Income Tax Appellate Tribunal - Hyderabad
M/S Rayalaseema Steel Re-Rolling ... vs Department Of Income Tax on 16 October, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
I.T.A. No. 1054/HYD/2014
Assessment Year: 2006-07
Dy. Commissioner of M/s. Rayalaseema
Income Tax, Vs Steel Re-Rolling Mills,
Circle-3(1), HYDERABAD
HYDERABAD [PAN: AADFR6518B]
(Appellant) (Respondent)
For Revenue : Shri Rama Krishna, Bandi, DR
For Assessee : Shri Kishore Kumar Kabra, AR
Date of Hearing : 24-09-2015
Date of Pronouncement : 16-10-2015
ORDER
PER B. RAMAKOTAIAH, A.M. :
This is Revenue's appeal against the order of the Commissioner of Income Tax (Appeals)-IV, Hyderabad dated 14-03-2014 on the issue of cancellation of estimation of income done by AO at 1% of the turnover.
2. Briefly stated, assessee is in the business of steel re-rolling has admitted income of Rs. 8,98,710/- for the impugned assessment year. Apart from making various additions, the Assessing Officer (AO) rejected the Books of Accounts and I.T.A. No. 1054/Hyd/2014 :- 2 -: M/s. Rayalaseema Steel Re-Rolling Mills estimated the income of assessee at Rs. 55,37,219/- at 1% of the turnover of assessee of Rs. 55.37 Crores. While rejecting the Books of Accounts, AO analysed various issues which are summarized by the Ld. CIT(A) vide para 5.1 as under:
The Assessing Officer made the following observations with regard to the appellant's business transactions and books of account:
"a. The gross profit ratio of the appellant was as follows:
AY Ratio
2004-05 7.26%
2005-06 3.49%
2006-07 Loss
b. The purchases included a sum of Rs.24,32,22,003 for 17,278.57 metric tonnes as a bulk purchase from Rastriya Ispat Nigam Ltd (RINL). This purchase was transferred to 12 parties at the purchase value on which no profit was derived. The appellant explained that it had entered into a cartel purchase from RINL which enabled the appellant to purchase goods at a rate lower than market rate. The Assessing Officer observed that these goods had been physically delivered directly to the other parties, that the payment for these goods had also been made by the other parties directly to RINL, that in the process the appellant's administrative expenses had been increased, that it was not known why the appellant became the leader of cartel and went out of its way to accommodate the other parties to enable them to earn profit while itself making a loss. The Assessing Officer also observed that in receipt of the purchase bills from RINL, the appellant recorded the quantity in its stock register even though the goods were never physically delivered to it, as a result of which the stock register did not give a correct picture of the appellant's stock.
c. The sales included raw material sales of Rs~10,80,30,479 on which negligible profit had been earned.
d. The appellant had sold pig iron at rates much less than the rate at which it had purchased pig iron on the same day. Though the appellant claimed that this was done as it needed cash on that day, I.T.A. No. 1054/Hyd/2014 :- 3 -: M/s. Rayalaseema Steel Re-Rolling Mills it was found that all such sales were credit sales, leading to the conclusion that the appellant had deliberately suppressed the sale price to arrive at a loss.
e. The appellant had made purchases of Rs.l,61,58,226 from its sister concern, M/s. Bilasraika Sponge Iron India Pvt Ltd. for which it was unable to produce the transportation bills for delivery of goods to it. The Assessing Officer concluded that these were paper bills without delivery of material to inflate the purchases in its books.
f. The serial numbers on some of the purchase bills/tax invoices were not printed but were handwritten which was not allowed for excisable goods. One of these suppliers, Rayalseema Koganti Steels Pvt. Ltd had effected sales to the assessee from 10.40 AM to 2.50 PfVl vide bill Nos.170 to 178 and had traded only with the appellant and no other party during this time. The Assessing Officer also noted that there was no proof of transportation of material to the premises of the appellant leading to the conclusion that the party had issued accommodative purchase bills without actual delivery of material.
g. In certain cases, three of which were listed by the Assessing Officer, the suppliers had made huge profits from the sales made to the appellant and the appellant had failed to explain why it had made purchases at such high rates from these parties.
h. Huge unsecured loans were taken by the appellant during the year, including from the sister concern M/s. S.B. Steel Industries on which interest of Rs.35,11,557 had been paid.
i. The cash book and ledger were found to have been written in two different handwritings on' the same day. In one case, the entries were made at the end of the financial year even though the account has been closed much earlier.
j. The appellant had credited a sum of Rs.2,30,00,000 in its cash book on 20.04.2005 as credit balances written off. A sum of Rs. 2,25,00,000 was transferred to the Tijori account on the same day. The credit entry of Rs.2,30,00,000 had been made at the end of the year in a different handwritinq. As and when there was a cash shortfall, the amount was transferred from the Tijori account which was squared up at the end of the year. Though the sum of I.T.A. No. 1054/Hyd/2014 :- 4 -: M/s. Rayalaseema Steel Re-Rolling Mills Rs.2,30,00,000 had been voluntarily offered by the appellant as credit balances written off, this accommodative entry was made at the end of the year as the opening and closing cash balances were not worked out on a daily basis and the appellant realised at the end of the financial year that it had negative cash balance on that day.
k. The appellant had not maintained any separate trading account and manufacturing account. The appellant had booked huge losses in its manufacturing activity for which it had submitted general explanations like increase in purchase cost of raw materials, increase in power consumption etc. The sale price per unit of quantity sold was Rs.12,959.60 whereas the cost of production was Rs.14,179.66.
l. The appellant had claimed a shortage of 2,529.655 mt. This was 20% of the total consumption and extremely high".
3. AO relied on the following decisions that books of accounts did not reflect the true and correct state of affairs and deserves to be rejected.
i. Allahabad Glass Works Vs. CIT [42 ITR 439]; ii. Bharat Milk Products Vs. CIT [128 ITR 682]; iii. Titaghur Paper Mills Co. Ltd., Vs. State of Orissa [47 STC 240 (Orissa)];
iv. K. Ramakrishna Rao Vs. State of Karnataka [49 STC 275 (Karn)];
v. CST Vs. Devi Saran Lal Prem Chandra
Tax LR 3235 (All);
vi. Luxco Electronics Vs. CST [48 STC 540 (All)];
vii. Satya Narain Rastogi Vs. CST Tax LR (NOC) 224 (All);
viii. Hukum Chand Mahendra Kumar Vs. CST [29 STC 394 (All)];
ix. Vrajlal Manilal & Co. Vs. CIT [92 ITR 287 (MP)];
I.T.A. No. 1054/Hyd/2014 :- 5 -: M/s. Rayalaseema Steel Re-Rolling Mills x. P. Venkanna Vs. CIT [72 ITR 328, 330 (Mys)]; xi. Steelsworth Ltd., Vs. CIT [69 ITR 366 (Assam)]; and xii. Gopinath Naik Vs. CIT [4 ITR 1, 23 (All)]
4. Assessee has contested the estimation of income before the Ld. CIT(A) and submitted various issues countering the observations of the Ld. CIT(A) which are again summarized by the CIT(A) in para 5.5 as under:
"a. The GP ratios adopted by the Assessing Officer for the preceding years was incorrectly computed and the correct computation was as follows:
Gross receipts as 2006-07 2005-06 2003-04
per AYs.
Gross receipts 499033223 206237468 203062088
Gross Profit 7737433 11752966 10735006
Gross profit ratio 1.55 5.70 5.29
GP excluding 6652117 6908824 7483631
interest and
depreciation
Gross profit ratio 1.33 3.35 3.69
Net profit ratio 0.05 0.51 0.44
b. The fall in GP during the year in appeal' was on account of non- incremental increase in the sale price of finished goods as compared to increase in cost of production, use of old and obsolete machinery with high power consumption and other expenditure.
c. The turnover included cartel sales of Rs.24,32,22,003 (on which there was no profit) and sale of raw material of Rs.10,80,30,749 (on which there was minimal profit). The turnover after excluding these two items was Rs.20,24,69,161 only.
d. Lower gross profit cannot be a ground for rejection of books.
e. The appellant had entered into a cartel purchase along with 12 other parties for purchase of raw material from RINL. While the sale invoice was raised in the name of the appellant, the consignees were directly mentioned in the invoice itself. The cartel purchase I.T.A. No. 1054/Hyd/2014 :- 6 -: M/s. Rayalaseema Steel Re-Rolling Mills enabled the appellant to avail benefit of lower price on account of lifting of big quantity of stocks. The payment for the purchase was made directly by the 12 consignees. Delivery was also made directly to them. The observation of the Assessing Officer that the appellant had recorded the entire purchase in its stock register was factually incorrect.
f. No profit was made on cartel sales since sale invoices were raised merely as a balancing accounting entry to offset the purchases as per the invoices.
g. The observations of the Assessing Officer that in the process of making the cartel purchase, the appellant had boosted its administrative expenses, was factually incorrect since no additional administrative expenses were incurred for it. Even otherwise the additional expenses would have been compensated by the lower purchase price.
h. The Assessing Officer had observed that the appellant had sold goods at a price lower than the purchase price on a particular day. Market conditions in the trade fluctuated not only on a daily basis but on an hourly basis and in any case, no part of the sales had been made to any relative parties. The mere fact that the sales had been made at a lower rate does not lead to a conclusion of suppression of sales since these were business decisions.
i. Though the appellant had failed to produce transport bills/proof of delivery of purchases of Rs.1,61,58,226 from M/s. Bilasraikas Sponge Iron India Pvt. Ltd, the purchases had been recorded in the stock registers after delivery at the factory premises and had availed Cenvat credit in respect of the excise duty paid on the purchase price. The stock / excise registers were verified by the Assessing Officer during the assessment proceedings. The goods were sold by , the supplier on FOR basis and therefore no transport costs were incurred by the appellant.
j. The Assessing Officer had observed that some of the purchase bills did not contain printed invoice serial numbers and that these numbers were handwritten. There was no requirement under the Excise Act that sale invoices should contained printed serial numbers. All the purchases had been entered in the stock/excise registers, excise duty had been paid on them and the appellant had availed Cenvat credit against the excise duty paid.
k. The Assessing Officer had observed that one of the suppliers, Koganti Steels Pvt Ltd (erroneously referred to as Rayalseema Koganti Steels Pvt Ltd) had made supplies to the appellant through a series of bill nos. 170 to 178 and had not had any business transactions with any other party during this period. The manner in I.T.A. No. 1054/Hyd/2014 :- 7 -: M/s. Rayalaseema Steel Re-Rolling Mills which the supplier carried out its business transactions had no implications for the appellant's income tax assessment. The goods in question had been entered in the excise register, excise duty paid thereon and Cenvat credit availed by the appellant against it.
l. The Assessing Officer had referred to the high margin of profit earned by some of the suppliers. None of these suppliers were related to the appellant and the margin of profit of the suppliers was not a relevant factor to decide the genuineness of the purchases or the reliability of the books of account.
m. The appellant had paid interest of Rs.35,11,000 on unsecured loans to the following parties:
Inderkaran Agarwal (Patner) Rs.18,76,406 Banks Rs.16,35,151 Total: Rs.35,11,557 No interest was paid on the loan received from S.B. Steel Industries.
n. The mere fact that the books of account had been written in two different handwritings on the same day could not lead to any adverse inferences. The difference in handwriting in the ledger account of Lakhani Steel Corporation came about due to the fact that while preparing the trial balance, it was found that the entry made on 28.09.1995 had not been posted in the ledger and therefore the entry was made at the end of the year. The payment had been made for purchases and no cash outflow or inflow resulted due to this entry.
o. The appellant had credited a sum of Rs.2,30,00,000 to its cash book on 20.04.2005 and transferred a sum of Rs.2,25,OO,000 to the Tijory account on the same day. The Tijory account was nothing but cash kept at residence of the partners since it was not safe to keep the entire cash at the business premises. As and when required, the requisite amount were credited to Tijory account and used for the business. This did not lead to a conclusion that there was a negative cash balance.
p. There was no requirement in law for maintenance of separate trading account and manufacturing account.
q. All purchases and sales were recorded in the excise register which was subject to audit and on which excise was paid and Cenvat credit claimed. The observation of the Assessing Officer that the appellant had suppressed sales and inflated expense was based on surmises and presumptions.
I.T.A. No. 1054/Hyd/2014 :- 8 -: M/s. Rayalaseema Steel Re-Rolling Mills r.The shortage of 20% in the raw material 'vis-a-vis the consumption was comparable to the shortage of 21% in AY 2005-06.
s. The appellant had voluntarily credited the sum of Rs.2,30,00,000 to its P&L A/c and there was no reason to say that it was undisclosed income u/s 68.
t. The case laws cited by the Assessing Officer were distinguishable on facts".
5. After considering the submissions, Ld. CIT(A) did not approve the rejection of books of accounts and estimation of income by stating as under:
"5.8 I have considered the facts on record and the submissions of the AR. The AR has pointed out that the net profit of the appellant was not 0.72% as presumed by the Assessing Officer for the AY 2005-06 but was actually much less at 0.51% (and 0.44% for AY. 2004-05) as 'compared to 0.05% for the year in appeal. Be that as it may, the net profit of the appellant is considerably less than the profit in the preceding two years even as per the computation furnished by the AR. However, the mere fact that the net profit of the appellant is much less than the preceding years cannot by itself be a reason for rejecting the books of account. A lower profit rate may be an indicator of a deeper malaise or it may be an indicator of genuine difficulties which an assessee may be going through or it may be an indicator of manipulations in the books of account by an assessee with a view to suppress its income. What is necessary for rejection of books is to establish that there were such manipulations and that the lower profit rate was not merely due to adverse business conditions.
5.9 The appellant has pointed out that a substantial portion of its turnover consisted of the cartel purchase and trading transactions on which there were nil or negligible profits. Entering into a cartel purchase is a business decision which cannot be questioned by the Assessing Officer. There is also no evidence of any major additional administrative expenses for this purchase. Similarly, the appellant cannot be faulted for entering into trading transactions with narrow margins.
5.10 The appellant also cannot be held responsible for the manner in which its suppliers carried out their business. The Assessing Officer has pointed out three such categories of suppliers. The first I.T.A. No. 1054/Hyd/2014 :- 9 -: M/s. Rayalaseema Steel Re-Rolling Mills relates to purchase bills which do not contained printed serial numbers. As pointed out by the AR, there is no mandatory requirement for the bill numbers to be printed on the bills. There is no provision to state that handwritten bill numbers are not acceptable. What is relevant is that the purchases were duly entered in the stock and excise registers of the appellant.
5.11 The second such set of transactions relates to Koganti Steels Pvt. Ltd while the third relates to purchases where the suppliers booked a very high margin of profit. Neither of these parties were related to the appellant and therefore these are not cases of collusive transactions with sister concerns. In the absence of any evidence that the appellant had entered into fraudulent or manipulative transactions with these parties, the mere fact that the suppliers had booked high profit or had traded only with the appellant cannot be held against the appellant, particularly when the entire purchases were duly recorded in the stock and excise registers.
5.12 The appellant had failed no doubt to produce the transportation bills. The AR has claimed that the purchases were FOB and hence there was no transportation cost. In the absence of the books of account, it is not possible to establish this claim. However, what is of relevance is whether the purchase from Bilasraikas Sponge Iron India Ltd was a genuine purchase. The fact that the purchase was entered in the excise and in stock registers indicates that they were.
5.13 The Assessing Officer has referred to a solitary instance of an entry being made in the ledger account of Lakhani Steel Corporation at a later date. The AR has explained that the omission was noticed while reconciling the accounts and the entry made thereafter. I find this explanation acceptable.
5.14 With regard to the transfer of cash to the Tijory account and back, the Assessinq Officer has accepted that the sum of Rs.2,25,00,000 was transferred to the Tijory account on 20.04.2005 itself from the cash book. In effect, the appellant split the cash book into two parts. I accept the appellant's explanation in this regard.
5.15 The facts narrated in the assessment order do not establish any lack of genuineness in the purchases made or any evidence of suppression of sales. The AR also produced the excise registers for verification of the claims made by him in his submissions. Under I.T.A. No. 1054/Hyd/2014 :- 10 -: M/s. Rayalaseema Steel Re-Rolling Mills the circumstances, I do not find any reason for rejection of the books of account. The estimation of net profit at Rs.55,37,219 is, therefore, directed to be set aside. The second and third grounds of appeal are allowed".
6. Ld. DR has taken us through the detailed order of AO to submit that AO has valid reasons for rejection of books and estimation of income is warranted on the facts of the case.
7. Ld. Counsel however, relied on the orders of CIT(A) and submitted para-wise observations, which are similar to the submissions made before CIT(A) which are extracted above.
8. After considering the rival contentions and perusing the submissions made on this behalf, we are of the opinion that CIT(A) is correct in setting aside the estimation of income. Even though certain mistakes are pointed out by the AO, in our opinion, they are not good enough to reject the Books of Accounts. In fact as contested by assessee, many of them are considered on wrong perceptions. AO was of the opinion that the stock purchased with cartel group are entered in the stock register, whereas it was found that they were not entered in the stock register and what assessee has accounted was only its share of purchases through the cartel. There are explanations given by assessee for separate entries in different ink and how assessee has suffered losses in its manufacturing activity. With reference to purchase of goods also, since none of the transactions are there with any associate or group companies or firms, as rightly pointed out by the CIT(A) the profits earned by the third parties should not be basis for disallowing cost of purchase in assessee's hands. Be that as it may, since assessee's books of accounts are maintained and I.T.A. No. 1054/Hyd/2014 :- 11 -: M/s. Rayalaseema Steel Re-Rolling Mills audited and most of the additions are made on the basis of books of accounts other than this estimation of income, we are of the opinion that Revenue has not made out proper case for rejection of books of accounts and estimating the income at 1%. Even the Revenue in Ground No. 4 accepts that percentage of estimation of income defers from year to year depending on the circumstances of the case. This also indicates that assessee's business profits or losses also fluctuate on year to year basis. There is no need to reject the Books of Accounts which are maintained and on which defects are not pointed out so as to reject them. In view of this, we uphold the order of CIT(A) and reject the grounds raised by Revenue.
9. In the result, Revenue's appeal is dismissed.
Order pronounced in the open Court on 16th October, 2015 Sd/- Sd/-
(P. MADHAVI DEVI) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 16th October, 2015
TNMM
I.T.A. No. 1054/Hyd/2014
:- 12 -: M/s. Rayalaseema Steel Re-Rolling Mills Copy to :
1. The Dy. Commissioner of Income Tax, Circle-3(1), 7th Floor, B-Block, IT Towers, Hyderabad.
2. M/s. Rayalaseema Steel Re-Rolling Mills, 4-1-970, C-403, 4th Floor, Ahuja Estates, Upasana Block, Abids, Hyderabad.
3. CIT (Appeals)-IV, Hyderabad.
4. CIT-III, Hyderabad.
5. D.R. ITAT, Hyderabad.
6. Guard File.