maintained regularly cannot be rejected merely on surmises without bringing any material on record (Pyarelal Mittal vs ACIT, 291 ITR 214). Moreover, in the past years, book results have been accepted by the Department. Under the circumstances, the ad hoc addition made by the AO cannot be sustained under the law. The same is, therefore, deleted and the ground is allowed in favour of the appellant."
30. We have heard both the parties and gone through the orders of the authorities below. We have gone through the orders of the authorities below carefully and find that the learned CIT(A) has examined the issue thoroughly and has rightly come to a conclusion that the ad hoc addition made by the 17 AO is not sustainable in the eyes of law. The AO has made the addition merely for the reason that why the products were sold on a price lower than the cost of production. This aspect of the matter has been explained by the assessee by stating that the forces of market competition compelled the assessee to sell the product at a cost less than the cost of production. Further, we find that the AO has not brought any material on record to prove and establish that the assessee had received any amount against sales over and above the amount recorded in the books of accounts. No material showing and indicating any sales made outside the books of accounts has been pointed out. Therefore, the ad hoc addition of Rs.1.25 crore made on presumption by the AO has rightly been deleted by the learned CIT(A). We, therefore, upheld his order on this issue.
31. In the result, the appeal filed by the revenue is dismissed.
32. This decision was pronounced in the Open Court on 6th August, 2010.
(A.K. GARODIA) (C.L. SETHI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 6th August , 2010
Vijay
Copy to:
18
1. Appellant.
2. Respondent.
3. CIT
4. CIT(A)-I, Dehradun.
5. DR Assistant Registrar