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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”: HYDERABAD
Before: SHRI SATBEER SINGH GODARA & SHRI LAXMI PRASAD SAHU
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “A”: HYDERABAD (THROUGH VIRTUAL CONFERENCE) BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
ITA No. 279/H/2013 & 1719/Hyd/2014 Assessment Years: 2009-10 & 2011-12 Dy. Commissioner of Vs. M/s MS Agarwal Income-tax, Circle – 16(2), Foundries Pvt. Ltd., Hyderabad. Hyderabad. PAN – AAICS 4832K (Appellant) (Respondent) Revenue by: Shri Rajat Mitra & Shri Sumit Jain Assessee by: Shri Burra Date of hearing: 19/07/2021 Date of pronouncement: 24/08/2021 O R D E R PER L.P. SAHU, A.M.: ITA No. 279/Hyd/2013 for AY 2009-10 This appeal filed by the Revenue is directed against CIT(A) – V, Hyderabad’s order dated 26/11/2012 for AY 2009-10 involving proceedings u/s 143(3) of the Income- Tax Act, 1961; in short “the Act”.
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Before us, the revenue has filed revised grounds of appeal, which are as under: “1. The CIT(A) ought not to have deleting the disallowance of expenditure on transportation amounting to Rs.3,70,35,199/ -. 2. The CIT (A) erred in holding tha the assessee had genuinely incurred the Transportation expenses. 3. Any other ground that may be urged at the time hearing.”
Briefly the facts of the case are that the assessee company, engaged in the business of manufacturing TMP Bars, MS Ingots and MS Billets, filed its return of income for the AY 2009-10 on 29/09/2009 admitting a total income of Rs. 1,43,72,448/-. The AO completed the assessment u/s 143(3) determining the total income of the assessee company at Rs. 6,00,34,098/- by making various additions including the addition of Rs. 3,70,35,199/- towards expenditure on transport, which is the subject matter in the revenue’s appeal.
The facts relating to the said ground are that the Assessing Officer found that the appellant had debited an amount of Rs. 3,85,56,294/- under the head 'freight outward and earlier year the same was at Rs. 1,24,55,142/-. The Assessing Officer observed that increase in sales during the year when compared to last year is only 27% whereas freight outward is increased by 210%. Further, he observed
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that the freight expenses debited were around 1 to 21 lakhs in initial months and suddenly in the months of January, February, and March these were increases to crores and all these expenses were payable to M/s APK Road Carriers. Therefore, the Assessing Officer held that the transactions with APK Road Carriers are not genuine and whatever the amounts recorded payable to M/s APK Road Carriers are nothing but inflation of expenditure by the appellant company and disallowed the expenditure on transportation.
Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A).
During appeal proceedings, the appellant company submitted that the expenditure was genuine and it had made advance payment to APG against installation and erecting of 132KVA line in factory premises. Subsequently, APCPDCL recommended another party which was more economical. Accordingly, it cancelled the dealing with APG before execution and obtained refund of the advance amount paid earlier. Further it was submitted that it also produced bills and ledger copies in support of its claim of expenditure.
6.1 The CIT(A) sent the evidences along with the written submissions to the AO for a remand report. The AO submitted his remand report dated 06/09/2012, which was
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extracted by the CIT(A) in his order at page 9. The remand report was forwarded to the assessee for its comments and the assessee’s explanation was extracted by the CIT(A) in his order at pages 9 to 11. After considering the remand report and submissions of the assessee, the CIT(A) directed the AO to delete the addition made on account of expenditure on transport by observing as under: “8.3.1 I have considered the submissions made by the appellant, gone through the order and the remand report, and also all other material placed before me. I have verified the sales invoices submitted by the appellant for various months starting from April 2008 onwards till March 2009. On the sales invoices the name of the transporter is reflected in column transportation details. This clearly indicates that the transportation is done by the transporter whose name is reflected in the invoice. It is further verified that the Assessee has collected the amount of transportation from its customer as the same is included in the sales bills separately and the same is included in his income under sales. I have also verified the ledger account of APK Road Carriers for the years 2009-10 and 2010-11. All the payments made to APK Road Lines are through account payee cheques only. Also TDS has been deducted and paid on the amounts paid to APK Road Carriers by the assessee, and the same is also reflected in the Form 26AS of APK Road Carriers produced before me. Further, receipt of the transportation amount is confirmed by APK Road Carriers and the same is reflected in its income as confirmed by it and the income tax return filed by it, a copy of which is on record. 8.3.2 The contention of Assessing Officer in his remand report stated that the ledger copies submitted by the assessee are self made and recently prepared seems to be wrong as the same are part of books of accounts and
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were submitted to the Assessing Officer at the time of initial scrutiny proceedings. 8.3.4 I have verified the bill copies of transportation raised by APK road carriers and the same has the serial Number. Further, the transportation bills of APK Road lines clearly shows the details to whom the transportation is done. The Assessing Officer in his remand report has wrongly stated that the serial nos. on the bills are not there and the details are not available. 8.3.5 The Assessing Officer in his assessment order states that the freight expenses debited were around 1 to 2 Lacs in the initial months and suddenly in the month of January, February and March, these expenses were increased in Crores. The appellant, in response to the same, states that the amount of freight debited in the month of January, February and March pertains to the transportation charges of the earlier months also. The appellant contends that the invoices had been accounted in the months of January, February and March as they had been received during those months only. A month wise comparison of freight with corresponding purchase and sales during that month is totally wrong as there are circumstances where the bills of the services rendered may be raised at a later period. The proof of services rendered by the transporter from the month of April 2008 has been verified by me from the sales invoices of the appellant. Thus the contention of the Assessing Officer that the expenditure is inflated at the end of the year is not correct as the appellant has proved to my satisfaction that the services are rendered from April 2008 onwards and the transportation charges are paid for the services received during the year. 8.3.6 Further the Assessing Officer in his assessment order agrees that an amount of Rs. 3,73,35,199 is payable to APK Road Carriers. The Assessing Officer
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contends that even though services worth crores of rupees have been received by the appellant but the transporter had not received majority of the payments immediately and waited till January, February and March 2010. In response to the same the appellant has provided the following details of payments made to APK Road Carriers during the AY 2009-10 and AY 2010-11: APK Road Carriers A/c (Transportation) AY Opening Bills raised Amount Closing Balance towards paid during balance transportation the year credit balance 2009- - 3,73,35,199 36,54,528 3,36,80,671 10 2010- 3,36,80,671 3,37,20,366 6,73,74,435 2,61,602 11
8.3.7 Thus it is evident from the above that the amount of transportation bills have been correctly recorded in the books of the appellant and though only an amount of Rs.36,54,528/- had been paid against the services received to the tune of Rs.3,73,35,199/-, the balance of Rs.3,36,80,671/- has been carried forward as closing balance to the next assessment year. Further the amounts of payments made during the AY 2010-11 to APK Transporters is Rs.6,73,74,435/- as compared to the services billed for Rs.3,37,20,366/-. Thus the amount payable to APK transporters at the end of AY 2010-11 is only Rs.261602. The same has also been verified from the account of APK Road Carriers submitted by the appellant, a copy of the same had also been made available to the Assessing Officer. I am of the view that it has to be seen whether the services are received or not and only because the payment is delayed, it does not mean that the appellant has not incurred the expenditure or received the services. Since the services are received and ultimately the payment is made by way of account payee cheques and on which TDS is deducted and the revenue is reflected in the
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income of the receiver as proved by the appellant, the expenditure cannot be disallowed on this ground. 8.3.8 The Assessing Officer in his assessment order has stated the assessee has not produced the complete bank account of APK Road Carriers, but it has produced the bank account partly to its convenience. I have verified the complete ledger account with payment details and am satisfied that the transportation expenses are ultimately paid and the contention of the Assessing Officer that the payments made to APK Road Carriers on account of transportation has been received back by the appellant is not correct. 8.3.9 Further the Assessing Officer states that he had issued summons to APK Road Carriers to the address mentioned on the Invoices. But no one appeared in this connection. The appellant contends that the APK Road Carriers are not in receipt of any summons. Further the Assessing Officer had not disclosed to the appellant that any summons had been issued to APK Road Carriers and also the appellant has not been given any opportunity to explain the material obtained by the Assessing Officer. I have not found anything on record stating that summons have been issued to APK Road Carriers. The Assessing Officer has also issued some letter to Mis Penna Cement Industries Ltd., and has received some reply. The appellant contends that he has not been given a copy of the letter or details received from Mis Penna Cement Industries Ltd., either during scrutiny proceedings or remand proceedings, as such the same cannot be used against the appellant. The appellant has quoted the following case laws: Every person before an administrative authority, exercising adjudicatory powers has right to know the evidence to be used against him. The court in case of Dhakeswari Cotton Mills Ltd. vs. CIT West Bengal (1954) 26 ITR 775 (SC), held that the assessee was not given a fair hearing as the Appellate Income Tax tribunal did not disclose the information supplied to it by the department. A person
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may be allowed to inspect the file and take notes. The AO cannot rely on third party statement without giving assessee copies and right to cross examine the deponent [Vasantlal & CO., (c) v CIT (1962) 45 ITR 206 (SC). Based on the above details and case laws, I am of the opinion that the material received from third party cannot be used against it unless the appellant is provided with a copy of the same and given an opportunity to contest the same. 8.3.10 Taking into consideration the observations of the Assessing Officer and the submissions and explanations of the appellant and as discussed above, I am of the belief that the appellant had genuinely incurred the transportation expenses. The transportation cost collected from the customers in many cases is shown in invoice separately and in some cases included in sales and credited the same to the sales account. The addition made by the Assessing Officer is not sustainable as already the amount of transportation collected from the customers has been accounted in the books of the company along with the sales and when the transpiration cost is paid to the transporters the same has been claimed as expenditure by the Company. In view of the above discussions, the Assessing Officer is directed to delete addition.”
Aggrieved by the order of CIT(A), the revenue is in appeal before the ITAT.
The ld. DR besides relying on the order of the AO submitted that the assessee company in support of its claim of expenditure produced freight bills and ledger copies are self-made, therefore, the genuineness of the expenditure is doubted by the AO and made the addition accordingly.
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On the other hand, the ld. AR submitted that the bills clearly indicate the name of the consignor and consignee and the amount paid to APK Road lines is duly accounted by them as can be seen from the financial statements of them and the certificates provided. Copy of APK road Carrier financial statement, form 26AS and return acknowledgment for FY 2008-09, confirmation are enclosed. The accounts of APK Road Carriers for the AY 2009-10 was also scrutinized by the income tax department.
We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The Assessing Officer observed that increase in sales during the year when compared to last year is only 27% whereas freight outward is increased by 210%. Therefore, the Assessing Officer held that the transactions with APK Road Carriers are not genuine and whatever the amounts recorded payable to M/s APK Road Carriers are nothing but inflation of expenditure by the appellant company and disallowed the expenditure on transportation. On the other hand, the ld. CIT(A) observed that I have also verified the ledger account of APK Road Carriers for the years 2009-10 and 2010-11. All the payments made to APK Road Lines are through account payee cheques only. Also TDS has been deducted and paid on the amounts paid to APK Road Carriers by the assessee, and the same is also reflected in the Form 26AS of
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APK Road Carriers produced before me. Further, receipt of the transportation amount is confirmed by APK Road Carriers and the same is reflected in its income as confirmed by it and the income tax return filed by it, a copy of which is on record. On perusal of the CIT(A)’s order, the CIT(A) has addressed each and every grievance raised by the AO in his order as well as in the remand report and came to the conclusion that the expenditure incurred by the assessee on transport is genuine. Therefore, we do not find any infirmity in the order of the CIT(A) in directing the AO to delete the disallowance of Rs. 3,70,35,199/- made by the AO on account of expenditure on transportation. Accordingly, we dismiss the grounds raised by the revenue on this issue.
ITA No. 1719/Hyd/2014 for AY 2011-12
This appeal filed by the Revenue is directed against CIT(A) – V, Hyderabad’s order dated 06/08/2014 for AY 2011-12 involving proceedings u/s 143(3) of the Income- Tax Act, 1961; in short “the Act”. In this appeal, the revenue has raised the following grounds of appeal: “1. That in the facts and in the circumstances of the case the Ld. CIT(A) erred in law in not considering the outcome of dispute between the Commissionerate and the assessee in respect of clandestine removal and unaccounted sales of MS Billets and TMT bars amounting to Rs. 64,93,972/-.
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That in the facts and in the circumstances of the case the Ld. CIT (A) erred in deleting the addition of Rs. 1,25,18,030/- made towards unaccounted sales to M/s. BS Transcom Ltd., before enquiring the genuineness of the sales. 3. That in the facts and in the circumstances of the case the Ld. CIT(A) erred in deleting the expenditure Rs. 1,30,80,016/- made u/ s 40A(2)(a) & (b) of the Income Tax Act, 1961.”
As regards ground No. 1 & 2, the brief facts of the case are that the assessing Officer based on the various loose papers impounded during the Survey proceeding conducted on 21-11-2012 in the business premises of assessee noticed that the assessee company during FY 2010-11 had made unaccounted purchase of 518.55 MTs of Sponge Iron M/s. Arshad Ispat, Koppal. Further Shri Gopal Agarwal, brother of Pramod Kumar Agarwal, factory in charge and authorized signatory of M/s. M S Agarwal Foundries Pvt. Ltd in his sworn statement dated 19-07-2011 recorded u/s 14 of the Central Excise Act , 1944 had accepted the same and paid an amount of Rs.8,50,000/- on account of Central Excise Duty on such clandestine removal and unaccounted sales of MS Billets and TMT bars amounting to Rs.68,77,022/-.
12.1 During the course of appeal proceedings, the appellant stated that the Central excise department has forcefully taken the declaration of unaccounted sales and collected the duty. The assessee company has filed an
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appeal against the central excise order and the matter is sub judice.
12.2 The assessee company also, inter-alia, contended that even in case of unaccounted sales, it is gross profit which is to be added and not entire sale proceeds.
12.3. After considering the submissions of the assessee, the CIT(A) observed as under: “I. have carefully considered the submission of the assessee and the assessment order. The assessee company is a manufacturer of TMT and MS Billets for which raw material is DRI (Sponge Iron), Scrap etc. No material can be manufactured without raw material. Further based on the ruling in CIT v. S. M. Omer (201 ITR 608) and Ashok Kumar Rastogi v. CIT (59 Taxman 82), V.RTextiles Vs. JCIT [2012J 20 taxmann.com 154 (AM), and CIT Vs. President Industries [2002J 258 ITR 654 (Guj), it is clear that the entire sales proceeds cannot be added to income, It is only gross profit which is income of assessee company and can be added to Income, Hence the addition of Rs. 68,77,022/- is reduced to gross profit portion i.e Rs. 3,83,050/- (Rs, 68,77,022 @ 5.57% adopted as per Audited Balance Sheet of the assessee company). Hence, out of the total addition of Rs.68,77,022, the appellant gets a relief of Rs.64,93,972 and the gross profit arrived at Rs 3,83,050 is sustained.”
12.4 Further, the AO added unaccounted sales of Rs. 1,25,18,030/- (Rs. 24,500 @ 510.94 MT) based on loose papers impounded during survey proceedings u/s 133A in the business premises of M/s BS TransComm Ltd. The
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assessee company claimed that all the sales made to M/s BS Transcom Ltd. were recorded in their books of account and denied any unaccounted sales to M/s BS Transcomm Ltd.
12.5 The CIT(A) deleted the said addition by observing as under: “4.9 1 have carefully considered the submissions of the appellant and the assessment order. The AO during the survey proceeding of assessee company business premises have not collected any material from assessee company which indicate unaccounted sales. The loose papers impounded from business premises of Mis B S Transcomm belong to them and assessee company cannot be held responsible for the other company's record and their statement. The possibility of false statement of M/s B S Transcomm cannot be denied. In the absence of any material from assessee company to attract section 292C is not correct. The mere records and statement of other company is not evidence of unaccounted sales of assessee company. Hence addition of Rs. 1,25,18,030/- as unaccounted sales from M/s B S Transcomm is deleted in the absence of an y material a f assessee's camp any record.” 12.6 To sum up, out of the total addition of Rs. 1,93,95,052 on account of unaccounted sales, the CIT(A) gave relief to assessee of Rs.1,90,12,002 and Rs. 3,83,050 was sustained.
Aggrieved, the revenue is in appeal before the ITAT.
We have considered the rival submissions and perused the material on record. While deleting the addition made by the AO, the CIT(A)’s categorical finding is that the
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AO during the survey proceedings of the assessee company’s business premises have not collected any material from assessee company which indicate unaccounted sales and the loose papers impounded from business premises of M/s BS Transcomm belong to them and assessee company cannot be held responsible for the other company’s record and their statement. Therefore, we do not find any reason to interfere with the order of CIT(A) in deleting the addition made by the AO on account of unaccounted sales. Thus, grounds Nos. 1& 2 raised on this issue are dismissed.
As regards ground No. 3 regarding deletion of addition of Rs. 1,30,80,016/- made by the AO u/s 40A(2)(a) & (b) of the Act, the Assessing Officer during the assessment proceeding found that the appellant company had made purchases both from related party and unrelated party. The assessing officer compared the price of purchase from related party(Agarwal Foundries) and unrelated party and disallowed Rs. 1,30,80,016/- as excess payment as provisions of Section 40A(2)(a)&(b).
Before the CIT(A), the appellant stated as under:
i) The quality of material supplied by related party and others was different.
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ii) The Product manufactured by the assessee out of the material purchased from related party is of different quality which ultimately fetched the assessee higher sales realization. iii) No efforts were made to determine the Fair market value of the product. iv) It is not the case of tax avoidance .
5.3 Further, the appellant Company submitted that the material purchased from related party M/s Agarwal Foundries was of different Quality. The material supplied by the M/s Agarwal Foundries was of higher grade and where as supplies by other unrelated parties were of lower grade. The appellant Company also submitted that by using higher grade raw material the finished products of higher quality were manufactured, which provided extra margins to the assessee company. Further, the CIT(A) extracted the other submissions of the assessee at pages 10 to 12.
5.4 After considering the submissions of the assessee, the CIT(A) deleted the addition of Rs. 1,30,80,016/- made by the AO u/s 40A(2)(a) & (b) of the Act, by observing as under:
“5.4 I have carefully considered the submissions of the appellant and the assessment order and gone through all other material placed before me. I find force in the contentions of the appellant and agree with the same. The assessing officer erred by comparing prices of two different quality product supplied by M/s Agarwal
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Foundries and unrelated parties. The Assessing officer has not tried to find out the fair market value of the product. The appellant company has also produced the details of sale price of finished product manufactured using higher grade material which fetch extra margins to company. Furthermore, both M/s Agarwal Foundries and Appellant Company are taxed at maximum rate of tax. As such it cannot be said that these transactions were done to reduce income tax. In view of above, it cannot be said that there is no product profile difference between MS ingots purchased from sister concern i.e. Agarwal foundries and the unrelated parties. Thus, it cannot be said that there are any excess payments made by the assessee company to its sister concern. Therefore, I hold that the AO is not justified in making disallowance u/s 40A(2)(a)&(b) of Rs.1,30,80,016/- and hence it is deleted.” 6. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The CIT(A)’s categorical findings are that “the assessing officer erred by comparing prices of two different quality product supplied by M/s Agarwal Foundries and unrelated parties. The Assessing officer has not tried to find out the fair market value of the product. The appellant company has also produced the details of sale price of finished product manufactured using higher grade material which fetch extra margins to company. Furthermore, both M/s Agarwal Foundries and Appellant Company are taxed at maximum rate of tax.” Therefore, we do not find any infirmity in the order of the CIT(A) in deleting disallowance u/s 40A(2)(a)&(b) of
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Rs.1,30,80,016/- made by the AO. Accordingly, the ground raised on this issue is dismissed.
In the result both the appeals of the revenue are dismissed in above terms. A copy of this common order be placed in the respective case files.
Pronounced in the open court on 24th August, 2021.
Sd/- Sd/- (S.S. GODARA) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER
yderabad, Dated: 24th August, 2021. kv Copy to : 1 DCIT, Circle – 16(2), 2nd Floor, “B” Block, IT Towers, AC Guards, Masab Tank, Hyderabad. 2 M/s MS Agarwal Foundries Pvt. Ltd., 2-1- 113, Tobacco Bazar, Secunderabad. 3 CIT(A) – V, Hyderabad. CIT – IV, Hyderabad. 4 ITAT, DR, Hyderabad. 5 6 Guard File.
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S.No. Details Date 1 Draft dictated on 2 Draft placed before author Draft proposed & placed before the Second 3 Member 4 Draft discussed/approved by Second Member 5 Approved Draft comes to the Sr. PS/PS 6 Kept for pronouncement 7 File sent to Bench Clerk 8 Date on which the file goes to Head Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order